Neogenomics Inc (NEO) 2017 Q1 法說會逐字稿

Greetings, and welcome to the NeoGenomics First Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Douglas VanOort, Chairman and Chief Executive Officer of NeoGenomics. Thank you, Mr. VanOort. You may begin.

Thank you, Michelle, and good morning, everyone. I'd like to welcome everyone to NeoGenomics' First Quarter 2017 Conference Call. To begin, I'd like to introduce you to the NeoGenomics team here with us today. Joining me in our Fort Myers headquarters is Steve Jones, our Executive Vice President; George Cardoza, our Senior Vice President and Chief Financial Officer; Fred Weidig, our Vice President of Finance; Jessica King, our Director of External Reporting; and Rob Shovlin, President of Our Clinical Services Division. Dr. Maher Albitar, our Senior Vice President, Chief Medical Officer and Director of R&D, is joining us from our Aliso Viejo lab in California. And importantly, I'd like to welcome Bill Bonello, who has been on many of these calls, but who is joining us for the first time on this side of the line as our recently appointed Vice President, Treasurer and Director of Corporate Development.

Before we begin our prepared remarks, Steve Jones 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 risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Before turning it back to Doug, I want to let everyone know that based on popular demand, beginning with this call, we will be making a copy of our transcript for this morning's call available on the Investor Relations section of our website shortly after the call is completed. (Operator Instructions)

Thank you, Steve. In this morning's conference call, I will comment briefly on the company's first quarter performance, discuss the completion of our significant integration activities and review our initiatives, opportunities and expectations for the rest of the year.

Quarter 1 financial performance was largely in line with our expectations, although it certainly was not what we would expect to deliver under normal operating conditions.

During the quarter, we were laser-focused on completing the important remaining integration activities, all while maintaining high service levels. I'm pleased to report that the integration of Clarient is now 100% complete. However, the intensive integration work affected each month of the quarter and temporarily disrupted our business more than we would've liked.

Despite the fact that our sales force devoted a significant amount of their attention to helping clients manage through the integration change process, test volume grew by over 15% compared with last year to our highest levels ever. The mix of testing was less profitable, though, with a 40% increase in histology testing, driven partly by significant increases in the immuno-oncology test for PD-L1.

As a result of the product mix change, average revenue per test was down 9% and consolidated revenue was only 3% higher than last year. Since we closed the Clarient acquisition, revenue has been relatively stable. Growth from new clients has been subdued as our efforts have been primarily focused on transitioning all our existing clients to a single laboratory process rather than on new growth. However, now that the integration is behind us, we expect to more aggressively convert the customers in our pipeline and return to more normal and balanced test mix growth.

Aided by the higher mix of lower-cost histology testing, cost per test declined by 10% to the lowest levels ever achieved. However, even at those lower levels, our quarter 1 cost per test was higher than what we believe it should be under normal operating conditions. Our first quarter costs were impacted by significant increases in overtime and inefficiencies associated with winding down activities at our Irvine, California lab and consolidating all Southern California testing in our newly renovated Aliso Viejo lab. Despite these disruptions to our operations, the productivity of our lab personnel in the first quarter increased to its highest level ever. These massive disruptions also put pressure on operating margins in the quarter, with adjusted EBITDA falling to $7.1 million or 11.5% of revenue. Revenue recognition was also impacted by the timing of our California lab facility move, which occurred during the very last week of the quarter.

Before continuing my prepared remarks, I would like to take a moment and thank our clients for their patience over the last year as we've integrated Clarient and made changes to standardize our product offerings. Change is never easy, but we are now finished, and we are returning very rapidly to the exceptional service levels to which you were accustomed prior to the integration. We know that many of our clients listen to these calls, and on behalf of all our Neo employees, I want to express our heartfelt appreciation to you and thank you for your loyalty. We are getting stronger every day, and we are committed to delivering exceptional service to you and your patients on a consistent basis all of the time.

In order to more fully understand our quarter 1 performance, I would like now to provide more insight about the integration of the Clarient business. We are all very pleased, employees, clients and investors, that the Clarient integration is now done. This has been our most significant focus area during the past 5 quarters. It's important for all investors to view our first quarter results in the larger context of these accomplishments and how well they position us to grow and realize synergies.

Let's start by describing the move. The single most important event of the quarter was successfully executing the move of our fully functioning and extremely busy Irvine laboratory operations into the newly renovated Aliso Viejo lab facility. Several key activities needed to be accomplished flawlessly in order for this to be successful.

First, the Aliso Viejo facility itself needed to have all construction completed. Despite construction delays, our teams work to have the facility ready by March 25, the last weekend of the quarter.

