NeoGenomics, Inc. (NEO) Q1 2019 Earnings Report, Transcript and Summary

Good day ladies and gentleman and welcome to NeoGenomics First Quarter 2019 Earnings Call Call. All lines have been placed on a listen-only mode and the floor will be open 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 for today, Mr. Doug VanOort. Sir, the floor is yours.

Thank you, Jess. Good morning. I’d like to welcome everyone to NeoGenomics’ first quarter 2019 conference call. Joining me from our Fort Myers headquarters is Sharon Virag, our Chief Financial Officer; Rob Shovlin, President of our Clinical Services Division; and Bill Bonello, Chief Strategy and Corporate Development Officer, and Director of Investor Relations. Joining us on the phone from Aliso Viejo is Dr. Larry Weiss, our Chief Scientific 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 represents 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 facts 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 prepared remarks 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 two per person in order to give more people a chance to ask questions within one hour that has been allocated for this call.

Thank you, Bill. For today’s call, I will briefly review some quarter one highlights and then turn the call over to Sharon for a more detailed review of the financial results. After that financial review, I will comment on several initiatives and investments that we are making to drive both, near-term and long-term growth. We will then have time for questions and answers. Let’s begin with quarter one highlights. First quarter results were outstanding, and we have substantial momentum as we head into the rest of the year. Revenue increased 51% year-over-year to $96 million driven by organic growth of approximately 20% and by the acquisition of Genoptix. Clinical volumes increased 31% with organic growth of approximately 12%. During the quarter, we added several large hospital and oncology customers with most of the revenue benefit from those additions still to come. We feel confident that there are more large new accounts on the horizon. Revenue per test increased 15% year-over-year due in part to adding Genoptix, but also to the continued success with our reimbursement initiatives. We recently signed a new national contract with Humana and are now contracted with every major national commercial health plan in the U.S. The benefits from the Humana contract are still ahead of us. We are especially excited by the momentum in our Pharma Services Division, where revenue grew 45% year-over-year to more than $9 million. We signed $21 million of new contracts during the quarter, and our backlog was up 41% year-over-year to $101 million. Importantly, we continued to grow profitably. Adjusted EBITDA increased 49% year-over-year to $14 million with most of the cost synergies from the Genoptix acquisition yet to be realized. Our integration efforts are well underway and tracking as expected. While things are going well, there are risks and challenges. In addition to handling rapid growth, we’re in the middle of an integration. It’s a management challenge to maintain the excitement around growth and sustain high levels of performance without exhausting our people. We’re trying to simplify, prioritize and pay close attention to the morale of our people and our culture. We also need to strike the right balance between achieving cost synergies and maintaining sufficient capacity to accommodate our growth both this year and in the future. Although these challenges – although these are challenges, our team is seasoned, and we are confident in our ability to manage through these challenges. In summary, we feel very good about the state of our business, we are clearly benefiting from our strategic positioning, and we are excited about the opportunities ahead of us. I’ll now turn the call over to Sharon to discuss our quarter one financial results.

Thank you, Doug. So as Doug mentioned, our first quarter revenues were $96 million, a 51% increase from last year. Of course, a substantial portion of that increase is due to the Genoptix acquisition but it is the remaining portion of that growth that we are really excited about, as it represents organic revenue growth in both businesses of around 20%. Clinical Services revenue alone increased 51% to $86 million. The majority of the Genoptix revenue went to the Clinical division so this was directionally as expected but we also saw substantial organic growth in this segment. That revenue growth came from both volume and price improvements. Clinical volume increased 31% to more than 234,000 tests, with organic volume growth of approximately 12% and the remaining growth from the addition of Genoptix. We are especially encouraged by the organic volume growth rate, given the potential for sales force distraction during the integration period. Fortunately, we have seen our sales force staying focused on strengthening the sales pipeline. Our average revenue per test increased 15% to $368. Approximately three quarters of this increase is from the addition of Genoptix, while the remainder of the increase is the result of our ongoing reimbursement initiatives. Looking to the future, we expect reimbursement to further improve, as Doug said earlier, we are very pleased to announce that we have entered into a new national contract with Humana, effective April 1, 2019. Humana is the fourth largest national insurance plan in the country, with six million lives under coverage. Our contract includes all products and covers all 50 states and incorporates all of our U.S. laboratories. Previously, neither NeoGenomics nor Genoptix had been contracted with Humana. Historically, this out-of-network status has negatively impacted volume growth and revenue per test. The new contract will allow us to better serve existing customers, add additional customers, reduce billing complexity, and improve our average revenue per test in the Clinical segment. Pharma Services revenue increased 45% to more than $9 million, which was also stronger than we had projected. This is almost entirely from organic growth as the pharma services revenue from Genoptix was very small. We booked $21 million of new business in the first quarter. Although our new bookings were outstanding, we did see $9 million of cancellations due to sponsors discontinuing certain development projects. Even with this unusually high level of cancellations, our backlog was up versus last quarter and increased 41% year-over-year. Our Pharma Services backlog now exceeds $100 million. Importantly, our backlog is converting to revenue. During the quarter, we saw robust growth across nearly every test modality, as well as contributions from our lab in Rolle, Switzerland. Combined gross profit increased by $20 million to $47 million, up 73%, from the prior year. This increase represents a 62% contribution on the $32 million of revenue growth. Gross margin improved by 625 basis points year-over-year to 49%. This improvement was driven by the impact of volume growth, higher average revenue per test, productivity gains, and cost efficiencies. It’s important to take a moment to talk about this margin. We hope that synergies, and our continued focus on both cost and reimbursement, will help us achieve and maintain a similar margin over time. However, we are currently investing and continued growth, which may impact gross margin in future quarters of this year. Our average cost-of-goods-sold per clinical test also known as our cost per test, increased by 5%, reflecting the impact of the Genoptix acquisition. Our expectation was that cost per test would increase by almost 8% due to the higher Genoptix cost per test as of the acquisition date. So we are very pleased to see the impact of both the strong organic growth and continued focus on efficiency cutting that increase meaningfully. General & Administrative expenses increased by $15 million to $32 million. The increase is due to the acquisition of Genoptix, growth initiatives and approximately $1.3 million of one-time acquisition and integration related costs. These one-time, nonrecurring expenses are counted as non-GAAP adjustments in our calculation of adjusted EBITDA, adjusted net income, and adjusted EPS. We expect the investments in infrastructure and innovation to continue throughout the rest of this year. Importantly, the quarter one G&A expense does not yet reflect the benefit of anticipated cost synergies from the Genoptix acquisition. Those synergies when realized should help off-set the impact of this continuing and possibly increasing investment. Sales and marketing costs increased by 66% year-over-year to $11 million as we doubled the size of our sales force, primarily through the acquisition of Genoptix. This increase was as expected. First quarter GAAP net loss was $2 million compared to net loss of $2 million in the first quarter of 2018, and diluted loss per share was $0.03 versus diluted loss per share of $0.03 in the prior year. The first quarter loss was due to a one-time accrual of $4.9 million, net of tax, related to resolution of a dispute arising from a 2012 licensing agreement. We believe that in order to compare the net income related to the true operations of the company on a more consistent basis across periods, it is appropriate to adjust GAAP net income or loss available to common shareholders to exclude certain non-cash items and, if applicable, one-time costs. We refer to this measure as adjusted net income and on a per share basis, adjusted diluted earnings per share, and we have included a table with how these are calculated in our earnings release. Adjusted EBITDA was a record $14 million, which represents an increase of 49% year-over-year. This is especially significant, because we expected zero adjusted EBITDA growth from the Genoptix acquisition until later in the year when synergies will begin to be realized. In the first quarter, adjusted net income was $7 million compared to $2.5 million in the prior year. Adjusted diluted eps was $0.07 versus $0.03 in the first quarter of 2018. Finally, we are very pleased to see cash collections remain strong in the quarter despite the possibility of integration distractions. Overall, DSO remained strong in the first quarter of 2019 at 78 days. We are updating our full-year 2019 revenue and earnings guidance. We now expect consolidated revenue to be in the range of $384 million to $400 million versus our previous guidance of $379 million to $395 million. We now expect adjusted EBITDA to be in the range of $52 million to $56 million, versus our previous guidance of $49 million to $53 million. The increase in guidance reflects better-than-expected first quarter results. I will now turn the call back over to Doug to provide some additional commentary on our key 2019 initiatives and opportunities.

Thank you, Sharon. Over the years, we have endeavored to build a competitive and differentiated position in the cancer testing market. As you can see from our strong first quarter results, we are clearly benefitting from our strategic position, which was noticeably bolstered with our acquisition of Genoptix in December. This morning, I would like to focus on three high-growth market segments, where we are seeing a significant benefit from our strategic position: next generation sequencing, pharma services, and companion diagnostics. Let me start by discussing our leading position and rapid growth in next-generation sequencing. You can see from our strong organic growth that our Clinical Services division continues to gain market share. What you don’t necessarily see from our reported numbers is our particular strength in molecular testing, or more specifically, next generation sequencing. Providers turn to us for NGS testing, because of our broad and deep of NGS offering, our capabilities across both solid tumor and hematologic cancers, and our ability to provide other critical, complimentary testing such as FISH and PD-L1. Just as we have worked to develop and offer the broadest overall somatic cancer testing menu in the industry, we’re also working hard to develop and offer the broadest and deepest menu of NGS based tests. We currently offer 30 different NGS-based multi-gene tumor profiles, which we have branded as NeoTYPE cancer profiles, for both hematologic disease and solid tumor. These tests range from highly focused, cancer specific panels to wide spectrum pan-cancer profiles, including our 315-gene NeoTYPE discovery panel. We also offer tumor mutational burden testing, or TMB, and microsatellite instability analysis, with many of our panels. And we continue to work hard on our voluntary submission to the FDA of a broad-based NGS panel, which we still hope to accomplish by year-end. The development of FDA approved tests and FDA compliant processes is one area of NGS investment, along with others, that we are making to competitively position our company for success over the long haul. So far, our strategy is working. In the first quarter, our NGS test volume increased by more than 50% organically and we believe that we are one of the largest providers of NGS-based somatic cancer testing in the country. In the most recent quarter, we provided nearly 12,000 NGS-based tests. Most of these tests are also accompanied by other non-molecular tests such as PD-L1 or FISH, underscoring the fact that physicians are utilizing a portfolio of different test methodologies to generate the best outcome. Our strategic positioning is also creating a significant competitive advantage for our Pharma services division. Pharma companies choose NeoGenomics, because of the depth and breadth of our capabilities, our scientific leadership and our leading pathologists. They also come to NeoGenomics, because of our unique ability to help develop and launch companion diagnostic tests. Pharma companies know that we can be ready to provide a new test on the first day of therapy gains FDA approval. Only a short list of labs have the ability to take a companion diagnostic test across the continuum from development, through clinical trials, and into the market. Pharma companies also value our unparalleled access to oncology testing data. We have several projects under development to work collaboratively with Pharma companies to identify patients for clinical trials or targeted therapy. These projects could add tremendous value for physicians and patients, differentiate NeoGenomics from other laboratories, and provide a new source of revenue for the company. These capabilities are driving market share gains, as is evidenced by both new bookings and revenue growth. We booked $21 million of new business in the first quarter, which is 44% higher than in quarter one 2018 and 19% more than what we booked in the fourth quarter. The 41% year-over-year increase in our backlog and 45% year-over-year revenue growth are strong evidence of the competitive strength of this business. Finally, I would like to discuss how our positioning is driving a significant opportunity in companion diagnostics. Our capabilities with regard to companion diagnostics are somewhat unique and powerful. We have 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. As I noted earlier, very few labs have the same ability to take a companion test through and across the continuum from development, through clinical trials, and into the market. This is clearly a synergy of operating both a Pharma Services and Clinical Services operation, and increasingly of interest to pharma and clinical clients. We are currently winning Pharma Services business, because of our companion diagnostic capability. For example, as of March 31st, we had approximately 30 different companion diagnostic-related projects in our Pharma Services backlog. Our clinical business will also benefit from our companion diagnostic capabilities. In March, we launched the Ventana PD-L1 SP 142 Assay, which is a companion diagnostic test that was recently approved by the FDA to identify advanced, metastatic triple negative breast cancer patients, who may respond to the immune checkpoint inhibitor therapy, TECENTRIQ, which is the first such immunotherapy approved specifically for breast cancer. We have several other companion diagnostic test launches in our pipeline. These tests have the potential to further fuel our revenue growth, as we expect the pace of companion diagnostic activity to increase meaningfully over the next couple of years. Before we close, I would like to briefly comment on our ongoing investments for future growth. Cancer diagnostics is evolving at an amazing pace and we believe we need to increase our investment in R&D and accelerate our pace of innovation to remain a leader. Specific areas of focus include building a portfolio of FDA-approved tests, developing a competitive liquid biopsy offering and strengthening our informatics capabilities. We are investing to make progress in each of these areas. We’re also making continued investments to grow our Pharma Services business. We recently opened a new laboratory in Singapore and we hope to be open in China by the end of this year. In addition, we added capacity in both Aliso Viejo and Houston, validated a number of new panels in our Houston lab, introduced new testing platforms and significantly beefed up our Flow Cytometry offering for Pharma Services. We have also expanded our Pharma Services sales team both in the United States and in Europe. In summary, quarter one results were very strong, and we feel good about our momentum heading into the rest of the year. And more importantly, we have established a leading position in the market which is proving to offer significant, sustainable competitive advantages today and in the future, and we look forward to further strengthening that position over time. I will now hand the call over to Bill Bonello to lead us through Q&A.

