Q3 2020 Neogenomics Inc Earnings Call
Please standby.
Good day, ladies and gentlemen, and welcome to your new genomics third quarter 2020 earnings call.
All lines have been placed in a listen only mode and the floor will be opened for your questions and comments following the presentation.
As a reminder, today's call is being recorded.
If you should require telephone assistance throughout the conference. Please press Star then zero.
At this time it is my pleasure to turn the floor over to your host chairman and CEO Mr., Doug Van Wart, Sir the floor is yours.
Thank you Melissa good morning, everyone.
I'd like to welcome you all to Neogenomics third quarter 2020 conference call.
Joining me from our Fort Myers headquarters with social distancing precautions and place our Catherine Mckenzie, our Chief Financial Officer, Rob Shovlin, President of our clinical services Division.
George Cardoza President of our Firstservice Division.
No president of our Informatics Division, Doug Brown, our chief strategy, and corporate development Officer, and Charlie Anderson, our manager of Investor Relations.
Joining the call via phone from California is Dr., Larry Weiss, our Chief Medical Officer, and director of R&D.
Before we begin our prepared remarks, Charlie will read the standard language about forward looking statements.
This conference call may contain forward looking statements, which represent our current expectations and beliefs about our operations performance financial condition and growth opportunities.
With me on this call that are not based on this.
Sorry about that are forward looking statements. These.
These statements by their nature involve substantial risks and uncertainties certain of which are beyond our control should one.
One or more of these restaurant uncertainties materialize or should the underlying assumptions prove incorrect actual outcomes and results could differ materially from those indicated in the forward looking statement.
Any forward looking statements speak 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 does that or I want to let everyone know that we'll 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.
We also want to let everyone know that we were going to win a number of questions and to a person in order to give more people a chance to ask questions within the one hour and there's been a lot. After this call.
Thank you Charlie.
This morning, I'll begin by commenting on quarter three results, including some encouraging market trends, we're seeing in our core business and then will provide a high level review of key strategic areas of investment.
Katherine will then provide a more detailed review of the financial results.
Following Catherines review, George Cardoza will provide some indexed comp commentary about our growth investments within pharma services and Doug Brown will make some comments about our strategy and other investments I'll make some closing comments before we open it up to questions and answers.
[noise] Neogenomics reported record revenue and adjusted EBITDA in quarter, three as we rebounded strongly from a very challenging second quarter.
Revenue grew 44% sequentially and 20% year over year to $125 million Encouragingly, we gained significant momentum in our core oncology business throughout the quarter.
In our core oncology business revenue grew 28% sequentially and 4% year over year.
COVID-19, PCR testing revenue added 16% revenue growth during the quarter as we worked around the clock to develop and provide high quality cobot testing.
It was a shortage of U.S. capacity in July and August.
The rebound in our core oncology business, which is somewhat a V shaped and its trajectory occurred in both our clinical and first services segments.
In our clinical oncology business revenue improved 28% compared with last quarter to approximately the same level as last year, despite a very challenging environment.
Revenue in our Afirma services segment also grew 28% from last quarter, while reporting its highest revenue quarter ever growing 38% on a year over year basis.
Well, we are pleased by the sequential rebound in quarter. Three we were also encouraged by the clear and continuing momentum we saw within the quarter and our core oncology business, both our clinical oncology business and our pharma segment continued to grow grow throughout the quarter and ended the quarter much stronger.
And our clinical oncology business test volume improved throughout the quarter as average daily test volume increased nearly 10% from the month of July to September.
The positive momentum has continued in the first three weeks of October with daily test volumes up approximately 8% over September.
Next generation sequencing test volume growth was particularly strong in quarter three growing faster than overall clinical rep volume.
[noise] test volume growth also improved for this product line as the quarter progressed upon.
The positive momentum in next generation sequencing testing has continued in October with daily test volumes, approximately 30% higher than last year.
Next generation sequencing revenue currently represents nearly 20% of our total clinical division revenue.
In the first services segment the rebound we experienced in quarter three was driven by as a momentum shift and strengthening.
As clinical trial activity begins to resume.
The majority of our clients reopened clinical trial sites and revenue from clinical trials accelerated nicely as the quarter ended.
We also saw the start of new clinical trials, which is something we did not see in order to.
From a research related services have remained strong all year and informatics related revenue has been extremely strong.
[noise] inter quarter trends were also positive in the pharma services segment. In fact September was the largest revenue month on record for the pharma services Division.
Although from a revenue was affected by the pandemic demand has remained strong and steady throughout this year as we continue to sign new contracts for future work.
That strong demand continues in quarter, three as we signed $35 million of new business in the quarter.
These pharma contracts included a wide range of our products and services from whole exome sequencing to informatics and covering geographic locations from the U.S. to Europe to Singapore and China.
As of September 30 is our backlog of signed contracts stood at $185 million, representing a 57% year over year growth and a new high watermark.
Also of note. This is the second quarter in a row, where farmers services represented greater than 15% of our core oncology revenue.
Just five years ago, we had essentially no it's pharma services business.
Since that time, we have continually and systematically built this business to be competitively well positioned.
We expect this business segment to demonstrate faster growth rates and to represent an even greater percentage of total core oncology revenue in the fourth quarter.
George will share some of our recent investments to add capabilities for future growth in a few minutes.
