Doug Sherk - EVC Group, Inc. Nancy Lurker - President & CEO Graham Miao - CFO

Ravi Fadah - William Blair Scott Henry - ROTH Capital

Greetings and welcome to the PDII Incorporated Fourth Quarter Year-End Fiscal 2014 Financial Results Conference Call. At this time, all participants are in a listen-only. A brief 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 Sherk. Thank you, Doug, you may now begin.

Thank you, operator. Good afternoon, everyone. Thank you for joining us for the PDI conference call to review the company's financial results for the fourth quarter and full year, which ended on December 31, 2014, as well as recent corporate development. The news release detailing the fourth quarter and fiscal year results was just after 4:00 p m Eastern Time and is now available on PDI's website www.pdi-inc.com. In addition, an archive replay of the event will be available on the PDI website. Before we get started, during the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward looking statement. This includes remarks about the corporation financial projection, expectation, plan, belief and prospects. These statements are based on judgment analysis as of the date of the conference call and are subject to numerous important risk and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risk and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement today usually as well as PDI's public periodic filing with the SEC including the discussion and the Risk Factors section of our 2013 Annual Report on Form 10-K and our Quarterly Report on Form-10Q for the period ended September 30, 2014. Investors or potential investors should read these risks. PDI assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not tend to do so. In addition to supplement the GAAP numbers, we have provided non-GAAP information. We believe that the non-GAAP numbers provide meaningful supplemental information are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release which is available on our website. Now I'll like to turn the call over to Nancy Lurker, President and Chief Executive Officer of PDI.

