NeoGenomics, Inc. (NEO) Q3 2020 Earnings Report, Transcript and Summary

Please standby. Good day, ladies and gentlemen. And welcome to your NeoGenomics’ Third Quarter 2020 Earnings 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. As a reminder, today’s call is being recorded. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Chairman and CEO, Mr. Doug VanOort. Sir, the floor is yours.

Well, thank you, Melinda, and good morning, everyone. I’d like to welcome you all to NeoGenomics’ third 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 Services Division; George Cardoza, President of our Pharma Services Division; Bill Bonello, President of our Informatics Division; Doug Brown, our Chief Strategy and Corporate Development Officer; and Charlie Eidson, our Manager of Investor Relations. Charlie 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 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 the one hour that has been allotted for this call.

Well, thank you, Charlie. This morning I will begin by commenting on quarter three results including some encouraging market trends we are seeing in our core business and then we will provide a high level review of key strategic areas of investment. Kathryn will then provide a more detailed review of the financial results. Following Kathryn’s review, George Cardoza will provide some in-depth commentary about our growth investments within the form of services and Doug Brown will make some comments about our strategy and other investments. I will make some closing comments before we open it up for questions-and-answers. NeoGenomics reported record revenue and adjusted EBITDA in quarter three as we rebounded strongly from a very challenging second quarter. Revenue grew 44% sequentially and 20% year-over-year to $125 million, encouragingly we gained significant momentum in our core oncology business throughout the quarter. In our core oncology business revenue grew 28% sequentially and 4% year-over-year. COVID-19 PCR testing revenue added 16% to revenue growth during the quarter, as we worked around the clock to develop and provide high quality COVID testing to help with the shortage of U.S. capacity in July and August. The rebound in our core oncology business, which is somewhat V shaped in its trajectory occurred in both our Clinical and Pharma Services segments. In our Clinical Oncology business revenue improved 28% compared with last quarter to approximately the same level as last year despite a very challenging environment. Revenue in our Pharma Services segment also grew 28% from last quarter, while reporting its highest revenue quarter ever growing 38% on a year-over-year basis. While we are pleased by the sequential rebound in quarter three, we are also encouraged by the clear and continuing momentum we saw within the quarter in our core oncology business. Both our Clinical Oncology business and our Pharma segment continue to grow throughout the quarter and ended the quarter much stronger. In our Clinical Oncology business, test volume improved throughout the quarter as average daily test volume increased nearly 10% from the month of July to September. The positive momentum has continued in the first three weeks of October, with daily test volumes up approximately 8% over September. Next-generation sequencing tests volume growth was particularly strong in quarter three, growing faster than overall Clinical volume. Test volume growth also improved for this product line as the quarter progressed. The positive momentum in next-generation sequencing testing has continued in October with daily tests volumes approximately 30% higher than last year. Next-generation sequencing revenue currently represents nearly 20% of our total Clinical division revenue. In the Pharma Services segment the rebound we experienced in quarter three was driven by a momentum shift and strengthening, as clinical trial activity begins to resume. The majority of our clients reopened clinical trial sites and revenue from clinical trials accelerated nicely as the quarter ended. We also saw the start of new clinical trials, which is something we did not see in quarter two. Pharma research-related services have remained strong all year and Informatics-related revenue has been extremely strong. Inter quarter trends were also positive in the Pharma Services segment. In fact September was the largest revenue month on record for the Pharma Services division. Although, Pharma revenue is affected by the pandemic, demand has remained strong and steady throughout this year as we continue to sign new contracts for future work. That strong demand continues in quarter three as we sign $35 million of new business in the quarter. These Pharma contracts included a wide range of our products and services, from whole exome sequencing to Informatics and covering geographic locations from the U.S. to Europe to Singapore and China. As of September 30th, our backlog of signed contracts stood at $185 million, representing a 57% year-over-year growth and a new high watermark. Also of know, this is the second quarter in a row where Pharma Services represented greater than 15% of our core oncology revenue. Just five years ago, we had essentially no Pharma Services business, since that time we have a continually and systematically built this business to be competitively well-positioned. We expect this business segment to demonstrate faster growth rates and to represent an even greater percentage of total core oncology revenue in the fourth quarter. George will share some of our recent investments to add capabilities for future growth in a few minutes. The promising recovery in our core oncology business along with a significant contribution from COVID-19 PCR testing significantly improved profitability. In fact, quarter three adjusted EBITDA of $17 million was our most profitable quarter on record. Remarkably, the recovery and profitability occurred despite significant change and disruption to our business. Like many other companies, the extensive workplace, protections and work-from-home measures we put in place had an effect on productivity. We also invested to retain our people and reward their efforts to keep our lands open 24x7. We feel very good about our decision to retain all of our employees through what hopefully were the darkest days of the pandemic and now are in hiring mode again as core oncology test volumes regain strength. During the second and third quarters we invested considerable resources to set up a high quality, high capacity COVID-19 testing lab and continue to invest in Pharma Services, next-generation sequencing and commercialization efforts. No question, quarter three was operationally challenging as a result of the pandemic that we are all dealing with. But, overall, we are pleased with the company’s performance. While we are not yet at core oncology testing volume levels, which we budgeted at the beginning of the year, we are encouraged by our recovery in quarter three. We are more confident every day that we are on a steady path towards growth levels consistent with our historical long-term guidance. I will now turn the call over to Kathryn McKenzie, our Chief Financial Officer to discuss some of the details of quarter three financial results.