The promising recovery in our core oncology business, along with a significant contribution from COVID-19, PCR testing significantly improved profitability in fact quarter three adjusted EBITDA of $17 million was our most profitable quarter on record.
[noise] remarkably the recovery and profitability occurred despite significant change and disruption to our business.
Like many other companies the extensive workplace protections and work from home measures, we put in place had an effect on productivity.
We also invested to retain or people and reward their efforts to keep our lads open 24 seven.
We feel very good about our decision to retain all of our employees through what hopefully with the darkest days of the pandemic.
No our in hiring mode again as core oncology test volumes run rate regained strength.
During the second and third quarters, we invested considerable resources to set up a high quality high capacity COVID-19 testing lab.
And continue to invest in fiber services.
Next generation sequencing.
And commercialization efforts.
No question quarter, three was operationally challenging as a result of the pandemic that we're all dealing with.
But overall, we're pleased with the company's performance.
Well, we are not yet at core oncology testing volume levels, which we budgeted at the beginning of the year. We are encouraged by our recovery in quarter three.
We are more confident every day that we are on a steady path towards growth levels consistent with our historical long term guidance.
I'll now turn the call over to Catherine Mckenzie, our Chief financial Officer to discuss some of the details of quarter three financial results.
Thank you, Doug and good morning, everyone as Don highlighted overall revenue grew 44% sequentially and 20% year over year to $125 million.
Clinical division revenues increased 17% year over year. This is significantly by the contribution from COVID-19 PCR testing.
Clinical division test volumes, excluding cobot, 19 testing increased 2% year over year and improved month to month as the quarter progressed.
Clinical division revenue per test was $359 down 3% year over year and 2% sequentially.
Our year to date revenue per test of $361 and 1% below our full year 2019 revenue per test of $366 and is consistent with our long term guidance of a 1% to 3% revenue per test declined annually.
Pharma services revenue increased 38% year over year to a record $17 million.
Clinical trial work rebounded nicely during the quarter and research related revenues continued to show strength.
Volumes are turning in pharma, our record level of backlog and a $185 million and continued success on the sales front. We are very optimistic about the strength of this business as we look forward to Q4 and beyond.
Overall gross margin improved approximately 1100 basis points sequentially to 43%, reflecting a strong recovery in both clinical and pharma revenues on largely fixed.
Uh-huh infrastructure.
Operating expenses increased 5% or $2 million year over year to $47 million due to investments and informatics additional insurance premium and the acquisition of HLN oncology, which we like to refer to now as Neal locally.
The increases were partially offset by significantly reduced travel and decrease trade show and marketing expenses.
We achieved a record level of adjusted EBITDA of $17 million in Q3, driven by a strong recovery in our core businesses and the contribution from COVID-19 PCR testing.
Turning to the balance sheet, we exited quarter three was $284 million in cash and marketable securities, which excludes an additional $32 million and restricted cash designated for the construction of our new state of the Art Laboratory and global headquarters in Fort Myers, Florida.
In the quarter. We also funded our second up to 12, and a half million dollar investments and antibody. This completes the funding of our minority shareholder investment and Nevada that we announced earlier this year.
Dsos decreased 16 days sequentially to 76 days.
As expected quarter, three dsos reflect the reversal of the unusual timing of revenue experienced during the second quarter.
As a reminder, we withdrew our full year 2020 financial guidance on April nine 2020 in light of the COVID-19 pandemic.
Well, we have experienced a recovery in recent months and are encouraged about that trajectory. We recognize that that uncertainty remains given the potential for a resurgence in COVID-19 cases in the United States and abroad and the potential downstream impacts.
I will now turn the call back over to Doug Miller.
Thank you Catherine.
Now I would like to introduce George Cardoza as many of you know George has been a senior leader at Neogenomics for about 11 years, having served as our Chief financial Officer and for the last three years as president of our pharma services Division.
For perspective revenue for firms services. During this past quarter is three and a half times higher than it was in the first quarter of 2017 and were excited about our future prospects.
George will review, some strategic investments and opportunities that we have in pharma services.
Thank you Doug I'm excited to have the opportunity today to discuss our pharma services business. The strategic investments. We've made in recent years together with additional planned investments.
US create a differentiated platform for continued growth.
Three big areas of investment, we would like to discuss our international expansion initiatives, our acquisition of HL I oncology in early January and investments we've made in our testing infrastructure.
Over the course of the last few years, we've invested to expand internationally, bringing up the lab in Switzerland in 2017 and opening in Asia Pac lab in Singapore in 2019, the Singapore Lab was opened in conjunction with our strategic Alliance partner PPD.
Earlier this month, we announced plans to expand our partnership and open a lab in shoes owed China, which will add capabilities to service greater China based clinical trials.
Slab is slated to be operational in 2021, and we are very excited about the growth potential in the greater China market as well as our ability to support global clinical trials with activity in China. This global expansion has proved critical for us to participate in certain RFP for important global clinical trial work.
Well that was increasing our global laboratory footprint, we have been fortunate enough to identify an AD incredible sales and management talent in Europe, and Asia Pac, they're proving instrumental to our growth strategy. The importance of our international strategic investments can't be understated and the strong new bookings numbers, we have been able to post in recent quarters.
Despite the global pandemic is strong evidence that our strategy is the right one.
I would also like to update you on the acquisition. We completed earlier this year on January 10, we announced the purchase of the oncology division of human longevity, Inc. and Luckily a California humans.
