Neogenomics Inc (NEO) 2018 Q1 法說會逐字稿

Greetings, and welcome to the NeoGenomics First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Doug VanOort, Chairman and CEO for NeoGenomics. Thank you, Mr. VanOort. You may begin.

Thank you, Bob. Good morning, everyone. I'd like to welcome everyone to NeoGenomics' first quarter 2018 conference call. Joining me from our Fort Myers headquarters is Sharon Virag. Sharon Virag, who recently joined NeoGenomics as our Chief Financial Officer; Rob Shovlin, President of our Clinical Services Division; Steve Jones, Executive Vice President; Kathryn McKenzie, Vice President of Finance and Principal Accounting Officer; Jessica King, Director of External Reporting; and Bill Bonello, Vice President of Strategy, Corporate Development and Investor Relations.

Before we begin our prepared remarks, Bill Bonello will read the standard language about forward-looking statements.

This conference call may contain forward-looking statements, which represents 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 statements 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 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. We also want to let everyone know that we are going to limit the number of questions to 2 per person in order to give more people a chance to ask questions within the 1 hour that has been allotted for this call.

Thank you, Bill. For today's call, I will briefly review a few of the quarter 1 financial highlights and then turn the call over to Sharon for a more detailed review of the financial results. After that financial review, I will provide additional commentary on our 2018 growth initiatives and some of the investments that we're making to drive both near-term and long-term growth.

Let's begin with the quarter 1 financial highlights. NeoGenomics first quarter performance was excellent. Total revenue grew 10%. Excluding the contribution from PathLogic, which we divested last summer, revenue increased nearly 14% year-over-year. Clinical Services Division test volume grew 15% and revenue grew approximately 8%. Excluding PathLogic, clinical revenue grew 11%.

Pharma Services Division growth remained exceptionally strong with revenue up more than 40% and backlog up nearly 90%. We believe that both divisions are gaining market share in a growing market.

Importantly, we were once again able to grow profitably. Adjusted EBITDA increased 40% year-over-year and adjusted EBITDA margin increased by more than 300 basis points to 14.6%. The adjusted EBITDA margin on revenue growth was 44%, which is well above the high end of our long-term guidance of 25% to 35%. We were particularly pleased with our record level of cash collections in spite of challenges caused by regulatory changes.

Cash flow from operations increased to a record $14 million. Days sales outstanding was lower than at any time since 2015, and our financial position is strong. All in all, first quarter financial performance was excellent, and we are pleased to see continued momentum in both the Clinical and Pharma Services businesses.

At this point, I'll turn the call over to our Chief Financial Officer, Sharon Virag, for a more detailed review of quarter 1 financial results.

Thank you, Doug. Before I begin, I'd like to remind everyone that we adopted ASC 606, effective January 1, 2018. As part of the adoption of ASC 606, we have also restated 2017 results to reflect the adoption of 606 for all of 2017. Hence, the year-over-year comparisons that we discuss will include the adoption of ASC 606 for both periods.

The primary effect of adopting 606 is that bad debt, which had previously been accounted for in SG&A expense, is now recorded as an implicit price concession and shown as a reduction to revenue. There are also some changes to the timing of revenue recognition in the Pharma Services business, although these changes are not material.

The adoption of ASC 606 had the effect of lowering revenue, gross profit and G&A expense relative to the prior accounting methodology for both years; however, the impact on adjusted EBITDA is not material.

Our first quarter revenues were $63.4 million, a 10% increase from last year. After adjusting for the sale of PathLogic, total revenue grew by nearly 14% year-over-year. Clinical genetic testing revenue increased 11% to $57 million and Pharma Services revenue increased 43% to $6.5 million.

As Doug mentioned, clinical genetic testing volume increased 15% year-over-year. Importantly, this growth was balanced across modalities with double-digit growth in both flow cytometry and FISH, and more than 30% growth in molecular testing. Average revenue per clinical genetic test was $319, a 3% reduction from the prior year. This decline results primarily from changes to Medicare reimbursement and regulation.

Gross profit increased by $4.4 million to $27.3 million, up 19% from the prior year. This increase represents a 73% contribution on the $6 million of revenue growth. Gross margin improved by more than 300 basis points year-over-year to 43%. This improvement was driven by a 7% decrease in clinical cost per test as well as a 490 basis point increase in our Pharma Services gross margin from the prior year.

Operating expenses increased by $1.3 million or 5%, primarily due to investments in sales and marketing. And our first quarter GAAP net loss attributable to common shareholders was $2.2 million compared to a net loss of $3.7 million in the first quarter of 2017, and [at] diluted income per share was a loss of $0.03 versus a loss of $0.05 in the prior year.

We believe that in order to compare a net income related to the true operations of the company on a more consistent basis across periods, it's appropriate to adjust GAAP net loss, or income, available to common shareholders to exclude certain net noncash items and, if applicable, onetime costs. We refer to this measure as adjusted net income and, on a per share basis, adjusted diluted earnings per share. We've included a table with how these are calculated in our earnings release.

Adjusted EBITDA was $9.2 million, an increase of $2.6 million or 40% compared to 2017's first quarter. In the first quarter, adjusted net income was $3.7 million compared to $2 million in the prior year. Adjusted diluted EPS was $0.04 per share versus $0.02 per share in quarter 1 2017.

As Doug mentioned, cash collections were quite strong in the quarter. DSO increased -- excuse me, DSO decreased sequentially to 83 days in quarter 1 from 89 days in quarter 4. The improvement in cash collections drove a $16 million increase in cash flow from operations from negative $1.7 million in last year's first quarter to positive $14.3 million in this year's first quarter. This performance is especially notable as quarter 1 tends to be a challenging quarter due to high level of patient deductibles.

We ended the quarter with $15.2 million of cash on the books. Our total debt at the end of Q1 was $101 million as we repaid $2.9 million on the revolver during the quarter in addition to our normal quarterly principal payment on the term loan. At the end of the quarter, our total liquidity, including borrowing capacity on our revolver, was $45 million.

We finished the first quarter with 1,023 full-time equivalent employees, contract doctors and temps versus 1,009 at December 31, 2017, and 1,012 as of March 31, 2017. Nearly all of the increases were laboratory personnel to deal with increased testing volumes, and billing personnel to adjust to the complexities caused by new regulations.

We are maintaining our full year guidance for revenue and adjusted EBITDA. We continue to expect revenue to be in the range of $260 million to $272 million. We continue to expect adjusted EBITDA to be in the range of $39 million to $43 million.

On the quarter 4 call, we discussed a number of reimbursement headwinds, including cuts to Medicare rates for flow cytometry, IHC, cytogenetics and molecular as well as changes to Medicare 14-Day Rule, the draft national coverage determination, or NCD, for next-generation sequencing for advanced cancer patients and prior authorization.

Based on the trends we've seen to date, we remain comfortable that our guidance adequately captures any potential impact from these changes.

Our press release this morning includes a more comprehensive summary of our 2018 guidance, including EPS and adjusted EPS ranges and a reconciliation of non-GAAP measures to GAAP.

I'll now call -- turn the call back over to Doug to provide some additional commentary on our 2018 growth initiatives.

Well, thank you, Sharon. Before we begin the question-and-answer segment of this call, I would like to provide an update on our 2018 growth initiatives and some of the investments that we're making to drive both near-term and long-term growth.

Our outlook for near-term growth remains positive. During the quarter, we continued to strengthen our competitive position by adding several important managed care and group purchasing organization contracts. These type of arrangements with payers and hospital groups helped us to add a number of new hospital accounts, and the pipeline of new accounts is very healthy. Importantly, our service levels continued to be very strong and we are maintaining exceptionally high levels of client retention.

To meet increasing demand for our Clinical Division services, we are adding capacity. As previously disclosed, we are opening a small lab in Atlanta, Georgia, within the next month to provide rapid turnaround flow cytometry services to clients in that area. We already have an outstanding flow cytometry program, delivering extremely consistent and rapid turnaround time for clients. And this new lab will allow us to deliver even faster service to clients in the large Atlanta marketplace.

