NeoGenomics, Inc.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Greetings, and welcome to the NeoGenomics Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Doug VanOort, CEO for NeoGenomics. Thank you, Mr. VanOort. You may now begin.

[Douglas M. VanOort:]

Thank you, Christian. Good morning. I'd like to welcome everyone to NeoGenomics' Second Quarter 2013 Conference Call and introduce you to the NeoGenomics team that's here with me today. Joining me this morning are Steven Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer, Bob Gasparini, our Chief Scientific Officer; Steve Ross, our Chief Information Officer; Fred Weidig, our Director of Finance and Principal Accounting Officer; and Jerry Dvonch, our Director of External Reporting. Dr. Maher Albitar, our Chief Medical Officer, is joining us from our Irvine, California office by phone. Before I begin our prepared remarks, Steve Jones will read the standard language about forward-looking statements.

[Steven C. Jones:]

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

[Douglas M. VanOort:]

Okay. Thank you, Steve. I'll begin our call today with some remarks about our performance in the second quarter of 2013, discuss some important initiatives and comment briefly on the recently issued proposal by CMS. I'll then turn the meeting back over to Steve to discuss our financial results in more detail. Second quarter profitability was solid, as our operations continued to execute well. However, we were disappointed that test volume growth and revenue were slightly below our expectations. The revenue shortfall versus our estimates was caused by 3 things

[Steven C. Jones:]

Thanks, Doug. I'll start by reviewing some of our financial and operating metrics for the second quarter, and then we want to open it up for questions. Second quarter revenue was $15.6 million, unchanged from Q2 last year. Test volume grew 12.7% versus last year. As in previous quarters, growth in molecular testing led the pack with 53% volume growth and 25% revenue growth. Average revenue per test, overall, was $480, an 11% decline from Q2 2012, primarily as a result of the expiration of the TC Grandfather Clause and the changes to the molecular reimbursement finalized this past quarter. The sum of these 2 impacts totaled almost $1.6 million or approximately $49 per test. Absent these impacts, revenue would've been 10.2% higher than the second quarter of last year. For those of you that tracks such things, our average revenue per molecular test was about $190 per test in Q2, which was down about 19% from Q2 last year, and we have now fully rolled through the molecular reimbursement cuts from Medicare and made appropriate assumptions for what the private payors will do for our molecular testing mix. Gross profit was $7.2 million, a 3% decrease from last year. Considering a large decrease in average price per test, we were quite pleased to hold margins in this area constant. As we have discussed, we have created a number of best practice teams to really go after improving our efficiencies and ringing out incremental cost savings. Average cost of goods sold per test was $260 versus $286 in Q2 2012 and $262 in Q1 2013. As Doug discussed, we believe we can make further improvements in these metrics by year-end. Turning now to SG&A. Total sales and marketing expenses increased by $37,000 or 2% versus quarter 2 last year and was up by about $40,000 from the first quarter of this year. As Doug mentioned, we have added 5 experienced sales professionals to our sales and marketing teams since the end of Q1, 3 of which were replacements and 2 were new. All of these hires occurred at the very end of the quarter or after the quarter ended. We're also expecting to add 1 to 2 additional sales rep during quarter 3, so investors should expect our sales and marketing expenses to go up in the coming quarters. General and administrative expenses were unchanged from last year, and R&D expenses increased by $89,000 or 17% versus Q2 2012. This increase in R&D spending is directly related to the significant increase in our molecular test expansion activities and the activities associated with the development of our new prostate cancer test. Total SG&A expense was up just $124,000 or 2% year-over-year. It was actually down $290,000 or 4% from the level posted in Q1, mostly as a result of decreases in stock-based compensation. Net income for the quarter was $273,000 or $0.01 per share compared to net income of $551,000 or $0.01 a share in quarter 2 2012. This decrease in profitability is due entirely to the loss of approximately $1.6 million of revenue from the unit price decreases that accompanied the TC Grandfather expiration and the molecular reimbursement changes. Depreciation and amortization was $1.1 million in the second quarter, and noncash stock-based compensation was $202,000, which resulted in adjusted EBITDA of approximately $1.8 million, essentially unchanged from the $1.9 million reported last year, despite the decreases in average revenue per test. We finished the quarter with 293 full-time equivalent employees and contract doctors as compared to 282 at March 31, and 268 at December 31 of last year. Our accounts receivable balance net of allowance for doubtful accounts was $16 million at June 30, up approximately $400,000 from the balance at March 31. Our AR balance in terms of days sales outstanding was 93 days as of June 30, up 3 days from the level we reported at March 31. The increase in DSO was mostly due to the fact that we are in the process of implementing a new billing system, which is scheduled to go live shortly, which has distracted our focus on collections somewhat. In terms of our overall liquidity, as of June 30, we had $4.6 million cash on hand and $6.8 million of availability under our working capital line of credit, which results in $11.4 million of total liquidity as compared to $10.4 million of total liquidity at March 31. Our cash flow from operations in Q2 was $1.9 million as compared to negative $1.3 million last quarter and $1.1 million in quarter 2 last year. We purchased $1.1 million of PP&E in the quarter. However, we are able to lease finance approximately $1 million of this amount, plus the net use of cash from investing activities was only $370,000. Although revenue was flat to Q1 and our DSO increased slightly, our liquidity -- our overall liquidity improved smartly in Q2. Indeed, we were able to pay down approximately $1 million of our revolving credit facility balance during the quarter. The revolver balance was only $3.2 million at June 30, which is the lowest it has been in years. Turning now to the guidance we issued this morning for the third quarter. In Q3, we are expecting revenue of $15.8 million to $16.4 million and 0 to $0.01 per share of net income. We've begun to hire additional personnel, so we expect that our SG&A expenses are going to go up modestly from the Q2 levels. For the full year, we are resetting our guidance to $63 million to $66 million, with earnings of $0.01 to $0.04 per share. At this point I'd like to close down our formal remarks and open it up for questions. [Operator Instructions] Operator, you may now open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum.

