U.S. Markets closed

Edited Transcript of NEO earnings conference call or presentation 22-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Neogenomics Inc Earnings Call

NAPLES Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Neogenomics Inc earnings conference call or presentation Wednesday, February 22, 2017 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Doug VanOort

NeoGenomics, Inc. - Chairman, CEO

* Steve Jones

NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer

* George Cardoza

NeoGenomics, Inc. - SVP, CFO

================================================================================

Conference Call Participants

================================================================================

* Bill Bonello

Craig-Hallum Capital Group - Analyst

* Amanda Murphy

William Blair & Company - Analyst

* Drew Jones

Stephens Inc. - Analyst

* Paul Knight

Janney Montgomery Scott - Analyst

* Chris Lewis

ROTH Capital Partners - Analyst

* Raymond Myers

The Benchmark Company - Analyst

* Bryan Brokmeier

Cantor Fitzgerald - Analyst

* Joe Munda

First Analysis Securities - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, welcome to the NeoGenomics fourth quarter and full year 2016 financial results call. All 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 would now like to turn the conference over to your host, Mr. Doug VanOort, Chairman and CEO. Thank you Mr. VanOort, you may begin.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [2]

--------------------------------------------------------------------------------

Thank you Tim. Good morning everyone. I would like to welcome everyone to NeoGenomics fourth quarter and full year 2016 conference call, and introduce you first to the NeoGenomics team that is with us here today. Joining me in our Fort Myers headquarters is Steve Jones, our Executive Vice President, George Cardoza, our Senior Vice President and Chief Financial Officer, Fred Weidig, our Controller and Principal Accounting Officer, Jessica King, our Manager of SEC Reporting, Rob Shovlin, President of our Clinical Services Division, and Steve Ross, our Vice President and Chief Information Officer. Dr. Maher Albitar, our Senior Vice President and Chief Medical Officer and Director of R&D is joining us from our Alisa Viejo lab in California. Before we begin our prepared remarks, Steve Jones will read the standard language about forward-looking statements.

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [3]

--------------------------------------------------------------------------------

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 speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [4]

--------------------------------------------------------------------------------

Thank you Steve. In this morning's call, I will put 2016 into context, comment on fourth quarter performance, update you on the status of the Clarient integration, and conclude with a look forward to growth and value creation opportunities for our Company this year, and over the next few years. 2016 was clearly a transformational year for NeoGenomics. We more than doubled the size of the Company, with 2016 revenue of $244 million compared to $99 million in 2015. We significantly deepened our oncology testing menu and capabilities, and now have a leading position in many geographic areas, and in every key testing discipline for oncology.

We added an exciting new growth business serving the pharmaceutical industry, and are now positioned as an emerging lab services leader for immuno-oncology. And importantly our adjusted EBITDA more than tripled to almost $35 million, from about $10 million in 2015. In addition, we leveraged our $21 million in cash flow from operations and improved financial position, to redeem more than half of the series A preferred stock we issued through GE in connection with the acquisition. We ended the year with a strong new bank syndicate, and with borrowing capacity and financial flexibility to pursue our growth strategies.

Now just 13 months after our acquisition of Clarient, we have successfully migrated all of the approximately 2,500 Clarient clients, and today, every single one of our clients is using a common service offering, a common laboratory information system, and a common billing system. With this migration effort completed, we can now build on our strengths in a common, efficient and more effective manner, and unlock meaningful synergies. Integrating an equally sized laboratory into our operations has been a challenging and complex undertaking, that could have stretched into a number of years rather than a number of months. It's noteworthy that our team was able to accomplish this, while achieving a 15% full year pro forma volume growth in our core clinical genetic testing business at the same time.

Most importantly, NeoGenomics is now exceptionally well-positioned as a leader in our industry with a unique business model, scale, and outstanding opportunities to grow and create value for our employees, our clients and patients, and for investors. So we're very pleased with this transformation, and are proud of the results we achieved in 2016. That context is important as we review fourth quarter results. Our teams did an excellent job with this very complex work of integration. To successfully migrant Clarient accounts, we focused our full attention on service and client retention during the quarter.

At the same time, our California labs were transitioning their work to common processes, while still operating out of the two laboratories, and during the same time our volume of immuno-oncology PD-L1 testing grew enormously. All of these dynamics placed a lot of stress on our operations. To provide a clearer understanding of the fourth quarter, let's review our key business metrics.

Fourth quarter clinical genetic test volume growth was good, with volume up 140% in total, or 16% on a pro forma basis, with Clarient included in both years. Average unit price was down more than expected at 10.5% due to effect of mix changes. However, cost for test reduction was exceptional, with a 10.7% reduction compared with last year, which fully offset the price reductions, and allowed us to hold gross margins steady. Service levels continued to be exceptional other than in certain California lab departments, which experienced large and sudden influxes of volume, particularly of PD-L1 testing, which we are diligently working through.

Pharma services revenue was down slightly on a pro basis compared with last year, and in the billing area, days sales outstanding increased by two days from the level reported on December 31st of 2015. There are many underlying dynamics affecting these key business metrics, and I want to provide some context and insight in a few important areas. Let's start with volume. The 16% pro forma growth and clinical genetic testing volume was very strong, especially given the fact that we're in the midst of such a large integration effort. To grow volume at the same time as we're migrating so many clients during the quarter is actually remarkable, but the nature of the growth was somewhat unusual. Nearly all of the volume growth occurred in two different test types, molecular and immuno-histochemistry. Molecular volume continued to be strong because of our leading molecular test menu, and particularly as an expanded molecular offering for the Clarient client base.

Immuno=histochemistry volume grew primarily because of the incredible growth in immuno-oncology-related therapies. Specifically, the FDA approved companion diagnostic test PD-L1 grew dramatically for us. NeoGenomics was a leader in performing clinical trials testing for this biomarker, and we were capable of performing the tests clinically as soon as the Keytruda and Opdivo product drugs were approved, and this led to sudden and dramatic growth in the quarter. In fact, based on external sources and our own analysis, we believe we currently have close to 50% market share for this important and growing test. Both the molecular and PD-L1 volume growth demonstrate the strength of our business model, and present exceptional long-term opportunities, but they added stress for operations in the short term.

Average unit price for our testing services declined as a direct result of the outsized growth in molecular and IHC testing. In fact, nearly half of the fourth quarter decline in average unit price was due to higher growth in these two testing categories relative to our other tests. In terms of PD-L1, we had priced the service at the same price as our typical IHC service, and we gained strong market share. Notably, the cost of the FDA approved PD-L1 supply kit is more than four times higher than a typical IHC test, so this also affected our profitability in quarter 4, and we expect this trend to continue in the short term.

Having now achieved a high market share, we are re-evaluating our pricing strategy, and refocusing on cost. We expect to take action shortly that will improve profitability on this test as the year progresses. The 10.7% decline in cost per test was exceptional, and it reflects the beginning of synergy realization from the Clarient acquisition, and the benefit of scale. About a third of the cost per test reduction resulted from product mix changes, and two-thirds from improved operating efficiency.

We ended the year with 969 full-time employees which was up 105%, from 473 people just prior to the Clarient acquisition at the end of 2015. Employee growth of 105% should be viewed in relation to the 155% clinical genetic testing growth, and a Pharma business that is nearly 20 times larger. Clearly, productivity has improved in our business with scale, and those trends remain healthy.

