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BRLI > SEC Filings for BRLI > Form 10-Q on 6-Sep-2013All Recent SEC Filings

Show all filings for BIO REFERENCE LABORATORIES INC

Form 10-Q for BIO REFERENCE LABORATORIES INC


6-Sep-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[Dollars In Thousands Except Per Share Data, Total Patient Data Or Unless Otherwise Noted]

Overview

We are a national clinical diagnostic laboratory located in northeastern New Jersey. We are a national laboratory in certain focused areas of laboratory testing and a full service laboratory in the New York super-region. We have developed a national reputation for our expertise in certain focused areas of clinical testing. GenPath, the name by which we are known for our cancer and oncology services, is recognized for the superior hematopathology services it provides throughout the country. Our Women's Health initiative, through which we provide dedicated services for obstetrics and gynecology practices, including a unique, technically advanced multiplex process for identifying sexually transmitted infections, is also offered as GenPath. Our regional footprint lies within the New York City metropolitan area and the surrounding areas of New Jersey and southern New York State as well as eastern Pennsylvania and some areas of western Connecticut; we also provide services further into New York State, Pennsylvania, Delaware and Maryland. As a regional provider, we are a full-service laboratory that primarily services physician office practices. Our drivers pick up samples and deliver reports and supplies; we provide sophisticated technical support, phlebotomy services or patient service centers where appropriate, and electronic communication services in many cases.


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Physicians outside of this regional footprint send samples to our laboratory in order to take advantage of the expertise that we are able to provide in blood-based cancer pathology and associated diagnostics or to take advantage of the superior service, support and technologically advanced testing we offer in our Women's Health initiative. These accounts frequently send routine testing to us as well in order to simplify their office workflow and to take advantage of our outstanding capability, service and support. Our correctional healthcare services are used throughout the country at prisons and jails. The focused markets we serve on a national basis outside of our regional footprint do not require many of the logistical and other ancillary support services required as a full service laboratory on a regional basis. Within our regional footprint, we provide all of the same services that we provide on a national basis as well as some regionally focused diagnostic services, such as histology and pathology support services, substance abuse testing, fertility testing, hemostasis testing, and molecular diagnostics that are unavailable from many of our smaller regional competitors; some of the regional testing may be provided outside of physician offices in clinics or other bulk deliverers of healthcare. In October 2012, we launched Laboratorio Buena Salud ("LBS"), the first national testing laboratory dedicated to serving Spanish-speaking populations in the United States on a Spanish language first basis. All interactions with patients and physician offices are handled in Spanish unless otherwise requested by the patient or office without the need of choosing Spanish or English.

Over the last few years, there have been fundamental changes in the laboratory services industry. In the 1990s, the industry was negatively impacted by the growth of managed care, increased government regulation, and investigations into fraud and abuse. These factors led to revenue and profit declines and industry consolidations, especially among commercial laboratories. There are currently two national mega-laboratories and Bio-Reference Laboratories, together with some specialty laboratories and a few small laboratories in the US public markets. There is one other Australian-based laboratory with significant presence in the US markets. In addition to these publicly-traded commercial laboratories, there are numerous hospital outreach programs and smaller reference laboratories that compete for the commercial clinical laboratory business scattered throughout the country. These clinical laboratories have had to improve efficiency, leverage economies of scale, comply with government regulations and other laws and develop more profitable approaches to pricing. Moreover, there has been a proliferation of technology advancements in clinical diagnostics over the last decade that has created significant opportunities for new testing and growth.

As a full service clinical laboratory, we are constantly looking for new technologies and new methodologies that will help us to grow. Since the turn of the century, our size alone has made us attractive to companies that are driving the advances in technology. We represent a significant opportunity for these companies to market their products with a nationally recognized specialty provider in our focused areas of specialty or in one of the major population centers of the world-the New York super-region. We have had several successful strategic relationships with such technology opportunities. In addition to new technology opportunities, we have an extremely seasoned and talented management staff that has been able to identify emerging laboratory markets that are under-served or under-utilized. We have recently developed programs for cardiology, histology and women's health to go along with our existing hemostasis, hematopathology and correctional healthcare initiatives which have already been established and in which we have been increasing our market share for the past several years. Over the past few years, we launched several new, disruptive testing services. OnkoMatch, an offering that has emerged as a result of our joint venture with Massachusetts General Hospital, provides tumor genotyping for solid tumor cancer patients at reasonable and affordable pricing. Inherigen, our pre-natal carrier detection panel, provides broad-spectrum carrier detection of autosomal conditions that may affect child-bearing decisions. GenCerv is an advanced test for identifying which HPV positive patients are likely to have cervical cancer. StormPath is our virtual pathology solution that allows remote pathologists to use our technical laboratory capabilities and consult with our pathologists remotely in order to provide improved diagnostics. We continually seek to offer innovative testing services that are clinically relevant and which improve patient care.