We continued to invest in our comprehensive oncology test menu. We introduced 9 new or enhanced tests since the beginning of this year. We believe our oncology test menu is the most comprehensive in America and provides an important one-stop shop for clients throughout the country.

In Pharma Services, we signed net new contracts of approximately $14 million during the quarter, and we ended quarter 1 with $73 million of booked contracts for future work. The number of new contracts being pursued by our Pharma Services team remains very robust. We are adding capacity and upgrading our capabilities significantly in Pharma Services.

Our new lab in Rolle, Switzerland is staffed, instruments are validated and has just begun to process specimens. We expect to ramp up project volume and be at a breakeven level by year-end.

We also are nearing completion of a new and significantly expanded lab in Houston, Texas. This 28,000 square foot purpose-built laboratory will primarily serve our Pharma Services Division with capabilities for next-generation sequencing and other molecular testing, flow cytometry and immunohistochemistry. This facility will also help us serve Clinical Services Division clients and can accelerate our growth in Texas.

We believe our prospects for long-term growth are also good, as the markets for oncology testing are growing, both due to demographic changes and to rapid advances in science and medicine. As a result, we are investing to position NeoGenomics as one of the leading oncology testing companies in the world over the long term.

Molecular testing, in particular, is an area of investment focus. In order to put this investment in perspective, I'd like to share some details about our existing molecular business. NeoGenomics is already one of the largest providers of molecular testing for somatic cancers in the U.S. In quarter 1, our molecular test volume grew more than 30% year-over-year to more than 40,000 tests. During the quarter, we provided more than 4,400 multi-gene panels, an increase of more than 80% from the prior year. Our run rate revenue for molecular testing is approximately $50 million.

We believe that our molecular testing capabilities are among the most advanced in the country, and that we have one of the largest molecular test offerings for cancer mutations in the U.S. We currently offer 157 different molecular tests and panels to our clinical customers and 162 to pharma customers in CAP-accredited, CLIA-approved testing facilities.

We offer single gene tests, over 30 multi-gene tumor profiles called NeoTYPE Cancer Profiles and larger panels of tests covering as many as 1,385 genes. We offer tumor mutational burden testing to provide information for new immuno-oncology therapies. We utilize all the major molecular technologies, including next-generation sequencing, Sanger sequencing, real-time PCR, fragment length analysis and microarray.

Our next-generation sequencing laboratories use platforms, including Illumina's MiSeq, NextSeq and HiSeq instrumentation; Thermo Fisher's Ion Torrent system; and a host of other technologies. NanoString's nCounter system is also available to pharma clients.

From a commercial perspective, clinical customers have the ability to customize their test requirements and our Pharma Services customers have even more significant opportunity to customize existing tests or to work with us to develop new tests. Our clinical tests cover every aspect of molecular oncology testing, including diagnosis, prognosis, prediction of response to therapy and detection of genetic predisposition.

With that background, I'd like to describe two of the significant ongoing investments in our molecular business. We are continuing to make investments to develop and support our multi-gene panels. However, as we discussed in the past, third-party reimbursement for these panels is currently sporadic, at best. Frankly, we lose money on a number of these panels, but we expect that reimbursement coverage will improve sometime in the future. We provide these tests because they are good medicine, our clients want them, they help differentiate us from the competition, and we believe that they will eventually be covered. One of our initiatives in this regard is to seek single-site PMA approval from the FDA for our large multi-gene next generation sequencing tests. We're currently in the process of filing our pre-submission letter. Obviously, this process is quite involved, and we are committed to invest in this important product development. We expect this initiative will lead to improved reimbursement in the future.

Molecular testing is a vitally important tool for physicians and researchers in their search to prevent, treat and cure cancer. We commit to lead in each area of our business, and we are making investments in molecular testing to competitively position NeoGenomics as a leader in oncology testing today, and for many years to come. I'll now hand the call over to Bill Bonello to lead us through a question-and-answer period. Bill?