Thank you, Doug, and good morning, everyone. As Doug highlighted, overall revenue grew 44% sequentially and 20% year-over-year to $125 million. Clinical Division revenues increased 17% year-over-year, boosted significantly by the contribution from COVID-19 PCR testing. Clinical Division test volumes excluding COVID-19 testing increased 2% year-over-year and improved month-to-month as the quarter progressed. Clinical Division revenue per tests was $359, down 3% year-over-year and up 2% sequentially. Our year-to-date revenue per test of $361 is 1% below our full year 2019 revenue per test of $366 and is consistent with our long-term guidance of a 1% to 3% revenue per test declined annually. Pharma Services revenue increased 38% year-over-year to a record $17 million. Clinical trial work rebounded nicely during the quarter and research-related revenue continue to show strength. With volumes returning in Pharma, a record level of backlog at $185 million and continued success on the sales front, we are very optimistic about the strength of this business as we look forward to Q4 and beyond. Overall, gross margins improved approximately 1,100 basis points sequentially to 43%, reflecting a strong recovery in both Clinical and Pharma revenues on largely fixed costs infrastructure. Operating expenses increased 5% or $2 million year-over-year to $47 million due to investments in Informatics, additional insurance premiums and the acquisition of HLI-Oncology, which we like to refer to now as Neo La Jolla. The increases were partially offset by significantly reduced travel and the increased trade show and marketing expenses. We achieved a record level of adjusted EBITDA of $70 million in Q3, driven by a strong recovery in our core businesses and a contribution from COVID-19 PCR testing. Turning to the balance sheet, we exited quarter three with $284 million in cash and marketable securities, which excludes an additional $32 million and restricted cash designated for the construction of our new state-of-the-art laboratory and global headquarters in Fort Myers, Florida. In the quarter, we also funded our second up to $12.5 million investments in Nevada. This completes the funding of our minority shareholder investment in Nevada that we announced earlier this year. DSO decreased 16 days sequentially to 276 days. As expected quarter, three DSOs reflect the reversal of the unusual timing of revenue experienced during the second quarter. As a reminder, we withdrew our full year 2020 financial guidance on April 9, 2020, in light of the COVID-19 pandemic. While we have experienced recovery in recent months and are encouraged about that trajectory, we have recognized that uncertainty remains, given the potential for a resurgence in COVID-19 cases in the United States and abroad, and the potential downstream impact. I will now turn the call back over to Doug VanOort.

Well, thank you, Kathryn. Now, I’d like to introduce George Cardoza. As many of you know, George has been a senior leader in NeoGenomics for about 11 years having served as our Chief Financial Officer and for the last three years as President of our Pharma Services Division. For a perspective, revenue for Pharma Services during this past quarter is 3.5 times higher than it was in the first quarter of 2017 and we are excited about our future prospects. George will review some strategic investments and opportunities that we have in Pharma Services.

