Greetings, and welcome to the NeoGenomics First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug Van Oort, Chairman and CEO for NeoGenomics.
Thank you, Mr. Van Oort. You may begin.
Thank you, Bob. Good morning, everyone. I'd like to welcome everyone to NeoGenomics' Q1 2018 conference call. Joining me from our Fort Myers headquarters is Sharon Virig, who recently joined NeoGenomics as our Chief Financial Officer Rob Shovlin, President of our Clinical Services Division Steve Jones, Executive Vice President Catherine McKenzie, Vice President of Finance and Principal Accounting Officer Jessica King, Director of External Reporting and Bill Bonello, Vice President of Strategy, Corporate Development and Investor Relations. Before we begin our prepared remarks, Bill Bonello will read the standard language about forward looking statements.
This conference call may contain forward looking statements, which 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 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 call available on the Investor Relations section of our website shortly after the call is completed. We also want to let everyone know that we are going to limit the number of questions to 2 per person in order to give more people a chance to ask questions within the 1 hour that has been allotted for this call.
Thank you, Bill. For today's call, I will briefly review a few of the quarter one financial highlights and then turn the call over to Sharon for a more detailed review of the financial results. After that financial review, I will provide additional commentary on our 2018 growth initiatives and some of the investments that we're making to drive both near term and long term growth. Let's begin with the quarter one financial highlights. NeoGenomics' 1st quarter performance was excellent.
Total revenue grew 10%, Excluding the contribution from Pathologic, which we divested last summer, revenue increased nearly 14% year over year. Clinical Services division test volume grew 15% and revenue grew approximately 8%. Excluding Pathologic, clinical revenue grew 11%. Pharma Services division growth remained exceptionally strong with revenue up more than 40% and backlog up nearly 90%. We believe that both divisions are gaining market share in a growing market.
Importantly, we were once again able to grow profitably. Adjusted EBITDA increased 40% year over year and adjusted EBITDA margin increased by more than 300 basis points to 14.6%. The adjusted EBITDA margin on revenue growth was 44%, which is well above the high end of our long term guidance of 25% to 35%. We were particularly pleased with our record level of cash collections in spite of challenges caused by regulatory changes. Cash flow from operations increased to a record $14,000,000 Days sales outstanding was lower than at any time since 2015 and our financial position is strong.
All in all, Q1 financial performance was excellent. We are pleased to see continued momentum in both the clinical and pharma services businesses. At this point, I'll turn the call over to our Chief Financial Officer, Sharon Virig for a more detailed review of quarter 1 financial results.
Thank you, Doug. Before I begin, I'd like to remind everyone that we adopted ASC 606 effective January 1, 2018. As part of the adoption of ASC 606, we have also restated 2017 results to reflect the adoption of 606 for all of 2017. Hence, the year over year comparisons that we discuss will include the adoption of ASC 606 for both periods. The primary effect of adopting 606 is that bad debt, which had previously been accounted for in SG and A expense, is now recorded as an implicit price concession and shown as a reduction to revenue.
There are also some changes to the timing of revenue recognition in the pharma services business, although these changes are not material. The adoption of ASC 606 had the effect of lowering revenue, gross profit and G and A expense relative to the prior accounting methodology for both years. However, the impact on adjusted EBITDA is not material. Our first quarter revenues were $63,400,000 a 10% increase from last year. After adjusting for the sale of PathLogic, total revenue grew by nearly 14% year over year.
Clinical genetic testing revenue increased 11% to $57,000,000 and pharma services revenue increased 43% to $6,500,000 As Doug mentioned, clinical genetic testing volume increased 15% year over year. Importantly, this growth was balanced across modalities with double digit growth in both flow cytometry and FISH and more than 30% growth in molecular testing. Average revenue per clinical genetic test was $3.19 a 3% reduction from the prior year. This decline results primarily from changes to Medicare reimbursement and regulation. Gross profit increased by $4,400,000 to $27,300,000 up 19% from the prior year.
