Greetings, welcome to NeoGenomics Signs a Definitive Agreement to Acquire Genoptix Inc. conference call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Doug VanOort, Chairman and CEO. Please go ahead, Mr. VanOort.
Thank you, Rob. Good morning. I'd like to welcome everyone to NeoGenomics' conference call to discuss our acquisition of Genoptix, which was announced earlier this morning. Joining me from Carlsbad this morning are Sharon Virag, Chief Financial Officer, Rob Shovlin, President of our Clinical Services division, Jennifer Balliet, Chief Culture Officer, 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 one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statements speak only as of today. We undertake no obligation to update any such statement to reflect events or circumstances after today. Before turning the call back to Doug, I want to let everyone know that a copy of our press release announcing the transaction is available on the investor relations section of our website, www.neogenomics.com.
We will be making a copy of the investor presentation and the transcript from this morning's call available on the investor relations site shortly after the call is completed. We also want to let everyone know that we are going to limit the number of questions to a couple per person in order to give more people a chance to ask questions within the one hour that has been allotted for this call. Doug?
Okay. Thank you, Bill. Our team is excited to announce the acquisition of Genoptix. Although Genoptix today is a privately held company, investors may remember Genoptix when it was publicly traded, and customers today know Genoptix as a leading clinical oncology laboratory company.
Our combination with Genoptix will set NeoGenomics apart from the rest of the industry in a variety of ways, with an unprecedented reach to all customer segments, including hospitals, pathologists, and community oncology practices, one of the industry's broadest and deepest oncology-focused test menu, a deep knowledge of both community oncology practices and hospitals and pathology practices, a specialized pathology consults and customized oncology test reports, which oncologists consider to be the gold standard, a broad portfolio of managed care and hospital group purchasing organization contracts, a highly efficient operation, a large and highly specialized medical team with approximately 50 oncology-specialized pathologists and hematopathologists, and an 80+ person oncology-focused sales force. Strategically, this deal makes a lot of sense. The acquisition expands NeoGenomics' reach into oncology practices in communities and allows us to create a new standard of highly advanced cancer testing service throughout the country.
Growth in this channel is a strategic priority and puts NeoGenomics in a position to enhance coordination and collaboration of providers in communities throughout the country. The combination also increases our competitiveness by leveraging the best offerings from each company, creating an innovative value proposition for oncologists, pathologists, hospitals, payers, and patients. Financially, this combination bends the curve, significantly accelerating our revenue and profit trajectory. It adds approximately $85 million in revenue, resulting in a combined company pro forma revenue of approximately $350 million. It gives us an opportunity to realize approximately $25 million of identified cost synergies over time, and it allows us to improve our level of profitability as we expect the incremental margin on Genoptix revenue to reach approximately 25% by the end of year three. Genoptix looks a lot like NeoGenomics in terms of its focus in oncology, its commitment to quality and outstanding customer service.
However, it's different from NeoGenomics in terms of customer focus and test mix. Where NeoGenomics is a leading provider to pathologists and hospitals, Genoptix has established an outstanding reputation and relationships with community oncology practices. Genoptix's current business mix is also more heavily weighted towards hematopathology. Whereas NeoGenomics' test mix is a bit more balanced between hematopathology and solid tumor work. As we will discuss this morning, the two businesses complement each other quite nicely. Genoptix is located in Carlsbad, California, which is only about 40 minutes south of our large Aliso Viejo laboratory facility. The acquisition of Genoptix significantly expands NeoGenomics' reach into oncology practices, positioning NeoGenomics as an industry leader in cancer diagnostic testing with hematologists and oncologists, while preserving the integrity of our core pathology business.
Growth in the community oncology segment has been and continues to be a strategic priority for the company, as it represents a significant opportunity for growth. There are more than 2,000 community oncology practices in the U.S., representing a testing opportunity of approximately $2.5 billion. While we've made some meaningful strides in building our oncology practice business over the past two years, it is still quite small. With the addition of Genoptix, that will change. Genoptix has 40 sales reps that have been exclusively focused on selling to community-based oncologists. In addition, they have a group of experienced pathologists with years of experience servicing these physicians. Genoptix has also delivered a suite of customized test reports that are considered to be the gold standard among oncologists.