Thank you, Doug, and good afternoon, everyone. Thank you for joining us for a review of our fiscal year and fourth quarter 2014 results as well as a general business update for the first two months of 2015. With me today on the call is Graham Miao, Chief Financial Officer. I'll begin our discussion with an overview of our recent progress and then Graham will review key fourth quarter and fiscal year 2014 financial highlights as well as our guidance for 2015. We'll then open the call for your questions. For more than a quarter century PDI's ability to successfully commercialize products for our healthcare customers has resulted in our company becoming a leader in our industry. We've consistently evolved our commercial services operation in order to offer our healthcare customers leading edge commercialization services. We combine these services with a critically important comprehension and implementation of the ever evolving compliant environment as well as a cost efficient total solution for our customers. As a result of our success, we've become one of the leaders in our industry with about 20% market share. We've managed a wide variety of healthcare products from pharmaceuticals, medical devices the diagnostics and occasionally physician office services. We continue to win a competitive portion of our P and non-FRP business that are customers need and we continue to evolve our commercial services business to stay cutting-edge. With our current win rate, we enter 2015 with solid momentum in our commercial services business. Last year, we embarked on the strategy to improve our long term returns to our shareholders by leveraging our expertise in commercializing products to healthcare providers. After a thoughtful and deliberative process, we arrived at a strategy to capitalize on our commercial services success by launching and selling molecular diagnostic tests. Specifically, we sought to identify molecular diagnostic product lines that have not maximized their commercial opportunity in the marketplace while at the same time offering significant differentiated benefits to patients, clinicians and payers. This process let us to making two molecular diagnostic acquisitions in 2014. The operations we acquired generated $1.4 million in net revenue in the fourth quarter of 2014. We believe we can significantly grow the molecular diagnostic operations of our company which we have branded as Interpace Diagnostics at a more consistent long term rate with higher gross margins than our commercial services business. Our goal is to consistently grow the revenue of these operations in 2015 and beyond. This growth is expected to be achieved to the successful execution of our go-to market strategies for ThyGenX, our next generation sequencing test for rule-in thyroid cancer risk assessment of thyroid nodules and PancraGen a genetic and biomarker algorithm based molecular diagnostic test that both diagnosis and risk ratified pancreatic cysts risk of pancreatic cancer, one of the deadliest cancer today. Furthermore, we expect to launch two additional molecular diagnostic products during 2015. While we execute our strategy molecular diagnostics we expect to continue the recent momentum we generated in our commercial services operations which includes new wins ranging from pharmaceutical products across multiple therapeutic areas to cancer diagnostics and medical and clinical services. We anticipate to finish 2015 with solid consolidated double-digit top line growth. Graham will provide a review of our outlook as well as the fourth quarter and 2014 financial highlights in a few moments. What I'd like to do now is to walk you through some of the factors why we are quite positive about the prospects for both businesses beginning with the commercial services operations. During 2014, we had relay a disappointing outlook for our commercial services growth rate due to lack of FDA approval of several products for which we'd won assignments and a weak year-over-year RFP pipeline. Since then our RFP pipeline has more than doubled year-over-year and our team has done an excellent job of focusing on our customer opportunities as well as refining some of the unique offering that distinguish us in the commercial services space, namely, the ability to provide laser focus on our customers and consistently deliver to them strong results while also offering unique services such as PD1 and our established relationship team. Our efforts with our commercial services operations have been very successful in the fourth quarter of 2014 and the first two months of this year. We've one program for therapeutics addressing a variety of needs in pain management, respiratory, ophthalmology and neurology. We've also won another launch in the cancer diagnostics space and medical and clinical services, and we continue to incorporate PD1 into our service offerings and can now demonstrate a positive ROI for those sales teams that utilize this unique offering. Our business development team is constantly interacting with the biotechnology and pharmaceutical industries, the medical device industry, and the diagnostic industry to establish partnerships to create win-wins for both our customers and PDI. Last year, we had a tough year in this space due to the aforementioned reasons. Based on the excellent start to 2015 and the numbers of new signed contracts, we expect commercial services revenue growth based on existing signed contracts to be in the 2% to 5% range net of the natural turnovers that occur regularly in our CSO business as compared to last year. Let's now turn to the Interpace Diagnostics business. While we became a fully integrated clinical developer, lab testing and marketer of molecular diagnostic products in the back half of 2014, we leveraged our rich and successful commercial services history of leadership in bringing to market molecular diagnostic tests. Our commercial services operations have launched the number one molecular test for human papillomavirus or HPV; we've launched a leading cervical cancer test, and we successfully sold several fetal nucleic acid tests. We also conducted