Douglas VanOort - Chairman of the Board & CEO Steven Jones - Executive VP & Director.

Amanda Murphy - William Blair & Company Drew Jones - Stephens Kevin Ellich - Craig-Hallum Capital Group Paul Knight - Janney Montgomery Scott Nicholas Jansen - Raymond James & Associates Raymond Myers - The Benchmark Company Joseph Munda - First Analysis Corporation.

Greetings, and welcome to the NeoGenomics' Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Doug VanOort, Chairman and CEO. Thank you. Please go ahead..

Thank you, Brenda, good morning. I'd like to welcome everyone to NeoGenomics' third quarter 2017 conference call.

Joining me from our Fort Myers headquarters is Steve Jones, our Executive Vice President; George Cardoza, our Senior Vice President and Chief Financial Officer; Bill Bonello, our Treasurer, and Director of Corporate Development; and Jessica King, our Director of External Reporting.

I would also like to welcome and introduce Kathryn Mckenzie, our Vice President of Finance and Principal Accounting Officer who is joining us for our the first time on this call. Dr.

Maher Albitar, our Senior Vice President, Chief Medical Officer, and Director of R&D, Rob Shovlin, President of our Clinical Services Division and Deena Murphy our Director of Billing are joining us from our Aliso Viejo lab in California.

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

Before turning it back to Doug, I want to let everyone know that we will be making a copy of our transcript for this morning's call available on the Investor Relations section of our website shortly after the call is completed.

We also want to let everyone know that we are going to limit the number of questions to two per person in order to give more people a chance to ask questions within the one hour that has been allotted for this call..

Thank you, Steve. I will begin my comments this morning by providing some context for our quarter three results we pre-announced two weeks ago. I will then comment on our guidance for this quarter four and conclude my remarks by describing our analysis of the current environment in our outlook for the longer term.

I won't sugarcoat this, we are disappointed with our third quarter results. We did not deliver what our investors were expecting and we accept full accountability for that that said there are also some very positive trends in the third quarter and we remain very optimistic about our growth prospects.

There are four areas in which our results differed from what the investment community expected. I'll give you a short explanation of each of these and of course will answer any questions you may have about any of these during the Q&A period.

The first difference between our results and expectations resulted from Hurricane Irma and to a lesser extent Hurricane Harvey. Our Houston and Fort Myers facilities were both directly impacted by these hurricanes, there's not much more we could have done to prepare for these disasters.

We executed our business continuity plans and our team did an outstanding job. In fact in my opinion it was an A plus performance. Even though we had lab closures and our people and systems experienced significant disruptions our clients barely felt any impact at all.

I'm extremely proud of the manner in which our teams managed through these natural disasters. The second difference has to do with our divestiture of Path Logic, this divesture reduced revenue but had a slightly positive impact on adjusted EBITDA for the quarter.

As you know we have been attempting to divest Path Logic for a while because it was no longer strategically or financially additive to our business. We struck a deal which protected as many of Path Logic's clients and employees as possible and we incurred a loss on the sale.

Without Path Logic our company is now more focused and will be more profitable going forward. The third reason we missed investor expectations was because I mean $1.3 million revenue adjustment. There is no excuse for this, the adjustment reflected revenue recorded for certain tests were the result was quantity not sufficient or QNS.

Although we incurred the full expense of testing these QNS specimens we do not bill for QNS tests unless partial results are reported out and generally QNS test result in zero revenue. We have established enhanced accounting procedures and controls to ensure that this situation does not recur.

In addition we have recently implemented new technologies to allow testing to be performed using much less tissue sample and that had reduced the number of QNS test. This will improve patient care and should give a slightly boost to revenue and profitability going forward.

The fourth and final reason we missed investor expectations was because of higher than expected bad debt expense as a result of changing payer dynamics for Medicare and insurance companies as well as the performance of our billing operation during the Clarient integration.

Unfortunately despite our best efforts sometimes Medicare and insurance companies refuse to pay an increasingly they're refusing to pay for our higher value molecular tests. Managed care organizations are more frequently requiring a test be pre-authorized in advance of an order for the lab to get paid.

In many instances the preauthorization must be secured by the physician ordering the test rather than by the lab, if the required pre-authorization is not included payers will often deny the entire claim.

In addition Medicare and managed care organizations are increasingly denied payment for next generation sequencing based test particularly disease specific multi-gene molecular panels.