Second, well-planned and detailed hour-by-hour plans to move all of Irvine's expensive and finely calibrated instrumentation to Aliso Viejo needed to happen flawlessly on March 26 and 27, while simultaneously meeting our clients' requirements. Testing was carefully choreographed between the sites in order to deliver test results to clients during this process.

Third, we needed to move all of our computer systems and network infrastructure, essentially unplugging everything and reinstalling hundreds of servers and computers and having an up and running again in a new location within a 24-hour period.

And fourth, we had to successfully navigate the cultural differences to combine 2 previously competitive laboratory and medical teams into 1 team in 1 location and have everyone seated and fully functioning on Monday morning, March 27. That was a massive undertaking. There are thousands of details involved in a move this complex, and it is fraught with risk. I am extremely pleased with our team's performance. They planned and executed the move flawlessly, and they demonstrated what NeoGenomics is capable of achieving. I personally was in Aliso Viejo the day after the move, and you would hardly have known that the move just happened. I couldn't have been more proud of our team.

Those of you attending our Annual Shareholder's Meeting and Investors Day on March -- on May 25 will be able to tour our newly renovated Aliso Viejo lab facility, and it's impressive. You will see over 50 automated immunohistochemistry instruments; a large number of sophisticated digital image analysis platforms; over 20 automated FISH and cytogenetics instruments; nearly a dozen advanced flow cytometers; a large number of next-generation sequencers and other molecular instrumentation and much, much more. You will also see one of the largest groups of highly trained, engaged and motivated employees ever to staff a sophisticated pathology lab. We invested several million dollars in the Aliso Viejo facility, and it is truly a first-class laboratory with a great team of laboratory professionals.

Retention of our great team of laboratory professionals is very important. Our people and our culture are vital to our success and our #1 asset. Therefore, we've made significant efforts to retain our key people and stay focused on our mission and values. In particular, we've made a number of changes to our commercial structure, operation structure and in finance. Our efforts have included reassigning people to more appropriate rules, realigning people in better teams, promoting people, training people, encouraging growth and making other changes necessary to strengthen our team. All of this has prepared us for the next stage of growth.

We are also in the hunt for additional talent and intend to build the dream team capable of capitalizing on the many opportunities we have in our business. Our appointment of Bill Bonello as an officer of NeoGenomics is an example of our efforts to strengthen our finance team. We are actively recruiting for more great people to join our team as well. We're pleased that retention of our key employees has been excellent, and that our efforts around culture are working, and that our people are engaged, excited and motivated.

Client retention is vitally important to us as well, and this also has been a key area of focus during this past 15-month integration period. Throughout the past year, as we've made many changes impacting our clients to standardize product offerings and improve our laboratory information system, our sales and customer-facing teams worked very hard to manage through these changes with clients and they have done a remarkable job. We're fortunate to be able to report that, as of today, we have retained nearly all of our clients. We are now working hard to return to the consistently rapid turnaround times and strong service levels for which we are known, and we are making good progress. We still have SWAT teams in place and extra effort is being made in this area, but we've made excellent strides and are intently focused.

I also want to comment briefly on the status of billing, which was also affected by the integration. I mentioned at our last call that our billing operations were stressed in the fourth quarter of last year, which resulted in a large backlog of unbilled claims at year-end. This was the result of significant changes in billing operations as we shifted all Clarient clients to the NeoGenomics billing system. On the surface, it appears that billing may still be moving in the wrong direction in quarter 1. Days sales outstanding ended the quarter at nearly 90 days compared with 85 days reported 3 months ago at year-end 2016. However, I want to assure you, billing is not moving in the wrong direction. In fact, it's a lot better than the DSO number would suggest.

Three months ago, we had over 33,000 unbilled tests in our system, representing about 21 days worth of unbilled work. At the end of quarter 1, our teams have reduced that to about 20,000 unbilled tests, representing about 11 days of unbilled work. As of today, the backlog is even lower still and is back to pre-integration levels. We have made additional hires and corrected a number of procedural issues. We still have work to do in our billing processes, but billing is getting back to its normal rhythm, claims are going out on time, teams are working hard on detailed processes and cash is beginning to come in. We expect DSOs to begin to come down in quarter 2 and to reach more normal levels in the second half of 2017. Our finance and billing teams are doing a remarkable job, and we appreciate them and their work.

I'd like to summarize my comments about the integration by saying, it certainly wasn't easy. But in just 15 months, we successfully assimilated a larger company with a similar-sized clinical lab operation into NeoGenomics. With the integration now complete and every customer being serviced from a single-lab information system and a common billing system and all by 1 highly dedicated group of NeoGenomics team members, we're happy it's done and this is the very last quarterly earnings call that we are going to talk about integration.

