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Edited Transcript of NEO earnings conference call or presentation 29-Oct-19 12:30pm GMT

Q3 2019 Neogenomics Inc Earnings Call

NAPLES Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Neogenomics Inc earnings conference call or presentation Tuesday, October 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas M. VanOort

NeoGenomics, Inc. - Chairman & CEO

* George A. Cardoza

NeoGenomics, Inc. - President of Pharma Services Division

* Kathryn B. McKenzie

NeoGenomics, Inc. - CAO

* Robert J. Shovlin

NeoGenomics, Inc. - President of Clinical Services Division

* William Bishop Bonello

NeoGenomics, Inc. - Chief Strategy & Corporate Development Officer and Director of IR

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Conference Call Participants

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* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* Joseph P. Munda

First Analysis Corporation - VP

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Stephen Scott Unger

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the NeoGenomics Third Quarter 2019 Earnings Release Conference Call. (Operator Instructions) At this time, it's my pleasure to turn the floor over to Mr. Doug VanOort, Chairman and CEO. Mr. VanOort, the floor is yours.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [2]

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Well, thank you, Tom, and good morning, everyone. I'd like to welcome everyone to NeoGenomics Third Quarter 2019 Conference Call. Joining me from our Fort Myers headquarters is Rob Shovlin, President of our Clinical Division; George Cardoza, President of our Pharma Services Division; Bill Bonello, Chief Strategy and Corporate Development Officer and Director of Investor Relations; and Kathryn McKenzie, our Chief Accounting Officer. Before we begin our prepared remarks, Bill Bonello will read the standard language about forward-looking statements.

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William Bishop Bonello, NeoGenomics, Inc. - Chief Strategy & Corporate Development Officer and Director of IR [3]

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This conference call may contain forward-looking statements, which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today. Before turning the call back to Doug, I want to let everyone know that we will be making a copy of our prepared remarks for this morning's call available on the Investor Relations section of our website shortly after the call is completed. We also want to let everyone know that we're going to limit the number of questions to 2 per person in order to give more people a chance to ask a question within the 1-hour limit that has been allotted for this call.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [4]

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Thank you, Bill. For today's call, I'll briefly review some quarter 3 highlights. Kathryn McKenzie will then provide a more detailed review of the financial results. And I'll then share with you several initiatives and investments that we're making to drive both the near-term and long-term growth. We'll then have time for questions and answers. Let's begin with quarter 3 highlights. Quarter 3 results were excellent, and we have significant momentum heading into the end of the year. Revenue increased 51% year-over-year to $105 million whereas organic revenue growth once again greater than 20%. Adjusted EBITDA increased 32% year-over-year to $15 million. Both divisions had very strong performance.

Clinical division test volumes increased 35% year-over-year, with combined company organic volume growth approaching 13%. Year-over-year growth rates have accelerated each quarter since acquiring Genoptix late last year. We once again drove growth across all testing modalities. Next-generation sequencing and molecular testing growth rates also accelerated and were well in excess of 50%. We believe those growth rates reflect a steady increase in market share with very high rates of customer retention in both the legacy NeoGenomics and the Genoptix customer base.

Clinical division revenue per test increased 15% to $369, marking the fifth straight quarter in which revenue per test has increased on a year-over-year basis. That increase primarily reflects the addition of Genoptix and a favorable change in the mix of test volume. As expected, revenue per test increased sequentially as we continue to work through and transition Genoptix reimbursement due to the NeoGenomics managed care contract rates at slightly more favorable terms than expected.

Pharma Services revenue increased 26% year-over-year to $12 million. New bookings in the quarter were a record $28 million, and the backlog increased 22% year-over-year to more than $118 million. We achieved outstanding revenue increases in flow cytometry and very strong increases in immunohistochemistry. We opened our new office in Singapore during the third quarter as our global expansion remains on track, and we are winning global studies as a result. The pharma business has great momentum and is well positioned to capitalize on a robust environment for oncology therapy development.

Importantly, we also saw a significant growth in profitability. Gross margin increased nearly 200 basis points year-over-year and 50 basis points sequentially to 48.6%. Adjusted EBITDA grew 32% to $15 million, and we're very pleased with the increase in profitability, particularly since we increased our R&D spending significantly and the Genoptix business is initially dilutive to EBITDA. Adjusting for the impact from the Genoptix business, the incremental EBITDA contribution in the quarter approximated 25%, in line with our long-term guidance of 25% to 35% EBITDA contribution on revenue growth.