In terms of synergies from the Clarient acquisition, frankly, we have yet to realize the bulk of them. In fact, I might argue that we had some negative synergies in the fourth quarter as we operated two different LIS Systems, two different billing systems, and had significant migration of many clients from one system to another. We continue to expect the same level of strong cost synergies as we originally planned, but now expect that benefit to begin to be more fully realized starting in the second half of 2017. NeoGenomics prides itself on exceptional and consistent service, and this has been a hallmark of our success. And clients who have experienced our service levels regularly refer us to others.

During the last few weeks of 2016, the service levels in our California labs did not meet our internal requirements as the client migration was being completed. In some cases, our clients told us that our service levels had become similar to other lab service levels. This is not a NeoGenomics' way, and as a result our people necessarily moved the full focus of their attention to operational matters, and to client retention. As we now speak, most of our service levels have returned, or are quickly returning to the exceptional levels for which we are known.

We expect that exceptional service levels will become consistently delivered once again, as we complete the combination of our Irvine and Alisa Viejo labs at the end of March. Having managed many large lab integrations in my career, I can say that they haven't gotten any easier. In the case of the Clarient integration, we planned very well, and executed many aspects in an outstanding fashion. We prioritized speed of integration, and had a goal of 100% client retention. There is no question that as we completed the process of migrating Clarient clients as the year ended, we stressed our operations in a few different areas. Our teams have been working diligently, and we are moving well through these growth pains.

But since accountability is one of our core values at NeoGenomics, I want to give you an integration progress report ,and rate how we've done so far in key areas to provide you to provide with some context for this process. Our teams did a great job with the hundreds of activities necessary to extract Clarient's operations from GE. We seamlessly took over every back office function that GE previously provided, including payroll and payables, and accounting and information systems, and human resources, and for this activity, I believe our team deserves very high marks. We have restructured the sales team, eliminated duplicative territories, added specialty teams, and installed new compensation and management structures, and a couple of weeks ago we held our national sales meeting, and it couldn't have gone better.

We have a very experienced professional and dedicated team of 67 commercial people, who are ready to move their focus from integration and get back to growth activities. I believe our team deserves very high marks for the way we've integrated our sales teams. In billing, our team deserves a solid rating. We restructured the Clarient billing process, eliminated outsourced vendors, hired our own team, and got the billing process under good management, and we now have all clients using the NeoGenomics billing system.

We did stress our billings operations in December though, because of the large influx of claims billed exclusively through the Neo billing system during the last few months of 2016. DSOs increased to 84 days at the end of 2016, but this is still a major improvement from Clarient's standalone DSO level of 108 before the acquisition. We had to train the Clarient billing team on the Neo billing system, and productivity dipped initially, as people managed through all the complexities of the new system. While productivity has increased over time, we do have a backlog currently in getting claims billed to insurance companies.

The backlog has not been visible to our clients, but has temporarily resulted in delayed cash collections and increased DSOs. Our teams are making considerable progress, and we see a clear path to further reductions in DSOs over the next few months. I believe our team deserves high marks for planning associated with migrating Clarient accounts to the NeoGenomics system, in a disciplined manner and eight predetermined ways ending in October. However we deserve a much lower mark for execution of the client migration process.

I reported to you in October that half of our larger clients had been migrated by then, and so the other half migrated in November and December. The first half of client migration was very smooth, but the second half was not so much. Migrating a large volume of accounts in late December, November and December caused stress on our operational processes, such as logistics, order entry, and billing. Although the quality of our testing processes remained outstanding, the challenges in logistics, for example, caused client dissatisfaction.

Frankly, these operational issues could have and should have been prevented. We recognized issues and have mobilized ourselves accordingly. There is considerable effort now being made, and we expect our operating processes to be back in better balance by the end of quarter 2. I believe our teams deserve very solid marks for the Alisa Viejo facility renovation, which is moving along well. We knocked down a lot of walls, built a state-of-the-art molecular lab facility with lots of capacity, standardized equipment, and moved every department to temporary space as construction was being performed.

I reported to you in October that we expected to be done at the end of February, but we are now scheduled to complete this activity by the end of March, as a result of construction delays. In five weeks, we are moving the Irvine lab, people, equipment and processes into our completely redesigned Alisa Viejo lab. We have excellent plans in place, and are working very hard. We're looking forward to a good move, and to all being in one lab facility, with all of the accompanying benefits that provides. We're also looking forward to showing it to investors on May 25 at our Annual Meeting, and first-ever Analyst Investor Day, which we'll hold in the Alisa Viejo lab.

Our rating for client retention frankly is not yet in. So far, one client has told us they're dissatisfied and plan to leave. However, we know we've stretched the patience of several others, not for quality of testing by way, but because of logistics errors or order entry errors. And client retention at this point is actually excellent, but we will need to wait until our next earnings call before we can give you a full accounting on this aspect of the integration.

Finally, I want to comment on our Pharma services division. After an exceptionally strong first half of 2016, we experienced weaker revenue performance in the second half of the year. In fact, revenue in quarter 4 was about the same as in quarter 3 at a little over $5 million. We had expected Pharma services revenue to bounce back nicely from quarter 3 levels, but that didn't happen. We reported in October that we have rebuilt our Pharma commercial organization, and are also rebuilding pipeline. We're encouraged by the strength of our commercial team, our strong client relationships, and our backlog of projects.

Many clinical research organizations regularly report their backlog of signed contracts as an indicator of future revenue. We have reviewed our backlog over the past several months, and have enough confidence now to begin to report it to investors. At the end of 2016, our Pharma services backlog was $37 million, compared with $20 million at the beginning of the year. This 85% growth in backlog is very encouraging for us, and supports our belief that Pharma services will be a strong source of growth for us in the future. We're also encouraged by the breakthrough that immunotherapies are providing in oncology, and by NeoGenomics' position as a market leader in PD-L1 testing. We're leveraging our early leadership in immuno-oncology testing as an area of promising growth for the Company, both in clinical trial services for new therapeutics, as well as in clinical testing as the new therapies are approved for clinical use.

We're also investing in our Pharma business, both in human resources and lab infrastructure. I reported in our last call that in response to requests from several of our global Pharma clients, we're finalizing plans to expand internationally. I can now report that we will be opening a lab facility in the Geneva, Switzerland area to support European clinical trials. This move is essential to our strategy of supporting global clinical trials, and has been well-received by those clients with whom we have shared our plans. We expect this facility to become operational in the second half of the year.

The bottom line here is that we believe our Pharma services business has great long-term growth potential, and we are investing in it. It also has the added benefit of helping keep NeoGenomics at the forefront of developments in the field of oncology. In our last call, I discussed ten key growth and profitability drivers that offer individually and collectively enormous value creation opportunities. Although our management operations and sales team are presently short-term focused on completing the final aspects of the Clarient integration process, we remain dedicated to market share driven growth, as a result of innovation and great service. Our sales team is extremely motivated to get the integration behind us and return their full efforts to sales. And we remain committed to being a Company known for operating discipline, that can translate that revenue growth into earnings and cash flow growth.

