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

Good morning. I'd like to welcome everyone to NeoGenomics' second quarter 2015 conference call and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters we have Steve Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer; Rob Shovlin, our Chief Operating Officer; Steve Ross, our Chief Information Officer; and Fred Weidig, our Controller and Principal Accounting Officer. Dr. Maher Albitar, our Chief Medical Officer and Director of Research & Development is joining us from our Irvine, California lab. Before we begin our prepared remarks Steve Jones will read the standard language about forward-looking statements.

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

Okay, thanks, Steve. I will focus my comments in this morning's conference call on growth and cost reduction initiatives including the numerous opportunities we are pursuing in the second half of the year and in 2016. Steve will then review our quarter two financial results and lead us through a Q&A period. This morning, we released results for the second quarter which showed revenue growth of 18% over last year. Half of that was driven by the including of PathoLogic and half from the core NeoGenomics business. Our company has grown rapidly in a variety of environments over each of the past five years and we believe we can continue to grow strongly for the foreseeable future. I'll comment first on the key growth dynamics impacting Quarter Two on our base business excluding PathLogic and put them in context with our longer term growth prospects; I'll discuss PathLogic in a few minutes. Second quarter growth in our base business was once again broad-based. It came from all major geographic regions with the western and central regions of the country experiencing the largest increases. Growth also came from all testing categories with molecular testing experiencing the fastest growth. In Quarter Two, test volume at our base business increased 21% over last year's level. Volume growth fluctuates from quarter-to-quarter depending on particular dynamics, but has averaged approximately 30% during the past four years. Quarter Two core volume growth would have been 28% were it not for our largest customer that began performing their own FISH testing in-house in mid-2014. Since the ramp up of their in-house testing occurred in the second half of last year, our year-over-year growth rates won't return to more normal levels until the end of this year. We are pleased that core volume growth is healthy and consistent…

Thanks, Doug. Before we open it up for queasiness I would like to briefly touch on a few financial highlights and then discuss the proposed reimbursement rates that came out for 2016 from Medicare recently. In the second quarter, we are pleased to have reported $24.3 million of revenue, an 18% increase over Q2 2014 despite the 10.6% decrease in average revenue per test in base NEO's operations which were largely as a result of the FISH reimbursement changes that went into effect on January 1. Approximately, $22.4 million of this revenue was from base NEO and $1.9 million from PathLogic. We talked at length on the first quarter call about the draconian cost for FISH reimbursement by CMS. So, I will not go into a lot of detail here, but to give you some context our average revenue from Medicare FISH test has gone down approximately 23% from last year and our average revenue per commercial insurance FISH test has gone down almost 49% on a year-to-date basis versus the prior year. This is on half of the 45% or so reduction in Medicare FISH reimbursement we experienced in 2014 as a result of the NCCI initiatives. These are massive changes they have to observe in such a short time and we are cautiously optimistic with the recently released preliminary rule making for the 2016 physician fee schedule will get us back on more realistic FISH pricing. Earlier this year, we said that we estimated the reduction to our revenue from these reimbursement changes across all payors would likely be $6 million to $8 million on a full year basis in 2015. Given that we now have had $2.1 million negative impact in both the first and second quarters, we now expect a full year impact on revenue to…

[Operator Instructions]. Our first question is from Bill Bonello from Craig-Hallum. Please proceed.

Good morning, guys. Just a couple of follow-up questions here. First of all, just making sure I sort of understand the nuts and bolts of the guidance, when you gave your initial revenue guidance last quarter you stressed that you didn’t have complete clarity on what the commercial payors actions would be relative to FISH and you had to make your best estimate and obviously that proved not quite conservative enough. At this point, do you believe you have a free comprehensive view of where the rates have settled across the payors?

Yes. We do, Bill. We're running about 49% on the commercial payor FISH reimbursement, 49% reduction versus last year, which is about 10% higher than originally we thought. While we did some success of getting a couple of the larger payors increase their FISH rate, most of the payors have just decided that their index to Medicare or their benchmark against Medicare or the benchmark against Medicare, and it's been an hand to hand combat with a lot of them. We have over 800 commercial players in our mix and we can't get them all, but on a good news front once Medicare raises the rates in 2016 we will have ample ammunition to go back to those payors and suggest that they really need to raise the rates.

Okay. That makes sense, but we should not expect any in future quarters at this point that should not really be subject to revision what the impact is from the FISH fees.

No, I think we are pretty well got it scoped out this point.

Okay. And then if am looking at the numbers correctly, it looks like there was a pretty significant year-over-year and maybe sequential reduction in the revenue per requisition at PathLogic this quarter. I guess you know year-over-year because I didn't have last quarter's, but relative to where it has been during the last quarter and the last couple of quarter is something going on there, has there been either a loss of the high value business, or have there been rate cuts on that side of the business, what accounts for that?