This experience in customization is critical, as the needs and requirements of community oncologists can be quite different than the needs and requirements of pathologists. The acquisition of Genoptix will leverage and enhance our product offering. NeoGenomics has a large, comprehensive, multi-modality test menu, which includes many tests that Genoptix does not currently offer to its customers. In particular, we offer a broader portfolio of next-generation sequencing-based panels, a much greater number of immunohistochemistry tests, and a more technologically enhanced 10-color flow cytometry program. NeoGenomics also has greater resources and expertise in the area of solid tumor pathology. NeoGenomics also has an extensive portfolio of managed care and group purchasing organization contracts for hospitals and integrated delivery networks. Since Genoptix is largely an out-of-network provider, we believe that this combination will benefit oncologists, hospitals, payers, and patients.
Moving Genoptix work in-network with contracted payers will result in lower rates for payers, lower out-of-pocket expenses for patients, and fewer hassles and complaints for physicians and hospitals. We are hopeful that the move to in-network status will result in increased referral volume and decreased denials. Genoptix lab operations are solely in Carlsbad, California, while much of their customer base is located east of the Mississippi. We anticipate being able to improve turnaround time and customer service for many East Coast clients over time by strategically redirecting select cases to our other lab facilities. As you know, NeoGenomics has large laboratory facilities on the East Coast, in Fort Myers, Florida, and in Houston, Texas, and Nashville, Tennessee, for more central states. Genoptix has highly differentiated diagnostic reports, which are specifically tailored to oncologists. These reports are considered the gold standard in the industry.
COMPASS is a comprehensive, hematopathologist-directed integrated assessment report that provides a customized workflow with a guideline-based, disease-specific evaluation for each case. CHART integrates information from a series of COMPASS reports over time, correlating relevant prior findings to provide a longitudinal patient view. Oncologists find this information useful for monitoring response to therapy, determining disease progression, evaluating clonal evolution, and assessing residual disease. The incorporation of the NeoGenomics molecular test menu into the guidelines-based process will further ensure oncologists are able to get all of the testing they need from a single laboratory company. It also allows us to reduce the overall cost of patient care by removing the need for further follow-up testing from another lab. We see this acquisition as an opportunity to create increased value for all of our stakeholders, including oncologists, pathologists, hospitals, payers, and patients.
By integrating NeoGenomics' deep knowledge of and relationships with hospitals and pathologists with Genoptix's understanding and experience with community oncology practices, the combined company will be in a unique position to coordinate oncology testing between oncologists and pathologists at the community level. Genoptix currently performs both the technical and professional work for the majority of its cases. These cases are referred to as global. While NeoGenomics performs a large number of global cases, we also have a long history of working collaboratively with community pathologists through our innovative tech-only model, in which NeoGenomics completes the technical component of the test and the local pathologist is then able to play an active role in the diagnostic process by performing the professional interpretation.
As we grow in the oncologist channel, we believe that we will have an opportunity to help our pathologist customers grow their business as well while honoring oncologist referral preferences and maintaining the highest quality of reporting and pathologist-to-oncologist interaction. I'll summarize by saying that this acquisition raises the bar for competitiveness and excellence in our industry. It expands our reach into oncology practices and significantly accelerates our progress towards key scale and growth objectives. It allows NeoGenomics to be uniquely positioned as a leading provider for all segments of the oncology lab market. It creates yet another growth opportunity by leveraging our extensive test offering for the Genoptix customer base, as well as our broad portfolio of managed care and GPO contracts. It creates a unique opportunity for NeoGenomics to coordinate care through oncology testing in the community, creating a win-win dynamic for oncologists, pathologists, and for NeoGenomics.
Importantly, the deal allows for the creation of substantial cost synergies and the opportunity for greater levels of profitability. I'll now hand the call over to Bill Bonello to lead us through question and answers.
At this point, we would like to open the call up for questions. Incidentally, if you're listening to this conference call via webcast only and would like to submit a question, please feel free to email us at bill.bonello@neogenomics.com during the Q&A session, and we'll address your questions at the end if the subject matter hasn't already been addressed by our call-in listeners. Operator, you may now open the call for questions.
Thank you. To ask a question over the phone today, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today comes from the line of Kevin Harris with Craig-Hallum. Please proceed with your questions.
Good morning. Thanks for taking the question. I know it's pretty early out there, Doug. I guess going back to your comment about Genoptix being out-of-network, how much lower are the rates? Is it safe to assume that you've baked in the lower in-network rates into the $85 million in revenue that you talked about?
