Good day, ladies and gentlemen, and welcome to the NeoGenomics First Quarter 2020 Earnings Conference Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host for today, Mr. Doug Van Aort. Sir, the floor is yours.
Well, thank you, Jess, and good morning, everyone. I'd like to welcome everyone to NeoGenomics' Q1 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 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 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 will 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're going to limit the number of questions
Well, thank you, Bill. The format for today's call will be a little different than that of our typical quarterly conference call. I'll begin by discussing our response to the COVID-nineteen pandemic and the impact that we are seeing on our business. Catherine McKenzie will then provide a more detailed review of the quarter one financial results, and I will wrap up with some thoughts about our strategy for operating and growing the business in these difficult times. We'll then of course have time for questions and answers.
Let's begin with a discussion of our response to the COVID-nineteen pandemic. Fortunately, we were in a relatively good position going into this challenging time of COVID-nineteen. Our business is strong, it's profitable, and we have a good solid balance sheet with available borrowing capacity. We had positive momentum going into this crisis with both revenue and volume tracking at or above expectations prior to the onset of the virus. We strongly believe that we will come out of this crisis with positive momentum as well.
Our services are critical for cancer patients. We fully expect that when it is safe for cancer patients to seek treatment and when their oncologists and hospitals resume more normal patient schedules again, our test volumes and growth rates will gradually return to normal levels. In responding to the crisis, our guiding principle has been first to secure the safety and well-being of our employees and thereby to maintain the continuity of our critical oncology testing for cancer patients. Our response was also influenced by our desire to emerge from this crisis in a relatively superior competitive position. As a result, rather than implementing layoffs or furloughs, we focused on short term actions to invest in our workforce, competitiveness.
To protect our employees, early on we de densified our laboratories and facilities, adjusted laboratory shifts to put space and distance between our people, restricted visitors to facilities, restricted employee travel and implemented an emergency paid off time policy for employees who were personally affected by the virus. We also quickly implemented a remote work environment and provided training and support for that. For the past several weeks, we have had well over 2 thirds of our employees working productively from home. We communicated extensively with our employees and implemented a comprehensive array of actions in response to employee feedback as well as medical, scientific and governmental guidance. We have also been managing our supply chain carefully to ensure that we have adequate inventory to continue testing.
In certain cases, we added months of supply to our inventory levels. These actions have worked. Importantly, all of our main lab facilities have remained open throughout this crisis, and we have been able to continue all of our testing services with excellent quality and turnaround time without interruption or delay. We've also responded by doing our part to help our country. Although we are an oncology company, we do have extremely strong expertise in molecular testing and have dedicated a number of R and D and laboratory experts to develop COVID-nineteen testing capabilities.
Like some other commercial laboratories, we are now offering the PCR test and are ramping our capacity up quickly. Within the week, we will have capacity to perform over 5,000 COVID-nineteen PCR test per day. If there is demand, we can quickly ramp that up significantly higher. We also have invested in instrumentation and other equipment to be able to offer the COVID-nineteen serology test and should be ready soon. At this point, it is too early to estimate the financial impact from the COVID-nineteen test offering.
We do know that testing is critical to help people safely get back to work. A number of organizations have reached out to us for help and we are doing this because we feel it's the right thing to do. Overall, our team feels very good about the actions that we have taken in response to COVID-nineteen. However, the pandemic has had an impact on our business. Although clinical test volume was quite strong for most of the quarter, it was only up 7% for the full quarter compared with last year because in the last 2 weeks of March, it was down by approximately 20%.
In April, clinical test volume declined slightly more and was down between 25% 30% year over year, although it has appeared to stabilize on a week over week basis. The volume decline is understandable. In many regions of the country, oncology practices reduced their hours of operation and postponed or canceled patient appointments. Similarly, many hospitals reduced surgeries as they devoted resources to COVID-nineteen preparations and urgent needs. Cancer patients, some of whom have compromised immune systems, were reluctant to see physicians even if they were available.
We believe this is a temporary condition. We have also seen an impact on our Pharma Services division revenue as some clinical trials projects and our backlog of signed contracts have been delayed due to COVID-nineteen. Sponsors have told us that they are unable to start certain new clinical trials as that effort typically involves visiting enrollment sites to train on-site staff. Clinical trials typically account for about 50% of our business. The other half of our pharma services business is largely in support of pharma companies' research and development work and that has not been affected by the pandemic so far.