In summary, we are pleased with the quarter 3 results and feel good about our outlook for the future.

I'll now turn the call over to Kathryn McKenzie, our Chief Accounting Officer, to discuss some of the details of quarter 3 financial results.

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Kathryn B. McKenzie, NeoGenomics, Inc. - CAO [5]

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Thank you, Doug. Doug already touched on some of the high points of revenue and profitability. So I will focus my commentary on some of the other important financial metrics in the quarter. Our average cost of goods sold for clinical tests, also known as our cost per test, decreased 4% year-over-year on a pro forma basis to approximately $190, despite adding 124 net new employees during the quarter. We continue to benefit from increasing scale, automation and process improvement. On a reported basis, cost per test increased 12% year-over-year due to the addition of Genoptix. Cost per test increased 2% sequentially, reflecting the impact of additional employees hired during the quarter to support our rapid growth as well as our test mix shifting to higher price and higher cost NGS panels. While we continue to expect to drive reductions in cost per test going forward, the reductions may be mitigated to some extent by continued test mix shift to higher cost next-generation sequencing panels. As a reminder, these next-generation sequencing panels also have higher revenue per test and higher margins. Also, the year-over-year decline may be lower than normal in Q4 due to the high level of investment made to accommodate growth and upgrade our next-generation sequencing products and capabilities during the quarter.

General and administrative expenses increased 57% or $12 million year-over-year to $33 million, primarily due to the addition of Genoptix. G&A expense increased by $3 million sequentially, largely due to the influx of new hires, incremental growth-related investments and other onetime items. Sales and marketing costs increased 67% year-over-year to $12 million driven by the acquisition of Genoptix and the expanded size of our sales teams on both the clinical and pharma sides of the business. Research and development costs increased nearly fivefold driven by continued investments in new test development, including our next-generation sequencing and FDA initiatives. We exited Q3 with $179 million in cash and $109 million in debt. We have approximately $115 million of availability on our credit facilities. DSOs declined 4 days year-over-year and 1 day sequentially to 80 days as cash collections were especially strong in the quarter. Cash flow from operations was strong at $19 million in the quarter.

We are increasing our full year 2019 revenue and earnings guidance. We now expect consolidated revenue to be in the range of $401 million to $406 million versus our previous guidance of $388 million to $402 million. We now expect adjusted EBITDA to be in the range of $56 million to $58 million versus our previous guidance of $54 million to $58 million. The increase in guidance reflects the better-than-expected third quarter results and our growth momentum.

I will now turn the call back over to Doug to provide commentary on our key growth initiatives.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [6]

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Thank you, Kathryn. Before addressing your questions, I'll share some thoughts about our business. As you can tell from our quarterly results, we continue to benefit from our position as a leading cancer testing provider in the United States. We are experiencing very high growth in both divisions and our outlook suggests that, that growth is likely to continue for the foreseeable future. In the Clinical division, we've recently added some of the largest and most recognizable hospital systems and oncology practices in the country, with most of that business still in front of us. And in the Pharma Services business, our backlog of signed contracts is larger than ever, and our pipeline remains robust. With that as background, I'd like to focus my comments on 2 key topics. First, actions that we're taking to focus and fortify our operations to accommodate high levels of growth, including the final phase of the Genoptix integration. And second, investments we are making to enable those high levels of growth to continue well into the future. In terms of fortifying our operations, we've recently taken a number of actions to maintain a laser focus on execution and to ensure that we consistently deliver the exceptional service that is expected of us.

First, we hired and onboarded almost 200 full-time employees during the quarter. The additional technical staff and pathologists have put us in a much better position to accommodate continued growth while maintaining exceptional service. Second, we added much needed facility capacity in Fort Myers and in Aliso Viejo. This is providing additional lab and office space to accommodate existing volume and allow us to have capacity until the new Fort Myers headquarters and lab facility is completed in 2021. Third, we significantly upgraded our next-generation sequencing instrumentation and assays during the quarter. We moved our assays to the high throughput NovaSeq instruments, upgraded our chemistry and optimized our pipeline. We also incorporated MSI, that's microsatellite instability; and TMB, Tumor Mutation Burden into most of our NGS panels; updated our gene list and upgraded our physician reports. With NGS growth rates well over 50%, these upgrades are providing us with much needed capacity, higher quality and the ability to streamline and further automate the workflow and processes.

