Q4 2020 Neogenomics Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the Neogenomics quarter, four and full year 2020 earnings call. At this time, all participants have been placed on listen only mode and the floor will be open for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host docs on the <unk>, Chairman and CEO of Neogenomics sorry of the.
Floor is yours.
Well. Thank you Paul good morning, I'd like to welcome everyone to Neogenomics fourth quarter 2020 conference call Joy.
Joining me for this call are a number of management team members from our Fort Myers headquarters, including Kathryn Mckenzie, Our Chief Financial Officer, Rob Shovlin, President of our clinical Division.
Hello, President of our Informatics Division.
Doug Brown, our chief strategy, and corporate development Officer, and Charlie Edson, our manager of Investor Relations.
Joining on the call via phone from California, as Dr. Larry Weiss, our Chief Medical Officer, and director of R&D, and George Cardoza, President of our pharma services Division.
Also joining us. This morning is linked Patriarch who is serving as our lead independent director of our board of directors Linden.
Lyndon I remembers of our boards of special CEO succession search committee and she is available to help address questions about CEO succession.
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.
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 restaurant uncertainties materialize, especially of the underlying assumptions prove incorrect actual outcomes and results could differ materially from those indicated in the forward looking statements.
Any forward looking statements speak only as of today and we undertake no obligation to update any such statements to reflect events of our circumstances after today.
Before I turn the call back to Doug 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 web site. Shortly after the call is completed.
I want to let everyone know that we are going to limit the number of questions to two per person in order to give more people a chance to ask questions within the one hour of that it's been a lot of for this call.
Thank you Charlie.
For today's call I'll briefly review some quarter four and full year of 2020 highlights Kathryn Mckenzie will provide a more detailed review of the financial results.
All of that share our current thinking about opportunities in 2021 of.
I'll conclude by commenting on this morning's other exciting announcement about our CEO succession plan.
We'll then have time for questions and answers.
2020 was a remarkable year for Neogenomics and one that obviously no one could have anticipated or prepared for.
When we reflect on the year, we take pride in how the Neogenomics team responded and excel in the most challenging operational environment and dynamic market, perhaps any of us have lived through.
In times of Great Challenge, our character and resilience is tested.
Our neogenomics employees passed the test.
They kept the laser focused on performing their essential work for cancer patients. Despite all of that was going on around them.
They showed up for work in our labs continue to process specimens and delivered high quality results for physicians and the patients we serve.
There are people across America, and around the world, who deserve our appreciation and our Neogenomics team is clearly among them.
I want to start this call by recognizing the great effort and dedication to saving lives.
While our labs remained fully capable of processing of high volume of tests that volume of tests was affected by the pandemic.
Many patients were reluctant or unable to see the oncologist or participate in oncology clinical trials throughout most of the year.
Yet even in this year of Great Challenge, our total revenue grew 9% year over year, and we are ready for growth to accelerate as the pandemic subsides.
There is good reason to be confident in a return to higher rates of growth in our core business of.
Our business recovered nicely in the second half of the year and we saw a direct correlation between higher core test volume levels at times of lower incident rates of COVID-19 cases.
In addition.
In January we achieved relatively strong growth in geographic areas that were under less restrictive measures.
While we saw negative growth in areas like California, and the northeast were more restrictions were in place.
Our Midwest Southeast South Central and Florida regions, combined 410% volume growth during the month of January giving us confidence in future nationwide volume levels, we may achieve when the entire country is more open.
The firm of Division grew 30% in 2020, despite the disruptions and our informatics division generated more revenue in the fourth quarter of 2020 alone than it did in all of 2019.
Demand for our products and services is strong and we're hopeful that increased vaccinations and lower incidence rates will quickly allow us to return to higher rates of core oncology growth as this year unfolds.
Our fastest areas of growth continue to be next generation sequencing pharma services and informatics inter.
Interestingly these product and service offerings were minimal in size just five years ago.
As we close the books on 2020. These three growth drivers of account for nearly one third of Neogenomics core revenue.
Even in a disruptive year and despite maintaining of full volume cost infrastructure.
For the entire year, we remained profitable and finished 2020 with $35 million of adjusted EBITDA.
We are proud of these financial results were equally equally proud of that even in these most trying times, we have strengthened our competitive position in the oncology marketplace.
We made significant investments in growth, both organic and inorganic.
We acquired the oncology assets of human longevity, and the Jolla, California made a minority investment and established a strategic partnership within Nevada, and launched or modified over 60 internally developed tests.
We also reallocated precious resources to quickly build of COVID-19, PCR laboratory and our Carlsbad facility.
And performed over 550000 tests to do our part to help America Battle the pandemic.
And perhaps most importantly, we continued to invest in our culture and organization.
We worked hard to support our team members through the difficult times, we of all endured positioning the company for continued success.
We know that are of value as a company starts with our employees and our culture and we see a demonstration of that value and customer satisfaction survey scores.
Our net promoter scores continued to increase in 2020, even during the pandemic.
And our critical division net promoter score reached an all time high at 66.
This bodes well for future organic growth.
Let's turn our attention now to the fourth quarter.
The final quarter of 2020 was a good one for Neogenomics.