GeneDx, Inc ("GeneDX") is our wholly-owned genetic sequencing clinical diagnostic laboratory. As molecular testing in general has become a more significant element in the diagnostic testing industry, the Company believes that genetic testing is an essential diagnostic tool of the future. GeneDx was started by two geneticists from the National Institute of Health ("NIH") in 2000. Over the next six years, based on the reputation and expertise of the founders and the outstanding team they built around themselves, along with a very focused and dedicated understanding of the science of genetics, GeneDx became known as one of the premier genetic testing laboratories for the diagnosis of rare genetic diseases. The Company believes that the promise of genetic testing is in the diagnosis of the genetic variants of common diseases. It has been the Company's intention to leverage the expertise and reputation of GeneDx in order to take a leadership role in the expanding area of genetic testing. The Company is seeking cutting edge methods of testing that will be commercially viable diagnostic tools for the advancement of genetic testing. In 2007, GeneDx introduced GenomeDx, a then new test based on CGH Array technology, a high-speed, chip-based technology that has allowed GeneDx to move to the forefront of an emerging technology platform. In 2008, GeneDx became the first commercial laboratory in the world to offer next generation (NextGen) sequencing (high-speed computer-based whole genome sequencing) and has since built up a comprehensive suite of cardiac arrhythmia panels, as well as other multi-gene testing panels, that have enhanced its reputation as a technology and service leader in the area of genetic testing. The Company believes that GeneDx has become a leader in clinical genetic testing with more than 13-years' experience and currently offering over 450 disease-specific tests as well as whole exome sequencing for all 20,000+ genes, and comparative genomic array. The laboratory has 35 board-certified geneticists and genetic counselors on staff available to address physician concerns and questions about genetic testing. The Company employs marketing techniques that were extremely successful in building GenPath, our oncology laboratory. In addition to scientists and technicians to manage testing, GeneDx employs 13 genetic counselors and 129 geneticists to help patients and referring physicians and geneticists understand the meaning of the test results.

The Company believes that it has an outstanding sales and marketing team and has implemented an acquisition strategy based on seeking out opportunities to acquire new technologies, new techniques, new opportunities that will enhance our existing business rather than seeking to acquire laboratories for their underlying business. Over the recent past we have made some strategic acquisitions based on this approach. Our philosophy regarding acquisitions is:
we buy laboratories we consider to be synergistic and accretive. As we have explained in the past, we offer one stop shopping to physicians as a specialty lab. When we buy laboratories in other geographic areas that do not bring in specific technical expertise, we do so to better service our clients and to add growth in the area.

On December 21, 2012, we entered into an agreement pursuant to which we agreed to purchase all of the authorized, issued and outstanding shares of Meridian Clinical Laboratory, Corp. ("MCL"), a Florida corporation. Information about MCL and the agreement may be found in the Form 8-K we filed with the Securities and Exchange Commission on December 21, 2012. MCL is a small laboratory located in the heart of the South Florida Hispanic community and will serve as a base of operations for our Florida LBS program. This acquisition will be our Florida presence for LBS.

On December 31, 2012, we entered into an agreement pursuant to which we agreed to purchase all of the authorized, issued and outstanding shares of Florida Clinical Laboratory, Inc. ("FCL"), a Florida corporation. Information about FCL and the agreement may be found in the Form 8-K we filed with the Securities and Exchange Commission on January 4, 2013. FCL had excess capacity and a strong presence in an underserved area of testing in Florida; its facilities provide the Company with better capability in Florida while expanding our service into an underserved area for testing.

On April 27, 2012, we entered into an agreement pursuant to which we purchased preferred shares of IncellDx, Inc. ("IncellDx"), a Delaware corporation. Information about IncellDx and the agreement may be found in the Current Report on Form 8-K we filed on May 1, 2012. InCellDx developed a valuable test for more positively identifying the likelihood that a woman may have cervical cancer than HPV testing alone. The Company has since introduced GenCerv based on the technology developed at InCellDx.


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On August 13, 2013 the Company acquired certain assets and liabilities of Hunter Laboratories, Inc. located in the northern California. The gross purchase price was $14,400, $7,000 of which was deferred for various anticipated pre-closing liabilities for periods of up to 36 months following the closing of the acquisition. The acquisition of Hunter assets provides the Company a West Coast presence with complex capability as well as Medi-Cal in-network status. The acquisition from Hunter includes most of its current business and a sophisticated facility that the Company will use as a base of operations for its growing western U.S. business. The Company believes that its existing comprehensive payer relationships will greatly enhance the anticipated business opportunities of the acquisition.

On August 21, 2013 GeneDX, Inc., our wholly owned subsidiary entered into a definitive agreement with Edge BioSystems a CLIA laboratory business to acquire "Edge BioServe", primarily a genetic sequencing service business located in Gaithersburg, MD. GeneDx, BRLI's wholly-owned clinical diagnostic sequencing laboratory, will acquire the Edge BioServe genetic sequencing services business. The purchase price will be approximately $3,100 subject to adjustment for certain liabilities of which $375 will be deferred payment for various anticipated pre-closing liabilities. The acquisition will include sequencing equipment and capabilities that are expected to enhance the ability of GeneDx to maintain and improve its position as a premier provider of clinical genetic sequencing services. GeneDx is one of the leading full service genetic laboratories in the world and the Company believes the additional capacity and technical expertise that will result from this acquisition will greatly enhance the opportunity for further growth and expansion of the GeneDx service offerings. The acquisition will provide GeneDx with additional equipment on multiple testing platforms operating in a CLIA-certified environment as well as additional infrastructure for R&D initiatives.

While we recognize that we are a clinical laboratory that processes samples, we also understand that we are an information company that needs to effectively communicate the results of our efforts back to healthcare providers. Laboratory results play a major role in the implementation of physician healthcare. Laboratory results are used to diagnose, monitor and classify health concerns. In many cases, laboratory results represent the confirming data in diagnosing complicated health issues. Since laboratory results play such an important role in routine physician care, we have developed informatics solutions that leverage our role in healthcare. We built a web-based solution to quickly, accurately, conveniently and competitively collect ordering information and deliver results. That solution is called CareEvolve. CareEvolve is a basic tool for our own operations. We license the technology to other laboratories throughout the country in order for them to more effectively compete against the national mega-laboratories. The laboratories licensing our technology are typically not our competitors since they are outside our regional footprint.

We have also created our PSIMedica business unit that has developed a Clinical Knowledge Management (CKM) System that takes data from enrollment, claims, pharmacy, laboratory results and any other available electronic source to provide both administrative and clinical analysis of a population. The system uses proprietary algorithms to cleanse and configure the data and transfer the resulting information into a healthcare data repository. Using advanced cube technology methodologies, the data can be analyzed from a myriad of views and from highly granular transactional detail to global trended overview. Events such as the Hurricane Katrina disaster in Louisiana and general pressures from the government have made development of an electronic medical record system and Pay-for Performance reimbursement priority goals in the healthcare industry. A large portion of an individual's medical record consists of laboratory data and a key performance indicator in any Pay-for-Performance initiative is laboratory result data. Our CKM system is a mature, full functioning solution that will allow us to play a role in these important national initiatives.

To date, neither our PSIMedica business unit nor CareEvolve have produced significant independent revenues relative to the primary laboratory operations, but they are important tools that we offer in the ordinary course of our laboratory business operations.

Recent Events:

Effective February 27, 2013, we announced that we will be offering NonInvasive PreNatal Testing ("NIPT") through the Natera Panorama program. NIPT is a substitute for invasive amniocentesis and CVS testing and reduces risks associated with the testing process itself. We believe that offering an NIPT test enhances our Women's Health program and helps us to be a more comprehensive solution for the Obstetrician office.

We adopted the Accounting Standard Update ("ASU") No. 2011-07: Health Care Entities (Topic 954) - Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities commencing with the current fiscal year, the first year such standard is required for the Company, We believe this update will have no material impact on the Company's financial statements.