Fourth, we delayed the planned migration of Genoptix customers to the NeoGenomics systems and processes by 3 months. This is providing our teams additional time to finalize plans and prepare more thoroughly for a seamless client migration process. We feel very good about the Genoptix integration. While we made a decision to delay, we are on track with all other integration activities and synergies are tracking as expected. Customer retention is our top priority during the integration period. And so far, so good. In fact, we have already stemmed the volume decline occurring when we took the business over, an organic growth for the combined company has been better than we expected at the beginning of the year.

We also passed on several smaller M&A opportunities, which could have been a distraction to our teams. With these actions, we feel that our lab operation is ready to seamlessly complete the Genoptix integration, and we'll be in great shape to accept greater volume with higher levels of productivity and efficiency.

Now let's turn our attention to investments we are making to enable high levels of growth to continue well into the future. I'll highlight just a few of these investments this morning. First, we continue to invest in new test development, particularly in next-generation sequencing. We are in various stages of development with several next-generation sequencing panels, including a comprehensive genomic profile for hematologic cancer, a 500-plus gene solid tumor profile, a suite of liquid biopsy offerings and an NGS-based test for minimal residual disease. We have a well-defined plan and a much broader and deeper organizational capability to execute it than ever before.

Second, we continue to invest in companion diagnostics. We have a unique and powerful capability to help develop and validate companion diagnostic tests and to quickly respond to new drug approvals with the timely launch of companion diagnostic tests. Among the most important of those capabilities is our wide-scale and scope across pharma and clinical markets, a broad reach to oncologists and pathologists and access to a massive quantity of oncology-specific test result data. Few labs have our same ability to take an oncology companion diagnostic test across the continuum from development through clinical trials and into the market. This capability is clearly a synergy of operating both the Pharma Services and Clinical Services operations focused in oncology and increasingly, our services are of interest to both pharma and clinical clients. We are currently winning Pharma Services business because of our companion diagnostic capabilities and boosting our Clinical Services market share by being first to market with companion diagnostic tests.

We have a track record of responding quickly to new drug approvals. I'll give you several recent examples. We already have several offerings for NTRK including 4 TRK inhibitor therapies, including a small fusion panel incorporating NTRK1, 2 and 3; and immunohistochemistry Pan-TRK screening panel and FISH NTRK1, 2 and 3 assay. We have also incorporated NTRK into our NeoTYPE next-generation sequencing panels. We have also been a leading provider, if not the world's leading provider of PD-L1 testing for lung cancer and other neoplasms. And we were quick-to-market with the SP142 assay for triple-negative breast cancer as well as assays for other new indications. We have talked at length about PIK3CA, which is the companion diagnostic for Novartis Piqray and have seen uptake that is even better than we expected. We also were quick-to-market with the QIAGEN therascreen companion diagnostic PCR assay for FGFR in metastatic bladder carcinoma. And we have already included RET into some of our small fusion panels and have incorporated RET testing into several of our NeoTYPE offerings. In addition, we have over 2 dozen companion diagnostic assays in our pipeline of signed projects for a variety of pharma and biotech companies and are increasingly in discussions to add to the pipeline.

Finally, we have begun to make initial investments in data and informatics. We are quite excited about the possibilities here. Over the past year, a number of leading payers, providers and Pharma Services companies have approached us to partner on data and informatics related initiatives. We have developed our strategy and plans, have begun to build our team and are investing to develop our capabilities and initial products. Areas of particular interest for us based on market research, include clinical decision support, real-world analytics, clinical trials matching and several other exciting ideas. We anticipate that informatics and data will enhance our competitive position in both clinical and Pharma Services and eventually be an incremental source of revenue for the company.

The need for precision oncology diagnostics is growing and changing rapidly. We believe that investments in advanced technologies, companion diagnostics and informatics have the potential to create exciting opportunities for future growth and continued market leadership for our company. In summary, quarter 3 results were extremely strong, and we feel good about our momentum heading into the rest of the year. More importantly, our leading position in the market is proving to offer significant, sustainable competitive advantages today and in the future, and we remain committed to further strengthening that position over time.