Human longevity built a beautiful lab and Luckily I invested in a broad range of molecular technologies, including an impressive display of next generation sequencing horsepower with a focus on whole exome sequencing.
While the lab was attractive to us the opportunity to add a talented molecular team was also a major factor in our purchase this.
This acquisition of talent is key for two reasons one the development of new sequencing test them platforms is attractive to pharma clients for both research and companion diagnostic development and to the development of customized testing solutions purpose fit for unique clinical trials in patient populations.
As with any integration, we had a transition this business platforms utilized by human longevity companywide to the Neogenomics infrastructure and platforms. We are pleased to say that on September 1st the team met this goal NHL I oncology has been fully integrated and is now serving as our primary pharma services molecular lab.
One of the key capabilities that human longevity team brought in the I was whole exome sequencing we.
We have been successful in leveraging these capabilities with our broader reach of pharma sponsors.
With the increasing interest in broader panels and tumor mutational burden, our whole exome sequencing offering and bio analytic capabilities provide pharma sponsors with a stronger solution and what can be theres <unk> derived from smaller panels.
Modern oncology drug development continues to select for smaller groups of patients defined by unique molecular modifications and our pharma clients now ask for a much larger range of molecular targets PSMA.
Ill focus panels are no longer sufficient for many of our pharma clients.
As the price point of whole exome sequencing continues to fall pharma sponsors are increasingly showing a preference looking at 19000 genes rather than just 300 are.
Our team has been extremely busy working on proposals from our sales team and Weve signed several contracts in our current backlog based on their work.
So while we anticipated that the acquisition would be a temporary drag on our gross margins in 2020, we remain very excited about our local <unk> business, which is actually tracking not calling human longevity anymore. We do believe we have a very bright future for the neo locally a laboratory and this will be a growth accelerator for us.
As we've discussed on prior earnings call in the back half of 2019, we determined that our pharma services business had reached sufficient scale, along with our anticipated growth where the timing was appropriate to invest in a pharma dedicated testing infrastructure.
We anticipated the temporary pressure on margins due to diseconomies of scale. The decision to decouple pharma project testing is expected to pay off for both pharma services and clinical and service levels in both divisions should benefit over the long term.
But the timing of the COVID-19 pandemic has delayed the rebound in margins from playing out as quickly as we would have liked we continue to believe that we are in a great position to benefit from investment our backlog has never been hired 185 million and new bookings in recent quarters of well outpaced revenue.
Our move to build out a pharma dedicated infrastructure has put us in a position to continue our rapid growth trajectory and high service levels without putting pressure on our clinical division in the process.
Overall, we believe that the strategic pharma investments that we've made in recent years have been the right ones. We also believe that our pharma business is stronger than it's ever been and we are well positioned to capitalize on a robust environment from colleges therapy development.
We've also seen numerous instances where projects from our pharma services division, how to become new tests, which accelerate growth over in our clinical division I'll now turn it back over to Doug bandwidth.
Thank you George.
We're obviously excited about our firm's services opportunities and you can see our investments are starting to pay off.
Now I'd like to introduce Doug Brown as many of you know Doug joined Neogenomics in February as our Chief strategy Officer and has recently also become responsible for Investor Relations Doug.
Doug has spent a close advisor to neogenomics for a number of years and is adding a lot of value to our strategic process Doug.
Doug will review some of our other strategic areas of investments.
Thank you, Doug and good morning part.
Prior to joining Neogenomics I've spent many years as an external advisor to the company over those years as an outsider looking in I was always very excited about the company's strategy and its opportunities for growth now on the inside and after working with the team for nearly a year I see more growth opportunities for neogenomics than ever before.
And we are investing in these growth opportunities to increase our competitive position and drive outsized rewards for our investors today I'd like to discuss specific areas of investment for strategic growth, which include informatics strategic marketing initiatives liquid biopsy testing, including our relationship within a quarter.
And our research and development priorities then Doug then we'll wrap it up with a brief update on our new laboratory and global headquarters being constructed right here in Fort Myers.
The decision last year to invest in a formal informatics strategy and our dedication to creating value from our existing oncology testing data is already paying off informatics is not one of the most exciting growth areas in our company building, our president of our Informatics Division now leads a team of 30 professionals focused on this offering for our clients.
Early commercial efforts continue to be encouraging and we're finding a growing number of real world use cases for our data given our optimism for this business. We have now made plans to make additional hires and informatics hires to the commercial team product team and operations team.
Earlier this year, we significantly enhanced our marketing capabilities by hiring our new Chief marketing officer brings considerable farmer experience and precision medicine, having led product launches for two novel cancer therapies, we've already built a much stronger marketing team and have been developing a number of exciting marketing initiatives, we view investment in these in.
Initiatives as highly strategic and we plan on updating investors on the impact over the coming quarters.
While we are still in the early innings of liquid biopsy at Neogenomics. We are excited about having launched our comprehensive suite of tests in the middle of this year initial feedback from physicians on the high quality of our offerings has been encouraging and we believe that adoption will continue to increase steadily over time.
Our coordination in partnership with a talented team and Envolve has been strong we feel great about our minority investment and we'll continue to monitor progress on the uptake of the envision first long test and the development progress of the company's promising minimal residual disease or MRT Pan cancer monitoring assay as we consider exercising our option to.
Purchase and evolve.