This increase represents a 73% contribution on the $6,000,000 of revenue growth. Gross margin improved by more than 300 basis points year over year to 43%. This improvement was driven by a 7% decrease in clinical cost per test as well as a 4 90 basis point increase in our pharma services gross margin from the prior year. Operating expenses increased by $1,300,000 or 5%, primarily due to investments in sales and marketing. And our Q1 GAAP net loss attributable to common shareholders was $2,200,000 compared to a net loss of $3,700,000 in the Q1 of 2017 and a diluted income per share was a loss of $0.03 versus a loss of $0.05 in the prior year.
We believe that in order to compare a net income related to the true operations of the company on a more consistent basis across periods, it's appropriate to adjust GAAP net loss or income available to common shareholders to exclude certain net 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. We've included a table with how these are calculated in our earnings release. Adjusted EBITDA was $9,200,000 an increase of $2,600,000 or 40% compared to 20 seventeen's Q1. In the Q1, adjusted net income was $3,700,000 compared to $2,000,000 in the prior year.
Adjusted diluted EPS was $0.04 per share versus $0.02 per share in quarter 1, 2017. As Doug mentioned, cash collections were quite strong in the quarter. DSO decreased sequentially to 83 days in quarter 1 from 89 days in quarter 4. The improvement in cash collections drove a $16,000,000 increase in cash flow from operations from negative $1,700,000 in last year's Q1 to positive $14,300,000 in this year's Q1. This performance is especially notable as quarter 1 tends to be a challenging quarter due to high level of patient deductibles.
We ended the quarter with $15,200,000 of cash on the books. Our total debt at the end of Q1 was $101,000,000 dollars as we repaid $2,900,000 on the revolver during the quarter in addition to our normal quarterly principal payment on the term loan. At the end of the quarter, our total liquidity, including borrowing capacity on our revolver, was $45,000,000 We finished the Q1 with 10 23 full time equivalent employees, contract doctors and temps versus 1,009 at December 31, 2017, and 1012 as of March 31, 2017. Nearly all of the increases were laboratory personnel to deal with increased testing volumes and billing personnel to adjust to the complexities caused by new regulations. We are maintaining our full year guidance for revenue and adjusted EBITDA.
We continue to expect revenue to be in the range of $260,000,000 to $272,000,000 We continue to expect adjusted EBITDA to be in the range of $39,000,000 to $43,000,000 On the quarter 4 call, we discussed a number of reimbursement headwinds, including cuts to Medicare rates for flow cytometry, IHC, cytogenetics and molecular, as well as changes to Medicare 14 day rule, the draft National Coverage Determination or NCD for next generation sequencing for advanced cancer patients and prior authorization. Based on the trends we've seen to date, we remain comfortable that our guidance adequately captures any potential impact from these changes. Our press release this morning includes a more comprehensive summary of our 2018 guidance, including EPS and adjusted EPS ranges and a reconciliation of non GAAP measures to GAAP. I'll now turn the call back over to Doug to provide some additional commentary on our 2018 growth initiatives.
Well, thank you, Sharon. Before we begin the question and answer segment of this call, I would like to provide an update on our 2018 growth initiatives and some of the investments that we're making to drive both near term and long term growth. Our outlook for near term growth remains positive. During the quarter, we continued to strengthen our competitive position by adding several important managed care and group purchasing organization contracts. These type of arrangements with payers and hospital groups helped us to add a number of new hospital accounts and the pipeline of new accounts is very healthy.
Importantly, our service levels continue to be very strong and we are maintaining exceptionally high levels of client retention. To meet the increasing demand for our clinical division services, we are adding capacity. As previously disclosed, we are opening a small lab in Atlanta, Georgia within the next month to provide rapid turnaround flow cytometry services to clients in that area. We already have an outstanding flow cytometry program delivering extremely consistent and rapid turnaround time for clients. And this new lab will allow us to deliver even faster service to clients in the large Atlanta marketplace.