Our panels include important biomarkers which guide treatment decisions and these panels are valued by our clients and our volume in these important test has grown significantly over the past year. Even though they are important for patient care, Medicare and managed care payers sometimes refused to reimburse us.

For context of revenue derived from these disease specific panels built to Medicare and managed care is approximately 2% of total revenue. Fortunately nearly 60% of our bills are sent directly to hospitals under our individual contracts with them.

This is a much prefer preferable situation for us because we directly bill our hospital clients for our services and they pay for what they order. Also fortunately for us we have enough scale and expertise to deal with bad debt challenges and we are adapting to new Medicare and managed care rules.

We have enhanced our processes in several ways, we're proactively communicating with payers about typical test algorithms in order to reduce the chance of confusion when pre-authorization requests are submitted.

We're educating our clients a new pre-authorization and documentation requirements and establishing systems to ensure that the preauthorization is secured before the test is sent.

Additionally we have established a process to identify acquisition that require pre-authorization at the time they are a accessioned in the lab and to secure that approval before the test is even sent to our laboratories.

With an understanding of those four quarter three dynamics let's turn our attention to some very positive fundamental trends in our business. These fundamentals are what have us excited about our future. One of the most positive fundamental trends in our business is our ability to continue to gain market share in our core clinical services division.

We reported 16.6% volume growth despite our labs getting hit by those two hurricanes. Moreover our growth this quarter was more balanced than in the recent past with continued strength in molecular and histology accompanied by accelerating growth in flow cytometry and FISH.

Our sales force is once again focused on winning new business and we are clearly taking share in most segments of the market. We also reported a record quarter in our pharma services division with revenue up 37% year over year to $6.9 million.

The health of this business is also demonstrated in a record number of new signed contracts and backlog is up 76% to $58 million. We are watching the momentum build in this business and we remain very excited about its prospects.

We also maintained very strong cost control this past quarter, cost per test was down 11% year over year despite the need to staff up in California to accommodate samples we directed due to the hurricanes.

Even with a significant spike in overtime and related expenses we were able to keep our cost down, our productivity increased once again and it's up more than 7% year over year.

These healthy fundamental trends continued market share gains in our clinical business, outstanding growth in our pharma business and strong and continuing cost control are right in-line with our expectations and consistent with our long term goals. We realize that our quarter four guidance was also a surprise and a disappointment.

We were disappointed as well both by the anticipated revenue and earnings shortfall relative to our initial expectations and by having failed to provide investors with an accurate assessment of our near term prospects.

As many of you know over most of our history as a publicly traded company Neogenomics has met and even exceeded expectations, this has not been the case over the past year.

We have taken a hard look at our process for forecasting and establishing guidance and have adopted prophecies which should reduce the chances that we miss again in future quarters.

Our general outlook for quarter four includes an expectation of significant commercial momentum in both our clinical and pharma services division offset by some continued pressure on the reimbursement and collections front.

On the clinical side our volume growth remains robust, we continue to win new accounts and our sales teams have excellent momentum. We expect continued strength in molecular growth and also expect improvements in more traditional and higher paying technologies such as FISH and flow cytometry.

Despite the reimbursement pressure on next generation sequencing test we expect greater stability in our mix as we begin to annualize the initial influx of PDL-1 testing which began in quarter four of last year. Our outlook for the pharma services division is very positive in terms of both quarter four revenue and backlog.

We're winning new contracts for multiomyx, our proprietary testing technology used primarily for immuno-oncology and immunohistochemistry testing. In addition our gross margin in pharma services was above 40% this past quarter and we expect this to continue to improve as this business gains the benefit of more scale.

On the cost side we expect to see continued reductions in cost per test as a result of increased scale and new initiatives implemented over the past several months. We expect that bad debt will remain at elevated levels in quarter four as we continue to adapt to changes in the payer environment.

Overall, we expect these dynamics to result in $65 million to $67 million of revenue and $9 million to $10 million of adjusted EBITDA in the fourth quarter. I'm now going to transition to talk about our competitive position and longer-term perspective.

Let me start by reminding everyone that we have a pretty successful track record navigating in a challenging environment. Over the years, we faced severe Medicare reimbursement cuts, cumbersome regulatory changes and intense competition.

Nevertheless, in the 34 quarters in which I have hosted these quarterly investor calls, our volume has grown by over 17 times. Our revenue has grown by over 10 times and our enterprise value has gone from about $25 million to over $800 million. We do understand challenges and we do know how to manage through them.

