Good day, ladies and gentlemen, and welcome to your NeoGenomics Second Quarter 2020 Earnings Call. All lines have been placed on a listen only mode and the floor will be open At this time, it is my pleasure to turn the floor over to your host, Doug Van Ort. Sir, the floor is yours.
Thank you, Tara, and good morning, everyone. I'd like to welcome everyone to NeoGenomics' Q2 2020 conference call. Joining me from our Fort Myers headquarters with social distancing precautions in place are Catherine McKenzie, our Chief Financial Officer Rob Shovlin, President of our Clinical Division and Bill Bonello, President of our Informatics Division and Director of Investor Relations. Joining the call via phone from locations across the country are George Cardoza, President of our Pharma Services Division Doctor. Larry Weiss, our Chief Medical Officer and Doug Brown, our
Chief Strategy and Corporate Development Officer. 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 represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunity. 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 1 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 the call back to Doug, I want to let everyone know that we'll be making a copy of our prepared remarks for this morning's call available on the Investor Relations section of our 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. This morning, I'll begin with some comments on quarter 2 results, some strategic actions we have taken to accelerate growth and our outlook for quarter 3. Catherine McKenzie will then provide a more detailed review of the quarter 2 financial results. I will wrap up with some summary thoughts on our strategy for operations and growing the business in these difficult times, And then we'll have time for questions and answers. As expected, quarter 2 financial results were challenging.
The revenue and profit loss caused by the COVID-nineteen pandemic were significant. Revenue was way below our trend. Margins were affected by the lower volume and also by decisions we made to invest in our business despite the pandemic. We made several strategic decisions in the Q2 to put us in a stronger competitive position to drive near term and long term growth. Those decisions are already beginning to show results and we fully expect a rapid and strong recovery in financial results in the Q3.
There are 6 noteworthy strategic decisions and investments that we would like to share with you. First, as a demonstration of the value we place on culture and people, we retained all of our employees during the crisis. With skilled employees available, we decided to build a COVID testing lab to do our part to help in the crisis. We started with a minimal level of testing capacity and now have steadily built capacity for the past 8 weeks. We currently have capacity to perform more than 10,000 tests per day, which we may scale up further.
We began to process COVID volume in the latter part of June and we have ramped that up considerably in July and anticipate a steady stream of business throughout the Q3. Our strategy for COVID-nineteen testing is to serve as a network reference lab for our hospital client labs and for commercial labs. In this way, we leverage our expertise by performing the molecular laboratory testing, but our partners perform the front end logistics in sample gathering as well as the back end reporting. As a result, our average revenue per COVID test will be lower than what you might see from other laboratories performing this full testing service, but our costs will also be lower. We have made sizable investments in equipment, supplies, R and D, people training and systems to get this lab operational.
For us, while we are benefiting financially from the revenue associated with COVID-nineteen testing, we view this service as short term in nature and not part of our overall strategy as a leader in oncology testing. Our intent is to partner with the lab industry to help the country combat this crisis. Although there is uncertainty about the amount of volume and duration of demand, we expect COVID-nineteen testing to result in incremental revenue and profit throughout the Q3 and into the Q4 as well. At this time, demand is so high that we have redeployed 50 employees and hired and trained temporary employees to perform COVID testing. Over the next several months, we expect our core oncology testing volume will continue to improve.
Should COVID-nineteen testing demand fall, we will scale back those dedicated resources and redirect some of our COVID testing staff back to our core oncology testing business. 2nd, we fortified our balance sheet by successfully completing an offering of common stock and convertible securities, resulting in net proceeds of $322,000,000 for our company. We used approximately $100,000,000 of the proceeds to repay our term loan and terminate the associated interest rate hedge, creating significantly increased financial flexibility for our company. The remainder of the proceeds are available to fund strategic investments and mergers and acquisitions. 3rd, we formed a strategic collaboration and made a $25,000,000 minority investment in Innovada, a leader in liquid biopsy testing technology.
As part of our deal, we have a seat on the Innovata Board of Directors and the exclusive option to buy the entire company. We also have the right to commercialize the Envision First Lung liquid biopsy test in the U. S. And to help commercialize their minimal residual disease test, which is currently in development. Envision First Lung is a highly competitive circulating tumor DNA next generation sequencing liquid biopsy assay testing 37 genes relevant to the care of advanced non small cell lung cancer.