We continue to invest in our comprehensive oncology test menu. We introduced 9 new or enhanced tests since the beginning of this year. We believe our oncology test menu is the most comprehensive in America and provides an important one stop shop for clients throughout the country. In Pharma Services, we signed net new contracts of approximately $14,000,000 during the quarter and we ended quarter 1 with $73,000,000 of booked contracts for future work. The number of new contracts being pursued by our pharma services team remains very robust.
We are adding capacity and upgrading our capabilities significantly in pharma services. Our new lab in Rolle, Switzerland is staffed, instruments are validated and has just begun to process specimens. We expect to ramp up project volume and be at a breakeven level by year end. We also are nearing completion of a new and significantly expanded lab in Houston, Texas. This 28,000 square foot purpose built laboratory will primarily serve our pharma services division with capabilities for next generation sequencing and other molecular testing, flow cytometry and immunohistochemistry.
This facility will also help us serve clinical services division clients and can accelerate our growth in Texas. We believe our prospects for long term growth are also good as the markets for oncology testing are growing both due to demographic changes and to rapid advances in science and medicine. As a result, we are investing to position NeoGenomics as one of the leading oncology testing companies in the world over the long term. Molecular testing, in particular, is an area of investment focus. In order to put this investment in perspective, I'd like to share some details about our existing molecular business.
NeoGenomics is already one of the largest providers of molecular testing for somatic cancers in the U. S. In quarter 1, our molecular test volume grew more than 30% year over year to more than 40,000 tests. During the quarter, we provided more than 4,400 multi gene panels, an increase of more than 80% from the prior year. Our run rate revenue for molecular testing is approximately $50,000,000 We believe that our molecular testing capabilities are among the most advanced in the country and that we have one of the largest molecular test offerings for cancer mutations in the U.
S. We currently offer 157 different molecular tests and panels to our clinical customers and 162 to pharma customers in CAP accredited CLIA approved testing facilities. We offer single gene tests, over 30 multi gene tumor profiles called NeoTYPE Cancer Profiles and larger panels of tests covering as many as 1385 genes. We offer tumor mutational burden testing to provide information for new immuno oncology therapies. We utilize all the major molecular technologies, including next generation sequencing, Sanger sequencing, real time PCR, fragment length analysis and microarray.
Our next generation sequencing laboratories use platforms including Illumina's MiSeq, NetSeq and HiSeq instrumentation, Thermo Fisher's Ion Torrent system and a host of other technologies. NanoString's nCounter system is also available to pharma clients. From a commercial perspective, clinical customers have the ability to customize their test requirements and our pharma services customers have even more significant opportunity to customize existing tests or to work with us to develop new tests. Our clinical tests cover every aspect of molecular oncology testing, including diagnosis, prognosis, prediction of response to therapy and detection of genetic predisposition. With that background, I'd like to describe 2 of the significant ongoing investments in our Molecular business.
We are continuing to make investments to develop and support our multi gene panels. However, as we discussed in the past, 3rd party reimbursement for these panels is currently sporadic at best. Frankly, we lose money on a number of these panels, but we expect that reimbursement coverage will improve sometime in the future. We provide these tests because they are good medicine. Our clients want them.
They help differentiate us from the competition and we believe that they will eventually be covered. 1 of our initiatives in this regard is to seek single site PMA approval from the FDA for our large multi gene next generation sequencing test. We're currently in the process of filing our pre submission letter. Obviously, this process is quite involved and we are committed to invest in this important product development. We expect this initiative will lead to improved reimbursement in the future.
Molecular testing is a vitally important tool for physicians and researchers in their search to prevent, treat and cure cancer. We commit to lead in each area of our business and we are making investments in molecular testing to competitively position NeoGenomics as a leader in oncology testing today and for many years to come. I'll now hand the call over to Bill Bonello to lead us through a question and answer period. Bill?
At this point, we'd like to open it up for questions. If you are listening to this conference call via webcast only and would like to submit a question, please feel free to email us at bill.bonelloneoeneogenomics.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 this call. Operator, you may now open up the call for questions.
Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Amanda Murphy with William Blair. Please proceed with your question.
Hi, good morning. I had a quick few follow ups on some comments that you just made, Doug, around the sequencing panels. So yes, first, with the FDA. So is your intention then to seek PMA for CDx indications for the panel so that way you can be covered under the new NCD? And any sense, I don't know if you've gotten a chance to talk to the FDA about how they're looking at potentially using the clearance process for CDx claims, which I don't think they sort of have done yet?
Thanks for the question, Amanda. Yes, we plan to submit to the FDA a large panel, which would include companion diagnostic testing for existing companion diagnostic approved test by the FDA.
Okay. And then just I guess a broader question on the sequencing panels. I think there's definitely it's a question we get anyway from investors just in terms of the complexity of those panels and how many labs are able to do them. And I'm sure it varies obviously between single gene and multi gene. But maybe you could just walk through kind of what where how you think you're positioned well in that market?
And do you think the market could change over time, particularly as some of the platform providers maybe also take their products through the FDA and sort of try to make a more distributed model? So just trying to look for your kind of methodology wise and data wise, what are kind of your advantages there? Thanks.
Yes. So we have a lot of multi gene panels that are broken down into tumor type as we've talked about in the past. We have we've typically sold these a lot of our billing goes to hospitals, as you know. And these panels have been extremely popular because they target driver genes and mutations, which have therapeutic implications. And so those panels have been very popular.
And as I mentioned in the prepared remarks, our growth in these panels has been spectacular. It's been about 80% even in quarter 1. We do expect that there are going to be changes here in these panels. Science is changing very rapidly. Our understanding of how these mutations individually and in combination affect therapeutic
alternatives
and physicians' possibilities relative to clinical trials is changing very rapidly. So we think that these panels will continue to be very popular, but we're also looking at through the FDA PMA process a larger panel, which we are probably going to send a pre submission letter within the next 2 weeks to the FDA for a larger panel, which we think will help us to be competitive over the long term.
Great. Thanks very much.
Thank you. Our next question comes from the line of Kevin Ellich with Craig Hallum. Please proceed with your question.
Good morning. Thanks for taking the questions. Doug, I just wanted to start off with the pharma growth, really nice performance there and nice improvement on the backlog. I guess, can you give us a little bit more color as to what's driving it? And clearly, with the $73,000,000 of booked contracts, how should we see that flow through over the next 12 months?
Yes. Kevin, we think we have some good competitive advantages in pharma. Some of the same competitive advantages that we have in our clinical business also exist in pharma given that we provide immuno visstochemistry, FISH, molecular testing, flow cytometry and also this proprietary technology called multiomics for pharma clients. So we are gaining business in each of those modalities and we actually believe that we have very good growth potential in each of them. And a number of the contracts that we have signed are for multiomics, for molecular testing.
We are starting to even penetrate the flow cytometry marketplace with some new technology that we've added both in Switzerland and in the U. S. I believe that the contracts that we have in backlog are getting a little bit longer in duration because a number of our contracts now are Phase 2 and Phase 3 type of projects. So we expect that some of these are going to be realized into revenue over a little bit longer period of time than we've had in the past. But as you know, the revenue has started to grow.
We've started to realize revenue a little bit more quickly as our backlog has increased. And for the last two quarters, our revenue growth year over year has been quite strong, and we expect that to continue.
That's helpful. And then just wanted to see if you could give us kind of some general statements or kind of broader impact, what you've seen from the reimbursement changes, PAMA, 14 day rule, any impact from next gen sequencing? Thanks.
Yes. Let me try to take that and Sharon may have a few comments as well. First of all, PAMA has not been a significant impact for us in this year. As you know that most of our testing is paid for using the physician fee schedule rather than the clinical fee schedule and PAMA impacts the clinical lab fee schedule. So only cytogenetics and molecular testing are affected by PAMA.
We do have a number of other impacts that I think Sharon mentioned in her prepared remarks that are changing our reimbursement for tests. And I think Rob Shovlin, who is President of our Clinical division, has some further comments on that.