At this point, we would like to open the call for questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel free to e-mail us at bill.bonello@neogenomics.com during the Q&A session and we will address your questions at the end if the subject matter hasn’t already been addressed by our call-in listeners. As mentioned at the beginning of this call, we would like to ask each person to limit their questions to 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. [Operator Instructions] We’ll move first to Drew Jones for Stephens.

Thanks. Good morning guys.

Good morning.

A couple of questions on the improvement in revenue per test. If we look at the 300 to 400 bps of price increase from the organic initiatives, let's call them, can you maybe parse out the impact from price increases, reimbursement improvements and then maybe Cigna coming in network? And would it be a good proxy to use for the impact on Humana, if there is one?

Yes. I’ll take that. So, first on – when it comes to price increases, we don't get a lot of this benefit from price increases, frankly. A lot of this is coming from money that's owed to us and just doing a better job of getting that money collected. So, I think Cigna is a great example. That started back in August and over time, you see not just the benefit of that in collecting more but the work we do for Cigna, but you see people have been more willing to give us work when it comes to commercial, where they know that it's going to be billed to commercial because they don't want their patients to be out of network. So, I think we see our Cigna dollars increasing because of that. And yes, I think you can look at Humana. I think if you took the business that we had in 2018 that was billed to Humana and then put in the impact of the contract on that, it may be only $1 million, but if you think about the benefit of additional growth we might have, where again oncologists, in particular, are willing to give us more business knowing we're in contract and their patients aren't going to be subjected to out-of-network bills. I think we can expect an even bigger benefit over time.

Okay. And just a quick follow-up there, I’m assuming with the impact from Genoptix, you guys have pretty well telegraphed that. But that impact we saw on the first quarter does fully contemplate Neo contracts on top of this…

Yes. Right, we have projected significant revenue compression when we brought Genoptix over. We're fully reserving for that and so you do see the full effect of that. And we do hope things like, for example, the Humana contract will help lessen some of that impact, but that's all to come in the future.

And then just quickly, I'm assuming you aren't starting cold here with the liquid biopsy, Doug, that you – effort that you talked about here on the call. Can you maybe help us understand where you are so far? And maybe the path for the rest of the year and maybe next several years?