[Unknown Analyst:]

This is actually Dylan sitting in for Matt. Just a few for you real quick. Just kind of parlaying of the hiring of the sales professional commentary, how long does it typically take for new salespeople to ramp up the business? And do you guys have a predefined goal for how -- in terms of dollar amount that you would like them to achieve?

[Douglas M. VanOort:]

Yes, thanks for the question. I'll make a couple of points here. One is that in the past, we've hired sales representatives that did not have a lot of experience in our particular industry or in atomic pathology and genetics space. So in that case, we would expect 6 to 12 months before they would really be at a pace of productivity that would be acceptable to us, then we put them through a lot of training. In this case, we mentioned that we've hired some sales professionals recently. These people are all very talented, very experienced, most of them know our industry, know our product lines, and we would expect them to be productive almost from the get go. I mean, obviously, we've put them through a little training, teach them about the NeoGenomics way, but we would expect in the first 3 or 4 months that we're going to see some benefits.

[Unknown Analyst:]

That's great. And then back -- going back to last quarter, you guys commented that you hired a couple business development people to pursue the larger oncology practices. Any color on how that's been going over the past quarter? And do you guys anticipate any to close by the end of the year?

[Douglas M. VanOort:]

Yes. So we're making a lot of good progress. And these people are working on both oncology practices and working through big pathology groups to try to help them gain new oncology practices that testing would come to NeoGenomics through the pathology groups. We are very happy with the 3 people that we've hired in this area. Unfortunately, the CMS proposal has cast some uncertainty over the notion of oncology groups bringing in some flow testing and some other testing, and so there has been a little bit of a hold on that particular aspect of the program. Nonetheless, I mean, we had all 3 of these people get together with our teams last week, and they're very excited about the opportunities broadly for business development. They each have a nice pipeline of large accounts, and in fact, we're starting to close a few of those. And they're working very nicely with the territory business managers that we have in the field.

