Good day, ladies and gentlemen, and welcome to the NeoGenomics Fourth Quarter and Fiscal Year 2019 Earnings Release Conference call. All lines have been placed on listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host for today CEO, Mr. Doug VanOort. Sir, the floor is yours.

Thank you, Jess. Good morning, everyone. I'd like to welcome everyone to NeoGenomics fourth quarter 2019 conference call. Our team is here together in San Antonio at our Annual National Sales Meeting and joining me for this call is Kathryn McKenzie, our Chief Financial Officer; Rob Shovlin, President of our Clinical Division; George Cardoza, President of our Pharma Services Division; Bill Bonello, President of our Informatics Division and Director of Investor Relations; 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, I want to let everyone know that we'll 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're 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 limit that has been allotted for this call.

Thank you, Bill. For today's call, I'll briefly review some quarter four highlights, Kathryn McKenzie will then provide a more detailed review of the financial results and I'll then share with you several initiatives and investments that we're making to drive both near-term and long-term growth. We'll then have time for questions and answers. Before I discuss the results, I would like to discuss a couple of important additions to our leadership team. First, we are delighted to introduce Kathryn McKenzie, as our Chief Financial Officer. Many of you already know Kathryn as she served as our Chief Accounting Officer for the past two years and in a senior finance leadership capacity over the past six months. I would also like to introduce Doug Brown, who joins us as Chief Strategy and Corporate Development Officer. Doug joins us from SVB Leerink where he was a Senior Managing Director. Doug brings years of experience in the oncology diagnostics sector and has been a longtime adviser and trusted friend of our company. We couldn't be more pleased to have Kathryn and Doug join our leadership team. I also want to recognize and congratulate Bill Bonello, who in addition to continuing to lead and direct our Investor Relations process is now the President of our Informatics Division, a newly created and exciting strategic initiative for our company. Now let's turn to 2019 full year and quarter four highlights. 2019 was an outstanding year for NeoGenomics. We grew revenue by nearly 50% including greater than 20% organic growth and increased gross margin by more than 200 basis points year-over-year to 48.1%. More importantly, we significantly strengthened our competitive position as a leading global oncology diagnostic company. Fourth quarter revenue increased 40% year-over-year to $107 million. As a reminder, Genoptix was included in part of…

Thank you, Doug. Doug already commented on the key points of revenue and profitability. So I will focus my commentary on some of the other important financial metrics in the quarter. On a full year basis, gross margin for our Clinical Services Division increased 160 basis points to 48.6%, primarily driven by improvements in revenue per test. For the fourth quarter, Clinical Services gross margin was down 120 basis points sequentially primarily due to increased hiring to accommodate both integration and anticipated growth. As a reminder, we staffed up significantly in the third and fourth quarters in both the Clinical Services and Pharma Services Divisions to support existing and anticipated growth and complete the transition of Genoptix clients to a common laboratory system and process. In 2019, our average cost of goods sold for clinical test also known as our cost per test increased by 10% to $188, primarily due to the impact of Genoptix and test mix shift. On a pro forma basis, cost per test decreased by 4.5% driven by increasing scale, automation and process improvement. In the fourth quarter cost per test increased by 14% year-over-year to $194 primarily due to the acquisition of Genoptix. On a pro forma basis including Genoptix in the base year cost per test was essentially flat on a year-over-year basis in the quarter. Pharma Services gross margin increased 540 basis points to 44.7% for the full year, but declined to 41.4% in the fourth quarter, as we continued to build independent testing capacity for this business. With a signed contract backlog of approximately $145 million, the Pharma Services business has reached a scale, which necessitate its own testing infrastructure. We believe that having Pharma testing decoupled from Clinical testing, will enhance efficiency in both divisions over time. We continue to expect…

Thank you, Kathryn. Kathryn provided full year guidance and we feel great about 2020. However, before addressing some of the key drivers and dynamics that have us feeling so optimistic about the full year growth, I want to set expectations for the first quarter. Normally, we would expect to start the year strong and to gradually improve from there. Unfortunately, that is not the case for 2020. Our forecast for profitability in the first quarter is significantly below, what we would normally expect. There are several reasons for this. Most significantly, given the tremendous growth in Pharma Services backlog and our record quarter four revenue, we have built a global cost structure to support a high level of activity. Unfortunately, the timing of revenue conversion for Pharma Services projects in the first quarter looks to be down by approximately $4 million sequentially. We had a number of projects end in December and a number of other large projects are not starting up until late March and April. Despite this timing dynamic, I can assure you that our team and our business is very healthy. And our $145 million in backlog of signed contracts gives us high confidence that Pharma Services revenue will continue to grow at rates exceeding 20% in subsequent quarters and for the year. First quarter adjusted EBITDA will also be impacted by dilution from the Oncology Division assets of Human Longevity's acquisition which we just recently acquired and is not yet at a breakeven point. We expect adjusted EBITDA to also be lower as a result of our investment in Informatics. We are executing our strategy and now have a team of 27 people working on Informatics-related initiatives. We expect these initiatives to strengthen our competitive position in both the Clinical and Pharma Services Division and provide…