Although Medicare and managed care reimbursement practices present challenges for us and for our industry in general, we believe NeoGenomics continues to have the capabilities to deal with these and to win. In fact, our competitive position is better than it's ever been.

We have scale, focus, balance and the ability to react and respond quickly and effectively. Every week we hear stories of competitors laying off sales people, cutting back service stores or retracting in the market. At the same time, we're focused on patient care, great service and quality and on relentlessly taking market share.

We expect that trend to continue. We believe NeoGenomics is positioned to continue to gain relative competitive advantage in this environment and we fully intend to do just that. More importantly, the demand for complex oncology testing in this exciting area of precision medicine continues to increase.

As the market leading full service oncology focused laboratory, we're uniquely positioned to meet that demand and we are aggressively pursuing opportunities to accelerate our growth. Here are just a few of the specific opportunities that we're pursuing. We're establishing preferred relationships with more national healthcare organizations.

In fact, in the last 2 weeks, we finalized a contract with one of the largest hospital systems in the country, giving us the ability to gain a number of new hospital accounts. We've entered preferred relationships with multiple organizations over the past year and we're working to add more.

We're also forming partnerships with large oncology practices. Over the past year, we became the exclusive reference lab for several large oncology practices and our pipeline includes dozens of additional practices. These opportunities tend to be even larger than our traditional pathology accounts.

We're continuing to cross-sell to capitalize on our comprehensive oncology test menu. We're beginning to see an uptick in FISH, flow cytometry and molecular work from clients who once used us exclusively for histology. Our sales teams have detailed plans to identify opportunities for cross selling and they are making progress.

We're building our Pharma Services business and establishing a global footprint. The grand opening for our new lab in Geneva, Switzerland is scheduled for November 8. We opened this lab at the request of several customers and already have projects under contract for this facility.

In fact, our contracted backlog is already $1.5 million with several bids in process. We remain confident in our ability to grow and to build a more profitable business. We continue to drive reductions in Cost per Test through automation, new technology, IT system enhancements, application of best practices and by leveraging our increasing scale.

I will reiterate our long-term financial goals of mid-teens volume growth in our clinical business, 20% plus revenue growth in our Pharma business and 25% to 35% incremental EBITDA contribution on our new revenue growth.

In summary, while we're working through some inevitable short-term challenges, we believe our competitive positioning is excellent and we remain steadfastly bullish about our future.

Now we're going to turn the floor over to Steve Jones, our Executive Vice President and Director of Investor Relations to review third quarter results in slightly more detail and lead us through a Q&A session..

Thanks, Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter and then describe a new accounting standard that will go into effect next year. Third quarter consolidated revenues were $63.1 million, a 3.8% increase from last year.

Clinical genetic testing revenue increased 3.5%, Pharma Services increased 37% and PathLogic revenue increased 78% as a result of its divestiture on August 1. As discussed in the press release, we estimate the 2 hurricanes depressed volumes by approximately 1.5% and revenue by approximately $1 million in the quarter.

Average revenue per clinical genetic test was $342, an 11.2% reduction from the prior year. The revenue adjustment related to unbilled tests was responsible for approximately $8 of the revenue per test decline. Consolidated gross margin was 45.7%, a 70 basis point increase from the 45% reported last year.

This improvement was driven by the 11% decrease in Cost per Test as well as a 350 basis point increase in our Pharma Services gross margin from last year. The sale of PathLogic also helped to improve gross margin.

We estimate that we incurred approximately $300,000 of overtime and other expenses directly related to the hurricanes which depressed the Cost per Test improvement by approximately $2 or 1%.

Incremental margins in our Pharma Services business continue to be strong with approximately 2/3 of the incremental Pharma Services revenue from Q2 to Q3 falling to gross margin.

Consolidated SG&A expenses increased by 19.9% or $5.2 million from last year's third quarter primarily as a result of increases in bad debt and personnel expenses including stock-based compensation. Bad debt expense increased by $2.3 million and personnel expenses increased by $1.9 million from last year.

Doug has already discussed the changing payer dynamics with respect to pre-authorizations and increasing denials for certain molecular tests.

In addition, as we have discussed on the last 2 calls, bad debt expense has also been running higher than normal this year as a result of normalizing the reserves for former Clarient clients now that they are on the NeoGenomics billing system. We believe we have now properly reserved for written off all tests falling into this category.

