Executives: Chris Dailey - Investor Relations Nancy Lurker - President, CEO Graham Miao -

CFO
Analysts: Scott Henry - ROTH Capital

Partners
Operator: Greetings and welcome to the PDI Inc. Third Quarter 2015 Financial Results Conference Call. At this time all participants are in a 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 is now my pleasure to introduce your host, Chris Dailey, Investor Relations. Thank you Mr. Dailey, you may begin.

Chris Dailey: Thank you, Wanda. And good afternoon, everyone.

Thank you for joining us on the PDI conference call to review the company's financial results for the third quarter which ended on September 30th, 2015. The news release detailing the second quarter results was issued just

after 4:00 pm Eastern and is now available on PDI's Web site at www.pdi-inc.com. In addition, an archived replay of the event will be available on the PDI Web site. 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 projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of the conference call and are subject to numerous important risks 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 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 Form 10-Q for the period ending June 30th, 2015. 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 GAAP numbers, we have provided non-GAAP information. We believe 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 Web site. Finally, we recently entered in an agreement to sell our commercial services business to Publicis Touchpoint Solutions. We intent to file with the SEC proxy statement and other relevant materials with respect to a special meeting of the stockholders to approve the sale.

Our stockholders are urged to read these materials once they are available. A forward discussion of the proposed sale of our CSO business and where to find additional information is described in the news release. 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 and thank you for joining us for a review of our 2015 third quarter results.

Joining me today is Graham Miao, our Chief Financial Officer. I'll begin today's call by detailing our recently announced sale of PDI commercial services business followed by an overview of Interspace Diagnostics performance in the third quarter. I'll then hand the call up to Graham for discussion of the financial results. Only last week, on November 2nd, we announced the PDII enter into a definitive asset purchase agreement the Publicis Healthcare Communication to sell our commercial services business. At closing, which we are targeting to be during the current fourth quarter, the agreement will be with up to 32.5 million in an upfront payment.

7 million of which contingent upon securing certain CSO client commitments, and a future contingent earn out payment based upon 2016 CSO revenue expected to range from $5 to $15 million. Our Board of Directors has approved the proposed transaction into 46% of our outstanding shares have agreed subject to certain conditions to vote in favor of the sale. We believe that the agreement is a win/win situation for both companies as well as our stakeholders. We are confident as the deal maximizes the value of our CSO business for shareholders. Our commercial services clients will have the opportunity to work with a significantly larger organization with improved resources while still receiving first class results that they've come to expect from PDI.

Our employees that migrate to Publicis will have enhanced career opportunities working for significantly strength in CSO with a substantially broader services footprint. From the beginning, our objective with the focus the resource gained in the agreement on the development of Interpace Diagnostics are growing molecular diagnostics business. We intent to use approximately 22 million of cash proceeds in the sale to pay up our existing commercial debt. We expect the remaining cash proceeds, net of transaction costs to improve our balance sheet by approximately 2 million to 9 million contingent on securing certainly as acquiring commitments and subject to customer working capital adjustments. This improved ballot sheet will allow us to further develop our commercial capabilities and clinical capacity for a new products.

I want to emphasize that our team will retain our core commercial expertise, which is one of our competitive differentiators in the molecular diagnostic space. With that we spent the what the past several quarters establishing a commercial infrastructure, add in a paste diagnostics including enhanced sales and marketing operations. And we have a lot to show from our effort which is just about a year-old. It was November 2014 when we acquired the operations that are now known as Interpace Diagnostics. We are making significant tries often times faster than others in our market.

In gaining national payer coverage, generating strong clinical data to support our essays with rigorous signs and showing solid sequential growth in test volumes. For example, after one year, our test have gained reimbursement for a 109 million lives. And our -- test grew 36% sequentially in the third quarter. However, we have experienced some challenges particularly related to collecting revenue for PancraGen our pancreatic cancer test. The billing issues we faced last quarter while improved still have some small final cleanup to complete along with hospital Medicare rule that are slowing the test uptake.