Fourth quarter revenue increased 18% year over year to a record $126 million.
Importantly, fourth quarter year over year growth in our core oncology business was nearly 10%.
You may recall that quarter three growth was due almost entirely to COVID-19 Pcr testing.
With core oncology revenue actually down.
In the fourth quarter for the first time since the pandemic began we saw year over year growth in all three of our core divisions.
Our clinical division grew core oncology revenue, 5% year over year in quarter, four driven by next generation sequencing volume growth of 23%.
Pharma services revenue was up 43% to the highest quarter on record.
Our sizable investments in this area are paying off as this segment is growing quickly and now represents over 16% of core oncology revenue.
Yes.
COVID-19, PCR testing revenue declined nearly 50% on a sequential basis in quarter four as demand for our services lessened in lieu of a proliferation of rapid tests and increased PCR testing capacity.
We believe that excess of PCR capacity currently exist in the country significantly reducing our role as an overflow of Covid testing laboratory.
In the fourth quarter core clinical test volumes increased 5% year over year.
While next generation sequencing services grew nicely, we continued to drive growth and other testing modalities with particular strength in fish testing.
While it is good to see our test volume is growing again, the pandemic continues to affect our ability to acquire new customers as most sales team members remain unable to be actively in the field.
And frankly, maintaining strong turnaround time service levels was a challenge for us as we experienced volume volatility and a variety of supplier disruptions.
However, our customer retention rates remained extremely strong and we believe that our fourth quarter volume growth reflects a slight increase in clinical market share.
Our pharmacy services segment, which includes informatics had record revenue bookings and ending backlog in the fourth quarter.
With over $48 million of new signed contracts our backlog of signed contracts now stands at $209 million, an increase of over 60% from one year ago.
In pharma services, we continue to benefit from our domain expertise in oncology and increasing global footprint, Our global Alliance with PPD, which includes our new China lab invest.
The investments in next generation sequencing, including whole exome sequencing and our positioning as a companion diagnostic partner to Biopharma.
We now have greater than 40 active companion diagnostic projects in place and our portfolio continues to grow.
Our growing list of products and services for the worldwide Biopharma industry, including informatics is increasingly in demand.
The pharma business is stronger.
It has ever been and is well positioned to fuel our overall corporate growth rate as it continues to become a larger share of our revenue mix.
I'll now turn the call over to Kathryn Mckenzie, our Chief financial officer to discuss some of the other details of quarter four financial results. Thank.
Thank you Doug.
As Doug highlighted overall revenue grew 18% year over year to $126 million importantly, our core oncology revenues increased 10% year over year, driven by strong growth in NGF pharma services and informatics.
19 of PCR testing contributed $9 million of revenue down from $17 million in quarter three.
The clinical division revenue, excluding COVID-19 testing returned to growth with a 5% increase over 2019.
Clinical division revenue per test of $369 with nearly flat from $370 in the fourth quarter of 2019 and is up 3% sequentially from last quarter.
While there is continued modest reimbursement pressure. This is offset by a favorable change in the mix of test volume and improved results from billing and reimbursement initiatives.
The favorable product mix is driven by next generation sequencing and fish testing services, which are grilling of much higher relative range.
All of 2020 revenue per test of $363 down about 1% from 366 for full year 2019.
As Doug mentioned.
From a services revenue increased 43% year over year two of record $19 million from the fourth quarter and grew over 30% $62 million for the full year.
Research related revenue continued to show strength and while the clinical trial volume increased during the quarter, we have not yet fully returned to pre pinned on the grades.
Our ability to drive value for our clients through companion diagnostic programs as evidenced in our over 40 active projects in our pipeline.
Pharma sponsors increasingly are interested in our informatics products and that also is a growth accelerator.
The record bookings for the quarter of $48 million led to a year end backlog of $209 million, we are very.
<unk> optimistic about the strength of this business as they look forward to 2021 and beyond.
Overall gross margin and truth, approximately 250 basis points sequentially in the fourth quarter to 45, 6%, reflecting a continued recovery in both clinical and pharma revenue on a largely fixed cost Cogs infrastructure.
Gross margin for the year was 41, 8%, which reflects the significant impact of the pandemic primarily during the second quarter of 2020.
As we have discussed before our gross margin rate include certain longer term margin investments.
Particularly in our pharma division, we have capacity that we have not yet fully grown into and many of our locations, including La Jolla and our international laboratories. These.
These investments support the continued growth of our bookings and backlog and are in line with our long term strategic priorities.
Operating expenses increased $4 million year over year to $52 million.
And included investments in and support for informatics, new facilities, including in Lafayette and in the international expansion.
We also had higher technology expense to support these initiatives as well as our COVID-19 testing services and higher sales and marketing expense the.
The increases were partially offset by significantly reduced travel.
We achieved a record level of adjusted EBITDA of $18 million in Q4, driven by a recovery in our core oncology businesses and relatively high EBITDA margin contribution from COVID-19 PCR testing.
Turning to the balance sheet, we exited the quarter four with $296 million in cash and marketable securities, which excludes an additional $22 million in restricted cash designated for construction of our new state of the Art Laboratory and global headquarters in Fort Myers, Florida.