In addition to exploring external partnership opportunities, including our collaborations when Avado, we continue to invest in our own internal research and development activities. We are currently validating a new arent a based fusion assay for solid tumors employing state of the our technology, which we believe will be superior to DNA based assay.
We will also be validating new fusion assays for hematologic Neil.
Neoplasms using probes already built into our current asset.
Our ngs based FDA submission is going well and we will soon be initiating active validation studies.
Finally, we soon hope to be developing a rapid AML ngs based assay as well as an ngs based Mardi assay for AML.
And one other note regarding opportunities aside from these strategic investment areas I have outlined today I can assure you that my role as Chief strategy Officer keeps me very active in assessing inorganic opportunities for growth at Neogenomics, our strong competitive position as the leading semantic oncology testing company in the country puts us very much on the industry radar as us.
TJ partner or buyer of strategic assets.
I will now turn it back to Doug mentor.
Okay. Thanks, Doug before we conclude our prepared remarks and want to update you on our Fort Myers Laboratory in global headquarters construction, which is coming along very well.
We remain on track for completion by quarter three of 2021.
We continue to see the facility, which will triple our current web footprint in Fort Myers and How's the stated the our molecular lab as a differentiator for our company.
The strategic investments that we just highlighted are core to our growth strategy and we remain committed to delivering on what we believe is enormous potential.
We look forward to providing quarterly updates on our progress.
At this point that we'd like to open up the call for questions. Incidentally. If you are listening this conference call via webcast only and would like to submit a question. Please feel free to email us that Charlie.
At Neogenomics dotcom during the Q and a session and we will address your questions at the end if the subject matter hasn't already been addressed by our call unless.
As mentioned at the beginning of this call we would like to ask each person to limit their questions to two so that we will hear from everyone and still keep us on the hour allotted for this call.
Operator, you May now open up the call for questions.
Thank you if you do have a question or comments. Please press Star then one on your telephone keypad to join the queue. If youre using a speakerphone. Please pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment. Please press Star then one on your telephone keypad at this time and we take our first question.
Alex Nowak with the Craig Hallum Capital Group. Please go ahead.
Great Good morning, everyone.
Grow do a while.
Just going to plug in the broader market here for cancer testing you were flat year over year in Q3 for the clinical cancer business, what was the year over year metrics for the broader cancer market.
I don't want to kind of pace the recovery of the broader marketplace. Neil was also taking share before the pandemic. So you think the market was closer to down 10% down 20% and US. This is somewhat proof that neo is still taking share during the pandemic.
Well Allison good morning, and thank you for the question it's difficult for us to gauge that there are a lot of different kinds of metrics out there I think in the Wall Street Journal. This morning, there was an article about various kinds of cancer and what the the volume has been and what the Rick.
Coverage has been.
I think those data would suggest that.
That in most cases, you know we're approaching the same level as we were about last year.
Now now that would suggest that there are theres still pent up demand because we know that cancer cases are increasing that the market's growing and that we're taking market share. So we think that.
Cancer diagnosis and therapy selection.
Monitoring or are all obviously essential for cancer patients and there was a lot of the postponement and delay in this activity and I think we're starting to see that come back.
And our volume as we said is is reflecting that.
Okay got it and then a lot of a lot of moving parts on liquid biopsy screening tests. I mean, you had grilled getting acquired by Illumina exact this morning, acquiring thrive you had CMS coming out with some screen benchmarks would you expect can you play a role and liquid biopsy cancer screening.
Early stage screening or is the company going to stick with later stage such as treatment selection and recurrence moderate.
Yeah. This is a very interesting market is a hot market and there is a lot of interest in activity in liquid biopsy, including our own interest and commitment to liquid biopsy as Doug talked about.
With our investment in Nevada, and our recent launch of three liquid biopsy tests.
But we're we're really focused not at this time in early detection, but really on.
Diagnosis therapy selection, I think we'll move into minimal residual disease kinds of testing.
And that's the sweet spot for Neogenomics at the present time.
Okay. That's helpful. And then just one more how would you expect the Cove and molecular testing revenue the change here in Q4 since you're seeing the increase of antigen test to the market I would expect that market to March where markets get ahead of equilibrium at some point and thus your businesses that that cold PCR business for you is going to have to come down at some point.
Yeah, the coated testing business and revenue for us.
Very strong in July and August.
And then it.
It did.
A route reduce somewhat.
I think what we're seeing now in the in the marketplace. In addition to a resurgence in Cove is a greater penetration of.
Rapid test and.
I think if you look at benchmarks like HCR ways.
Metrics of the number of PCR test performed by major commercial labs, it's really not increasing as much as the the more.
More rapid tests that are being offered throughout the country. So.
We have a capability very good capability for PCR testing for Covance.
Our turnaround time is terrific.
We have the ability to to meet demand if it if it.
The increases.
But it's not our core testing business and we're very focused really in oncology.
That's great. Thank you very much I appreciate it.
Next we go to Brian Weinstein with William Blair. Please go ahead.
Hey, guys. Good morning. This is Chris sorry on for Brian Just a quick question start here. When you think about the different services that you guys offered locate your volume numbers. Obviously, you mentioned in the release that core oncology business looks to be.
Shape recovery, where there are certain areas in your offering that came back stronger than others and anything to note. There just to give us a better sense of the recovery.
Yeah, there's the recovery.
Really was pretty broad based and really did progress and strengthened as the quarter ended and is continuing to strengthen into October.