Yes. Good morning, Kevin. It is early here. Yes. One of the most extensive parts of our diligence, frankly, was understanding the effect of our managed care plans as they relate to Genoptix out-of-network rates. Every plan is different. We did a fairly extensive analysis, and those rates are reflected in the numbers that we provided. An $85 million increase to our revenue base reflects the full extent of the price compression. We think we understand it quite well, and we think that potentially there are volume opportunities also as a result of moving Genoptix in-network under our contracts.
Sure. There's been a lot of talk in the industry about payer denial rates for molecular diagnostics and genetic testing, which I think is still hovering around 50%. Is Genoptix in that range, or can you talk about their denial rates and where you think that could go?
We're not sure exactly what their denial rates are. I mean, we're actually exploring the denial rates in our own business and trying to rectify that. Certainly, being in-network is a way to work with payers to reduce the number of denials, and we think that there's an opportunity at Genoptix to do the same thing. We're looking forward to working with them on that.
Great. As for the cost synergies of $25 million, I guess, two-fold question. How long will that take to attain? I know you gave the three-year outlook for the EBITDA margin, but to get the $25 million of cost synergies, is that over the same time period? Can you give us any specifics as to where that's going to come from?
Yeah, Kevin. The cost synergies we do expect to be realized over the course of three years, and that's reflected in the projections that we gave you. I think that we've learned a lot of lessons from the Clarient integration. As we mentioned in the script, the Carlsbad facility is only about 40 mi away from our existing facility, so there are opportunities there. The other thing is that as a growth company, we are hiring people all the time. We would expect that some of the openings that we currently have and will have over time, we'll be able to call on some of the Genoptix folks that might be able to fill those positions. That's also cost synergy. We feel like we understand it pretty well.
What about the revenue synergies, Doug?
We didn't model any revenue synergies in our justification for the deal, Kevin. As you know, it's easier to quantify cost synergies, and that's what we modeled in. Revenue synergies are harder to quantify, so we don't typically include those. However, we do believe that there are revenue synergies. Just a quick example of that would be cross-selling the more comprehensive menu that we have at NeoGenomics to the clients of Genoptix. There are other revenue synergies, but we didn't model them in to justify the deal.
Great. I'll hop back in queue. Thanks for taking my questions.
Thank you.
The next question is from the line of Puneet Souda with Leerink Partners. Please proceed with your questions.
Hi, Doug. A good acquisition. Congrats on the acquisition. First question around the comments you made on tech-only component. Help us understand, Genoptix is doing both tech-only and local, could you just elaborate on how that would play out, and how would you execute on that in terms of oncologists that are used to having a certain tech-only component versus both tech and local? How would you manage across these two populations?
Yeah. Thank you, Puneet, for the question and for the congratulations. As you know, NeoGenomics has both a product offering in which we can offer the tech-only service to pathologists, but we also do a lot of global testing, and it's quite flexible, I would say. Some pathologists like to interpret certain kinds of tests, like maybe flow cytometry. Others like to interpret FISH testing, others immunohistochemistry. Some like to interpret all of those. It really is a client-by-client decision, and our menu and the way we work with pathologists allow for a lot of flexibility there. The Genoptix clients are usually not engaged in any kind of tech-only model. The oncologist will make use of the Genoptix COMPASS report, which is a global report.
I think the opportunity for us is to work with the physicians in the community, both oncologists and pathologists, and to ask them what their wishes are, because we can do both, and we can do the global work, and we would anticipate continuing what Genoptix has done so well in that regard, and frankly, using some of their reporting to enhance the NeoGenomics reporting on a global basis. Also be able to offer pathologists in the community the opportunity to work with oncologists in the community and perhaps to grow their business by performing some of that oncologist work if the oncologist wants to do that. We feel like we understand the dynamics here. It is a client-by-client decision, but the flexibility of our menu allows for us to navigate through that, I think pretty well.
Okay, thanks for that. Second question is around the biopharma opportunity that you have had where you've seen growth. Now, I know this is an acquisition more in the community setting. It strengthens your position there, but help us, just educate us on your appetite for further M&A and potentially in some of the higher growth areas of servicing biopharma.
Yeah, we love the biopharma business. This Genoptix acquisition does not include any biopharma revenue or business as a part of it. It's all clinical. This was an important acquisition to bolster our clinical business. It was the best acquisition that we could possibly do to solidify that core foundation of our company. We are very much interested in the biopharma space. We're growing that organically. We're growing that through the affiliation, the alliance that we have with PPD, and we will also look at acquisitions in biopharma to accelerate our growth there. We're constantly looking and evaluating potential opportunities. We have a big appetite to grow that business.
