NeoGenomics Q3 '19 revenue up 51% YoY

NeoGenomics, Inc. (NEO) is a premier pure-play oncology testing company that I found mentioned often and given high reviews and respect by medical researchers, doctors, professionals and companies while conducting my liquid biopsy due diligence, which, in turn, led to my initial NEO investment in 2018, and my introductory post here on 8/1/2019.…

This post covers Q3 2019 results, recently released on 10/29/2019.


NeoGenomics is a high-complexity CLIA (Clinical Laboratory Improvement Amendments)-certified clinical laboratory and pharma services company that specializes in cancer genetics diagnostic testing, the fastest growing segment of the laboratory industry. The company’s testing services include cytogenetics, fluorescence in-situ hybridization (FISH), flow cytometry, immunohistochemistry, anatomic pathology, and molecular genetics.

NeoGenomics services the needs of pathologists, oncologists, urologists and other physician specialists, academic institutions, and the pharmaceutical industry. Headquartered in Fort Myers, FL, NeoGenomics operates a network of cancer-focused genetic testing laboratories, located in Ft. Myers and Tampa, Florida; Aliso Viejo, Carlsbad and Fresno, California; Houston, Texas; Atlanta, Georgia; Nashville, Tennessee; Rolle, Switzerland; and Singapore.

The mission of NeoGenomics is to improve patient care through exceptional genetic and molecular testing services. Its vision is to become the World’s leading cancer testing and information company by delivering uncompromising quality, exceptional service and innovative solutions.

Complementary Acquisition of Genoptix

On 12/10/18, NeoGenomics completed the acquisition of the parent company of Genoptix, Inc. for $125 million in cash, as adjusted by working capital and other adjustments, and 1 million shares of NeoGenomics common stock. Genoptix is a leading clinical oncology laboratory, specializing in hematology and solid tumor testing. The acquisition expands NeoGenomics’ reach into oncology practices, and significantly accelerates the company’s progress towards key scale and growth objectives.

NeoGenomics gave the following benefits of this transaction:

Advances expansion into community oncology practices. Genoptix has well-established relationships with community oncology practices, a sales force and pathologists that are experienced in serving oncologists, and customized reports that are considered to be the gold standard among community oncologists. Oncology practices are an important, and under-penetrated, channel for promoting NeoGenomics’ capabilities in next-generation sequencing and liquid biopsy.

Leverages complementary services to create unprecedented offering in oncology testing market. NeoGenomics will draw on the best attributes from each company to improve the quality of service for all of our customers. Genoptix’s customers will benefit from NeoGenomics’ more comprehensive test offering, broad portfolio of managed care and GPO contracts, and national laboratory infrastructure. NeoGenomics’ customers will benefit from Genoptix customized consults and reports and extensive experience serving community oncologists. With deep relationships across all customer segments, NeoGenomics is positioned to better coordinate oncology testing between oncologists and pathologists within the community to improve patient care.

Accelerates revenue and profit trajectory. The acquisition is expected to contribute $85 million of revenue and break-even EBITDA in year one, $25 million of cost synergies over time, and 25% EBITDA margin by the end of year three.

In the recent Q3 2019 Earnings Call on 10/29/2019, Robert J. Shovlin, President of NEO Clinical Services, related that the IT integration of Genoptix is going really well and the final phase of integration, which is the last waves of client migration, has been moved out to Q1 of 2020, in order to allow time to ensure that our systems are implemented and stabilized before impacting clients with changes.

NeoGenomics Investor Presentation October 2019

Here’s an excellent investor presentation.…


The following corporate financials for NEO show the following:

Third-Quarter 2019 Highlights:

• Consolidated revenue increased 51% Y-o-Y to $104.7 million.

  • Clinical Services revenue increased 56% Y-o-Y to $92.6 million.
  • Pharma Services revenue increased 26% Y-o-Y to $12.1 million.

• Pharma Services backlog increased 22% to $118.3 million.