On a year-to-date basis, bad debt expense as a percent of revenue was 6.8% compared to 4.5% for the first 9 months of 2016.

Adjusted EBITDA was $6 million in the third quarter, a decrease of $3.1 million or 34% compared to last year's third quarter primarily as a result of the impact of the hurricanes, the one-time revenue adjustment and the increases in bad debt.

We expect that higher bad debt expense will continue to somewhat offset lower costs in other parts of our business and as a result, our quarter 4 adjusted EBITDA guidance is $9 million to $10 million. As we continue to grow and unlock synergies and our bad debt expense moderates, we expect adjusted EBITDA margin to improve considerably next year.

Third quarter GAAP net loss available to common shareholders was $7.8 million compared to $5.6 million in the third quarter of last year. Diluted loss per share was $0.10 versus $0.07 last year. Included in the calculation of GAAP net loss is a $1.1 million loss on the sale of PathLogic.

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 certain non-cash items and, if applicable, one-time costs.

We refer to this measure as adjusted net income and on a per share basis adjusted diluted earnings per share and we have included a table with how these are calculated in our earnings release.

In the third quarter, adjusted net income was $474,000 compared to $3.4 million reported in last year's third quarter and adjusted diluted EPS was $0.1 per share compared to $0.04 per share last year. We finished the third quarter with 977 full-time equivalent employees, contract doctors and temps versus 1024 as of June 30.

This large sequential decrease was due to the sale of PathLogic. Before opening up for questions, I would like to briefly discuss accounting standards update number 2014-09 entitled Revenue from Contracts with Customers which is also commonly referred to as Accounting Standards Codification Topic 606 or ASC 606.

In May 2014, FASB and the International Accounting Standards Board collectively issued a new converged standard on revenue recognition, which will go into effect on January 1, 2018 for most US public companies. Among other things, we expect this accounting change will eliminate most, if not all of our bad debt expense on a moving forward basis.

Instead of bad debt expense being an expense line item in general administrative expenses, it will be treated as a contra-revenue line item and thus reduce revenue by a corresponding amount. There may also be a timing difference related to the treatment of long-term Pharma Services contracts.

We are still determining how to best comply with ASC 606, but we do not expect this accounting change to have any impact on adjusted EBITDA or net income. However, it will reduce revenue per test and our gross margin percentage in 2018. We will quantify the expected reductions in our quarter 4 earnings call this coming February.

We will also provide restated 2017 historical results when we report our 2018 quarterly results. At this point, we would like to open it up for questions. Incidentally, if you are 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.

As mentioned at the beginning of this call, we would like to ask each person to limit their questions to 2 so that we may hear from everyone and still keep within the hour allotted for this call. Operator, you may now open up the call for questions..

[Operator Instructions]. Our first question comes from the line of Amanda Murphy with William Blair..

I'm sorry, I jumped on a bit late and I caught the end of your comments Doug around prior auth and Medicare. I was just curious, did you also talk about those dynamics with commercial payers given some of the changes Anthem has made as well as United kind of upcoming..

Sure, I'll try Amanda. Thank you for the question. We are seeing that more payers are adopting prior authorization procedures. UnitedHealthcare I think begins -- at the beginning of November and we're gearing up for that. There has been a number of payers that have then requiring prior authorization.

Frankly, that's one of the reasons that our bad debt expense has crept up this past quarter. I think that we have very good processes in place engaging our sales team and our billing operation. So that would be pretty well prepared particularly for the United prior authorization for molecular testing..

Okay and I guess you gave some quantification, I think that was just Medicare right. So I think people are just trying to figure out what's your exposure, obviously 25% of your business is commercial, the most of it is still hospital-based.

How much of a risk is this prior auth component versus the Clarient component, which obviously after a year I think you said you kind of write those off anyway. So that can maybe more temporaneous.

So that's kind of what I'm trying to get handle on?.

Yes, let's try to put it in some perspective here. The primary issue that we're facing or we have faced for prior authorization and denial -- I'll say denials generally around molecular testing had been for what we call neotypes. These are disease specific multi-gene molecular panels.

In total, the amount that we bill to Medicare and managed care for these, even though they've increased a lot is about 2% of revenue..

And the reason, Amanda that percentage is still low is we do have a lot of payers set at 0 for those. So we don't even record revenue. If we see a history of a payer not recording -- not paying for the panels, we will set our expected revenue at 0 for that.