Significantly and encouragingly, we have not seen an impact on the amount of new pharma services contracts we are signing. In fact, we signed contracts for an additional $28,000,000 of new business during the quarter, our 2nd highest bookings quarter of all time. Like most companies, NeoGenomics has not been immune to the impacts of this unprecedented situation. Unlike a lot of companies though, we have not furloughed employees or reduced our employee levels. Although it may reduce short term profitability, we are investing in our people and our culture.
We're providing more training, more development and even a small cash bonus of appreciation to those employees that are on the front line working in one of our laboratories during this critical time. Our employees are responding very positively and we believe the level of employee engagement and our culture is as strong as ever. A strong team is an important competitive strength of our company. I think you would be as proud as I am about our NeoGenomics employees' response to this unprecedented situation. Throughout this crisis, they have continued to provide critical testing services to cancer patients with excellent quality, turnaround time and customer service.
My hats off to them. I will now turn the call over to Catherine Mackenzie, our Chief Financial Officer, to discuss some of the details of quarter 1 financial results.
Thank you, Doug, and good morning, everyone. I will give a brief overview of Q1 financial results. Consolidated revenue increased 11% year over year to $106,000,000 First quarter results include modest contribution from the acquisition of the Oncology Division assets of Human Longevity on January 10. The Genoptix acquisition was completed on December 10, 2018. So Genoptix results are fully reflected in the 2019 comparison.
We estimate that the COVID-nineteen pandemic reduced 1st quarter revenue by approximately $4,000,000 due to reductions in clinical services testing volume and delays in pharma services work. In the Q4, clinical division test volumes increased 7% year over year. Prior to the impact of COVID-nineteen, we were once again seeing growth across all testing modalities with particular strength and next generation sequencing and molecular testing. We estimate that the COVID-nineteen situation reduced clinical volume by at least 4% during the quarter. As Doug mentioned, clinical volumes were down approximately 20% in the last 2 weeks of March and between 25% and 30% in April.
Clinical division revenue per test was essentially flat both year over year and sequentially at $3.71 Revenue per test was not significantly impacted by the COVID-nineteen pandemic. Pharma Services revenue increased 39% year over year to $13,000,000 This increase was primarily due to additional next generation quarter 4 of last year. We did have 2 very large projects complete in quarter 4 of last year. Also, several large projects that have been scheduled to start late in the quarter have been delayed by several months due to COVID-nineteen. Despite the challenging environment, the pharma team continued to sign new contracts and grow the backlog of signed contracts.
New contracts signed in the quarter were $28,000,000 and the backlog of signed contracts increased 47% year over year to $148,000,000 The acquisition of HLI Oncology increased backlog by approximately $15,000,000 Excluding the contribution from HLI Oncology, the backlog grew approximately 32%. For the Q1, clinical services gross margin was down approximately 300 basis points year over year to 47.4 percent and our average cost of goods sold per clinical test also known as our cost per test increased by 7% year over year to $195 These impacts are mainly due to the lower than expected volume levels and additional expenses caused by COVID-nineteen. Pharma Services gross margin decreased to 17.7% in the 1st quarter, primarily due to lower revenue resulting from the timing of projects. As a reminder, we have been building an independent testing capacity for the pharma services business to support our growth projections and this has resulted in a temporarily negative impact on pharma services gross margin. With a signed contract backlog of more than $145,000,000 the pharma services business has reached a scale which necessitates its own testing infrastructure.
We believe that having pharma testing decoupled from clinical testing will enhance efficiency in both divisions over time. However, this change results in short term decreases in cost effectiveness in each division. This quarter also reflects the acquisition of the oncology division assets from HLI on January 10, 2020, and we expect the acquisition to be dilutive to gross margin this year. Gross margin was also impacted by costs associated with the COVID-nineteen pandemic. We continue to expect that pharma services gross margin will expand to levels at or above clinical division margins over time.
General and administrative expenses increased 13% or $4,000,000 year over year to $36,000,000 in large part due to the addition of HLI Oncology and the associated acquisition related expenses. Sales and marketing costs increased 18% year over year to $13,000,000 driven by the expanded size of our overall sales team and commissions on higher revenues. While we will continue to fund our key growth initiatives, we are being prudent in evaluating our operating expense and other costs and reducing or delaying certain capital expenditures where appropriate. 4th quarter adjusted EBITDA was $7,100,000 which was approximately $1,000,000 lower than the guidance that we provided in February. The shortfall relative to guidance is due entirely to the COVID-nineteen impact.