Bill, it is a little bit of both. We did lose one hospital system that had a relatively attractive price, but also one of the things we have via electron microscopy department out there and those codes were cut for 2015. So, it is a little bit of both in terms of the PathLogic [indiscernible].

Okay, in the sequential presumably that the sequential decrease it wasn't related to the Medicare rates, is that right that would have been to the loyal customer or something?

That would be right, yes.

Okay. Great. And then just one point of clarification on Doug's comments. You talked about having 500 samples now for your liquid biopsy. I guess it was not specifically sure if that was prostate specific that you are talking about or if you could just clarify on that?

Yes, Bill. So that was in reference to our latest work to develop our prostate cancer test. We have reported on that before. Actually Rob Shovlin, our Chief Operating Officer, has been working on the commercial aspects of that. Rob, you want to make a couple of comments about that?

Sure. Hey Bill, so historically on the earnings calls we focused mostly on the development of the assay and we have accomplished quite a lot of that front. Dr. Albitar in the R&D team published the paper in 2014 which was our first site in prostate cancer with 141 patients and that was accomplished in genetic testing and molecular biomarkers and we followed that up with a second study of 319 patients. That was accepted as poster at ASCO in 2014 and that site now has been submitted to a journal for publication as well. And so the site we were talking about today is the third study in prostate cancer where we have a goal of 800 patients and we referred about 500. Since the last earnings call we have several more sites that are now participating in that study. So we are accruing cases that are at faster rate. Personally for me I try to focusing more of my time on the commercial launch, and as you can imagine there are a lot of details to consider especially since we are entering a brand new market for NeoGenomics. Given that we do not have a lot of existing presence or any presence in urology it is important that we make a great first impression there. So we are working on that commercial plan as well and shifting our focus to commercialization from development.

Okay. Great. That is pretty helpful, thanks.

Good. Thank you, Bill. Let me just follow up really quickly about your question about PathLogic. So it has taken us longer to get the revenue synergies that we wanted at PathLogic, there are couple of reasons for that. One it is integrating the lab information system and the second is getting our NeoGenomics sales force all geared up and trained. We have made a lot of progress on PathLogic in terms of the laboratory. We really feel good about the laboratory, we have just come through an excellent inspection of that lab and I think we are making a lot of progress with PathLogic. We just have not seen it in our financial results yet.

Our next question is from Debjit Chattopadhyay from ROTH Capital Partners.

Good morning guys. Thanks for the questions. Firstly, on the proposed CMS changes to the rates going forward. So what can NEO and the industry is doing to make sure that CMS does not repeat the 2000 fiasco?

Thanks for the question, Debjit. So we are doing a few things. First is we are making sure that CMS knows that they are doing the right thing on the FISH corrections for 2016. A number of labs and providers are trying to communicate with CMS to let them know that that those rates for 2016 for FISH are appropriate. Relative to the flow cuts, we have just understood this within the last week and we are still trying to understand exactly why they cut them, what the components of those reductions are we will be sure to comment to CMS about those cuts. Quite frankly, a 70% cut is very disruptive to the whole industry. We would really argue very, very closely and very vehemently with Jim and ask that if we're going to cut something, you know they got to make it into a three or five-year sort of process to give the industry a time to observe these cuts and to pursue alternative strategies. We continue to have dialog with CMS; ACLA does, CAS does and it is a process.

Okay. Great. And then have you guys already reached out to managed care or do think you want to basically the ruling comes in before you can actually have a formal discussion with managed care regarding 2016?

So as we learned last year there can be changes between the preliminary rule and the final rule. It is probably as best to wait till the final rule is out and then we can bang the table on it. And I think we are having conversations generally with managed care, but we will get much more specific and intentional after the final rule comes out.

And moving on to PathLogic, the synergies that you were expecting from that acquisition it is not clearly materialized on selling bad businesses, [indiscernible] to your core customers, but what is your part on the other way around, I mean selling NEO's core practice businesses to the PathLogic accounts?

Yes, actually Debjit, we are making some progress there. So in Northern California we did not have a big presence before in NeoGenomics and we have been making a number of presentations to hospital systems there and the client explaining for example our molecular menu or beginning to make progress entering some of those accounts for the NEO core services. We would like to be serve a one stop shop for those clients and to be able to offer the PathLogic services as well as NeoGenomics. We are trying to sell to existing NeoGenomics clients the specialty pathology services that PathLogic offers those would include renal pathology in women's health and dermatology or dermatopathology consults and things like that and we have not made progress there yet, but I think we will.