All right, thanks, Doug.
Our next question is from the line of Bruce Jackson with The Benchmark Company. Please proceed with your questions.
Hi, good morning, and congratulations on the acquisition. It's a nice add to the portfolio. My first question is about the Genoptix revenue growth rate. Was this a business that was growing at can you give us a range of how fast they were growing?
Yeah, Bruce, thanks for your question. Genoptix was not growing. In fact, under the ownership of the private equity firm, their initial work was not focused on growth in revenue, but rather growth in profitability. So they took action to eliminate business that wasn't profitable, and that certainly resulted in some revenue pullback, I would say. As NeoGenomics has been growing organically pretty nicely, many others in the industry have not, and Genoptix is in that category.
Okay. My second question.
What we've seen recently is, as a result of the work that the management team at Genoptix has done, they have stabilized the business quite nicely. That's one of the things that's attracted us to the business, that the business at Genoptix is stable. It's beginning to grow again. Certainly, we feel good about the business that exists today.
Okay. If I could ask about, I know this is going to be kind of a broad question, but just generally about the testing habits of the community oncologist and the Genoptix customer base. Were they using Genoptix to do the primary patient workups and then also the follow-up testing, or was it primarily the follow-up testing that they were doing for the community oncologists? Are there any opportunities for you to expand their test usage by capturing the early samples and then running them through for the higher ASP tests later on as well?
A lot of Genoptix work is for hematologists and oncologists, a lot of that is bone marrow biopsy work, which would include, it really is an initial diagnosis for all sorts of blood-based cancers. There's follow-up testing. The follow-up monitoring testing would occur as therapy is provided to a patient to make sure that the therapy is being effective. Yeah, I think that there may be some other testing that can be done. I think the NeoGenomics test menu, because it's broader, can offer more opportunities for hematologists and oncologists in the community. I think that's sort of the extent of the additional testing that might be offered.
As you know, NeoGenomics does work with hematologists and oncologists locally, but we also do a lot of solid tumor work, and there may be opportunities to broaden the solid tumor testing, which Genoptix clients currently do with the NeoGenomics test offer.
Okay. That's helpful. Thank you very much.
Thank you for the question.
The next question is a follow-up from the line of Kevin Harris with Craig-Hallum .
Hey, Doug. Just a couple follow-ups. I guess the first one is, when do you guys expect this deal to close? I didn't see that in the press release.
The deal will close after the Hart-Scott-Rodino period, so we would expect it to close in late November to early December.
Okay. Really more of a 2019 impact. That makes sense. Then I guess you talked in the prepared remarks about better positioning between oncologists and pathologists to improve care. Can you expand on that and just give us a little bit more color as to what sorts of things we could see in terms of improving patient care?
Sure. Right now, as you know, we at NeoGenomics have a pretty deep understanding of what happens in the hospital segment. Hospitals have acquired pathology practices. They've grown cancer centers, we have a pretty good understanding of what happens there. We have less of an understanding of where the samples are going that originate from the community clinicians, from the oncologists and hematologists. Sometimes those samples go to the hospital, then we would capture them as a result of that channel. Sometimes they go out to other labs who perform global testing, the hospital doesn't see them.
I think what this acquisition will allow us to do is to see where all of that work is going, where it's originating and where it's going, and we might be able to help optimize the testing locally because we know there are terrific pathology resources in a local community. We might be able to help develop those kinds of interactions. Also the testing is changing a bit. We have to recognize that some of the testing, like next-generation sequencing, doesn't really need to go through a pathologist channel. It can go directly to a lab. We would be in a unique position to be able to help oncologists and pathologists navigate this increasingly complex testing process that exists as the science and technology changes. We think we'll be in a somewhat unique position to do that.
Great. Sound good. Thank you, Doug.
Okay. Thank you, Kevin.
Thank you. Are there any additional phone questions this time or are there any electronic submissions?
Any other questions, Bill? Electronic, please.
No. I'm sorry. There are no electronic questions.
Okay. Well, before we end the call, I would like to take a moment to recognize the approximately 1,100 NeoGenomics team members from around the globe for their dedication and commitment to building a world-class cancer genetics testing company. To the Genoptix team members who may be listening to this call, we also thank you for your dedication and commitment. You've built a first-class organization with an outstanding reputation. We look forward to working together to accomplish even greater things on behalf of our customers. On behalf of our NeoGenomics team here today, I want to thank you for your time joining us this morning. For those of you who are listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Goodbye.
This will conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation.