Q1 2022 Neogenomics Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, thank you for standing by and welcome to the Neogenomics first quarter 2022 earnings call. At this time all participants are in a listen only mode. After the management's prepared remarks, there will be a question and answer session I would now like to turn the call over to the host executive chair of Neogenomics Linda Patriot. Please go ahead.
Thank you Kelly and good morning.
I'd like to welcome everyone to Neogenomics first quarter 2022 conference call.
Joining me for this call from our Fort Myers headquarters are Bill Bonello, Our Chief Financial Officer, Doug Brown, our chief strategy, and corporate development Officer, and Charlie Edson, our director of Investor Relations.
Joining on the call via phone is doctors Shashi Kulkarni, our chief Scientific Officer, and Executive Vice President of research and development.
Before we begin our prepared remarks, Charlie will discuss the forward looking statements and non-GAAP measures used on this call.
This conference call includes forward looking statements about our 2022 initiatives 2020 financial outlook growth opportunities and anticipated operating results and performance.
Each forward looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Additional information regarding these risk factors appears under the heading forward looking statements in the press release, we issued this morning and in the risk factors section of our annual report on Form 10-K for the year ended December 31, 2021 that is filed with the Securities and Exchange Commission.
The forward looking statements made during this call speak only as of the original date of the call and we undertake no obligation to update or revise any of these statements.
In addition, during this conference call in order to provide greater transparency regarding our operating performance we refer.
Certain non-GAAP financial measures that involve adjustments to GAAP results. These non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. It should not be considered to be measures of liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies and a non-GAAP financial measures referenced.
On this call are reconciled to the most directly comparable GAAP financial measure in a table available in the press release, we issued this morning before I turn the call back to Lynn 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 we also want to let everyone know that we are.
Going to limit the number of questions to one per person in order to give more people a chance to ask questions within the one hour that has been allotted for this call.
Thank you Charlie.
For today's call I will begin by sharing my perspective on the state of our company and the actions we've taken since we announced the departure of our Chief Executive Officer on March 28.
So, but Nello will then review our first quarter financial results, including some of the factors underlying the underperformance of the business and outline the near term actions, we are taking to improve our performance and return to profitable growth.
Finally, I will introduce our new Chief Scientific officer, Dr. Shashi Kulkarni, and the new President of our clinical Division Dr. David Shalwar. These two talented executives are experts in oncology diagnostics, and we'll play leading roles in our company's future.
Each of them will share their background and reason for joining neogenomics and offer their early insights on our business and our critical priorities since joining in early March.
We will then have time for questions and answers.
I would like to begin with some historical context.
I have served on the board of Neogenomics for seven years and became the lead independent director in 2020 before taking over the board chair role in October 2021.
During the majority of that time, our business performed very well with consistent top line growth strong operational efficiency, increasing market share and a world class culture.
Unfortunately, our performance over the past year has been inconsistent with our historical track record as evidenced by slowing growth and decreased profitability.
The company experienced a number of challenges in 2021, including the transition of our long standing Chairman and Chief Executive Officer, Doug banner, continuing headwinds from Covid and shifting dynamics in the external environment.
So the company's market position remains strong and our overall strategy is sound our execution over the last year was poor.
The board of directors took decisive action last month to change leadership in order to restore the operational performance of the business and better position the company for long term success.
Since March 28th I've had three main priorities.
First we have moved quickly to stabilize the organization.
Other members of the management team have visited many of our sites and met with leaders and employees at all levels to share our direction hear their feedback and engage them in our efforts.
And I am consistently impressed with the degree of commitment that our people have to our mission and their desire to improve our performance.
Second the office of the CEO together with other members of the management team have worked swiftly and collaboratively to identify actions to improve performance.
Bill will describe some of these positive changes later in our prepared remarks.
The addition of Doctor Coke Carney and Dr. <unk> to the management team with their extensive experience and deep expertise has helped us identify additional opportunities for improvement and you will hear from them later on in our prepared remarks.
Third the board of directors and I are making progress in our search for a new CEO .
We have developed a list of key criteria and Russell Reynolds is in the process of sourcing qualified candidates.
In summary, we recognize that there is significant work to be done, but we're confident that in time, we will return to the growth and operating efficiency that drove our success for many years.
Our long term strategy remains intact in particular, we see great strategic value in marrying new technologies, such as radar with our long standing channel leadership.
And finally, the board and I are confident that our strong executive leadership team will advance the execution of our strategy, while we recruit an outstanding Chief Executive Officer.
I will now turn the call over to Bill.
Thank you Lynn.
This morning, I would like to review, our first quarter financial results provide some additional color on the factors that have been impacting revenue growth and margin and provide some detail on some of the actions that we're already taking to return to profitable growth, while we will not be providing formal revenue or EBIT.
Guidance today, we will provide some directional commentary with respect to both revenue growth and profitability.