With respect to quantification even on the UnitedHealthcare, we know on 11/1 they are putting the pre-authorization in place for all of their molecular tests. Our total sort of the whole population for UnitedHealthcare was about $0.5 million and literally that would assume that we got no pre-authorizations which clearly is not going to happen.

So we've been working with our sales team to roll out the communications what clients have to do and again it's a partnership with our sales team to try to go through and basically try to mitigate that risk to the extent possible. I'm not saying it's going to be 0, but I don't think it's going to be anywhere near the full $0.5 million.

I think we'll able to get it down substantially and hopefully have this be a relatively small blip..

And Amanda, we've talked about this in the past, but our percentage of revenue from client bill accounts which are mostly hospitals is increasing each year. It's up over 60% so far this year and we think that trend will continue to modestly increase over time.

So we have far less exposure to this issue than perhaps some other labs that don't have a client bill component in their revenue mix..

Is Anthem a big payer for you because they obviously have one that's live now, a prior auth program?.

Yes, Anthem is a payer and it did go into effect July 1.

We have been successful in appealing some of their denies and some we haven't been -- but thus far it's not been a big issue with respect to Anthem per se, but it's something where like every one of these programs that goes into effect, we had to adjust our processes, our people have to adapt to the rules that the payers put in place.

In some cases, they use service companies to manage the prior auth period and the service companies don't really have exact add-on, exactly what we have to submit when and so it's a process to figure out how to work with one another and we'll go through a bit of that process with UnitedHealthcare as well as..

Our next question comes from line of Drew Jones with Stephens..

I wanted to dive into the G&A expense a little more, you guys obviously walked through the bad debt expense in detail, you talked a little bit about stock-based comp increasing but if I take 3Q results combine it what you've guided for 4Q, it implies that G&A is still going to be up on an absolute dollar basis, $6 million to $7 million year-over-year versus 2016.

Can you give us a feel where that increase is coming from?.

We have sort of set out that we expect to continue to have elevated levels of bad debt for quarter four. So a lot of it does come with quarter 4 bad debt.

In addition, our stock is, even though it's off 25% in the last 2 weeks, it's still up on a year-to-date basis and what happens when the stock goes up, we have a number of our contract doctors in California that have options and warrants and those get valued each quarter on using variable accounting because that's the GAAP rule and unfortunately in California it's -- they have something called a prohibition against the corporate practice in medicine, so your doctors can't be employed.

They form professional service corporations and they have sort of exclusive contracts with us, but since they don't meet the formal definition of an employee, you have to account for the stock-based compensation component on a variable basis and so in quarters like the third quarter where our stock went up quite dramatically, we're going to have higher bad debt expense.

In quarters where our stock price goes down, there is actually recoupment of bad debt expense. So it's just -- we're unable to tell what it's going to be. So in our guidance assumptions we've assumed a stable stock price in the fourth quarter..

I guess, even when I back out the impact from the bad debt expense and stock-based comp, we're still seeing a little bit of an increase year-over-year in G&A, I guess if we can just isolate it on the third quarter, I guess, I was under the impression that might not be the case given the lab consolidation that occurred in 2Q.

Are we just a little bit or we are still a couple of quarters away from realizing the synergies there?.

So let me give you some context, the total SG&A went up by about $5.2 million.

We said that the personnel and related portion of that was $1.9 million of the increase and the stock-based compensation component in G&A, stock-based compensation appears in multiple different places in cost of goods sold as well but in the G&A component, it was about a $400,000 increase.

The bad debt was the biggest single increase with -- on the order of $2.4 million on a year-over-year basis..

Our next question comes from the line of Kevin Ellich with Craig-Hallum..

Just wanted to go back to the bad debt and the prior authorization that Amanda was talking about.

With United kicking in on November 1, I think it's my understanding that [indiscernible] in Florida and Texas aren't affected by that change, is that how you guys are understanding it as well?.

Yes, that is correct. Florida already had a program from Beacon Laboratory Benefit Solutions, BeaconLBS, but the model in Florida is fairly different than the model in the other 49 states. I don't believe they rolled this out into Texas yet, but Florida was sort of the combination of really a narrow network with the pre-authorization model.

The other 49 states is really BeaconLBS are really acting as just a pre-authorization company, similar to what Evercore or some of these other companies do. So basically it's not excluding providers, any provider can participate, you would just need to register and get your approvals through them.