As we discussed in our last earnings call, Q1 adjusted EBITDA was negatively impacted by a number of factors in addition to the COVID-nineteen impact. Most significantly, our pharma services revenue was lower than normal simply due to the timing of new project starts and stops. As we noted earlier, our new business wins remain robust. We exited quarter 1 with $125,000,000 in cash, including $39,000,000 in restricted cash designated for construction of our new state of the art laboratory and global headquarters in Fort Myers, Florida. Cash was reduced by approximately $37,000,000 during the quarter for the acquisition of the oncology division assets of Human Longevity.
We ended the quarter with $104,000,000 in total debt, including our financing obligations. We have approximately $103,000,000 of available borrowing capacity on our credit facilities. DSOs increased 5 days sequentially to 86 days due to revenue from retroactive rate increases secured late in the quarter and timing of pharma and informatics revenue. Cash used in operations was approximately $7,000,000 for the quarter. Cash from operations was reduced by approximately $6,000,000 from increases in inventory as we adjusted our supply chain management strategy for our COVID-nineteen environment and $3,300,000 for costs related to the construction of our new Fort Myers headquarters, which is included in operating cash flow as well as acquisition related expenses.
As a reminder, we withdrew our full year 2020 financial guidance on April 9, 2020 in light of the COVID-nineteen pandemic. I will now turn the call back over to Doug to provide commentary on our key growth initiatives.
Thank you, Catherine.
I would like to take some time to discuss further our strategy for operating and growing the business in these difficult times. We believe that we are well positioned competitively with excellent growth potential and plans, and we are continuing to invest in important and compelling growth initiatives. Obviously, we're closely monitoring and containing our costs. While we're continuing construction of our Fort Myers laboratory and headquarters facility, we are substantially scaling back or postponing plans for changes and upgrades to all other facilities. We are not hiring unless it's strategically important.
We are continuing to invest in automation as that will allow us to continue our long term improvement in cost per test. While volume levels remain lower than normal, we are engaging employees in activities to better prepare for that growth by sustainably improving processes to improve turnaround time, enhance customer service, strengthen our test menu and decrease cost. Our sales team is also engaged in value added activities and planning, and I must say they are fired up. As I mentioned, we are also redeploying a certain number of employees to be able to perform COVID-nineteen PCR and serology testing in order to help fill the capacity to support America's needs. We realize that some may question our decision to retain employees during this temporary volume slowdown.
And we are also aware that it will have a short term impact on earnings. However, we believe this is an investment worth taking. Based on our experience in this business, having an experienced, skilled and loyal workforce is necessary to accommodate the rebound in test volume we expect as the crisis wanes. We feel fortunate that our company is strong enough that we can invest in our workforce in this current environment, and we believe that this investment will allow us to We We will continue to make growth investments, particularly in next generation sequencing, pharma services, informatics and companion diagnostics. Next generation sequencing remains an area of particular focus for us.
We plan to continue our substantial investment in this area and expect to introduce several new products in 2020. Liquid biopsy is one area of particular interest for us. Although the market is still relatively small, we expect it to grow quickly. Our validation of a pan cancer assay is proceeding, and we expect to introduce a pan cancer liquid biopsy test by the middle of this year. We are also expanding our offering of RNA based next generation sequencing assays for both solid tumor and hematologic malignancies.
We are developing a rapid next generation sequencing panel designed for acute myeloid leukemia, which often requires prompt treatment. This panel will replace the rapid AML therapeutic panel comprised of both single gene molecular and FISH assays that we released earlier in the month. Finally, we continue to investigate assays for identifying minimal residual disease, particularly for hematologic neoplasms. Another area of focus is pharma services. While we're seeing some near term disruption in clinical trials projects due to delays in the timing of clinical trials, we continue to sign new contracts for future work.
Our broad global testing capabilities to perform both research type work and clinical trial support continues to be in strong demand. Our multiplexed immunohistochemistry, expanded flow cytometry and new next generation sequencing capabilities are unique, and companion diagnostics projects are growing rapidly. As many of you know, we made an important strategic move to expand our pharma services next generation sequencing capabilities with the acquisition of the Oncology division assets of Human Longevity Inc. In early January. This lab provides germline, whole exome and whole genome sequencing specifically for pharma companies.
This business generated approximately $10,000,000 of revenue in 2019 and ended the year with a backlog approximately $15,000,000 of signed contracts. Thus far in 2020, the business is performing in line with our initial forecast despite the COVID-nineteen situation. We are also continuing to invest in our informatics division, both in terms of product development and early commercial engagement. We expect this division to be an incremental source of revenue in the long term, while strengthening our competitive position in both the clinical and pharma services divisions. We are still in the very early innings in terms of product development, but we already have significant engagement from various stakeholders including global pharmaceutical firms, large national health systems and major managed care payers.