Before I walk through the numbers I wish to point out that the growth rates, we cite exclude prior period revenue from COVID-19 PCR testing.
We've made this adjustment to make the year over year comparisons more useful as we stopped performing COVID-19 testing during the first quarter of 2021.
Revenue increased 3% year over year to $117 million with clinical services revenue up 4% year over year, and pharma services revenue down 4% year over year.
Clinical revenue was $99 million in the quarter.
Clinical division test volumes increased 2% year over year.
The Omicron Varian had a significant impact on test volume during the month of January with volume down 7% month over month and flat on a year over year basis, while volume grew both sequentially and year over year in both February and March we have not yet return.
And to pre Covid growth rates.
Our volume growth is being impacted by a couple of factors first our test mix is weighted to legacy modalities and disease specific and GSO offerings, while the market is moving towards larger more comprehensive panels second.
Operational challenges that made it difficult to add new business at our historical rate.
We are taking a number of steps to upgrade our NGF product offering and improve our lab operations, which Dave and Josh will discuss in greater detail later in the call.
Average revenue per test increased 2% year over year to $371 with positive contributions from ongoing strategic reimbursement efforts, partially offset by Medicare rate cuts.
Pharma services bookings were $41 million in Q1, and we ended the quarter with a backlog of $282 million.
Which was up 6% sequentially and 30% year over year.
While backlog was up pharma services revenue decreased 4% year over year to $18 million. We view this year over year decline as an anomaly and not a trend as we faced a very tough prior year comp.
Revenue was quite a bit lower than we had been expecting in March of this year as one large project got pushed out to later in the year.
I contrast March 2021 was a record revenue month for pharma services.
We are taking action to drive near term pharma revenue, including increasing our efforts to secure preclinical business, which tends to convert more quickly than clinical trials work.
Even as we continue to build out our backlog of large clinical studies.
We are also implementing processes designed to pull revenue through earlier in the lifecycle of a project.
Our informatics business, which is reported as pharma services revenue continues to grow at a rapid clip and we're excited about the progress of these initiatives.
Our GAAP gross margin was 32, 6%.
Adjusted gross margin, which includes in Nevada related which excludes in Nevada related noncash amortization expense was 36, 8%.
Adjusted gross margin declined 380 basis points year over year.
And 310 basis points sequentially.
There are several factors that contributed to the decline in adjusted gross margin and we are taking immediate action to mitigate these trends.
In late 2021, we significantly increase the size of our laboratory workforce in preparation for a return to pre COVID-19 growth rates as noted earlier volume growth did not rebound to the extent that we had expected as a result, we have scaled back.
Our laboratory hiring plans to better align with near term volume trends.
Like most companies, we have experienced wage and supply cost inflation.
A response to this cost pressure, we are implementing price increases in both our clinical and pharma businesses.
And pursuing strategic reimbursement opportunities to increase value capture for the services that we are providing.
Third we did have extra cost associated with the transition to our new Fort Myers lab.
This move will drive productivity and efficiency improvements over time, we incurred extra costs related to operating two different fort Myers facilities during the transaction.
We expect this transition to be completed around the end of Q2.
In addition to these factors we have seen a notable decrease in lab efficiency over the course of the past year.
This decrease is largely attributable to increased complexity of both our product offerings and our lab processes due in part to efforts to respond to customer requests for customization.
We are already taking action to reduce this complexity.
These actions include eliminating low margin services.
Dream lining our mgs processes to drive reductions in labor supplies, and bioinformatics costs, while simultaneously improving turnaround time.
And implementing AI to increase lab tech productivity.
We estimate that these actions plus our pricing actions could contribute at least $15 million of annualized gross profit once we fully implement them.
Moreover, we have every expectation that we will identify additional near term actions as we continue to engage the organization.
Finally, as we've discussed in the past our pharma lab expansions, including both our international Labs, and our La Jolla facility continued to be a drag on adjusted gross margin.
While our international labs are important to our long term growth strategy and allow us to bid on larger global clinical trials. These labs are operating well below capacity are.
La Jolla lab, which we acquired through the acquisition of the oncology assets of human longevity in 2020, and which is where we perform whole exome and whole genome sequencing is also operating below capacity.
While lab expansion remains an important component of our pharma growth strategy, we are working to better align capacity expansion with growth.
In addition to these near term actions. We are also developing a long term plan to drive step function improvements in productivity and efficiency. We will do this through automation and process improvement product payer and customer mix and pricing.
Operating expenses increased $34 million year over year, and $3 8 million sequentially to $90 million.
Approximately $13 million of the year over year increase is related to ongoing operating expense at both in Nevada, and Trapelo, which were acquired in the second quarter of last year.
In particular, we.
We continue to make significant investments in radar supporting what we believe is a leading assay for minimal residual disease and recurrence testing.
In addition, another $11 million of the annual increase is related to non cash stock option compensation expense and other nonrecurring items that have been excluded from our calculation of adjusted EBITDA.