The test covers all National Comprehensive Cancer Network or MCCN guideline recommended genomic drivers with FDA approved targeted therapies for non small cell lung cancer. The Envision first lung test is covered by Medicare and various private insurance payers and is one of just 2 NGS based liquid biopsy tests with specific Medicare coverage. 4th, we launched a suite of solid tumor liquid biopsy tests, including the Envision First Lung as well as the NeoLab solid tumor liquid biopsy and the QIAGEN TheraStream PIK IIICA test for plasma. NeoLab's solid tumor liquid biopsy is a highly sensitive and specific pan cancer NGS test for genomic profiling. We had previously announced that the assay was being validated and that we expected to launch it before mid year, and we accomplished that on schedule.
The TheraScreen PIK3CA test is an FDA approved companion diagnostic test for PIKRATE. As you may know, we have worked with Novartis on their tissue based companion diagnostic PIK3CA test and have a sponsored testing program with them. The PIK3CA liquid biopsy test accompanies the existing tissue biopsy test. 5th, we continue to invest in our pharma services business. During the quarter, we further established pharma specific testing capabilities, hired additional sales and business development people in Europe and Asia, and progressed with our China lab in collaboration with our strategic partner PPD, which is expected to be operational by the end of this year.
As you see from our quarter 2 results, pharma revenue was negatively impacted by trial delays resulting from the COVID pandemic, as well as reduced enrollment in existing trials. However, while patient access was an issue, net bookings of signed contracts were at an all time high, with $40,000,000 of new business signed during the quarter. Clearly, there is strong demand for our services and the current backlog of over $170,000,000 in signed contracts should pave the way for strong revenue growth over the next several quarters. Finally, we continue to invest in our informatics business. We continue to have substantial engagement from pharma companies, providers and payers and have already had some early commercial success.
As the leader in oncology testing, we are uniquely positioned to use the vast amounts of our valuable data to help solve real world problems for our customers and for cancer patients. And we are just beginning to harness the true value of our testing data and information. Our decisions to maintain our workforce and invest in growth opportunities has positioned NeoGenomics for a strong recovery. Based on current trends, we now expect to report organic revenue growth in excess of 20% for quarter 3. This growth will be driven by a combination of modest year over year organic revenue growth in core oncology testing as well as a boost from COVID-nineteen testing.
To give you a better sense of the pace of recovery in the core oncology business and some confidence in our quarter 3 outlook,
we thought it might be
helpful to share a few statistics related to our quarter 2 and early quarter 3 volume trends. The COVID impact on our testing volume was most severe in April, with volume down nearly 30% year over year. Volume began to recover in May and further recovery in June. In total, June 2020 volume was essentially in line with June 2019 volume, though still about 15% below our pre COVID expectations. Volume did get better each week in June with year over year growth in the last week of the quarter.
Volume trends have continued to recover in July, but we are not yet back to our pre COVID expectations. We have experienced a similar volume trend in our pharma services business. Obviously, there is still a great deal of uncertainty about the continued pace of recovery given the resurgence in infections, which is reflected in our expectations for quarter 3 growth. In summary, quarter 2 financial statements, our results were poor as expected due to the impact of the COVID pandemic. Nevertheless, we are confident that the actions we took in response to the pandemic have positioned the company for a strong recovery, and we believe that our competitive position and long term growth prospects are stronger than ever.
I'll now turn the call over to Catherine McKenzie, our Chief Financial Officer to discuss some of the details of quarter 2 financial results.
Thank you, Doug, and good morning, everyone. I will give a brief overview of 2nd quarter financial results. Consolidated revenue declined 14% year over year to $87,000,000 reflecting the impact of the COVID-nineteen pandemic. For the quarter overall, clinical division test volume excluding COVID-nineteen testing declined 18% year over year. Consistent with what we previously discussed, April represented our low for the quarter as test per day declined between 25% 30% in the month.
Fortunately, we experienced a sequential improvement in both May June. Volume in each week of June was better than the last and we are especially encouraged that the last week of June this year was better than the last week of June in 2019. Clinical division revenue per test was $3.51 down 1% year over year and down sequentially from $3.71 The revenue per test reflects lower revenues during the quarter on non contracted claims related to legacy Genoptix. As a result, AUP or revenue per test was unusually low in the quarter. We would like to note that we have now completed the Genoptix integration after just 18 months, despite the distractions from the COVID pandemic.