And then [indiscernible] test I believe you basically have now doubled the number of patients you have technically enrolled in the study from your betascroll protocol. When you say 2016 launch when do you think that launch is like to materialize? Are you really going to wait for a big national conference like the ASCO or [indiscernible] something like that or do you think it could happen pretty early in 2016 considering the test is now been potentially more than a year delayed?

Hey, Deb, this is Rob. So on the commercialization again for those others on the call, urologists and primary care physicians need a test that can better discriminate which patients are likely or unlikely to have cancer and which are likely to have high grade disease and we believe our test can have a real impact on these patient's lives. As I was saying to Bill, we're being very deliberate with the planning here because we're entering a new market and we want to live up to high standards set by NeoGenomics at our core business and we want to make a great impression. So we're being deliberate with that planning process but I'd expect that it would be in the early part of 2016. Probably the best time [indiscernible] when the American Urological Association meeting occurs to have something out so you can make a big splash at that meeting. ASCO happens around the same time but the initial push will be in the urology community followed by more general practitioners.

And one last question on the clinical side of the business segment. You mentioned $8 million in business won already. Has that started to reflect in your top line or that’s more of a second half in 2016 story at this point?

Well, it's just beginning actually, Debjit. So we continue to believe that the clinical trials business is a real opportunity for us. And the awarded business takes a little time to have the investigator sites all up and running and that sort of thing as you know. So it's beginning. We're also starting to make progress developing our direct to pharmaceutical channel. We've made some important hires in that area and so we'd expect that the business would ramp up as we go forward here.

Our next question is from Amanda Murphy from William Blair.

I just had a few more questions on the test situation. So I think what you're saying based on your answer to Bill's question was that in terms of the guidance you say that you are ending up not getting as much as you thought, is that the right way to think about the difference?

Well, I think the best way to think about it is the [indiscernible] was a little bigger than we thought. And we made some progress some of the larger guys but getting to the bulk of the insurance companies and getting in any meaningful changes is likely not going to happen. And so we get the final rule for 2016 published. We have had discussions with numerous of them but to get smaller insurance companies who are hell bent on having a benchmark to Medicare even engage you in a conversation like this quite a lot of energy.

And then the amount you quantified for 2016 in terms of the those initial benefit from all the changes, can you just talk a little bit and I guess maybe specifically around, well, I guess both test and flow kind of what the Medicare benefit vis-à-vis the private pay. So I'm just trying to get a sense of what you're specifically assuming on the private pay in terms of them maybe giving you some back from 15 versus the straight Medicare benefit?

Well, it's an estimate, and its preliminary estimate at that, but if you take the chemical component going up by 90% on the multiplex automated FISH and you assume that the private payors were below Medicare to begin almost all of them, our initial estimates are somewhere on the order of half of that we would get from Medicare we would get from the private payors. And again that’s just a preliminary estimate based on where we are at now. And on the flow side commentary we don’t think it will go down as much as Medicare because the private payors are well below Medicare in some cases on flow depends on how where you are and what exactly the markets are but so maybe it’s a third to a half of the impact on the flow side commentary side. That third to half being back to Medicare on the commercial side. But you got to also look AHD going by 30% and you got to look at morphology going down, you got to put it all into the blender and range bound it and come up with a decent range and we may get some of these a little wrong but we're hoping on average to come about where we think we're going to be. We generally try to be very conservative as you know on these types of estimates.

And then just another one on reimbursement, so just thinking forward what else is out there? I mean, you got PEMA which maybe as you [indiscernible] clinical lab you still go back at the potentially [indiscernible] and kind of frame out what kind of left here? I know obviously '16 look better with the FISH increases but maybe longer term you're thinking what else is on the table potentially?

So Amanda, the [indiscernible] fee schedule for next year at least came out amply flat for this year for the mix of business that we've performed at least. We think that -- well, if you look at our mix of payors, right now about half is client bill under contract. So if you look at just the Medicare piece of that, I mean they cannot head, kind -- and just about everything that we do. And of course their commentary was the last one that we have talked about that we knew was on the "misvalued code risk" and so they are looking at that obviously as we discussed for 2016. I'm not sure what else there is [indiscernible]. But I'll give you guys a little context. If you look at 2006 to 2009 what I call as the glorious years, where average revenue per test was increasing 4%, 5%, 6% and even 7% one year on average bar mix of testing. If you look at 2010 through 2015, we have seen cumulative reductions to overall average revenue per test more than 30% in that six year period and that's something you can't keep doing that forever. So we are I don't know cautiously optimistic may be even optimistic that the worst is over and that we are going to see at the worst stable pricing and at the best nice [move is] upward. Medicare has actually very reasonable, they're very -- they want to get the policy right. When they over touch something they usually put it back. When they change around for a cytology reimbursement in 2015, they increased it pretty aggressively over the next few years after everybody stream blood [indiscernible] and they realizes they got the policy wrong and lapsed for selling themselves. And I think they launched capacity in the system very closely and when capacity start to go other system all realizes they probably got in the wrong. And we have a great relationship with Medicare and we don't want to single them out. And at the end of day, we actually really do believe that they're trying hard to get the policy right. And we'd like to be a source for them to help input their thinking and influence their thinking. And so we are going to comment on all these things. But we just can't see a scenario where there is any further [indiscernible] in content, how you think view at this in time, it just -- it wouldn't make sense.