At this point, we'd like to open it up for questions. If you are listening to this conference call via webcast only and would like to submit a question, please feel free to email us at bill.bonello@neogenomics.com during the Q&A session and we'll address your questions at the end if the subject matter hasn’t already been addressed by our call-in listeners. As mentioned at the beginning of this call, we would like to ask each person to limit their questions to 2 so that we may hear from everyone and still keep within the hour allotted for this call. Operator, you may now open up the call for questions.

(Operator Instructions) Our first question comes from the line of Amanda Murphy with William Blair.

I have a quick few follow-ups on some comments that you just made, Doug, around the sequencing panels. So, I guess, first with the FDA, so is your intention then to seek a PMA or CDx indications for the panel so that where you can be covered under the new NCDs? And any sense -- I don't know if you've gotten a chance to talk to the FDA about how they're looking at potentially using the clearance process for CDx claims, which I don't think they sort of have done yet?

Thanks for the question, Amanda. Yes, we plan to submit to the FDA a large panel, which would include companion diagnostic testing for existing companion diagnostic approved tests by the FDA.

Okay. And then just, I guess, sort of a broader question on the sequencing panels. I think there's definitely -- it's a question we get anyway from investors just in terms of the complexity of those panels and how many labs are able to do them, and I'm sure it varies obviously between single-gene and multi-gene. But maybe you could just walk through kind of what -- where -- how you think you're positioned well in that market? And do you think that market could change over time, particularly as some of the platform providers maybe also take their products through the FDA and sort of try to make a more distributable model. So just trying to look for your kind of, methodology-wise and data-wise, what are kind of your advantages there?

Yes. So we have a lot of multi-gene panels that are broken down into tumor type as we talked about in the past. We have -- we've typically sold these -- a lot of our billing goes to hospitals, as you know. And these panels have been extremely popular because they target driver genes and mutations, which have therapeutic implications. And so, those panels have been very popular. And as I mentioned in the prepared remarks, our growth in these panels has been spectacular. It's been about 80% even in quarter 1. We do expect that there are going to be changes here in these panels. Science is changing very rapidly. Our understanding of how these mutations in individually and in combination affect therapeutic alternatives, and physicians' possibilities relative to clinical trials is changing very rapidly. So we think that these panels will continue to be very popular, but we're also looking at through the FDA PMA process, a larger panel, which we are probably going to send a pre-submission letter within the next 2 weeks to the FDA for a larger panel, which we think will help us to be competitive over the long term.

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

Doug, just wanted -- I just wanted to start off with the Pharma growth, really nice performance there and nice improvement on the backlog. I guess, can you give us a little bit more color as to what's driving it? And clearly, with the $73 million of booked contracts, how should we see that flow through over the next 12 months?

Yes. Kevin, we think we have some good competitive advantages in Pharma. Some of the same competitive advantages that we have in our Clinical business also exist in Pharma, given that we provide immunohistochemistry, FISH, molecular testing, flow cytometry and also this proprietary technology called MultiOmyx for Pharma clients. So we are gaining business in each of those modalities, and we actually believe that we have very good growth potential in each of them. And a number of the contracts that we have signed are for MultiOmyx, for molecular testing; we are starting to even penetrate the flow cytometry marketplace with some new technology that we've added both in Switzerland and in the U.S. I believe that the contracts that we have in backlog are getting a little bit longer in duration because a number of our contracts now are Phase II and Phase III type of projects. So we expect that some of these are going be realized into revenue over a little bit longer period of time than we've had in the past. But as you know, the revenue has started to grow, we've started to realize revenue a little bit more quickly as our backlog has increased. And for the last 2 quarters, our revenue growth year-over-year has been quite strong and we expect that to continue.

That's helpful. And then, just wanted to see if you could give us kind of some general statements or kind of broader impact, what you've seen from the reimbursement changes PAMA, 14-Day Rule, any impact from next-gen sequencing?