As a result, we are now in position to drive increased efficiencies, including improvements in billing processes and collections over the next several quarters. We continue to believe that our original synergy projections will be realized as expected. Pharma Services revenue increased 3% year over year to $13,000,000 Research oriented revenue growth remains strong, bolstered by the acquisition of HLI Oncology. As a reminder, we acquired the state of the art NGS lab in La Jolla, California in January of this year, giving us advanced NGS capabilities. Clinical trials work was down significantly as a result of the COVID-nineteen pressures on clinical trial activity around the world.
Despite the challenging environment, the Pharmatene continued to sign new contracts and grow the backlog of signed contracts. In fact, new contracts signed in the quarter were $40,000,000 representing the highest quarterly number yet and the backlog of signed contracts increased 63% year over year to $173,000,000 For the Q2, gross margin declined year over year to 32.2% as a result of the volume and of the COVID-nineteen pandemic. Operating expenses increased 5% or $2,000,000 year over year to $47,000,000 due to investments in informatics, pharma services growth initiatives and the acquisition of HLI Oncology. The increases were partially offset by lower commissions, significantly reduced travel and decreased trade show and marketing expenses. While we continue to fund our key growth initiatives, we remain disciplined in evaluating and controlling our operating expenses and other costs, and we have reduced or delayed certain expenses and capital expenditures where appropriate.
2nd quarter adjusted EBITDA was negative $7,200,000 reflecting the impact of significant volume declines and other challenges experienced related to the COVID-nineteen pandemic. And as Doug previously noted, we also made important investments in our people and other strategic initiatives, which we believe positions us for a strong recovery. Turning to the balance sheet, we exited quarter 2 with $295,000,000 in cash, excluding $36,000,000 in restricted cash designated for construction of our new state of the art laboratory and global headquarters in Fort Myers, Florida. Construction of that facility continues to be on track for opening in the fall of 2021. We were busy this quarter.
We significantly enhanced our financial position by raising approximately $320,000,000 in total net proceeds from our concurrent equity and convertible debt offering from late April. We utilized a portion of these proceeds to retire our outstanding term loan and related hedge for approximately $100,000,000 Additionally, we invested $13,000,000 as a part of a $25,000,000 total minority investment in and strategic alliance with Innovada that we announced in late May. We also received $7,900,000 in provider disbursements under the CARES Act, of which $4,000,000 was received during the Q2 with the remainder received in early July. Days sales outstanding increased 6 days sequentially to 92 days, primarily due to the distribution of our revenue in the quarter being heavily weighted towards June. As a reminder, we withdrew our full year 2020 financial guidance on April 9, 2020 in light of the COVID-nineteen pandemic.
While we are expecting recovery in the second half of the year, we recognize that uncertainty remains given the resurgence in COVID cases and potential downstream impacts. I will now turn the call back over to Doug to provide commentary on our key growth initiatives.
Thank you, Catherine. As I noted at the beginning of the call, quarter 2 financial results were quite difficult, but we expected as much. We made strategic decisions to invest for long term growth opportunities rather than cutting costs as a response to the short term reduction in volume. We think these were the right decisions. There is no disputing the fact that our decision to stand up COVID testing reduced earnings in quarter 2.
However, we believe that providing COVID testing is not only the right thing to do, but will prove to have been financially prudent. We started to see an uptake in testing volume at the very end of quarter 2, and that has grown considerably in the 1st several weeks of quarter 3. Our decision to retain employees during the pandemic despite the volume decline, also had a significant impact on profit in the quarter. Again, we believe this was the right thing to do, but also has long term cultural and customer service benefits for our company and the clients and patients we serve. One data point that supports this belief is our most recent customer survey Net Promoter Score.
We surveyed clients in the midst of the pandemic and received our highest response rate and highest score ever, with a score that is nearly tenfold higher than the average score for our peer group. We have competitive strategies that continue to change and evolve, but our fundamental business model remains unchanged. We try to lead with a culture that is purpose driven and values based, and we continue to believe that high levels of employee engagement drives high levels of customer satisfaction and retention, which in turn drives shareholder returns. Finally, we believe that our strategic decisions to invest in growth is enhancing our competitive positioning and will pay dividends in both the near term and long term. In fact, we believe that we are even better positioned for growth than we were before the pandemic hit.