a six month test market on a cardiac pharmacogenomics test and determined that the reimbursement landscape was not conducive to a broader launch and, therefore, exited out of that test market collaboration. This track record of careful assessment and multiple diagnostic sales successes over the past several years coupled with a strong molecular diagnostic market growth rate led us to the oncology test acquisitions that we completed in 2014. As I mentioned before, we completed the acquisition of our thyroid cancer test from Asuragen in August, 2014 and RedPath in the fourth quarter of 2014. We have now fully integrated these assets and the lab into Interpace Diagnostics. In addition, we've been fortunate to have Heiner Dreismann, the former CEO of Roche Molecular Systems, join our board. Heiner has worked with us to refine our strategic approach to the market. Our strategy is focused on four key characteristics. First, we are focused on oncology diagnosis and prediction, where there is high unmet medical need and the innovation is driven by solid science. Second, we are marketing and developing oncology tests that offer enhanced value to current diagnosis paradigm and with reimbursement significantly higher than other diagnostic areas. Third, we are bringing to market products that has high barriers to competitive entry due to the complexity of the test and intellectual know-how. And finally, our products involve highly complex messaging to healthcare professionals that must be delivered in multiple venues in order to successfully penetrate the market, all of which is a core expertise of our company. We have two key molecular diagnostic products in the market right now. PancraGen is the first and only U.S. commercially available molecular test for the diagnosis and prognosis of pancreatic cancer from cysts. In a major clinical study that was published in Endoscopy the PancraGen technology generated substantial data that helps physicians reduce unnecessary surgeries and more accurately detect cancer risk. The current standard of care called the CENDI guideline resulted in 79% of patients meeting those guidelines for surgery actually having benign outcomes. With a sensitive molecular diagnostic test many of these unnecessary costly and risky surgeries could have been avoided. PancraGen is that test. Avoiding surgery means substantial cost savings of the healthcare system and significantly lower patient morbidity and, in this case, even mortality due to the risky nature of the surgery. We believe that PancraGen will reset the standard of care for pancreatic cyst diagnosis and provide our company with an addressable market opportunity of approximately $350 million. Of note, PancraGen is currently reimbursed by Medicare for $3100 per test and approximately 60% of all patients who have pancreatic cyst are Medicare eligible. We estimate we have today over 50 million lives cover for reimbursement for PancraGen. Since January, 2015, we have completed over 600 PancraGen test. In December we launched ThyGenX, which is a next generation sequencing test for rule in cancer test assessment of Thyroid Nodules. As a reminder, Thyroid Nodules are often found in middle aged and older people. Typically, a physician will then order a FNA or fine needle aspirates to draw fluid from the cyst to help diagnosis whether this cyst is benign or malignant. Approximately 525,000 of these FNAs or done annually and the rate is accelerating as a population ages and better nodule deduction occurs. Today, the majority of these thyroid nodule FNAs are assessed through traditional cytology of which 3% to 6% are diagnosed as malignant, 60% to 75% are diagnosed as benign, and 15% to 30% are diagnosed as indeterminant. For those that are diagnosed as indeterminant, often patient is still referred for surgery to do a thyroid diagnostic lobectomy to gain a more definitive diagnosis. This surgery is quite invasive and entails for moving half of the thyroid gland and can result in significant morbidity to the patient such as vocal cord impairment, life-long thyroid hormone supplementation if too much of the thyroid is removed, and scarring. .: Of note, ThyGenX is reimbursed by Medicare for a $1100 per test and approximately 30% of all patients who have FNAs are Medicare eligible. And we are pleased to announce that we recently an exclusive national major payor contract for ThyGenX. We estimate we now have over 60 million lives covered for reimbursement for ThyGenX. Since January, 2015, we have completed over 350 ThyGenX and miRInform tests. We are also excited about the upcoming launch of ThyraMir, our second thyroid nodule cancer test which is a micro RNA highly sensitive rule-out thyroid cancer cyster test. The combination of ThyGenX and ThyraMir should establish us as a strong competitor in the thyroid cancer test base. To maximize the potential of these two tests, we've doubled the sales force and are now calling on clinicians nationwide. In addition helping to fuel growth over the longer term will be the second half 2015 launch of our fourth molecular diagnostic product BaraGen for Barrett's esophagus. Barrett's esophagus is a rapidly growing diagnosis that affect approximately over 3 million people in the United States and over time can progress to esophageal cancer. We will discuss more BaraGen in future calls. Applying our go-to market expertise we believe we can increase the net revenue in Interpace Diagnostics from both our endocrine and GI test to approximately 10% of our total company net revenue in 2015. It is important to keep in mind that in the initial stages of diagnostic test launches revenue recognition is often delayed due to the extensive process required for gaining reimbursement status and establishing payments from commercial payers. We have begun this process and believe that the net revenue growth of Interpace Diagnostics will be solid in 2015 and will accelerate as the year progresses. Now I'd like to turn the call over to our Chief Financial Officer, Graham Miao, who will review key financial data from the fourth quarter, the full year and our 2015 outlook. Graham?