So Florida was a little bit different, but again, as we said earlier our total, if you look at the whole population of UnitedHealthcare molecular would be about $0.5 million and again that would assume that we actually didn't get one pre-authorization and we think we're going to have a fairly high success rate given our sales teams engaged, our managed care teams engaged and we have a lot of communications with clients as to what the requirements are and even on the backend if clients aren't cooperating, we are going to have hard conversations to do there potentially although perhaps having the client bill them or certainly making hard decisions along those lines, but clearly I think our risk is moderate and then certainly we're going to do a lot of things over the coming weeks if this rolls out to mitigate that..

Sure and then, how long do you think it will take before your bad debt normalizes and I guess when I say normalized, what sort of levels do you think it will actually get back down to?.

Well, on January 1, we may not have bad debt anymore. I guess that would be part of it, but certainly, we're at 6.8% year-to-date. I think clearly the Clarient integration was a factor in that as Doug said, our billing team had some performance issues earlier this year as they struggled with the integration.

So we think there is some room for improvement. I wouldn't go crazy certainly, but obviously for next year we're hoping to bring that 6.8% down some..

Great and then one quick question for you Doug, in your prepared remarks you talked about preferred provider relationships with some national healthcare systems, just wondering if you can give any more color as to which systems, how big we're talking and then also on the oncology side, what type of groups you're targeting because I think U.S.

Oncology already has a relationship with Quest?.

Yes, Kevin, thank you. We were engaged with a lot of the large hospital organizations. I think you know that we have agreement that we've announced with Premier. There are a lot of other large groups that we have been engaged with.

We love to be able to tell you the name of the organization that we just contracted with, but we don't have their permission to do that, but these are large organizations and we are meeting with a lot of success in contracting with these GPOs.

Relative to the oncology groups, we've had a lot of recent success talking with, meeting with a number of oncology groups and these range in size from a dozen oncologists to 100 oncologists or more and we think that we have a unique business model and solution that might help them as they engage in the new value-based payment model systems and try to do engage even further in this environment of precision medicine and so we've had a lot of success meeting with them and we've actually closed a few and we think that our pipeline is pretty robust and we're looking forward to closing a number of others over the next several months..

Next is Paul Knight with Janney Montgomery Scott..

Doug, can you talk to the pricing down 11% in the quarter.

How much is related to PDL1 and the lower price of that particular test?.

We think about 2/3 is caused by the huge growth in PDL1 testing on a year-to-date basis..

And molecular testing?.

And some molecular testing, yes. Now, I would just add Paul that the big growth in PDL1 testing for us occurred in the fourth quarter of last year and accelerated quite a bit in November and December. So we believe that the impact of that on price will begin to modulate as we go forward here..

Paul, in addition 2% of the 11% reduction is a result of this one-time revenue adjustment. In order to look at it, you probably ought to normalize that impact on entire year-to-date basis. So our actual revenue per test on a year-to-date basis would run closer to $350..

Okay, in your opinion in a still a price per test decline world of low single digits or where are we do you think?.

Paul, I don't know if this is helpful for people, but I did a little history, looked at history the other day and when I started 34 quarters ago, our price per test was $660. So now it's about $350 and even though that's occurred every quarter and every year, we've been able to manage through it pretty successfully.

I think at this point, we expect less reduction on an annualized basis going forward in our particular business and we've said that we could suggest that we model maybe 3% kind of declines, absent the impact of mix. And if you think about next year, for example, we've got PAMA which is impacting the lab industry in general.

For us, even though we think that whole approach by CMS is flawed, the impact to NeoGenomics in 2018 will be less than a $1 million from PAMA. We have some residual impact from reductions in flow cytometry, but the combination of those would be well within the guidance that we've provided for reductions in revenue per test..

Our next question come from the line of Nick Jansen with Raymond James..

My first is on volume growth.

You've had very impressive volume growth this year partly due to some of this explosion that you've talked about in PDL1, but how confident you are as that moderates beginning in the month of November that this kind of mid-teens range is the right range because I would assume that right now you are not growing mid-teens in the other categories given some of the integration related noise with Clarient.

So just wanted to kind of get your thoughts on maybe growth recently ex-PDL1 as we kind of frame our expectations for '18 revenue growth..

Yes, thanks for the question. First point I would make is that our growth has been accelerating. That's important to know because I think we said early on in the year that our sales team was not spending a lot of time closing new accounts.