We have since added to this cash balance with our financing in January and now have over $800 million in cash and marketable securities.
Quarter four Dsos remained strong at 78 days I will now turn the call back over to Dustin Wei.
Thank you Catherine.
As we look ahead, we remain highly confident in the strength of our core oncology business and long term growth opportunities. In fact, we are more confident than ever before.
Post pandemic, we believe that growth in our core business will recover steadily back to our longer term clinical volume growth targets of mid teens.
We believe our pharma segment growth will exceed our previous long term, 20% revenue growth target.
There is however, significant uncertainty about the short term and the pace of recovery from this pandemic.
Because of the unpredictable pace of the oncology markets returned to full recovery, we have decided not to reinstate formal 2021 financial guidance yet.
We will resume formal guidance when we feel comfortable that the uncertainties surrounding the pandemic will allow us to guide more confidently.
Notwithstanding that short term uncertainty.
We anticipate that quarter, one will generate mid single digit revenue growth in our clinical and pharma businesses.
For the first few weeks of this quarter clinical test volume was flat compared with the prior year, but last weeks of severe weather caused significant disruptions in test shipments to our labs.
We expect our pharma services segment to continue to be strong with quarter, one year over year of growth exceeding our 20% long term revenue goal.
We expect daily volumes in our clinical business to improve every month now as we exit the pandemic.
With the explanations on the rise in daily Covid cases on the decline we are anticipating that oncology testing volumes will track and maybe exceed historical growth rates in the second half of 2021.
Our business development professionals and clinical pharma and informatics are very excited to be able to visit with their customers again and work on their pipeline of new potential accounts.
I must say that our management team is quite excited about debt environment and we are actively preparing for it.
I will share some of our 2021 initiatives that will position neogenomics not only for volume recovery, but also for strategic leadership and the oncology market.
Our leadership team has been planning and positioning the company to take full advantage of our opportunities and of post pandemic environment.
These first several weeks of 2021 has been as busy as I can recall.
In early January we executed a public financing in the equity and convertible debt markets.
Transactions were oversubscribed and the outcome was quite successful as we raised over $500 million in net proceeds.
This capital raise allows us to be more competitive in terms of our position as we assess M&A opportunities in the oncology market that we'll be able to advance our strategic priorities.
In addition, we announced the strategic collaboration and precision medicine with par Excel and our Informatics Division.
And we believe there are many other future opportunities like this one out there.
As many of you are aware of the M&A market is very active in.
In the first two months of 2021 alone there have been several transactions.
Are there opportunities may also be available.
We are of a long history of M&A success with Clariant Genoptix and recently with the La Jolla oncology business of human longevity.
We want to build our net success in 2021.
Many of you are aware that we have an option to purchase in Nevada accompany with novel technology that is developing a minimal residual disease or <unk> test that is shown to be highly sensitive.
While no decisions have been made debt partnership is progressing very nicely and we are very encouraged by our diligence on the radar assay for minimal residual disease.
We're also investing in areas that will build on our foundation to support sustainable organic growth rates as well as inner organic strategic growth.
We have established our goals and objectives for 2021 and aligned our processes of incentive plans as we've done now for over a decade.
This year in addition to our focus on World Class culture, we will be working hard on further differentiating the neogenomics based on strong service levels.
Our net promoter score is high and our customer retention rates are very strong, but we want to make them even better.
Turnaround time is important for patients and clients Neogenomics has traditionally had industry leading turnaround time.
Whether it's liquid circulating tumor DNA or tissue based testing, we want to make sure that we are the best in the industry.
We're also moving faster on innovation.
We recently introduced a world class RNA fusion assay and are working on a number of very advanced mgs panels and rapid tests.
We believe these offerings will have the capability to save lives by informing precision therapy selection and monitoring residual disease. So that it can be treated earlier.
2021 will be an exciting year for Neogenomics and that leads me to the next topic.
CEO succession.
The board of directors and I have been discussing CEO succession for a number of years.
We're very pleased that the company has grown nicely and the team is deeper and stronger than it's ever been.
We believe the company is well positioned competitively and has enormous opportunities to grow well into the future.
I've had the honor and privilege to lead Neogenomics now for 12 years and I believe that this is the right time for a transition personally and for the company.
After a thoughtful and deliberate succession and CEO search process. We're very excited to have Mark mallon serve as Neogenomics next CEO.
Mark brings a great experience in health care. He spent 24 years as a senior executive at Astrazeneca and recently as CEO of Ironwood Pharmaceuticals, where he led the financial transformation of that company.
We issued a press release. This morning that provides some detail about Mark's very successful career and track record.
Rather than repeat debt I'd thought of.
It might be more helpful. If I described why the board and I are so confident that mark will be of great CEO for Neogenomics.
First Mark has a deep and broad operational experience. He has demonstrated that through a track record of disciplined execution and growth in both of the U S and globally.
That experience is very important and leading neogenomics into the future.
Mark also has a keen intellect and impressive strategic strengths he.
He has intrigued with neogenomics competitive and strategic positioning.
You will see great opportunities to continue to drive growth in our clinical pharma and informatics businesses.