Yes, Drew, let me broaden the question to include all of next-generation sequencing, innovation and investment. We're investing heavily in NGS, both on the hematologic and the solid tumor side. We're increasing our – the number of genes that we'll include in both of those panels. We're taking a look at all of our NeoTYPES and making sure that they reflect the most current advances in medicine and technology. And we're excited also about the idea of liquid biopsy, and we are investing in that area as well. You know liquid biopsy is very exciting because it's great for patients, frankly. It addresses the issue of tumor scarcity. Potentially, there's faster turnaround time. It's less invasive for patients. But I think we all have to recognize that there are some issues yet to be resolved with the liquid biopsy, including lack of concordance, which is being worked on by a lot of people, and reimbursement. There are a lot of solutions for us here, high-quality solutions for us, including lab developed test, IVD kits, and we're looking at all of these areas. It makes a lot of sense for us to include a liquid biopsy offering in our portfolio, in our test menu and we will do that.

We'll move next to Kevin Ellich at Craig-Hallum.

Good morning. Congrats on the nice quarter. I guess starting off, could we talk about the organic growth. Sharon, 20% sounds great. Just want to make sure I'm doing the math right. I mean, did Genoptix add about $19.5 million and if that’s right, how much was in the Pharma Services business?

So, the amount of Pharma that actually came from Genoptix is minuscule. I mean it's very small. They did, obviously, some work with Novartis, with Navigate, but it's very small. So what, I'm sorry, what was your other question?

I mean, so was the Genoptix revenue about $19.5 million in the quarter?

We don’t really know Kevin, because the revenue is now a little bit fungible. It's hard to tell whether the revenue is coming from Genoptix or NeoGenomics. Clients are switching back and forth from Genoptix to NeoGenomics. So we – our math says that the organic revenue growth is about 20%, and that's – I think that's a good number.

Yes. It’s just based on expectations compared to what we saw on the total and I think that's our best estimate.

Okay, okay. And that does make sense. And then Doug, you talked about the three high-growth segments, next-gen sequencing, Pharma, companion diagnostics. Can you provide a little bit more color on how much contribution or growth you expect from each of these areas for 2019?

I think, let me see if I can put some color on that. In terms of – starting with companion diagnostics, there is a little growth right now in companion diagnostics from expansion of indications for PD-L1, for example, but we would expect that there's going to be increasing growth in companion diagnostic testing as the year goes on as more therapies gain FDA approval. In terms of Pharma Services, I think we've telegraphed our expectation for 20% revenue growth there. Obviously, quarter one was more than double that. So, we are hoping that we're going to, at least, be able to meet our guidance – our long-term guidance there. And next-generation sequencing, we indicated that our revenue – our volume growth is up over 50%. I don't see that changing much as we look forward to the rest of the year.

Sounds good. Thank you.

We’ll move next to Puneet Souda at SVB Leerink.

Yes. Hi, Doug. Congrats on the quarter.

Hey.

So, the first one around the cost per test, I appreciate that it increased because of Genoptix, but just wanted to get the sense of overall it seems like what's implied into your guidance and how should we expect the cadence of cost per test. Obviously, you have a lot of volume leverage. But just as efficiencies come on board, just give us a sense of how we should think about the cost improvement throughout the year.

We feel great about our cost per test in the quarter. You know it did bump up, because of the addition of Genoptix. But what we're seeing, Puneet, is continued benefits from automation. We're seeing benefits from continued volume growth and getting operating leverage in our business. And frankly, as Sharon said, we are not yet seeing much synergy increase – improvement affecting cost of goods sold and cost per test. So we're very encouraged about our performance in terms of efficiency in quarter one. And we expect that we're going to continue to gain momentum in our cost per test as we realize synergies and get the benefits of some of the automation initiatives that we've been working on.

Okay. Thanks. I have a question on the Pharma backlog. Do you have any clarity on any further sort of cancellations? Just if you could elaborate on the $9 million cancellation? And sort of, was that just unexpected trial cancellation? How should we think about cancellations going forward? Obviously, you're delivering a good backlog growth here, and if you could comment on the conversion as well.