Thank you, Doug. I am excited to have the opportunity today to discuss our Pharma Services business. The strategic investments we have made in recent years together with additional planned investments have helped us create a differentiated platform for continued growth. Three big areas of investment we would like to discuss our international expansion initiatives, our acquisition of HLI-Oncology in early January and investments, we have made in our testing infrastructure. Over the course of the last few years we have invested to expand internationally, bringing up a lab in Switzerland in 2017 and opening an Asia-Pac lab in Singapore in 2019. The Singapore lab was opened in conjunction with our strategic alliance partner PPD and earlier this month, we announced plans to expand our partnership and open a lab in Suzhou, China, which will add capabilities to service Greater China based clinical trials. This lab is slated to be operational in 2021 and we are very excited about the growth potential in the Greater China market, as well as our ability to support global clinical trials with activity in China. This global expansion has proved critical for us to participate in certain RFPs for important global clinical trial work. Along with increasing our global laboratory footprint, we have been fortunate enough to identify and add incredible sales and management talent in Europe and Asia-PAC that are proving instrumental to our growth strategy. The importance of our international strategic investments can’t be understated and the strong new bookings numbers we have been able to post in recent quarters despite the global pandemic is strong evidence that our strategy is the right one. I would also like to update you on the acquisition we completed earlier this year. On January 10th, we announced the purchase of the Oncology Division of Human Longevity Inc. in La Jolla, California. Human Longevity built a beautiful lab in and invested in a broad range of molecular technologies, including an impressive display of next-generation sequencing horsepower with a focus on whole exome sequencing. While the lab was attractive to us, the opportunity to add a talented molecular team was also a major factor in our purchase. This acquisition of talent is key for two reasons. One, the development of new sequencing tests and platforms is attractive to Pharma clients for both research and companion diagnostic development. And two, the development of customized testing solutions purpose fit for unique clinical trials and patient populations. As with any integration we had a transition this business from platforms utilized by Human Longevity company-wide to NeoGenomics infrastructure and platforms. We are pleased to say that on September 1st, the team met this goal and HLI-Oncology has been fully integrated and is now serving as our primary Pharma Services molecular lab. One of the key capabilities that the Human Longevity team brought to Neo was whole exome sequencing. We have been successful in leveraging these capabilities with our broader reach of Pharma sponsors. With the increasing interest in broader panels and human mutational burden our whole exome sequencing offering and bio analytic capabilities provide Pharma sponsors with a stronger solution than what can be derived from smaller panels. Modern oncology drug development continues to select for smaller groups of patients defined by unique molecular modifications and our Pharma clients now ask for a much larger range of molecular targets. Small focused panels are no longer sufficient for many of our Pharma clients. As a price point of whole exome sequencing continues to fall, Pharma’s response is increasingly showing a preference looking at 19,000 genes rather than just 300. Our team in La Jolla has been extremely busy working on proposals from our sales team and we have signed several contracts in our current backlog based on their work. So we anticipated that the acquisition would be a temporary drag on our gross margins in 2020, we remain very excited about our La Jolla business, which is actually -- we are actually not calling Human Longevity anymore. We do believe we have a very bright future for the NEO laboratory and this will be a growth accelerator for us. As we have discussed on prior earnings call, in the back half of 2019, we determined that our Pharma Services business had reached sufficient scale along with our anticipated growth where the timing was appropriate to invest in a Pharma dedicated testing infrastructure. While we anticipated the temporary pressure on margins due to diseconomies of scale, the decision to decouple Pharma project testing is expected to pay off for both Pharma Services and Clinical, and service levels in both divisions should benefit over the long-term. While the timing of the COVID-19 pandemic has delayed the rebound in margins from playing out as quickly as we would have liked, we continue to believe that we are in a great position to benefit from our investment. Our backlog has never been higher at $185 million and new bookings in recent quarters have well outpaced revenue. Our move to build out a Pharma dedicated infrastructure has put us in a position to continue our rapid growth trajectory and high service levels without putting pressure on our Clinical Division in the process. Overall, we believe that the strategic Pharma investments that we have made in recent years have been the right ones. We also believe that our Pharma business is stronger than it’s ever been and we are well-positioned to capitalize on a robust environment for oncology therapy development. We have also seen numerous instances where projects from our Pharam Services division help to become new tasks, which accelerate growth over in our Clinical Division. I will now turn it back over to Doug VanOort.

Well, thank you, George. We are obviously excited about our Pharma Services opportunities and you can see our investments are starting to payoff. Now I’d like to introduce Doug Brown. As many of you know, Doug joined NeoGenomics in February as our Chief Strategy Officer and has recently also become responsible for Investor Relations. Doug has been a close advisor to NeoGenomics for a number of years and he’s adding a lot of value to our strategic process. Doug will review some of our other strategic areas of investment.