At this point, we'd like to open the call for questions. Incidentally, if you're listening to this conference call via webcast only and would like to submit a question please feel free to e-mail us at bill.bonello@neogenomics.com during the Q&A session and we'll address your questions 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 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. Jess you may now open the call for questions.

Certainly. [Operator Instructions] We'll move first to Puneet Souda at SVB Leerink.

Hi, Doug thanks Kathryn, congrats on the new role. Great to have you onboard here and great to have everyone, the entire team on the call here. So my first question, Doug is on the guide. I mean it's almost 15% organic growth at the midpoint. I was hoping if you could parse out in terms of the contributions from NGS? That's a strong grower, do you expect that to accelerate here and contributions from Pharma? HLI correct me if I'm wrong, but that's expected to contribute about $5 million into this guide. And are you expecting multi-gene panels and informatics effort to contribute here as well if you could parse those out? Thank you.

Well, thank you Puneet. Thanks for the question and the comments. We do expect strong growth to continue in our business. This -- investments that we've made recently in informatics, in Pharma, in the acquisition of the oncology division assets of Human Longevity should continue to fuel that organic growth that we've seen recently. Clearly the organic growth is being driven partly by next-generation sequencing and molecular testing. We mentioned that those growth rates have been approximating 50%. And we have really restructured in some respects our NGS panels and we think they are very, very high-quality panels. We continue to make improvements in them in terms of number of genes and in our reporting capabilities and the marketplace is reacting very favorably to that. So our next-generation sequencing panels in the clinical business should continue to fuel growth. In Pharma, I mentioned on the -- in the script that we expect the revenue for the remainder of this year after quarter one to exceed 20%, which is our long-term guidance there. We've got very strong capabilities. Certainly the acquisition of the assets of Human Longevity will continue to fuel that. Human Longevity's revenue for last year 2019 was about $10 million and we would expect that to grow at least at the same rates that the Pharma business is growing. In terms of multi-gene panels, you know, that we have a full portfolio of NGS and multi-gene panels using our multimodality capabilities. And these multi-gene and multimodality panels are growing very, very nicely. A lot of our customers like targeted panels. There also some customers are ordering the large panels. Some customers are also ordering just single-gene molecular tests. And we offer the full spectrum of those product opportunities. And lastly you asked about informatics, I can tell you we are really excited about our informatics strategy. We are getting a lot of inquiries from pharma companies, from payers and others to help them solve problems that they have running their business. And in pharma's case, identifying patients for clinical trials or matching patients with therapies and we're very excited about our capability, our expanding capability here. And we should expect to see revenue in the second half of 2020 and certainly beyond that.

Okay, good. Great. My second follow-up is on -- largely on NGS. Number one, I was expecting a sequential improvement in ASP given the NGS is -- continues to be an important driver for you in terms of growth and the contribution? So if you could elaborate in terms of ASP lift. When can we start to see that given NGS becoming larger? And I'm assuming NGS tests are being priced slightly higher than the current portfolio. Also, on NGS front, could you remind us again in terms of what's been the feedback from FDA? And when can we expect the approval for the multigene? And on the liquid efforts, if I could squeeze that into -- on liquid when -- a second half launch as you pointed out, but should we expect it to go through the same regulatory pathway that you're taking the current multigene panel? Thank you.