That's changed and so now they are back to hunting and so our growth in our clinical business is clearly accelerating. As the PDL1 volume normalizes as we get into the last part of the fourth quarter and into 2018, we expect that our guidance to you, our long-term guidance of volume growth in the clinical business in the mid-teens is pretty good..

Okay, that's good and as we think about kind of just building the bridge from kind of your 4Q EBITDA guidance range of $9 million to $10 million to something in 2018, what are the key puts and takes that we should be thinking about.

The way I look at it is, you kind of annualize the 4Q number, you have 25% to 30% incrementals on, let's say, plus or minus 10% revenue growth, is that the right way to think about it or is there something another big headwind to consider for '18 or a potential good guy as we frame up kind of intermediate term EBITDA expectations for the organization?.

Yes, I think that you're right. So what we would do is -- first of all it's all about growth for us. So our quarter 4 guidance is somewhat depressed because of the bad debt challenges that we've described.

We would hope that that would get better, but in addition to that, we're estimating that we're going to have some very strong growth in both the clinical division and the Pharma division we would expect as we've described, 25% to 35% of that would fall to the adjusted EBITDA line.

Obviously, we try to do better than that, but we think that's a reasonable expectation for a reasonably well-managed company..

One thing I'd add, we won't give 2018 guidance till February and we've been saying now for a couple of years that we expect 25% to 35% incremental EBITDA on each incremental dollar of revenue. So I'd encourage the analysts to sort of play within those parameters in their expectations for next year.

We'll obviously give you more refined guidance in February..

Our next question comes from line of Raymond Myers with The Benchmark Company..

I don't believe we've talked much about Pharma service on this call yet.

Can you describe what your outlook is for the growth of that business after a couple of very strong quarters and also how the Geneva facility affects capabilities and cost structure in Pharma Services?.

Thanks, Ray for the question. We're excited about Pharma Services. We explained I think over the last several quarters that we rebuilt our sales and business development teams in Pharma Services. We've invested in the business, we've invested in systems and processes and we're starting to see that in the backlog and in the revenue growth.

I think our revenue growth in Pharma Services has been somewhat buoyed by MultiOmyx. So we have a proprietary testing technology, which focuses predominantly in immuno-oncology and it's a very unique testing capability. We've got a lot of interest from pharma companies in this.

We also have done a lot of PDL1 and related immuno-oncology sort of testing for the pharma industry and I think our leadership there generally has been good for us. So the growth prospects are very strong, you can tell in the backlog that increase of 70% plus in the end of quarter three compared to last year.

So we would expect that our revenue growth is going to continue pretty strong in Pharma Services. Certainly, Geneva will help. It helps being a worldwide provider to this industry. We have incurred some cost to set Geneva up.

It's ready to go, we're going to have a grand opening on November 8 and we're essentially ready now to accept our first patient samples. So we're excited about that and we think we'll begin to realize some revenue from Geneva in fact in quarter four..

Geneva won't be a really material item. Literally, we're talking about 6 employees at this point. I mean it's a small operation, it's not that large right now. We did spend about $0.5 million though in terms of all-in in terms of set up costs, but that's obviously behind us now and then now, hopefully we'll actually start to generate some revenue.

We've already got one contract in house and we're very bullish on having the capabilities to do European trials..

Good, that sounds great.

And is that cost in cost of goods or in R&D?.

At this point actually it's all in G&A. All of the set up costs because there was no revenue associated with it to date are flowing through our G&A line. It has elevated a bit from prior year. Once it effectively opens and starts to process samples, then really the vast majority of those costs will go up in the cost of goods..

Okay, sounds good. Second question is around the Clarient integration.

Describe again when you felt the Clarient facilities were integrated with NeoGenomics and are there still synergies remaining to be captured from that integration the combination of the businesses in 2018?.

Yes, sure Ray. The Irvine lab and the Aliso Viejo lab were combined completely at the end of March of 2017. As some of our people just reminded me, in Aliso Viejo, it takes a month or 2 to know what the processes are that have come into the lab and to revise current processes and I think some of that work continues.

So yes, there are synergies that remain to be realized. We think that the integration is going very, very well. I mean we've explained in the past that even though, putting two labs together is never easy. We really had no appreciable loss of any client or revenue as a result.

It delayed some of our growth expectations, but on the synergy side, I think overall we said that we estimate $20 million to $30 million of synergy to be realized over the course of 3 years from the Clarient acquisition and we continue to believe that's a good estimate.

