Good day, ladies and gentlemen, and welcome to this NeoGenomics Inc. 4th Quarter and Full Year 2018 Financial Results Conference Call. As a reminder, today's meeting is being recorded. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. And now at this time, for opening remarks and introductions, I am pleased to turn the floor over to Mr.
Doug Van Oort. Please go ahead, sir.
Thank you, Jim, and good morning, everyone. I'd like to welcome everyone to NeoGenomics' 4th quarter 2018 conference call. Joining me from our Fort Myers headquarters is Sharon Birag, our Chief Financial Officer Rob Shovlin, President of our Clinical Services Division George Cardoza, President of our Pharma Services Division and Bill Bonello, Chief Strategy and Corporate Development Officer and Director of Investor Relations. Before we begin our prepared remarks, Bill Bonello will read the standard language about forward looking statements.
This conference call may contain forward looking statements, which 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 it back to Doug, I want to let everyone know that we will be making a copy of our transcript for this morning's prepared remarks 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 allocated for this call. Bill?
Thank you, Bill. For today's call, I will briefly review some quarter 4 highlights and then turn the call over to Sharon for a more detailed review of the financial results. After that financial review, I will comment on several of our growth initiatives and investments that we are making to drive both near term and long term growth. We will then have time for questions and answers. Let's begin with the quarter 4 highlights.
We were very pleased with our quarter 4 financial performance. We reported record revenue and adjusted EBITDA with 25% top line growth and 30% adjusted EBITDA growth. Those results included 20 days of Genoptix results and when excluding the impact of Genoptix, organic revenue growth was 17% and adjusted EBITDA was up 27%. In the Clinical Services division, we continued to achieve good results from our efforts to improve both revenue and cost per test. Excluding the impact of Genoptix, we actually increased average revenue per test by 6% year over year and we lowered cost per test by 3%.
Obviously, the resulting impact was an expansion of our margins. Clinical test volume growth was a little bit lower than normal as we were up against an exceptionally strong prior year comparison. Clinical test volume increased 13% year over year with Genoptix and 9% year over year excluding Genoptix. Volume growth was unusually low in November, but has returned to historical levels in both December year to date in 2019. Pharma Services revenue grew 33% year over year to a record $10,600,000 We signed $15,000,000 of new contracts during the quarter and our backlog was up 44% year over year to $99,000,000 The quarter's record levels of profitability were achieved even as we continued to make significant investments for future growth.
And adjusted EBITDA margin reached an all time high of 17%. Importantly, service levels were excellent and customer retention levels were outstanding. Cash collections were very strong and also reached a record level for the quarter. On the strategic front, we completed our acquisition of Genoptix on December 10. Now that we've had 2 months of ownership, we are even more excited about the acquisition today than we were at the time we announced the deal.
This combination of NeoGenomics and Genoptix sets our company apart with unprecedented reach to all customer segments, including hospitals, pathologists and community oncology practices. It also allows us to be even more competitive by leveraging best practices and offerings from each company and unifying cancer care among oncologists, pathologists, hospitals, payers and patients. I will provide a more detailed update on the Genoptix integration activities later in this call. The strong 4th quarter results capped an eventful year for our company, which included good quarterly performance, a new strategic partnership with PPD, our redemption of the preferred stock owned by GE and GE's subsequent exit from their ownership position in Neo stock and $135,000,000 secondary offering followed by our acquisition of Genoptix. We feel very good about 2018 and are even more excited about our opportunities in 2019.
Before we talk about those opportunities, I would like to turn the call over to our Chief Financial Officer, Sharon Varig, for a more detailed review of Q4 financial results.
Thank you, Doug. Our 4th quarter revenues were $76,500,000 a 25% increase from last year. Clinical services revenue increased 23 percent to $65,900,000 and pharma services revenue increased 32.6 percent to $10,600,000 Clinical volume increased 13% to 198,000 tests and average revenue per test increased 9% to $3.33 Excluding the impact of Genoptix, revenue increased 17% to $71,800,000 volume grew 9% and average revenue per test increased 5.5 percent to $3.23 As we discussed last quarter, we are optimistic that we are beginning to see less downward pressure on price per test than we've experienced over the past several years. Also impacting revenue per test are improvements in our cash collections. Gross profit increased by $10,300,000 to $37,100,000 up 39% from the prior year.