• Gross profit increased 57% Y-oY to $50.8 million.

• Non-GAAP diluted EPS of $0.07, a Y-o-Y increase of 40%.

• Gross margin improved by 180 basis points Y-o-Y to 48.6%.

• A solid stable capital structure.

• Full-year 2019 guidance increased for the third time that now expects consolidated revenue of $401 to $406 million, a Y-o-Y increase of 45% to 47%.

**NEO	             11/01/19**
MARKET CAP	   $  2.355 B   
Employees	      1,500	
52-WK HIGH	      26.89	
PRICE 	              22.68     	
52-WK LOW	      11.05	
Price Change Y-T-D    79.7%     		
Price Change 52-week  22.9%			
P/E (non-GAAP) 	      90.72       
P/E (GAAP)         1,662.27
EV/Sales (ttm)	       6.11	 
P/S (ttm)	       6.02	 

Current levels of P/E, EV/S and P/S for this growth company are high and require investor vigilance.
As of 11/1/2019, NEO share price has increased 80% Y-T-D and 23% over the recent 52-week period.

**MARKET		       NON-GAAP		 NON-GAAP	       GAAP		  GAAP**
**CAP	    REVENUE	 YoY   NET INCOME  YoY   Diluted EPS  YoY   NET INCOME	 YoY   Diluted EPS**
**FY/QTR	    $ B      $ M       Change	  $ M 	  Change     $       Change     $ M     Change	   $** 

**FY '19 est	  $401M-$406M  45%-47%					      $1M-$3M**

**Q3 '19    2.536 B   104.672      51.5%   7.535    63.2%     0.07      40.0%    2.143      5.9%    0.02**

Q2 '19    2.095 B   101.713      50.1%   7.228    61.8%     0.07      40.0%    1.991    (66.4%)   0.02									
Q1 ‘19	  1.935 B    95.577      50.7%	 7.159	 182.2%	    0.07     133.3%   (2.424)		 (0.03)

**FY 2018	  1.140 B   276.741      15.2%   17.937	 127.6%	    0.20     122.2%    6.088   (155.6%)	  0.07**
Q4 ‘18	  1.140 B    76.475	 24.5%	 5.485	  71.9%	    0.06	       0.353    (81.0%)	  0.00
Q3 ‘18	  1.429 B    69.096	 16.8%	 4.617		    0.05	       2.023		  0.02
Q2 ‘18	  1.101 B    67.746	  8.8%	 4.466	  27.2%	    0.05	       5.924		  0.07
Q1 ‘18	  0.660 B    63.423	 10.4%	 2.537	  24.3%	    0.03	      (2.212)   (40.7%)	 (0.03)

**FY 2017   0.707 B   240.251	  3.6%	 7.881		    0.09	     (10.943)		 (0.14)**
Q4 ’17 	  0.707 B    61.422		 3.191		    0.04	       1.858		  0.02
Q3 ’17 	  0.808 B    59.137		(0.585)		   (0.01)	      (6.915)		  0.09
Q2 ’17 	  0.683 B    62.264		 3.512		    0.04	      (2.156)		 (0.03)
Q1 ’17 	  0.598 B   57.4238		 2.041		   (0.50)	      (3.731)		 (0.05)

**FY 2016   0.695 B   231.808     132.3%		  			     (30.816)		 (0.40)**
**FY 2015	  0.490 B    99.802	 14.6%					      (2.657)		 (0.04)**
**FY 2014	  0.243 B    87.069						       1.132		  0.02**


The following is an excerpt from the NEO FY 2018 10K:

“We have two primary types of customers, Clinical and Pharma. Our Clinical customers include community based pathology practices, oncology groups, hospitals and academic centers. Our Pharma customers include pharmaceutical companies to whom we provide testing and other services to support their studies and clinical trials.