Importantly, we continue to create synergistic opportunities across our 3 divisions, particularly with regard to companion diagnostics. We have agreements with several large pharmaceutical companies to provide day 1 commercial launch services and advanced analytical support for companion diagnostic testing associated with drugs in the late stage pipeline. Few labs have our same ability to take an oncology companion test across the continuum from development through clinical trials and into the market. While we will be particularly sensitive to liquidity in this current environment, we will continue to consider select strategic financially prudent acquisitions and investments, particularly in the areas of growth opportunity that I just discussed. In summary, the short term environment will be challenging.
We are seeing an impact on revenue in both our clinical and pharma services divisions, and we are likely to see a near term impact on earnings. However, these near term challenges are entirely attributable to the COVID-nineteen pandemic and should dissipate with time. We remain excited about our long term opportunities for growth. Our leading position in the market is providing is proving to offer significant sustainable competitive advantages today and we are working hard to make our competitive position even stronger in the future as we pursue our vision to become the world's leading oncology diagnostics company. I'll now hand the call over to Bill Bonello to lead us through a question and answer session.
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. Banelloneogenomics.com during the Q and 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 the call. Operator, you may now open the call for questions.
We'll go first to Puneet Souda at SVB Leerink.
Hi, Doug. Thanks. So first, on the recovery, sort of post COVID, I know timing is hard to nail down here, but could you give us a sense of the strength of recovery that we should expect here among the in the community setting? After all, your majority of the clinical business that you have is in the community setting and you have good visibility there. Could you give us a sense of sort of what we should expect as we get into sort of the post the apex of COVID here in the broader country?
Yes. Good morning, Puneet. Thanks for the question. The timing of recovery is uncertain, I think we can all agree, and it will differ geographically. I would say there is no reason though to believe that our growth rates won't return to what we have explained in the past when the pandemic subsides.
So we expect fully that our clinical division will return to the mid teens volume growth that we've experienced in the past. We expect that our pharma division would return to the same kind of growth rates that we've experienced, and we've expected greater than 20% revenue growth there. If anything, I would say that the reimbursement environment in the clinical division looks better than it has previously. And our pharma division new sales activity is every bit as strong as we could have hoped.
I think that we should look
to what's happening state by state. Hospitals are beginning to reopen. I think when we start to see hospitals perform elective surgeries, again, that will be a good sign. I think physician offices when they open for more normal business hours, so that will be a good sign and we fully expect when those things happen to see a return to our normal kinds of volume and growth rates.
Okay. Thanks. And on pharma services, I mean, it's great to see the strength in the contracts here in Pharma Services. Could you help us understand, are those new trial starts that are being planned during these times or those were planned pre COVID? And how should we think about the sort of the recovery in pharma services?
Again, timing is hard to say here, but what are you hearing from the pharma customers? And what is the appetite for those customers longer term as we emerge from sort of a post COVID in the post COVID environment? What do you think the appetite will be there?
Well, our firm services division sales team is just doing a great job. And for the quarter, I think Catherine mentioned as I did that we had $28,000,000 in new sales, new bookings, those are signed contracts, which is on pace with, in fact, better than we would have expected. There are delays in setting up trials. Certainly, there are delays in setting up new trials, and even trials that have been existing have slowed down some. But the pace of activity in new sales a And we don't really see a slowdown in the appetite for pharma companies to engage us support for their drug development activities at all.
Okay, great. And if
I could squeeze in
the last one on the NGS focus, which is a big important driver for you here. Could you just update us briefly on the FDA and how should we on the multi gene panel that you have submitted to FDA? And also on the regulatory timeline for the liquid biopsy assay, if you could elaborate what should we expect this year, if any updates? Thank you.
We continue to make good progress on the FDA submission. We are engaged with the FDA. We have a good dialogue with them. We've made a lot of upgrades to our infrastructure. Frankly, a lot of those upgrades to our place.
I would say it is a complicated process. I think we're working systematically and rigorously through the process and we are making good progress with our multi gene panel submission to the FDA. Regarding liquid biopsy, we have been, as we said before, validating a pan cancer liquid biopsy product. That validation is going quite well. And we would expect really before the end of the second quarter to have a liquid biopsy product, a pan cancer test available.