[Steven C. Jones:]

Doug, I would add to that, some of the new just regular sales reps we hired at our "oncology business development matters" have brought some relationships with oncology practices as well. And so we're getting traditional lab testing business from some of the new reps as well.

[Unknown Analyst:]

Okay. Great. And then last one for me. Just noting from the press release, you've announced 60 new molecular tests over the past 6 quarters. Would you be willing to break out any one or a couple of tests that have been performing exceptionally well for the past 6 quarters?

[Douglas M. VanOort:]

Well, I would tell you that about 10 tests make up 80%, 85% of our revenue volumes. Those are the KRASs, JAK2s, EGFRs, the Bcr-Abls, and those kinds of tests. The profiles are relatively new phenomenon for NeoGenomics. We have had a lot of interest in our MDS profile. It's really very early on in the days. We also have a lot of traction with the CLL panel. I'd say the panels, in general, get bigger and bigger -- the ordering patterns get bigger and bigger every quarter, but we haven't seen the "explosion" in uptake rates for the panels yet, but we still have 53% year-over-year volume growth in molecular in general. So the core molecular tests outside of the panels and the profile tests are really -- still got a lot of traction in the marketplace.

[Operator:]

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

[Amanda Murphy:]

First question is on your comments on the hospital volumes dynamics, I guess -- I mean, there's quite a lot going on in terms of the hospital market, where they're obviously buying more doc practices, in-sourcing through volume. But then you also have whatever reimbursement changes actually happened and then reforms sort of layered on top of all of that. So I'm curious, kind of how do you see this all evolving over the longer term in terms of how the volumes are going to flow from between the hospitals, between reference labs and between the independent labs?

[Douglas M. VanOort:]

Thanks. It's a great question. It's not a question that we can give you a specific crystal ball answer, or our crystal ball is nothing better than anyone else's. Generally, we are seeing a lot of dynamics. If you just break it down some of those things into their component parts, when a hospital buys doc practices, specifically oncology practices, it's going to be good for us because our volumes go up materially. I've mentioned before that we had one case where the hospital bought a 9-person, 9-doctor hema practice, and our lab volumes doubled in 1 month. So that's generally a good trend as hospitals begin to in-source more and more stuff that is a negative trend for us. But we are not seeing big uptake rates in the in-sourcing of the critical high difficulty testing. I mean, I'm not aware of really any hospitals that have in-sourced this. Maybe one large academic center, and I was playing around with that, but many of the hospital start with the IHC going towards that, and then they'll move the flow as they get more and more comfortable. A lot of hospitals, generally, they will just have the pathology practice due to professional interpretation of the flow and will send the test flow somewhere else. And so that's a little bit more of a mixed bag. Over time, I think what's going to happen is you're going to see not just hospitals aggregating the bigger groups but oncology practices. One of the things the investment community hasn't focused on not as much as how much rapidly the hematology oncology industry is rolling up. There are aggregations of hema practices happening all over the country, and I think this is a direct response to ObamaCare. That will have implications for laboratory testing as well.

[Amanda Murphy:]

And then on the reimbursement side, I guess 2 questions. One, just in your discussion with the lab industry folks and other labs out there, I mean, do you have any idea why Medicare is going after some of the codes are going after? And then I guess another question is, would it make sense that ultimately -- I think you talked about this a little bit, but that as -- so the codes are cut, that, that volume will ultimately flow back out of wherever it's been enforced into?