Thank you, Nancy, and a good afternoon, everyone. Our commercial services business has stabilized and is positioned for growth in 2015 while we've built a new molecular diagnostic business that has the potential to generate higher revenue growth and margins. Today, I would like to focus on some key elements in our financial statements, then review our 2015 financial guidance. Let's begin with the fourth quarter and the full year income statement. As a part of our strategy to improve our financial performance, we have sold our Group DCA business while keeping PD1 and integrating it into our commercial services business. As a result, we had total net revenue for the period of $28.9 million of which commercial services was $27.5 million and Interpace Diagnostics was $1.4 million. The Group DCA divestiture allows us to reduce spending in this area and focus our strategic plan to invest in our diagnostic business. For the year, total net revenue was $120 million, which included commercial services net revenue of $118.5 million and Interpace Diagnostics net revenue of $1.5 million. If we included the $3.3 million of revenue from discontinued operations for the year we would have achieved Street's revenue estimates for both the fourth quarter and the year. Gross profit for the fourth quarter were $4.4 million or 15.1% of net revenue. During the quarter, commercial services gross profit was 13.4% of net revenue while our Interpace Diagnostics gross profit was 48.9%. Gross profit for the year was $18.5 million. In 2014, our commercial services gross profit was $18.3 million or 15.5% of net revenue, while Interpace Diagnostics gross profit was $0.2 million or 14% revenue. This is primarily due to the inclusion of the cost of sales related to a service offering the company completed during the year. As we look into 2015, we believe the gross profit margin generated from the Interpace Diagnostics business will improve significantly over the prior year level due to the full year impact of the higher margin business and increasing scale. Total operating expenses in 2014 were $32 million as compared to $24.9 million in 2013, primarily due to the investment spending required to implement our molecular diagnostic strategic initiative. Turning to the balance sheet, cash and cash equivalents as of December 31, 2014 were $23.1 million. Total assets increased to approximately $116 million from $69 million a year ago, primarily due to the increase in acquired intangible assets as a result of the acquisition of certain thyroid and pancreas cancer tests from Asuragen as well as the acquisition of RedPath. The RedPath acquisition was financed in part with two debt instruments. The first is a $20 million term loan bearing an interest rate of 13.5% with a term of six years and a interest-only payments in the first two years. The second instrument is a subordinated note with the present value of approximately $7 million and has eight equal quarterly payment starting in the fourth quarter of 2016. Given our anticipated revenue growth and improved gross margin, we believe we have adequate cash resources to execute our strategy for the next 12 months. Of course as would be expected, we are consistently evaluating strategies to maximize our return to shareholders and provide resources to execute our growth strategy. Before I begin on 2015 financial guidance, let's first discuss the two business segments PDI will operate and report to. Effective December 31, 2014, we realigned our reporting segments due to the acquisition of RedPath and acquiring certain assets from Asuragen to reflect our current and forward business strategy. As a result of divesting Group DCA business, we will no longer be presenting a marketing services segment. Going forward, PDI will operate two reporting segments. The first segment is commercial services, which is our personal promotion or contract sales organization CSO, medical and clinical services, and the full product commercialization services. The second segment is Interpace Diagnostics that is PDI's new molecular test based diagnostic business as a result of a company acquisition of RedPath and asset acquisition from Asuragen last year. With that background our guidance for 2015 is as follows. Total net revenue $133 million to $140 million, which would include commercial services revenue of $121 million to $125 million or 2 % to 5% growth over 2014, and Interpace Diagnostics net revenue that would represent approximately 10% of our total revenue. We also expect gross margin to improve by 250 basis points to 18% from 15.5% in 2014 largely due to the higher level of Interpace Diagnostics sales and we are looking at an adjusted operating loss of $17 million to $19 million. We define adjusted operating loss a non-GAAP financial measure as operating loss from continuing operations excluding amortization expenses of acquisition related intangible assets and other fair value adjustments. We expect adjusted operating loss to be greater in the first of six months of the year as Interpace Diagnostics net revenue growth is expected to ramp-up towards the second half of the year. As Nancy mentioned earlier, we anticipate having four molecular tests commercially available in the endocrine and GI cancer diagnostic space by the end of this year. These will include PancraGen and ThyGenX to currently available tests and ThyraMir for thyroid cancer and BaraGen for Barrett's esophagus cancer two upcoming test we will make commercially available in the second half of the year. Before we open up for Q&A, I would have to note that we will be attending and representing at the ROTH Annual Conference on March 10 and conduct non-deal road show investor meetings in San Francisco and Boston later this month. With that, let me turn the call back to the operator. Michael?