We now have a full suite of liquid biopsy tests, which further strengthens our next generation sequencing product portfolio and solidifies our comprehensive oncology test menu. We also have a strong balance sheet to support further M and A. We have a very large backlog of Steins Pharma Services contracts and are well positioned for growth with an increasingly global presence. And we are advancing our informatics initiatives and are very excited about what that team has already accomplished. All in all, we continue to run our business for the long run and we are looking forward to a bright future.
At this point, we'd like to open the call for questions. Incidentally, if you're listening to the conference call via webcast only and would like to submit a question, please feel free to email us at bill.bonelloneogenomics.com during the Q and A session, and we'll address your questions at the end of the call if the subject matter hasn't already been addressed by our call in listeners. As mentioned at the beginning of the call, we'd 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.
Thank
We'll take our first question from Alex Nowak with Craig Hallum. Please go ahead. Great.
Good morning, everyone. I was just hoping you could provide some more details how you'd be rolling out some of these newer tests within liquid biopsies to the accounts. Do you expect you'll need to do some sort of higher level education with the physicians in the clinics that you're working with? Or is simply adding the test to the menu list enough to elect demand here?
Good morning, Alex, and thanks for the question. We actually have spent quite a bit of time with our marketing team launching the liquid the suite of liquid biopsy tests. And we do, as a normal course of business with product launches, provide a lot of education for our clients. And in this case, I would say that we're providing even more education than we typically do. These tests are a little different in as much as they are liquid versus tissue based.
Many of our clients have experimented with liquid based tests in the past, but many have not because we serve community oncologists and pathologists in hospitals. So there is a fair amount of education that we are doing and we have a terrific collaboration with Innovada to help us with that.
Okay, understood. And then just on the broader macro environment here, cancer is a little bit of a different disease than some others where you can't really defer diagnosis indefinitely. So just when you're thinking about your volume compared to pre COVID levels, is the primary delta here just that people aren't going in and getting screened and that's driving the real difference? And if so, is it really a function of just getting people to go back to their primary care physician getting screened for some of these diseases and then Neo's volume will come back as a
result? Well, we believe, first of all, that there is some pent up demand. But as you know, cancer patients are particularly vulnerable for COVID-nineteen. Their immune systems in many cases have been compromised and advice that they're getting from their physicians are if you don't have to come in, don't. And so there have been many cases where oncology groups have postponed or canceled semi annual visits.
There are a number of patients that have delayed surgeries. We've seen that throughout this time. We're worried, frankly, that there are cancer patients that aren't getting the right care. And this is a problem for our country and we're quite concerned about this. But we believe that as the pandemic eases that cancer patients will have access again to either their physicians or clinical trial sites and that our volume will come back to the pre COVID levels that we have experienced.
Okay, understood. Thank you.
Our next question comes from Puneet Souda with SVB Leerink. Please go ahead.
Yes. Hi. Thanks, Doug, and thanks for the details. And obviously, thanks for what you're doing to serve the community with COVID testing in these times. First one, given the capacity that you have 10,000 tests, could you help us parse out how much of that contribution is in the 20% organic guide?
And traditionally, your core business clinical revenue, it seems like it's recovering back to normal levels, but there is still some recovery left to go. But can you sort of tell us, given your past and traditionally you've delivered mid teens level of growth, Is that something we can potentially expect here by the end of Q3? Help us just parse out the 20% organic guide number.
Thank you, Puneet. Thank you for the question. I would first say that there is a fair amount of uncertainty in the numbers. We feel that the 20% revenue growth number that we provided is something that we have a lot of confidence in. I would say parsing it out that the core oncology business we said is recovering and we would expect some modest growth year over year there.
But as we said, if we can actually fill the capacity that we have, we have capacity today for about 10,000 COVID tests per day, but if demand continues, we'll continue to build that. If that demand is filled, we should be able to easily accomplish the 20% growth rate. So there's a lot of uncertainty. That's why we haven't given more detail about the components of that growth, but we feel confident in the 20% number.
Puneet, I might just Yeah, go ahead. Hey Puneet, it's Bill. I just want to reiterate that we did say in the script that the 20% consisted of modest organic growth in our core oncology business. So I just I don't want people to have runaway expectations about what volume growth in the core oncology business would look like in Q3.
Okay. I appreciate that clarification. On the gross margin front, I appreciate the investments towards doing these times into employees and overall facilities and capabilities to serve the market. But maybe can you just elaborate on that? Is this largely volume driven recovery?
Is that what you expect here? And sort of, I know you haven't provided the ASP on the COVID testing, but what sort of margin contribution should we expect from COVID and into the clinical business?