Now I would say that we are also looking very closely at other liquid biopsy products and initiatives and trying to understand how best to develop those products and add those products to our product line. There's one other thing I would mention and that's that last year we invested a lot of money in next generation sequencing. We upgraded both our solid tumor and our hematologic assays. We're very pleased that recently in the last month or so, we received a designation for our solid tumor panel to be a comprehensive genomic profile, And we've gone through a rigorous validation for that, and the reimbursement actually has improved from what we've seen before. So we're seeing a lot of progress with our next generation sequencing assays and work, and we're continuing to invest in this area.
We will go next to Brian Weinstein, William Blair.
Hey, guys. Good morning. Thanks for taking the question. First question is, what do you think all this means for competition in the industry? How do you expect this COVID-nineteen situation to change that?
Will it lead to further consolidation of the industry? And do you think that you are poised to pick up share as a result?
Thank you for the question, Brian. All of what we have said, our investment in our workforce, our investment in our long term strategy is all designed to ensure that NeoGenomics emerges from this crisis in a superior competitive position because we fully believe that the stronger players are going to be able to strengthen their position. Over the last several years, there have been a lot of smaller players that have begun operations and are losing a lot of money and are relying on capital markets to support their operations, and we've never subscribed to that theory. And so as I mentioned, we're coming into this crisis in a relatively strong position. Through the crisis, we are really investing to make our position even stronger.
I think that there will be consolidation. We are, I think, in a very good position to continue to consolidate the market, and you can bet that we're looking very carefully at that.
Okay. And then just curious what it means for your clinical business if patients who may be usually referred to the lab after something is found in kind of a routine blood work situation associated with the wellness visit isn't happening. When they do come back, if cancer is more late stage, how does that impact your business, if at all, versus seeing patients that are kind of earlier in the diagnosis?
Well, we had a sort of an internal debate, Brian, about whether when the crisis wanes, we get a bolus of specimens in. And let me give you both sides of that debate. On one side, as you point out, the specimens that we receive are from cancer patients who are ill and they need to be tested and they're going to continue to be tested. And if they haven't been tested, they're going to need to go to the doctor to get tested. So that would suggest that our volume will recover very quickly.
On the other hand, we have to understand there are practical limitations on the capacity of physicians to have office hours and for surgeries to take place, there's only limited capacity. So I think there are two sides of that debate in our clinical division. But I think as we return to more normal levels, as I said, there's no reason to expect that our growth rates won't return to the rates that we've experienced in the past. And frankly, we're encouraged by some of what we're encouraged by some of what we're seeing on the reimbursement side. So there are some encouraging signs out there longer term.
Can I sneak just a real quick one in, did you guys receive any kind of CARES Act payment? I know that there were payments being made to certain labs who are providers for Medicare fee for service. Did you guys get anything like that? Not referring to PPP, but just a separate payment.
Yes. We received recently $3,900,000 from the Medicare program. This is not the program that it provides reimbursement for, that's the paycheck provider or protection program. This is a Medicare program, CMS program designed to support providers that have billed Medicare in 2019 at a particular rate based on their billings last year. So that was $3,900,000 that was received a couple of weeks ago.
We'll go next to Andrew Cooper with Raymond James.
Thanks guys. Just a few from me. I think we hit some of the highlights already. But when you talk about expenses tied directly to COVID-nineteen and investing in your employees and all of those things, can you help us splice out what was maybe a little unusual in the quarter above and beyond and how much of that might persist versus what's just sort of lack of overhead absorption when we think about margins?
Yes. So when you think about our cost structure, we have about 25% that can flex with our volumes. So between supplies, commissions, we also have some reduced travel expenses clearly as we've reduced travel. But a lot of that not a lot of that, but some of that gets offset by what you were mentioning as the one time cost. So even as far as spacing out the lab can create some efficiencies and productivity as well as cost for masks and the thermometers and the additional time and expenses that it takes just to make sure that we are ensuring the safety and well-being of our employees first.
So there are some offset costs. When you think about how much we can really control, we do have about 25% of variable costs that are more closely tied with the revenue and the test. But again, we are being very prudent in the rest of our operating expenses and watching very closely, the timing of the even planned expenses and making sure we're being prudent on which initiatives we are continuing and which we may be postponing.
Yes. And just to build on that, in addition, we're piloting even as we speak COVID-nineteen testing for our own employees to make sure that they continue to come to work safely. We have given expense or premium pay to some of our workers. There are a variety of things that we have done that will in support of our culture and our workforce. The other thing that we've done is we've added expenses to bring up COVID-nineteen testing for both molecular and serology testing.