Thank you, Doug, and good morning. Prior to joining NeoGenomics, I have spent many years as an external advisor to the company. Over those years as an outsider looking in, I was always very excited about the company’s strategy and its opportunities for growth. Now on the inside and after working with the team for nearly a year, I see more growth opportunities for NeoGenomics than ever before. And we are investing in these growth opportunities to increase our competitive position and drive outsized rewards for our investors. Today, I’d like to discuss specific areas of investment for strategic growth, which include Informatics, strategic marketing initiatives, liquid biopsy testing, including our relationship with Nevada and our research and development priorities. Then Doug VanOort wrap it up with a brief update on our new laboratory and global headquarters being constructed right here in Fort Myers. The decision last year to invest in a formal Informatic strategy and our dedication to creating value from our existing oncology testing data is already paying off. Informatics is now one of the most exciting growth areas in our company. Bill Bonello, President of our Informatics division now leads a team of 30 professionals focused on this offering for our clients. Early commercial efforts continue to be encouraging and we are finding a growing number of real world used cases for our data. Given our optimism for this business, we have now made plans to make additional hires in Infomatics, hires to the commercial team, product team and operations team. Earlier this year we significantly enhanced our marketing capabilities by hiring our new Chief Marketing Officer who brings considerable Pharma experience and precision medicine having led product launches for two novel cancer therapies. We have already built a much stronger marketing team and have been developing a number of exciting marketing initiatives. We view investment in these initiatives as highly strategic and we plan on updating investors on their impact over the coming quarters. While we are still in the early innings of liquid biopsy at NeoGenomics, we are excited about having launched our comprehensive suite of tests in the middle of this year. Initial feedback from physicians on the high quality of our offerings has been encouraging and we believe that adoption will continue to increase steadily over time. Our coordination and partnership with the talented team at Inivata has been strong. We feel great about our minority investment and we will continue to monitor progress on the uptake of the InVisionFirst-Lung test and the development progress of the company’s promising minimal residual disease or MRD pan-cancer monitored assay, as we consider exercising our option to purchase Inivata. In addition to exploring external partnership opportunities including our collaboration with Inivata, we continue to invest in our own internal research and development activities. We are currently validating a new RNA-based fusion assay for solid tumors employing state-of-the-art technology, which we believe will be superior to DNA-based assays. We will also be validating new fusion assays for hematologic, neoplasms using probes already built into our current assay. Our NGS-based FDA submission is going well and we will soon be initiating active validation studies. Finally, we soon hope to redeveloping a rapid AML NGS-based assay, as well as an NGS-based MRD assay for AML. And one other note regarding opportunities, aside from these strategic investment areas, I have outlined today, I can assure you that my role as Chief Strategy Officer keeps me very active in assessing inorganic opportunities for growth at NeoGenomics. Our strong competitive position as the leading sematic oncology testing company in the country puts us very much on the industry radar as a strategic partner or buyer of strategic assets. I will now turn it back to Doug VanOort.

Okay. Thanks, Doug. Before we conclude our prepared remarks, we want to update you on our Fort Myers laboratory and global headquarters construction, which is coming along very well. We remain on track for completion by a quarter three of 2021. We continue to see the facility which will triple our current lab footprint in Fort Myers and how is the state-of-the-art molecular lab as a differentiator for our company. The strategic investments that we just highlighted are core to our growth strategy and we remain committed to delivering and what we believe is enormous potential. We look forward to providing quarterly updates on our progress.

At this point, we would like to open up 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 email us at charlie.eidson@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] And we take our first question from Alex Nowak with the Craig-Hallum Capital Group. Please go ahead.

Great. Good morning, everyone. Hope you are doing well. I just want to talk in a broader market here for cancer testing. You were flat year-over-year in Q3 for the Clinical Cancer business. What was the year-over-year metrics for the broader cancer market, not only to kind of pace the recovery of the broader market, but Neo was also taking share before the pandemic. So do you think the market was closer to down 10%, down 20% and thus this is somewhat proof that Neo is still taking share during the pandemic?

Well, Alex, sorry, good morning and thank you for the question. It’s difficult for us to gauge that there are a lot of different kinds of metrics out there. I think in The Wall Street Journal this morning, there was an article about various kinds of cancer and what the volume has been and what the recovery has been. And I think those data would suggest that, that in most cases you know we are approaching the same level as we were about last year. Now that would suggest that there are -- there’s still pent-up demand, because we know that cancer cases are increasing that the market is growing and that we are taking market share. So we think that cancer diagnosis and therapy selection and monitoring are all obviously essential for cancer patients and there was a lot of the postponement and delay in this activity and I think we are starting to see that come back and our volume, as we said, is reflecting that.

Okay. Got it. And then, a lot of moving parts on liquid biopsy screening tests, I mean you had GRAIL getting acquired by Illumina, Exact this morning acquiring Thrive, you had CMS coming out with some screening benchmarks. Would you expect Neo to play a role in liquid biopsy cancer screening, early-stage screening or is the company going to stick with later-stage such as treatment selection and recurrence monitoring?