Now I want to comment about getting back to growth. I've commented previously about the strength of our sales team, and historically, we have demonstrated industry-leading levels of growth and market share gains. Since the acquisition, that growth has abated somewhat as our teams have focused largely on managing change for our existing clients during the integration period rather than focusing and closing new accounts. Thus, our growth has come largely from existing clients ordering more immunohistochemistry and molecular tests. Our sales team is now beginning to get back to what it does best, and that's sell. In fact, they can't wait. Pipelines are in good shape. And with our operations and service levels getting back to normal, they are ready to execute, once again, on their growth strategies. We expect this activity to begin to ramp up and begin to show better year-over-year revenue growth as the year unfolds.

We had 15% test volume growth during quarter 1, but that growth was not as tightly managed as is normal for us. Many clients came to NeoGenomics because of our capability in histology and PD-L1 testing, and our mix of business became somewhat different than we have had in the past. With more stable and normal operations, we are beginning to, once again, more actively manage our mix of business. Now that all clients are being serviced from the same systems and under the same processes, we have the necessary information to better analyze and evaluate profitability of our client relationships. We're going to get back to our normal process now to ensure acceptable levels of profitability by client. Clients that use our services for only 1 testing line, especially for histology-only testing, will be introduced more assertively to our comprehensive test menu as a way to improve growth -- both growth and profitability.

Finally, I want to comment on a number of areas that I'm excited about beginning with our pharma services division. Pharma services revenue was essentially flat at $5 million during the quarter. In fact, it's been flat for the past 3 quarters. During that time, we rebuilt our sales team and invested in other areas needing attention. We have a strong capability in immuno-oncology testing and molecular diagnostics. As a result, we are winning contracts and building our reputation for quality and innovation in this dynamic market. Encouragingly, our backlog of signed contracts is growing. At the end of the first quarter, our backlog grew to $41.5 million, up from $37 million at year-end and up 75% from quarter 1 of 2016. We expect this to begin to result in higher levels of revenue and profitability in coming quarters.

Our plans to open a new lab near Geneva, Switzerland to support European clinical trials are also moving along nicely. Recently, we received notification that our application for a 10-year tax holiday was approved. We are excited about being able to offer our services outside the United States, and our clients seem to be excited as well. We continue to expect the Geneva lab to be fully operational in the second half of this year.

We believe strongly in our pharma services business and that it has a great long-term growth potential, and we are planning to invest in it. The pharma business is important to our diversification, and it has the added benefit of helping NeoGenomics stay at the forefront of medical and scientific developments in the field of oncology.

I'm also excited and looking forward to moving our attention, once again, to growth as a result of innovation and great service and to being operationally disciplined to translate revenue growth into earnings and cash flow growth. As we've discussed in other conference calls, we believe we have tremendous opportunities to take market share in a growing market; cross-sell to capitalize on our comprehensive oncology test menu; partner with oncology groups; develop and grow our pharma services business; develop and commercialize liquid biopsy tests; develop information products based on our vast oncology database; add testing for early detection, predisposition testing and treatment monitoring; capture cost synergies from the Clarient acquisition; automate our laboratories; and participate in the future consolidation of our industry. Each one of these 10 areas are opportunities that we are actively pursuing. We believe that, individually and collectively, these opportunities can create a lot of value for our clients, our patients and our investors.

Now I'm going to turn the floor over to Steve Jones, our Executive Vice President and Director of Investor Relations, to review first quarter results in more detail and lead us through a Q&A session.

Thanks, Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter. First quarter revenue was $61.7 million, a 3% increase over the prior year and in line with our expectations for the quarter. Clinical genetic testing revenue increased 4.5% over the prior year to approximately $55.1 million, pathologic revenue decreased 16% to approximately $1.6 million and pharma services revenue decreased 2% to approximately $5 million. Average revenue per test was $354, a 9.5% reduction from the prior year and 3% below the quarter 4 level. This was slightly below our expectations and was the result of continued mix changes. In addition, quarter 1 was the first quarter that we had all tests being billed out of the same billing systems for the entire quarter. When we migrated the Clarient clients to the Neo billing system, we had to standardize pricing with the Neo pricing. In many cases, we had to bring certain client prices up to where the Neo pricing was. And in other cases, we had to bring certain prices down. Now that we have a good baseline for where our overall average revenue per test is settled, we believe it is prudent to reset expectations for average revenue per test in the clinical genetic testing business to $345 to $355. Recall that on our last call, we thought that we would be somewhere in the $355 to $360 range for the full year 2017.

Consolidated gross margin was 44.1%, 140 basis point decrease from the 45.5% reported in Q1 2016. This decrease in gross margin was driven primarily by the negative gross margin at PathLogic, but also by underutilization in the pharma services division. It is important to note that our gross margin in the clinical genetic testing business has not been impacted at all by the recent reduction in average revenue per test. In fact, the gross margin for this business was up about 10 basis points year-over-year to 47.5% in Q1, because the 9.5% reduction in average revenue per test was more than offset by the 9.7% reduction in average cost per test. Incidentally, $186 cost per test reported in Q1 was the lowest in our history, and it would've been even lower were it not for the added cost of overtime and other inefficiencies created by integration activities and the move.

As mentioned in the press release, now that the integration is complete, we expect to unlock the additional cost synergies from having all clients on 1 laboratory information system and 1 billing system and having all of our Orange County California employees in the same facility. As a result, we expect average cost per test will continue to fall and our clinical genetic gross margin will continue to expand. We believe that this, combined with growth in our pharma services division, will drive consolidated gross margin higher over the course of the year.

Consolidated SG&A cost increased by $2 million or 8% from Q1 2016, primarily as a result of increased personnel, bad debt and depreciation costs. Bad debt has been higher than normal for the past few quarters as a result of normalizing the reserves for former Clarient clients now that they are on the NeoGenomics billing system. We expect bad debt reserves as a percent of revenue to return to more normal levels as 2017 progresses.

Adjusted EBITDA decreased by 14% year-over-year to $7.1 million in quarter 1 , which was slightly below our guidance due to higher-than-expected inefficiencies and overtime charges incurred in connection with the move. Now that the integration is complete, we expect visibility into adjusted EBITDA to improve as the year progresses.

First quarter GAAP net loss available to common shareholders was negative $3.2 million compared to negative $5.5 million in the first quarter of last year and diluted EPS was negative $0.04 per share versus negative $0.07 per share last year. These reductions year-over-year were largely driven by a reduction of preferred stock charges as a result of redeeming 55% of the Series A preferred stock last December.

As disclosed in the press release and in previous earnings calls, we believe in order to compare the net income related to the true operations of the company on a more consistent basis across periods, it is appropriate to adjust GAAP net loss available to common shareholders to exclude: one, noncash amortization of intangibles; two, noncash stock-based compensation expenses that are partially driven by changes in the company's underlying stock price in any given quarter; three, noncash deemed preferred stock dividends required by GAAP accounting; four, noncash amortization of the beneficial conversion feature related to the preferred stock that is also required by GAAP accounting; and five, if applicable in any reporting period, any noncash impairments of intangible assets, acquisition-related transaction expenses, debt termination fees and other onetime or nonrecurring income or loss items. We refer to this measure as adjusted net income and, on a per-share basis, adjusted diluted earnings per share. And we have included a table with how this is calculated in our earnings release.

In the first quarter, adjusted net income was $2.6 million, an 11.7% decrease from the $2.9 million reported in the last year's first quarter, and adjusted diluted EPS was $0.03 per share compared to $0.03 per share in Q1 2016.

We finished the first quarter with 1,012 full time equivalent employees, contract doctors and temps versus 969 as of December 31, 2016. This is a milestone for NeoGenomics, as we now have over 1,000 employees processing over 600,000 tests on an annualized basis. During quarter 1, we added an additional 32 laboratory personnel and 9 sales and marketing and customer care personnel to help with client integration activities. Notably, we hired 10 IHC technicians in Aliso Viejo and another 5 since the end of the quarter to help with the increased IHC volumes.

Before opening up for questions, I would like to comment briefly on the quarter 2 and revised full year 2017 guidance we issued this morning. Given the difficulty of the integration efforts and the lower-than-expected average revenue per test in our core clinical genetic testing business, we believe it is prudent to lower growth expectations in quarter 2 and for the full year 2017. We expect quarter 2 revenue to be in the range of $62 million to $64 million and GAAP diluted EPS to be a loss of $0.04 to a loss of $0.03 per share. We expect adjusted EBITDA to be $8 million to $10 million and adjusted diluted EPS to be positive $0.03 to $0.04 per share.

For the full year 2017, we now expect revenue to be in the range of $255 million to $265 million and GAAP diluted EPS to be a loss of $0.10 to a loss of $0.06 per share. We expect adjusted EBITDA to be $39 million to $46 million and adjusted diluted EPS to be positive $0.17 to $0.21 per share.

The lowered guidance is largely the result for lowered expectation for revenue per test in the clinical genetic testing business. As mentioned previously, we believe it is prudent to assume revenue per test will decrease to $345 to $355 on average for the full year. We also expect average cost per test to decrease to $175 to $185 on average for the full year. These estimates factor in the continued evolution in our test mix toward lower-priced IHC test, although we do expect to get back to a more balanced growth footing later in the year.

Importantly, we will expect volume growth to be 13% to 17% for the full year with some volatility exhibited from quarter-to-quarter. So we're not changing our volume growth estimates. Our revised guidance also factors in some of the delays and recognizing more revenue in pharma services, and resets our growth expectations to approximately 18% year-over-year at the midpoint of our range, but we believe there is upside to this if we can begin to realize more revenue from the backlog quickly.

I would also like to remind everyone that we are planning on having our 2017 Annual Meeting of Shareholders at 8:00 a.m. on May 25 at Renaissance ClubSport Hotel in Aliso Viejo, and this hotel is just a mile from our Aliso Viejo laboratory facility. So following the Annual Meeting, we'll hold our first ever Analyst/Investor Day to highlight recent developments of interest and showcase our new lab. If you'd like to attend, please let us know by contacting Sherry Terzian, so that we can get the accurate account for the hotel. Sherry's contact information is at the bottom of the press release.

At this point, I would like to close down our formal remarks and open it up for questions. Incidentally, if you're listening to this conference call via webcast only and would like to submit a question, please feel free to email us at sjones@neogenomics.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 call-in listeners. (Operator Instructions)

Operator, you may now open up the call for questions.

(Operator Instructions) Our first question comes from the line of Kevin Ellich with Craig-Hallum Capital Group.

Congratulations again to Bill for joining the company. I guess going back to the guidance, Steve, and your comments about lower average revenue per test, is that all driven by IHC and PD-L1? And then how much of the reduced revenue guidance is due to the delay in pharma services revenue? And kind of follow-on of that is, that backlog is growing pretty nicely, up to $41.5 million. How long will it take to recognize those revenues? And kind of what's the incremental quarterly flow-through or grab-through that we should see on that business?

Thanks, Kevin. Thank you also for picking up coverage. We look forward to working with you. I'll take the first couple of these, and then I'll pass it to Doug to address the pharma services book-to-bill issues. With respect to the average revenue per test, we're basically coming down about $5 per test in our expectations for the year. If you recall, we were sort of $355 to $360. We're now at $345 to $355. So analysts should bring in their ranges to somewhere in the order of $350. Most of the reduction in the clinical genetic revenue comes from that. We do believe we're going to continue to see some pressure on PathLogic, so we may get a few hundred thousand dollars further reduction in PathLogic. With respect to pharma services, we're probably shaved about $0.5 million off of the revenue at the midpoint of the range, bringing the growth rates down about 18%, as I mentioned. And that's just a reflection of the fact that revenue in Q1 came in a little bit softer than we thought, and it's going to take a little bit longer than we thought to get the backlog to flow through into the revenue stream. And I'll let Doug address his thoughts on when that will start to happen.

Great. Kevin, thanks for the question. Relative to pharma services backlog and revenue, I would say that we're encouraged very much by the backlog. We have a very strong team in pharma services. We have very strong client relationships, which I think are getting stronger because of our service levels. But it does take some time once we've signed contracts to realize the revenue. These contracts range in duration from 3 months to 3 years, I think, as we said before. It sometimes takes 9 months before patient recruitment fully starts and gets into full rhythm. And so these bookings, we think will result in revenue starting later in quarter 2 and in quarter 3. We just put in place some good management tools to be able to track this better, and we'll have even better visibility into the backlog as that's -- and how that's going to be realized as revenue as we go forward.

Great. And then just one follow-up question. So DSO shut up to 90 days. I heard the comments about expecting it to come down in Q2 and then back to normalized levels in the back half of the year. I guess, what should we expect for normalized levels? And kind of in relation of that, free cash flow was negative $4.5 million this quarter largely due -- it looks to be to the working capital changes. What's really behind that? Was it the integration of Clarient and the move? Or can you give us any more color on the working capital changes?

Sure. Well, certainly, in terms of the DSOs, if you look back to the pre sort of integration levels when Clarient and Neo were first combined, we were in the low 80s. So certainly, I think that would be our target, probably be, I think, 82 to 85 would be a good range. Obviously, we always aim to do better than that. And yes, for the quarter, obviously, as Doug mentioned, we did spend a significant amount of money on the Aliso Viejo facility. It's also -- the first quarter is when all of the year-end bonuses are paid out. So there was a drag on cash for both of those items. And then certainly, the fact that the DSOs went up contributed as well. Our expectation is DSO should start to come down in the second quarter. And hopefully, by the third quarter, we're completely back to where we think we should be.

Our next question comes from Drew Jones with Stephens Inc.

I wanted to dig back into maybe pricing per test a little bit. Was there a group of testing -- a group of test that you saw a little more pressure than you had anticipated that you could call out as you consolidated everything under onto the same billing system?

Drew, we had a big increase in histology test generally, but PD-L1 testing was the test that grew the fastest among the histology test. Histology, as you probably know, carries a much lower average revenue per test, and that's what really drove down the averages.

And in PD-L1 testing, as we mentioned on the last call is about the $100 test. So it's even below the average histology test.

Okay. So it really was all with IHC and not a matter of maybe lower billing on the FISH or somewhere else?

No. The only other test, Drew, that declined somewhat was flow cytometry, and that was because of a Medicare decline. But as you know, that was a very small impact on our overall average revenue per test because Medicare is a relatively low percentage of our revenue mix at about 16% or 17%.

Okay. And then there was a pretty meaningful uptick in G&A in the first quarter. Does that sustain at those levels? Or do we need to think about maybe decreasing it a little bit now we've got the consolidated labs?

Yes. So we did incur quite a bit of overtime in relation to the move. And you also saw all the move costs in the G&A, about $351,000 of move costs that we broke out in the adjusted net income piece. And we also saw bad debt levels stay right around that 6.1% level that they were at in Q4 as we're normalizing things, and that was a higher amount of bad debt and higher percentage as well than we had in Q1 2016.

Our next question comes from Bryan Brokmeier with Cantor Fitzgerald.

You mentioned in the prepared remarks that you've relatively -- that you've retained nearly all of your clients. Last quarter, you'd discussed one small client that you had lost. Have you lost any others?

No. We're not aware of any other clients that we have lost, and we have a lot of efforts being expended to make sure that client retention stays very high. We do have some client relationships that are -- that we're watching very carefully. But so far, our client retention has been very high.

All right, great. And the lab consolidation is completed at the end of March, as you've mentioned. So you're now about a month past the real heavy lifting of that integration. Has the sales force begun targeting the 100 Clarient IHC-only accounts? And when do you expect to start to see revenue benefit from those efforts?

The sales team has a very, very strong pipeline. The pipeline includes cross-selling existing accounts and it includes also a number of new accounts. We are working with the sales team to build those pipelines and get ready when we are -- feel that we can handle more volume, particularly in histology and other areas. We will unleash the sales team. I think we're about ready. The service levels have returned over the last several weeks to more normal levels. All the metrics are moving in the right direction, and we're feeling very good about where we are and about ready to start to manage those sales pipelines more assertively.

Our next question comes from Joe Munda with First Analysis.

First off, Steve, you had mentioned some lab personnel numbers. I think you had said 32 added in the quarter and 9 salespeople. Can you give us a sense of what the total number is for both as it stands today or at the end of the quarter?

Well, I know the sales and marketing organization, which includes customer care people is right around 61, 62 people. The total lab headcounts are -- it's the single-biggest department in the company. George, do you have a feel for what those are? We'll get back to you on that one, Joe. But we added a lot of people to deal with the bottlenecks that have been created through the integration activities and then make sure the move went smoothly and certainly added a lot of people. We added 10 more people on IHC alone in Q1 and another 5 at the end of the quarter -- after the quarter was ended, and I believe we're still going to add another 5 on top of that. And so everything starts with IHC. When it comes in, you got to cut the blocks and whatnot. And if you get a backlog in IHC, it will create ripple through as the rest of your lab. And so getting that fixed was really, really important to us.

Yes. Our lab FTEs are right around 650 in terms of 1000. So again, almost 2/3 of our staff actually are in the COGS area.

Okay, that's helpful. Steve, just real quick, and as well, Doug. Listening to the LabCorp call, they had talked a little bit about some issues about converting revenue on the Covance side, in particular, oncology trials, some issues there, some delays. Are you guys seeing any of that as far as you guys are concerned in dealing with pharma, perhaps in-sourcing some of the diagnostic components involved with those trials?

Joe, we haven't seen any in-sourcing from our perspective. Some -- every pharmaceutical company is different. Some are moving very fast. Some tend to move a little bit slower, but we haven't seen, as of yet, any cancellations of any contracts we have. In fact, we see a lot of interest in an area that we have a particular expertise in, which is immuno-oncology. And it's not just PD-L1 testing, it's other forms of testing and other biomarkers. So we haven't really seen that.

Okay, that's helpful. As far as the Geneva lab is concerned, you expect it to come online later this year. Is that reflected in the guidance, in the current guidance? Or is there a possible upside from a contribution from that lab?

We believe we've reflected it in the current guidance.