PancraGen does represent the bulk of our 2015 revenue collections and as a result we are revising our full year revenue guide Interpace Diagnostics to be approximately $9 million to $10 million. Graham will later provide more detailed review in his remarks. In tackling the challenges, to our 2015 PancraGen revenue growth, our team is actively involved in addressing the legacy billing issues related to PancraGen. Specifically, we've cleaned up almost all of the past billing issues and are now engaging these hospitals directly to re-initiate the use of PancraGen. Further, we began the process of applying for local MEC coverage in other jurisdiction beyond Novitas at hospitals outside of the Novitas regions have had trouble getting Medicare reimbursement.

Despite these headwinds, we continue to add new physicians ordering PancraGen, new plans covering PancraGen, and new publication demonstrating the value of PancraGen. Additionally, we continue to receive favorable coverage decisions from large pairs including the entire of humanity network. We are also pleased to announce that as of today CMS has posted permanent LCD coverage effective 12/31/2015 from Novitas our local MEC who is also confirmed to maintain reimbursement for PancraGen at $3100. As you may recall, PancraGen had a provisional LCD code subject to certain clinical conditions being met. We are gratified to now have a permanent LCD code for PancraGen.

We have also initiated speaker programs with our KOLs to raise doctor awareness of the benefit of molecular diagnostic test for pancreatic cyst. Our team is focused on its messaging and concentrated on educating doctors about the benefit of PancraGen. Of course one excellent way to educate doctors about PancraGen is by generating impressive data that reaffirms our confidence in the cost efficiency and clinical efficacy of the test. Most recently clinicians presented a two posters during the American College of Gastroenterology, annual scientific meeting and post graduate course. The posters demonstrated PancraGen's ability to provide both sensitivity and specificity which ultimately produces better patient results than the current Sendai guidelines.

We are also focused on producing further clinical utility data which should enhance payer covering going forward. Our study demonstrated PancraGen’s clinical utility has been accepted by a major medical journal and we look forward to sharing those results with you when they become public. We firmly believe that PancraGen has the potential to be a valuable test for physicians and patients with pancreatic cysts. It has the opportunity to lower healthcare cost and reduce the number of unnecessary pancreatic whipple surgeries, which are highly invasive and carry a high morbidity and immortality risk. Also, there is no other molecular test in the market today to help diagnose the risk of cancer for pancreatic cysts.

As we execute our action plan to close out the remaining billing issues and build awareness around PancraGen. We are confident there is adoption and procedure volumes will accelerate, which will drive revenue growth. Now let me move to our commercialized thyroid test; ThyGenX and ThyraMIR. The two tests have both high sensitivity and specificity that corresponds to clinically actionable negative predicted value of 94% to rule out benign nodules. And a positive predicted value of 74% to rule in malignant nodules.

This provides physicians with the confidence to more accurately identify and rule out thyroid cancer with the single testing service, providing what we believe to be a superior solution that is unsurpassed in the current market. In addition, we now have the capability to offer not only fine needle aspirate sample proceeding, but also the ability to process thyroid nodule cytology slides, then perhaps cytology out slide and formal and fixed paraffin embedded samples otherwise known as FSPEs. No other company can offer this breath of thyroid nodule services to endocrinologists and pathologists. We presented these results at the 15th international thyroid congress and 85th Annual Meeting of the American Thyroid Association, in October. And we expect them to help drive payer coverage and increase procedure volumes to a much greater level than what we have already achieved.

Because of our superior offering, in the third quarter both ThyGenX and ThyraMIR generated 36% sequential procedure volume increases compared to the second quarter. We are excited about the accelerated procedure growth and expect revenue to catch up with the volume as coverage expands. We currently have four payer networks covering our thyroid tests and a total of 92 million covered lives mostly for ThyGenX with ThyraMIR coverage beginning to pick up momentum. Our fourth BarreGen for Barrett's Esophagus has been released to a select group key opinion leaders and will have its full commercial launch in 2016. As a reminder Barrett’s esophagus is a rapidly growing diagnosis that affects approximately 3 million people in the U.S.

and overtime can progress to esophageal cancer. BarreGen will help physicians differentiate between patients at high risk of progression from those of low risk of progression well before observable changes in the cells. There is no other test today that provide diagnostic and prognostic solutions to help physicians identify patients that are at risk for esophageal cancer. There is a high end met need for this rapidly growing disease and we consider BarreGen as one of our key long term growth driver. We've been working closely with our Scientific Advisory Board to ensure a successful commercial launch in 2016.