And I think we're as I mentioned, we have capacity now for the molecular test and we'll have capacity very shortly for a very high quality antibody test.
Great. That's super helpful. And then I guess jumping to pharma, the quarter was maybe a little bit stronger than we expected. So just curious if there's anything in particular that maybe accelerated or anything like that relative to what you talked about in the last quarter? And then 2, as I recall, you had talked about a significant number of new trial starts in April.
I know you've talked about things pushing a little bit, 2 major projects. But just maybe a little bit more detail on some of the dynamics there. And as you look at the backlog as it builds, any sort of aging of that or commentary on when you expect to get sort of back to normal on some of that would be great?
Yes. I will answer part of it and then maybe ask George if he can answer remotely to help fill in. The strong the quarter was stronger, Andrew, than we expected it to be when we talked with investors back at the toward the end of February. And I think that speaks to the diversity of our pharma services business. So not only is it geographically global in structure, but we also have a fair amount of research oriented activities as well as clinical trials activities.
So while the clinical trials have slowed down, the research related activities, both in next generation sequencing and in multiplex immunohistochemistry work, have actually increased a little bit and we saw a lot of strength as the quarter ended. In terms of trial starts and backlog, let me turn that over to George to ask for his input.
Yes. No, and I'd just piggyback on what Doug said. We are fortunate to have a fairly diverse offering in terms of product offerings. And not only did we see strength across what Doug mentioned, but we also saw a nice uptick in data and informatics sales, and we've really seen an increase in that from our pharma sponsors as well, which has been helpful. On the clinical trial side, yes, I mean, I think we've even heard some frustration from some sponsors where, unfortunately, the sites just aren't able to enroll the patients the way they used to.
So, one in particular said as soon as some of these states start to open up, that's where they're going to go first to open up some sites. Others have been maybe a little bit more cautious and are figuring more maybe July or August. So you do kind of have the spectrum, but I think the demand is still there for the clinical trials. And I think if anything, there's almost frustration on the pharma side because they want to move forward on these projects. And unfortunately, the sites are closed or are drugs that are limiting hours, limiting elective visits and that really is cutting down the patient flow.
1 of our biggest sponsors, the top 20 pharma firm, said across all their oncology trials, they're seeing about a 50% reduction in patient flow. So they're seeing it, but certainly their hope is that, that ramps up soon as possible. And I do think in the coming months, they're going to push hard to try to get those numbers up as best they can.
Great. That's very helpful.
I'll leave it there. Thanks guys. We'll go
next to Alex Nowak at Craig Hallum Capital Group.
Great. Good morning, everyone. Doug, of the lower testing volumes, do you think this is all lost revenue? Or should there be a catch up in Q3 and Q4 because cancer doesn't go away? So I've got to imagine there's going to be some sort of catch up once the state's clinics and labs are to reopen here.
Alex, that's the subject of great debate amongst our team. As I mentioned, I think, there is one school of thought that says, yes, these patients need testing. If they haven't had testing, they're going to want to get testing as soon as possible. And I think that's a compelling argument to suggest that our volume will come back strong. On the other hand, we really do have to understand that there are practical limitations of capacity by physicians, by community based oncologists and by hospitals in their surgery centers.
So there's a sort of a cap on how much that can come back. But you're absolutely right. The work we do is for cancer patients, patients who are ill and they need to be tested and it's an essential service and that's why we're so confident that our business is going to return to normal when things return to normal.
That's helpful. And is there any timeline for when you would expect to launch the minimal residual disease test? And what sort of additional investment or work needs to be done there to get that test ready for prime time?
Let me explain, 1st of all, that we already have a minimal residual disease test by a test modality called flow cytometry, which is useful and we are marketing that and continue to market it. The MRD test that a lot of people talk about are next generation sequencing base. And we are investing in MRD next generation sequencing to complement our flow cytometry work. There are a number of innovations in this area. We're looking at internal development as well as potentially external sources for that.
We expect that MRD is going to be an important testing test in the future, but there's a lot of development that has to take place really in the near term to make that viable commercially.
Okay, understood. Thank
you. We will go next to Jacob Johnson at Stephens.
Hey, thanks for taking the question and thanks for your efforts on the pandemic. You mentioned that
Are you on
mute? Can you hear me?
Jacob, are you there?
Can you hear me now?
We seem to have lost Jacob, Jess.
We'll move to Paul Knight at Janney.
Oh, no. Did we lose everything? Yes, are you there?
Yes, you are connected. I can hear you.
Hey, Paul, go ahead and ask your question. I guess we'll manage this on our own.