This increase represents a 69% contribution on the $15,100,000 of revenue growth. Gross margin improved by 4 95 basis points year over year to 48.5%. This improvement was driven by productivity gains, cost efficiencies and improved revenue per test. Genoptix had a modestly positive impact on gross margin during the quarter. G and A expenses increased by $9,100,000 or 55 percent year over year to $25,700,000 Approximately $2,300,000 of this increase is related to onetime nonrecurring acquisition related transaction costs.
These expenses are counted as non GAAP adjustments in our calculation of adjusted EBITDA, adjusted net income and adjusted EPS. The balance of the increase is primarily attributable to the addition of Genoptix, higher professional fees and increases in payroll and payroll related costs. Excluding one time costs and the impact of Genoptix, G and A expenses were 24% higher than last year. This increase reflects key investments made in the company's G and A infrastructure to support our continued growth. Sales and marketing costs increased by 37% year over year to $8,000,000 primarily due to the Genoptix acquisition.
Excluding the impact of Genoptix, sales and marketing expenses were 24% higher than last year. Similar to G and A, this increase reflects important investments made in the company's sales and marketing team to support top line growth. 4th quarter GAAP net income attributable to common shareholders was $353,000 compared to net income of $1,900,000 in the Q4 of 2017. And diluted income per share was 0 versus diluted income per share of $0.02 in the prior year. We believe that in order to compare the net income related to the true operations of the company on a more consistent basis across periods, it's appropriate to adjust GAAP net income or loss available to common shareholders to exclude certain non cash items and if applicable one time costs.
We refer to this measure as adjusted net income and on a per share basis, adjusted diluted earnings per share, and we have included a table with how these are calculated in our earnings release. Adjusted EBITDA was $13,000,000 an increase of 30% year over year. The marginal adjusted EBITDA contribution on revenue growth, excluding Genoptix, was 26%, which is within our long term guidance of 25% to 35%. As we've mentioned in the past, the 25% to 35% guidance is in a range that we expect to fall into on average with some quarters above and some quarters below that range. In the 4th quarter, adjusted net income was $5,500,000 compared to $3,200,000 in the prior year.
Adjusted diluted EPS was $0.06 versus $0.04 in quarter 4 2017. Cash collections were strong in the quarter with clinical DSOs improving 7 days sequentially to 77 days, excluding the impact of Genoptix. Cash flow from operations increased 148% for the full year to 44,800,000 Capital expenditures for the year were $21,900,000 with $14,300,000 of cash CapEx and the remainder under lease financing. We ended the quarter with $10,000,000 of cash and $112,000,000 of total debt, including capital leases. During the quarter, we completed the acquisition of Genoptix for approximately $125,000,000 in cash and 1,000,000 shares of common stock.
We finished the 4th quarter with 1475 full time equivalent employees, contract doctors and temps, including 359 legacy Genoptix employees versus 1078 as of September 30, 2018, 980 as of December 31, 2017. On a consolidated full year basis, we finished 2018 with $276,700,000 in revenues, representing 15.2 percent year over year growth and test volumes increased 14.1% compared to 2017. We also saw revenue per test improve 1.2% and experienced a decrease in cost per test of 4.6 percent. This corresponded to a 360 basis point gross margin improvement year over year. Additionally, we posted 2018 adjusted EBITDA of $43,600,000 which represents 29.6% growth year over year and our adjusted EBITDA margin expanded 170 basis points versus 2017 to 15.7%.
We are issuing full year 2019 revenue and earnings guidance. We expect consolidated revenue to be in the range of $379,000,000 to $395,000,000 and adjusted EBITDA to be in the range of $49,000,000 to $53,000,000 This guidance assumes $80,000,000 to $85,000,000 of revenue from Genoptix, approximately 10% volume growth on legacy NeoGenomics business, low single digit declines in legacy NeoGenomics clinical services revenue per test and approximately 20% growth in pharma services revenue. I want to address an anticipated question about our volume growth expectations. As many of you know, we have historically guided to mid teens volume growth. We continue to believe that we can grow the business at that rate on a long term basis and in a normal operating year.
