Good day, ladies and gentlemen and welcome to your NeoGenomics Second Quarter 2020 Earnings call. All lines have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Mr. Doug VanOort. Sir, the floor is yours.
Thank you [Karen]. Good morning everyone. I would like to welcome everyone to NeoGenomics second quarter 2020 conference call.
Joining me from our Fort Myers headquarters, with social distancing precautions in place, are Kathryn McKenzie, our Chief Financial Officer; Rob Shovlin, President of our Clinical Division; and Bill Bonello, President of our Informatics Division and Director of Investor Relations.
Joining the call via phone from locations across the country are George Cardoza, President of our Pharma Services Division; Dr. Larry Weiss, our Chief Medical Officer; and Doug Brown, our Chief Strategy and Corporate Development Officer.
Before we begin our prepared remarks, Bill Bonello will read the standard language about forward-looking statements.
This conference call may contain forward-looking statements, which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements by their nature involve substantial risks and uncertainties certain of which are beyond our control. Should 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 the call back to Doug VanOort, I want to let everyone know that we will be making a copy of our prepared remarks for this morning’s call available in 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 two per person in order to give more people a chance to ask a question within the one hour that has been allocated for this call.
Thank you, Bill. This morning I will begin with some comments on quarter two results, some strategic actions we have taken to accelerate growth and our outlook for quarter three. Kathryn McKenzie will then provide a more detailed review of the quarter two financial results. I will wrap up with some summary thoughts on our strategy for operations and growing the business in these difficult times and then we'll have time for questions and answers.
As expected quarter two financial results were challenging. The revenue and profit/loss caused by the COVID-19 pandemic were significant. Revenue was way below our trend. Margins were affected by the lower volume and also by decisions we made to invest in our business despite the pandemic. We made several strategic decisions in the second quarter to put us in a stronger competitive position to drive near-term and long-term growth. Those decisions are already beginning to show results and we fully expect a rapid and strong recovery in financial results in the third quarter. There are six noteworthy strategic decisions and investments that we would like to share with you.
First, as a demonstration of the value we place on culture and people, we retained all of our employees during the crisis. With skilled employees available we decided to build a COVID testing lab to do our part to help in the crisis. We started with a minimal level of testing capacity and now have steadily built capacity for the past eight weeks. We currently have capacity to perform more than 10,000 tests per day which we may scale up further. We begin to process COVID volume in the latter part of June and we have ramped that up considerably in July and anticipate a steady stream of business throughout the third quarter.
Our strategy for COVID-19 testing is to serve as a network reference lab for our hospital, client labs and for commercial labs. In this way we leverage our expertise by performing the molecular laboratory testing but our partners perform the front-end logistics and sample gathering as well as the back-end reporting.
As a result our average revenue per COVID test will be lower than what you might see from other laboratories performing this full testing service but our costs will also be lower.
We have made sizable investments in equipment supplies, R&D, people training and systems to get this lab operational.
For us while we are benefiting financially from the revenue associated with COVID-19 testing, we view this service as short term in nature and not part of our overall strategy as a leader in oncology testing.
Our intent is to partner with the lab industry to help the country combat this crisis.
Although there is uncertainty about the amount of volume and duration of demand we expect COVID-19 testing to result in incremental revenue and profit throughout the third quarter and into the fourth quarter as well. At this time, demand is so high that we have redeployed 50 employees and hired and trained temporary employees to perform COVID testing.
Over the next several months, we expect our core oncology testing volume will continue to improve. Should COVID-19 testing demand fall, we will scale back those dedicated resources and redirect some of our COVID testing staff back to our core oncology testing business.
Second, we fortified our balance sheet by successfully completing an offering of common stock and convertible securities resulting in net proceeds of $322 million for our company. We used approximately $100 million of the proceeds to repay our term loan and terminate the associated interest rate hedge creating significantly increased financial flexibility for our company. The remainder of the proceeds are available to fund strategic investments and mergers and acquisitions.
Third, we formed a strategic collaboration and made a $25 million minority investment in Inivata, a leader in liquid biopsy testing technology.
As part of our deal we have a seat on the Inivata board of directors and the exclusive option to buy the entire company.