I think the area that is as strengthen the most has been next generation sequencing as we mentioned in our prepared remarks, there's been a lot of natural growth for us in next generation sequencing.
Over the last number of quarters and that really continued in.
In quarter, three and we would expect to grow next generation sequencing kinds of products at an outsized pace even going forward.
Great. Thank you and just one more here nice quarter for pharma services, how much of that was driven by.
Clinical trials and can you give us a sense of how the clinical trial recoveries going.
And also maybe a little more cover a color on the makeup of that $185 million backlog is it more a bolus of pent up demand coming back.
Yes if.
If you look at the second quarter, we really saw two things happen. We saw our existing trial volume really shrink I mean, a lot of trials that were enrolling 15 20 patients a month to enrolling two to three patients a month.
What we saw the existing trials come back, but unlike the second quarter literally in July for the first time, we started getting first patients and on a few trials and that continued into July and really sort of continued on into August and September. So it was a combination of the existing trials sort eventually turning back to maybe more normal enrollment numbers as well as for it.
New trials finally, starting but through this all the demand has remained strong I mean, the the pharma sponsors continue to sign contracts with us. So we're seeing the demand be strong I think there were some access issues clearly related to co bid, but I do think we feel really good about the underlying demand.
Great. Thank you.
Next we go to the line.
Ciudadano with SVB Leerink. Please go ahead.
Yes, hi, Doug Thanks.
For the question. So first one on if I could ask on the ERP.
Just given the puts and takes here from Ngs and.
Liquid biopsy test being introduced into the therapy management liquid biopsy tests being introduced into that.
And other asset is being introduced.
Overall, what's your expectation for improvement for Ngs.
Longer term here and what sort of what is the where could that potentially reach to and what did the pace of that sort of improvement. If you can walk through that either Doug or Katherine.
Yes. Thanks for the question funny, we definitely have a lot of opportunity for growth when it comes to Ngs and our AMC as you can imagine, especially as new tests are coming to market and we are working with payers on the clinical benefit as well as the other alternatives in the market.
We're continuing to pass through revenue per test. In addition to looking at those Medicare reimbursed rate. So there is not only an opportunity for that NGL. So we do all of them have that continued pressure as we go forward on some of that pricing pressure that 1% to 3%. So when we're looking at are you now and how it.
Could change with mix.
From a margin perspective, just as a reminder, those higher price type of income was higher cost.
And then and totally get broader coverage and reimbursement rate, you'll see a little bit of that pressure on our margin, but we are very encouraged by the efforts of our managed care and our commercial teams that are working with the payers, especially as these become more prominent and the market will continue to see some growth opportunities in 18.
Okay. Thanks for the margin comments too.
If I could follow up with on Ngs as well and as a.
There to test in the marketplace that recently received FDA approvals.
For for.
For those respective assay wondering if you will.
What's your expectation for your multi gene panel when can that potentially.
Potentially receive FTC approval and also what are the plans for the new labs solid tumor or the envision first and say too.
Get into that.
The approval Q potentially.
Yes, thanks for the question funny well.
Well I know, we've been saying that we've been working on the SDK Pan.
Panel four for some time and we have we've been working on a very very diligently.
We now feel like we have a clear pathway with the FDA given our our conversations with the FDA and so right now.
We are initiating the validation studies for validating that FDA approves panel and we think we have a clear pathway. We think it's perhaps one of a family of SDMA approved tests that you will see neogenomics initiate over the next.
Several years.
And we feel pretty good about it no. We don't have plans for our existing Neolab Pan cancer.
Assay to well I guess it is actually approved because we're using the thermo Fisher platform for that so where.
We're continuing to validate other genes on that Pancancer panel and we think it's a good test.
Okay, Great and last one Doug.
We've been getting a number of questions on.
The overall performance in the business and the pace of recovery now, where you said and as you look at how things have you.
You know what has transpired through two kobin times, and and as we merge into sort of back.
The last two months here.
What's your expectation just given the timing of the holidays, but at the same time, we're recovering from Cowen just if you can give us a sense of how that recovery can continue to work and anything you can provide on the next couple of months.
Forward looking I appreciate it.
Well, thanks, Penni, we've tried to be transparent about what's happening in our business I would say that the environment continues to be challenging.
The.
Our customer behavior has has been disrupted someone supply chains are then.
Then disrupted.
Productivity is still not what it what it could be because of all the precautions. We've put in place with our workforce, but I would say that we're very encouraged within that kind of environment by what's happening with the volume trends and in both the clinical business and the pharma business and.
We're we're encouraged by what we're seeing what we talked about for October and for quarter four worse.
We're expecting quarter four to be quite strong in pharma we've.
We've got a very strong backlog, there and the trends look pretty good in our clinical business. So we haven't it re initiated guidance because of the environment that we're in but I think you can tell from our remarks that we're we're optimistic.
Okay, great. Okay. Thank you.
Next we go to the line of case OS Svod with Morgan Stanley. Please go ahead.
Hey, guys good morning.
Doug I know you mentioned sort of quarterly clinical volume grew up a couple of points yard and you also noted that month over month improvement.
But can you shed some more color on the on sort of the weekly linear already here in October have.
Have you seen any impact at all from a potential second wave following the resurgence in infections, we are seeing in the states.
Or or have trends essentially held up and continue to improve on a sequential basis week over week.
Okay.
Yes.