However, 2019 is an integration year. It's our goal not to lose a single customer during that integration. The top priority for our sales team will be customer retention. Thus, while we are encouraged by the growth opportunities in front of us, it seems prudent to forecast slightly lower than normal volume growth this year. Finally, I want to take just a minute to discuss our plans for reporting 2019 results.
This quarter, we quantified the impact that Genoptix had on certain results and metrics. We did this because our 2018 revenue and EBITDA guidance and most analyst estimates excluded the impact of Genoptix acquisition on our Q4 results. Going forward, we will not be quantifying the impact of Genoptix on specific results. We expect that our integration activities will progress at a rapid clip and it would be both impractical and counterproductive to segregate Genoptix results from the rest of our business. That said, we will keep you apprised on how we are tracking with basic assumptions such as cost synergies and revenue compression.
I'll now turn the call back over to Doug to provide some additional commentary on our key 2019 initiatives and opportunities.
Thank you, Sharon. I'd like to begin with an update on Genoptix and our integration activities. We're very excited about this opportunity to combine the best of Genoptix with the best of NeoGenomics. Virtually everything we have seen and heard since closing the acquisition on December 10 reaffirms our conviction that this combination makes a lot of sense for patients, providers, payers, employees and shareholders. As a privately held company for many years, Genoptix focused on building its business with community based oncologists.
The company developed outstanding products and services for this market segment and developed an excellent reputation for quality of testing and reporting that remains a gold standard in our industry. I'm happy to report that we're moving forward at a rapid pace with integration activities and are very much on schedule. Rob Shovlin is leading the commercial and operational integration and Sharon Verig is leading the financial aspects of the integration process. Most of our NeoGenomics team now has experience with complex integrations and we're applying our learnings to this integration. We're moving as deliberately and quickly as possible.
We're making very good progress. Our estimates of synergy have been verified and we feel that our plans are on track. Several Genoptix leaders have assumed key leadership positions in our commercial operations and finance teams, and we're working to fill a number of new growth positions with highly qualified people from Genoptix. Since finding great people is a constraint to growth, this is a welcome relief. Shortly after closing the deal, a number of us met with each member of the Genoptix sales team.
Then after significant review and analysis, we developed and rolled out a complete integrated sales organization and new territory alignment, all within 6 weeks after closing. Just last week, we held a very successful national sales meeting. We now have 80 sales professionals in our clinical services division and 9 in our pharma services division. Counting our marketing and managed care teams, we now have approximately 100 people in our commercial organization. We have found a very high level of experience, commitment and enthusiasm across all departments at Genoptix, including the medical team, lab operations and corporate support functions.
On the medical team, a strong group of Genoptix pathologists and PhDs have added to the to our existing team, which now combines to total approximately 80 MDs and PhDs. I believe we now have one of the largest and most capable team of medical and scientific professionals for cancer diagnostics in the country. In operations, in particular, Genoptix has an excellent molecular lab and the combination of our molecular teams and capabilities is going to be extremely beneficial to our operations and future strategies. Former molecular leaders at Genoptix are now part of the current molecular leadership for our combined company. Also in operations, we have already worked to consolidate test menus and identify best practices, which we will standardize on.
The broader NeoGenomics solid tumor test menu has allowed for tests formally sent out by Genoptix to nearly immediately be performed internally at our lab at Aliso Viejo. Internalizing send out testing is both a cost reduction and an improvement in service and turnaround time for clients and patients. Although we purposely did not include revenue synergy in our deal models, we have come to believe that there is a good opportunity to increase business with existing customers over time by leveraging our comprehensive test menu and large portfolio of managed care and GPO contracts. Genoptix sales representatives have confirmed that many customers were sending solid tumor work to other labs because Genoptix was not actively trying to win that business. The reps also believe that they missed out on a significant amount of business because they did not have contracts to serve as an in network provider with a large number of managed care plans that NeoGenomics does have contracts with.