Yes. So overall, the margin profile in the COVID testing business is lower than our normal clinical testing margin just based on the way that we have the cost structure and bringing up the COVID testing. So you should expect that the margin on that will be lower than your historical clinical testing margin.
Okay. Thanks. And then on if I could ask on pharma services and liquid biopsy. Pharma services, can you if you can quantify the HLI contribution in the quarter, if possible? And it seemed like there were obviously samples that were collected over time that you were running through.
And is that still the case in the Q3 as recovery happens across the pharma base? And at what point do you think those samples you'll need more and more increasing levels of fresh trial samples coming in? And on the liquid biopsy front, if Doctor. Weiss can maybe chime into that too. You obviously have significant number of liquid biopsy launches here.
What are your expectations for liquid biopsy to grow this year and potentially next year? Should we think of this as in line with the NGS growth that you have seen or could this be potentially faster than that? Just help us understand the growth that we can expect from liquid biopsy given that there is already an existing market leading product that's been there for in the market for some time and this is a new entrant into the market. And by that, I'm referring
ten questions 10 questions in one. So I'm going to start with the HLI and then I'll turn it over on the lipo biopsy question. So for HLI, we're not going to be breaking out HLI contribution separately, but I will say it's consistent with the plan that we announced at the acquisition. That being said, HLI capabilities are more research oriented and we've shared that the research oriented projects are showing relative strength to the clinical trial. So you can kind of induce what the contribution was on the pharma services there related to HLI.
Doug, do
you want to talk through the glucobiopsy a little bit?
Yes. Doctor. Weiss, would you care to make a comment about that or should you would you like me to take
it? Sure, I can try.
As you mentioned, there are a number of liquid biopsy offerings as we roll out our products, we are just coming in line with changing consensus guidelines and we do not think we are too late to the game. I would expect to see growth of our liquid biopsy products a little more than our solid tumor, our tissue offerings. And I have high expectations for them over the next 2 years. Doug?
I can't add anything to that, Doctor. Weiss. It's perfect.
All right, great. Thank you.
Thank you. Our next question comes from Brian Weinstein with William Blair. Please go ahead.
Hey, guys. Thanks for taking the questions. Just kind of piggybacking on the last one, I like with biopsy. Can you talk a little bit more about how you expect to compete and how you expect to talk about the differentiation and what that differentiation really is in the liquid biopsy portfolio versus the other people that are in the market today? Can you highlight some of that for us?
Yes, Brian. Thank you for the question. First of all, I would comment that the market is growing. So the market for liquid biopsy tests is, as we've talked about and as many people have published is in the early stages and there's a lot of growth opportunity here. That said, we have a very strong market position with pathologists, with hospitals and with oncologists around the country.
And we also compete on the basis of having, we think, the most comprehensive oncology test menu. And many of our clients use us for a as a one stop shop for their cancer testing needs. And we would we believe that we will have good penetration of our liquid biopsy tests because first, they're very high quality. And second, because we are, I think, a trusted partner with our clients. They use us as a one stop shop, and I think that they will continue to do that.
The third thing is that I think that our liquid biopsy tests have very good terms. So they have very high quality as we have noted and the turnaround time we expect to be 7 days or less. And particularly, frankly, in an environment where you have COVID-nineteen, we think that there may be more uptake for a liquid biopsy test than even before.
I'd like to add a
reason, and that is that for the minority of our tissue specimens that have insufficient results, we can easily recommend a reflex to our liquid biopsy products.
All that makes perfect sense. Thank you. And then I'm curious about the competitive environment right now, just more broadly for all of your testing services. Curious if the pandemic has caused anybody to kind of any of your competitors to act differently. We've heard from some of the large guys out there, but curious what you're seeing as far as how they may be responding to this versus you?
And then also, you have a lot of smaller competition that's out there, we'll call them sort of mom and pops. Are you seeing any of those businesses be impacted and presenting an opportunity for you to either take share just by taking it or potentially through some M and A opportunities? Thank you.
Thanks, Brian. I would say that, first of all, I'm proud of the whole industry, to tell you the truth. I mean, our industry and I think particularly the commercial laboratories have done a fabulous job building COVID testing capacity And I think right now there's probably 700,000 or 800,000 tests performed on a daily basis for COVID and commercial laboratories are performing at least half of those from a standing start 4 months ago. So I'm very proud of the industry and what they're doing. I think a lot of the players in the industry have focused enormous amounts of their time and attention to fulfilling this need, this demand.