And importantly, mark as a leader who is a great fit for Neogenomics culture.
He has an authenticity and deeply rooted values that align with ours.
He is the developer of people and teams and culture, which is critical to our continued success.
I was heavily involved in the CEO selection process and interviewed many impressive people.
Mark stood out as being an outstanding fit for our company and I'm truly confident in his ability to lead neogenomics in this exciting market for oncology diagnostics.
And I am personally excited about mark becoming our next CEO and I'm looking forward to working closely with him in my role as executive Chairman.
In net role I will continue to serve as chairman of our board of directors and work to ensure a smooth transition.
Mark will officially joined Neogenomics on April 19th and he is looking forward to meeting with our terrific team of employees and the great investors and analysts that have believed the neogenomics and continue to do so.
I'll conclude our formal remarks by saying that while 2020 was challenging for us operationally and strategically it was truly a remarkable year for our company.
We're very proud of our team and of our performance and our commitment to our vision, our values and most importantly to patient care.
We have tremendous opportunities ahead.
Oncology diagnostics is a more exciting place to be than ever before.
Advances in science and technology, both in improved diagnostics and a proliferation of oncology therapies are increasing survival and enhancing quality of life for cancer patients around the world.
Our leading position in the market is proving to offer significant sustainable competitive advantages and we are working to make that competitive position even stronger as we pursue our vision to become the world's leading oncology diagnostics company.
I'll now hand, the call over to Charlie Hudson to lead us through some questions and answers.
At this point, we'd like to open up the call for questions.
Incidentally if you are listed at the conference call via webcast, only and we'd like to submit a question. Please feel free to email us at Charlie Dot Edson at Neogenomics Dot com during the Q&A session and we will address your questions at the end if the subject matter hasn't already been addressed by our calling listeners.
As mentioned at the beginning of the call we would like to ask each person the limit the number of questions. The two so that we may hear from everyone and still keep within the one hour allotted for this call. Operator, you may now open up the call for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We asked a lot of posing your question. Please pickup your handset of listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
And the first question is coming from David Westenburg, David Your line of lives. Please announce your affiliation and pose your question.
Hi, Thank you for taking the question I wanted to start off with.
Radar you kind of mentioned I am not sure exactly what you can say on that but.
But the space is getting.
Pretty attractive with some <unk>.
CRC products. So I was just wondering if you can give us some timelines in terms of launch and what you think about in terms of reimbursement and then if maybe you can talk about product specific if you could talk about maybe some of the the market dynamics do you see this quickly transitioning from CRC to other kinds of cancers. Thank you.
And of a couple of follow ups.
Well, thank you Dave and thanks for the question as you know radar is a assay in development by our strategic partner in Nevada, and they are in.
In charge of and doing a great job developing that assay.
We also believe that minimal residual disease, which radar is intended for is a very attractive space for us.
And very encouraging for patients really around the world.
I think in Nevada.
It is currently planning to continued development of the product as we go through this year and what they would like to do is to apply for mol Dx reimbursement at some point in the near future probably later this year.
But as I said they are in charge of the development process.
In terms of the market dynamics. We believe this is a terrific market. We believe that the radar assay is.
The most sensitive assay that we are aware of that.
That's being developed and there are a number of tumor types that a minimal rajiv residual disease product like in Nevada would target, including potentially breast lung colon and a variety of other solid tumors.
So this is.
Very very encouraging for us we're optimistic about our relationship with <unk> and about the radar assay.
Great. Thank you very much I'm going to go back to that commentary you gave in terms of regional dynamics I think you said ex north eastern ex.
West Coast and I think you said, 10% dynamics could you give a little bit of more indication on terms of of.
What that 10% might represent if it maybe did represent some pent up demand I'm just trying to get a feel for as the economy reopens and the other parts of the regions if it might look like that and.
If there wasn't in fact pent up demand there and you have a lot of analysts so I'll hop back in the queue after that.
Okay. Thank you David Wells the observation that we've made about 10% of volume growth.
In the month of January in regions that were less restrictive in terms of Covid restrictions.
Was actually a little bit surprising to us and there is a big difference between the areas of the country that are more or less restrictive and the correlation to our volume growth it's hard for us to.
To pinpoint exactly how much of that might be pent up demand and how much might be just of freeing up of the markets, but that was our experience and we're hopeful that.
That bodes well for our clinical division volume growth as we as we continue to to see Covid cases decline as the year unfolds.
Thank you very much and congrats on retirement.
Thank you David.
Thank you and the next question is coming from Alex Nowak, Alex Your line is live please announce your affiliation and pose your question Greg.
Greg Good morning, everyone. This is Alex from Craig Hallum I, Congrats on the transitions everyone enjoyed working with the Doug welcome to the near team Mark maybe actually on the transition to start Doug you and your team you built up obviously, a very impressive lab in the space, perhaps walk through just how you and the board were looking about bringing some of them.
With prior farm experience versus pulled straight from another diagnostic lab, what sort of new expertise of this brings the neo and I guess, how does it signal of what does it signal about the future path for the company.
Well. Thank you for the question Alex.
There were a number of different variables that we looked at in our selection of the next CEO I mentioned some in the script, obviously culture is very important to us.
History of operational experience and strategic experience health care experience, but.
In terms of Mark's special skills and experiences. We're very encouraged that he has a lot of deep experience with Astrazeneca Astrazeneca. As you know is one not only of the leading pharma companies, but also a leading oncology.
Company and so he has a lot of experience in the in oncology.
And.
What we've talked about in the past our pharma Division our Informatics Division.
The things like next generation sequencing minimal residual disease. These are the kinds of products that are going to drive outsized growth for us in the future of and I think mark with his experience and strategic abilities is very nicely positioned to help us.
Undertake those opportunities.
Now Alex we also have.
Lynn Teatro here, who as I mentioned is our lead independent director and Lynn joining me on the search committee and the and she may have some other comments about about work.
Thanks, Doug and Alex Thanks for the question.
I think what I'd start off saying is that I have had the privilege of knowing mark for 22 years and worked with him for 15 years at Astrazeneca. So I have real experience of what he's capable of delivering and I think the board's intention is continuing to follow the strategy that we've been on to drive strategic growth and innovation in.
Sure excellent operational delivery and financial performance and continue to build the unique culture that makes the company that it is.
And I am really confident and I know the entire board has confidence in what mark will bring to that.
Seen firsthand what of tremendous leader. He is he is an incredibly bright.
Strategically strong individual with a great track record and he'll be a terrific set to the culture. I think he has experience in pharma will bring a broad perspective to neo that will be helpful. And his global leadership experience I think will also be a tremendous advantage for the company.
But I think the board is excited about the opportunities and continuing to follow the strategy that we have done sort of to date.
That's great I appreciate that and maybe to build on the informatics piece. There is obviously, a large lab out there using it from Baxter as its primary pitch in diagnostics, but can you expand more and give some specifics about the capabilities you want to build out in the upper bags unit that could be you need the neo and should we.
Think about the informatics unit as being a standalone business unit generating a total revenue generating its own gross profit dollars or is it going to be more of a loss leader and I don't mean that of negative term, but of loss later to bring in more oncologists to Neil help out with your market share of how that with cash or just help out with the pharma business.
I'm going to.
Turn that over to bill in the second, but I want to say that.
We're so excited about informatics.
A couple of reasons it is an independent.
The revenue grower for us.
Think might be profitable for us as we go forward.
But it also is benefiting our pharma division and our clinical division. So it very much is synergistic with the rest of the Neogenomics, but we're excited about the products that we're building here and Bill do you want to.
Given the color there sure absolutely so.
The core Alex we're building out tools for precision medicine tools.
Tools that will help ensure.
Debt patients.
The right therapies that they get access to clinical trials the.
Primary customer for most of those services at least is today is the pharma services the industry.
We're working with them on a number of different projects.
The evolving some of them are evolving.
Clinical trials anywhere from the <unk>.
Trial designed to the site selection to the actuals screening of patients to follow up with patients.
Or their providers.
Some of them involve commercial launches in understanding the market dynamics of the trends in diagnostic testing that might impact.
Access to a particular therapy some of them are at a broader.
Sort of investigational level, where they are using data to sort of formulate future plans.
Either commercially or from the drug development the.
The standpoint.
A lot of the work that we're doing with them to date is is basically.
Being done sort of the tough week.
But in the background, we are building automated tools.
That will allow pharma to build cohorts and.
Place.
Information more broadly through at the oncology ecosystem. So that's basically what we're developing we're absolutely generating revenue.
And for.
For one we will be extremely disappointed if we're not generating.
Good profit.
Down the road.
Okay very helpful. Thank you.
Thank you and the next question is coming from Mark Massaro, Mark Your line of lines. Please announce your affiliation and pose your question.
Hey, guys. Thanks for taking the questions I guess, Doug Congrats on really strong tenure at Neogenomics as CEO I guess can you share why you think now is sort of the right time for you to step down in the CEO role and move to executive chair.
Well good morning, Mark.
I think it is the right time, the company is stronger than it's ever been before.
We have a.
A very good strategy I think the company is very well positioned for the future.
It's a really a great time to bring in of new experienced leader to take the company to the next higher level of performance.
It's really tremendous opportunities ahead, and I think it's a great time for a new person to come in and pursue those.
In my case I think it does.
Sided that it's better to retire when things are good.
Good good shape, so that we can be thoughtful about transitioning our new CEO and I think thats the best thing from the company.
Understood.
I have another question and it's related to.
Your commentary around how Covid testing is.
Certainly shifting to the point of care I guess how.
How long do you expect to offer Covid testing and then related to that your gross margins were down year over year.
I guess.
At least qualitatively do you expect gross margins to go up in 2021 and to what extent would maybe shifting away from Covid help.
Well.
Sure.
Our strategy Mark for Covid testing was always to be an overflow lab.
We never wanted to make this our primary business we were doing this relatively altruistically.
Did happen to buffer some of the decline that we had in our core oncology business, but at this point.
We did have a fair amount of volume of Covid testing of quarter three debt declined by about half in quarter four.
Our COVID-19 testing of quarter, four actually occurred sort of as the resurgence of occurred.