We hope to leverage our large test menu and portfolio of Bayer contracts to gain revenue synergy over time. As we work through the integration, our top priority is customer retention. Obviously, maintaining high service levels and turnaround time is critical to customer retention as is a long list of other aspects of superior service. NeoGenomics is laser focused on client satisfaction. We are quite proud that with approximately 2,000 responses to our customer surveys during 2018, our net promoter scores ranged from 59 to 60.
We understand what it takes to satisfy customers and we will try to maintain those throughout the integration process. While successfully integrating Genoptix is our most important job this year, we do have a lot of other exciting growth initiatives underway. There are 4 that warrant an explanation. 1st, we continue to sign contracts with commercial payers, group purchasing organizations, integrated delivery systems, large hospital networks and large oncology practices. This activity is a direct result of our scale and strong ability to serve providers and payers on a national basis.
In addition to recently announced agreements with Cigna and Premier, we added several important new contracts in the Q4 to further expand our access to referring physicians and patients. Once contracts are awarded, they typically take several months before beginning and then several more months to fully transition. As a result, we have some good visibility to volume growth beginning in the next several months. 2nd, we continue to make progress with our proactive measures to address revenue per test. We have enhanced our analysis of existing reimbursement trends, identified areas where we are being underpaid and implemented a plan for improvement.
These activities include securing coverage for non covered tests, improving our billing process to avoid denials and working denials more effectively when they do occur. We are also evaluating our fee schedules to identify tests that are not appropriately priced. Our recent results suggest that we are seeing some initial benefits from these efforts. The 3rd area of growth is in our exciting Pharma Services division. You may have noticed that our revenue grew nicely on a sequential and year over year basis each quarter during 2018.
That revenue growth is driven by our strong backlog of signed contracts, which totaled nearly $100,000,000 at year end. We believe this growth is fueled by strong market demand for oncology clinical trials and also to our unique capabilities. 1 of those capabilities, the ability to help sponsors with a complementary biomarker or companion diagnostic and then be able to immediately offer that test commercially upon drug approval is becoming of increasing interest to our pharma clients. We continue to invest in our capabilities to serve pharma clients, including a build out of our global infrastructure. We're beginning to see projects roll through our lab in Switzerland.
We are slated to open our Singapore lab in just 2 weeks and we are in the planning stages for China as well. We also continue to be excited about our global partnership with PPD. We have a handful of early wins and a number of bids outstanding with pharma and biotech companies today. We expect the pace of activity to increase over time, especially as we add capabilities in Asia. 4th, we continue to make progress with our FDA initiative.
As we have discussed on previous calls, we are in the process of seeking FDA approval for a large multi gene next generation sequencing channel. We believe that an FDA approved next generation sequencing test offering will benefit both our pharma services and clinical testing divisions by further differentiating us from other oncology labs, helping to drive reimbursement for our multi gene panel and increasing our attractiveness to pharma companies for clinical trials involving companion diagnostics. After we closed the Genoptix deal and reviewed our plans in detail with our new broader team, we decided to make some additions to our assay and we are quite excited about it. Even with these revisions, we expect to submit the assay to the FDA late in Q3 or in Q4 of this year. In summary, we are excited about the strength of our business, our position in the market and our near term and long term growth opportunities.
Sophisticated laboratory testing plays an increasingly critical role in identifying appropriate care protocols for cancer patients, ultimately improving quality of care and saving lives. We're pleased to play an important role in this vital segment of our healthcare system and believe that our services are creating value for patients, employees, customers and for our investors. I'll now hand the call over to Bill to lead us through questions and answers.
At this point, we'd like to open it up for questions. Incidentally, if you're listening to this conference call via webcast only and would like to submit a question, please feel free to e mail us at bill. Banelloneogenomics.com during the Q and A session, and we will address your questions at the end if the subject matter hasn't already been addressed by our call in listeners. 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 speak within the hour allocated for this call. Operator, you may now open the call for
And we'll take our first question today from Drew Jones with Stephens Inc. Please go ahead.
Thanks. Good morning, guys.
Good morning.
Just wanted to start quickly on the volume growth. And Doug, could you maybe tell us what was it in November that maybe slowed things? And then just given the commentary around the improved trajectory year to date, how that factored into the decision to be a little more conservative with the guidance on volume growth for 2019?
Sure, Drew. The volume growth was surprisingly low in November, and we don't really have a great explanation for it, to be honest. We didn't lose any clients. We had a slight reduction in ordering from a lot of different clients, but it bounced back really completely in December and has been strong year to date. We believe that the volume projections and pipelines are pretty strong for us as we look forward, but we are cautious.
We are going through an integration year and we thought that our guidance volume growth was responsible in light of that.
Okay. Maybe moving on to something that looks pretty positive. Can the momentum on price per test and the improvements that you showed there, how much runway is left in some of these initiatives that you guys have been enacting? Maybe is there a way to quantify the opportunity with non covered tests on existing volume to kind of support the outlook there?
Let me try to make a few comments and then I'll turn it over to Sharon. I would say that improvements that we're making in reimbursement per test is not because we're raising prices necessarily. It's just that we're being more efficient about getting paid for the work that we already do. We put a lot of tools in place to try to get reimbursement. You know that we've worked with a number of managed care plans and we continue to add to our list of managed care plans and that certainly helps.
But we're also implementing tools in our billing process generally, which I think will continue to help us to offset the natural kind of decline that we're seeing in the marketplace. Sharon, do you have anything to add? Yes.
I would just add, all of the opportunity that we've had on these GPO contracts and everything, they come with volume, which means that we might be willing to be flexible on price. And what all of these efforts that we're doing, basically we're trying to hold serve against that. And so people shouldn't expect to see us be able to hold that forever in light of the way in which our contracting is moving. If we can stay flat, I would be happy for this year. We did project just a little bit of a decrease in it in the numbers and the guidance that we've given you, but I'd be happy if we stay flat.
Thank you, guys.
Thank you, Drew.
We'll go now to Kevin Ellich with Craig Hallum. Please go ahead, sir.
Good morning. Thanks for taking the questions. A lot of discussion, Doug, on the Genoptix acquisition and integration. Just a couple questions there. The $80,000,000 to $85,000,000 of revenue that you guys called out in your guidance for the year, just wondering, it seems like that's a slight decrease relative to what you guys had expected when you first announced that deal.
And just wondering if there's any seasonality early findings you can give us on how that deal is going?
All right. So on the revenue compression in particular, we went back once we had full visibility, as you know, we had these third parties because we were competitors during diligence. We went back after we had full access and everything that we thought was confirmed, which is great. And I think there is the revenue compression that we thought, the contracts do line up the way they do where they're out of network, we're in network. And so there's going to be a change for that and we reflect that in that range.
We also discontinued a small piece of their business where the margins weren't what we would want to have in what's called urine psychology. So that's gone. And so that's why you see that range come off of $85,000,000 and a little bit lower because of that discontinued piece. And we feel really comfortable that with time, we are going to be able to see some revenue synergies, but that's not going to happen immediately. So we wanted to make sure that the range was something that was very realistic for an integration year.
Doug?
Yes, I would just add one thing, and that's that so far the Genoptix volume has pretty well stabilized and it was declining last year. It was declining when we completed the acquisition, but it's stabilized, and we feel pretty good about what we're seeing so far.
That's helpful. And then, Doug, just quickly on the PPD partnership or collaboration, you talked about early wins in your prepared remarks and existing bids. Just wondering if you can give any more color on the size of those wins. And are you still on track for that $10,000,000 of run rate revenue by year end? Or is there potentially some upside there?
Thanks.
Kevin, I'm going to turn that over to George Cardoza, who is here with us.
Yes. For competitive reasons, we really can't give out revenue for a particular customer, but we are happy with the alliance. We have had some early wins. We presented at their national sales meeting a few weeks ago to their entire team, and we're actually traveling next week over to Asia with them. So things continue to be on track.
We have a lot of joint bids out there, and we remain very excited about the alliance.
Thank you.
Thanks, Kevin.
Our next question will come from Puneet Souda with SVB Leerink. Please go ahead.
Yes. Hi, Doug. Thanks for the question. So first, just briefly, again touching on volume, I just wanted to make sure I'm understanding it correctly. Your guide is implying you obviously have overall sales rep and commercial organizations that's larger, Genoptix is moving in network, solid tumor volumes are coming in internally, and you have good visibility here.