[Douglas M. VanOort:]

Well, I mean, Amanda, we don't really know why Medicare is picking on oncology testing or the other codes that they've targeted in the past. It doesn't really make a lot of sense to us why they would target FISH testing, for example, when FISH testing is critical to diagnose and monitor cancer patients. I mean, we just don't get it. So I don't think we really understand, although we, the industry and NeoGenomics, hopes to have some time with CMS over the next month or 2 as we explore these issues. I think that relative to what's been in-sourced and whether things pop back out to the lab industry from physician groups that have in-sourced in the past, I think that will happen. What we have a sense for is that physician groups, clinician groups, are less -- are more reluctant now to in-source because they don't know what the reimbursement is, and the reimbursement rates for a lot of the immunohistochemistry histology costs has been cut so much, that I don't think there's a great rush to in-source. There is one other thing that's happened. The GAO just scored the impact of physician self referral, and I think that will give Congress some ammunition to think a little bit more about whether they want to close down the start exemption.

[Steven C. Jones:]

Amanda, one important sort of nuance, this is a technical nuance, but the FISH codes on the hospital outpatient prospective payment system really have not been vetted at all, those are very, very few hospitals that ever provide FISH internally, and so they always send those out. So the -- while Medicare changed the way hospitals get reimbursed for those tests after the expiration of TC Grandfather -- literally 95% of the hospitals in the U.S. are probably covered hospitals are more grandfather than the TC Grandfather. So when they started making hospitals absorb the price -- absorb the cause of those FISH tests, none -- those codes haven't been really vetted. The hospitals always use outside lab. And so we have a situation where we have FISH codes on the hospital outpatient prospective payment system that have been around for years but nobody's really using much and having been vetted. And then you have the left hand of Medicare saying, "hey, we want to use that as a new benchmark for the physician fee schedule." It just doesn't make any sense. The costs for providing FISH are substantially higher than it was on the OPPS system, and we are hopeful that calmer heads and rational heads will prevail in Medicare.

[Amanda Murphy:]

Got it. Then just last one. On the competitive landscape. So some of the other independent labs talks about, I guess, moving more aggressively into the hospital pieces of the world, whether it be professional services or reference numbers. Or have you seen any changes in terms of your business from the competitive standpoint from the independent guys?

[Douglas M. VanOort:]

Well, as I think you know very well, Amanda, our business has always been very, very competitive. And we haven't necessarily seen more strong competitive behavior. In fact, we're -- as I mentioned in my remarks, we're actually quite -- feel quite fortunate that a lot of the sales representatives from other companies have been actively coming to us saying, "We'd like to work with NeoGenomics." So we think we've got some pretty good competitive strengths, and I haven't seen a noticeable change in the competitive landscape against us. I mean, what we see competitively is that, although this is anecdotal, most of our competitors, we think, are losing volume and reducing costs. And we're trying to be -- taking an opposite perspective here, we believe that bigger is better, we're trying to grow, we're trying to be aggressive about growth, and we're trying to be aggressive about reducing our costs but doing it in terms of a process management fashion.

[Steven C. Jones:]

One interesting trend, as a result of TC Grandfather, Amanda, is that a lot of hospitals are showing our hema practices, that use to do the bone marrow in the hospital setting, they don't want to no longer do them. And so they're pushing it back into the hematology and oncology clinics. And so we see -- actually have a lot of interest from hematology and oncology clinics, who are just beginning to in-source the bone marrow draws and how we can help them. We have a team up training one large hema practices this week. And so a lot of competitors may want to get in a hospitals business -- hospitals don't want those outpatient bone marrows very much anymore because of the OPPS issue, which we have discussed.

[Operator:]

Our next question comes from the line of Mark Zinski with Unique Plan Assessments.

[Mark Zinski:]

Just first question is just looking for an opinion, answer regarding Medicare. There certainly have been like an increasing backlash by doctors, who, you're seeing, were not even going to take Medicare patients anymore. It's still a small percentage of the overall doctor population, but it is growing rapidly. I guess the opinion I'm looking for is, do you sense any kind of kind of seismic shift in terms of reaction to the Medicare cuts, are docs just getting set up with it? And do you think that, that's potentially bringing some more political activism, I guess?