In terms of the smaller competition, frankly, we haven't really seen a lot of change yet, And I expect that there will be change. Our industry is naturally consolidated over the years, and I think that in many ways this COVID-nineteen pandemic may be an accelerant for more consolidation. As you know, we purposely fortified our balance sheet a couple of months ago, as Catherine commented, to be prepared for an environment in which there might be more competition. And we have been a consolidator, and I think we want to continue to be 1.
Great. Thank you so much.
Our next question comes from Steve Unger with Needham. Please go ahead, sir.
Thanks. Great job in a challenging environment. First question, just on the pharma services bookings, very strong. And I'm wondering if you could provide some additional color on sort of what the composition of that bookings is as far as service lines? And how are you doing on your international expansion?
That's my first question. And then I have a second question.
Well, I'll
comment very briefly and we have George Cardoza on the call, so he will want to comment further. But I would say, first of all, we have a terrific pharma services portfolio of service of products and a terrific business development team. And I am continually shocked and surprised by how effective they are. So we just had a review yesterday, frankly, and the contracts that they're signing are very broad. There's a lot of different clients that they're signing up and a lot of different kinds of testing modalities.
And our service, I think, is very strong. And we've actually hired a lot internationally. We've hired in Europe and in Asia and built our teams there where we have a lot of capacity in both Singapore and Geneva to fill those labs. So we are very focused on international expansion as part of this. But George, you may want to provide more detail.
Yes. No, that's right, Doug. I mean, our strength really has been across the board, certainly in NGS, certainly in multiomics. Doug talked about our informatics initiative and I think the pharma teams are really starting to see the value there. So that kind of number really was broad based across a lot of the modalities.
Our international labs continue to be up and running. They were clearly impacted by COVID, but our Geneva lab, we've sort of seen a similar rebound in June July with volumes coming back there. Our Singapore lab is newer. It actually just got Capra credited in December. So that's still sort of almost in a startup phase.
And then as we mentioned, the last piece of the puzzle really for us is China and we're working hard with PPD on plans there. So yes, it was extremely strong quarter on the booking side and obviously I think once the access comes back you'll really see the revenue conversion there.
Great. Thanks. And second question is just you've now completed the Genoptix integration and I realize there's been some variability in the revenue per test. Is there some form of guidance or color you can provide us as far as what you see that sort of stabilizing in the second half of the year?
Yes. We definitely had some variability in our revenue per test, specifically around the non contracted claims with Genoptix. And so now that the vast majority of those claims are going to be in network following the integration. Going forward, we're definitely expecting some more stability in our revenue per test as we're able to have them all in one billing system and really get those contracted claims out the door.
Steve, I would just add that I think Catherine mentioned that we completed the Genoptix integration in about 18 months despite the pandemic, which caused our sales folks to not be able to visit clients as they normally would. What we now have is all of our testing done on a common laboratory information system, as Catherine said, a common billing system, and that creates a lot of flexibility for us as we move tests around or have the ability to move tests around our network. And also, frankly, we were able to redeploy some folks in our Carlsbad facility to work on the COVID testing. So, and we feel very good about it. The team did a great job.
Great. And just a follow-up. So the revenue per test this quarter is likely to be the lowest.
We're moving higher from here?
Yes. I would expect this going to go higher. This is an unusually low A and P.
Got it.
Now remember, when you think about AUP, there's going to continue to be some volatility depending on just the type of revenue that's coming in the door and timing. But yes, it should be higher
going forward. Thanks. Appreciate it.
We'll take our next question from Jacob Johnson with Stephens. Please go ahead, sir.
Hey, thanks for taking the questions. Maybe on pharma services, can you talk about the competitive environment for this business line? I mean, is this like clinical services kind of all about customer service in a full suite of offerings? Or are there areas of differentiation? And then to what degree does the informatics effort kind of add to the differentiation here?
George, would you like to take that one?
Yes, absolutely. You're absolutely right. It is clearly about service. It's very common in pharma services for us to start with $60,000 $100,000 projects. You have to prove yourself.
You have to show them that you do a good job, then the scale goes up. And then obviously over time hopefully you turn them into multimillion dollar clients. So, but they're very service focused, very demanding clients and that's the nature of this business is serving their needs. Certainly we try to have every testing platform that they'll need whether it's NGS or immunohistochemistry, FISH, flow cytometry. We try to have the full suite of operations there, but the other compelling argument for us certainly is that we are global versus a lot of the smaller players.