Yeah. This is a very interesting market. It’s a hot market and there is a lot of interest and activity in liquid biopsy, including our own interest and commitment to liquid biopsy, as Doug talked about, with our investment in Inivata and our recent launch of three liquid biopsy tests. But we are really focused, not at this time in early detection, but really on diagnosis therapy selection, I think, we will move into minimal residual disease kinds of testing and that’s the sweet spot for NeoGenomics at the present time.

Okay. That’s helpful. And then just one more, how would you expect the COVID molecular testing revenue to change here in Q4, since you are seeing the increase of antigen tests in the market. I would expect that market -- the molecular markets get ahead of equilibrium at some point and thus, your businesses that COVID PCR business for you is going to have to come down at some point?

Yeah. The COVID testing business and revenue for us was very strong in July and August, and then it did reduce somewhat. I think what we are seeing now in the marketplace in addition to a resurgence in COVID is a greater penetration of rapid tests. And I think, if you look at benchmarks like ACLAs metrics of the number of PCR tests performed by major commercial labs. It’s really not increasing as much as the more rapid tests that are being offered throughout the country. So, we have a capability, very good capability for PCR testing for COVID, our turnaround time is terrific. We have the ability to meet demand if it increases. But it’s not our core testing business and we are very focused really in oncology.

That’s great. Thank you very much. Appreciate it.

Next we go to Brian Weinstein with William Blair. Please go ahead.

Hey, guys. Good morning. This is Griffin Soriano on for Brian. Just a quick question to start here, when you think about the different services that you guys offer and looking at your volume numbers, obviously you mentioned in the release that core oncology business looks to be a V-Shape recovery, were there certain areas in your offering that came back stronger than others and anything to note there just to give us a better sense of the recovery?

Yeah. The recovery really was pretty broad based and really did progress and strengthen as the quarter ended and is continuing to strengthen into October. I think the area that has strengthened the most has been next-generation sequencing as we mentioned in our prepared remarks. There has been a lot of natural growth for us in next-generation sequencing over the last number of quarters and that really continued in quarter three. And we would expect to grow next-generation sequencing kinds of products at an outsized pace even going forward.

Great. Thank you. And just one more here, nice quarter for Pharma Services. How much of that was driven by clinical trials and can you give us a sense of how the clinical trial recovery is going? And also, maybe a little more color a -- color on the makeup of that $185 million backlog, is it more a bolus of pent-up demand coming back?

Yeah. No...

If you look at the second quarter, we really saw two things happen. We saw our existing trial volume really shrink. I mean a lot of trials that were enrolling 15, 20 patients a month, we are enrolling two to three patients a month. So what we saw the existing trials come back. But unlike the second quarter, literally in July for the first time, we started getting first patients in on a few trials and that continued into July and really sort of continued on into August and September. So it was a combination of the existing trial sort of eventually returning back to maybe more normal enrollment numbers, as well as for the new trials finally starting. But through this all the demand has remained strong. I mean the Pharma sponsors continue to sign contracts with us. So we are seeing the demand be strong. I think there were some access issues clearly related to COVID, but I do think we feel really good about the underlying demand.

Great. Thank you.

Next we go to the line of Puneet Souda with SVB Leerink. Please go ahead.

Yeah. Hi, Doug, thanks for the question. So, first one on -- if I could ask on the AUP, just given the puts and takes here from NGS and liquid biopsy test being introduced into the therapy management, liquid biopsy test being introduced into that and other assays is being introduced. Overall, what’s your expectation for improvement for NGS, I mean, AUP longer term here and what sort of -- what is the -- where could that potentially reach to and what is the pace of that sort of improvement, if you can walk through that either Doug or Kathryn?

Yeah. Thanks for the question, Puneet. We definitely have a lot of opportunity for growth when it comes to NGS and our AUP. As you can imagine, especially as new tests are coming to market and we are working with payers on the Clinical benefits, as well as the other alternatives in the market, we are continuing to talk through the revenue per test in addition to looking at those Medicare reimburse rates. So there is not only an opportunity for that NGS, but we do also have that continued pressure as we go forward on some of that pricing pressure, that 1% to 3%. So when we are looking at our AUP now and how it could change with mix, from a margin perspective, this is a reminder, those higher priced tests also come with higher costs and until we get broader coverage in reimbursement rate, you will see a little bit of that pressure on our margins, but we are very encouraged by the efforts of our managed care and our commercial team that were working with the payers, and especially as these become more prominent in the market, we will continue to see some growth opportunities in AUP.

Okay. And thanks for the margin comments too. If I could follow up with on NGS as well on -- as there are two tests in the marketplace that recently received FDA approvals for those respective assays. I am wondering if you -- what’s your expectation for your multi-gene panel, when can that potentially receive FDA approval? And also what are the plans for the NeoLAB Solid Tumor or the InVisionFirst assay to get into the FDA approval queue potentially?