Although this update does not have a material impact on the Company's financial statements as a whole, this update requires that we adjust the presentation of our statement of operations along with prior periods presented in this report to maintain comparability. As the result of this change in presentation, our "Net Revenues", "Gross Profit on Revenues and our "General and Administrative Expenses" will change while our "Operating Income", "Net Income" and "Earnings per Share" will remain the same. The presentation is adjusted for a portion of our "Bad Debt Expense" that is now reported in our Net Revenues as required under ASU No. 2011-7.

Note [4] to our financial statements includes a table that shows the amount of
Bad Debt expense relating to patient service revenue that was moved from the Selling and Administrative expense section of our statement of operations to the Net Revenue section.

Third Quarter Fiscal 2013 Compared to Third Quarter Fiscal 2012

The numbers in this comparison are affected by the change in presentation on our statement of operations as the result of the Company adopting ASU 2011-7 on November 1, 2012. See discussion of ASU 2011-7 in the notes to our consolidated financial statements for more information.

NET REVENUES:

Net revenues for the three-month period ended July 31, 2013 were $185,427 as compared to $160,532 for the three-month period ended July 31, 2012. This represents a 15% increase in net revenues. This increase is due to an 8% increase in patient counts and an increase in revenue per patient of 7% due to a shift in business to higher reimbursement esoteric testing, which continues to be the principal driver in increasing net revenue per patient. The number of patients serviced during the three-month period ended July 31, 2013 was 2,161, which was 8% greater when compared to the prior fiscal year's corresponding three-month period. This increase in patient counts is mainly due to the overall success of all our lines of business. Net revenue per patient for the three-month period ended July 31, 2013 was $85.25 compared to net revenue per patient of $79.75 for the three-month period ended July 31, 2012, an increase of 7%.

Our revenues and patient counts could be adversely affected by a number of factors, including, but not limited, to an extended economic downturn in general


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or healthcare economic conditions, an unexpected reduction in reimbursement rates, increased market penetration by our competitors or a substantial adverse change in federal regulatory requirements governing our industry as well as a failure to continue the sizeable annual percentage increase in base business from significantly higher levels after 19 years of sustained growth.

Many provisions of Affordable Care Act ("ACA") became effective January 1, 2013. At this time we are not yet aware as to how this will affect our revenues.

COST OF SERVICES:

Cost of services increased from $86,253 for the three-month period ended July 31, 2012 to $99,767 for the three-month period ended July 31, 2013, an increase of 16%. This increase in cost of services is basically in line with the increase in net revenues.

GROSS PROFITS:

Gross profits increased from $74,279 for the three-month period ended July 31, 2012 to $85,660 for the three-month period ended July 31, 2013, an increase of 15%. Gross profit margin remained the same at 46%.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the three-month period ending July 31, 2012 were $51,605 as compared to $60,601 for the quarter ended July 31, 2013, an increase of 17%. This increase is slightly more than the increase in our net revenues as the result of additional employee related expenses incurred by the Company that increased by 23% this quarter over the corresponding quarter in fiscal 2012.

INTEREST EXPENSE:

Interest expense decreased to $350 during the three-month period ending July 31, 2013 from $382 during the three-month period ended July 31, 2012. This decrease is due to a decrease in the utilization of our PNC Bank's credit line.

NET INCOME:

We realized net income of $14,701 for the three-month period ended July 31, 2013, as compared to $12,596 for the three-month period ended July 31, 2012, an increase of 17%. Pre-tax income for the period ended July 31, 2012 was $22,182, compared to $25,755 for the three-month period ended July 31, 2013, an increase of 16%. The provision for income taxes increased to $11,054 for the three-month period ended July 31, 2013 from $9,586 for the period ended July 31, 2012. During the quarter ended July 31, 2013 the Company received a refund of $1,062 for its New York State clinical laboratory inspection fee that was included in other income.

Nine Months 2013 Compared to Nine Months 2012

NET REVENUES:

Net revenues for the nine-month period ended July 31, 2013 were $523,136 as compared to $450,767 for the nine-month period ended July 31, 2012. This represents a 16% increase in net revenues. This increase is due to an 8% increase in patient counts and an increase in revenue per patient of 8% due to a shift in business to higher reimbursement esoteric testing, which continues to be the principal driver in increasing net revenue per patient. The number of patients serviced during the nine-month period ended July 31, 2013 was 6,199, which was 8% greater when compared to the prior fiscal year's corresponding nine-month period. This increase in patient counts is mainly due to the overall success of all our lines of business. Net revenue per patient for the nine-month period ended July 31, 2012 was $77.63 compared to net revenue per patient for the nine-month period ended July 31, 2013 of $83.83, an increase of 8%.