We can handle their trials and we also have the ability to we're uniquely positioned in terms of companion diagnostics because we have the ability to go to them and say, we can work with you on the clinical trial phases, we can work with you upfront, get familiar with the assay and then certainly once you receive FDA approval we've got the largest share in the oncology market. We work with thousands of hospitals and oncology clinics and we can help you commercialize that test and that certainly is becoming a very compelling value proposition which is also helping fuel our growth. So I think it's our service, it's our platform, it's our companion diagnostics. Certainly the informatics and what's happening there is exciting. I think we are starting to harness some of the great information that we have from doing a 1000000 cancer tests a year and I think unlocking some of that potential I think is really going to bode well for us in the future as well.
Got
it. Thanks for that. And maybe sticking with George, congrats on the strong backlog in pharma services. I think you typically expect 70% of that backlog to translate to revenues over maybe 3 years. Does the environment we are in change your expectations for that at all in the near term?
Honestly, in the near term, yes. I think we have seen some trials push out. We have seen a couple of trials start up in July, which is very encouraging. Certainly in Q2, we were seeing typically to set up a clinical trial, they have to go out to the site, they to train the site, talk about the informed consent process. It's very hard when people can't travel.
A lot of sites weren't accepting visitors. So that seems to be easing a bit, but we have seen things slide out. So I do think COVID is still going to have an impact on us in Q3. And hopefully by the time we get into Q4 and Q1, we see sort of this more return to normalcy, but there still will be some short term drag in Q3.
Got it. Thanks for taking the questions.
We'll take our next question from Andrew Cooper with Raymond James. Please go ahead, sir.
Thanks. A lot has already been asked, so I'll just kind keep it short here. But just as we think about 2Q having a lot of moving parts in terms of certainly keeping everybody on and adding new folks for standing up COVID and less T and E and all those different moving parts. Maybe give us just a little bit of flavor of when you think about the OpEx lines both through 3Q and then longer term, what costs that you didn't necessarily intentionally take out, but if you think about being able to do some of those trainings for liquid biopsy and things like that, perhaps virtual, is there anything that's changed in terms of how you think about some of those cost lines that you could give us to sort of inform our thinking? That would be great.
Yes. Thanks for the question. So definitely as we're going forward, we're seeing a little bit of a change in the mix of OpEx. And so we're seeing great favorability when it comes to travel and conferences. And it will be interesting to see which of that actually comes back and where we've decided that even from investor and analyst perspective where Zoom and WebEx are good alternatives.
That being said, there is also a cost, an offsetting cost on a work from home environment and making sure that we're fortifying our IT and our cybersecurity and making sure that we have appropriate measures in place to make sure that we're keeping our data safe and our employees effectively working from home. And so the OpEx, while you'll see those cost savings in certain lines to sales and marketing, there's other offsetting costs as well. We are being as diligent as we can in evaluating the spend that's going through OpEx. And if it's not urgent and we don't need it from a strategic perspective, we are pulling back where we can. And so in the short term, we'll continue to keep that as one of our at the forefront of our discipline and making sure that we're being very clear on where we are investing in OpEx.
Yeah, that's a perfect answer. And I might just build on it by saying there are some strategic areas that we are continuing to invest, which are affecting operating expenses. For example, we are continuing to invest in informatics. We're continuing to invest in our pharma services division. We'll continue to invest, frankly in building our marketing team and our sales team in the clinical division.
So there are a number of growth oriented investments that will impact the operating expense line, but I think they are quite strategic and as Catherine said, we are trying to be as disciplined as possible.
Great. I'll stop there. Appreciate it.
We'll take our next question from Ivy Ma with Bank of America. Please go ahead.
Hi, good morning. Thank you for taking the question. So first question on margins. Appreciate the color on the expenses tied to COVID that you just talked about. You also mentioned COVID testing has a lower margin profile.
So I wonder what's the breakdown of the base business recovery, say, if the higher margin test volumes are recovering investments you just talked about, any color on the impact on both gross margin and EBITDA margin would be appreciated?
So thank you for the question, Ivy. I think similar to how we discussed earlier, there's still a lot of uncertainty on what that mix is going to look like in the back half of the year. We are seeing some modest improvement in our core clinical business, which will carry with it similar margins to our historical margins, both for clinical and pharma as that volume comes back. However, we have staffed up and we do have employees that we had for pre COVID volume. So I would expect that there's still going to be margin pressure until we return to more stable pre COVID volume.