[Douglas M. VanOort:]

Well, yes, we have a sense for that for sure from the physician community and absolutely from the CMS recent proposal on July 8. Their laboratories, physicians, pathologists are all extremely united, completely aligned and are going to push back hard with CMS on this recent proposal. But we believe that there was a brewing sense from physicians that the CMS has gone too far.

[Mark Zinski:]

Okay. And now is that impact -- or I should say are the recent CMS proposals materially impacting your acquisition strategy? I mean, are you thinking we want to reduce our Medicare exposure? Or is that not a big factor in your acquisition thinking?

[Douglas M. VanOort:]

Well, in terms of our acquisition thinking, what we are doing is we're trying to be aggressive. We're trying to be aggressive about considering a great variety of alternatives. There's a lot of uncertainties, so we're being very careful about our thinking here. We would like to diversify a little bit away from the Medicare risk. It's a little difficult when you're an oncology company because cancer is a disease of the elderly, so that's just -- that's what it is. But there are very interesting opportunities for us, for example, in clinical trials. I mentioned that. And there are other ways that we can potentially diversify given the very strong genetic and molecular platforms that we have. So, yes, we will consider all of the above, Mark.

[Mark Zinski:]

Okay. And then just to confirm, you're expecting that the prostate cancer test to potentially be brought to market in the first half of 2014, is that correct?

[Douglas M. VanOort:]

That's correct. Dr. Albitar, do you -- would you like to make a comment on that?

[Maher Albitar:]

Yes, I mean, we are very confident with our tests, that clearly, always, you need to do additional patients and accumulate more detail and this is what we are doing. But as a target date, it is very much solid date for launching the test on the first quarter or first half of 2014, yes.

[Mark Zinski:]

And then finally just in terms of the geographical expansion out west, do you have indicated that you thought you have some room to expand more out there. I'm just wondering how you're progressing on that front.

[Douglas M. VanOort:]

We are making progress. We've hired a couple of people out there, and our volumes that are flowing through, our Irvine lab keeps growing pretty nicely. We've just hired an experienced sales representative from one of our competitors that has been in the California market for quite some time. And we're making, I think, pretty decent progress out of this.

[Operator:]

Our next question comes from the line of Debjit Chattopadhyay with Emerging Growth Equities.

[Debjit Chattopadhyay:]

So I'm just trying to rationalize the second half guidance here. So you're adding a bunch of new sales -- to the sales team. You've added about 60 new tests, but you've cut the guidance by 5% at the low end of the prior range. Now is that because you're expecting a significant decline in revenue per test going into the end of the year or are you just kind of positioning yourself for a big lead in the second half of the year?

[Douglas M. VanOort:]

It is something we have spent quite a lot of time thinking about. We don't have specific granular views nor would we give those as part of the guidance. But I can tell you on the volume side, we expect volume to increase nicely in the second half of the year. And as Doug mentioned in his remarks, we expect the year-over-year volume growth actually to start increase in the second -- in the third and fourth quarters. We had previously estimated that we would have some of those large oncology initiatives. And it's looking more and more doubtful that, that will happen until there's more clarity around what the Medicare rates are. And the other piece of this is molecular reimbursement came in substantially higher in terms -- or substantially lower in terms of what we had originally expected. We saw a full 19% reduction in average revenue per test versus prior years, and I think the industry was more thinking broadly in the 13% to 15%. But by the time we forecasted that out over our mix and we rolled in, well, the expected private payor reactions would be, it was a bit higher than what we had expected. So those are kind of some of the components of it. What you really pulled it down though, our guidance for the second half of this year is really more based on we need to get back to having everybody's expectations be something that we can deliver on. This is the first quarter in many, many, many quarters where we were even below the -- slightly below or near the bottom of the range. And so we want to just does have the map, makes sense to everybody and not continue to be talking about something that is probably very, very unprobable at this point in time.

[Debjit Chattopadhyay:]

So with the average revenue per test at around $480 right now, do you think a $450 number is what you're like modeling right now? Because, I mean, at the back of the envelope, that's where it comes down to about $450 for -- in average.