I'll now hand the call back over to Bill Bonello to lead us through the question-and-answer period.

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William Bishop Bonello, NeoGenomics, Inc. - Chief Strategy & Corporate Development Officer and Director of IR [7]

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At this point, we'd like to open up the call for questions. Incidentally, if you're listening to this conference call via webcast only and would like to submit a question, please feel free to email us at bill.bonello@neogenomics.com, during the Q&A session and we'll address your questions at the end of the call, if the subject matter hasn't already been addressed by our call-in listeners.

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

Operator, you may now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Puneet Souda with SVB Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [2]

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Doug, congrats on an impressive quarter here. So first question, if I could. I was hoping you to touch on the guidance raise in Genoptix. You have steadily increased guidance throughout the year. And as you proceed here in the final phase of Genoptix, your recent hiring, the capacity expansion, the NGS effort. I mean it's clear that the growth is accelerating. So I wanted to touch on 2 points. I mean what we're seeing here is the fourth quarter implied guide that still looks a bit conservative. Anything there that you would point to in terms of anything that gives you a pause in the near term? And then secondly, on Genoptix if you could elaborate on what's left at this point in the integration, it's been much more smoother compared to your sort of last integration. So just help me on those 2 points. And I just have a quick follow-up.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [3]

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Great. Puneet, well thanks. Relative to the guidance, our incremental EBITDA contribution, which is implicit in the guidance is consistent with our long-term guidance, which is in the range of 25% to 35% incremental EBITDA on the revenue growth. And at the midpoint of the raise from the initial guidance, our EBITDA raise is about 36%, I think. At the midpoint of our raise versus the last guidance in quarter 2, the EBITDA raise is approaching 30%. So I think it's quite consistent. The quarter -- quarter 3 was a little better than we expected. So we did take the guidance up. As you point out, we are still in the midst of the Genoptix integration. So we do want to be prudent with our guidance.

In quarter 4, we expect to make continued investments in next-generation sequencing. We are investing, as I mentioned in the script, in informatics. But we feel very good about the business, there's no pause in our momentum. And I think our guidance reflects prudence as well as confidence. In terms of the Genoptix integration, Rob Shovlin is here. He's leading the integration effort, along with the clinical division. So allow us -- Rob to address that.

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Robert J. Shovlin, NeoGenomics, Inc. - President of Clinical Services Division [4]

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Puneet, so the integration is going really well. We've made tremendous progress this year. And I think the acquisition is contributing as we expected it to. Q3 was really a quarter of lots of IT system projects. Through Q3, we completed nearly 300 -- we implemented nearly 300 different IT user stories, of which 2/3 were integration-related. So we're basically doing an IT release every week. We did decide to move the final phase of integration, which is the last waves of client migration out to Q1 of 2020. We did this to allow time for -- to ensure that our systems are implemented and stabilized before impacting clients with changes. And to your point, this was a lesson that we learned from the Clarient integration, where we got a little too aggressive with client migration and then had to stabilize afterwards. So we applied that lesson learned, and we're allowing the systems to stabilize and be ready for client migration in Q1. So it's also been great to see that our sales team has continued to grow the business without integration distractions to this point. It's a little too early to see any revenue synergies just yet, but we have seen some cost synergies realized in the quarter.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [5]

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That's great. And on NGS, if I could. Doug, this is increasingly becoming a focus for you? And clearly, for the market as well. You highlighted strong growth last quarter, again this quarter. So just wanted to get sort of a longer-term view here. What's your expectation for NGS contribution sort of longer term? And is it taking any business away from the current test? Or is it just the overall market growth? And so just help us get situated here in the NGS contribution and sort of the longer term, again, NGS seems to be becoming a larger piece of the story here? Is that the right way to think about it?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [6]

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It is the right way to think about it, Puneet. I think I'd mentioned that the NGS and molecular growth rates were in excess of 50% during the quarter, and that's a continuation of very strong momentum. NGS is becoming a greater part of our mix, but it's still relatively low. We have a comprehensive menu. And as you know, we're offering every discipline. And interestingly, every single test modality increased during the quarter so that indicates we're taking market share. But I think NGS will, over time, take market -- some of the mix away from some traditional FISH testing, particularly in the solid tumor FISH area. But I think that we expect NGS generally to continue to grow at an outsized pace relative to our other test modalities for -- as far as my eye can see.