Yeah. Thanks for the question, Puneet. Well, I know we have been saying that we have been working on the FDA panel for some time and we have. We have been working on it very, very diligently. And I think we now feel like we have a clear pathway with the FDA given our conversations with the FDA. And so right now we are initiating the validation studies for validating that FDA approved panel and we think we have a clear pathway, we think it’s perhaps one of family of FDA approved tests that you will see NeoGenomics initiate over the next several years and we feel pretty good about it. Now we don’t have plans for our existing NeoLAB pan-cancer assay to, well, I guess, it is actually approved because we are using the Thermo Fisher platform for that. So we are continuing to validate other genes on that pan-cancer panel and we think it’s a good test.

Okay. Great. And last one, Doug, we have been getting a number of questions on the overall performance in the business and the pace of recovery now where you said and as you look at how things have transpired to COVID times and as we emerge into sort of back the last two months here. What’s your expectation just given the timing of the holidays, but at the same time, we are recovering from COVID? Just if you can give us a sense of how that recovery can continue to work and anything you can provide on the next couple of months forward looking? Appreciate it.

Well, thanks, Puneet. We try to be transparent about what’s happening in our business. I would say, that the environment continues to be challenging. The -- our customer behavior has been disrupted somewhat, supply chains are been disrupted, productivity is still not what it could be, because the lot of precautions we have put in place with our workforce. But I would say that, we are very encouraged within that kind of environment by what’s happening with the volume trends in both the Clinical business and the Pharma business and we are encouraged by what we are seeing, what we talked about for October and for quarter four. We are expecting quarter four to be quite strong in Pharma. We have got a very strong backlog there and the trends look pretty good in our Clinical business. So we haven’t reinitiated guidance because of the environment that we are in. But I think you can tell from our remarks that we are optimistic.

Okay. Great. Okay. Thank you.

Next we go to the line of Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good morning. Doug, I know you mentioned sort of quarterly Clinical volume grew a couple of points here and you also noted that month-over-month improvement. But can you share some more color on sort of the weekly linearity here in October. Have you seen any impact at all from a potential second wave following the resurgence in infections we are seeing in the States or have trends essentially held up and continued to improve on a sequential basis week-over-week?

Yeah. Hey. It’s a little granular to think about it. Actually, we look at it day-by-day. But it is difficult for us to comment on a week-over-week basis. I will say this that, that it appears that our hospital clients and our oncology clients have learned to sort of deal with an environment in which we are handling COVID and so it’s not like the lockdowns that we had back in quarter two. They are seeing patients, they are performing procedures in the hospital and I think as long as the pandemic remains at a somewhat manageable level, that even at this level and maybe even higher, we expect that our clients are going to remain open for business. So I think the trends that we are seeing, and as I said, Tejas, we are optimistic that we are going to continue to see the same kind of growth trends that we have been recently experiencing and October has been relatively strong.

Got it. And then one on the liquid biopsy pipeline here. In terms of plans for Inivata’s RaDaR MRD assay and the timelines to bring it to market, would you sort of consider sort of working with them to accelerate that just in line of -- in light of some of the movement you have seen here in terms of the draft LCD in place from Palmetto. You have a couple of peers sort of who will be on the market I guess by the time you guys plan to bring RaDaR to the U.S. So are there any levers you can pull there to accelerate that path?

Well, we have a very good collaborative relationship with Inivata. We serve on their Board. We have a minority interest. As you know, our teams are working very, very well together and we talk a lot of that both the InVisionFirst-Lung test and how to accelerate progress and penetration on that, as well as MRD. Now, we are very excited about the minimal residual disease product at Inivata. We are working with them in a number of different ways. Part of that process, by the way includes whole exome sequencing that we -- we are working with them through our Neo La Jolla laboratory that George mentioned. So, yeah, we are all very interested in accelerating as much validation work as we can in MRD. We think it’s going to be a terrific product for patients and a terrific product for us, and you can assume that we are working hard together to make it happen.

Got it. Fair enough. And then, one final one on Informatics here for, Bill. Can you just walk us through sort of your plans for monetizing that offering, obviously, you are scaling headcount there and there seems to be a lot of excitement at least among your Pharma customers around the prospects for what Informatics can add? But can you walk us through sort of like your plans for perhaps formalizing the monetizing structure around that business?

Sure. Thank you very much, Tejas, for the question. So we are generating revenue from the business. Today in fact we have significantly exceeded our year one revenue expectations though those were relatively small. We do have active engagements with a number of different life sciences companies already both in terms of projects that we are working on today and projects that are in our backlog. Those projects span in breadth from helping companies with clinical trials, recruitment or site selection to commercial support, which might be identifying diagnostic trends to figure out where likely patients are for certain therapeutics or to size the market or other commercial support activities. To-date, we haven’t done a lot in terms of supporting basic Clinical research, but we do think that is an opportunity as well. There is also an opportunity on the imaging front. There is significant interest in utilizing annotated digital images for training purposes and other research related activities. So those are the kinds of things that we are working on. We probably will come back to you on a future quarter with more color and more specifics around those activities. I would end by saying, we do have a healthy backlog of signed contracts and we should launch a number of stakeholder facing portals over the course of 2021 and so there actually will be some places that we can take you to look at how we are interacting with our stakeholders in Informatics.

Got it. Appreciate the time this morning. Thanks.

Our next question or comment comes from the line of David Westenberg with Guggenheim Securities. Please go ahead.

Hi. Thank you for taking the question. I don’t want to belabor the macro point, but I am getting questions on that, so I just wanted to maybe ask it different way. Can you talk about the volume recovery in community versus academic versus maybe private practice? Or if there is any differences in recovery regionally in terms of a percentage, and then maybe kind of give us some color in terms of percentage to exposure to those end markets for NeoGenomics?

Yeah. We are going to ask Rob to try to add some color to that one, David.

Yeah. I think what we have seen is, obviously, there are significant geographical differences as you look around the country on which markets were faster to reopen and others that were slower and you have seen that across the new cycles. What we have seen as the markets have started to open more and more is our sales team seems to have easier access to hospitals and pathology groups that seems to be an easier access point to get into the hospital away from where patients are consolidated and into the pathology suite for meetings. Oncology practices were a little slower to give access to salespeople because you have more of a concentration of patients in a waiting room. But we have seen that start to open up more and more recently. And then some of those geographies that have remained a little bit tighter have loosened a little bit more recently. So we are seeing some good momentum there with more and more access as we went through quarter three into October.

Great. Thanks for the color. And then, just maybe a question for Doug Brown, are you seeing in terms of the deal pipeline, in terms of small regional labs? Are there any change in terms of dynamics there, I mean I am sure they are getting hit with volume too, they probably have more liquidity concerns or maybe they are having more difficulty accessing capital and I -- you guys are were very well-capitalized at $300 million. Just any changes in those kind of dynamics, we should think about and that’s my last one. Thank you.

Yeah. I don’t have anything statistically to tell you, but anecdotally we do hear that and I think it’s a reasonable point. We are not really focused on some of these small regional tuck-in sort of acquisitions. We are spending more time in Pharma and Informatics. But we do think we are perhaps taking share for some of these smaller labs.

Next we go to the line of Jacob Johnson with Stephens. Please go ahead.

Hey. Thanks. Maybe a bigger picture question on having a strategy in both Clinical Services and Pharma Services, I think companion diagnostics represents maybe a key synergy there. Can you just give us an update on the companion diagnostics efforts and maybe how many of these you are working on right now in Pharma Services?

Sure. Let me lead it off and then, I think, maybe George and Rob each have comments about this. So in Pharma Services, we have a terrific pipeline of companion diagnostic projects. I think it’s something like 40 different projects that we are working on and the list keeps growing. We have a lot of interest in that. We also now are getting interested, not only because we can help in Pharma Services with the Companion program, but also because we have the ability in our Clinical division once the therapy is approved by the regulatory agency to flip it over and to help commercialize that assay and the therapy is relatively rapidly, because we have the test up and running. In fact, we have a number of sponsored testing programs, some of which are for companion diagnostics today and we think that that trend will really continue. George, anything to add?

Yeah. No. We had our sales team call yesterday and I mean the amount of opportunities in our pipeline are remarkable and again it’s from companion diagnostics. Our share in oncology really has Pharma sponsors wanting to work with us. And the great part of NeoGenomics too is we create optionality for them, so if they want to work with an IVD partner, they can, if they want to go to a single-site PMA, we can and even if the approval sort of lags, the FDA approval, we can go out with an LDT in the short run, while they are working on sort of this FDA approval. So I think the Pharma definitely are realizing the benefits of working with us and the demand for these is extremely strong.

Yeah. And we have seen some success with our previous projects and sponsored testing programs and I think it’s a real competitive advantage for us to be able to do the development work on the Pharma Services side and then offer it clinically through our channel access to oncologists and pathologists.