Hey, Kevin, it's Rob. Good to talk with you again. So on the 14 day rule, just as a reminder, prior to January 1, 2018, the 14 day rule prohibited non hospital reference labs from billing Medicare for any laboratory test performed within 14 days of sample procurement in a hospital setting. But under the new rule, which took first took place on effect on January 1st, a non hospital reference lab must fill Medicare now for certain molecular pathology tests that are performed within 14 days of sample procurement in a hospital outpatient setting. So now we go from billing our clients directly to billing Medicare, and that really pertains to most of our molecular tests that have historically been billed to hospital clients.
In many cases, the Medicare rates are slightly lower than our hospital rates. But based on the trends we've seen to date and what Sharon gave in her comments, we remain comfortable that our guidance adequately captures any potential impact from these changes.
Got it. Thanks, Rob.
Thank you. Our next question comes from the line of Drew Jones with Stephens Inc. Please proceed with your question.
Thanks. Good morning, guys. The FDA pathway for the molecular panels, was that spend contemplated in the $5,000,000 and growth spend that you got telegraphed for 2018?
Yes, Drew, it was.
Great. And then as far as the incremental margin, the EBITDA margins on the incremental revenue in the quarter at 44 percent and a seasonally weak quarter. Maybe update us on the deployment of that gross spend and is that level of incremental margin sustainable from this point?
Drew, we gave guidance, I think, which we're going to stick to, which says that we expect 25% to 35% incremental adjusted EBITDA on the revenue growth. And I think that's a good benchmark for us. We were able to drive better than that adjusted EBITDA for the Q1. The cost programs, cost containment programs, cost reduction programs, automation, scale advantages, that sort of thing continued to allow us drive good incremental EBITDA. But I think 44% is probably on the high side of what we should expect going forward.
Thanks, guys.
Thank you. Our next question comes from the line of Paul Knight with Janney Montgomery Scott.
Scott. Doug, you had mentioned $50,000,000 run rate on the molecular tests. What was that a year ago? Or what was the growth rate year over year? Paul, I don't actually know the answer to that question.
Bill, do you I think Yes.
I think, Paul, we have the data, but we're not we disclosed some of the molecular information on this call to give you a sense of what kind of player we are in the space, but it's not necessarily numbers that we're going to provide on a routine basis. We did say that our molecular volume grew by more than 30% in the quarter.
Okay, got it. And then my next question my second question is pricing, average price down 3% in the quarter. Historically, it's been quite a bit more than that. Is this the new normal?
So is the 3% the new normal? I mean, I think as we work through I'm not sure on historical, we believe that the revenue per test decline was more around the Medicare reimbursement cuts and then for some of the payer mix that we've seen. So we'll continue to work through those, but I don't know if I would consider that the new normal that it would be down. Anybody else want to add to that?
My hands. Okay.
Okay.
We stick by our previous guidance that we've delivered that we expect average revenue per test to be $300 to $3.10 for the year.
Okay. Thanks, Bill.
Thank you. Our next question comes from the line of Raymond Myers with The Benchmark Company.
Doug, first question is beyond the pre submission letter that you discussed, what are the milestones and timing to FDA clearance for this new large panel that you're seeking?
Thanks for the question, Ray. As you know, there haven't been a lot of these. There has I think have been a couple that have gone through the FDA process. So we the FDA has indicated that these kinds of processes they think should take around a year. And that would be a sort of a benchmark for us.
There's a lot of work to be done. And we have teams that are working on this, and we have some consultants that are helping us. And we're hoping that, that kind of time frame works for us as well.
Great. And would the next milestone be the actual submission of something?
Yes. There's a pre submission letter, which is going to be made very soon. And then we will have a meeting with the FDA. And there's a whole process that we would undertake. And this is a single site PMA submission.
Okay, great. And then second question is around well, for Sharon actually. Sharon, what supported the very strong Q1 receivables collection?