I'll ask 4 questions. Just kidding.
Go for it.
The backlog build as I look at your success on the pharmaceutical services side, is it oncology? Is it your technical capabilities? What's creating the win success versus peers, do you think, Doug or George?
Yes. It's a follow-up. I'll start off with Jeff and our sales team, certainly. We do have an outstanding sales team. But I also think it's sort of our comprehensive strategy.
Doug talked about the synergies between the divisions. We do have the number one physician in oncology. So that's extremely attractive for a pharma firm to work with NeoGenomics on all their upfront research and phase trials. And then when we reach day 1, Neo is out there helping them with literally thousands of oncologists and pathologists bringing the test to market. So I think holistically, if you look at the strategy, we're kind of in a unique position where they can get great service, pre FDA approval, but then they've got the same partner helping them to launch it.
And I do think it's very powerful and it really is helping drive our sales.
And Doug, when you look at the states across the U. S, of course, I know 8 or so are allowing elective surgeries as of May 1. Is it patients just not going in or doctors not in at clinical settings in your view?
Yes. Hey, this is Rob. So we've seen a mix in the different geographies. We've seen oncology practices that have reduced their hours to say just half days each week or even are only seeing new patients on Fridays only. And they've canceled 6 month and annual follow-up appointments.
And we've seen cancer patients whose elective or are considered elective even though you want to imagine it to be, treatments are being pushed off right now. So as Doug said, until those patients can get access to oncology practices in hospitals, we need to wait for that to return to normal to see the volume.
And lastly, do you see within these guidelines, I see elective surgery, which obviously not much to do with you. But are you seeing guidelines as well surrounding clinical lab openings state by state? Or are they getting that specific?
Well, Paul, my I've been surprised at the definition sometimes of elective surgery. We've seen cases where cancer patients have not been able to have surgery, potentially because it was described as elective. But I've heard cases of, for example, patients with prostate cancer or breast cancer that were unable to get surgery or the surgery was postponed because of the situation. So I would say in response to the question about clinical laboratories, most clinical laboratories that I know, especially the large commercial laboratories and labs like NeoGenomics, have put in place enough protections for their people that their labs have continued to stay open. And we've certainly had that situation.
We've worked very hard to maintain the operation of our laboratories, and we continue to work hard to make sure that we're able to deliver the kind of service with same kind of quality, same kind of turnaround time. In fact, our turnaround time is frankly improved during this pandemic. So thanks for the question, Paul.
Okay. Thank you. Bye bye.
We'll go to Jacob Johnson at Stephens.
Can you hear me now? Yes.
Okay, great.
Thanks for taking the question. Just 2. First, you mentioned that human longevity would be dilutive to gross margins. Are the projects you've added to your pharma services backlog from human longevity, anything different from your legacy business in terms of pricing and margin? Or is this just some excess capacity?
George, do you want to try to answer that or should I?
Yes. No, absolutely. Generally, the margins are fairly comparable to what we've seen historically on the pharma side. So really don't think there's much of a difference there. Yes, that laboratory is a beautiful laboratory, but it's well under capacity right now.
And that was one of the reasons it was attractive to buy. I think we did we looked at we got 37% internal growth last year. So we were looking for a laboratory where we had the space to grow. Matter of fact, we are bringing up fish and cytogenetics testing in that facility in La Jolla as well. So certainly, our goal is to fill that lab up.
It is well under capacity here. We knew this was going to be dilutive in the 1st year. I think we had just $1,400,000 of depreciation just in the Q1. So that doesn't affect EBITDA, but it certainly had a big impact on the margins that you're seeing. So but we're still very bullish about the laboratory.
It's beautiful. And certainly, our goal is to fill it up in the next year.
Got it. Thanks for that, George. And this one may be for you as well. But I was skipping your line on the pharma services clients regarding COVID. In it, you mentioned that you have increased your work on vaccines in the past year.
So just two questions here. 1st, are you doing any COVID work in your pharma services segment? And then 2, just in general, how much vaccine work do you do in pharma services today?
Yes. About a year ago, we actually started down that path because obviously for things like HPV, we have seen cases where vaccines are certainly trying to prevent cancer. And we also had requests from our sponsors. So we sort of migrated into that. But certainly now the demand pull has gone up substantially.
And yes, we do actually have a couple of COVID projects in our Houston facility. The dream would be one of the projects we work on actually is what the world is waiting for, but certainly, it's still a fairly small part of our business, but certainly one that we think has very bright growth prospects for the next year.
Great. Thanks for taking the questions.