Okay, good. Puneet. Thank you for those questions. In terms of next-generation sequencing's impact on our average unit price, it is impacting our average unit price slightly and it will continue to do so. Our NGS panel tests are generally -- are significantly greater than the average of our price per test. Reimbursement is I think improving somewhat in next-generation sequencing although it's still difficult to get paid by some payers, but I see that environment improving somewhat. So we would expect that there would be some favorable impact going forward in our AUP as a result of the increasing share of our test volume mix held by next-generation sequencing. We also have other reimbursement initiatives by the way that we expect will have a favorable impact on average unit price over time. In terms of FDA approval, we're continuing to work very hard to achieve FDA approval of a large panel of next-generation sequencing assay that we brought before the FDA. We have very good dialogues with the FDA. We've had some good recent dialogues with the FDA. I must say we're learning as a result of this process, and we would hope to make substantial progress by the end of the year. And it's difficult to give real firm guidance with confidence as to when we would be through the FDA process, because there are a number of learnings that we're having for sure. So the timing is a bit difficult to predict, but we are making very good progress. And I would hope that we would be through the process by the end of 2020. You also asked about liquid biopsy. We are in the process of developing a number and series of liquid biopsy product offerings. One is a pan-cancer liquid biopsy test, which we are in the process of validating right now. And we would expect that around summertime, we would be able to introduce that product commercially. We also have liquid biopsy offerings that we're working with partners on, which are in the single-gene category and these are being sponsored partly with pharmaceutical companies. In addition to all that, we're working on other liquid biopsy opportunities for both our Pharma business and potentially for our clinical business. So this is a very important area of growth for us. And we will add liquid biopsy products to our comprehensive menu in 2020 and beyond.

All right. Great. Thanks, Doug.

We’ll go next to Brian Weinstein at William Blair.

Yes. Thanks for taking the questions. Maybe to dig in a little bit more on the guidance. Can you talk about the pricing dynamic versus volume growth in 2020? Also are you -- within that are you baking in share gains? Or are we really thinking about industry growth for testing volume? And then I'll ask the second question here in a second. Thanks.

Okay. Thank you Brian. I appreciate the question. In terms of volume gains in the clinical business, yes, we would expect to see continued market share gains. As we've talked about and I think you know we have a very strong competitive position. We're one of the few companies out there in our space that has a very comprehensive menu which we keep up to date. And we have a very cutting-edge comprehensive menu serving cancer centers, pathologists, oncologists, academic centers and we continue to see market share gains as we have for some time. In terms of pricing, the pricing environment even though we've had six straight quarters of increasing average unit price is relatively stable. Now, there are some dynamics there. One dynamic is that, when we gain large group purchasing organization or large hospital contracts, national contracts, in some cases there will be pricing concessions that we'll make. But as I said, we do have a little bit favorability in our test mix, which is improving our average unit price. And the general market for next-generation sequencing pricing is improving somewhat. So I think our guidance for average unit price is about down maybe 1% or so. We've guided historically to 2% to 3% annual decrease in AUP. And I think that would be a relatively reasonable expectation for you to have.

Great. And then for my second question as it relates to the backlog and the conversion of that backlog and things getting pushed out a bit. Can you give us a little bit more detail on your confidence that that's really what is going on here and that it's not just a broader slowdown in some of the projects that you guys are working with your partners on? Or that some of these projects are maybe more unlikely to play out? So just whatever else you can give us on that because that was a bit of a surprise. Thanks.

Yes. We understand, we're just finishing our best year ever and we've got some terrific growth in Pharma both in our backlog of signed contracts, and we continue to add new signed contracts at a very robust pace. And I can assure you, we've got a sales team in Pharma which is terrific, and they're very excited. So we don't see a slowdown in Pharma over the long-term at all. In fact, what we're seeing is long-term growth which is meeting or exceeding our expectations. What we have in quarter one is a bit of an unusual dynamic, where we did have projects that stopped or ended in December, and we have a lot of projects, which are starting in March and April. It's an unusual dynamic. Now, we also have some seasonality here. So January and February and March typically in Pharma are seasonally a little bit weaker than the rest of the year. We've seen that in the last couple of years and now Pharma is a bigger piece of NeoGenomics. And so that's impacting things a bit. But we have very, very strong confidence in our Pharma business. We love the business, it is a unique property. It's one of the few businesses out there that can meet needs of the Pharma customers on a worldwide basis with a comprehensive menu of products, and we feel very good about it.

Great, answered multi questions. Thanks.

We'll go next to Joe Munda of First Analysis.

Good morning. Thanks for taking the question. Can you hear me okay?

Yes. We can Joe. Thanks.

So real quick I just wanted to touch on the Q4 gross margin. Kathryn had said gave us some details on the decline the year-over-year decline there. Commentary was talking about the integration of Genoptix as well as growth. So really a two-part question, how much of the decline was due to the integration versus investments for future growth? And then two, I guess as we look out how much do we have left as far if you could walk us through what's left in the Genoptix integration as well as the opportunity to maybe drive down costs in the second half? Thank you.