Clinical Services Segment
The clinical cancer testing services we offer to community-based pathologists are designed to be a natural extension of, and complementary to, the services that they perform within their own practices. We believe our relationship as a non-competitive partner to community-based pathology practices, hospital pathology labs and academic centers empowers them to expand their breadth of testing and provide a menu of services that matches or exceeds the level of service found in any center of excellence around the world. Community-based pathology practices and hospital pathology labs may order certain testing services on a technical component only (“TC” or “tech-only”) basis, which allows them to participate in the diagnostic process by performing the professional component (“PC”) interpretation services without having to hire laboratory technologists or purchase the sophisticated equipment needed to perform the technical component of the tests. We also support our pathology clients with interpretation and consultative services using our own specialized team of pathologists for difficult or complex cases and provide overflow interpretation services when requested by clients.
In addition, we may directly serve oncology, dermatology, urology and other clinician practices that prefer to have a direct relationship with a laboratory for cancer-related genetic and molecular testing services. We typically service these types of clients with a comprehensive service offering where we perform both the technical and professional components of the tests ordered. In certain instances larger clinician practices have begun to internalize pathology interpretation services, and our “tech-only” service offering allows these larger clinician practices to also participate in the diagnostic process by performing the PC interpretation services on TC testing performed by NeoGenomics. In these instances NeoGenomics will typically provide all of the more complex, molecular testing services.

Pharma Services Segment
Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research. This portion of our business often involves working with the pharmaceutical firms (sponsors) on study design as well as performing the required testing. Our medical team often advises the sponsor and works closely with them as specimens are received from the enrolled sites. We also work on developing tests that will be used as part of a companion diagnostic to determine patients’ response to a particular drug. As studies unfold, our clinical trials team reports the data and often provides key analysis and insights back to the sponsors.
Our Pharma Services segment provides comprehensive testing services in support of our pharmaceutical clients’ oncology programs from discovery to commercialization. In biomarker discovery, our aim is to help our customers discover the right content. We help our customers develop a biomarker hypothesis by recommending an optimal platform for molecular screening and backing our discovery tools with the informatics to capture meaningful data. In other pre and non-clinical work, we can use our platforms to characterize markers of interest. Moving from discovery to development, we help our customers refine their biomarker strategy and, if applicable, develop a companion diagnostic pathway using the optimal technology for large-scale clinical trial testing.
Whether serving as the single contract research organization or partnering with one, our Pharma Services team provides significant technical expertise, working closely with our customers to support each stage of clinical trial development. Each trial we support comes with rapid turnaround time, dedicated project management and quality assurance oversight. We have experience in supporting submissions to the Federal Drug Administration (“FDA”) for companion diagnostics and our Pharma Services strategy is focused on helping bring more effective oncology treatments to market through providing world class laboratory services in oncology to key pharmaceutical companies in the industry.
Our Pharma Services revenue consists of three revenue streams:
• Clinical trials and research;
• Validation laboratory services; and
• Data services.

In FY 2018, our Clinical Services segment accounted for 87% of consolidated revenues and our Pharma Services segment accounted for 13% of our consolidated revenues.”

I’ve pulled together the following data showing the breakdown of quarterly and annual revenue growth for Clinical Services and Pharma Services for over the recent past 3 years.

**NEO	CLINICAL        Sequen-		 PHARMA		Sequen-		 TOTAL	Sequen-**
**REVENUE	SERVICES % of	  tial	Y-o-Y	SERVICES % of	  tial	Y-o-Y	REVENUE	  tial	Y-o-Y**
**($ M)	 Total	Change	Change	 ($ M)	 Total	Change	Change	 ($ M)	Change	Change**

**Q3 '19   92.565  88.4%   4.0%   55.7%   12.107   12.6%   (4.9%) 25.5%   104.672   2.9%   51.5%**

Q2 '19   88.982  87.5%   3.2%   49.4%   12.731   12.5%   35.9%  55.1%   101.713   6.4%   50.1%
Q1 ‘19	 86.210	 90.2%	30.8%	51.3%	 9.367	  9.8%	(11.3%)	45.2%	 95.577	 25.0%	 50.7%

**FY 2018	241.873	 87.4%	13.5%	13.5%	34.868	 12.6%	 28.4%	28.4%	276.741	 15.2%	 15.2%**
Q4 ‘18	 65.913	 86.2%	10.9%	23.3%	10.562	 13.8%	  9.5%	32.6%	 76.475	 10.7%	 24.5%
Q3 ‘18	 59.449	 86.0%	(0.2%)	16.1%	 9.647	 14.0%	 17.6%	21.3%	 69.096	  2.0%	 16.8%
Q2 ‘18	 59.540	 87.9%	 4.5%	 7.2%	 8.206	 12.1%	 27.2%	22.2%	 67.746	  6.8%	  8.8%
Q1 ‘18	 56.971	 89.8%	 6.6%	 7.7%	 6.452	 10.2%	(19.0%)	42.7%	 63.423	  3.3%	 10.4%

**FY 2017	213.097	 88.7%	 1.4%	 1.4%	27.154	 11.3%	 25.4%	25.4%	240.251	  3.6%	  3.6%**
Q4 ‘17	 53.456	 87.0%	 4.4%		 7.966	 13.0%	  0.2%		 61.422	  3.9%	
Q3 ‘17	 51.187	 86.6%	(7.8%)		 7.950	 13.4%	 18.4%		 59.137	 (5.0%)	
Q2 ‘17	 55.547	 89.2%	 5.0%		 6.717	 10.8%	 48.6%		 62.264	  8.4%	
Q1 ‘17	 52.907	 92.1%			 4.521	  7.9%			 57.428		

**FY 2016	210.159	 90.7%			21.649	  9.3%			231.808**



For Q3 ’19, gross margin increased nearly 200 basis points year-over-year and 50 basis points sequentially to 48.56%.


**Q3 '19   48.56%    3.50%     2.05%**
Q2 '19   48.1%     4.4%      1.95%
Q1 ‘19	 49.3%     2.7%	    (2.5%)
FY 2018	 46.0%	   3.6%      1.0%
Q4 ‘18	 48.5%	   3.7%	     0.5%
Q3 ‘18	 45.1%	   5.9%	     2.9%
Q2 ‘18	 45.1%	   1.2%	    (0.6%)
Q1 ‘18	 43.1%	   4.0%	     1.0%
FY 2017	 42.4%	   1.7%	    (0.2%)
FY 2016	 42.3%	   2.4%	    (2.9%)
FY 2015	 43.8%	  (5.9%)    (2.5%)



**PERIOD       FCF** 
 **$ M**

Q3 '19      11.32
Q2 '19     ( 8.16)
Q1 '19       2.90
Q4 '18      12.23      

FCF (ttm)   18.29

FY 2018     30.48
FY 2017      4.35
FY 2016     13.94
FY 2015      4.18
FY 2014      5.68



SBC/revenue ratios are favorably very low.

 **SBC      REVENUE   SBC/REV** 
 **$M         $M**

**Q3 '19     3.275     104.672    3.12%**
Q2 '19     2.313     101.713    2.27%
Q1 ’19     2.139      95.577    2.23%

FY 2018    6.955     276.741    2.60%

Q4 ’18     1.807      76.475    2.36%
Q3 ’18     1.191      69.096    1.72%
Q2 ’18     2.333      67.746    3.44%
Q1 ’18     1.624      63.423    2.56%

FY 2017    6.441     240.251    2.68%
FY 2016    5.438     231.808    2.34%



The NeoGenomics capital structure remains stable and solid.