It's a little granular to think about it actually we look at it day by day, but but it is difficult for us to comment on a on a week over week basis, I will say this that.
It appears that our hospital clients in our oncology clients have learned to sort of deal with an environment in which we're handling code and so it's not like a lot takedowns that we had back in in the quarter too.
They are seeing patients they are performing procedures and hospital.
And I think as long as the pandemic remains.
I had a somewhat manageable level at that even at this level and maybe even higher we expect that our clients are going to remain open for business.
So I think the trends that we're seeing as I said Jay Haas. We're we're optimistic that we're going to continue to see the same kind of growth trends that we've been recently experiencing in October has been relatively strong.
Got it.
And then one on the liquid biopsy pipeline your.
In terms of plans for Nevada is radar MRT assay and the timelines to bring it to market.
Oh, what do you sort of consider sort of working with them to accelerate that just didn't linus in light of some of the movement. We've seen here in terms of the draft LCD in place from Palmetto you have a couple of P. or just sort of you know we'll be on the market I guess by the time you go.
As planned to bring radar to the U.S. So are there any levers you can pull to accelerate that boss.
Well, we have a very good collaborative relationship within Nevada, we serve on the board we have a minority interest as you know our teams are working very very well together and we talk a lot about both the envision first long test and how to accelerate progress.
Penetration on that as well as M. R&D now we're very excited about the minimal residual disease product at in Nevada, We are working with them in a number of different ways a part of that.
Processed by the way includes whole exome sequencing that we were working with them through our neo Neo La Jolla Laboratory that George mentioned so.
Yeah we're.
Yes, well, we're all very interested in.
Accelerating as much validation work as we can and M or d., we think is going to be a terrific product for patients and a terrific product for us and you can assume that we're working hard together to make it happen.
Got it fair enough.
And then one final one an informatics CR for Bell.
Can you just walk us through sort of feel plans for monetizing that offering obviously, you know you're scaling headcount sat and there seems to be a lot of excitement.
Keith among.
Pharma customers around the prospects for bought informatics.
Can add but.
Can you walk us through sort of like your plans for perhaps you know formula.
Formalizing the monetizing structure around that business.
Sure. Thank you very much to answer the question.
We are generating revenue from the business today in fact, we significantly exceeded our year one revenue expectations. Those were relatively small we do have an active engagements with a number of different life sciences companies already both in terms.
The projects that we are working on today and projects that.
Our in our backlog as those projects span a breadth from helping companies with clinical trials Rick.
Recruitment or site selection.
New commercial support which might be identifying diagnostic trends to figure out where.
Mike Leigh patients are.
For certain therapeutics origins size a market.
For other commercial support activities.
To date, we haven't done a lot in terms of supporting basic clinical research, but we do think that is an opportunity as well.
There is also an opportunity on the imaging front theres significant interest.
In in utilizing.
Annotated digital.
Niches for training purposes, and other research related.
Activity so those.
Those are the kinds of things that we're working on we probably will come back to you on a future quarters with more color and more specifics around those activities I would end by saying, we do have a healthy backlog of signed contracts and we should launching number of.
Stakeholder facing.
Portals over.
Over the course of 2021 and so they are actually will be some places that we can continue to look at how we're interacting with our stakeholders and informatics.
Got it I appreciate the time this morning. Thanks.
Our next question or comment comes from the line of David Westenberg with Guggenheim Securities. Please go ahead.
Hi, Thank you for taking the question I don't want to belabor, the macro point, but I am getting questions on that so I just wanted to maybe ask a different way I can you talk about the volume recovery in community versus academic versus maybe private practice or if there's any differences in recover regionally in terms of a percentage mix and then.
Maybe kind of give us some color in terms of percentage exposure to those end markets for neogenomics.
Yes, we're going to ask Rob to try to add some color to that one David Yes, I think what we've seen is obviously there are significant geographical differences as you look around the country on which markets were faster to reopen and others that were slower and you've seen that across the new cycle.
What we've seen as the markets have started to open more and more is our sales team seems to have easier access to hospitals and pathology groups.
That seems to be an easier access point to get into the hospital away from where.
Patients are consolidated and and into the pathology suite for meetings.
On Koji practices were a little slower to give access to to salespeople because you have more of a concentration of patients in a waiting room, but.
But we've seen that start to open up more and more recently and then some of those geographies that have remained a little bit tighter I have loosened a little bit more recently, so we're seeing some good momentum there with more and more access as we went through quarter three.
Into October.
Great. Thanks for the color and then just maybe a question for Doug Brown.
Are you seeing in terms of the of the deal pipeline in terms of small regional labs are are there any change in terms of dynamics. There I mean, I I mean, I'm sure they're getting hit with volume two they probably have more liquidity concerns or maybe you know, they're having more difficulty accessing.
Capital and <unk> you guys are we're very well capitalized at $300 million on did you see any changes in those kind of dynamics, we should think about and that's my last one thank you.
Yes, I don't have anything statistically to tell you, but anecdotally, we do hear that and I think it's a reasonable point.
We're not really focused on some of these small regional tuck in sort of acquisitions were spent more time in farm and informatics, but we do think were perhaps taking share for some of these smaller labs.
Next we go to the line of Jacob Johnson with Stephens. Please go ahead.
Hey, Thanks, maybe a bigger picture question.
Strategy in both clinical services and pharma services think companion diagnostics represents maybe a key synergy there can you just give us an update on on the companion diagnostic efforts and maybe how many of these you're working on right now in pharma services.