Yes. Let me say, first of all, that we're really excited about the Pharma Services bookings and backlog. We are adding business at, I think, a pretty rapid rate, $21 million or so of new business during the quarter. The backlog was up, obviously, very nicely as we said. We did have $8 million plus of cancellations. These aren't a result of anything that NeoGenomics did. These are sort of typical cancellations. What was not typical was the amount of cancellations that we experienced during the quarter. They were unusually high. But you, I think, will recall we've said all along that we would expect about 70% of that backlog to convert to revenue over time. So over the long haul, that's, I think, within our general guidance range. So we're excited about that. I think the other thing I would just add, Puneet, is that we're also excited about our alliance, our strategic alliance with PPD. And we've been working very closely with PPD. They're a terrific partner of ours, and we're starting to gain momentum there in the marketplace with PPD, and we're hopeful about continued increases in backlog even as the conversion rate into revenue increases.

Great. And the last one if I could squeeze in on – just on turnaround time. Could you give us some color on where you stand currently? And how – obviously, that maybe is a little bit higher as we – as you integrate Genoptix, but just give us a sense of what's the expectation for the rest of the year. And if any comments around customer conversations or oncologist conversations around both organizations now under one roof, conversations you've had with just the broader hospitals and oncologists, I would appreciate that. Thank you.

Turnaround time is – in the lab business, if you follow service and lab business, you'll know that turnaround time remains one of the most important measures of client satisfaction, and it is really important to us. We have a lot of processes built into our company. We monitor the heck out of this measure on a daily basis. NeoGenomics has always been known to have outstanding turnaround time, and that's reflected in our high net promoter scores. We were challenged, frankly, during the quarter in some of our turnaround time measures in certain of our test modalities. And we have – actually, I feel very proud of our team because we've recovered very, very nicely over the last three or four weeks. So our turnaround times are right where we want them now. And we've got a lot of automation initiatives underway and people additions that are coming into our company that are going to help. We have some capacity constraints. One capacity constraint is just hiring people fast enough, because we're growing pretty quickly in some of these test modalities. So we are putting every effort into maintaining industry-leading turnaround time, and we know we can do that. We have a history of doing that. You had one other question, Puneet?

Discussions with oncologists and hospitals.

Yes. Our discussions with oncologists and hospitals and pathologists are occurring on a hourly basis. We have, I think, great relationships with people. So far, the conversations have been wonderful around our Genoptix acquisition. And you can, sort of, see that by the market share gains. I guess that's the proof in the pudding.

We'll move next to Brian Weinstein at William Blair.

Hey guys. Thanks for taking the call or the question rather. You have talked about when you were doing Genoptix deal that the biggest potential areas of disruption were kind of around redrawing sales rep territories, customer education, the combination of the systems, the realignment of the sales force and the meshing of the cultures. Can you just give an update as to where you are on those specific things? And are those still the biggest potential areas of disruption?

Yes, Brian. The Integrations are hard. I don't care if it's a small integration or a big integration, they're always hard. I would say, so far, our integration with Genoptix is right on track with where we expected it to be and overall in every area that you mentioned. In terms of the sales force, we very, very quickly integrated the sales team. I think I mentioned on a previous call that that's going very well and continues to go well. We have very, very high retention of all of our sales folks. They’re out in the field. They’re selling. We feel very good about that. We’ve begun to integrate almost every single other function from IT to finance to human resources, and now we are also integrating on the laboratory side. And that integration will occur over the next six months. Culturally, we’re very excited about the team that we inherited from Genoptix. There are some really high-quality people there, and we have integrated them into the fabric of our company. And we feel very good about that. So overall, so far, so good.

Great. And then as a follow-up with United announcing their preferred lab network last week, how does that selection – how does their selection of various labs impact you? And do you see this as a broader trend in the industry? And if so, is there anything that you think you guys need to do to position yourself going forward?