Sure, Joe. Let me take some of that and maybe Kathryn will weigh in if necessary. First of all, I would say that the integration of Genoptix is going very well. We are now, I think about 13 or 14 months into the integration process and we are about done. We have about two months left of integration where we are going to migrate the remaining Genoptix customers onto a single laboratory information and billing system, and that will -- that activity will culminate in about two months' time and will set us up for a lot of progress both on the cost front and on other fronts going forward. Because we have a lot of folks, who are involved in migrating the customers and still in preparing our IT systems and other processes to have a unified laboratory information and billing system. So that process did impact our gross margins in quarter four, because we have somewhat redundant costs in place and a lot of people focused on finishing the integration activity. We -- but we feel very good about it. And we think that in the second half of 2020, we are going to see some acceleration in our cost per test or normal cost per test reduction activities. In terms of investments in growth impacting gross margin, I would point to Pharma Services where we have invested a lot in global expansion, we've also invested a lot in separating and creating a separate laboratory infrastructure for Pharma Services, because the Pharma Services business is getting to be a large part of NeoGenomics. And customer requirements in Pharma are different than in the Clinical business. And that is necessitating us to separate in the laboratory, Pharma business and activity from Clinical business and activity. So in that sense, we've got a fair amount of cost that we've added for Singapore, for Geneva, for our laboratory systems and processes in the U.S. And we feel great about it, because there's a lot of growth. There's $145 million of signed contracts in backlog, which we're just ready and waiting to execute. So, our gross margin was pressured to some extent in quarter four, but we would expect our gross margins to rebound in the second half of 2020.

Okay. And then, Doug just one follow-up to that. The relationship with PPD, can you comment on that as well as incremental revenue as a result of that relationship? Thanks.

Yes, Joe. I could comment, but George Cardoza would do a better job. So, let me pass the mic to George.

We're very pleased with the relationship with PPD. They're a very valued partner. We're literally right across the hall from them in Singapore, and they were invaluable in setting that office up. We have gotten quite a few -- actually several million dollars in contract wins for them. For competitive reasons, we don't give out the specific dollar amount. But I would say, we're pleased with that partnership. We're 1.5 years in, and I think we're working really well with them. And I think both sides realize that there's still a lot more upside in that relationship that's to be had. So, I would say, it's on track, and I think the future looks very bright for our partnership.

Okay. Thank you.

[Operator Instructions] We'll go next to Bruce Jackson at The Benchmark Company.

Hi. Thank you for taking my question. The informatics strategy sounds really exciting. I wanted to know if we could get maybe some more details on the clinical decision support tools.

Hi. Sure, Bruce. I mean I think the concept here is that with the rapid evolution in testing technologies and just what's going on in terms of cancer therapeutics, it's getting increasingly difficult for providers to know which are the most appropriate tests to be ordering. And so, the -- at the most basic level the concept for clinical decision support is if we could integrate tools, for instance, into our online ordering or through working with payers or working directly with health systems that would better direct physicians to appropriate tests based on the situation with the patient that we could help improve ensuring that patients are getting the right testing. I mean, a simple example that we use as an illustration often is non-small cell lung cancer patient that maybe gets a PD-L1 test, but doesn't get the corresponding molecular tests that should be ordered. If we can design tools that could sort of automatically inform those providers about guidelines and alert them when patients haven't gotten testing that's sort of consistent with guidelines et cetera, we think that could make a big difference in improving patient care.

Okay. Thank you. And then, a fast question on the pharmaceutical side of the business is the timing of the project starts. Does that have anything to do with the coronavirus? You've got a global footprint and just wondering, if there's any impact to that particular business?

We are an oncology laboratory. So, yes really that doesn't -- the coronavirus or COVD-19 doesn't lapse over to our business. So I do think right now, we have a couple of projects that we are managing through our partner. We do have a partner in China that we've been working with. Those projects have slowed down. So, there could be a minor, minor drag on this. But in terms of our overall pharma revenue, it's not a material amount of our overall revenue.

All right. That’s it from me. Thank you, very much.

Okay. Thanks, Bruce.

And with no other questions holding, I'll turn the conference back to Mr. VanOort for any additional or closing comments.

Okay. Thank you, Jess. As we end the call, I'd like to recognize the approximately 1,678 NeoGenomics team members around the world for their dedication and commitment to building a world-class oncology diagnostics company. On behalf of our NeoGenomics team, I want to thank you for your time joining us this morning. For those of you listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Goodbye.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time and have a great day.