The sequential increase in operating expense is related to increased legal and accounting costs associated in part with operations of antibody to enter pelo as well as the ongoing compliance manner CEO transition costs and increased product development.
Expense related to our informatics business.
We are taking steps to reduce our G&A expense run rate, but there is more work to be done.
Given the factors, we just discussed adjusted EBITDA loss was $19 million.
Turning to the balance sheet.
We exited quarter, one with $481 million in cash and marketable securities.
Dsos were 85 days in at the high end of our normalized range. The increase in DSO is primarily driven by the intercompany cadence of revenue with March being the highest month of the quarter, we expect DSO to normalize as the year progresses.
Having reviewed the first quarter results and the immediate actions that we're taking to improve both revenue growth and margins I'd like to spend a little time discussing our outlook for the remainder of the year.
As a reminder, we withdrew our 2022 revenue and EBITDA guidance in March in conjunction with the departure of our CEO .
We continue to believe that it is important for the new CEO to influence and feel comfortable.
I can feel accountable for the guidance, we eventually provide.
That said, we understand that our decision to withhold formal revenue and EBITDA guidance makes it difficult for investors to assess our current financial situation or evaluate our near term prospects.
Therefore, we would like to share some additional thoughts regarding near term trends in both revenue and profitability.
We view 2022, as a rebuilding year, where our primary focus is to improve our current product offering drive operational efficiency generate clinical evidence in support of radar and lay a foundation to support sustainable profitable growth in 2023 and beyond.
We expect revenue to be up sequentially in Q2, and up modestly year over year for the full year.
Similarly, we expect that our quarterly adjusted EBITDA will improve modestly sequentially each quarter as the year progresses.
Looking to 2023, we expect revenue growth to accelerate and we expect to be adjusted EBITDA positive exiting the year.
We believe that the actions we're taking today are important first steps to achieving these goals.
I will now turn the call back to Lynn, who will introduce Dr. Kulkarni industrial sugars.
Thanks Bill.
We are delighted to have both Dr. Kulkarni and Dr. Shaw are officially on board as Chief Scientific Officer, and clinical Division President respectively.
Executives are already having a major impact on our business, despite having joined less than two months ago.
I've asked them both to provide some background on some of their relevant experience express why they chose to join Neogenomics and discuss some early areas of focus for them, including any quick wins, they see for improving our business.
With that I'd like to introduce our new Chief Scientific officer, Dr. Shashi Kokang.
Thank you and then.
It's great to speak on the earnings calls today, and Im pleased to be representing Neogenomics.
Good evening clinical genomics spans over 30 years and most of my career has been spent in the field of molecular genetics and next generation sequencing.
I've held numerous academy scientific and operational leadership positions at Washington University.
The school of Medicine in St. Louis Baylor College of Medicine, and help build and.
Operational and financial turnarounds at both institutions.
I have a strong passion for using genomic and multi omics decision apology tools to improve human health.
I've written a book on Ngls that is widely adopted and popular amongst the medical professionals.
Madness cancer Genetics Elsevier Journal.
And cheese for more than seven years I've also authored many best practices guidelines related to Ngls by co working with organizations such as <unk>.
<unk> and CDC.
And I frequently serve as an expert panelist at FDA for NCS.
Hi, Jordan Neogenomics because of the company's unparalleled leadership position in oncology for multimodal diagnostic solutions IC, the company's longstanding customer relationship with pathologists and oncologists as a key strategy FX.
And believe that the fundamentals are there to be a market leader for many many years to come.
Why my.
Our focus will be primarily on next generation sequencing.
I believe I can help drive improvements in operational productivity.
This improvement in automation across in the Barclays.
I will look to develop and launch cutting edge and <unk> solutions for a clinical and pharma divisions.
And create NGF center of excellence.
Neogenomics is a strong market position covering the continuum from diagnosis to monitoring and I will be.
Actively working to optimize our service menu that sound business principles and.
In my short tenure here at Neal we have identified several operational and informatic improvements that they are already working to implement these initiatives are expected to reduce our turnaround times and lowered our cost of testing and could be completed over the next six months.
I've seen multiple areas of improvement within our processes that I would consider low hanging fruit.
I'm immensely impressed with the scientific talent, Neil as evidenced by over a dozen presentations at the recent ACR conference in New Orleans.
Exciting action that we have already completed.
The launch of our new lung cancer, DNA, RNA and GSL knee offering.
This comprehensive panel includes genomic and Classico basketball and multi model driven.
Driven by clinical evidence, which differentiates it from other leading cancer lung cancer offerings on the market.
And he has collected this.
For our sponsored testing programs, which we have launched to our clients on Monday.
Additionally, we are bringing beginning validation on larger than cancer panels.
<unk>.
Site of our NGL products for selection.
First with the outstanding sensitivity and strong data from radar assay for minimal residual disease and recurrence testing.