Sure Let me lead off and then I think maybe George and Rob each of comments about this so in pharma services. We we have a terrific pipeline of companion diagnostic projects I think it's something like 40 different projects that we're working on and the list keeps growing we have a lot of interest in that.
We also now are getting interest not only because we can help.
In pharma services with a companion program, but also because we have the ability in our clinical division once the.
The therapy is approved by the regulatory agency to flip it over and to help commercialize that assay and the therapy is.
Relatively rapidly because we have a test up and running and said we have a number of sponsored testing programs. Some of which are for companion diagnostics today, and we think that that trend will really continue.
George anything to add that we had our sales team call yesterday, and I mean, the amount of opportunities in our pipeline are remarkable and it gets from Mccain diagnostics our share in oncology really has pharma sponsors wanting to work with us and the great part Neogenomics do as we create optionality for them. So if they want to work with an Ivy the partner they can if they want to go to a single site.
Maybe we can and even if the approval sort of lag to the FDA approval. We can go out with an LDC in the short run while they're working on sort of is that the approval. So I think that the farm. It definitely are realizing the benefits of working with us and the demand for these is is extremely strong.
Yes, we've seen some success with our previous projects and sponsor testing programs I think it's a real competitive advantage for us to be able to do the development work on the pharma services side, and then offer a clinically through our channel access to oncologists and pathologists.
Got it thanks for all that color and then maybe on the clinical services side.
Imagine covert nineteens, taking up a disproportionate amount of your time, but in clinical services Act. After Youve integrated Genoptix are there any operational areas that you've been focused on recently.
Admittedly in the midst of a pandemic I think billing and collecting is always an area of focus but anything else.
Well, yes.
Yes.
Our team has been very very busy.
I would say that.
It's been very busy setting up a coated lab, which we did and I think it's a terrific capability that we have even though we don't have a lot of demand for that testing line currently.
But our primary focus is in oncology and getting back to a position where in which we have.
The best service that we can possibly offer because I think thats going to allow us to continue to take market share as we have in the past and our whole team is really focused on that displays that kind of disruption that we see in supply chains and other and other areas I think this can differentiate neogenomics.
On a going forward basis, and we're very focused on that.
Great. Thanks, Doug.
Next we go to the line of IB Maher with Bank of America. Please go ahead.
Hi, Good morning, Thank you for taking the question.
I'm wondering to follow up on that on a we shaped recovery tungsten mission little better.
So when we think about the base business, a whats your expectations around potential repeated to covert away.
And then Oh employment rate seems to be going on on for the foreseeable future for a while.
Could you help us think about how this sounds like it would impact your baseline recall it makes sense. Thank you.
Well, we're watching this obviously a day by day basis and there is some uncertainty there is some disruption that continues in.
Really in almost every business in.
In the country.
I would say that.
Our.
The current trends, we've had a resurgence recently.
Encoded cases, but it doesn't seem to be affecting our clinical business.
Unemployment doesn't seem to be a factor in our clinical business or our pharma business either.
The kind of.
General trends that we're seeing in pharma for example have been very very strong throughout this even though axis as George said as an issue.
The clinical business. It's also been sort of an access issue because patients and really want to really venture out to to see their physician and we know has been well publicized that many hospitals in oncology practices.
Add to reduced hours and that sort of thing, but we don't see that anymore.
What were seeing despite resurgence in unemployment continuing at the levels that.
They are at is that our business.
His recovery.
Great. That's very helpful. And then second one on Cobi testing.
And then can terrific teheran earlier and wanted to follow up on that so given CMS recently pricing Oh 20 told you why laid which depends on quicker turnaround time today. So I'm just wondering if there's any update to your contracted wage.
Well they rent if the average rate is trending one way or the other on and of course. It would appreciate any color on test utilization for the next couple of quarters. If you have any visibility. Thank you.
Well I mean, I would say maybe a couple of things on that one first of all our cobot testing laboratory regularly turns around test well within the timeframe that that.
CMS is requiring for this extra $25 reimbursement. So that's not an issue with us at all.
I would just mention that we.
Cowen testing is not our primary business and our pattern of businesses oncology.
We have the capability, we have the capacity for Covance testing if.
You America really needs it, but but we're serving as an overflow laboratory for other laboratories and right now there seems to be a enough capacity in the system. So that we're not seeing all lot of demand for our testing.
Okay now that May change.
But that's that's a.
Thats a situation.
Great. That's very helpful. I appreciate it.
Thank you Amy next.
Next we go to the line of Steve anchor with Needham. Please go ahead.
Hi, Thanks.
Heading into 2021 is there anything you want to highlight regarding reimbursement changes or contract pricing.
And then as it did this challenging in this environment to gain new customer relationships or new payer contracts or agreements.
Well I would say first of all Steve. Thanks for the question and reimbursement, we don't really see anything other than what Catherine already discussed.
That being 2021, I mean, we've got.
We had long term guidance here, where we said, yes, I think you should expect 1% to 3% decline in our a few key but we've got a variety of dynamics affecting that one that preneed asked about earlier was the impact of mix of next generation sequencing and these other assays that are higher price.
That might have on it we've got another dynamic frankly, and that's that we're doing I think a better job of collecting for the work that we do and that impacts a upi also so a number of cross currents, there, but I don't think that any.