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Operator [7]

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We'll take our next question from Kevin Ellich with Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Doug, thanks for the commentary, a lot of information there. But I wanted to go back to the data and informatics investments you're making. Can you give a little more detail in terms of, what could this ultimately become? And I guess, how long will it take you to continue -- convert that into revenue for the company?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [9]

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Yes, Kevin, thanks for the question about informatics. And Bill Bonello is here and is actually leading our strategy development and informatics efforts. So Bill will address this. I'll just say upfront that we have invested a lot of time and energy and money in developing our informatics strategy. The general idea is that we would both strengthen our existing businesses in clinical and pharma and develop an independent revenue stream. And we've got a lot of great plans and thoughts here. And with that, let me just turn it over to Bill to see if he has anything to add.

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William Bishop Bonello, NeoGenomics, Inc. - Chief Strategy & Corporate Development Officer and Director of IR [10]

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Yes, Kevin, I would say, it's still, obviously, very early days. We do have lots of requests from our clients, as Doug mentioned on the call, including payers and provider clients as well as our pharma clients to collaborate on various data initiatives. We have a number of projects that are actually in place right now, some of which are revenue generating, albeit not hugely revenue generating. We do have a pretty robust pipeline of additional projects, but more importantly, we have a roadmap of products that we want to develop. And that's really where our time and energy is focused today is on getting our organization in place and those products up and developed and working in a sort of pilot fashion with our various customers to make sure that we're meeting their needs. So there'll be a little bit of revenue we probably won't break that out in the near term, but it will help a little bit, but it will be a bit before -- it's a significant needle mover from a revenue standpoint. In the meantime, we do think it's already reinforcing our strategic position in both of our divisions.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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That's helpful. Bill, I guess, on top of that, clearly, you guys are making investments, you talked about the R&D investments you made during the quarter. And also the additional investments that you made. I guess, kind of a combined question, how much more do you plan on investing in informatics? And I guess, what are the capabilities do you want to add? And then on the hiring side, what positions did you fill? And do you have much less that you want to do on that front?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [12]

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Kevin, we continue to make investments in our business, and I think we will for some time. This is a company which is operating in exciting area, precision medicine in oncology is growing very rapidly. We're -- at this part of the evolution of the company, we think it's prudent to focus on growth and growth-related investments. So we're going to continue to do that. We are investing heavily in next-generation sequencing, as we mentioned a couple of times now and in the script, we're also investing in capacity, we're investing in people. I mentioned, we hired about 200 full-time and part-time folks during the quarter. I think we've hired over 400 people so far this year, and that is a lot to keep up with our current volume growth. But also, we are investing in new capabilities. For example, informatics is a new capability that we're investing in. We're investing pretty heavily in our Pharma Services division globally. You know that we put in a new lab in Singapore. We've increased our business development team in pharma outside the U.S. pretty significantly. We've added technical resources in a big way. I think we've increased the number of molecular pathologists by about just 4x from where we were just about a year ago. We're increasing our hiring in the area of bioinformaticians, variant scientists, pathologists. This is a growth business. We intend to continue to grow at outsized pace and our investments, I think, reflect that.

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Operator [13]

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And we'll take our next question from Brian Weinstein with William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [14]

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First, can you talk about the impact in sustainability of test mix on the pricing? As well as kind of just get a better understanding of contribution here. Obviously, I think NGS and molecular are higher. But can you give a little bit more specific on what you see there versus more traditional testing methodologies? And how to think about where average revenue -- average recognized revenue per test goes longer term? Why would the trend not continue here?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [15]

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Well, there are a lot of cross currents, Brian, in average unit price, you can -- we mentioned it, it's been up 5 consecutive quarters. Part of that is Genoptix, and they increased [part of] Genoptix test mix in our overall mix. But next-generation sequencing has, as that's grown at very high growth rates, has come in at higher prices. And that has impacted our average unit price, and I think we'll continue to impact our average unit price. We also have gotten some benefit in our average unit price because of good cash collections. And you'll see that in the quarter when you have a chance to look at our financial results, you will see cash from operations was very strong. And as Kathryn mentioned, our days sales outstanding sort of reflects that. So AUP can fluctuate and it has fluctuated. But I think we're on the right track, and we have a heck of a lot of opportunities to further improve average unit price beyond test mix with just playing good old-fashioned collecting cash for the work that we do. We have a lot of opportunity to do that.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [16]