Sure the team's belief that readout would be leaving a martin installation and in 2022, we are prioritizing data integration and are actively involved in <unk>.
In discussions with several different pharma companies for larger mid stage opportunities.
Hi, Steven.
Thank you <unk> I'm also pleased to introduce our new clinical Division Division President Dr. David Shalwar.
Thank you Lynn and I am excited to be at <unk> and for the opportunity to speak with everyone with.
With everybody today as well, including my time in medical school and residency for pathology I've spent over 30 years of my career in and around diagnostics and laboratory space and I believe my experience and passion for patient care fits well with my new role at Neogenomics over that time.
<unk> significant commercial and general management leadership positions at both J&J and quest diagnostics in the IBD and lab services businesses respectfully.
As a result, I have experience with a wide range of relevant diagnostic technologies, including liquid biopsy molecular diagnostics and GFS anatomic pathology and digital pathology.
Each of these positions that I've held came with full P&L responsibility and I often assume these positions when the businesses were experiencing challenging circumstances and I have a demonstrated track record of helping to drive improved business performance.
In terms of why I chose to join Neal personally I feel there is no more relevant fields of being in health care that helping cancer patients as well as their caregivers and physicians navigate the increasingly complex world of cancer diagnostics and care I also believe that Neil is well placed to be a market leader emerging from a position of strength between earlier stage companies that lack breadth of menu.
And large diagnostic labs that have difficulty selling specialty testing I saw an exciting future ahead for Neil and I wanted to be a part of it.
During my time at Neo thus far as Josh has been digging in with the team and working to prioritize areas of immediate focus I believe that there are some near term actions, we can take to improve commercial productivity operational efficiency and our overall service to customers.
She has touched on exciting immediate term opportunities, we have launched new high value tests and make our turnaround times more reliable, but I also see near term commercial benefits by extent expanding our already excellent sales force with precision medicine managers, focusing on the oncology channel as well as introducing new tools to manage the sales process and pipeline more ifs.
<unk> in.
In addition, we are establishing cross functional process excellence teams to streamline them streamline our approaches in the lab and develop tools in a few key areas to increase productivity and expand margins.
Longer term I am focused on reinforcing our foundation and building a platform sustainable for sustainable growth. While there is significant work ahead of us I see the challenges. We are facing is familiar and addressable I expect that we can drive improving results and return to faster growth and improving profitability over time, I'm, all in and I'm energized and ready to get to work I will now pass it back to Lynn for some.
Closing comments.
Thank you David.
In closing, while we are disappointed in our Q1 results. We are taking immediate actions to improve our performance.
This year as Bill said will be one of rebuilding to improve our lab operations and drive greater cost efficiency. In addition, we will continue to make strategic investments to improve our current product offering drive clinical evidence in support of radar and lay a foundation to support sustainable profitable growth in 2023 and beyond.
We see tremendous opportunities to build on our leading position in the oncology marketplace and achieve our vision of becoming the leading cancer testing and information company.
I'll now hand, the call over to Charlie Edson to lead us through the Q&A.
At this point, we would like to open up the call for questions Incidentally, if you're listening. This conference call via webcast only I would 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 hasnt already been addressed by our calling listeners.
As mentioned at the beginning of this call we would like to ask each person to limit their number of questions to one 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.
Certainly 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 ask that while posing a question you. Please pick up your handset if listening on a speaker phone to provide optimum sound quality. Please hold just one moment, while we poll for questions.
Your first question is coming from Brian Weinstein with William Blair. Please pose your question your line is live.
Hey, guys. Good morning, Thanks for taking the questions.
I wanted to ask you on the clinical side of the business.
Identified.
Some some neo specific things obviously, but.
Any thoughts on what.
Whats going on maybe in the broader market right now do you anticipate that there is a.
That kind of a broader slowdown that maybe contributing to some of this recognizing of course that there are some very clear issues that you guys have to deal with but.
Just thoughts on kind of what that broader market may look like and then.
For Shashi.
<unk> for you on the panels here.
And the expansion there.
What kind of timeframe are we thinking about too to see kind of these broader mgs panels and how competitive do you expect that theyre going to be when you initially launched them. Thanks guys.
Thanks, Brian for your questions I'll ask Dave to address your first question and then chassis the second one.
Sure sure. Thanks, Yes, so I mean for broader issues bill touched on it.
When we take a look at our legacy business I mean, theres no doubt that a lot of those modalities are are mature.
In their market segments and over time, we've seen some price pressure.
So I think that Thats the biggest.
<unk> related to the legacy business when it comes to the market dynamics related to Ngls, we actually touched on this as well that we are seeing bigger and bigger panels coming from some of these emerging companies more than emerging at this point.
We have not kept up so part of NPS actually part of your follow on question to Shashi is how can we catch up to that and internally we're talking about how do we get to the standard for we can become the standard if you will and I think that we have some some work to do there so.
Just to summarize it I'll emphasize actually what Bill said previously I think the market dynamics in our legacy business are probably not unfamiliar to more mature modalities.
And then with the <unk> and the new stuff, we actually have to get better to responding to the to the market needs as they evolve.
Great. Thanks, Dave chassis.
Yes, I think.
I was asked about the timeline so we are working.
It's competitive.
<unk> if you will.
And we.
Our launch to happen some time in next six months and the validation work for that Big panel, which will be.
Not only competitive what would be the best in class would be ready.
Six months timeframe.
Your next question is coming from Matt <unk> with Goldman Sachs. Please pose your question your line is live.
Hi, Good morning, Thanks for taking my questions, maybe one for you Bill just on that $15 million annualized improvement in gross profit can you put some timeframe around that and when you could start realizing that understand its an annualized number but just looking for when that could start shifting.
And then secondly, just on the broader panel over the next six months I'll show you that you just mentioned.
In terms of costs for launching that is that within sort of the relative cost budget that you have over the course of this year would that be incremental costs and launching that new panel. Thanks.
Yes, so thanks for the question Matt.
In terms of the cost savings so we are.
Already beginning the actions.
It will take some time.
Before the actions are implemented and start to generate cost savings.
And so I think those will increase throughout the year. So we should see some sequential improvement in margin as we move our way through the year.
But the thought is that we will exit the year.
With.
The $15 million run rate, so that's really going into 2023 with $15 million of annualized.
Cost of reimbursement benefit based on the activities that we have already identified and started to pursue.
And do you want to respond, yes, actually I'll respond to the to the budget question two if thats okay.
Answer is yes.
We absolutely have the cost of.
New NGF panel development factored in to our budget and if it wasn't clear from chassis comments earlier, the exciting thing about the improvements that we're going to be making is in addition to ending up with a better product that also has improved turn.
And around time.
We'll end up with a product that has lower ongoing costs than what we're currently performing.
Okay.
Your next question is coming from Andrew Cooper with Raymond James. Please pose your question. Your line is live.
Hey, everyone. Thanks for the thanks for the questions here, maybe first just kind of a high level one on some of the comments around optimizing the service menu how do we think about or how do you think about balancing that and pulling out some of these custom customization as folks have asked for with.
The historical.
Language around being that one stop shop, having the broad menu keeping that NPS really high just as you think about narrowing down that menu a little bit is there anything we should be considering or or anything we should think about in terms of the relationship with customers there as that happens.
Thanks, Andrew I'm going to ask Dave to respond to that.
When we talk about rationalizing or optimizing the menu I don't know that were necessarily.
Talking about the.
Some of the assays that we have.
<unk> launch on the on the advanced diagnostic side that folks like and we're finding that given our our customer breadth. If you will from smaller community.
Based on colleges and pathologist all the way through to large medical centers.
Having having that variety of targeted versus comprehensive panels.
Panels and things like that does have relevancy I think when we're talking about optimizing the.
The complexity of our offerings and things like that it's more about some of the lower margin lower volume test that still require time.
In the lab.
To produce a result.
And really streamlining it on the lower end rather than rationalizing the higher end.
Okay helpful. And then if I can just sneak in one last one.
In terms of I think Bill you mentioned some of the costs stemming from the compliance matter. Just wondering if you could give an update there if if.
If anything is changed or is just continuing to work through but what you've accrued for is still still what you expect.
Thanks, Andrew There've been no changes with regard to the compliance matter. So we remain where we were in terms of any accruals.
Okay, I'll stop there to let others ask thanks again.
Okay.
Your next question is coming from Derik de Bruin of Bank of America. Please pose your question. Your line is live.
Hi, This is John on for Derek.
So given that other clinical labs haven't noticed any slowdown in oncology testing.
Wondering if there is.
There is more competition now or any particular competition thats, causing share loss or.
If there is anything special about your geographical mix that timeframe growth.
Thanks, John I'm going to ask bill to address that sure.
Just guess I'd reiterate what we talked about earlier.
In that.
We are seeing some increased.
Competition on the NGL front as panels move or as customers move to demanding larger more comprehensive ngls only panels and our offering is.
More oriented towards smaller targeted panels. So I think that is.
Competitive dynamics that we're experiencing and probably why you see a differentiation and our growth rate relative to those of some of our competitors.
Got it and thanks for the color on the.
The NDS matters earlier, but more specifically how does how did you and get turnaround time compared to peers now.
Okay.
Honestly, it's still a work in process for us I mean that is one of the key areas, we talked about the process excellence team to streamline.
Dreamliner approaches in the lab and a few key areas and Thats actually one of our few key areas.
So more to come on that.
Okay.
Your next question is coming from Alex Nowak at Craig Hallum Capital. Please pose your question. Your line is open.
Great. Good morning, everyone. I was just hoping you can give us some more detail around the CEO search process is the company looking entirely externally here or also looking towards board members that are internal to the company and then just when you go back a year ago, Neil had a very different cost profile than we do now something like 150 additional spend has been added so maybe just to keep it simple trying to cut.
The noise, where has that additional $150 million gone too.
How much is available to be called here as you look at cost containment.
Okay. Thanks, Alex I'll take the first question and let bill handle the second one in terms of the CEO search we are making good progress we are looking.
Exclusively externally with Russell Reynolds, helping us to source qualified candidates with regard to any individuals who serve in our current board. We don't make any comments about individual came to see for the role, but we are moving quickly as quickly as we can and it is online and the ports number one priority.
Yes.
Hey.
So thanks for the question, Alex I would say the cost increases have come from.
The variety of factors.
One obviously, we did acquire two companies both through our polo and.
Nevada, and so there is a significant amount of incremental cost that is associated with those two companies without any offsetting revenue yet at this point in time. So that's one two.
Not unique to us, but obviously, it's an inflationary environment and we have said that we've seen.
Our labor costs in our supplies costs going up about 6% on a year over year basis, three as I mentioned, we did staff up in our laboratory to prepare.
For a.
Rebound.
In volumes coming out of Covid, we haven't seen those to the extent that we expected.
So we will.
Very tightly manage any additions in the lab.
Right now.
Four we talked about the increased complexity of our.
Our lab operations, which is driving a decrease in efficiency or productivity.
And <unk>.
Causing us to take more people to do the same amount of work that used to be done with less people I.
I guess is the simplest way.
Putting that.
We also had a little bit of technical debt that we had to make up for.
And adding in some of our G&A structure. So those all have contributed.
I want to put a number right now in terms of how many how much cost we can take out.
As I mentioned, we've identified a number of immediate actions and we put a dollar amount around that.
We're still in the process of developing a more comprehensive plan.
To drive as I said step function improvements in productivity and efficiency and a return to profitable growth and until we have that plan.
Establish.
I just don't want it.
Throw out any preliminary targets.
Yeah understood I appreciate the update thanks.
Thanks Al.
Your next question is coming from Mark Massaro with BTG.
Please ask your question your line is live.
Hey, guys. Thanks for the questions, maybe one for a doctor Kulkarni.
One thing for a market leader in the space to come out with an 80 or 300 gene panel, but there are some labs coming out with full <unk>.
I guess I'm just curious.
Where do you think youll play in terms of the depth of sequencing and scale is in that 80 to 300 or 500 gene range or could it go all the way up to a full exome and then I also wanted to ask if radar is still on track. So I think you guys were planning a commercial launch in mid 'twenty two.
Love to hear an update as far as.
To what extent do you have the sales force in place now leveraging your existing salesforce versus having to make some <unk>.
Incremental hires and how does that marry with your cost reduction.
The reduction plan.
Thanks, Mark I'll ask <unk> to respond to the first part I'll give a general update on the status of greater and ask Dave to comment on the sales force Shashi.
Yes, Thank you Lynne.
Turns of the content.
Our.
New offering in GFS comprehensive genomic profiling.
The content we are.
Looking at would be more than 500 genes.
And as far as the whole exome.
Is concerned yes.
I think once we.
Like Dr. <unk> mentioned, we have to get to the standard and then set the standard later on.
We are going to.
Get to the.
Industry standard and become competitive anti NGF panel offering and then the next step is to obviously look at call Exxon.
Sequencing.
Very exciting.
Okay.
<unk>.
Im looking forward to develop is using whole exome sequencing as the diagnostic and therapeutic selection.
Yes, and then using the data from that for our bespoke assay. So that it has.
It creates.
A single solution from diagnosis disease monitoring.
We first need to fix what we have and then that will be our next step so all exon skip down to more normal.
And then following up with minimal residue disease is what I would be working on once we get to the next stage.
Thanks, Charlie.
So with regard to your question Mark about radar, we are in active discussions with multi acts as we speak and we anticipate either we will be on that midyear timeline or we won't be some of that is not within our control given those ongoing discussions.
Dave you want to comment on sales force sure. Thanks, Lynn, Yes, so we're actually preparing for success honestly.
Our hiring.
For the we call the Pms, that's our precision medicine managers that call on the oncology space.
So we are hiring through may.
To get that sales force ready and trained and then as far as internal preparation for training for the broader organization and all the other things that you do in prep for launch we are continuing those those as well so from a commercial perspective, we are preparing for success as planned.
Yeah.
Your next question is coming from Puneet <unk> with <unk> Securities. Please pose your question your line is live.
Yes, hi.
Thanks for taking my question.
Maybe first one on pharma if I may ask.
Could you, maybe just give us a sense of.
Why that number declined despite the significant backlog that you have and how should we think about the backlog conversion there and how is <unk>.
Labor inflation or cost inflation those.
Anything there that's impacting the pharma business, how should we think about the pharma business of world through the year.
Sure they'll go ahead, yeah, I'd be happy to do that so first of all in terms of the year over year decrease we did mentioned a couple of things one it was a very.
Tough Q1 comp as I noted.
March 2021 was the strongest revenue quarter that we've ever had.
In our pharma services business Secondly, we did have one big project that we were expecting.
A lot of work to happen in March that got pushed out until.
Later into the year, so that caught us a little bit by surprise on that front in terms of conversion from backlog to revenue Youre absolutely right.
We have seen a slowdown there for a while part of that was obviously attributable.
To Covid and trial activity.
Slowing down during Covid and it's possible that some of it is still related to a maybe slower than anticipated.
Bounce out of out of Covid.
Part of it is also related to the mix of the business.
We have.
Early on we had a weight of business that.
Heavily.
On on preclinical work, which tends to convert very quickly.
Over time more and more of the backlog consists of clinical trials work, sometimes worth that takes four years or longer.
Totally complete.
So that is impacting the pace of conversion as well.
In light of that that's why we are pursuing some of the activities that I described one trying to secure more preclinical work added the expensive trial work, but in addition to so that we can better balance out on the revenue front and two there are things that.
We can do to pull through revenue more quickly than we typically would.
Given on given projects in terms of inflation.
We talked about 6%.
Inflation on wage and supply cost and I don't think we've really seen any significant difference in our pharma services business than we have in our clinical business I would like to reiterate that.
We are.
Passing some of that through and the terms of price increases in both of those businesses.
Haven't seen the benefit from that.
Yet so that would be something that would show up later later in the year and into two.
<unk> 2023, but we are we are trying to respond to that inflationary.
The pressure with the price lever.
Okay.
Very helpful.
On.
The oncology piece can you just clarify.
Both for Ngls and <unk> side.
I think at one point you had plans to increase the sales force to 50, or so reps, maybe even more but where does that stand today and what's the new updated plan on that front and where do you stand today with the reps.
Thanks, I'll ask Dave to handle that yes. So we've actually decreased the high end of that number so we're actually hiring too into the low twenty's.
For <unk>, So I had mentioned that hiring is actually.
A little bit more than halfway done right now as I've mentioned, we're trying to get everybody on board by the end of May So that we can continue their training the new the new peoples trading as we continue to train those that we have and also expose the pbms as well that are calling on oncologists.
In preparation for for radar.
Okay. Thanks, guys.
Your next question is coming from Dan Brennan with Cowen. Please pose your question your line is live.
Great. Thank you. Thank you for taking the questions.
I guess multi part question I guess the first one is just on your base business based on clinical business ex <unk> I think we've.
Come to understand that business grows volumes high single digits, you'll have a little pricing pressure. So the revenue growth rate some are still in the high single digits.
Could you just speak to whether or not that's still a valid algorithm. Obviously this year things are off the table, but given the pressure on the base business, which you've discussed from these larger mgs offerings.
Just wondering if you could address that and specifically within those within your key modality IHG flow and fish.
Which of those to the extent that they are facing more question from Ngls.
Most subject to a kind of a de rating in growth. That's the first part of the question. The second part is just on competing in the larger NGL area.
I guess, what can we look forward to measure your early traction there.
The larger labs that youre looking to compete with spend a materially higher level of revenues on R&D and I'm wondering.
Should we expect R&D to step up materially as you look to push into that area.
Thanks, Dan I'll ask Bill to address the first part of the question and then let Dave comment Hey, Dan Thanks, a lot.
Thanks, a lot for the question I think in terms of growth in our legacy.
<unk> candidly the jury is out a little bit.
Clearly growth was impacted over the last two years because of Covid.
We expected to see a greater rebound coming out of COVID-19 than than.
What we have seen and so.
We are getting our arms around what is the sort of real.
Market growth rate in those underlying modalities today and what is our ongoing opportunity to continue to take share because remember historically.
Growth has been a combination of underlying market growth and market share market share gains.
I don't think we believe there is any reason that we can't continue to take market share as we look forward.
But in terms of what the underlying market growth as we probably need to do a little bit of work on that in terms of the modalities that are most impacted by Ngls I would say, where we see it in the in the most pronounced way is probably in solid tumor.
Fish testing where.
Things that were looked at using that modality can now effectively be analyzed.
Through.
<unk> panel, particularly when you have combination RNA.
DNA panels and you can do fusions.
Ngls and so I think that's probably where the greatest impact is.
There is certainly no real.
Cannibalization at this point I would say of cytogenetics or.
Flow cytometry, we see at less than inflation and candidly.
Most of the Mgs work that happens today on the solid tumor side still needs to be accompanied by IHG work.
So probably most most significantly.
On the solid tumor fish.
Yes, so on the cost side I guess I have a couple of perspectives on this I mean, one to a certain degree.
The front runners that have spent.
The vast majority of the.
Forces in money and time honestly as well.
Really driving into new new ground in new territory and to a certain degree some of the things that we're doing is they are fast or not so fast follower, we will benefit from from them.
<unk> got a little bit for us so I would say that being the.
The first mover when it comes to some of these technologies and proving the mouth, both analytically, but also clinically.
There is a higher cost and that with US now trying to prove analytical equivalency.
The second part I'll talk a little bit to something that Bill mentioned, which is.
I think it was a quick comment, but one that actually benefits us and that's the capacity.
The pharma business. So a lot of these technologies actually are being used and capacity is available.
Through the facilities.
For pharma as well that we can actually tap into and.
So the infrastructure is already there I guess is my point, so us leveraging that infrastructure allows us to keep the cost somewhat constant in that regard, but then also improving utilization of those facilities at the same time.
Great. Thanks for that maybe just one quick follow up just on the radar.
So it sounds like I know the guide has been for a while mid year and I know now you are basically saying it is kind of out of your hands, if something changed on that front I mean, I understand making.
Making timelines on regulatory decisions is really difficult because it is out of your hands, but net net the guidance has been consistently mid year. So has anything changed on that front and then related to that I guess, we had been anticipating high single digit revenue contribution I know there is no official revenue guide for 'twenty, two but it sounds like that high single digit revenue number probably it may not be.
Valid anymore.
Sure.
Thanks for that additional questions. So I'll have Dave comment on this first and then bill on the last question.
Yes, so the.
Timing of them.
<unk> is really not.
For anybody that's submitted something for reimbursement or for a coverage decision. It's basically the request for additional samples. If you will additional statistics are not a large amount. So we're actually negotiating with them right now are not negotiating discussing with them right now what that looks like.
And so.
So thats the best buy and everything so we have we have a plan based on feedback from our most recent conversation with them.
To review that plan hopefully in early may with them and.
And if the plan is accepted then we will be moving forward and if there's additional questions. Then we will respond to them in time.
Sure.
Yes, what I would say on the on the revenue standpoint is that.
We had not expected any kind of meaningful.
Revenue from radar, probably before 2024 for all practical purposes. So while we were going to have launch related activity.
To kind of seed the market so to speak the revenue that we had pointed.
From was on on the on.
On the pharma side.
And we remain optimistic we certainly have a lot of ongoing conversations with pharma companies for radar related projects and some of them are actually quite sizeable.
But we'll have to we'll have to see which of those make their way over the finish line.
Dave you want to add yes, and if I could just also because then that begs the question what are we doing with 2000 <unk>.
If there is a if it doesn't go our way.
Just to kind of get ahead of that question I'm sure. It's on People's minds. So we actually have these other launches that Josh was talking about with the DNA RNA long and comprehensive and we also have an ambition first loan product as well. So we're actually expanding the bag that <unk> will carry.
Regardless of what happens with.
With radar so those will not be stranded costs those will actually be productive cost as the plan is.
Okay. Your next question is coming from Jr. Savant with Morgan Stanley . Please pose your question your line is live.
Hi, guys. This is edmund on for cases, thanks for the questions two questions for me first on your pharma services business.
What does the preclinical and clinical work mix looks like right now in your pharma backlog today and over what timeframe do you expect the backlog conversion to start ticking higher.
And the second question would be on margins.
You talked about increasing pricing, what underlines underlies our confidence that the demand will hold up and recover to pre COVID-19 levels. As you guys increase your prices and how much pricing increase are you guys thinking of in terms of bids.
And then I'll ask bill to come on doses.
Sure.
<unk>.
Let me let me answer the second question first which is.
It will take some time.
Do you see a meaningful shift in the rate of backlog.
The conversion.
These are long large.
Long standing projects.
And while we will.
Work to add more quicker converting.
Projects to that mix.
It's going to take it takes some time for you to see it in terms of percentage.
I would say today, the backlog is comprised probably 75% to 80%.
The clinical trial work versus preclinical work.
Yes.
What was the I'm sorry was there another question.
What was the question and then if you want to repeat the question about.
Pricing.
In pharma.
We're just pricing increases in general I think was the question yet.
When we're thinking about.
Hot weather demand will hold up.
Okay, sorry, sorry about that.
So sue.
A as we said we are implementing.
Price increases.
We're not particularly.
Worried we.
Done this on the pharma side, we've seen.
Really no pushback.
We will be doing it on the clinical side.
I think the impact that any one.
Customer is going to experience will be relatively.
Modest and.
I think we're in an environment, where people are expecting and he used to getting.
Price increases.
There appear to be no further questions in queue. At this time I would now like to turn the floor back over to Lynn Petro for any closing remarks.
Thanks, Kelly as we end the call I'd like to recognize the over 2125 Neogenomics team members around the world for their dedication and commitment to building a world class oncology diagnostics and information company.
And on behalf of our Neogenomics team I want to thank you for your time and joining US this morning and for those of you listening who are investors or are considering an investment in neogenomics. We thank you for your support and interest in our company.
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.