And so now as the resurgence has declined as Covid cases have decline you can imagine what has happened to our COVID-19 testing business and I think if if we don't see of future for us in Covid testing is the next.
A month or so unfolds, then we'd probably will not be in that business.
In terms of gross margins of Catherine may want to weigh in here I would just say that.
Covid testing helped our EBIT margins not necessarily our gross margins.
But as is.
Covid testing for us declines.
We would expect that our there would be an EBITDA impact for us going forward.
And from the gross margin perspective Mark.
Thinking about qualitatively, we're continuing to assess areas for improvement in gross margin in our core business.
But keeping in mind the investments and the additional capacity, we do have in pharma and the pressure we have.
Experiencing continued on the pandemic volume and Q1 as we get through the rest of the year absolutely. There is room for continued improvement over prior year.
Okay. Thank you.
Thank you and the next question is coming from Teahouse Zavon pass your line of life. Please announce your affiliation and pose your question.
Hey, guys. Thanks for the time this morning.
Doug first of all congratulations on the on the next stage at the.
I kind of chairman.
It's a pleasure working with you.
In terms of just the.
The <unk> guide here are you essentially assuming sort of of low single digit million contribution from Covid testing and is it fair the thing that that goes to zero starting in <unk> just given your comments here around the excess capacity in the field.
The highest Doug Brown here I think it's fair to say that the as Doug said the pandemic subsiding of has had an impact on the PCR testing.
As the quarter evolves, you can envision that continuing to go down and as Doug mentioned debt. When you think about the rest of the year. We're hopeful that we're not in the business. So I think you may get some reasonable assumptions of their sales.
Okay. Good that's helpful.
And then on the on the liquid biopsy launch I mean anything you can share in terms of color. It's relatively recent but I know you launched a mobile <unk> offering back in November.
Has that helped in terms of just.
Getting the word out and getting volumes to ramp your.
As you launch.
The two assays there.
Yes.
And then just so everyone knows we have to.
Liquid biopsy products the in Nevada, envisions called envision first lung test.
Our own Pan cancer test.
Have had uptake and we have had the.
Very good feedback from our clients about most of those tests and we have.
Spent a little difficult due to market them since our sales folks are unable to readily get into oncology offices. So that clearly has impacted things, but we have had some uptake we have.
Improved our service offering we've offered now just launched mobile phlebotomy we've.
<unk> made some significant changes to our reporting for liquid biopsy and we've done a number of other things, which we think are going to improve the offering and as folks get out there in the field, we have very high hopes for further penetration.
The market, where we play in the community is really underpenetrated in terms of liquid biopsy and as you know in the <unk>.
Community, setting, probably 80% or more of cancer care occurs. So we think we've got a lot of room for growth.
Got it and then one final one from me on capital deployment.
I've got some of the comments you made on sort of.
More opportunities on the M&A front any of our plans to kind of like pursue those year end of 'twenty one.
Can you highlight what would be sort of the beyond the Nevada, what would be the two or three adjacencies, where you were.
You think it would make a lot more sense to buy rather than build and whether it's sort of very interesting assets out there.
Hey, Jeff, It's Doug Brown again, I would say at the <unk>.
Narrative, we've had for the last year is we are really focused on pharma informatics and Ngls, whether it's tissue of liquid if you look back of the last thing we did strategically the purchase put us in the whole exome sequencing business on the pharma side, we continue to think about bolstering areas in farm and informatics and high growth areas. So that's the focus.
Got it so by the both thanks guys.
Thank you.
Thank you and the next question is coming from Puneet, So that Puneet your line is less.
Hey, guys. This is actually <unk> on for Puneet This morning.
The extend our teams congratulations to Doug as well.
Kind of.
A bunch of years from me I was hoping to just dig in a bit more on to the NGL side of the business in the quarter.
The 3% of its really strong quarters wondering if you could just talk about the.
The impact of of the liquid biopsy launched there what your expectations are moving forward.
Obviously, we have some easier comps I think coming up over the next few quarters.
And then what impact we can expect us to have on the revenue and cost per test.
While high West.
For the.
Of the comments and for the question.
Yes, our next generation sequencing.
Product line is continuing to grow nicely, we've made a lot of changes to it we're continuing to make changes to it we're.
We're investing a fair amount in next generation sequencing and by the way our new Fort Myers Laboratory is going to have a brand new next generation sequencing lab, which we think will improve service as we have net we will have been east coast and of West coast capabilities. So we're really investing in next generation sequencing.
And the RNA fusion the Dr waste and the R&D team just recently launched as I think a testament to our continued investment.
Assay development as well as in facilities and infrastructure.
The liquid biopsy.
<unk>.
I just mentioned I think is going well.
And we think it is going to gain traction sequentially as the year unfolds.
The next generation sequencing has been of high growth area for US. We think it will continue to be of high growth area for us.
And also Doug Brown, just mentioned our whole exome sequencing line in pharma, we think that that will continue to gain traction.
The us as well so.
We're pretty bullish on our mgs portfolio.
And from an A&P and our cost per test perspective, MTS that carry a higher revenue per test, but youre of various student that also have carry of the higher cost per ton.
Looking at the overall margin contribution of will offset.