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Okay. And then the second one. Can you just describe a little bit more and get a little bit more detail to us on the nature of the backlog that you're building on the services side? How you see that developing in terms of time to bringing that backlog to revenue? And any other details that you can provide on efforts that George and the team are making to continue to add to that?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [17]

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Yes. Let me make one brief comment, and then George will fill it in. I would say that we are really excited about Pharma Services and the backlog increase, the 20 -- I think $28 million of new sales was our -- again, a record. We've got a terrific sales team in clinical but also in Pharma Services. And our products are really in good demand. We've made a lot of good progress in our infrastructure. So George, do you want to take it?

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George A. Cardoza, NeoGenomics, Inc. - President of Pharma Services Division [18]

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Yes. No, obviously, we're pleased to have a record backlog and we are winning more Phase II and Phase III studies, which are, by nature, longer than maybe a quick research project or a Phase I study. So the timing of our backlog has gone out a bit, but we do scrub our backlog pretty faithfully. We have a very rigorous dormant policy. So things do come out of our backlog. If we don't feel that they're real, and I think you've seen in the growth in the backlog convert to the 41% year-to-date revenue growth that you see. So we're very excited about the backlog. Certainly, we're winning business now in Europe, we're winning business now on global studies that we really couldn't win a year or 2 ago. So we remain very bullish, and the backlog is a nice time for future growth.

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Operator [19]

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We'll take our next question from Steve Unger with Needham.

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Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [20]

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Doug, you talked about large wins with health systems and oncology groups briefly. And I was wondering -- and that these were relatively untapped. And I was wondering if you could provide some additional color there.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [21]

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Yes, I can provide additional color there. I would say that increasingly, our capabilities, our scope of services, our comprehensive menu, our emerging informatics capabilities are more interesting to large players. So for example, let's take large hospital systems. We have a somewhat unique capability to serve them and help them to standardize their practices, monitor their testing, understand their costs across their wide scope of hospital systems regionally or even nationally. And so that's helped us to land a number of big hospital systems as clients. And we're just penetrating their hospitals. And I think we've got a lot of room to grow through those activities.

Switching over to the oncology group side, as I think most people know, oncology group practices, many of them are getting larger. And our ability to serve large oncology group practices with multiple offices regionally within a state or regionally or even nationally is somewhat unique. And we can offer them partnerships, which allow us to benefit from their testing as well as to offer them some capabilities around internalizing certain testing, which might be quick turnaround tests, understanding their data better and a variety of other services that I think are of interest to them. We've just started to -- well, we've been penetrating the oncology group practicers for quite some time, but we've got some opportunity to continue to do that.

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Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [22]

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Great. And then as far as the FDA initiative is concerned, I guess, how long do you think it will take you to complete the change to FDA sort of compliance as far as your lab operations? And is that on EBITDA at the moment?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [23]

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We are investing a lot of money in time and resource in this FDA process, I must say. We've made a lot of progress. So our infrastructure is in the assays that we intend to bring to the FDA is largely FDA compliant at this point. That's not a small feat, by the way, because that requires a heck of a lot of validation and documentation, including systems documentation and validation for those areas. So I think we made excellent progress there. We have invested a lot of money in resources to make that happen. In terms of taking the test through the FDA process. We're still working on that with the FDA. The assays require different kind of validation than we're used to under a CAP/CLIA regulatory environment, which, as you know, most labs, just about all labs are subject to. And so we're working through that with the FDA. I think we've got a little bit more work to do with the assay that we intend to bring through the FDA. But I would stress that the infrastructure is, in our opinion the most important because that allows us to bring multiple tests through the FDA in the future, if we consider that to be appropriate and to our advantage.

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Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [24]

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And then just one last one. On the cost per test trend, I guess, is the -- I realize there's a mix issue and that we should expect, perhaps the cost per test to rise as the sophistication of the tests increase in the mix. I was just wondering if -- but there's also this dynamic of incremental staff hiring, and I know that you're hiring a lot of people. Is there a point in time where that sort of staff additions sort of normalizes? And I know you're hiring lots of people still in your facilities. And is that beyond 2020 or sometime in 2020?