Thank you, Jacob.
We'll go next to Steve Unger at Needham.
Hi, good morning.
Could you give us
an update on your informatics strategy? And are you planning to continue to spend at the levels that you guided to initially?
Yes, I'll take that and then Bill may want to weigh in here as well. So we are investing in informatics. We feel great about our strategy in informatics. I think today we have a little over 25 folks, maybe 26 folks in the division. So it is an investment, but I must say that the engagement the level of engagement that we're getting from pharma companies and from payers is proving that what we're doing is relevant to their business.
Now I would say that, as George said, even in quarter 1, we experienced more revenue derived from our informatics work than we expected. And we're really bullish on the prospects here, even in the short term. So we expected that this division might in the long term be a real revenue generator for us. But even in the short term, this is starting to impact our business and generate some revenue. And all of that revenue, by the way, once we cover the 28 or 26 folks that we have in the division, really falls to the bottom line.
Yes. And Doug really covered the highlights there. I would just say we put together, I believe, an exceptionally good team with a lot of experience and we're in the very early stages of building some products that we think and services that we think are going to be really helpful to various stakeholders. And as we get later in the year, hopefully we'll be able to showcase some of those for you. And we're feeling good about where we're at on the revenue side so far.
Okay. We'll see them ahead.
And then as far as the COVID-nineteen patient testing opportunity, would this kind of the direction of the federal government? And how should we frame reimbursement for whether it's PCR test or the serology test?
Yes. The COVID-nineteen testing that we brought up, we felt we should do as a good corporate citizen. And we've been working on this for a while. I mentioned the kind of capacity we have for the molecular test and bringing up the serology test. So we did not do this at the direction of the government, but we certainly are working very closely with American Clinical Laboratory Association and members to work with the government to make sure that we have enough testing capacity in this country.
Now in terms of the reimbursement, the reimbursement for the molecular test has recently been increased. I think it started out at a reimbursement rate of around $51 and it's been increased to around $100 during this crisis. And I believe that the serology test, there's some discussion right now amongst CMS and HHS about the level of reimbursement for that. I don't think that's been determined yet. There is some crosswalk discussion and other things, but we don't really know an answer yet, but we expect to know that reimbursement rate relatively soon.
And could you would you care to offer what platform you will be providing, urology? Yes. We're using
the Abbott test for serology. We're using the Thermo Fisher test for primarily for the PCR test.
Excellent. Thanks.
We'll go next to Bruce Jackson at The Benchmark Company.
Hi, good morning. Just a follow-up question on the companion diagnostics test that you're going to be launching later this year. I was wondering if you could provide us with some details on the launch cadence, what kind of cancers they're targeted toward? Are these going to be single marker test or panel test? And to the extent you can provide some more information on that program, that'd be great.
Yes, Bruce. Let me put this in context and maybe Bill or Rob can build on my comments. So we have roughly 30 companion diagnostic projects in our pipeline at NeoGenomics. And these are projects with a variety of pharmaceutical companies. They would involve our pharma services division and also, as George pointed out, our clinical division.
Now we've had a variety of projects, sponsored testing programs with pharma, some that we've been operating for several quarters and some that we're beginning to operate now. And we have a number of projects in the pipeline. So we're very bullish about our capability in companion diagnostics. And I know Rob or Bill, do you have specifics that you
can Yes.
I would add this is Rob. I would add that we have a handful where we have signed contracts and we're putting together all the market planning, but it's really contingent upon FDA approval of the drug. So the timing isn't definitive right yet. So we're planning for this year, but it's dependent upon the pharma company and the FDA.
And then just a quick follow-up on that. Could COVID-nineteen slow down the approval of those drugs or are these late stage programs where they just have
to get through the FDA?
Well, we don't have a lot of visibility as to the discussions between our pharma clients and the FDA relative to those companion projects. I think a lot of these are moving along have moved along quite well and we really don't know whether COVID-nineteen is going to have an impact on those.
All right. That's it for me. Thank you very much.
Okay. Thanks, Bruce.
And with no other questions holding, I'll turn the conference back to Mr. Van Oort for any additional or closing comments.
Great. Thank you, Jess. So as we end the call, I'd really like to recognize the approximately 1685 NeoGenomics team members around the world. They have been so dedicated and committed to helping us build a world class oncology diagnostics company. And on behalf of our NeoGenomics team, I want to thank you for your time joining us this morning.
And for those of you listening that are investors or considering an investment in NeoGenomics, we thank you for your interest in our company.
Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time and have a great day.