And on top of that, the COVID-nineteen margin profile is slightly lower than our historical margin. So when you're looking over the next couple of quarters, I would expect that our margins will continue to be lower than what our historical margins have been. Over the long term, as volumes come back, we should see those come back to a more normalized level. Similar with the operating expenses in the near term, we're going to continue to invest strategically in OpEx. We're going to try to be as disciplined as we can, but you're going to see the impact of that lower margin come through on the EBITDA margin.
Is there anything you would add, Doug?
Yes, I would that's great, Catherine. I would just add maybe that as we get more experience with COVID-nineteen testing, maybe there are a couple of things to add. One is that we are continuing to automate the process, And so we're trying to improve the COVID-nineteen testing margins. And the other thing I would say is because of the nature of our COVID-nineteen testing where we are operating as a network lab, we don't have sales and marketing and G and A expenses associated with that. So the gross margins to the extent there are gross margins in the COVID business, they tend to fall right down to the EBITDA line.
Great. Thank you for the color. And second question, more longer term, bigger picture. So post COVID, do you see more outsourcing of oncology volumes in general? Basically, as we see more funding and stimulus plans going into other parts of the healthcare system?
Do you see hospital labs maybe building up more oncology testing capabilities? And how do you envision that, any impact on your business going forward? Thank you.
Well, thanks for the question, Ivy. I think most of the stimulus money and that has been either dispersed or is contemplated is really directed at COVID testing, not so much at other kinds of testing. And so right now, at least I don't see a fundamental shift as I look at the industry right now in terms of our clients performing more oncology testing. In fact, to some extent, they've been inundated with other things and they've tended to refer work out to us. So I think the same competitive advantages and positioning that we have had before would continue in
that sense.
Great. Thank you very much.
We'll take our next question from Bruce Jackson with The Benchmark Company. Please go ahead.
Hi. Thanks for taking my questions. Two questions on COVID-nineteen. First, could we get a dollar amount for the 2nd quarter? Was it like $3,000,000 $5,000,000 $7,000,000 And then secondly, some labs have talked about pooling samples from low prevalence areas.
I was wondering if that's something you're considering and if you've got with your geographic customer base, if you've got any low prevalence areas that you could take advantage of that?
Yes. Thanks for the question. So as we mentioned before, really the volume for our COVID testing came in the back end of June and really ramped up in the last few weeks of June. So it's fairly minimal for the quarter. It's about $2,000,000 for the quarter.
But I'll have Doug talk to you a little bit about pooling.
Yes, pooling is a good approach And you've seen the there's been a recent EUA approving that as an approach for areas in which the prevalence is low. So in our sample population, the positivity rate has been running in the high single digits. And so I think for us, pooling is not appropriate at this time, but certainly that capability exists. And I think when positivity rates come down to a level where it makes more sense to pool, then that's something that we could potentially do. And I know a number of the other labs where they can are contemplating pooling, and I think it will increase the capacity of COVID-nineteen testing.
And I think it's a good approach.
All right. That's helpful. Thank you very much. I'll hop back in queue.
For our next question, we'll return to Steve Unger with Needham. Please go ahead.
Hey, great. I thought I could just sneak one in here. I just wanted to clarify, your lab footprint is in California, it's in Texas, it's in Florida, it's in Georgia. Are you doing COVID testing just in California? And would you consider doing COVID testing in Texas if you're not?
Steve, we aren't performing COVID testing just in our Carlsbad, California facility. We've devoted a fair amount of space to it, probably 40,000 square feet, And we were lucky that we had the space there. We had not only the space, but we had the talent and it was easier for us to bring it up in Carlsbad. I think it would be more difficult for a lot of those reasons to bring it up either at Fort Myers or in our Houston, Texas facility. So right now, we're not contemplating
that. Got it. Great. Thank you.
And that's all the questions that we have in the queue at this time.
Okay. Thank you very much and thanks for all questions everyone. As we end the call, we would like to recognize the approximately 1675 NeoGenomics team members around the world who are dedicated and committed to building world class oncology diagnostics company and performing COVID-nineteen testing for our country. On behalf of our NeoGenomics team, I want to thank you for your time joining us this morning. For those of you listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company.
Thank you.
Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.