In May, we presented our base study at Digestive Disease Week we demonstrated the BarreGen has overall accuracy of 95% in identifying patients who progressed to cancer from those who did not progress to cancer. Similar results were later published in the American Journal of Gastroenterology. As a follow-up to the base study, our scientific team in conjunction with the scientific advisors have been conducting a much larger the long study with 200 patients which is progressing nicely and is on track for unblinding. We expect to have final results sometime in the first quarter and expect a full commercial launch in 2016. We are very excited about BarreGen's potential and look forward to keeping you updated on its progress.

Given our focus on Interpace Diagnostics which will be a considerably smaller company than PDI, after closing the transaction with Publicis, we have to go on a corporate restructuring initiative to reduce spending. Before I hand the call up to Graham I would like to reiterate that we are in a transformative period in our company's history. After we close the transaction we will focus all of our efforts on Interpace Diagnostics. We will continue to execute our strategy to drive volume growth and increase peer coverage to impressive the clinical data and higher physician awareness. We are confident that our three commercialization tests along with soon-to-be-launched BarreGen have significant opportunity to reduce healthcare cost and improve patient outcome.

With that I will hand the call off to Graham Miao, PDI Chief Financial Officer.

Graham Miao: Thank you Nancy, and good afternoon everyone. Today I will highlight recent financial developments, then I will focus on some key elements in our financial statements. And finally I will provide an update on our 2015 financial guidance. As a reminder, PDI currently operates in two reporting segments; commercial services the CSO business and Interpace Diagnostics, our molecular diagnostics business.

As you all know we had recently announced the definitive asset purchase agreement with Publicis Healthcare Communications Group to acquire PDI's Commercial Services CSO business. This transaction is subject to PDI's stockholder approval and is expected to close in the fourth quarter this year. Shareholders representing approximately 46% of PDI's outstanding shares have agreed to vote in favor of the transaction. The results from the third quarter include our commercial services operations. Additionally, our full year 2015 guidance is based on the assumption that we will close the sale of our commercial services business near the end of this year.

To begin, I would like to review the highlights of our third quarter financial results. Total net revenue for the third quarter was $36.6 million, and a increase of 29% over the third quarter of 2014. By segment, commercial services net revenue was a $34.1 million, a year-over-year increase of 21%. Interpace Diagnostics or IDX net revenue was $2.5 million, and a 11% sequential increase as compared to 6.4% sequential growth during the second quarter. The accelerated growth rate in IDX revenue was primarily due to driven by the growth momentum of our thyroid and molecular tests.

As a reminder, PDI recognized very limited revenue from Interpace Diagnostics during the third quarter of 2014 because PDI is a pre-support diagnostics assets were acquired in the fourth quarter of 2014. Gross profit for the third quarter was $7.2 million, or 19.7% of net revenue. During the quarter, commercial services growth profit was $6.5 million or 19.1% of net revenues. Reflecting primarily higher than anticipated call volumes related to the Established Relationship Team, ERT. Interpace Diagnostic gross profit was $0.7 million or 28.2% an increase from the second quarter's gross profit of 17.8%.

As we have previously discussed. We expect the growth profit margin generated from Interpace Diagnostic business will continue to improve as revenue gross benefitting from operational leverage. Total operating expenses excluding acquisition related amortization expense in the third quarter were $10.2 million as compared to $6.9 million in 2014, primarily due to the investment spending in Interpace Diagnostics. We did lower Interpace’s overall operating expenses and during the quarter to $4.4 million from $5.1 million in the second quarter, primarily due to the reduced G&A expense. Cash utilization during the quarter was a $5.4 million and we finished the quarter with cash and the cash equivalents of approximately $9 million.