[Operator Instructions]. Thank you. Our first question comes from the line of John Kreger with William Blair. Please proceed with your question.

Hi good afternoon guys. It's Ravi Fadah in for John today.

Hi Ravi.

Thanks for the guidance and all the detail that is much appreciated.

You're welcome.

If I can just start in on the commercialization business, what is your view of the sustainability of the some improvement in RFP activity? And would you characterize your hit rate on that new business above your 20% market share or consistent with it?

So let me say this. As you know, Ravi, this business remains always difficult to project. However, we do expect that for 2015, the pipeline should remain consistent and part of that just as looking at the momentum that we are experiencing right now is certainly larger than last year. I would also say that we know our hit rate is higher than our current market share. So we’re quite pleased with that, and as we announced in the fourth quarter we want some substantially large contracts in the fourth quarter and we continue to add to that in the first quarter.

That great. Is there anything you could tell us about the margin profile of that business because it seems like with that new operating structure we might have a little less clarity on how the gross margin will be trending in the core CSO?

So in the core CSO business the margins for our RFPs have remained relatively consistent. However, I want to put a caveat on that, which is that as we win larger contracts, and we did win some in 4Q, those margins as is typical are lower than when we win smaller contracts. So we do expect to see year-over-year just some slight margin decline in that business as smaller contracts roll-off, which as you know is very typical, the turnover in this business can be substantial as some of our smaller contracts roll-off and the larger ones roll in. However, we could also see smaller contracts come in during the year which would then bump it slightly up, but right now we do see just a very slight margin decline primarily due to the big wins that we've won.

Great, and if I could just ask one or two quick once on the diagnostics piece, it sounds like you're making some nice progress in that business. Is there a rule of thumb that we can think of, as you're launching new tests, is there an average spending per new test that you target as you add headcount or incur start up costs ahead of the revenue recognition?

No, there really isn’t, Ravi, it depends, is very specific to the therapeutic area, the number of doctors we need to call on, the competitive landscape, so it's very test specific.

Okay, okay. And then last one, given that and the pace -- it seems like the accelerating pace of new test introductions, what are your thoughts on the timing of return to profitability at this point?

I will turn that over to Graham.

Yes, we have given guidance for this year. We do anticipate an adjusted operating loss of between $17 million to $19 million. And as we go forward and over the next several years and we are -- we believe that still in the margin and also ramp-up, a ramp-up of the revenue and as well as our ability to capitalize the pipeline of our commercial services and we do see over the next several years and we see a dramatic improvement in our financial performance both top and bottom line.

Great, but no concrete timing yet as I'm hearing it. Great, thanks very much.

Thank you. And our next question comes from the line of Scott Henry with ROTH Capital. Please proceed with your question.

Thank you and good afternoon. And I jumped on late so I may have missed some of the prepared remarks. So bear with me if you can. I just wanted to get a sense of the diagnostics business. It sounds like you're guiding to $13 million to $14 million in 2015. I guess first question, how should we think about that quarterly? I mean is this 2, 3, 4, 5, is that how we should think about it or what sort of ramp up?

Well Scott, let me just -- let me reiterate, we are not at any position to give quarterly guidance, particularly when you're in launch mode it's too hard to give that. So I don’t want to give quarterly guidance. However, obviously, as with any kind of a new launch it takes time for the field force to get trained, get out into their territories, get introduced to the doctors, make appointments to see the doctors and then begin to communicate and sell the test into the doctor's offices. All of that takes time. So of course we would expect to see much more ramp up in the second half of the year than in the first half of the year.

Okay, and I think that’s fair. And I'm not asking for specific quarterly guidance. I guess what I'm thinking about and Nancy, I'm sure you can understand this, it's been a frustrating run at PDII and it'd be nice to know if this new initiative is going better, worse or as expected kind of on a quarterly rate. So what can you tell us after first quarter that can give us a sense as if it's going on as planned, or in such in a way that it's not retroactive, because everyone says everything is great as long as they can, but if we could get a proactive then we could probably objectively evaluate it?