Yes. Let me just build on one aspect of that. It's not all that. I mean, for trigonometry, let's just take that as an example. We think we have a low cost physician and we have a terrific product. Already hospitals are closing down their flow leads and we are beginning to benefit from those things. So we would expect in the future to have a lot more volume growth in instances where hospitals look at it and say we just -- this is unprofitable for us to keep running flow. So that' the case where our work off position is going to even as revenue per test declines our profitability would be -- the impact would be mitigated because of the volume growth.

Got it. Okay. And just last one for me on the clinical trial commentary. Was any of the guidance reduction kind of related with the comments what was mentioned [indiscernible]? And maybe just if you could give us a little more clarity on what that means going forward in terms of -- is it going [indiscernible] or is it just not quite in line with our expectations?

Yes. So the guidance reduction was all about PathLogic and FISH as Steve mentioned. Our clinical trials business is about where we thought it would be and it's about on our [indiscernible] number for the year. We actually are gaining momentum in our clinical trials revenue on a month-by-month basis. And its slower growth than we expected, but it's growth nonetheless.

[Operator Instructions] Our next question is from Jeff Bernstein from Concept Capital.

Hi guys. Just back on the expected $4 million to $6 million potential increase from the CMS rate increase in 2016, could you talk about what that [indiscernible] fall through order all like to operating income on that?

Yes. So when you have a price increase the only incremental expense on it are commissions only selling it and on the incremental bad debt. And we would expect somewhere around the 92% to 92% of that to fall through to adjusted EBITDA and network income.

Great. So we should be seeing the benefits of the leverage here that's building underneath?

We certainly hope so. In fact if you combine rate increases with continued reductions in cost for test interesting things start to happen.

And in the flow cytometry I think you guys have some pretty advanced flow stuff that you do, is that what this is focused on or this is just generic flow overall?

The [late] flow cytometry is billed as you get one rate for the first marker and then you get a much lesser rate for additional markers. Medicare has limited the number of markers you can bill to 24, so we typically bill 24. In most of the complex heam cancers that we do flow cytometry on the medical standards, goal standard is to do somewhere between 28 and 31 markers. In other applications of flow cytometry you wouldn't bill as many markers, but the heam cancers generally you want to look at that. And so you'll see us do 24 panels, usually pretty consistently on our Medicare cases. And so when they reduce the price on the additional marker by 70% it has a pretty big impact on our overall business. The are other uses for flow cytometry like EKB, there is some EKB testing, there is other uses that have less than 23 or 24 markers, but for us it's mostly just cancer and the heam cancers.

Got you. Okay. And so heam cancers are kind of a big growth area. So -- and we're trying to just wrap our brains around kind of with the madness behind the method is at CMS. It still sort of feels like they are kind of taking blunt instruments to whatever areas are growing quickly out there. Is that still basically what's going on there?

Well, I think CMS does scrutinize tests, which are gaining in volume much more so than others, yes. We don't really know what criteria go into their definition of misvalued codes, but FISH was a misvalued code three years ago, flow cytometry was in last couple years. Those were based on we believe their growth in those test types. None -- after flow I'm not sure of any misvalued code items on their radar screen that we performed.

Okay.

And we feel little worked on the [indiscernible] XL, tables with the rules and we did a little work on the supplies cost input and it looks like they dramatically reduced the allowable reagent cost for flow [indiscernible] in the 2016 assumptions. And obviously, one of the first things we'll be doing is assessing in where they think it should be versus what we own practices. We believe we'll be able to light a pretty good common letter; we have a different point of view on that.

Operator, I think there is no more questions in the queue. And we haven't received any further questions via email. So Doug, I'll turn it back to you to wrap the call.

Okay. Steve, thank you. As we end the call, we'd like to recognize all 447 NeoGenomics team members around the country for their dedication and commitments to building this world-class cancer genetics testing program. And on behalf of all of our NeoGenomics team, I want to thank each and every person on the phone for your time joining us this morning for the quarter two 2015 earnings call. Let you know, that our third quarter 2015 earnings call will be on or around October 22 of this year. So for those of you listening who are investors or considering an investment in NeoGenomics, we thank you for your interest in our company. Good bye.

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.