Our next question comes from Carolina Ibanez-Ventoso with Janney Montgomery Scott.

You mentioned the lab headcount you have dedicated on IHC destined to meet demand. Could you also speak to the capacity of your consolidated lab for testing capability given the growth that you are experiencing now you'd see in both the clinical genetic orders and also in immuno-oncology with your pharma customers?

Yes. I'll try to comment on that, Carolina. We have capacity in our network. So in -- right now in Aliso Viejo, frankly, our histology lab is pretty darn full. Now some of that is because we haven't leaned it out, and we expect to get more capacity out of that lab in histology as we lean things out, but also as we move work around our network. You also know that we have a Houston lab, which we have capability to perform both pharmaceutical testing as well as clinical testing in that lab. We are growing that lab or actually moving that lab and creating more capacity there as well. So because we have a network of laboratories, we can move work around. And in the system, we have capacity and will continue to grow that capacity.

Okay, that's helpful. And then I was also wondering if you could give us a sense on an average -- like the stage of your different projects with pharma on average are (inaudible), earlier-stage Phase I or more advanced.

Our testing and our services for pharma really range from a biomarker discovery to Phase II and III testing. A lot of it, as I said, has been recently focused in immuno-oncology, and we feel like we are one of the few companies that have a capability to provide all forms of testing to pharma in a lot of different phases. So we do a lot of immunohistochemistry, but we also do a lot of next-generation sequencing. We are performing some FISH tests, some flow cytometry tests. So we have a wide range of tests that we offer or testing capabilities that we offer to the pharma industry, and we think it's relatively unique.

Our next question comes from Scott Billeadeau with Walrus Partners.

Just a quick one. With PD-L1, how many clients are PD-L1 only and there lies the opportunity to upsell and cross-sell? Do you have a pretty good sense of that? And maybe give us a little sense.

Scott, we don't have a lot of strictly PD-L1-only clients. We have a few, but we have quite a few histology-only clients, which includes PD-L1. And that's what we have as an opportunity in front of us to cross-sell, to offer our comprehensive menu in FISH and flow cytometry and molecular testing and other things. And that's what we are going to be working on.

Okay. And then maybe just as a follow-up to that. I think you said you're running pretty hot on histology. How about the capacity for FISH, flow, molecular and so forth? How's the capacity for that, for those types of things as -- if you get successful with some cross-selling?

Yes, we have capacity in FISH, flow cytometry, molecular testing. We just built 1 heck of a molecular lab in Aliso Viejo. We hope you can come see it on Investor Day. We have a lot of capacity in those areas.

And then maybe just one quick last question. About competitive, certainly trying to be the lab that works with the local oncologists instead of trying to take their business away. Is that still -- maybe talk a little bit about that strategy. Or is that still a key to the company and have the other guys -- is any change in the competitive environment out there?

Competitively, this is a tough industry, and we feel like we have a very, very strong business model. We're very happy with our franchise, serving hospitals and pathologists in community settings as well as in academics centers and cancer centers. So we think we've got a broad client-base. We're very happy with our ability to provide services to pathologists to help them grow their business and to help them compete in the marketplace. So we feel like we like our business model as much or more than we ever have.

Our next question comes from Kevin Ellich with Craig-Hallum.

I just wanted to follow up on the growth that you talked about. You said histology was up 40%. Did I hear you correctly, did you say PD-L1 is growing faster than that? And if so, how fast?

We said, Kevin, that histology was up about 40%. We didn't comment on the component of PD-L1, except that, that was a major component for the growth.

Got it. Okay. And then for the increase in DSO, was unbilled claims the only reason that, that has been increasing? Or was there anything else behind that?

Ellich, you have to think about it. A, the claims have to go out the door, but then if you have a backlog of unbilled claims even if 3 quarters of those get paid the first round through, you're going to have more denials to work as well. So you have the claims of, by and large, gone out the door, but we will have more denials to work in the second quarter than normal as well.

Got it, that makes sense. And then going back to the Geneva lab, you said it's reflected in current guidance. I guess, are we accounting for revenue contribution? Or is it more on the cost side? And if going to that point, what is the cost to stand up that lab in Geneva?

Yes. I mean we're not talking about a massive investment here, we're only talking about probably 10 to 12 people. And even now, I mean, we've just been trading emails back and forth with the landlords. So we're still -- we still haven't even signed the lease yet. So we do think we can have it up and running probably late third, early fourth quarter. But in terms of actually having it fully staffed and handling work -- and that's the reason why the revenue contribution will be de minimis this year, but we're really trying to get it stood up so that we can in some trials that we're already talking to pharmaceutical clients about. But really, we're expecting it to contribute fully to revenue in 2018.