Yes, let me try to take that, and Sharon may have a few comments as well. First of all, PAMA has not been a significant impact for us in this year. As you know, that most of our testing is paid for using the physician fee schedule rather than the clinical fee schedule and PAMA impacts the clinical lab fee schedule. So only cytogenetics and molecular testing are affected by PAMA. We do have a number of other impacts that I think Sharon mentioned in her prepared remarks that are changing our reimbursement per test. And I think Rob Shovlin, who is President of our Clinical Division, has some further comments on that.

Hey, Kevin, it's Rob. Good to talk with you again. So on the 14-Day Rule, just as a reminder, prior to January 1, 2018, the 14-Day Rule prohibited nonhospital reference labs from billing Medicare for any laboratory test performed within 14 days of sample procurement in a hospital setting. But under the new rule, which took first -- took place on -- effect on January 1, a nonhospital reference lab must bill Medicare now for certain molecular pathology tests that are performed within 14 days of sample procurement in a hospital outpatient setting. So now we go from billing our clients directly to billing Medicare. And that's -- really pertains to most of our molecular tests that have historically been billed to hospital clients. In many cases, the Medicare rates are slightly lower than our hospital rates, but based on the trends we've seen to date and what Sharon gave in her comments, we remain comfortable that our guidance adequately captures any potential impact from these changes.

Our next question comes from the line of Drew Jones with Stephens Inc.

The FDA pathway for the molecular panels, was that spend contemplated in the $5 million in growth spend that you guys telegraphed for 2018?

Yes, Drew, it was.

Great. And then, as far as the incremental margin -- the EBITDA margins on the incremental revenue in the quarter at 44% in a seasonally weak quarter. Maybe update us on the deployment of that growth spend and is that level of incremental margin sustainable from this point?

Drew, we gave guidance, I think, which we're going to stick to, which says that we expect 25% to 35% incremental adjusted EBITDA on the revenue growth. And I think that's a good benchmark for us. We were able to drive better than that adjusted EBITDA for the first quarter. The cost programs, cost containment programs, cost reduction programs, automation, scale advantages, that sort of thing, continued to allow us to drive good incremental EBITDA, but I think 44% is probably on the high side of what you should expect going forward.

Our next question comes from the line of Paul Knight with Janney Montgomery Scott.

Doug, you had mentioned $50 million run rate on the molecular tests. What was that a year ago? Or what was the growth rate year-over-year?

Paul, I don't actually know the answer to that question. Bill, do you? I think that...

Yes. I think, Paul, we have the data, but we're not -- we disclosed some of the molecular information on this call to give you a sense of what kind of player we are in the space, but it's not necessarily numbers that we're going to provide on a routine basis. We did say that our molecular volume grew by more than 30% in the quarter.

Okay. Got it. And then, my next question -- my second question is, pricing, average price down 3% in the quarter. Historically, it's been quite a bit more than that. Is this the new normal?

Is the 3% the new normal? I mean, I think as we work through -- I'm not sure on historical. We believe that the revenue per test decline was more around Medicare reimbursement cuts and then for some of the payer mix that we've seen. So we'll continue to work through those, but I don't know if I would consider that's the new normal, that it would be down. Anybody else want to add to that?

(inaudible)

We stick by our previous guidance that we've delivered that we expect average revenue per test to be $300 to $310 for the year.

Our next question comes from the line of Raymond Myers with The Benchmark Company.

Doug, first question is, beyond the pre-submission letter that you discussed, what are the milestones and timing to FDA clearance for this new large panel that you're seeking?

Thanks for the question, Ray. As you know, there haven't been a lot of these. There, I think, have been a couple that have gone through the FDA process. So we -- the FDA has indicated that these kinds of processes, they think, should take around a year, and that would be a -- sort of a benchmark for us. There's a lot of work to be done. And we have teams that are working on this and we have some consultants that are helping us. And we are -- we're hoping that, that kind of time frame works for us as well.

Great. And would the next milestone be the actual submission of something?

Yes. There is a pre-submission letter, which is going to be made very soon. And then, we'll have a meeting with the FDA. And there's a whole process that, that we would undertake. And this is a single-site PMA submission.