**CAPITAL STRUCTURE	          Q3 2019**
Cash & cash equivalents (mrq)	$ 178.891 M	
Working Capital	                $ 223.094 M	
Current Ratio (mrq)	            4.24  	   
LT Debt (mrq)	                $ 120.879 M     	            
Total Debt (mrq)                $ 136.406 M 
Stockholders’ Equity	        $ 497.007 M	
LT Debt/Stockholders’ Equity	   24.3%	           	            	            
Total Debt/Stockholders' Equity    27.4%



Since issuing its initial corporate financial guidance for FY 2019 on 02/19/2019, NeoGenomics has revised and increased three times its FY 2019 financial outlook as follows:

 **2/19/19      Q1 '19       Q2 '19      Q3 '19**
**NeoGenomics	           Initial      Revised	     Revised     Revised**
**(in $ millions) 	  Guidance      Guidance     Guidance    Guidance**
Consolidated Revenue	$ 379 - 395     384 - 400    388 - 402   401 - 406 
Net Income/(Loss)	$ (3) - 3       (3) - 1	     (1) - 3       1 - 3
Adjusted EBITDA	        $  49 - 53       52 - 56      54 - 58     56 - 58


NEO Q3 2019 EARNINGS CALL ON 10/29/2019…

Douglas M. VanOort, Chairman & Chief Executive Officer, reported the following key results:

• Revenue increased 51% year-over-year to $105 million with organic revenue growth once again greater than 20%. Adjusted EBITDA increased 32% year-over-year to $15 million.

• Clinical division test volumes increased 35% year-over-year with combined company organic volume growth approaching 13%. Year-over-year growth rates have accelerated each quarter since acquiring Genoptix late last year.

• We once again drove growth across all testing modalities. Next generation sequencing and molecular testing growth rates also accelerated, and we are well in excess of 50%. We believe those growth rates reflect a steady increase in market share with very high rates of customer retention in both the legacy Neogenomics and the Genoptix customer base.

• Pharma Services revenue increased 26% year-over-year to $12 million. New bookings in the quarter were a record $28 million and the backlog increased 22% year-over-year to more than a $118 million. We achieved outstanding revenue increases in flow cytometry and very strong increases in immunohistochemistry. We opened our new office in Singapore during the third quarter as our global expansion remains on track and we are winning global studies as a result. The Pharma business has great momentum and is well positioned to capitalize on a robust environment for oncology therapy development. Importantly, we also saw significant growth and profitability

• Gross margin increased nearly 200 basis points year-over-year and 50 basis points sequentially to 48.6%.

• Adjusted EBITDA grew 32% to $15 million, and we’re very pleased with the increase in profitability, particularly since we increased our R&D spending significantly and the Genoptix business is initially dilutive to EBITDA. Adjusting for the impact from the Genoptix business, the incremental EBITDA contribution in the quarter approximated 25% in line with our long-term guidance of 25% to 35% EBIT contribution – EBITDA contribution on revenue growth.

Kathryn B. McKenzie, Vice President, Finance & Principal Accounting Officer, reported the following results and guidance:

• General and administrative expenses increased 57% or $12 million year-over-year to $33 million, primarily due to the addition of Genoptix. G&A expense increased by $3 million sequentially, largely due to the influx of new hires, incremental growth related investments and other one-time items.

• Sales and marketing costs increased 67% year-over-year to $12 million, driven by the acquisition of Genoptix and the expanded size of our sales teams on both the clinical and pharma side of the business.

• Research and development costs increased nearly five-fold, driven by continued investments in new test development, including our next-generation sequencing and FDA initiatives.

• We exited Q3 with $179 million in cash and $109 million in debt. We have approximately $115 million of availability on our credit facilities. DSOs declined four days year-over-year and one day sequentially to 80 days as cash collections were especially strong in the quarter. Cash flow from operations was strong at $19 million for the quarter.

• Guidance: We are increasing our full year 2019 revenue and earnings guidance. We now expect consolidated revenue to be in the range of $401 million to $406 million versus our previous guidance of $388 million to $402 million. We now expect adjusted EBITDA to be in the range of $56 million to $58 million versus our previous guidance of $54 million to $58 million. The increase in guidance reflects the better-than-expected third quarter results and our growth momentum.

Additionally, Douglas M. VanOort, Chairman & Chief Executive Officer, made the following significant comments about the company’s growth:

We continue to benefit from our position as the leading cancer testing provider in the United States, where we are experiencing very high growth in both divisions, and our outlook suggest that that growth is likely to continue for the foreseeable future.

In the Clinical division, we’ve recently added some of the largest and most recognizable hospital systems and oncology practices in the country, with most of that business still in front of us. And in the Pharma Services business, our backlog of signed contracts is larger than ever and our pipeline remains robust.

Actions taken to focus and fortify operations to accommodate high levels of growth, including the final phase of the Genoptix integration:

• Hired almost 200 full-time employees during the quarter with additional technical staff and pathologists to accommodate continued growth while maintaining exceptional service.

• Added much needed facility capacity in Fort Myers and in Aliso Viejo that provided additional lab and office space to accommodate existing volume with capacity until the new Fort Myers headquarters and lab facility is completed in 2021.

• Upgraded next generation sequencing instrumentation and assays during the quarter; moved assays to the high throughput no-seq [Phonetic] instruments, upgraded chemistry and optimized our pipeline. We also incorporated MSI that’s microsatellite instability, and TMB, tumor mutational burden into most of our NGS panels, updated our gene list and upgraded our physician reports. With NGS growth rates well over 50%, these upgrades are providing us with much needed capacity, higher quality and the ability to streamline and further automate the workflow and processes.

• Delayed the planned migration of Genoptix customers to the NeoGenomics systems and processes by three months. This is providing our teams additional time to finalize plans and prepare more thoroughly for a seamless client migration process. We feel very good about the Genoptix integration. While we made a decision to delay, we are on track with all other integration activities and synergies are tracking as expected. Customer retention is our top priority during the integration period and so far so good. In fact we have already stemmed the volume decline occurring when we took the business over, and organic growth for the combined company has been better than we expected at the beginning of the year.
With these actions, we feel that our Lab Operation is ready to seamlessly complete the Genoptix integration and will be in great shape to accept greater volume with higher levels of productively and efficiency.

Investments made to enable those high levels of growth to continue well into the future:

• Continue to invest in new test development, particularly in next generation sequencing. We are in various stages of development with several next generation sequencing panels, including a comprehensive genomic profile for hematologic cancer, a 500 plus gene solid tumor profile, a suite of liquid biopsy offerings and NGS based test for a minimal residual disease. We have a well-defined plan and a much broader and deeper organizational capability to execute it than ever before.

• Continue to invest in companion diagnostics. We have a unique and powerful capability to help develop and validate companion diagnostic tests and to quickly respond to new drug approvals with the timely launch of companion diagnostic test. Among the most important of those capabilities is our wide scale and scope across Pharma and Clinical markets, a broad reach to oncologists and pathologists, and access to a massive quantity of oncology-specific test result data. Few labs have our same ability to take an oncology companion test across the continuum from development, through clinical trials, and into the market.

• Began to make initial investments in data and informatics. We are quite excited about the possibilities here. Over the past year, a number of leading payers, providers and pharma services companies have approached us to partner on data and informatics related initiatives. We have developed our strategy and plans, have begun to build our team, and are investing to develop our capabilities and initial products.



NeoGenomics has a very strong, highly experienced executive management team in place. The company receives highly positive reviews and feedback at Glassdoor, showing Douglas M. VanOort, NEO Chairman & Chief Executive Officer, with a 97% approval rating.…



Although outside of this board’s current norm, NeoGenomics is a solid growth company, operating in the black with top-notch corporate leadership, excellent growth in revenue and a solid capital structure.

NeoGenomics is another diversified holding in my family’s current portfolios that is easy for me to follow and fully comprehend.

As always, conduct your own due diligence and decision-making.