[Steven C. Jones:]

No, I would take some of the volume growth estimates down. I think $470 to $480 is a reasonable estimate for the balance of this year. We're not given any guidance on 2014 until we see what Medicare does. Obviously, there would be some potential there for changes there. But given some of the change to ordering patterns of hospitals and whatnot that Doug touched on, I think we are pulling in our overall volume views in the second half of this year. Doug, do you want to add anything?

[Douglas M. VanOort:]

I think you got it.

[Steven C. Jones:]

Okay.

[Debjit Chattopadhyay:]

The in-sourcing confidence that you had mentioned in the press release and you went through even in the prepared remarks, could you kind of elaborate on what -- is that more of the single market kind of tests or does that impact your [indiscernible] business as well because, I mean, clearly, as patients for lab needs assistance, the single market has already served the purpose. So the broader market is moving towards old panels. So does that -- I mean, is it the in-sourcing impacting that or is this primarily a single market kind of thing?

[Douglas M. VanOort:]

Well, actually the in-sourcing that we referred to in the past has really been not molecular. It's been more histochemistry and a little bit of flow cytometry and that sort of thing. So as you might imagine, bringing in an in-sourcing molecular testing currently is very complex, and there are not a lot of people that have that kind of expertise. So there aren't -- and plus, the recent reductions in reimbursement for molecular testing, if you're buying a kit and trying to perform the test, molecular test on a one-off basis based on a kit cost, you're going to lose money.

[Debjit Chattopadhyay:]

A question on next-gen sequencing, I mean, how are you positioning yourself? I mean, I understand that there are reimbursement challenges and there is [indiscernible], but you can get from next-gens but is this clearly emerging and maybe 2, 3 years down the road it's going to become a major threat to your conventional molecular testing? So what's the company doing to be a frontrunner in next year?

[Douglas M. VanOort:]

We will be a frontrunner. So, Dr. Albitar, do you want to take that?

[Maher Albitar:]

Yes. There's going to be the next-gen sequencing is a platform that we already adapted. But today, we are not offering it as a routine work. We offer it only for clinical trial work. That's mainly because what you just said regarding reimbursement and the we resolve these issues and have figured out how the reimbursement is going to be. But I personally believe, and we as a company, that next-gen is the way for the future for molecular testing, and we are on top of it. There are multiple utilities for that conventional molecular testing to actually perform. But again, it is a methodology that we, as a company, is leader in moleculars, focused on adapting the best approach and the state-of-the-art approach. So we are on top of it, and we are very interested in spending time, money and efforts into it.

[Operator:]

Our next question comes from the line of Jack Wallace from Sidoti & Company.

[Jack Wallace:]

I have a couple of quick questions here. One, as you're talking about the guidance, lower for the next year and given the comments you made about the average revenue, price per test, those would imply the growth in volume some in the mid to high teens. Obviously, there's -- with all the uncertainty surrounding what's going to happen in 2004, (sic) [2014] with the CMS cuts. If you're to assume normalized data, would you assume that this is how the new lower level of volume growth that you're going to see going forward after having such high volume growth in the 40, mid-30, 50% you had in the last couple of quarters in the last year?

[Douglas M. VanOort:]

Well, let me make a couple of comments. Steve will probably comment as well. So we said that we can accelerate our growth from where it was in quarter 2. We expect that we'll be able to do that in quarter 3 and quarter 4. So I think your number is not unreasonable. But frankly, we've said all along that we'd like to target volume growth in the 20% range. And we don't see any reason to necessarily change that.

[Jack Wallace:]

Okay. That's helpful. And then terms of where that volume growth is going to be coming from, looks like the ecology -- large oncology groups, any kicks from new wins there, it's going to be pushed off until the rate cut situation is going to be decided, and probably that's what happens for Q1. What other kinds of many new accounts or maybe upselling from existing accounts -- or I guess, how are those 2 pieces of the mix going to figure into the volume growth?