Our revenues and patient counts could be adversely affected by a number of factors, including, but not limited, to an extended economic downturn in general or healthcare economic conditions, an unexpected reduction in reimbursement rates, increased market penetration by our competitors or a substantial adverse change in federal regulatory requirements governing our industry as well as a failure to continue the sizeable annual percentage increase in base business from significantly higher levels after 19 years of sustained growth.

COST OF SERVICES:

Cost of services increased to $285,878 for the nine-month period ended July 31, 2013 from $248,837 for the nine-month period ended July 31, 2012. This represents a 15% increase in direct operating costs. This increase in cost of services is basically in line with the increase in sales.

GROSS PROFITS:

Gross profits on net revenues increased to $237,258 for the nine-month period ended July 31, 2013 from $201,930 for the nine-month period ended July 31, 2012; an increase of 17%. Gross profit margins remained the same at 45% for the nine-month period ended July 31, 2013 compared to the corresponding nine-month period ended July 31, 2012.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses for the nine-month period ended July 31, 2013 were $175,731 as compared to $149,202 for the nine-month period ended July 31, 2012. This represents an increase of 18%. This increase is 2% more than the increase in net revenues. This increase is basically in line with the increase to our net revenues.

INTEREST EXPENSE:

Interest expense decreased to $1,077 during the nine-month period ending July 31, 2013 as compared to $1,153 during the nine-month period ending July 31, 2012, a decrease of $76. This decrease is due to primarily a decrease in our utilization of our PNC Bank credit line.

INCOME:

We realized net income of $34,704 for the nine-month period ended July 31, 2013 as compared to $29,267 for the nine-month period ended July 31, 2012, an increase of 19%. Our operating income increased by 17% for the nine-month period ended July 31, 2013 as compared to the nine-month period ended July 31, 2012. Pre-tax income for the nine-month period ended July 31, 2013 was $61,324 as compared to $51,549 for the period ended July 31, 2012, an increase of 19%. The provision for income taxes increased from $22,282 for the period ended July 31, 2012, to $26,620 for the current nine-month period; an increase of 19%.

LIQUIDITY AND CAPITAL RESOURCES:

Our working capital at July 31, 2013 was $168,371 as compared to $151,625 at October 31, 2012, an increase of 11%. Our cash position increased by


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$3,424 during the current period. We increased our short-term debt by $22 and repaid $367 in existing debt. We had current liabilities of $105,012 at July 31, 2013. We generated $16,975 in cash from operations, compared to $36,561 for the nine-month period ended July 31, 2012, an overall decrease of $19,586 in cash generated from operations year over year.

The decrease is primarily due to slower cash collections. These slower collections are, in the opinion of management, attributable first in part to the expired "grandfather" provision, a rule that allowed us to bill Medicare directly for in hospital laboratory work that was performed on Medicare patients even though the patient was in the hospital at the time the service was rendered. This exemption expired at the end of 2012 and starting in 2013 we were required to bill the hospital directly for such laboratory work instead of billing Medicare for it. As a consequence of this change collection cycle has increased and in some cases prices may have decreased. The second reason for slower collection, in our opinion, involves changes in the molecular coding around the country by Medicare and in some cases Medicaid, who have simply stopped paying at all for these molecular tests. These reimbursement levels are set my CMS. With regard to payments by Medicare, there still remain many of these tests whose reimbursement has not been determined by the carrier. Another reason for slower collections is the change in the Blue Cross Blue Shield ("BCBS") reimbursement practices whereby instead of billing BCBS for all of the laboratory services preformed nationwide on one bill we are now required to bill each local BCBS only for the services preformed based on the location where a patient's sample was drawn. This new practice, also effective in 2013, significantly increased the complexity of our BCBS billing and collection processes. In many cases billings were delayed for some time until prices were loaded in the various systems around the country. Lastly, slower collections occurred due to a dispute with Horizon Blue Cross Blue Shield of New Jersey ("Horizon BCBSNJ") concerning Horizon BCBSNJ's obligation to pay Bio-Reference with respect to certain of its insurance plans. There continues to be ongoing communications, however we are uncertain as to whether this will be resolved through negotiations or must be litigated.

Accounts receivable, net of allowance for doubtful accounts, totaled $191,798 at . . .

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