So I’ll take that. I think the preferred network – I mean, I think, that was an interesting thing, that preferred network. We are still contracted and are – to our – to the doctors that we serve, to the hospitals that we serve. What’s important is that we’re in network. I think there are other things that we sell off of based on our turnaround time, customer service, customer satisfaction, the quality of our science. And so I don’t think that it’s going to have a big impact on us. I don’t see people turning away what we bring to the table just to get from contracted, which we are with United, to preferred. That just doesn’t really fit with our model. So we’re not particularly worried about that. The other thing to add is just that less than 20% of our revenue is with commercial providers, and United is a very, very small piece of that 20%. And so I’m just not worried about it.

Thank you.

We’ll move next to John Hsu at Raymond James.

Good morning. First one, just on the – just going back to Genoptix. Obviously, it seems like things are tracking pretty well there. But it sounds like the revenue compression is kind of tracking in line with what you had been hoping for. But as far as an offset, for instance, you called on an area around potential revenue synergies from solid tumor. Maybe you could give some color around that to start.

Yes. So let me see if I can answer your question well, John. First of all, on the revenue compression, it is about what we expected. No surprises there. We feel pretty good about our position. And you can see it reflected in our revenue per test and Sharon has talked about that. In terms of next-generation sequencing and the benefit that we are – that accrued to us through Genoptix, I would say that this is one of the benefits that we didn’t expect from Genoptix. Genoptix had a terrific team in their molecular department and the next-generation sequencing capability and molecular capability that was quite strong. And so we have very quickly merged the capabilities in NGS of our great team in Aliso Viejo with a terrific team in Carlsbad. And I think we’re starting already to get a lot of synergies as a result of that both in costs, in efficiency in future potential, new tests that we’re bringing to market and so forth.

And I think if you think about revenue synergies that are possible in the future, which I think we do think – we think that Genoptix customers will be hungry for, for the solid tumor testing that we do that they didn’t offer, I think what we’ll see that benefit probably much – we’ll see that benefit as we bring those customers over onto Neo so that they can – onto our systems so they can really have the benefit right now. If they sell from Genoptix, it’s through a send-out process and it’s complicated. But I think as we get into the end of Q2 and the beginning of Q3 and we see those system conversions taking place, that entire menu will be not just available to them as it is today, but easy for them to access, and so I think we’ll see even further revenue synergy from that.

Okay, great. And then just on volumes, obviously 12% organic volume came in pretty nice against a very tough comp. Easter falls into Q2 this year, just wanted to think as far as from a pacing standpoint, anything that you would call out that could impact volumes quarter-over-quarter as we move throughout the year?

No. I don’t think there’s anything unusual that we would call out.

Okay. Then if I could just sneak in one more. Just – obviously, one other area that you’ve talked about for investment, Doug, was your informatics capabilities and all the data that you’ve been capturing. So just could you level-set us on where you are now? And what type of investments you’re making on that side? And perhaps are there opportunities there? Or is it just kind of organic build? Thank you.

Well, I think there are tremendous opportunities for us in informatics. We are investing in this area. We’ve built a team. We’re investing in the infrastructure to be able to satisfy a lot of requests that are coming in from pharma clients and other clients for informatics kinds of products and services, everything from trial matching to finding patients for therapies. There are all kinds of new requests that we are fielding almost on a daily basis for informatics. So we’re gearing up to satisfy what we expect will be increasing demand in this area. And we think we’re pretty excited about it.

[Operator Instructions] We’ll go next to Joe Munda at First Analysis.

Good morning. Thanks for taking the questions. Just two quick here. Doug, in your prepared remarks you talked about Pharma Services sales force expansion. Can you give us some idea of the size of the sales force there as well as your plans potentially going forward, are you looking to add to that headcount based on the growth that you’re seeing in the backlog and the demand? And then second, in regards to the NGS FDA panel, PMA that you guys are looking to submit, in the past we were looking for a fall submission, now in your prepared remarks looking like end of year hopefully. Can you give us some color or commentary as to the status of what you’re seeing in regards to that submission? Thanks. I’ll hop back in the queue.