Debt as well, even though NGF, it's going faster than our other modality of they are all growing so just as a reminder of the impact on overall A&P increase of that revenue per test increased.
We'll take some time to be realized in a significantly higher A&P, because all of our modalities of our drilling.
Great. Thank you and then just on pharma.
Really seem to weather the storm throughout the year really strong growth in the second half of the year I guess, just how can we think about it moving forward I mean backlog is continuing to grow.
Grow really nicely here I think you mentioned about 16% of the core business.
And the.
Thats, probably accelerating but just trying to get they're trying to think about backlog conversion.
Well I mean, I know you mentioned more than 20% growth in the first quarter.
But I mean, if you're comparing the first quarter of last year to the fourth quarter were at a much higher run rate. So.
Just looking for any color on how we can expect pharma too.
The perform moving forward. Thank you.
Yes.
We're excited about the pharma business in the long term growth.
Opportunities there I will say west of the pandemic has impacted our pharma business and really continues to impact the pharma business.
Somewhat.
And there is some seasonality to the pharma business also of quarter. One traditionally has been a little bit lower but our backlog I think we ended the.
The year at $209 million of combined backlog for informatics and for pharma and the.
That is converting.
George Cardoza is on the line.
I want to make a couple of comments about the backlog conversion, but our sales team in pharma is doing a great job. We added a lot of new contracts. The demand is very strong and as I said I think our revenue growth in the in the next year or two should exceed our previous long term.
Revenue growth targets of 20% of <unk>.
George do you want to make a comment about the backlog conversion.
Yeah, no absolutely I mean, I hope you see in the 43% year on year growth that obviously it is starting to convert certainly so I think if you look at the back half of the year Youll see 30% growth. So.
Thats the back more in line and we had 38% growth in in 2019. So so I think as sort of the pandemic lifts. We're hopeful certainly that we can get back to.
High growth rates, but certainly out of the pandemic is still having an impact on enrollees in clinical trials, we're seeing the research side, the pretty strong and certainly informatics has been very strong, but there is still a little bit of a drag out there on the <unk> side and in some of these trials the trials of our active but we.
We are still hearing some frustration that theyre not quite getting the enrollee accounts that people would like of people anticipated. So so.
So it's still a little bit of of Covid headwind, but I think as that lifts, we're very optimistic about the especially the second half of 2021.
Great. Thank you.
Thank you and the next question is coming from Jacob Johnson Jacob Your line of live please announce your affiliation and pose your question.
Hey, guys. This is mason on for Jacob just a few quick ones from me.
First on the Nevada, a lot of excitement around liquid biopsy.
Think of investors are interested in better understanding of the timeline here.
How should we think about the timing of you potentially buying the company and what are the key things you need to see to make a decision.
Well, we have a great relationship with the Nevada, we have.
A seat on the <unk> board of directors.
Have a terrific relationship between our commercial folks in our operating folks in the clinical division.
And the pharma division in Nevada, So right now the.
The envision first assay is being commercialized by us.
And we have a pretty good insight as to that uptake and how that is progressing we would like to work within Nevada on the R&D assay development and understand better how that is progressing.
We believe it is progressing very very nicely.
But the MLR DSA is.
Frankly, more interesting to us than the envision first lung assay. So our decision in terms of acquiring that company and exercising our option will be largely dependent on the progress with the assay development for minimal residual.
<unk> disease.
Got it and then maybe one just big picture question.
As we look out of couple of years, how should we think about your mix of revenues.
How large pharma services and informatics, the compared to your legacy clinical services business and how much of clinical services could we expect to come from liquid biopsy.
Well I would say that we've tried to give some hint as to how we think about that and I will maybe answer that question of two different ways. So one is organically than the others Inorganically. So organically, we would expect the combination of pharma.
And informatics to grow at at least twice the rate of our clinical division.
And the and.
And I think we have good evidenced from that it's actually occurred in the last year and you can see that in the numbers.
We've invested very heavily in both areas, which is why you see some pressure on gross margins in the other margins as we put infrastructure in place.
In addition to that though when you can do the math I think Mason.
We would also want to sink a lot about strategic investments mergers and acquisitions to fuel the growth in pharma and informatics and I think that.
We're working on those.
As we speak and I think it's possible that we could sort of rocket boost the the.
Growth rates, there and we would like to have a combination of pharma and informatics. The at least the third of the revenue and the <unk>.
Few years.
Got it thanks for taking the questions.
Thank you and the next question is coming from Brian Weinstein, Brian Your line of knives. Please announce your affiliation and pose your question.
Hi, guys. Good morning, congrats on the transition of them.
Not sure where people in Florida retired two because people in Chicago go down there.
Okay.
For a few months youre wearing factory nice of come visit us and true.
June July or something like that.
So.
Question on pharma services here I'm curious a series of questions here.
On this.
I'm curious how competitive these mandates have become a lot of investments being made by you guys and others. There. So can you talk about how.
Our competitiveness is becoming really what are the dynamics of that determined winning or losing one of things and how that seem to have then from.
I'm also curious about the appeal.
Of that you've been signing more recently.
Can you talk about these in terms of.
The depth of relationship here and going deeper with kind of existing partners or you're bringing new partners into the mix.