So I just want to make sure that the volume guidance decline is due to the discontinued pieces overall or is there something else that's just making you a little bit more conservative here? Just wanted to understand that correctly. Thank you. And I have 2 more follow ups.
Puneet, it's Bill. I'll take that one. So again, we're modeling we're talking about 10% volume growth on the legacy NeoGenomics business, which is a little bit lower than our historical mid teens long term guidance. And the entire reason for that being a little bit lower than our long term guidance is the fact that we're integrating Genoptix. And we know that our sales force is going to be focused on customer retention above all else.
And our number one objective is to not lose a single customer and that's more important than going out and winning a new customer. Ideally, you'll be able to do both, but that's it. And so we're just being prudent. We're very excited by the opportunities that are in front of us, as you pointed out. But we know the reality of what can happen during a big integration project.
So it makes sense from a guidance standpoint to project conservatively or not conservatively, but prudently.
Okay. Appreciate that. And then if I could touch a little bit on the end client or the customer. You have had conversations with them so far. What's your feedback overall from the oncologists and pathologists about the integration?
Usually customers are either pleased or have comments on 1 or 2 aspects of the business maybe they're excited about as a result of the integration. Could you give us some color there? And then just any sense of using the gold standard Compass reports, how are you going to integrate those across Neo now and the investment that you have to do in IT for some of that integration? Thanks.
Puneet, so far the customers that we talked with and we're out there a lot are quite pleased about the what we're going through in the combination of NeoGenomics and Genoptix. I think the Genoptix customers are pleased about the opportunity to access a broader menu, particularly on the solid tumor side. We're already seeing some early wins in terms of tests that were previously sent out by Genoptix are now being performed internally at turnaround times that are superior to what they were offering before. And on the NeoGenomics customer side, I think there's not a lot of change, frankly. I think over time so we had no negative reaction from the pathologists that we've talked with.
In fact, I think they are also feeling good about our expanded service and offerings. In terms of Compass, we intend to offer the Compass product, which as you know is a gold standard for oncologists broadly to oncologists across the NEO network. And that's one of the things that we're programming in our systems right now and we will offer as a result of the completion of the integration efforts.
Great. Thank you. I'll jump back in the queue.
We'll go next to Brian Weinstein with William Blair.
Hey, guys. Thanks for taking the questions and good morning. A couple of things. First, I just want to go back on this notion of the integration here. You say, obviously, you're laser focused on this.
But I'm just trying to understand, what is the kind of legacy NeoGenomics rep doing differently in 2019 versus 2018 that gives kind of any concern about losing revenue? I mean, given that we're kind of dealing with a bit of a different customer base, just trying to understand why you think that there's some risk there, Doug. I think you just said that there's not a lot of change in these customers and that these customers feel good about the offerings. So just kind of help me understand that a little bit.
Yes. I'll turn it over to Rob Shovlin to address that, if you don't mind, Brian.
Yes. Hi, this is Rob. So we pretty quickly integrated our commercial organization within 6 weeks of the close. So we now have NeoGenomics reps and legacy Genoptix reps that are one sales organization and we've redrawn the territory boundaries. So each of these sales reps are now introducing themselves to new clients, the legacy Genoptix or the legacy NEO clients.
So they need to spend time getting acclimated with their new clients and their new restructured territory. And then as we move forward with integration items, we'll need to educate our clients on existing base in their territories. I would probably add to that.
You know, I think
base in their territories.
I would probably add to that. If you think about it, we're moving, for example, we're bringing the systems together and they're going to have to be, becoming on that one system, including, for example, billing. So just moving these customers from one billing system if they're with Genoptix over to our billing system, for example, there's education that has to happen. There's resetting up those connections that has to happen and those can all be distractions. We want to make sure the sales folks are participating in those with their customers.
I will just correct comment on one thing you said, Brian, you talked about losing customers. Our retention rate of customers is in the very high 90s and we don't expect to lose customers as a result of this.
No, totally understand that. Thanks for the clarification. Thinking about some of the investments that you've made, I think you talked about G and A and sales and marketing were up somewhere, I think, 24% in the quarter. Can you give me a little bit more specific on some of the investments that you've made here for future growth? And should we expect those types of investments to continue?