Cash utilization for the nine months was $14.1 million. Given our anticipated revenue growth, improved the growth margin and that the implementation of a reduced operating expense plans, we expect our cash utilization to improve over time. To help and strain the balance sheet, we’d recently launched an at market offering program of $5 million to gain access to capital as appropriate. We believe the limited program is in the company’s best interest and allows for additional capital in a cost effective manner during the transition period we are currently in. Moving on to financial guidance.

As I mentioned, we are basing our full year companywide outlook on the assumption that we will close our CSO definitive asset purchase agreement by the end of the year. With that expectation we are reaffirming our companywide total net revenue guidance for 2015 to be in the range of $136 million to $140 million. This includes commercial services revenue of $127 million to $130 million. As Nancy discussed earlier, we are refining our guidance for Interpace Diagnostics to be in the range of $9 million to $10 million. This is a result of lingering historical bidding issues related to PancraGen that came from RedPath’s acquisition last year, as well as a slower than anticipated uptake for revenue from this test.

In the anticipated time lag in a conversion of the growing thyroid tests to revenue. We have developed an action plan to address these issues and do not expect them to continue over the intermediate or long term. We are reiterating our gross margins guidance which we expect to improve by 250 basis points to 18% from 15.5% in 2014. The increase is largely due to the higher level of Interpace Diagnostics sales. Finally, adjusted operating loss is expected now to be in the range of $14 million to $16 million, as compared to our previous guidance of $16 million to $18 million based on our year-to-date performance.

As a reminder, 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. With that let me turn the call back to the operator for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Scott Henry with ROTH Capital. Go ahead.

Scott Henry: Thank you. Good afternoon. A couple of questions. I guess, start on the Interpace Diagnostics, I had thought when you bought RedPath it was on a run rate of 10 million and in revenues. And you bought other things as well and now for the third consecutive quarter you've lowered guidance to basically the same level as RedPath before you added the sales reps why things going on?

Nancy Lurker: Well, Scott as we said in our call, first of all let me just reiterate that we anticipated there is always a lag for thyroid in terms of revenue collection.

So, that's not unexpected and we are actually on track for where we expected to be and as I mentioned the thyroid volume is growing very nicely. So, we expect revenue to start to pickup as we go into 4Q and into next year. For PancraGen, I explained and I'll reiterate. We've had some historical hospital billing issues that we had to address and we are now in the process of reengaging those institutions that had actually stopped ordering due to those billing issues. In parallel, we've been able to pick up additional doctors to basically keep test volume relatively stable.

So, where we are right now is we have got new doctors who are starting to order and we expect that the older physicians who are ordering the test but had to stop, will begin to reengage. Finally, we are now going out and going across the country to the other local MEC because in some situations not all local hospitals outside of Novatas has found it difficult to get paid by their local CMS MEC provider. And as a result we are now going to submit an application in those local MEC to get reimbursement beyond just Novatas, which is our home based MEC. So, with the efforts, we do think that we will continue to see uptake on PancraGen. PancraGen remains a very viable test.

We are having good response from a pair coverage on it. And as I said we are pleased that Novatas just gave us our permanent LCD coverage code this week and have reaffirmed that we will continue to be reimbursed at $3100 that is a very positive development as you may recall we had a provisional code. So, we expect to continue to do well with PancraGen, it's just taken longer than we thought to clean up some of the issues that we have run into at the hospital level.

Scott Henry: Okay. Well it's tough to see the continued lowering of guidance but shifting gear well not really shifting gears but what do you think is the breakeven revenue target for the diagnostic business, what level of revenues would you least approach cash flow breakeven?

Graham Miao: So, we can this is Graham, Scott.

Hi. We look at benchmark data and also similar companies in the molecular diagnostic business. Depending on the test margins, in certainly for our, in our business we offer high value of molecular tests. And to reach breakeven and if we look at the industry data and what we have seen is somewhere north of $50 million to an up and not seeing, and but saw relative. For example, if you look at Veracyte, that's over there and it's there losing they are still incurring a profit loss.

So, it's relatively it's on company specific depending on the number of tests.