Okay, great. And then, second question is around -- well, for Sharon actually. Sharon, what's afforded the very strong Q1 receivables collection?

So the Q1 receivables collection was us kind of getting a bit of a handle on the day 14 or the 14-Day Rule and making sure that we've gotten education for our different customers, making sure that our billing teams are all getting all of the information that's necessary to kind of get that in order. And I think we showed that by the end of the quarter -- certainly at the beginning of the quarter as everybody was getting used to it from a new perspective. And I think we were able to get our handles on -- our hand on it. Anything else you would add?

No. We, as you know, Ray, have integrated the billing system with the -- last year, there was a lot of work going on to implement -- integrate the billing systems here at the company. And we think that the billing team and our billing process is really getting under strong management. We used to drive these kinds of DSO levels, and we're once again achieving the DSO levels that we achieved prior to the Clarient acquisition. And we've got a very good billing team, good billing processes. We're automating as much as we can there. And the cash collections, I think, were strong and reflect that.

Our next question comes from the line of Joe Munda with First Analysis.

Real quick, Doug, as far as cost per tests are concerned, I mean, you've been able quarter-over-quarter, year-over-year to strip out costs. I'm just curious how much more can you strip out from these tests going forward as we look out over 2018? Are we expected that cost per test will continue to outpace the reduction in revenue per test?

Yes. Thanks for that question, Joe. We have been successful in reducing our cost per test. There are a lot of reasons for that. And some of those reasons we expect to continue for some time. One reason is scale, and the volume growth that we're bringing in is -- we're using that volume growth on our existing platforms to drive a lower overall cost per test. We're also automating a lot of the work that we do. We're also deploying LEAN practices throughout our laboratories, we're also using our scale advantage for savings and supplies and that sort of things. So there are lot of tools that we're bringing to bear to reduce our cost per test. We think that, that can continue for some period of time. And we certainly expect that at least for the foreseeable future that our cost per test reductions will outpace the reductions that we're seeing in revenue per test.

And then, in regards to the tests themselves, in the quarters past, you talked a lot about PD-L1. I'm just wondering, how much of a contributor, to the extent you can tell us, how much PD-L1 was a contributor in the quarter? And how much of an impact did it actually have on overall average revenue per test? Was that a driver? I know you talked about Medicare reimbursement being an issue, but I'm just curious to get some state of how PD-L1 was in the quarter?

Yes, PD-L1 was a big growth driver in 2017, but that growth has pretty much annualized in quarter 1. So there was not a significant impact of PD-L1 in either our revenue per test change or our cost per test change in the quarter.

Okay. And then, a couple more here. In terms of the backlog, added roughly $14 million, correct, this quarter? I'm just curious, how much of that was new versus existing customers?

I don't have the exact breakdown, Joe, but I can tell you that, just my gut feel is that a lot of that came from relatively new customers. We have a sales team that is now, I think, the average tenure of our Pharma sales team is coming up on almost 2 years, and they're getting a lot of traction in the marketplace. They've approached a number of new clients. We have some very good relationships with a number of Pharma clients, both small and large. And I think that the projects, I think, many of them are coming from new clients.

Okay. Can you just remind us how many reps do you have selling Pharma Services?

Yes, we have 7 right now. And we just hired 1 in Europe. We're looking for another representative in Europe as well to support our lab there in -- just outside of Geneva.

And hey, Joe, this is Bill. To be fair to everybody else, we are going to try and stick to the 2-question limit. We let you sneak a couple extra in, but I think we'll have to end it there.

(Operator Instructions) There are no further questions at this time. I'd like to turn the floor back to management for closing comments.

Okay. Thank you, Bob, and thank you, everyone, for your questions. Before we end the call, I'd like to recognize the approximately 1,000 NeoGenomics team members around the U.S. for their dedication and commitment to building a world-class cancer genetics testing company. On behalf of our NeoGenomics team, I want to thank you for your time joining us this morning, and let you know that our second quarter 2018 earnings call will be held on or around July 24, 2018. For those of you listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Good bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.