So the Q1 receivables collection was us kind of getting a bit of a handle on the day 14 or the 14 day rule and making sure that we've gotten education for our different customers, making sure that our billing teams are all getting all of the information that's necessary to kind of get that in order. And I think we showed that by the end of the quarter, certainly at the beginning of the quarter as everybody was getting used to it from a new perspective. And I think we were able to get our handles our hand on it. Anything else you would add?
No. We as you know, Ray, have integrated the billing system with the last year when there was a lot of work going on to implement, integrate the billing systems here at the company. And we think that the billing team and our billing process is really getting under strong management. We used to drive these kinds of DSL levels, and we're once again achieving the DSL levels that we achieved prior to the Clariant acquisition. And we've got a very good billing team, good billing processes.
We're automating as much as we can there. And the cash collections, I think, we're strong and reflect that.
Well, excellent. Congratulations. Thanks.
Thank you. Our next question comes from the line of Joe Munda with First Analysis. Please proceed with
Good morning. Thank you for taking the questions. Real quick, Doug, as far as cost per tests are concerned, I mean, you've been able quarter over quarter, year over year to strip out costs. I'm just curious how much more can you strip out from these tests going forward as we look out over 2018? Are we expected that cost per test will continue to outpace the reduction in revenue per test?
Yes. Thanks for the question, Joe. We have been successful in reducing our cost per test. There are a lot of reasons for that. And some of those reasons we expect to continue for some time.
One reason is scale. And the volume growth that we're bringing in is we're using that volume growth on our existing platforms to drive a lower overall cost per test. We're also automating a lot of the work that we do. We're also deploying lean practices throughout our laboratories. We're also using our scale advantage for savings and supplies and that sort of thing.
So there are a lot of tools that we're bringing to bear to reduce our cost per test. We think that, that can continue for some period time. And we certainly expect that at least for the foreseeable future that our cost per test reductions will outpace the reductions that we're seeing in revenue per test.
And then in regards to the tests themselves, in the quarters past, you talked a lot about PD L1. I'm just wondering how much of a contributor to the extent you can tell us how much PD L1 was a contributor in the quarter and how much of an impact did it actually have on overall average revenue per test? Was that a driver? I know you talked about Medicare reimbursement being an issue, but I'm just curious to get some state of how PD L1 was in the quarter?
Yes, PD L1 was a big growth driver in 2017, but that growth is pretty much annualized in quarter 1. So there was not a significant impact of PD L1 in either our revenue per test change or our cost per test change in the quarter. Okay.
And then couple more here. In terms of the backlog, you added roughly $14,000,000 correct, this quarter. I'm just curious, how much of that was new versus existing customers?
I don't have that exact breakdown, Joe, but I can tell you that just my gut feel is that a lot of that came from relatively new customers. We have a sales team that is now I think, the average tenure of our pharma sales team is coming up on almost 2 years, and they're getting a lot of traction in the marketplace. They've approached a number of new clients. We have some very good relationships with a number of pharma clients, both small and large. And I think that the projects, I think many of them
are coming from new clients. Okay.
So can you just remind us how many reps do you have selling Farm Services?
Yes. We have 7 right now. And we just hired 1 in Europe. We're looking for another representative in Europe as well to support our lab there in just outside of Geneva.
And hey, Joe, this is Bill. To be fair to everybody else, we are going to try and stick to the 2 question limit. We'd like to sneak a couple of extras in, but I think we'll have to end it there.
Thank you.
The floor back to management for closing comments. Okay. Thank you, Bob, and thank you everyone for your questions. Before we end the call, I'd like to recognize the approximately 1,000 NeoGenomics team members around the U. S.
For their dedication and commitment to building a world class cancer genetics testing company. On behalf of our NeoGenomics team, I want to thank you for your time joining us this morning and let you know that our Q2 2018 earnings call will be held on or around July 24, 2018. For those of you listening that are investors or considering an investment in NeoGenomics, we thank you for your interest in our company. Goodbye.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.