With that as a backdrop, here once again are the ten key growth and profitability drivers for NeoGenomics over the next few years that we reviewed on our last call. Continuing to take market share in a growing market, cross selling the strong Clarient products, to Neo clients and vice versa. Partnering with oncology groups who choose to internalize some pathology services. Growing the Pharma services business in a era of precision medicine. Capturing the cost synergies from the Clarient acquisition. Developing and commercializing liquid biopsy tests. Automating our laboratories. Developing information products based on our vast oncology database. Adding testing for early detection, predisposition testing and monitoring, and further consolidating our industry.

In each of these ten areas, there are opportunities that we are actively pursuing, and we think individually and collectively they are help us to create a lot of value for our clients and the patients they serve, and for our investors. now we're going to turn the floor over to Steve Jones, our Executive Vice President, Director of Investor Relations, to review fourth quarter results in more detail and lead us through a Q&A session. Steve.

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [5]

--------------------------------------------------------------------------------

Thanks Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter. We're pleased to report $60.5 million of revenue quarter 4, a 122% increase over the prior year, driven primarily by the inclusion of Clarient in the results. Approximately $53.8 million of this revenue was derived from the core clinical genetic testing test, $1.5 million from PathLogic, and $5.1 million from the Pharma services division. Consolidated gross margin was 45.1%, a 30 basis point increase from the 44.8% reported in Q4 2015. This increase in gross margin was driven by the 10.7% year-over-year decrease in average cost of goods sold for clinical genetic tests to $192 per test. This is the lowest level we have ever reported for this metric, and this is before we unlock the additional cost synergies from having clients on one laboratory information system, and all of our Orange County California employees in the same facility.

Consolidated SG&A expense increased by $12.8 million, or 73% from Q4 2015. However as we discussed in the press release, $1.5 million of this increase was due to non-cash variable stock-based compensation, and non-cash amortization of intangibles directly related to the Clarient acquisition, and an additional $3.5 million of this increase was due to a non-cash impairment charge in quarter 4 to write-off the remaining unamortized intangible values associated with the PathLogic acquisition and a licensing agreement. Given the reductions in cost per test, and the economies of scale we achieved on the cash portion of our SG&A expenses, consolidated adjusted EBITDA increased by 178% year-over-year to $8.1 million, and adjusted EBITDA margin grew by 280 basis points to 13.5%.

As we discussed in the press release, we incurred $3.9 million of one-time expenses in connection with refinancing our bank facility on December 22nd. $1.1 million of this amount was due to prepayment penalties, and $2.8 million was to write-off the remaining unamortized debt issuance costs associated with our original bank facility. Per GAAP regulations, all of this was charged to interest expense in quarter 4. As we discussed in our December 22nd press release, we were able to refinance our existing bank facility, which had an interest rate of LIBOR plus 700, with a new bank facility which is priced at LIBOR plus 300, that also has further step-downs in rates as we continue to reduce leverage.

Although we nearly doubled the amount of bank debt outstanding, we do not expect a meaningful increase in our overall amount of interest expense this year. This refinancing activity enabled us to redeem 8.067 million shares, or 55% of the series A redeemable preferred stock, at an redemption price of $6.82 per share, for a total of $55 million. This redemption partially eliminated an increasingly expensive equity instrument, and had the effect of reducing our fully diluted as converted shares outstanding by 8.5%. Fourth quarter GAAP net loss available to common shareholders was negative $14.2 million, and GAAP diluted EPS was negative $0.18 per share. This compares to GAAP net loss available to shareholders of $1.6 million, and diluted EPS of negative $0.03 per share in quarter 4 2015.

As disclosed in the press release and in previous earnings calls, 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 loss available to common shareholders, to exclude 1, the non-cash amortization of intangibles, 2, non-cash stock based compensation expenses, that are partially driven by changes in the Company's underlying stock price in any given quarter, 3, the non-cash deemed preferred stock dividends required by GAAP accounting. Four, the non-cash amortization of the beneficial conversion feature related to the preferred stock, which is also required by GAAP accounting, 5, the non-cash impairments of intangible assets, and 6, if applicable on a reporting period, any acquisition related transaction expenses, debt termination fees, and other one-time or non-recurring income or loss items. We refer to this measure as adjusted net income and on a per share basis adjusted diluted earnings per share, and we've included a table with how this is calculated in our earnings release.

In the fourth quarter, adjusted net income was $4.4 million, a 52% increase over the $2.9 million in last year's fourth quarter, and adjusted diluted EPS was $0.05 per share, compared to $0.05 per share in Q4 2015. We finished the quarter with 969 full-time equivalent employees, contract doctors and temps, versus 947 as of September 30th, and 885 FTEs as of December 31st, 2015. Of the 84 people we added to our payroll since year end 2015, at least 20 were related to internalization of previously outsourced GE functions. Adjusting for this, we added just 64 people or 7% to our workforce, which is less than half of our pro forma clinical genetic test volume growth rate for all of 2015.

Before opening it up for questions, I would like to comment briefly on the 2017 guidance we issued this morning. Given the temporary integration challenges we experienced in Q4, which we expect to continue to ripple through Q1 and into Q2, we believe it is prudent to lower growth expectations in the first half of 2017, and push out the realization of some of the expected EBITDA synergies until later in 2017 and 2018.

As a result, we are recommending that analysts reset their 2017 revenue estimates to $260 million to $275 million, and their adjusted EBITDA estimates to $42 million to $50 million. We also recommend that full year 2017 revenue and adjusted EBITDA growth be more heavily biased toward the second half of the year. Embedded these projections is an assumption this our average revenue per test in our core clinical genetic testing business will decrease by another 5% to 7% for the full year 2017 across all payers, to approximately $355 to $360 on average for the full year. This estimate of AUP decreases, factors in the approximately 19% reduction to Medicare flow psychometry reimbursement that went into effect in 2017, as well as continued evolution in our test mix towards lower priced molecular and IHC tests, which we expect to drive most of the decreases in AUP in 2017.

As discussed in the press release, we are currently projecting adjusted net income to increase from $14.4 million in 2016, to approximately $15 million to $19 million in 2017. And adjusted diluted EPS to increase from $0.15 per share in 2017, to $0.17 to $0.22 per share in 2017. For context here, a good analogy would be that we ate a big meal in the fourth quarter, and we're going to need a quarter or two to digest things. As a result we think it is prudent to push out some of the growth and synergy realization activities that we were expecting this year by a quarter or two. We still fully expect to realize all of the $24 million to $30 million in synergies that we previously forecast, however it is now likely that we will only realize $7 million to $8 million in synergies this year, instead of the $10 million to $12 million that we had been expecting.

I would also like to draw everyone's attention to our announcement this morning that we're planning on having our 2017 Annual Meeting of shareholders at 8 AM on May 25, 2017 at the Renaissance Club Sport Hotel in Alisa Viejo, California. This hotel is just a mile from our Alisa Viejo laboratory facility. Following the Annual Meeting, the Company will hold a series of presentations for analysts and investors to highlight recent developments of interest. In addition, guided tours of the Company's newly remodeled Alisa Viejo lab facility will be available. If you believe you will attend, please let us know by contacting Ms. Sherry Terzian, at Sherry.Terzian@NeoGenomics.com, so that we can get an accurate count for the hotel.

At this point I would like to close down our formal remarks and open it up for questions. Incidentally, if you're listening to this conference call via webcast only, and would like to 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 call-in listeners. Operator, you may now open up the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you. (Operator Instructions). Our first question comes from the line of Bill Bonello of Craig Hallum, please proceed with your question.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [2]

--------------------------------------------------------------------------------

Good morning guys. A couple follow-ups here. So the move in price, or in ASP, is that 100% related to mix, or are you seeing any kind of price pressure either from payers or large client billed customers?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [3]

--------------------------------------------------------------------------------

It's mostly mix related. It is the continued evolution of molecular and IHC testing, which is growing much faster than the rest of the business, and it's created pressure on it. We always get a little bit of pressure from clients as time goes on, but it doesn't really wind up being very meaningful on a sequential basis.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [4]

--------------------------------------------------------------------------------

Okay. And then there are customers and there are customers. Can you give us any greater sense of the client that said they were dissatisfied and planning on going somewhere else?I think you originally gave a client attrition estimate of like $6 million or something. Are you still within that range, or how big a deal is this particular client?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [5]

--------------------------------------------------------------------------------

Yes, I would be grabbing my chest if it was $6 million client attrition. No, so Bill, we reported in the last call that we had lost one client. We actually managed to get that client back. The client that we referred to this morning is not a large client, but every single one is sort of painful for us. I mentioned that our clients, our service is generally exceptional, and we take great pains to make sure that every single client is delighted with our service. And we didn't do as good a job in the last three or four weeks. Three or four weeks of the end of the year. And so we are focusing our full attention on this. We still want to have 100% client retention. We're still trying to do that. I think it's possible that because we have some fragile clients that we were in danger, and got our full attention on that. But I don't think that will have a lot of client attrition.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [6]

--------------------------------------------------------------------------------

Okay. That is helpful. And then just the last question, carious if you have any thoughts or organic growth going forward from a volume standpoint? I guess it's sort of implicit in the guidance you gave, but just when might you expect to see the PD-L1 volume burst kind of run its course, and when that happens, do we see a big drop in the organic volume growth, or is that sort of offset because you've returned to more normalized operations, as opposed to focusing on integration activity?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [7]

--------------------------------------------------------------------------------

Thanks Bill. It is Steve. Our forecast midpoint of our forecast sort of implies somewhere on the order of the 15% area, clinical genetic test volume growth. We don't actually project out individual line items in our forecast. But obviously IHC testing we are expecting to continue to be out-sized growth here, in at least the next quarter or two. When a new therapy is approved as a first line therapy, there's always a big catch-up period where everybody who hasn't thought about that therapy, looks at it for their clients, and then wants to test their clients, to see whether that therapy would be appropriate. So we're going through a lot of that initial bulge here. Doug, I don't know if you think differently, but I'm thinking that this matter quarter or two, that will settle down, I think the initial bulge, and then we'll just see normal growth in PD-L1?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [8]

--------------------------------------------------------------------------------

I think that's great, Steve. We are pleased that we have such a strong market share we believe in PD-L1 testing, and we think that this is leveragable, because we do have some clients that are only sending PD-L1 testing to us, and we can certainly leverage that situation. And I think the other thing about immuno-oncology is this is a growing business and growing trend, and we are leaders not only in the clinical side of PD-L1 testing, but in immuno-oncology generally, and that relates to growth in our Pharma services business as well

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [9]

--------------------------------------------------------------------------------

Great, thank you.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Amanda Murphy, William Blair & Company - Analyst [11]

--------------------------------------------------------------------------------

Hi, good morning. I just had a follow-up actually to Bill's questions. In terms of the volume, if you put aside PD-L1 and the molecular piece, the rest of the business, I just want to make sure that I am interpreting it correctly. So the volume there, are you saying those were a bit challenged because the sales force was more focused on service, or are you saying that because you had such high growth in PD-L1 and molecular, that implicitly impacted the ability to grow in the other side of the business?I'm trying to distinguish between the two I guess, whether PD-L1's cannibalized the growth in any way?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [12]

--------------------------------------------------------------------------------

Amanda, this is Doug. The primary reason was because our salespeople were so preoccupied with client retention during the last five or six months of the year. The PD-L1 growth occurred because we had the capability, we performed the clinical trials, and we were capable of doing the PD-L1 testing when other people were not. And so that sort of happened to us. As a result of good work that we did with Pharma services, but not because of a lot of sales effort.

--------------------------------------------------------------------------------

Amanda Murphy, William Blair & Company - Analyst [13]

--------------------------------------------------------------------------------

Okay. And so when you think about what the sales force is doing on a day-to-day basis, maybe you could just give a little a little more detail around what exactly, obviously I understand what you're saying when you're saying focus on retention, but how does that preclude growth?Is it that they're not in the offices every day, they're talking to different people in the office. I'm just trying to get a sense of why they are involved in incremental growth, just given the touch points between sales and the customer I guess?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [14]

--------------------------------------------------------------------------------

Yes, that's a good question, Amanda. Let me try to shed some context for it here. We have a very good sales team, a very experienced sales team. They are out in the field a lot. They are not in offices much. What they're doing with clients and have done for the last six months, is train a lot of clients about the use of a relatively new system or a different system for those clients, and to train them on new ordering forms, and new contacts. There are a variety of training needs that we have put our clients through, as we've changed from one system to another.

In addition, there has been a lot of training on new products, because the NeoGenomics process was, as you know we have a very large molecular menu, and Clarient had a very large immuno-histochemistry menu, so there is a lot of training that has occurred as a result of that. As clients move, our sales team is in the office trying to help them navigate through translating that training into actual practice. And so they've spent a lot of time doing that, and that's been why we haven't spent a lot of time in our normal selling activities.

--------------------------------------------------------------------------------

Amanda Murphy, William Blair & Company - Analyst [15]

--------------------------------------------------------------------------------

Got it. Okay. And then I had one also on the ASP side. It sounds like, I was going to ask you what the ASP decline would have been without PD-L1, but I think you said to build that it was most of it, is that right?I was going to see if you wanted to give us a quantification there?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [16]

--------------------------------------------------------------------------------

It is not just PD-L1, it's molecular too, which is tending grow at an out-sized rate. Molecular, we still do a lot of single marker molecular tests which are relatively low reimbursement tests relative to the overall corporate average. So the sum of those two were most of the compression in AUP reduction. And in fact that will be most of the compression in AUP reduction that we're projecting on a full-year basis this year.

--------------------------------------------------------------------------------

Amanda Murphy, William Blair & Company - Analyst [17]

--------------------------------------------------------------------------------

Yes. I guess my last one was going to be, and I don't know how much detail you're willing to go here. I think it might be helpful to just kind remind us the various segments. You just mentioned molecular, a lot of that is single gene, but I know that you are doing some panels there. So I guess it seems to me that at least the molecular ASP might increase over time, and then you've got the rest of the business, and then obviously PD-L1 being a detractor to ASP. Can you go back and give us a high level view of the various businesses where ASP is, and how you expect those to trend? Obviously you said some stuff about PD-L1.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [18]

--------------------------------------------------------------------------------

So our overall corporate average, molecular average revenue per test in quarter 4 was about $320.

--------------------------------------------------------------------------------

Amanda Murphy, William Blair & Company - Analyst [19]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [20]

--------------------------------------------------------------------------------

That is a blend of the panels which are counted as one test and the single marker test. It has been trending up slightly, over sequentially in the last three or four quarters, because we're doing more and more panels. But at the end of the date, the majority of our testing is still the single marker molecular stuff. It's not the case where the panels are the biggest piece of it. It's the run of the mill, JAK2, KRAS, EGFRs, and what not. The IHC test that we do, we have an overall corporate average of around $167, however that has actually been trending down, because PD-L1 is only about a $100 test. It's one antibody that we do on an IHC test, so we actually saw a pretty substantial compression from Q3 to Q4 in that, and that's been kind of working the other way as well. We don't really get into a lot of detail on giving our average revenue per test on the other stuff, because we're 58% client bill, and it tends to give a road map to our competitors on where to price things. We're going to demure on any further details at this point.

--------------------------------------------------------------------------------

Amanda Murphy, William Blair & Company - Analyst [21]

--------------------------------------------------------------------------------

Okay. Very helpful, though, thank you.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Drew Jones, Stephens Inc. - Analyst [23]

--------------------------------------------------------------------------------

Thanks. Good morning guys. I just want to make sure I have my arms around where we stand on synergy recognition. Could you give us a little bit better idea about what was actually realized for 2016, I guess how much of the synergy is going to come about as a result of the Alisa Viejo lab combination? And then Steve you talked a little bit about the second half of this year that $7 million to $8 million recognition. Should we split that by 2 and that's basically a $3.5 million to $4 million per quarter recognition?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [24]

--------------------------------------------------------------------------------

Well, first I would like to ask George to sort of address what we've realized and what we expect to realize this year, and then we can talk about the timing.

--------------------------------------------------------------------------------

George Cardoza, NeoGenomics, Inc. - SVP, CFO [25]

--------------------------------------------------------------------------------

Sure. Obviously in terms of you see the reduction in our cost per test in 2016. We've had very significant benefits, obviously the sales teams were combined in the first quarter. That was a significant synergy. Clarient sent out about $4 million of testing a year to various other laboratories, the vast, vast majority of that testing has been brought in-house now, and we're testing it in the NeoGenomics molecular lab. Most of it was molecular. So that was a significant synergy gain. And we were able to combine some contracts on the laboratory side.

But if you think about it, the real significant benefit comes from bringing the two laboratories together, being able to one batch in the wet lab areas, rather than two separate laboratories, that's really where the significant gain is going to come. So as Doug mentioned, the two labs are coming together in late March, so we expect $7 million to $8 million to be realized this year. Obviously if we come together at the end of the first quarter, clearly there will be a tail that will go out into 2018, so we still believe in the original synergy numbers, just the timing, and sort of the phase-in of that. But you should still think $7 million or $8 million in terms of the total synergies for 2017,

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [26]

--------------------------------------------------------------------------------

And that translates somewhere on the order of, the call it a 6% area cost per test this year. We hope we can do better than that. Our internal targets are always better than that. It does get a little funky. How much of your cost per test decrease do you attribute to synergies, versus just scale, and if you would just give us a little license to that, and call it all synergies, those numbers would hold up.

--------------------------------------------------------------------------------

Drew Jones, Stephens Inc. - Analyst [27]

--------------------------------------------------------------------------------

Okay. And then the Pharma services business obviously lock-term outlook there very good, but with the backlog, what percentage do you expect to recognize over the next 12 months, and should that lumpiness, maybe we get a little bit of a snapback in the first half of this year, or is that a second half event as well?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [28]

--------------------------------------------------------------------------------

So we don't actually break out bio Pharma revenue projections. We do expect to see good growth in this year, but I can't really get at answering the question about how much we expect this year, because to get at your percentage of the backlog. Generally we expect growth in the biopharma higher than the overall corporate average growth rate. And as for the lumpiness, Doug, do you want to address that one?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [29]

--------------------------------------------------------------------------------

Let me just say one thing. Each of these projects in the backlog have different terms. Some of these projects would be realized over three months, and some over three years. I would say also that the growth we reported about an 85% growth from the beginning of 2016 to the end of 2016 in the backlog. A lot of that growth came in the second half of 2016. Once a project is signed and put in the backlog, there is a whole timeline that's required before that revenue begins to be realized. That timeline can stretch from three months to six months, as patients are recruited in the clinical trials, and that process moves along. So we would expect that the revenue for Pharma services is going to be a little bit back end loaded in 2017, but we're pretty bullish about it.

--------------------------------------------------------------------------------

Drew Jones, Stephens Inc. - Analyst [30]

--------------------------------------------------------------------------------

Thanks guys.

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [31]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Paul Knight, Janney Montgomery Scott - Analyst [33]

--------------------------------------------------------------------------------

Hi Doug and Steve. Can you talk about your test volume growth outlook on your 2017 guidance via, for both Clarient and core NeoGenomics?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [34]

--------------------------------------------------------------------------------

The mid point of our guidance approximately suggests somewhere in the order of 15% full year volume growth. As I mentioned in my remarks, you should assume somewhere in the order of $355 to $360 average revenue per test on a full year basis this year.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [35]

--------------------------------------------------------------------------------

PathLogic, we would just model as flat for now.

--------------------------------------------------------------------------------

Paul Knight, Janney Montgomery Scott - Analyst [36]

--------------------------------------------------------------------------------

Okay. And then as we think about a multi-year model, will you become a taxpayer, should we think about a tax rate in outer years for NeoGenomics?

--------------------------------------------------------------------------------

George Cardoza, NeoGenomics, Inc. - SVP, CFO [37]

--------------------------------------------------------------------------------

You see the booked tax rate. I mean typically there were some unusual items in the fourth quarter with the impairment and the like, but for the first half of the year we ran 45% to 50%. That would be our more typical booked tax rate going forward. Keep in mind though, that he we do have NOLs, and we are not expecting to be a taxpayer for 2017. And actually for probably 2018 as well.

--------------------------------------------------------------------------------

Paul Knight, Janney Montgomery Scott - Analyst [38]

--------------------------------------------------------------------------------

Okay. And then lastly, the Switzerland facility what, doesn't come online when, and when do we expect revenue from it, Doug, and last on the contract research business, the $37 million of backlog, does that got burned off over what, a couple of years?What is the burn profile on it?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [39]

--------------------------------------------------------------------------------

Paul, George will answer the Geneva question, and I'll take the backlog.

--------------------------------------------------------------------------------

George Cardoza, NeoGenomics, Inc. - SVP, CFO [40]

--------------------------------------------------------------------------------

Yes, we have submitted applications for tax holidays in two Cantons in the Geneva area. We're hopeful to receive the tax holiday, which would obviously be very significant to have in terms of investing. Our plan certainly is to bring the laboratory up, again we've got the expertise here, so we think once we have the site identified, literally in three or four months, we can get some of these testing platforms up, with assistance from US people going over, as well it is an area where we think there's quite a bit of talent already. So our goal certainly is to get it up and running by the third quarter, and hopefully having it contributing to our revenue growth by being able to place European-based studies out in Q3 and Q4.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [41]

--------------------------------------------------------------------------------

Paul, let me try to address your question around backlog, and how that relates to revenue. The backlog will burn over a variety of time periods. It's a lot of different kinds of projects. I think the best way to answer your question, is to suggest that we are looking for revenue growth in Pharma in 2017 of about 20%-plus versus 2016. So that will give you a sense for how it's going to burn. And there will be some projects that aren't in our backlog, that will begin to, we will begin to realize revenue in 2017 as well. But I think that will give you some sense of worth.

--------------------------------------------------------------------------------

Paul Knight, Janney Montgomery Scott - Analyst [42]

--------------------------------------------------------------------------------

Okay, thank you.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Our next question comes from the line of Chris Lewis of Roth Capital Partners. Please proceed with your question.

--------------------------------------------------------------------------------

Chris Lewis, ROTH Capital Partners - Analyst [44]

--------------------------------------------------------------------------------

Hey guys, good morning, thanks for taking the questions. I wanted to start on the LIS migration process, Doug, I was hoping you could just elaborate on the strategies you put in place to help address some of the concerns you talked about with the dissatisfied customers, to ensure you don't lose additional clients going forward?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [45]

--------------------------------------------------------------------------------

Yes, Chris, thanks for the question. As I said the testing process was not where we've had challenges. We've had challenges in I think I mentioned a couple of different areas. Order entry, which we call accessioning in the lab business, is a key one, logistics is another one. In order entry, for example, we've got as people, as our clients were moving to one system from two systems, we had people in accessioning working actually in two different laboratory systems. So some specimens would come in. They would put the orders in the old Clarient system. Some specimens came in, they put the orders in the NeoGenomics system. The NeoGenomics system was different than the Clarient system, so these accessioners, these people who are putting the orders in have to be trained on both systems. Because they're different and because they're moving from system-to-system, they made some errors. When they make errors, what happens is, we might put the client name in wrong, or put the address in wrong, or something like that. These things cause issues.

And then when that happens, then there's a problem hold, and we don't get the test out quite on time, or we have to call back the client, and we've had those kinds of issues. You might say well, that's really easy to fix. Well, it is easy to fix but it just takes a little time, because we have to bring in the right people. We have to train them. We have to make sure that we have the right quality controls. We do a whole number of things, and we put spot teams on this. We have an operations excellence group that is very, very involved. And we're getting these things fixed, but it takes a little time, and there are, as you know this business, there are 500 things that have to happen every single day to satisfy a client. And you can do 499 of them very well, and you make one mistake, and it's a mistake. So I feel very confident that we will get all of these issues well under management and the lab in balance. But it's just taking a little bit longer than we expected.

--------------------------------------------------------------------------------

Chris Lewis, ROTH Capital Partners - Analyst [46]

--------------------------------------------------------------------------------

Understand. And then the 16% pro forma clinical genetic testing growth, do you happen to have a breakout between the legacy Neo and Clarient segments in the quarter?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [47]

--------------------------------------------------------------------------------

We don't because we have now completely integrated Clarient and NeoGenomics clients. They are all in the same system. We could with a very, very deep analysis, but they're all in the same system now. It's very, very difficult for us to do, to break them down.

--------------------------------------------------------------------------------

Chris Lewis, ROTH Capital Partners - Analyst [48]

--------------------------------------------------------------------------------

And in terms of cross selling, it sounds like you still really haven't fully realized the cross selling opportunities yet, with the LIS migration and menu now aligned. When do you expect we could start to see some increased cross selling opportunities?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [49]

--------------------------------------------------------------------------------

You're right. We have not yet had a lot of cross selling going on. We have about four weeks left or five weeks left, before we have the labs put together, and as soon as that happens, we will have a little bit more capacity and room, and we'll have the ability to, and confidence to go out and really, really cross sell. Because we've got a terrific and deep product mix, and a very good service offering, and our sales representatives just can't wait to be able to cross sell.

--------------------------------------------------------------------------------

Chris Lewis, ROTH Capital Partners - Analyst [50]

--------------------------------------------------------------------------------

Got you. Just one more from me. What's the expected interest expense for 2017?Thanks.

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [51]

--------------------------------------------------------------------------------

Well, I'm going to give you a number and tell you that we believe it's reasonably good, but I think you need to give us a little leeway. Approximately $5.4 million for the full year, would be just the pure interest expense on the debt. Obviously that will be impacted by how much lease financing we do. We've been generally replacing leases that run off with new leases, so I don't know that that will vary too much.

--------------------------------------------------------------------------------

Chris Lewis, ROTH Capital Partners - Analyst [52]

--------------------------------------------------------------------------------

Okay, thanks for the time.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [53]

--------------------------------------------------------------------------------

Thanks, Chris

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question comes from the line of Raymond Myers from Benchmark. Please proceed your question.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [55]

--------------------------------------------------------------------------------

Yes, thank you. First question is, did you tell us what the revenue was for PD-L1 in the quarter?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [56]

--------------------------------------------------------------------------------

No, we didn't disclose that, Ray.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [57]

--------------------------------------------------------------------------------

Would you or you won't?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [58]

--------------------------------------------------------------------------------

We don't typically give out revenue by any one product line. I mean it gets right smack at competitive issues and dynamics.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [59]

--------------------------------------------------------------------------------

Okay. Why was it that the second half of the migration was tougher or somehow different than in the first half that had gone so well?I'm just curious kind of what was the difference and what did you learn from that?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [60]

--------------------------------------------------------------------------------

I think the second half, Ray, was a little tougher because we had so many of the larger clients migrating at the same time. And this was an execution, we didn't execute this very well. I will admit. And the clients that migrated sort of in November and December were, a lot of them were from California. And they have their own requirements. And some of those requirements are, they come in at a certain hour, or they are overnight order entry. There are a whole number of issue, that put a little more stress on certain departments, as opposed to having more of a streamlined smooth approach, where we're increasing the volume at all departments on an equal basis. So we had an anomaly in volume growth in certain areas, that stressed certain departments, and had to do it over again, we would have smoothed some of those client migration activities earlier in the year.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [61]

--------------------------------------------------------------------------------

Okay, thank you. And did you feel you have your arms around those issues now, or are you still working them out?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [62]

--------------------------------------------------------------------------------

Yes, we have our arms around the issues and we are working them out.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [63]

--------------------------------------------------------------------------------

Okay, excellent. And turning to the billing issue, is the billing issue resolved now?Same question, are you still working that out?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [64]

--------------------------------------------------------------------------------

No, we are seeing progress, but again, exactly the same as accessioning. When we changed from one system to the other, there was an initial dip in productivity. So the productivity has come up in January, generally we were able to get what was billed out, what came through the lab able to be billed out, but in terms of working the backlog down, that is something that's happening now. We are starting to see that come down in February, and expect that to come down in March. But realize there's a DSO lag, so when you catch up on that backlog in February and March, you're not going to see that cash billing until later into Q2

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [65]

--------------------------------------------------------------------------------

Okay, thanks. Let me just clarify on billing. There are different shades of billing issues. Is it the type of billing issue where it's just difficult to get the bills entered into the appropriate systems in the necessary format?Or is it a billing problem where there's a risk where you may not get paid?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [66]

--------------------------------------------------------------------------------

No. It's just a matter of us processing the volumes and the fact that we had a dip in productivity because of people learning the new system. So it really is just a lag of getting through the claims, and making up for the weeks when we had that productivity dip, as people went from literally billing 100 to billing 40. We lost that productivity gap, and basically we have now we have to catch it up. It really doesn't affect the quality of the claims, it's just a matter of working through those. Even our shortest claim filing deadline is 90 days, and we're well within any limits like that.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [67]

--------------------------------------------------------------------------------

Okay, good. That is helpful. And then finally, just maybe Doug, can you give us a sense of what competence or visibility do you have in restoring the historical growth levels and service levels of the business throughout this year?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [68]

--------------------------------------------------------------------------------

We have a very high confidence level that we will restore the kind of exceptional service that NeoGenomics is accustomed to delivering. In terms of growth, I think all of the growth projections that we've made to you, we stand behind. We have got a couple of quarters here where we've got to resume and reprime the pump so to say. But we are confident that the same growth projections that we've provided in the past.

--------------------------------------------------------------------------------

Raymond Myers, The Benchmark Company - Analyst [69]

--------------------------------------------------------------------------------

Okay. Sounds good. We'll see you in May

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [70]

--------------------------------------------------------------------------------

Thank you. See you in May.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

Our next question comes from the line of Bryan Brokmeier of Cantor Fitzgerald. Please proceed with your question.

--------------------------------------------------------------------------------

Bryan Brokmeier, Cantor Fitzgerald - Analyst [72]

--------------------------------------------------------------------------------

Hi, good morning. Is there anything materially different in the reasons behind the lost clients in the fourth quarter, or the tone relayed to you compared to the client you had previously lost, and said you had gotten back?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [73]

--------------------------------------------------------------------------------

I would think so. I mean I think that it all comes down to service. And if a client recognizes that we are delivering and are capable of continuing to deliver a very strong service, we will generally keep that client. We have very good client relationships. I think people are willing to be patient with us, if we have a turnaround time which may slip a bit, because generally our turnaround times lead the industry. But we've got make sure that we treat our clients well, that they know that they're valuable to us and that we get our service back in line with what they expect, and we intend to, we are delivering that for the most part today, and we've got a few outliers that we've got to pay a little attention to.

--------------------------------------------------------------------------------

Bryan Brokmeier, Cantor Fitzgerald - Analyst [74]

--------------------------------------------------------------------------------

Okay. And you announced the $150 million credit facility at the end of December. You still have dry power for M&A or for repurchasing the remaining preferred shares, and you get a discount on the repurchase of those preferred before the end of the year. So should we expect that you most likely use your cash flow and the remaining revolver for those shares later this year?How should we think about your capital deployment plans?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [75]

--------------------------------------------------------------------------------

You can think about it that we're going to make decisions which are based on the economics. So right now, we are in the market looking at opportunities to grow our business, both organically and through M&A. And if we are presented and are able to negotiate some deals that make sense to us, we'll deploy our capital in that way. We know what the recurrent is if we deploy our capital to redeem the remaining preferred stock, and that's sort of a benchmark for us to work against.

--------------------------------------------------------------------------------

Bryan Brokmeier, Cantor Fitzgerald - Analyst [76]

--------------------------------------------------------------------------------

Okay. And PathLogic continues to be a little bit of a drag on the business. Have you given any consideration to divesting it?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [77]

--------------------------------------------------------------------------------

Yes, PathLogic's performance has not met our expectations, and we're evaluating all of our strategic alternatives, and we would expect to be able to provide more clarity on that over the next few quarters.

--------------------------------------------------------------------------------

Bryan Brokmeier, Cantor Fitzgerald - Analyst [78]

--------------------------------------------------------------------------------

Okay. And lastly, given the revolver that you have in place, what level of cash are you comfortable drifting down to, as you engage in M&A or repurchase those shares?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [79]

--------------------------------------------------------------------------------

I think if you look at our balance sheet as of December, that's probably about the cash balance you should expect to see on our books. I think obviously we don't want to take it completely down. We do have, we want to have some dry powder, and that's the level you should expect going forward.

--------------------------------------------------------------------------------

Bryan Brokmeier, Cantor Fitzgerald - Analyst [80]

--------------------------------------------------------------------------------

Okay. Good. Thanks a lot.

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [81]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [82]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [83]

--------------------------------------------------------------------------------

Our next question comes from the line of Joe Munda of First Analysis. Please proceed with your question.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [84]

--------------------------------------------------------------------------------

Good morning, can you hear me okay?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [85]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [86]

--------------------------------------------------------------------------------

We can, sure.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [87]

--------------------------------------------------------------------------------

A couple of questions. Just piggybacking off some of the client migration questions, Doug, can you let us know how many clients actually were migrated in the fourth quarter?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [88]

--------------------------------------------------------------------------------

Yes. Let me describe larger clients. So we migrated in total about 2,500 clients. I would say that about half of the larger clients migrated prior to November and December, and about half migrated in November and December.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [89]

--------------------------------------------------------------------------------

Okay. Can you give us a ballpark of how many larger clients you guys have?So we can kind of --

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [90]

--------------------------------------------------------------------------------

Yes. We struggled a little bit with this, because we haven't previously disclosed how we describe clients, but I would say that we migrated about 700 of the larger clients in November and December.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [91]

--------------------------------------------------------------------------------

Okay. That is helpful. As far as the facility in Switzerland, you guys talk about opening in third quarter 2017. I'm just wondering, does the guidance reflect revenue contributions from that facility in 2017?Or is there upside there?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [92]

--------------------------------------------------------------------------------

There may be upside there. We try to be conservative in that. We reported the backlog of I think $37 million for Pharma services. I don't believe that there's any backlog in there for international trials or projects. So if we were to book some, that would go in the backlog, and we'll see how quickly we can realize it.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [93]

--------------------------------------------------------------------------------

Okay. That is helpful. Then I guess looking forward on that facility, could that facility essentially accelerate Pharma growth above the 20%?Doug, you talked about as far as growth is concerned in 2017?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [94]

--------------------------------------------------------------------------------

Yes, it might.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [95]

--------------------------------------------------------------------------------

Steve, op CapEx and head count related to that facility, can you give us a sense of what that would look like?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [96]

--------------------------------------------------------------------------------

I think our expectation initially is in the $2 million ballpark. Again it's not going to be a large facility. We're probably talking 12 to 15 people to start, and then clearly the revenue and the contract wins will drive ultimately how much we grow. That would be a happy problem to have, if we had so much business that we had to put more capital into it.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [97]

--------------------------------------------------------------------------------

Okay. And then as far as PathLogic is concerned, you guys recognized an impairment charge there. In the fourth quarter. Are we assuming further impairment charges as we move through 2017, or do you think we've seen the last of them?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [98]

--------------------------------------------------------------------------------

We took a charge to write off the remaining intangible value that we assigned the customer list when we did the acquisition, so that's it.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [99]

--------------------------------------------------------------------------------

That's it.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [100]

--------------------------------------------------------------------------------

Okay. And then I guess my last question, more of a macro picture here. New administration coming in, Tom Price, HHS Secretary, I was just wondering, I wanted to get your take on what you guys feel expectation-wise going forward, if you're confident about diagnostic testing particularly in the oncology space, any interactions, early on would be great? Thanks.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [101]

--------------------------------------------------------------------------------

Okay, thanks for the question about that. I think generally we are pleased that the current administration is one in which, we're regulated heavily, and I think the current administration obviously has announced that they going to try to roll back some of the regulations. There are two that affect our industry a lot, one is the so-called LDT proposed guidance. This is a laboratory developed test guidance that the FDA proposed to regulate over the last few years. As a result of the new administration, primarily the FDA decided that they were not going to finalize that guidance. That doesn't mean that the guidance has been withdrawn. There is a difference. They decided not to finalize it. I think that Congress is probably more supportive than they have been in the past of potentially a legislative solution to the LDT issue. And I think the industry is going to try to figure out whether we should pursue a legislative solution, rather than to just allow the FDA to propose something, and we can work collaboratively with the legislature and the FDA.