As you know, I think in the 22 months since the acquisition, I think our Cost per Test is down about 20% and you'd certainly have to attribute some of that reduction to synergies and we're starting to realize some synergies also on the volume growth side as we cross-sell..

Just to clarify, Ray, we have always talked about synergies from the acquisition as including the benefits of scale that come from the acquisition, lot of our Cost per Test reductions are hard costs but a lot of the other ones are because of the increased scale..

Next question comes from the line of Joe Munda with First Analysis..

Real quick, one housekeeping item here, on the cash flow statement, it says fair value of restricted stock issued to fund purchase of customer list, roughly $4.5 million.

Can you give us some sense of what that actually is?.

Yes, a very, very small customer list acquisition.

We mentioned in the script that a number of our smaller competitors are finding it increasingly difficult to navigate the industry and we are working hard to try to find small deals that we can do that might be additive/accretive to our business and we think that the revenue that we -- or estimates of revenue from this acquisition are in the $3 million to $4 million range and where we can do other acquisitions of this nature, we will..

Okay.

And then as far, you talked about the tissue samples, a new process as well as for QNS, I'm just wondering how much of this new tissue sample process, if you could give us some details around it is factoring into your volume growth expectations as well as the ability to win new business and keep going after accounts because on our end, we get a lot of questions on how do they continue to maintain this mid-teens growth, I know other people have asked that question on the call.

How do they keep this mid-teens growth going? Is it more market growth, how much of its market growth, how much of it versus volume growth or taking share if you will and then you factor in this new tissue sample process and I'm just wondering where that all comes into play here? Thanks..

Thanks, Joe.

I would characterize the new tissue sample process that we described as in the category of a number of innovations that we regularly make in our business and this one I think is going to be important for patient care, but we're innovating, introducing new tests changing our processes all the time as we try to improve constantly quality and introduce new medically important tests.

So I would put the tissue sample initiative in that category. In terms of our growth, the growth is really in two areas, one as you said is the markets grown. We're in this era as we all know of precision medicine. There are new therapies coming out all the time require our precise testing and this is an area we think in which the U.S.

market is probably growing at a 8% level, maybe even a little bit faster.

In addition to that we've fueled the growth by our ability to take market share and there's no -- I think that one really depends on good old fashion service, quality, focus and having a very comprehensive test menu and we as you know, because we're focused just in oncology, we think we do a pretty good job here and its enabled us to gain share..

Okay, can we just go back to the -- I appreciate the answer, can we just go back to the that small acquisition? Can you give us some sense of what it was as far as area of testing, molecular, as well as can you give us some sense of why the decision to use restricted stock rather than cash?.

That was just -- first of all, it was a very small acquisition. I'll say that. Second is the product mix was in our wheel house. FISH, some flow cytometry, some molecular testing. Third thing is that we used restricted stock because that seemed to be what the seller was more interested in and the deal was accretive and had a good return profile for us..

And it was not completed until September. So there was not appreciable impact yet in the quarter because it was just one month of the quarter..

And there won't be because it was quite small..

Yes..

Okay, thank you, we've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for closing comments..

We do have one email question that needs to get addressed here. It says that bad debt is running around 6.8% in 2017 and this will be treated as an offset to revs in 2018.

How should we think about revenue and revenue per test growth next year? When we begin to report the quarterly numbers next year, we're going to restate the 2017 financials to show what that would be on apples-to-apples basis, so you can get growth rates, but it does bring up an interesting point about those analysts that are going to model ASC 606 in before we give our guidance for next year.

I need to highlight that and to make their assumptions very clear to people because otherwise the consensus is going to be all over the map on this.

We again want to reiterate that this will have no impact on adjusted EBITDA or net income, but it will have an impact on revenue and we would actually prefer that people don't model it in yet next year, so we can have everybody reset all at once so we don't have this trickle out over time, but everybody has got to do what they think is best.

If you are going to model it make an assumption on what percentage of revenue decline is from ASC 606 so it's clear to everybody..

Okay, good. Thank you, Steve. Thank you, operator.

As we end the call, I'd like to recognize the approximately 975 NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics testing program and on behalf of all of our NeoGenomics team, I want to thank you for your time joining us this morning and let you know that our fourth quarter 2017 earnings call will be on or around February 21 of 2018.

For those of you listening that are investors or are considering an investment in our company, we thank you for your interest. Goodbye..

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