Executives: Chris Dailey - EVC Group Nancy Lurker - President and Chief Executive Officer Graham Miao - Chief Financial

Officer
Operator: Greetings and welcome to the PDI Inc First Quarter 2015 Financial Results Conference Call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce to your host, Chris Dailey for the EVC Group.

Thank you, Mr. Dailey, you may begin.

Chris Dailey: Thank you, Joe, and Good afternoon, everyone. Thank you for joining us on the PDI conference call to review the company's financial results for the first quarter, which ended on March 31, 2015, as well as recent corporate development. The news release detailing the first quarter results was issued just

after 4:00 pm Eastern Time and is now available on PDI's website at 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's financial projection, expectation, plans, belief and prospects. These statements are based on judgment and 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 the conference call and webcast are described in the Safe Harbor statement in today's news release as well as PDI's public periodic filings with the SEC including the discussion and the Risk Factors section of our 2014 Annual Report on Form 10-K and our Quarterly Report on Form10-Q for the period ended December 31, 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 intend to do so. In addition to supplement to GAAP numbers, we have provided non-GAAP information. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance.

A table reconciling the GAAP information to non-GAAP information is included in our financial release which is available on our website. Now I would like to turn the call over to Nancy Lurker, President and Chief Executive Officer of PDI.

Nancy Lurker: Thank you, Chris. Good afternoon, everyone. Thank you for joining us for a review of our first quarter 2015 results.

With me today on the call is Graham Miao our Chief Financial Officer. I will begin the call with an overview of our progress since we last talked two months ago and then Graham will review the key first quarter financial highlights. Following that we will open the call for your questions. During our last call in early March we reviewed how our commercialization services business was building momentum, while we were executing on molecular diagnostic product strategy. Today you can begin to see the results of our efforts as our overall net revenue growth as compared to last year is up 20% and our commercialization services net revenue grew 14%.

Our commercialization services revenue growth combined with a relatively stable cost space as well as more than 2 million in net revenue from molecular diagnostic, led to a 280 basis point increase in our overall gross margin as compared to the first quarter of 2014. Our commercialization team worked diligently during 2014 to increase our RFP pipeline. At the end of the first quarter, the RFP pipeline was strong at more than $200 million. Additionally we won several therapeutic programs covering a variety of patient needs in pain management, respiratory, ophthalmology, neurology and a women's healthcare molecular diagnostic product. In April, despite our customers entering a period, where they typically focus on execution, versus entering into new commercial services agreement, our momentum has continued and we have had additional multiyear win valued at approximately $20 million.

Our ability to distinguish ourselves in the commercialization services business stemmed from our sales team focusing on what they do best. Delivering exceptional compliance results and interfacing directly with clients and physicians to unique offerings like PD1. We launched PD1 in late 2014 as a proprietary sales representative communication tool that allows real time two-way communication with the physicians and our sales representatives. The service is exclusively available to PDI clients and office physicians personalized access to clinical information resources while developing a valuable database for PDI. We anticipate PD1 will be utilized by more than 500 sales representatives during 2015, and we continue to see this service gain traction.

In the first quarter, we were able to maximize on our expertise in delivering exceptional results to our current client base while also utilizing our revamped pipeline to develop new business. The strong quarter exemplifies our commercialization teams insight and knowledge in the industry that has distinguished us from our peers. It's our intent to leverage that expertise in our new molecular diagnostic business, Interpace Diagnostics. Combining our sales team's intimate knowledge of what physicians are looking for with what we believe are our best in class diagnostic assays, we are confident that we're well positioned to execute on our go-to market strategy that will drive consistent growth over 2015. We currently have three diagnostic tests commercialized on the market today, starting with PancraGen which is the first and only U.S commercially available molecular test for the diagnosis and prognosis of pancreatic cancer from cysts.

Under the current standard of care too many patients are ending up on the operating table despite actually having benign outcome. PancraGen has the sensitivity required in a molecular diagnostic test to avoid many of those unnecessary, very risky, and costly surgeries, potentially resulting in substantial cost savings to the healthcare system and improved patient outcome. Last December we commercialized our second test ThyGenX, which is a next generation sequencing test for cancer risk assessment of Thyroid Nodules that improve pre-operative diagnostic accuracy by providing physicians with greater confidence to rule in cancer for indeterminate thyroid nodules. We estimate that we already have approximately 60 million lives covered in the U.S for reimbursement for both tests, which as you know is a key indicator of success and combined molecular diagnostic test ordered during the first quarter were approximately 1,700. In April we launched our third molecular diagnostic, ThyraMir, which is the first and only micro RNA gene expression classifier for thyroid nodule identification.

When ThyraMir is using combination with ThyGenX, the two tests have a high sensitivity and specificity that correspond to clinically actionable negative predicted value of 94% to rule out benign nodule and a positive predicted value of 74% to rule in malignant nodule. The combination of the two tests allow physicians the ability to more accurately identify and rule out as well as rule in thyroid cancer with a single testing service, providing what we believe to be a superior solution. Something that was not previously available in the market. Each year in the United States there are approximately 525,000 thyroid nodules fine needle aspirations or FNA procedures representing a potential market size of 350 million. In many cases pre-operative molecular testing on indeterminate nodule can aid physicians in ruling in or rolling out thyroid cancer and reduce the number of unnecessary surgeries which may occur in 70% to 80% of the cases.

Our complimentary test provides physicians with greater confident that the patient either has thyroid cancer or does not have thyroid cancer, before initiating an invasive surgery. We also anticipate the multi-stage launch of our fourth test, BaraGen, for Barrett's esophagus, beginning in the second half of 2015 and will further help to fuel growth over the longer term. Barrett's esophagus is a rapidly growing diagnosis that affects over 3 million people in the U.S and over time can progress to esophageal cancer. The condition occurs when tissue lining the esophagus is replaced by tissue similar to the intestinal lining and is associated with an increased risk of developing esophageal cancer. BaraGen will help physicians differentiate between patients at high risk of progression from those at low risk of progression, prior to the onset of cancer and well before favorable changes in the cells.

We also continue to generate substantial clinical evidence to reinforce our diagnostic test. During the quarter we presented ThyGenX and ThyraMir at the 97th Annual Meeting & Expo of the Endocrine Society in San Diego, California. The study showed that benign or malignant nodules can be identified with high sensitivity and high specificity. Additionally within the next few weeks we will be presenting abstracts and poster at two leading conferences, the American Association of Clinical Endocrinologists, AACE conference held May 13th to May 17th and at Digestive Disease Week, DDW congress held May 16th to May19th. One of the posters entitled comprehensive diagnostic evaluation of neoplastic thyroid lesions by next generation sequencing and microRNA gene expression has been selected to be a featured presentation during the poster session at the AACE conference.

Another poster at DDW presents the clinical validity and utility in the use of genetic mutation to predict a progression to high grade dysplasia or esophageal adenocarcinoma in Barrett's esophagus. We are excited about the potential of each of our diagnostic test. Individually they provide physicians with the ability to indentify patients that are true candidates for invasive surgeries. This can allow from our personalized patient management strategies and can lead to reduced cost to the healthcare system. We are very pleased with the continued progress we are making on our molecular diagnostic tests in 2015 and reaffirm our previous guidance of net revenues reaching 13 million to 14 million.

With that I'd like to hand the call off to Graham Miao, our Chief Financial Officer to discuss the financial highlights in the first quarter. Graham.

Graham Miao: Thank you, Nancy, and good afternoon everyone. Today I would like to focus on some key elements in our financial statement and then review our 2015 financial guidance. Before I start, I would like to remind everyone that on the previous earnings call we announced that PDI will operate in two reporting segments.

The first segment is Commercial Services, which encompasses our contract sales organization or CSO and other fee-for-services businesses in medical and clinical area. The second segment is Interpace Diagnostics, our recently launched molecular test based diagnostic business. Let me first start with the first quarter income statement. In the quarter we had total net revenue for the period of $38.3 million representing an increase of approximately 20% over the first quarter of 2014. Broken down by segment, Commercial Services' net revenue was $36.2 million, an increase of 14% from 2014 first quarter.

And Interface Diagnostics net revenue was $1.2 million. As you know we did not have Interpace Diagnostics operations during the first quarter of 2014. Gross profit for the first quarter was $7.6 million or 20% of net revenue, driven by better gross margin from the commercial services segment as well as contributions from a higher gross margin mix from Interpace Diagnostics. During the quarter commercial service business gross profit was 19.2% of net revenue, an increase of 280 basis points over the same period last year, primarily due to the better than expected performance upside fees earned. We do not expect it to reoccur for the rest of the year.

Interpace Diagnostics gross profit during the first quarter was 25.6%. As we have previously discussed we believe the gross profit margin generated from Interpace Diagnostics business will continue to improve over the year from the current priority stage as we increase sales. Total operating expenses in the first quarter were $10.5 million as compared to $5.5 million in 2014, primarily due to the investment spending required for molecular diagnostic strategic initiative. Cash utilization during the first quarter was approximately $6 million and we finished the quarter with cash-and-cash equivalent of $17 million. Given our anticipated revenue growth improved gross margin and a continued effective management of our expenses, we expect our cash utilization to further improve during 2015.

We are updating our total net revenue guidance for 2015 given our last earnings call on March 3rd. For the full year 2015, we now expect total net revenue of $136 million to $140 million, as compared to our previous guidance of $131 million to $140 million. This would include commercial services revenue of $123 million to $126 million or 3% to 6% growth over 2014. We continue to anticipate Interpace Diagnostics net revenue to achieve $13 million to $14 million. For the year, 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 net revenue as the year progresses.

Based on our first quarter performance, we expect adjusted operating loss to now to be at the low of $17 million to $19 million guidance we provided in March. We define adjusted operating loss on non-GAAP financial measure as operating loss from continuing operations excluding amortization expenses of acquisition related intangible asset and other fair amount market adjustment. We expect adjusted operating loss to be greater in the first six months of the year as Interpace Diagnostics' net revenue growth is expected to ramp up during the second half of the year. With that, let met turn the call back to the operator for questions.

Operator: Thank you.

We will now be conducting a question-and-answer session. [Operator Instructions] The first question today comes from John Kreger with William Blair. Please go ahead.

Unidentified Analyst: Hi, this is Matt in for John today. You did mention just briefly about how you thought your cash position will improve throughout the year -- can you give us a little update on, sort of where you've set your cash position to end by the end of 2015?

Graham Miao: This is Graham.

So we have -- but we have not given specifically cash guidance for the year. We have given guidance on the adjusted operating loss between $17 million to $19 million, now with first quarter good performance and we now expect the adjusted operating loss to be at the low end of the range. And then our cash performance in the first quarter are actually better than we expected and we manage our cash very diligently and expense very closely and we anticipate for the year we have sufficient resources to execute our strategy.

Unidentified Analyst: A follow up. The gross margin for the services was pretty good, can you talk a little bit about maybe, is there a price mix or just overall the business is doing better in general?

Nancy Lurker: Let me first add, the business is doing better in general.

We also earned some upside fees and that’s due to again just superior execution on our team side. So that’s over arching what drove that improved -- I'll now let Graham comment as well if you want to add anything to that.

Graham Miao: We are very pleased with our first quarter performance overall, top line and bottom line. Now specifically to your question for the CS business the first quarter gross margin over 19% was primarily due to our first quarter performance of one of the large clients had not only the quarterly, add risk measures, performance measures. But also had an annual performance measure so we'd recognize being the first quarter and up performance upside fee that we earned for that quarter.

So that was the primary driver for the outperformance -- for the high gross margin.

Unidentified Analyst: What do you guys think that the market is going right now, market services, are you guys growing in line or slightly ahead of market growth?

Nancy Lurker: We right now are definitely growing ahead of the market. But as we said, the pipeline is strong at 200 million, so what you are seeing I think we reported this for our fourth quarter call. We do believe that one of the trough in the commercial services business has passed and we see modest stable growth going forward. But again I'll reiterate from the back half of 2014 certainly going into 2015, we are definitely getting more than our fair share of that growth.

Graham Miao: And also remember for the year first quarter typically you have -- we have, typically have a strong quarter and as we go into the year and there is some volatility. But overall the year we are confident that with the positive growth guidance that we have given.

Operator: [Operator Instructions] There are no further questions at this time. I'd like to turn the conference back over to Nancy Lurker for closing comments.

Nancy Lurker: Thank you, everyone.

And just to reiterate we're very pleased with our progress in 2015. We have many exciting developments over the next few months and we look forward to updating you on our progress. Thank you for your continued support and goodbye for now.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time.

Thank you for participating, have a good day.