We also have the right to commercialize the envision first lung liquid biopsy test in the U.S. and to help commercialize their minimal residual disease test which is currently in development. InVision First Lung is a highly competitive circulating tumor DNA next generation sequencing liquid biopsy assay testing 37 genes relevant to the care of advanced non-small cell lung cancer. The test covers all national comprehensive cancer network or MCCN guideline recommended genomic drivers with FDA-approved targeted therapies for non-small cell lung cancer. The InVision First Lung test is covered by Medicare and various private insurance payers and is one of just two NGS-based liquid biopsy tests with specific Medicare coverage. Fourth, we launched a suite of solid tumor liquid biopsy tests including the InVision First Lung as well as the NeoLAB Solid Tumor liquid biopsy and the QIAGEN therascreen PIK3CA test for plasma. NeoLAB Solid Tumor liquid biopsy is a highly sensitive and specific pan cancer NGS test for genomic profiling. We had previously announced that the assay was being validated and that we expected to launch it before mid-year and we accomplished that on schedule. The therascreen PIK3CA test is an FDA-approved companion diagnostic test for PIK rate.
As you may know, we have worked with Novartis on their tissue-based companion diagnostic PIK3CA test and have a sponsored testing program with them. The PIK3CA liquid biopsy test accompanies the existing tissue biopsy test. Fifth, we continued to invest in our pharma services business.
During the quarter we further established pharma-specific testing capabilities, hired additional sales and business development people in Europe and Asia and progressed with our China lab in collaboration with our strategic partner PPD which is expected to be operational by the end of this year.
As you see from our quarter two results, pharma revenue was negatively impacted by trial delays resulting from the COVID pandemic as well as reduced enrollment in existing trials.
However, while patient access was an issue, net bookings of signed contracts were at an all-time high with $40 million of new business signed during the quarter. Clearly there is strong demand for our services and the current backlog of over $170 million in signed contracts should pave the way for strong revenue growth over the next several quarters.
Finally, we continue to invest in our informatics business.
We continue to have substantial engagement from pharma companies, providers and payers and have already had some early commercial success.
As the leader in oncology testing we are uniquely positioned to use the vast amounts of our valuable data to help solve real-world problems for our customers and for cancer patients and we are just beginning to harness the true value of our testing data and information.
Our decisions to maintain our workforce and invest in growth opportunities has positioned Neogenomics for a strong recovery. Based on current trends we now expect to report organic revenue growth in excess of 20% for quarter three. This growth will be driven by a combination of modest year-over-year organic revenue growth in core oncology testing as well as a boost from COVID-19 testing. To give you a better sense of the pace of recovery in the core oncology business and some confidence in our quarter three outlook, we thought it might be helpful to share a few statistics related to our quarter two and early quarter three volume trends. The COVID impact on our testing volume was most severe in April with volume down nearly 30% year-over-year. Volume began to recover in May and further recovery in June. In total, June 2020 volume was essentially in line with June 2019 volume though still about 15% below our pre-COVID expectations. Volume did get better each week in June with year-over-year growth in the last week of the quarter. Volume trends have continued to recover in July but we are not yet back to our pre-COVID expectations.
We have experienced a similar volume trend in our pharma services business. Obviously there is still a great deal of uncertainty about the continued pace of recovery given the resurgence in infections which is reflected in our expectations for quarter three growth. In summary, quarter two financial statement, our results were poor as expected due to the impact of the COVID pandemic. Nevertheless, we are confident that the actions we took in response to the pandemic have positioned the company for a strong recovery and we believe that our competitive position and long-term growth prospects are stronger than ever. I will now turn a call over to Kathryn McKenzie, our Chief Financial Officer to discuss some of the details of quarter two financial results.
Thank you, Doug and good morning everyone. I will give a brief overview of second quarter financial results. Consolidated revenue declined 14% year-over-year to $87 million reflecting the impact of the COVID-19 pandemic.
For the quarter overall, clinical tests of -- clinical division test volume excluding COVID-19 testing declined 18% year-over-year. Consistent with what we previously discussed, April represented our low for the quarter as tests per day declined between 25% and 30% in the month.
Fortunately we experienced a sequential improvement in both May 2020 and June 2020. Volume in each week of June 2020 was better than the last and we are especially encouraged that the last week of June this year was better than the last week of June in 2019. Clinical division of revenue per test was $351 down 1% year-over-year and down sequentially from $371. The revenue per test reflects lower revenue during the quarter on non-contractor claims related to legacy synoptics.
As a result AUP or revenue per test was unusually low in the quarter. We would like to note that we have now completed the synoptics integration after just 18 months despite the distractions from the COVID pandemic.