Well so let me just say this. As I mentioned already, we will give test volume, so I've already disclosed in my script that I communicated what the number of tests are that we are generating by product line, so that’s something you should look at. Do you see momentum in the test volume growing? The second thing is our number of lives covered and our managed care wins, and I don’t know when you came on the call, Scott, but I covered that as well for both PancraGen and ThyGenX. So you should start to see and we should start to see for hitting our goal post that you see meaningful, quarterly on test volume and meaningful growth in our pairs and reimbursement. Now I just want to put caveat on reimbursement; reimbursement takes time. Now I'm very pleased to say that we've got very good progress already for both ThyGenX and PancraGen. As I mentioned on the call, PancraGen is primarily about 60% covered by Medicare and we are currently covered by Medicare today. So that’s a major, major significant advantage for that test. So, we do expect that we're making good progress but it does take time. You have to get into the queue with the payors, you got to get on their schedules, you have to make presentations and they have to render a verdict and then they implement the contract, all of which takes time. However, I want to reiterate that we are pleased with our progress on that front to-date. As per ThyGenX, we have about 30% on Medicare and we also are pleased to say that we've got Medicare coverage for ThyGenX to the tune of $1100 per test and about 30% of patients are Medicare eligible. In addition, we just announced a major national payor contract exclusive to ThyGenX where we were added to their coverage. So we're quite pleased with that. So those are two main drivers that I would be looking for.

Okay, that’s seems fair and that should be helpful. Just your take relative to the expectations you set out, how do you feel about January and February? Obviously, the beginning of the year but I'm sure to be January 1, you have a budget for every month, January and February were they inline, ahead, below, I'm just trying to get an idea of how the early roll out is going?

We are on track with where we should be and quite pleased with the momentum that we're seeing on a number of different initiatives, if you probably haven't had a chance yet to look at our release, but we are very pleased with the amount of publications and presentations that we have planned in this business in substantial journals and venues, so we are quite pleased with our momentum. I also wanted to stress our commercial services business, we're quite pleased with the momentum that we have coming into 2015, we feel optimistic about where we're headed with that business; our win rate remains well above our fair share of the marketplace and above our current market share. So right now 2015 looks very positive.

Okay, great. And just a general question so I can understand the diagnostic business. What's your overhead for that? When you're up and running on a steady state, what's kind of the total SG&A of that unit? So when I think about what you need to do to break even, I'm just wondering what that kind of overhead is that you're seeing?

Well I'm not -- we're not going to disclose at this point, Scott, all right. That’s something that we'll, as we go forward you can look at our quarterly earnings announcements, we're not going to -- we don’t disclose our overhead.

Okay. I guess it will become apparent after you report quarter-to-quarter.

Right.

Final question, and this is kind of out of left field. The CSO business, would you ever consider selling that business? Is that -- and focusing on diagnostics I mean there is only a couple of players and if there was consolidation it would probably improved pricing; I'm just thinking out loud, what are the thoughts on maybe looking at monetizing that out?

First, let me be very clear because I want to make it clear for should any of our customers be listening to this call or others, we remain committed to this business and it remains a core part of PDI. It is by far and away still the largest revenue driver and is generating, we expect it to generate a profit this year. As you probably saw, we did some restructuring however painful that was to ensure that we could deliver a profit in our core commercialization services business. And our key strategy is to grow these operations and based on the pipeline and the momentum that I've described during our call today.

Okay, fair enough. Well that should do it for me. Thank you taking the question, Nancy.

You are welcome, Scott.

Thank you, Scott.

[Operator Instructions]. Thank you. There are no other questions in queue at this time. I will now turn the conference over to management for any closing comments.

I want to thank everyone for your time today to listen to our call. We remain quite positive about the direction of our business and I also want to thank the many employees of PDI for their diligence in making sure that we integrated our acquisition assets carefully and thoughtfully and set us on the momentum as well as our commercial services colleagues for the effort that they have done to set us up for a very good 2015, and more importantly to our shareholders for your patience over the last several years but particularly the last year as we have added a new division to the business and for your many thoughtful input and advice over the past several years. So, as I said, thank you for your time. We look forward to talking with you more in the upcoming months. Thank you, operator.

This concludes today’s teleconference. You may disconnect your lines this time and acknowledge for your participation.