[Douglas M. VanOort:]

Well, we're going to get some volume growth from the new representatives that we just hired. And we did eliminate some representatives that weren't productive. Hopefully, you got that through my -- or should I be nice in my remarks about that. I think we have a more productive sales team, and that's going to help. We also have some new products that are rolling out. So we've introduced a lot of new products over the last couple of years. We've talked a little bit about our image analysis product. We have not aggressively rolled that out yet because we needed to get our -- some systems things in order to allow us to handle a lot of volume. So -- and that's just one example. So there are a number of reasons that we're expecting our volume growth to begin to accelerate, and we -- I think we feel pretty good about that.

[Steven C. Jones:]

Yes, I would add that one of the nice new trends that we're beginning to see is a lot of interest directly from hematology oncology groups. As a result of our very broad and very deep molecular menu, we now have a substantially more advanced molecular offering. And almost every other lab, probably every other lab in the U.S. and that is attracting interest just for traditional trend on molecular testing from large oncology groups. Now once you get your foot in the door there, it's a lot easier to begin to grow that. And so some of that's coming as a result of molecular, some are just coming with the new reps and the oncology business development managers that we're seeing. So while we may not see the large kinds of what we call laboratory collaboration initiatives, where we help them in-source flow. We are seeing nice uptick from that. And regard to the hospital in the pathology group, as we get broader and deeper on our menu offering, we wind up taking a more meaningful share of wallet in each client. It's rare that our share of wallet goes down. It's much more common that our share of wallet will go up as we get in and work these clients a little harder.

[Jack Wallace:]

Okay. That's certainly helpful. And then just 2 quick questions for you, and I'll probably ask some other questions offline. One, regards to the average cost of test, matching that reduction year-over-year is great. I think even Q4 of last year as the base, the goal is to have a 10% reduction. And then in Q4 of this year, to about 6.2% reduced from Q4. Do you see the 10% goal being attainable so far?

[Douglas M. VanOort:]

From Q4 to Q4, yes, we think that, that's very attainable. I think whether or not we'll get all the way to that is another question, but we're certainly making good strides on that. We've got a lot of initiatives that will continue that trend.

[Jack Wallace:]

Great. And then one last question regards to the CMS rate cuts. Well, let's assume the worst case scenario, the cuts come in largely as described. Will this mean that additional hospitals, like the other labs, will then go ahead and not service the Medicare patients or should they intentionally be walking away from the 25% of your revenue mix?

[Douglas M. VanOort:]

We just don't know. It's too early to speculate. We can give you some examples, but what -- this is how great it is. So breast cancer is the most common form of cancer in women. And in some types of breast cancer that are referred to as HER2 positive, The HER2 positive breast cancer patients represent about 20% -- 15% to 20% of all breast cancer patients, and the HER2 positivity makes that cancer more aggressive. So there's a companion diagnostic for this. It's a FISH test that is a companion diagnostic to herceptin. Now herceptin therapy costs about $70,000 a year. The FISH test currently is reimbursed by Medicare at about $400 per year -- $400 per test, sorry. So under one interpretation of the CMS proposal, the $400 per test would be reduced to about $75 per test. So that -- so just to put it in perspective the supplies costs for HER2 FISH test are about $100. So Medicare wants to reimburse it at $75. Our supplies costs alone are about $100. If you add the cost of transporting the sample and reviewing it by the pathologist and putting it on the instrument, and all of that sort of stuff, who's going to do that test? So the question is, if the test is not available, if the lab is not going to offer the test, what are you going to do? Give a $70,000 herceptin treatment to every breast cancer patient when you know that 85% of the time it's not going to be effective? It doesn't make any sense. So -- or maybe you don't offer herceptin at all, then you'll have a lot more patients that are going to die early. I don't think either of those 2 scenarios are appropriate or maybe even understood by CMS. And so we believe that once they understand the dynamics that there's -- they'll say, well, this doesn't make any sense because it doesn't make any sense to us.