Thanks.
You should expect our investments to continue, but not at that pace, I would say, of year over year increase. The investments that we're making include investments in the FDA assay process. For example, we've added a number of people to comply with the FDA submission process. We've added facilities globally. You know that we've added people and facilities in Europe, in Singapore.
We're exploring facilities in China. We're investing in our technology, in IT. In science, generally, there's a lot of great things happening technologically. And so we intend to make sure that our test menu is the most up to date scientifically advanced menu out there. And so that has been an area of investment as well.
I would say that we're investing for growth. All of these activities are growth related. And some of these are being made because we have some visibility to growth that we expect to see in 2019. So I think we feel pretty good about the investments that we've made even though the number looks like it's a little bit higher than it normally would be.
Okay. My last question for me, if I could sneak one more in here. It's just on pacing, given that we haven't heard we don't really know kind of all the details here. I just want to make sure any comps that might be difficult for Genoptix as we think about quarterly pacing going forward, things that you would kind of call out, either about that side of the business or on the legacy side just as we think about the quarters here?
Yes. I don't think there's anything unusual, Brian, about the quarterly pacing at Genoptix. The revenue seasonality would mirror that of legacy NeoGenomics. What we're seeing so far is a stabilization of the volume. In the past, if you've looked at the SEC filings, you can see that Genoptix volume had declined in 2018 and previously.
Now that's stabilized. So there are no unusual trends that I would alert you to.
Yes. I think one thing just to think about is synergies will come over time, right? So we have a great plan and we're really excited about it. Those will unfold over time. So there will be a little bit of a trend related to those that's towards the back end.
Synergy or revenue compression, the bad news on this deal was that, that we expect to start really quickly. And we're already seeing our contracted payers interested in moving them the Genoptix business over. That happens immediately versus when the synergies will kick in. So you'll see a little bit of trending for those 2 that are on the different tracks. So we hope that they meet as early as possible, but compression will start earlier than synergies.
Our next question comes from the line of John Hsu with Raymond James. Please go ahead, sir.
Good morning. Just a couple for me. Just on Genoptix, unless I missed this, do you have a specific cost synergy target for 2019? You're obviously very helpful sharing and providing some of the details around that there will be pacing of synergies throughout the year. But just how do we think about the maybe the run rate exiting 2018?
And then maybe along with that, And since you've now closed the deal and had made progress on the Salesforce integration, any changes to your expectations for timelines for the integration process? Do we expect that the integration could be largely complete in 2019 or moving into 2020? Just help us think about the cost synergy targets for this year as well as time lines. Thank you.
Yes. So over the 3 year period, we're still looking at $25,000,000 Some of that is a little bit back loaded because some big things have to happen, including and mostly system rationalization has to happen, that takes time. So there is some portion of that in this year. We're not giving out the exact amount, but it's not exactly straight lined over the 3 years, but it's not off that far. If you think about the revenue compression, it was about $15,000,000 on it was $15,000,000 originally calculated with about half of that covered by their existing EBITDA.
So our first task this year to get to flat EBITDA is to recognize enough synergies to offset that and that gets us back to 0 EBITDA on the Genoptix business. So you could think of that as our target for the year and we're working towards that goal.
Yes. The bottom line, John, is we haven't seen anything which changes our original synergy estimates that we discussed before, and we're feeling like everything is on track.
Yes. I think the timing is as we expected as well, right, to get to your timing question.
Okay, great. And just one more for me. Just on M and A, can you just speak to your appetite for M and A at this point? You've obviously talked about wanting to continue to grow the pharma services side of the business. So maybe you could just give us your updated thoughts and any color on the pipeline.
We remain very interested in growing our Pharma business, both organically and through M and A. And we are out there looking at deals. We are not currently looking to acquire in the clinical business. We've got our hands full right now with Genoptix integration. But we are looking at pharma deals, and we intend to continue to build that business through acquisition as well as organically.
Great. That's all for me. Thank you so much.
We'll go next to Joe Munda with First Analysis.
Good morning. Can you hear me okay?
We can. Hi, Joe. Thanks.
So real quick, two quick questions here. First, in terms of 2019, with the integration of Genoptix and the volume growth expectations that you're putting out there,
I was wondering if you could give
us some color or some granularity on what your thoughts would test mix would look like in 2019? And then a follow-up in regards to the Farm Services business. Can you give us some color on what the mix looks like in terms of stage of trial? Or is fund services the backlog there? Have we weighted towards one phase of the trial or another?
Thanks.
Sure, Joe. I will start by addressing the test mix question and then turn it over to George to talk about the pharma services backlog. In terms of test mix, because of Genoptix, we are seeing more of a mix in 2019 to heme testing as opposed to solid tumor. We are also seeing, as we have in the past, more growth in molecular testing, particularly the next generation sequencing panels. Other than that, I think that what we're seeing is similar kinds of trends in terms of test mix as we've had before.
In terms of formal, George?
Yes. We've really gone across we do quite a bit of research and discovery or pre Phase 0, if you would, and up to Phase 1, 23. What we did see in 2018 is sort of a shift to more longer trials, the Phase 2 and 3. And that's really one of our objectives is to be large enough and at the scale to be able to handle a clinical trial all
the way through the discovery of
the molecule, all the way through the FDA approval process. Now the flip side of that is having those Phase II and III trials that can be a little bit longer in terms of the revenue recognition in our backlog, but we're happy that obviously we're able to take these trials all the way through now.
Okay. Thank you.
Next, we'll go to Paul Knight with Janney Montgomery.
Hi, Doug. Two things. 1 is the pricing environment for the core business excluding Genoptix seems to be better and better. What are your thoughts this year? That would be my first question for you.
Thanks, Paul. I would say the pricing environment is not necessarily better. It's always very competitive in our part of the market. I would say that PAMA, which is impacting the industry at large, is not as significant an impact on NeoGenomics. And we're seeing some stabilization on the physician fee schedule.
But as we engage in larger and larger GPOs and these kinds of contracts, there is some very modest price decline that we sometimes see as we gain volume by entering into these agreements. So I think the guidance that we've generally laid out there of 1% to 3% kind of decline still seems appropriate to us. But the days of having the significant declines that we've experienced years ago, we think for now are behind us.
And then the other, Doug, would be regarding the PPD collaboration. Are you seeing that backlog build due to PPD? Or is it separate from that? Could we get an update on that JV?
Yes, we really can't call out specific clients in a backlog. But again, we are pleased with the alliance. We continue to make progress. We're both very committed to it. Both sides have worked together and we've actually made some significant bids together.
And we've also had a few wins across the finish line. So we're pleased with the alliance, but we really can't call out specific numbers on it.
Thanks.
Thank you, Paul.
Next, we'll go to Bruce Jackson with Benchmark Company. Please go ahead, sir. Your line is open.
Good morning. Nice quarter. I've got a 2 part question on the quoted Genoptix revenue number. Did that include any solid tumor revenue? And then can you just talk a little bit more about the synergy opportunity from the community oncology market?
And do you think you can increase solid tumor business there?
Yes. Bruce, the Genoptix numbers do include some solid tumor, but most of that business coming from Genoptix is on the heme side. But we do expect that there will be some revenue synergy, which we did not include in our original deal model as a result of being able to provide solid tumor testing to the Genoptix customer base. As we met with all of the representatives at Genoptix, we learned that Genoptix was not actively pursuing solid tumor testing. As you know, we have a very strong solid tumor business at NeoGenomics and we are able to provide that kind of testing to those customers.
So we think that's revenue synergy.
Great. Thank you.
You're welcome.
And it appears we have no signals from the group. Mr. Van Hoard, I will turn it back to the group for any additional or closing remarks or perhaps if we received any web questions.
We have received no web questions. Thank you.
Okay. Thanks, Bill, and thank you, Jim. Before we end the call, I would like to recognize the approximately 1475 NeoGenomics team members around the world for their dedication and commitment to building a world class cancer genetics testing company. And on behalf of our NeoGenomics team, I want to thank everyone for their time joining us this morning. For those of you listening who are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company.
Goodbye.
Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines and enjoy the rest of your day. Thank you.