Any theres anything no surprises that we would point to in 2021 for you Pete.
In terms of your second question about gaining customers you know Rob said access.
From a lesser or salespeople to some of our customers is still somewhat constrained in the oncology practices.
Although thats loosened up recently of our people have gotten to be pretty darn, good about gaining customers going to trade shows and without actually visiting the us.
So, although our new customer acquisition activity is not what it.
We'll be and and maybe what it has been we're still gaining new customers and.
And we're also gaining I think a bit of a share of wallet from the customers that we have because other competitors had the same problem I mean, they can't get into the customers either so.
Some cases weve already got the relationship and that helps us even with things like liquid biopsy.
So.
Yes, that's the that's where we are at the present time, the only thing I'd add there is that Brown mentioned, we are investing in strategic marketing and in this environment, everyone, having to rethink creative marketing and Lonore version will trade shows and how do we interact with our customers in a different way and we're being very proactive and how.
We are really positioning ourselves going forward to make sure that we're at the forefront.
Ah the playbook and making sure that we're thinking about what marketing and client.
Attention and.
Land acquisition looks like going forward, because I think thats going to be this way for a bit.
Understood got it Thats Super helpful. And then just lastly on the gross margins in pharma services, great progress there.
Because the goal I guess as far as gross margins for pharma services, especially considering the implications of the.
Informatics business I assume that that's a higher revenue or higher gross margin revenue stream.
Yes, we clearly had capacity some of our international sites aren't fully up to capacity yet even though the oil laboratory, we said that human longevity would be a drag on our margins in 2020 that laboratory isn't it capacity either that's exciting for us because we have a large backlog. So certainly we are expecting margin to rebound and.
And you saw that in the third quarter and hopefully, we'll see even more progress in the fourth quarter. So long term, we've said that we expect them to get around that 50% margin with clinical was and certainly we're still anticipating that if we can fill up our capacity, but right now we had to separate from our clinical division. We just grew to the point, where you know our projects was so large.
We had to build our own infrastructure, so that depressed our margins in the short run, but certainly we expect to grow into the capacity we have.
And you're right.
Informatics ought to come in at higher gross margins as we go forward. So.
We're looking forward to improve margins in those areas.
That's great. Thank you very much.
Okay.
Next we go to the line of Andrew Cooper with Raymond James.
Thanks for sneaking me in guys.
I'll keep it quick real often asked but just to kind of drill and maybe a little bit more on what volumes were like October and as we think about if things don't.
Dramatically change with overhead.
If I just kind of doing my math right year, 2% core core growth in the quarter.
Exited 8% higher month over month should get us back to sort of a double digit type trajectory. So maybe just confirm that and then help me think about I know as we look at other places outside of testing outside of oncology folks are talking about utilization kind of in that 90, 95% range and a lot of.
But that last leg up seems to be the hardest part that's not coming back. So just any thoughts on what it takes or or what that might look like as as we continue through the fourth quarter and 2021 would be great.
Sure Let me, let me try to take a crack at that.
I would say that our volumes are improving no question. Those the stats that you mentioned are are correct.
No. There is some seasonality in our business. So October typically is a bit higher on a daily rate than September. So you have to take that into consideration too, but we are certainly moving into the range of double digit growth.
And.
And we hope that that will.
Move more firmly into that range.
We are not yet back to pre coded test.
Tested test volume levels.
In terms of what we expected so when we when we budget. When we gave guidance you know early in the year long term, we would expect our clinical volume growth to be in the kind of 12% to 15% range and we're not yet at that level.
But we're moving in that direction.
Okay. That's helpful. And then maybe just one last one as you think about kind of drilling in on the margins in that core clinical testing segment.
Can you maybe help us backed out how much of the impact.
Might be from sort of that the consolidation of the pharma services piece.
Versus other moving parts when we think about you know obviously mix and.
And things like that you know how much is just sort of procedural verse, hey, we've got some some mix and some volume and overhead.
Yes.
Speakers. Please go ahead.
Well, we lost the call. So we are rejoining sorry.
Mr. Cooper, if you could please re signal so I could put you back in the queue. When you could finish your question.
Please go ahead Mr. Cooper.
Yes, I was just asking about sort of gross margin in the core clinical services clinical testing business. If you could just help us think about when we look at that trajectory how much of a headwind is the decoupling in kind of separating out there on the services piece versus what's more operational in nature.
And how we should think about that going forward, obviously understanding kind of that the pricing headwinds and the mix components, we've already talked about.
Yes, I think the margin that you've seen over the last couple of quarters of pretty indicative of what you would expect going forward clearly, we're seeing some of that impact in the short term and that as we go forward into 2021, we're fully expecting that we're able to gain some efficiencies as that'd be helpful. So I really think.
You look over does not Q2 per se because Q2 was definitely impacted by the pandemic.
But looking back at Q4 in Q1, 2019, and 2020 more indicative of our short term expectations with improvement from there.
Okay.
Okay, operator, I think we're going to wrap it up.
Okay, well return to Mr. van Wart for finishing our excuse me [laughter] final comments.
All right. Thank you.
I'd like to recognize the approximately 1680 neogenomics team members around the world for their dedication and commitment to our company into building a world class oncology diagnostics program and on behalf of the whole team I want to thank you for your time joining us. This morning for those of you listening that are investors.
There are considering an investment in Neogenomics, we thank you for your interest in our company.
Good bye.
Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a great day.
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