[Operator:]

Our next question comes from the line of Kevin DeGeeter with Ladenburg Thalmann.

[Kevin DeGeeter:]

Some of my questions have been answered, but maybe just 2 quick ones here again. Can you give a little bit of granularity on the 12.7% test volume growth in the quarter? In terms of rough order of magnitude, what portion of that was coming from new products, however you want to define that, versus legacy, is it 50-50 on the growth side, is it 90-10? One way or another, just some order of magnitude would be helpful.

[Steven C. Jones:]

Well, I mentioned that molecular led the pack. The molecular growth, the volume growth of molecular was 53%. That was probably close to half or maybe a little more than half of the overall volume growth. We have continued to stay strong, strong growth in our heme products and our flow products. So yes, I think we're seeing a decrease in volume in the IHC, as Doug mentioned, products and some of the more traditional pathology tests. So really, molecular and FISH, and hem FISH in particular, continue to be the strongest growers for us.

[Kevin DeGeeter:]

Okay. And I want to go back into the probably the M&A for a moment. In terms of at least for the remainder of 2013, what type of risks are you willing to take on as company with the potential M&A candidate? What I mean by that is at least for the variables that we have visibility on at the moment, maybe CMS in 2014 aside, are you willing to take on that reimbursement risk, when you're considering an acquisition? Is it -- or are you -- maybe technology risk that's a concern for you. But I want to kind of balance out Doug's comments that the company remains interested in being aggressive on the M&A front with the number variables that are out there for almost many assets if you're considering an acquisition here.

[Douglas M. VanOort:]

Yes, Kevin, let me see if I can get at your question. So I would say, first of all, that I used to do a lot of M&A in my past, and I've done some good ones and some bad ones, and the bad ones are not good. We're not going to do bad deals. Every deal is different. Every deal has its own level of risks. There's reimbursement risk, there's people risk, there's all kinds of risks. So we're going to be -- we're going to try to be very smart about it but we're also going to be very aggressive about it. So there are a lot of potential opportunities for us to acquire out there. And we'll look at each one individually and try to understand the impact on the market. For us, whether there's testing that we can deliver to that company, whether there's testing that can be brought to NeoGenomics, what kind of cost synergies are available, what's the reimbursement risk, there's reimbursement risk in a lot of the lab industry today. So we -- I think you can count on us being as diligent about analyzing a deal as we can be.

[Steven C. Jones:]

One of the things that Doug never liked to talk to much about is his experience on Corning Life Sciences, when they put together both Quest and Covance, it was Doug and his colleague, they bought 100 companies and put those 2 companies together before they spun them out. And approximately 70 of those M&A deals became what is now Quest Diagnostics today. That level of experience in laboratory M&A, I don't think you'll find another CEO in the United States in a lab company that has done that before. And so we're very blessed to have his experience and expense and his guidance in this. And I have a high degree of confidence having worked with Doug side by side for the last 5 years, that we won't make any big boo-boos here.

[Kevin DeGeeter:]

Okay. That's a fair point. There may be one more for me, and then I'll get back in queue as well.

[Douglas M. VanOort:]

Kevin, I think we'll try to wrap it up here. We're at the appointed hour here.

[Kevin DeGeeter:]

Fair enough. I'll take more offline.

[Steven C. Jones:]

Okay, thanks so much. Okay.

[Douglas M. VanOort:]

All right. Thank you, everyone. So I'll just wrap this up by saying that we'd like to recognize all 293 NeoGenomics team members around the country for their dedication and commitment to building a world-class genetic testing program. And on behalf of our entire team, I'd like to thank you for your time joining us this morning for our quarter 2 2013 earnings call and let you know that our quarter 3 2013 earnings call will be held on or around October 25 of this year. For those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your interest in our company. Goodbye.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.