Okay. Thanks, Joe. In terms of the Pharma sales team, I think we have about nine or 10 people right now. We’ve just added a couple of folks in Europe, and we’ve added a sales commercial leader in – outside the U.S. We’ve added one recently here in the U.S. as well. I think we may add maybe one or two as the year progresses. But we have a very good sales team in Pharma. I feel really good about it. They are, I think, hitting on just about all cylinders right now. In terms of the FDA-approved assay, our team is working very hard on this. We’re – this is a voluntary submission on our part. We’ve said all along that there are a number of reasons that we’re doing this. We want to make sure that we have FDA-compliant processes in a world in which companion diagnostics may be more important. We think that Pharma will appreciate the quality of processes that we have that are FDA-compliant. But this is a lot of hard work. This is a novel test that we’re submitting to the FDA. And frankly, we’re learning a lot through the process. I think last call I said that fall or the fourth quarter would be a target for us. We’re still targeting the fourth quarter. But we’re learning a lot. And the FDA has been fabulous. We’ve been working closely with them. They’ve been very encouraging. But there’s a lot of learnings here and that’s still our target, but we want to make sure that people understand that this is new territory for us.

Okay. Thank you.

We’ll go next to Bruce Jackson at The Benchmark Company.

Hi, thank you for taking my question. So reimbursement for next-generation sequencing continues to be an evolving area. CMS recently had some positive development. So I just wondered if you could give us your most recent thinking on NGS reimbursement trends and how that’s shaping up for the next couple of years.

Yes. I think, first of all, I would say that about two thirds of our reimbursement comes from hospitals. And I think that’s an important dynamic for everyone to understand. And our NGS tests are under contract with hospitals two thirds of the time and those – we feel pretty good that those are competitively bid and competitively priced. In terms of Medicare reimbursement, that’s been a challenge for, I think, us and the whole industry. We’re continuing to work with MolDx in terms of reimbursement. They not inappropriately require evidence to make sure that reimbursement is appropriate. And we’re working with all of the folks that are trying to determine appropriateness of reimbursement. On the commercial side, I think that, just as Sharon said, we’re trying to – we’ve got good contract coverage with all of the major managed care organizations. We have an opportunity to talk with them about reimbursement. And I think, in many cases, we have reimbursement and sometimes it’s difficult to make sure that we satisfy all their documentation requirements in order to get paid, but many times we have open conversations with them about that.

Thank you.

We’ll move next to Paul Knight at Janney.

This is actually Casey, on for Paul. Just moving back to the cost per test. You guys mentioned that so it grew 5% over your expectation of 8% for the quarter. Just thinking about this moving forward and then for the rest of the year, do you still expect that 8% in the coming quarters? Or with the Genoptix synergies that you’ve seen, do you think this will be less? Thanks.

So I think when we built our expectations in bringing Genoptix on, their cost structure is higher, so we expected when you blended the two together that it would be 8% up and instead we saw 5%. And I honestly think that’s because of the efficiencies that we were able to build on the Neo business. And so there’s still more to come because we certainly think, as we’re swapping best practices between the companies and that’s leading us to synergies, those are still to come on the Genoptix side. So I feel really comfortable that that’s something that’s lasting, that benefit is lasting and that we’ll even see further improvement over the rest of the year

Gotcha. Thank you.

And no other questions holding at this time. [Operator Instructions] And we’ll return to Kevin Ellich at Craig-Hallum.

Hi, guys. Just a quick follow-up. Doug, going back to the Pharma Services, which was really strong this quarter, and you mentioned the PPD collaboration or your strategic partnership. Are we still on track for $10 million of run rate revenue by year-end? Or do you think we’ll see upside of that?

Yes. I don’t think we have any reason to change that previous estimate, Kevin. We feel very good about the momentum that we have with PPD. A lot of joint bids are happening. We’re working very well together. And I think that estimate is as good as any we have.

Thank you.

And with no other questions holding, I’ll turn the conference back to management for any closing remarks.

Okay. Thank you, Jess. And thanks everyone. Before we end the call, I would like to recognize the approximately 1,442 NeoGenomics team members around the world for their dedication and their commitment to building a world class cancer genetics testing company. And on behalf of our whole team, I want to thank all of you for your time joining us this morning. And for those of you who have been listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Thank you.

Thank you. Ladies and gentlemen, that does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.