As a result we are now in a position to drive increased efficiencies including improvements in billing processes and collections over the next several quarters.
We continue to believe that our original synergy projections will be realized as expected. Pharma services revenue increased 3% year-over-year to $13 million. Research oriented revenue growth remains strong bolstered by the acquisition of HLI-Oncology.
As a reminder we acquired the state-of-the-art NGS lab in La Jolla, California in January of this year giving us advanced NGS capabilities. Clinical trials work was down significantly as a result of the COVID-19 pressures on clinical trial activity around the world. Despite the challenging environment the pharma team continued to sign new contracts and grow the backlog of signed contracts.
In fact new contracts signed in the quarter were $40 million representing the highest quarterly number yet and the backlog of signed contracts increased 63% year-over-year to $173 million.
For the second quarter, growth margin declined year-over-year to 32.2% as a result of the volume and cost impact of the COVID-19 pandemic. Operating expenses increased 5% or $2 million year-over-year to $47 million due to investments in informatics, pharma services growth initiatives and the acquisition of HLI-Oncology. The increases were partially offset by lower commissions, significantly reduced travel and decreased trade show and marketing expenses.
While we continue to fund our key growth initiative we remain disciplined in evaluating and controlling our operating expenses and other costs and we have reduced or delayed certain expenses and capital expenditures where appropriate.
Second quarter adjusted EBITDA was negative $7.2 million reflecting the impact of significant volume declines and other challenges experienced related to the COVID-19 pandemic and as previously noted we also made important investments in our people and other strategic initiatives which we believe positions us for a strong recovery.
Turning to the balance sheet we exited quarter two with $295 million in cash excluding $36 million in restricted cash designated for construction of our new state-of-the-art laboratory and global headquarters in Fort Myers, Florida. Construction of that facility continues to be on track for opening in the fall of 2021. We were busy this quarter. We significantly enhanced our financial position by raising approximately $320 million in total net proceeds from our concurrent equity and convertible debt offerings in late April. We utilized a portion of these proceeds to retire our outstanding term loan and related hedge for approximately $100 million.
Additionally, we invested $13 million as a part of a $25 million total minority investment in and strategic alliance with in Nevada that we announced in late May.
We also received $7.9 million in provider disbursements under the CARES Act of which $4 million was received during the second quarter with the remainder received in early July. Days sales outstanding increased six days sequentially to 92 days primarily due to the distribution of our revenue in the quarter being heavily weighted towards June.
As a reminder we withdrew our full year 2020 financial guidance on April 9, 2020 in light of the COVID-19 pandemic.
While we are expecting recovery in the second half of the year we recognize that uncertainty remains given the resurgence in COVID cases and potential downstream impacts. I will now turn the calls back over to Doug to provide commentary on our key growth initiatives.
Thank you, Kathryn.
As I noted at the beginning of the call quarter two financial results were quite difficult but we expected as much. We made strategic decisions to invest for a long-term growth opportunities rather than cutting costs as a response to the short-term reduction in volume. We think these were the right decisions. There is no disputing the fact that our decision to stand up COVID testing reduced earnings in quarter two.
However, we believe that providing COVID testing is not only the right thing to do but will prove to – have been financially prudent. We started to see an uptake in testing volume at the very end of the quarter two and that has grown considerably in the first several weeks of quarter three.
Our decision to retain employees during the pandemic despite the volume decline also had a significant impact on profit in the quarter. Again we believe this was the right thing to do but also has long term cultural and customer service benefits for our company and the clients and patients we serve. One data point that supports this belief is our most recent customer survey Net Promoter Score. We surveyed clients in the midst of the pandemic and received our highest response rate and highest score ever with a score that is nearly tenfold higher than the average score for our peer group.
We have competitive strategies that continue to change and evolve but our fundamental business model remains unchanged. We try to lead with a culture that is purpose driven and values based and we continue to believe that high levels of employee engagement drives high levels of customer satisfaction and retention which in turn drives shareholder returns.
Finally, we believe that our strategic decisions to invest in growth is enhancing our competitive positioning and will pay dividends in both the near term and long term.
In fact, we believe that we are even better positioned for growth than we were before the pandemic hit. We now have a full suite of liquid biopsy tests which further strengthens our next generation sequencing product portfolio and solidifies our comprehensive oncology test menu.
We also have a strong balance sheet to support further M&A.
We have a very large backlog of signed pharma services contracts and are well-positioned for growth with an increasingly global presence. And we are advancing our informatics initiatives and are very excited about what that team has already accomplished. All in all we continue to run our business for the long run and we are looking forward to a bright future.
At this point we'd like to open the call for questions incidentally.
If you're listening to the conference call via webcast only would like to submit a question please feel free to email us at email@example.com during the Q&A session and we'll address your question at the end of the call if the subject matter hasn't already been addressed by our call-in listeners.
As mentioned at the beginning of the call we'd like to ask each person to limit their questions to two 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. Ladies and gentlemen the floor is now open for questions. [Operator Instructions] At this time we'll take our first question from Alex Nowak with Craig-Hallum. Please go ahead sir.
Great. Good morning everyone. Doug, I was just hoping you could provide some more details how you'll be rolling out some of these newer tests within liquid biopsies to the accounts. Do you expect you'll need to do some sort of higher level education with the physicians in the clinic that you're working with or simply adding the tests to the menu list enough to lift demand here?
Good morning Alex and thanks for the question. We actually have spent quite a bit of time with our marketing team launching the liquid but the suite of liquid biopsy tests and we do as a normal course of business with product launches provide a lot of education for our clients. In this case I would say that we're providing even more education than we typically do. These tests are a little different in as much as they are liquid versus tissue based; many of our clients have experimented with liquid-based tests in the past but many have not because we serve community oncologists and pathologists and hospitals.
So there is a fair amount of education that that we're doing and we have a terrific collaboration with Inivata to help us with that.
Okay. Understood. And then just on the broader macro environment here cancer is a little bit of a different disease than some others where you can't really defer diagnosis indefinitely.
So just when you're thinking about your volume compared to pre-COVID levels is the primary delta here just that people aren't going in and getting screened and that's driving the real difference and if so is it really a function of just getting people to go back to their primary care physicians, getting screened for some of these diseases and then Neo’s volume will come back as a result?
Well, we believe first of all that there is some pent up demand but as you know cancer patients are particularly vulnerable for COVID-19. Their immune systems and in many cases have been compromised and advice that they're getting from their physicians are if you don't have to come in, don't and so there have been many cases where oncology groups have postponed or canceled semi-annual visits. There are a number of patients that have delayed surgeries. We've seen that throughout this time. We're worried frankly that there are cancer patients that aren't getting the right care and this is a problem for our country and we're quite concerned about this but we believe that as the pandemic eases that cancer patients will have access again to either their physicians or clinical trial sites and that our volume will come back to the pre-COVID levels that we have experienced.
Okay understood. Thank you.
Our next question comes from Puneet Souda with SVB Leerink. Please go ahead.
Yes. Hi. Thanks Dough and thanks for the details and obviously thanks for what you're doing to serve the community with COVID testing in these times.
First one given the capacity that you have 10,000 tests could you help us parse out how much of that contribution is in the 20% organic guide and traditionally your core business clinical revenue it seems like it's a recovering back to normal levels but there is still some recovery left to go, but can you sort of tell us given your past and traditionally you've delivered mid-teens level of growth. Is that something we can potentially expect here by the end of the third quarter? Help us just parse out the 20% organic guide number.
Thank you, Puneet Thank you for the question. I would first say that there is a fair amount of uncertainty in the numbers. We feel that the 20% revenue growth number that we provided is something that we have a lot of confidence in, I would say parsing it out that the core oncology business we said is recovering and we would expect some modest growth year-over-year there but at as we said if we can actually fill the capacity that we have, we have capacity today for about 10,000 COVID tests per day but if demand continues we'll continue to build that, if that demand is filled we should be able to easily accomplish the 20% growth rate.
So there's a lot of uncertainty that's why we haven't given more detail about the components of that growth but we feel confident in the 20% numbers.
I just want to reiterate that we did say in the script that the 20% consisted of modest organic growth in our core oncology business.
So I just, I don't want people to have runaway expectations about what volume growth in the core oncology business would look like in Q3.
Okay. I appreciate that clarification.
On the gross margin front, I appreciate the investments towards during these times to into employees and overall facilities and capabilities to serve the market but maybe can you just elaborate on that? Is this largely volume driven recovery? Is that what you expect here and sort of I know you haven't provided the ASP on the COVID testing but what sort of margin contribution should we expect from COVID and into the clinical business?