Thank you Brian.
The.
I will miss your sense of humor.
Yeah.
In terms of from a pharma services.
I'll, maybe take a crack at this and George I think can weigh in.
Okay.
We have.
Fairly broad.
A list of the major pharmaceutical companies in oncology, who are working on oncology drug development. It's a very broad list and we are both broadening the list of clients and deepening it so.
One of the aspects of the business that we have developed as a <unk>.
Comprehensive menu not only for clinical but also for pharma. So we offer a lot of different test modalities for pharma and that allows us once we've established a reputation.
They understand our service levels of our commitments to have an opportunity to participate in other kinds of test modalities in other trials in the research that.
Pharma companies.
Our engaged and so I would say, it's both we're broadening the client list and deepening the client list and I think there's a lot of room for both going forward.
George do you want to make any other comments about the yes.
I do think in 2020.
What you heard earlier, our sales team did have some challenges certainly I'll typically they go to trade shows they meet people.
So they are they are doing everything via zoom and webex, but.
They have been able to certainly be successful deepening of lot of our relationships.
And I think that's the nice part is we have a very broad.
<unk> of customers. So there aren't a lot of opportunities for them to get greater share in these accounts and I think we did a really good job of that in 2020, and yes. We have brought in some new customers as well and the IR team has been working extremely hard but.
Hopefully if things get back to normal the can travel a bit more youll see maybe a little bit more push to the sort of new logos coming into the portfolio, but I do think in 2020, we were able to deepen some relationships and I do think that's what enabled our growth, especially in the second half.
Great and then you talked the talk about differentiation on the service on some of the investments that you want to make there.
Specifically on turnaround time is that simply just having labs in both sides of the country or are there other investments that youre, making there and then you also mentioned some supply chain issues impacting this in the short term is that all COVID-19 related or is that all now behind you. Thanks guys.
Well, it's interesting Brian the.
Supply chain chain disruptions and how they have occurred in our business.
Originally there were things like gloves in pipettes and extraction kits and a whole number of other things in the downstream disruption has been.
It's been challenging frankly, I mean, even in terms of logistics.
With the with.
Some of our logistics carriers. So there has been disruption and we're looking to operate in a much more stable kind of environment going forward now.
I think I mean.
Mentioned in a number of times, our net promoter score of customer survey of activity. We are pretty rigorous about surveying customers of couple of times of year and we don't just get one survey score I mean, we get a lot of rich data.
<unk>.
Rob Shovlin, and our whole clinical team and our pharma team also pour through these data and we try to analyze what we can do better along a variety of different kinds of attributes and so.
Turnaround time has always been an important attribute in probably perhaps the most important but there are a lot of others too. So we're continuing to work on.
Fundamental changes in some of our laboratories to reduce turnaround time, but were working on a number of other service differentiators.
And that's of continual process for us, it's part of our really quality system of <unk>.
To use of proven.
Great. Thank you.
Thank you and the next question is coming from Ivy MA IV. Your line of sight. Please announce your affiliation and pose your question.
Hi, This is ivy from the okay. Thank you for taking my question.
Congrats on the other type of Doug.
Wanted to follow up on capital deployment and.
And appreciate all of the details so far with the.
Strategic focus.
Finite and informatics.
Can you expand on how does the succession plan change.
Your M&A plans, if any and if there is.
Any change to the strategy either in terms of financial metrics or geographic region. Thank you.
Well, thank you Ivy and thanks for the.
Congratulations ill make a couple of comments and then maybe I'll turn it over to Doug Brown.
The first of all we've talked a lot with Mark Mallon about about our strategy, we have a pretty rigorous process to define our goals and objectives for each coming year, and we have set as well for 2021 and mark embraces the goals and objectives that we currently have in <unk>.
Place.
Both operationally and strategically and I think that Mark is going to add a lot to the.
Execution of our goals and our strategies, but at this point, we don't think.
Our goals and strategies are changing at all I mean, obviously.
Our goals and strategies, we put them down on paper and we have a lot of dialogue about them and then we changed the them as circumstances change.
Change and so that will continue but.
Right now our goals and our strategies.
Our in place and Mark embraces those.
Hi, Ivy its Doug Brown.
<unk> with Doug says and also when you think about his comments about leaving the company in a position of strength. So you think about operationally and culturally and also strategically now certainly Mark mountain is going to put his finger prints on the company and he brings a new dimension, but when I think about what he brings I get most excited about the pharma and of product mentality. So youre seeing this convergence of service and product and our in our sector.
And he is bringing something global.
Launched products, you think about the margin assay and where this company can go and also pharma services. So inorganically, we're trying to drive that mix, but mark can really help organically as well. So I think it's more of the same but.
He is also going to accident.
<unk>.
Thank you and we will now hand, the call back to Doug for any closing remarks.
Okay. Thank you very much Paul and as we end this call.
I would like to recognize the approximately 1714 neogenomics team members around the world for their dedication and commitment to building a world class oncology diagnostics company.
The half of our Neogenomics team I want to thank you for your time joining us this morning.
Are you listening that are investors or are considering an investment in our company. We thank you for your interest in Neogenomics.
Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.