Scott Henry: Okay. Graham, I'll just take your number of $50 million. How long do you think it will take you to get the $50 million? And I assume that every strategy starts with getting that.

Nancy Lurker: Scott, we are not going to give forward guidance right now.

All right. So, we're going to make -- this is not, we are not prepared to give forward guidance. We would expect that we can start to give guidance for next year as we go into the first of the year, but right now I don't want to get into any kind of forward guidance looking forward two and three years. Let me say this, all right, if you look at where we are in the trajectory that we have with our thyroid tests alone coupled with what we think we can do with PancraGen on a modest spaces and then the upcoming launch of BarreGen, you put all those together and we remain very optimistic that we can achieve the types of revenue numbers that we have achieved in a reasonable period of time. The other thing though I want to state is this, we are going to maintain very tight control of our cost.

Now Graham hinted there are other companies out there many of them much larger who are not still not profitable. That is not our goal. Our goal is to be able to achieve strong solid growth without continuing losses and you can't get to where you start to see light at the end of the tunnel was profitability. We do believe that if we are judicious in how we spend our capital, careful with how we deploy our resources, that we can get to a profitable scenario faster than other benchmarked companies.

Scott Henry: Okay.

Well, just a couple other question, which should be helpful as we start thinking about this as a standalone business. Where do you, in -- you don't even have to guide me to 2016, but if you ran your business as the diagnostic business for 2015, what would you expect the G&A in the sales and marketing budget be? Basically I am just asking you what your numbers are if I pull out the CSO business.

Graham Miao: So you will see in our proxy we are going to file, where we have a standalone financials and a carve-out financials and will file with SEC after this call. Right now we’re operating as PDI, continue to operate PDI and then we're reporting the segment reports for these two business segments. And that there was cross leveraging of our corporate charges for these two businesses.

Scott Henry: Well, I mean, since you've done it already for the final, Graham, how about a sneak peek at the preview. Where do you think it would be for sales and marketing in G&A?

Graham Miao: So, we have and that’s only for the nine months, not the full year, to your question. So, we have not given full year guidance.

Scott Henry: Yes. I am not looking for specific numbers.

I am just looking for an idea of what the blueprint is for G&A and in a sales and marketing division for running your molecular diagnostics company.

Nancy Lurker: Yes. Let me, Scott, let me just say this that right now because we've operated PDI and we haven’t I believe we reported on our segments for 2015 nine months. So, you can look at that.

Scott Henry: Yes.

Nancy Lurker: And then what we do expect is that as we go into 2016 but actually as we mentioned with once the transaction closes we are preparing to be ready to rationalize that in a more cost effective way. So what you’re seeing going forward from 2015, we expect to bring that down.

Scott Henry: Okay.

Nancy Lurker: Okay?

Scott Henry: Okay. And I guess just asking yet in another way to ask the same question.

Where would you see your growth margins being at a steady state?

Nancy Lurker: Well, what we would project to do based on where we are once we get the ramp up going and again I am not going to give you a top period, but we would expect to have gross margins in the 65% to 75% range. As we start to see the ramp up occur and more volume starting to come into the labs but right now given our trajectory, we would expect that we can achieve that in a reasonable period of time.

Scott Henry: Okay. So, if I say 50 million which Graham alluded to and I put a 65% gross margin, that would seem to cover a footprint of about $25 million to $30 million in SG&A. So, I mean I guess I’ll take that as the answer, but thank you for the help in getting there and thank you for taking the questions.

Nancy Lurker: You’re welcome.

Graham Miao: Thank you, Scott.

Operator: [Operator Instructions] One moment while we poll for questions. [Operator Instructions] It appears there are no further questions at this time. I would like to turn the floor back over to Nancy Lurker for closing comments.

Nancy Lurker: Well, thank you everyone for taking the time to listen to today's call. We are very excited about the recent developments and the company's direction. I am looking forward to updating you on our progress as we close out 2015. And thank you for your continued interest and support.

Operator: This concludes today's conference.

You may disconnect your lines this time. Thank you for your participation.