In terms of the other big item is called the PMA, and PMA is a way to instill some market-based pricing in the clinical lab fee schedule. And that legislation is proceeding at the current pace of implementation in 2018. I would remark that the clinical lab fee schedule change only applies to NeoGenomics in two different test types. One is molecular, and the other is cytogenetics. And as a result we don't expect that PMA implementation will greatly affect NeoGenomics. I think just for information, there is a sense in the industry that PMA is not broad, and not in its definition of what laboratories should provide these data. Right now only about 5% of laboratories are submitting private payer data to CMS, and the industry believes that that's insufficient, and there should be a broader collection of data to get the true market-based measure. So that dialogue will continue I expect. And we'll see what happens as a result. But I think the industry is encouraged that we may be able to have better dialogues about these important matters facing the industry.

--------------------------------------------------------------------------------

Joe Munda, First Analysis Securities - Analyst [102]

--------------------------------------------------------------------------------

Okay, thank you.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [103]

--------------------------------------------------------------------------------

You are welcome.

--------------------------------------------------------------------------------

Operator [104]

--------------------------------------------------------------------------------

Our next question comes from the line of Bill Bonello of Craig Hallum.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [105]

--------------------------------------------------------------------------------

Okay, thanks guys for taking all of these questions. This is short-term focus, but just to make sure we don't run into problems unnecessarily. The Q1 revenue in EBITDA consensus that's out there is $65 million, and $10.5 million for EBITDA. It just strikes me that there's one less day in the quarter, you're still working through the lab integration. Those feel like they might be a little bit on the high side. I am wondering if we should think of the quarter as being maybe more flat sequentially from a revenue and EBITDA basis, and then progressing throughout the year, I guess kind of forcing you into Q1 guidance if you give it, or at least parameters?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [106]

--------------------------------------------------------------------------------

We appreciate the question, Bill. We don't typically give forward quarter guidance. I think it does warrant giving a little pit more color on this right now. We do expect the growth this year to be sort of back end biased. In Q1, we think analysts would be sort of well-served by setting up their models with just minimal growth, maybe in the $61 million to $62 million of revenue range. Certainly EBITDA if you're not doing $65 million of revenue, EBITDA would probably need to come down into the $7.5 million to maybe $8.5 million range at the most. And I think if the analysts reset their Q1 around those levels, and then kind of project from there, on the full year guidance, we'll get close to being in the right zip code for everybody.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [107]

--------------------------------------------------------------------------------

Perfect. That is very helpful. And then just because I have you, I'm going to try one more time at Drew's questions earlier on the synergies. And I know it's imprecise, as we are thinking about the growth opportunity, I mean how much of the $24 million to $30 million of synergies is probably still ahead of us, in terms of looking at we're at today, and then sort of layering on incremental EBITDA?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [108]

--------------------------------------------------------------------------------

So when you talk about synergies Bill, you really have to look at what's realized in the period, and then what the run rate is at the end of the period. So we stated last year that we expected to do $6 million to $8 million, and sort of generally hinted we were at the mid point or better of that. We just stated in our remarks this year that we expect to realize another $8 million or so this year. So let's call that $15 million of the total will be realized, or in the mix, if you will, by the end of this year. However in Q4 of this year, we'll be on a much higher run rate from those. As to whether we're on a run rate to do the full $24 million to $30 million or not, that sort of remains to be seen, and you'll have to give us a little bit of room on that. But we do believe that it's only going to take a few quarters of operating the labs and the combined facilities off the one laboratory information system and one billing system, to begin to unlock meaningful synergies.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [109]

--------------------------------------------------------------------------------

Okay, perfect. And those are when you talk about the synergies, you think of those as truly incremental to just the normal EBITDA growth you would get from revenue growth and normal leverage?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [110]

--------------------------------------------------------------------------------

So again it gets hard to separate out. What's a synergy and what's a benefit of scale?I mean they're almost one in the same, because we added so much scale. If you just think about somewhere in the order of 5%, 6% cost per test reductions, that would get you to around $7 million or $8 million of cost reductions on just the clinical genetics side. Now there will be some other stuff that shows up in DNA as well, but we're also making investments. We're making investments in Switzerland, and what not. So it gets hard to really get too precise on all this stuff. But we think the bulk of the synergies will come in the cost to goods sold line item, as we continue to unlock the benefits of having everybody on the same system and in the same facility. George, did you want to add anything to that?

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [111]

--------------------------------------------------------------------------------

Let me just build on that. Just one quick comment. Let me give you an example of what Steve was talking about. We are applying supplies agreements that Clarient had and methodologies that Clarient had to some NeoGenomics processes. Now would we have eventually figured out a better way to reduce costs, probably. But because we have these processes and we understand them, we are getting $2 million, $3 million, $4 million of synergies just as a result of that. And so I think that we can stand up and say, the synergies that we talked about are very real as a result of this deal. And I think we're on track with accomplishing the synergy projections that we talked about.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [112]

--------------------------------------------------------------------------------

Okay. That is helpful. I mean the reason, just so you understand the reason I was asking, is more about thinking about modeling long term. I think there's a tendency for both investors and analysts to put some basic level of EBITDA growth, and then they want to, we want to layer an incremental $15 million of synergy on top of that or whatever. And it sounds like from what you're saying, is that might be a bit aggressive, if we did sort of both growth and layered in that complete synergy on top of it. Some of the synergy and growth are redundant?

--------------------------------------------------------------------------------

Steve Jones, NeoGenomics, Inc. - EVP Finance, Chief Compliance Officer [113]

--------------------------------------------------------------------------------

Yes, I think that's right. If you just took where we finished last year, $34.7 million of EBITDA and took the midpoint of our EBITDA guidance this year, it's 32% implied EBITDA growth, which ain't too shabby. Moving in 2018, EBITDA growth should be higher than the revenue growth again, whether it will be another 32% or not remains to be seen. But certainly as we unlock synergies on a full run rate basis by Q4 2017, a lot of that is going to accrue to EBITDA improvements in 2018, and we haven't given any out year guidance yet, but certainly EBITDA growth in excess of revenue growth, and probably meaningfully in excess of revenue growth is not a bad assumption for 2018.

--------------------------------------------------------------------------------

Bill Bonello, Craig-Hallum Capital Group - Analyst [114]

--------------------------------------------------------------------------------

Yes. Great. Thank you.

--------------------------------------------------------------------------------

Doug VanOort, NeoGenomics, Inc. - Chairman, CEO [115]

--------------------------------------------------------------------------------

Okay. Thank you everyone. So as we end the call here, I want to recognize the 969 NeoGenomics team members around the country, for their dedication and commitment to building a World Class cancer genetics testing program. And on behalf of the full team, I want to thank all of our investors and analysts for your time in joining this morning for our fourth quarter 2016 earnings call. And let you know that our first quarter of 2017 earnings call will be held on or around April 26th of this year. For those listening that are investors or considering an investment in NeoGenomics, we thank you very much for your interest in our Company. Good bye.

--------------------------------------------------------------------------------

Operator [116]

--------------------------------------------------------------------------------

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.