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Kathryn B. McKenzie, NeoGenomics, Inc. - CAO [25]

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Yes. So Steve, this is Kathryn. We've had a lot of progress selling cost per test on a pro forma basis, we've decreased 4% year-over-year. And so you do see that increase with Genoptix. You're seeing the increase with our investment in people and our investment in technology. And as we continue to go forward. I think we still see a lot of opportunity. We have a lot of different things that are going to impact that cost per test, including your NGS mix growth and those additional head count. But I think that -- you'll see that there's opportunity going forward, and we should see that in the coming quarters.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [26]

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Steve, volume growth really does play a role in reducing cost per test. And as Kathryn said, we have a lot of initiatives in addition to volume growth, automation initiatives and so forth, lean initiatives, once we get through the Genoptix integration, we're just licking our chops here because we think we've got a lot of opportunity to reduce cost per test once everything is on the same platform.

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Operator [27]

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We'll take our next question from John Hsu with Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [28]

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Doug, if we could just go back to the guidance again. It seems like everything is trending well. You mentioned Genoptix volume is actually, you spend the losses there, and then the organic volume has accelerated every quarter. So again, just on the -- maybe on the revenue side, if it's said another way, can you help us think about the implied sequential decline at the midpoint? What type of scenario would kind of drive the low end of the range? Or is there any conservatism in there? For instance, I know a year ago, there were some anomalies in terms of the testing volume in November. So perhaps some conservatism that you can speak to?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [29]

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Well, we try to be prudent, first of all, in our guidance. We have raised our guidance every -- really every quarter this year. And we don't see anything in our results that would give us pause as I think someone asked before. But this is -- it's a very competitive market, we have a lot going on here, and we think it's just wise to be relatively prudent. But gosh, we just had a meeting yesterday and we reviewed all of the pharma pipeline for each representative in the Pharma Services division. And George and I were feeling very good about that. We just had a similar review in the clinical division just a while ago. So I think the long-term growth prospects in both of our divisions are very, very strong. And we may have some fluctuations in the short term, but we feel pretty darn good about it.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [30]

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Okay. Great. And then maybe you could just provide a quick update on the CFO search process? Any color you can provide there? And maybe given your comments on the laser focus on execution, at this point, would you say that the search would preclude you from capital deployment? Just help us think about some of those dynamics?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [31]

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Yes, thanks for asking about the CFO search. So we are in the midst of a CFO search. We've hired a recruiting -- an executive recruiting firm, and we've had some initial interviews, and we're going through that process on a timely basis. I do want to mention to everyone, though, in response to your question, we have a very, very good and deep financial staff here. So we have a CFO for the clinical division, who's terrific; a CFO for the pharma division who's terrific. You heard Kathryn here, Kathryn's been with us for 2.5 years now, I guess, and she's terrific. We've got a great new Treasurer. So we have a very, very strong financial organization. That in -- not having a CFO in no manner is impeding any kind of analysis or capital deployment decisions or anything else. So things are moving along, I think, very well. And I don't -- I'm not worried about that.

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Operator [32]

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We'll take our next question from Bruce Jackson with The Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst [33]

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If we could focus on the companion diagnostics business for a moment. You've got 24 projects in the pipeline. Maybe you could talk a little bit about the launch cadence. And is there anything notable that some on the near-term horizon?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [34]

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Thanks, Bruce. Actually, I think I said in excess of 2,000 -- we have a lot of companion diagnostic work in our company right now. I would say that you might see a companion diagnostic launch by us in the next couple of quarters. I would say, some of these companion diagnostic projects will take 1 year or 2 and sometimes more. We're launching companion diagnostics in our clinical division in the normal course as new drugs get approved and as our partner suppliers develop a companion diagnostic test that we'll use. But I think importantly, we're developing a number of those ourselves with the Pharma Services division. George, do you want to add anything?

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George A. Cardoza, NeoGenomics, Inc. - President of Pharma Services Division [35]

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Yes. No, I think you see there's a big example with the success of the PIK3CA. I mean we've blown away every projection that we came up with for that. So I mean, the NeoGenomics, the day 1 readiness program certainly is a very compelling to the pharma division, the Pharma Services customers. They see the value that we have and they can get great service from us, pre-approval on the Pharma Services side, and then we're ready day 1 to commercialize it. So it's certainly a unique offering to NeoGenomics. There's very few companies that have that continuum that we have, and it's the reason why we continue to win business.