So overall the margin profile in the COVID testing business is lower than our normal clinical testing margin, just based on the, yes just based on the way that we have the cost structure and bringing up the COVID testing.
So you should expect that the margin on that will be lower than your historical clinical testing margin.
Okay. Thanks. And then if I could ask on pharma services and liquid biopsy. Pharma services, can you if you could quantify the HLI's contribution in the quarter if possible and it seemed like there were obviously samples that were collected over time that you were running through and is that still the case in the third quarter as recovery happens across the pharma base and at what point do you think those samples you'll need more and more increasing levels of fresh trial samples coming in. And on the liquid biopsy front if Dr. Weiss can maybe chime into that too, you obviously have significant number of liquid biopsy launches here. What are your expectations for liquid biopsy to grow this year and potentially next year, should we think of this in line with the NGS growth that you have seen or could this be potentially faster than that? Just help us understand the growth that we can expect from liquid biopsy given that there is already an existing market leading product that's been there for in the market for some time and this is a new entrant into the market and by that I'm referring to the NeoLAB assay or liquid biopsy solid tumor assay.
Puneet, you've officially mastered the 10 questions in one, I'm going to start with the HLI and then I'll turn it over on the liquid biopsy question.
So for HLI we're not going to be breaking out HLI contribution separately but I will say it's consistent with the plan that we announced that the acquisition. That being said HLI capabilities are more research oriented and we assure that the research oriented projects are showing relative strength to the clinical trials.
So you can kind of induce what the contribution was on the pharma services there related to HLI. Doug do you want to talk through the liquid biopsy a little bit?
Yes. Dr. Weiss would you care to make a comment about that or should you, would you like me to take it?
Sure, I can try.
As you mentioned there are a number of liquid biopsy offerings already out in the market but I think the day is early and we're still in the early innings of this.
I think as we roll out our products we are just coming in line with changing consensus guidelines and we do not think we are too late to the game. I would expect to see growth of our liquid biopsy products a little more than our solid tumor, our tissue offerings and I have high expectations for them over the next two years. Doug?
I can't add anything to that Dr. Weiss, it's perfect.
All right. Great. Thank you.
Our next question comes from Brian Weinstein with William Blair. Please go ahead.
Hey guys thanks for taking the questions.
Just kind of piggybacking on the last one on liquid biopsy. Can you talk a little bit more about how you expect to compete and how you expect to talk about the differentiation and what that differentiation really is in the liquid biopsy portfolio versus the other people that are in the market today? Can you highlight some of that for us?
Yes Brian. Thank you for the question.
First of all I would comment that the market is growing.
So the market for liquid biopsy tests is as we've talked about and as many people have published is in the early stages and there's a lot of growth opportunity here. That said we have a very strong market position with pathologists, with hospitals and with oncologists around the country and we also compete on the basis of having, we think the most comprehensive oncology test menu and many of our clients use us for a as a one-stop shop for their cancer testing needs and we believe that we will have good penetration of our liquid biopsy test because first, they're very high quality and second, because we are, I think, a trusted partner with our clients they use this as a one-stop shop and I think that they will continue to do that.
The third thing is that, I think that our liquid biopsy tests have very good tournament.
So they have a very high quality as we have noted and the turnaround time we expect to be seven days or less and particularly, frankly in an environment where you have COVID-19, we think that there may be more uptake for a liquid biopsy tests than even before.
I'd like to add another reason and that is that for the minority of our tissue specimens that have insufficient results we can easily recommend a reflex to our liquid biopsy products.
Yes. All that makes perfect sense. Thank you and then I'm curious about the competitive environment right now just more broadly for all of your testing services. Curious if the pandemic has caused anybody to kind of any of your competitors to act differently. We've heard from some of the large guys out there but curious what you're seeing as far as how they may be responding to this versus you and then also you have a lot of smaller competition that's out there we'll call them sort of mom and pops. Are you seeing any of those businesses be impacted and presenting an opportunity for you to either take share just by taking it or potentially through some M&A opportunities? Thank you.
Thanks Brian. I would say that, first of all I'm proud of the whole industry, to tell the truth. I mean our industry and I think particularly the commercial laboratories have done a fabulous job building COVID testing capacity and I think right now there's probably 700,000 or 800,000 tests performed on a daily basis for COVID and commercial laboratories are performing at least half of those from a standing start four months ago.
So I'm very proud of the industry and what they're doing.
I think a lot of the players in the industry have focused enormous amounts of their time and attention to fulfilling this need, this demand.
In terms of the smaller competition frankly we haven't really seen a lot of change yet and I expect that there will be change.
Our industry is naturally consolidated over the years and I think that in many ways this COVID-19 pandemic may be an accelerant for more consolidation.
As we know purposely fortified our balance sheet a couple of months ago as Kathryn commented to be prepared for an environment in which there might be more competition and we have been a consolidator and I think we want to continue to be one.
Great. Thank you so much.
Our next question comes from Steve Unger with Needham. Please go ahead sir.
Thanks. Great job in a challenging environment.
First question just on the pharma services bookings; very strong and I'm wondering if you could provide some additional color on sort of what the composition of that bookings is as far as service lines and how are you doing on your international expansion? That's my first question and then I have a second question.
Well, I will comment very briefly and we have George Cardoza on the call.
So he will want to comment further but I would say first of all we have a terrific pharma services, portfolio of products and a terrific business development team and I am continually shocked and surprised by how effective they are.
So we just had a review yesterday frankly and the contracts that they're signing are very broad. There's a lot of different clients that they're signing up and a lot of different kinds of testing modalities and our service, I think is very strong. And we've actually hired a lot internationally. We've hired in Europe and in Asia and built our teams there where we have a lot of capacity in both Singapore and Geneva to fill those labs.
So we are very focused on international expansion as part of this but George you may want to provide more detail.
Yes. That's right. I mean our strength really has been across the board certainly in NGS, certainly multiomics, Doug talked about our informatics initiative and I think the pharma teams are really starting to see the value there.
So that kind of number it really was broad-based across a lot of the modalities.
Our international labs continue to ought to be up and running. They were clearly impacted by COVID but our Geneva lab we've sort of seen a similar rebound in June and July with volumes coming back there.
Our Singapore lab is newer it actually just got cap accredited in December.
So that's still sort of almost in the startup phase and then as we mentioned the last piece of the puzzle really for us is China and we're working hard with PPD on our plans there.
So yes extremely strong quarter on the booking side and obviously I think once the access comes back you'll really see the revenue conversion there.
Great. Thanks and second question is just, you've now completed the genoptics integration and I realize there's been some variability in the revenue per test. Is there some form of guidance or color you can provide us as far as what you see that sort of stabilizing in the second half of the year?
Yes. We definitely had some variability in our revenue per test specifically around the non-contracted claims with genoptics and so now that most of the vast majority of those claims are going to be in network following the integration.
Going forward we're definitely expecting some more stability in our revenue per test as we're able to have them all in one billing system and really get those contracted claims out the door.
So I will just add to that, I think Kathryn mentioned that we completed the genoptics integration in about 18 months despite the pandemic which caused our sales folks to not be able to visit clients as they normally would. What we now have is all of our testing done on a common laboratory information system as Kathryn said a common billing system and that creates a lot of flexibility for us as we move tests around or have the ability to move tests around our network and also frankly we were able to redeploy some folks in our Carlsbad facility to work on the COVID testing.
So all in all we're very pleased that we're able to complete the integration in 18 months and we feel very good about it. The team did a great job.
Great. And just a follow-up so the revenue per test this quarter is likely to be the lowest, I mean we're moving higher from here?
Yes. I would expect it's going to go higher. This is an unusually low AUP.
I remember when you think about AUP there's going to continue to be some volatility depending on just the type of revenue that's coming in the door and timing but yes it should be higher going forward.
Thanks, appreciate it.
We'll take our next question from Jacob Johnson with Stephens. Please go ahead sir.
Hey thanks for taking the questions. Maybe on pharma services, can you talk about the competitive environment for this business line? I mean, it's just like clinical services kind of all about customer service and a full suite of offerings or there are areas of differentiation and then to what degree does the informatics effort kind of add to the differentiation here?
George would you like to take that one?
You're absolutely right. It is clearly about service. It's very common in pharma services for us to start with [$60,000 – $600,000] projects.
You have to prove yourself.
You have to show them that you do a good job then the scale goes up and then obviously over time hopefully you turn them into a multi-million dollar clients.
So but they're very service focused, very demanding clients and that's the nature of this business is serving their needs. Certainly we try to have every testing platform that they'll need whether it's NGS or immunohistochemistry FISH- flow cytometry. We try to have the full suite of operations there but the other compelling argument for us certainly is that we are global versus a lot of the smaller players. We can handle their trials and we also have the ability to -- we're really uniquely positioned in terms of companion diagnostics because we have the ability to go to them and say we can work with you on the clinical trial phases. We can work with you up front, get familiar with the assay and then certainly once you receive FDA approval, we've got the largest share in the oncology market. We work with thousands of hospitals and oncology clinics and we can help you commercialize that test and that certainly is becoming a very compelling value proposition which is also helping fuel our growth.
So I think it's our service. It's our platform. It's our companion diagnostics certainly the informatics and what's happening there is exciting.
I think we are starting to harness some of the great information that we have from doing a million cancer tests a year and I think unlocking some of that potential I think is really going to bode well for us in the future as well.
Thanks for that. And maybe sticking with George congrats on the strong backlog and pharma services.
I think you typically expect 70% of that backlog to translate to revenues over maybe three years. Does the environment we're in change your expectations for that at all in the near term?
Honestly in the near term, yes.
I think we have seen some trials push out.
We have seen a couple of trials start up in July which is very encouraging. Certainly in Q2 we were seeing typically to set up a clinical trial they have to go out to the site. They have to train the site, talk about the informed consent process. It's very hard when people can't travel a lot of sites weren't accepting visitors.
So that seems to be easing a bit but we have seen things slide out.
So I do think COVID is still going to have an impact on us in Q3 and hopefully by the time we get into Q4 and Q1 we see sort of this more return to normalcy but there still will be some short-term drag in Q3.
Got it. Thanks for taking the questions.
We will take our next question from Andrew Cooper with Raymond James. Please go ahead sir.
Thanks. A lot's already been asked.
So I will just kind of keep it short here but just as we think about 2Q having a lot of moving parts in terms of certainly keeping everybody on and adding new folks for standing up COVID and less T&E and all those different moving parts. Maybe give us just a little bit of flavor of when you think about the OpEx lines both through 3Q and then longer term, what cost that, you didn't necessarily, intentionally take out but if you think about being able to do some of those trainings for liquid biopsy and things like that perhaps virtual. Is there anything that's changed in terms of how you think about some of those cost lines that you could give us to sort of inform our thinking that would be great?
Yes. Thanks for the question.
So definitely as we're going forward seeing a little bit of a change in the mix of OpEx and so we're seeing great favorability when it comes to travel and conferences and it will be interesting to see which of that actually comes aback and where we've decided that even from an investor and analyst perspective where Zoom and Webex are good alternatives. That being said there is also a cost, an operating cost on a work from home environment and making sure that we're fortifying our IT and our cyber security and making sure that we have appropriate measures in place to make sure that we're keeping our data safe and our employees effectively working from home.
And so the OpEx well you'll see those cost savings and certain lines to sales and marketing. There is other offsetting costs as well.
We are being as diligent as we can in evaluating the spend that's going through OpEx and if it's not urgent and we don't need it from a strategic perspective we are pulling back where we can and so in the short term we'll continue to keep that as one of our at the forefront of our discipline and making sure that we're being very clear on where we are investing in OpEx.
Yes. That's a perfect answer and I might just build on it by saying there are some strategic areas that we are continuing to invest which are affecting operating expenses.
For example, we are continuing to invest in informatics. We're continuing to invest in our pharma services division. We'll continue to invest frankly in building our marketing team and our sales team in the clinical division.
So there are a number of growth oriented investments that will impact the operating expense line but I think they're quite strategic and as Kathryn said we're trying to be as disciplined as possible.
Great. I will stop there. Appreciate it.
[Operator Instructions] Our next question from Ivy Ma with Bank of America. Please go ahead.
Hi. Good morning. Thank you for taking the question.
So first question on margins. I appreciate the color on the expenses tied to COVID that you just talked about.
You also mentioned COVID testing has a lower margin profile.
So I wonder what's the breakdown of the base business recovery say if the higher margin test volumes are recovering faster or if there's any noticeable trends that you can share with us and combined with the cost saving considerations and improvements you just talked about and color on the impact on both gross margin and EBITDA margin would be appreciated.
So thank you for the question Ivy.
I think similar to how we discussed earlier there's still a lot of uncertainty on what that mix is going to look like in the back half of the year.
We are seeing some modest improvement in our core clinical business which will carry with it a similar margin to our historical margins both for clinical and pharma as that volume comes back.
However, we have staffed up and we do have employees that we had for pre-COVID volume.
So I would expect that there's still going to be margin pressure until we return to more stable pre-COVID volumes and on top of that the COVID-19 margin profile is slightly lower than our historical margins.
So when you're looking over the next couple of quarters, I would expect that our margins will continue to be lower than what our historical margins have been.
Over the long term as volumes come back we should see those come back to a more normalized levels. Similar with the operating expenses in the near term we're going to continue to invest strategically in OpEx. We're going to try to be as disciplined as we can but you're going to see the impact of that lower margin come through on the EBITDA margin. Is there anything you would add Dough?
Yes. I would, that's great Kathryn. I would just add maybe that as we get more experienced with the COVID-19 testing maybe there are a couple of things to add. One is that we are continuing to automate the process and so we're trying to improve the COVID-19 testing margins and the other thing I would say is because of the nature of our COVID-19 testing where we are operating as a network lab, we don't have sales and marketing and G&A expenses associated with that.
So the gross margins to the extent there are gross margins in the COVID business they tend to fall right down to the EBITDA line.
Great. Thank you for the color. And second question more longer term bigger picture, so post-COVID do you see more outsourcing of oncology volumes in general basically as we see more funding and stimulus plans going into other parts of the healthcare system? Do you see hospital labs maybe building up more oncology testing capabilities and how do you envision that? Any impact on your business going forward? Thank you.
Well, thanks for the question Ivy.
I think most of the stimulus money that has been either dispersed or is contemplated is really directed at COVID testing, not so much at other kinds of testing and so right now at least I don't see a fundamental shift at as I look at the industry right now, in terms of our clients performing more oncology testing.
In fact, to some extent they've been inundated with other things and they've tended to refer work out to us.
So I think the same competitive advantages and positioning that we have had before would continue in that sense.
Great. Thank you very much.
We'll take our next question from Bruce Jackson with The Benchmark Company. Please go ahead.
Hi, thanks for taking my questions. Two questions on COVID-19.
First, could we get a dollar amount for the second quarter? Was it like $3 million, $5 million, $7 million and then secondly some labs have talked about pooling samples from low prevalence areas. I was wondering if that's something you're considering if you've got with your geographic customer base if you've got any low prevalence areas that you could take advantage of that?
Yes. Thanks for the question.
So as we mentioned before really the volume for our COVID testing came in the back end of June and really ramped up in the last few weeks of June.
So it was fairly minimal for the quarters, it’s about $2 million for the quarter but I will have Doug talk to you a little bit about pooling?
Yes. Pooling is a good approach and you've seen there's been a recent EUA approving that as an approach for areas in which the prevalence is low.
So in our sample population the positivity rate has been running in the high single digits and so I think for us pooling is not appropriate at this time but certainly that capability exists and I think when positivity rates come down to a level where it makes more sense to pull then that's something that we could potentially do and I know a number of the other labs where they can are contemplating pooling and I think it will increase the capacity of COVID-19 testing and I think it's a good approach.
All right. That's helpful. Thank you very much. I will hop back in queue.
For our next question we will return to Steve Unger with Needham. Please go ahead.
Hey great, I thought I could get sneak in here. I just wanted to clarify your lab footprint is in California, it's in Texas, it's in Florida, it's in Georgia. Are you doing COVID testing just in California and would you consider doing COVID testing in Texas if you're not?
Steve, we are performing COVID testing just in our Carlsbad California facility. We've devoted a fair amount of space to it; probably 40,000 square feet and we were lucky that we had the space there. We had not only the space but we had the talent and it was easier for us to bring it up in Carlsbad.
I think it would be more difficult for a lot of those reasons to bring it up either in Fort Myers or in our Houston, Texas facility.
So right now we're not contemplating that.
Got it. Great. Thank you.
And that's all the questions that we have in the queue at this time.
Okay. Thank you very much and thanks for all the questions everyone.
As we end the call we would like to recognize the approximately 1,675 Neogenomics team members around the world who are dedicated and committed to building a world-class oncology diagnostics company and performing COVID-19 testing for our country. On behalf of our Neogenomics team I want to thank you for your time joining us this morning, for those of you listening that our investors or are considering an investment in Neogenomics we thank you for your interest in our company.
Thank you ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation.
You may disconnect your lines at this time and have a great day.