Our next question is a follow-up from Drew Jones with Stephens Inc.

I just wanted to follow-up on a couple of different things. Trying to get a feel for how this growth is going to shake out in the second half and beyond, with the sales force that's largely been handcuffed here for the past, well, let's say, 15 months, did it stand a reason that the PD-L1 growth in demand has largely been inbound?

Yes. Drew, actually, that's exactly right. Because we have the capability and we -- initially, were one of the few labs that have the capability for PD-L1 and we had a distribution system, we benefited from a lot of PD-L1 testing. The sales team, as we said, I'm not sure I would use the word handcuffed, but they were very, very busy working with clients, training clients on our new products, helping them to transition to the new service offering. And now we have a process. Every month, we review every sales representative in the country's pipeline. And I can tell you, we just had a review a week or 2 ago and the pipeline is very, very strong. They haven't been sitting around just working with clients on transition, they've been building their pipelines. And so the growth, we feel very confident in, is going to happen in the second half and as we move forward.

And so it's not unreasonable to assume that you loosen the reigns there on the sales force that maybe some of that growth comes in higher ASP areas?

Yes, that's what we're targeting, Drew. We -- well, I said we're going to target a better mix of business. We're going to more assertively manage that mix. And if there are clients that are very low-priced, histology-only clients, they're going to be deprioritized.

Okay. All right. Great, guys. And so just to sum it all up, I'm sorry to keep harping on this, but you guys have not been doing PD-L1 at the expense of anything else. This is just kind of something that dropped into your lap?

Yes, that's correct. I would say, though, that the huge increase in histology has put a stress on our laboratory operations and that has caused us to work very hard on service levels, and that's -- affected things.

Our final question is a follow-up from Joe Munda with First Analysis.

Two real quick ones here. First off, if I heard this right, growth rate biopharma 18% for the year, is that correct?

Yes, that's the midpoint of the range. We -- again, we think there's upside to that. We're still getting a fix on how much of the backlog will pull through, how quickly. The oncology trials are more complex than your normal trial and generally take longer to get moving. Our sales force has done a great job of selling new clients. And the backlog consists only of signed contracts and signed statement of what works, but we're still getting our arms around how quickly those will pull through.

Okay. And then my last one on PathLogic. I mean, it's been a little bit -- well, it's been a drag on the business from my perspective at least, both on revenue and on the cost side. I guess, what are your thoughts on that business going forward? Can -- could you divest that business? Would somebody buy it? I guess, what options do you think are on the table to rightsize that business?

It's been a drag on the business from our perspective as well. PathLogic has consistently underperformed. It hasn't met our expectations in a few years now, and we are currently evaluating all of our strategic alternatives there, and we would expect to report more on that soon.

Thank you. There are no further questions at this time.

I've got a couple of email questions I want to interject here. How big is PD-L1 now and how sticky was that business? How much did this test get reimbursed versus the other tests you have? Are most of your customers sending you this now? Does PD-L1 account for growth of the company? What other categories are growing?

We've talked about a lot of these, I'll just give you some numbers. The PD-L1 test per -- our revenue per test is about $100 per test. Our average IHC test is about $166 per test. So it is quite a bit below the other average IHC tests. With respect to what's growing, as Doug mentioned, our sales force hasn't been selling new accounts in earnest. And so the FISH, the flow, the cyto, the stuff that wasn't being sold to new accounts has had more subdued growth, more in the single-digit areas versus the PD-L1 and IHC testing, which is coming in inbound, as Drew mentioned, in some of the molecular tests, which coming in more on the inbound basis, as those technologies involved and people want to get into that. So we are seeing a unbalanced growth in the last quarter or two, and we expect to get back to a more balanced growth profile as the sales force becomes more unleashed. We also have some more questions on PD-L1. Why hasn't this been a driver upside to the revenue? Greater internal focus, we've kind of answered these. And lastly, we had another one here. Is there any cannibalization going on with PD-L1 and the other test? And I would answer no, for sure not. This is just -- PD-L1 testing was additive to what we're doing. We just haven't been selling new clients on the other core business items. Doug, that's it for the questions we received via email.

Okay, good. Thank you, Steve. As we end the call here, I want to thank everyone for their questions and also like to recognize the approximately 1,000 NeoGenomics team members around the United States for their dedication and commitment to building a world-class cancer genetics testing company. And on behalf of our NeoGenomics team, I want to thank you for your time in joining us this morning. I want you to know that our second quarter 2017 earnings call will be on or around July 25, 2017. Thank you for those of you listening, who are investors or are considering an investment in NeoGenomics. We thank you for your interest in our company.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.