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Operator [36]

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And we'll go next to Joe Munda with First Analysis.

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Joseph P. Munda, First Analysis Corporation - VP [37]

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Real quick. Doug, you talked in your prepared remarks about capacity, expanding capacity due to demand. 2 questions there. If you could give us some sense of how much capacity was the increase versus prior? And then maybe an update on the progress of the new facility and when you expect to break ground?

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [38]

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Yes, thanks for asking about capacity, Joe. In terms of capacity, I guess, there are 2 kinds of capacity. Well, there are lots of different kinds, but I'll talk about 2. But one is just playing with people capacity. So in our business, it's -- it just takes good skilled, trained people to do the work that we have. They're not easy to find. And so we're thrilled to have hired over 200 people in the quarter. And we are -- we actually have sort of a recruiting machine now. And it's recruiting, on-boarding, training, getting people productive and all that stuff. So I would say that we are -- we have good momentum, increasing capacity in terms of people. In terms of facilities, maybe a little less positive, but we did open another facility here in Fort Myers that's freed up some space. We have another facility in Aliso Viejo, which we're working on. And I would say, within the month, we'll be moving folks around to add a lot of capacity, lab capacity in Aliso Viejo. We do have some capacity in Carlsbad as well that we are looking to optimize. Our Houston lab is getting close to being full, frankly. And you remember, as you've covered us before that, that lab was not full a year ago. So I think on the capacity side, we're making good progress. In 2021, we will have probably by fall, the new headquarters and lab facility in Fort Myers operational, and that will enable us to move business around and free up a lot of capacity. And I think hold us in good stead for a number of years after that. We have names of the roads in Fort Myers, and I think we're going to break ground here in the next couple of months. One road is called NeoGenomics Way, and the other is called the Assay Avenue, I think.

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Joseph P. Munda, First Analysis Corporation - VP [39]

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Okay. And then, I guess -- sorry. I guess I'm sure Steve Jones would have been buying for a name of a street there as well, but I guess, he would have -- and so flipping the script here, on the pharma side of the business, can you talk a little bit about the PPD collaboration? Have you seen any incremental revenue as a result or assigned business as a result of that relationship? And then George, I was wondering if you could talk to us a little bit about the pricing you're seeing on the pharma side? Is it getting stronger? Any color there would be great.

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George A. Cardoza, NeoGenomics, Inc. - President of Pharma Services Division [40]

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Yes. We don't break out individual customer data, but certainly, we're very pleased with the PPD alliance, where we're into the second year of it now. And even yesterday, we won a couple of contracts. So I mean, it continues to go quite well. And we've got a very good relationship with them. They also were a tremendous help to us over in Singapore, we're literally located right across the hall from them. And for about 3 months, our people were working out of their conference rooms. So they've been a very valuable partner with us. And just strategically, the ability to have that CRO solution for a pharma customer that wants it is very important strategically. These people really don't want to bifurcate their contracts and just want sort of a one -- just want to write one check and help everything managed centrally. So PPD will -- continues to be a really good partner, and we're quite pleased with that. So we really don't see -- in terms of overall pricing environment, there's always some competition. One of the things about our division is we do a lot of custom assays and we really do tend to compete probably on a little bit of a higher end than maybe most firms. Speed is very important to our customers, we're able to bring up custom assays fairly quickly. So that also sort of eliminates a lot of pricing competition because we do tend to move faster than the big guys. So generally, I think there's always a little bit of competition in the market, but we really haven't seen anything significant in terms of overall trends. And again, I think our positioning in the market does shield us a lot because we're really coming at it from the sort of the high science side as opposed to maybe going through the procurement door.

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Operator [41]

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That is our final question for today. I'd like to turn the call back over to Mr. VanOort for any closing comments.

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Douglas M. VanOort, NeoGenomics, Inc. - Chairman & CEO [42]

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Okay, Tom. Thanks very much. As we end the call, I'd like to recognize the approximately 1,600 NeoGenomics team members around the world for their dedication and commitment to building a world-class oncology diagnostics company. And on behalf of our NeoGenomics team, I want to thank everyone here for your time joining us this morning. For those of you listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Goodbye.

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Operator [43]

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Ladies and gentlemen, that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines now and have a great day.