Got it. Thanks for all that color. And then maybe on the Clinical Services side, I imagine COVID-19 is taking up a disproportionate amount of your time. But in Clinical Services after you have integrated Genoptix, are there any operational areas that you have been focused on recently admittedly in the midst of a pandemic I think billing and collecting is always an area of focus but anything else?

Well, yeah, we -- our team has been very, very busy. I would say that, they have been very busy setting up a COVID lab, which we did and I think it’s a terrific capability that we have, even though we don’t have a lot of demand for that testing line currently. But our primary focus is in oncology and getting back to a position in which we have the best service that we can possibly offer, because I think that’s going to allow us to continue to take market share as we have in the past and our whole team is really focused on that, despite the kind of disruption that we see in supply chains and in other areas, I think this can differentiate NeoGenomics on a going forward basis and we are very focused on that.

Right. Thanks, Doug.

Next we go to the line of Ivy Ma with Bank of America. Please go ahead.

Hi. Good morning. Thank you for taking the question. I wanted to follow up on the V-Shape recovery to understand this a little better. So when we think about a base business, what’s your expectations around potential repeated COVID rates and then the unemployment rate seems to be going on for the foreseeable future for a while. Could you help us think about how these uncertainties would impact your base volume recovery trend? Thank you.

Well, we are watching this obviously on a day-by-day basis and there is some uncertainty. There is some disruption that continues in really in almost every business in the country. I would say that, our -- the current trends, we have had a resurgence recently in COVID cases, but it doesn’t seem to be affecting our Clinical business. Unemployment doesn’t seem to be a factor in our Clinical business or our Pharma business either. The kind of general trends that we are seeing in Pharma, for example, have been very, very strong throughout this even though access, as George said, is an issue. In the Clinical business, it’s also been sort of an access issue, because patients didn’t really want to really venture out to see their physician and we know it’s been well-publicized that many hospitals and oncology practices had reduced hours and that sort of thing. But we don’t see that anymore. What we are seeing despite resurgence and unemployment continuing at levels that they are at is that our business is recovering.

Great. That’s very helpful. And then second one on COVID testing. You mentioned terrific turnaround earlier and I wanted to follow-up on that. So given CMS’ recent repricing of 2021 rate, which depends on quicker turnaround time in two days, so I am just wondering if there is any update to your contracted rate or rate rent, if the average rate is trending one way or the other, and of course, would appreciate any color on test utilization for the next couple of quarters, if you have any visibility? Thank you.

Well, I mean, I would say, maybe a couple of things on that one. First of all, our COVID testing laboratory regularly turns around tests well within the timeframe that CMS is requiring for this extra $25 reimbursement. So that’s not an issue with us at all. I would just mention that we -- COVID testing is not our primary business and our primary business is oncology. We have the capability. We have the capacity for COVID testing if America really needs it. But we are serving as an overflow laboratory for other laboratories and right now there seems to be enough capacity in the system, so that we are not seeing a lot of demand for our testing today. Now that may change but that’s the situation.

Great. That’s very helpful. Appreciate your time.

Thank you, Ivy.

Next we go to the line of Steve Unger with Needham. Please go ahead.

Hi. Thanks. Doug, heading into 2021, is there anything you want to highlight regarding reimbursement changes or contract pricing? And then, is it challenging in this environment to gain new customer relationships or new payer contracts or agreements?

Well, I would say, first of all, Steve, thanks for the question. And reimbursement, we don’t really see anything other than what Kathryn already discussed affecting 2021. I mean, we have got -- we did long-term guidance here, where we said, I think, you should expect 1% to 3% decline in our AUP, but we have got a variety of dynamics affecting that. One that Puneet asked about earlier was the impact of mix of next-generation sequencing in these other assays that are higher priced that might have on it. We have got another dynamic frankly. And that’s that we are doing, I think, a better job of collecting for the work that we do and that impacts AUP also. So a number of cross currents there, but I don’t think that any -- there’s anything no surprises that we would point to in 2021 for AUP. In terms of your second question about gaining customers, Rob said, access from some of our sales people to some of our customers is still somewhat constrained in the oncology practices. Although, that’s loosened up recently, our people have gotten to be pretty darn good about gaining customers without going to trade shows and without actually visiting them. So although our new customer acquisition activity is not what it will be and maybe what it has been, we are still gaining new customers and we are also gaining I think a bit of a share of wallet from the customers that we have, because other competitors have the same problem, I mean they can’t get into the customers either. So in some cases, we already got the relationship and that helps us even with things like liquid biopsy. So that’s where we are at the present time.

The only thing I’d add there is, Doug Brown mentioned, we are investing in strategic marketing and in this environment everyone’s having to rethink creative marketing and a lot of virtual trade shows and how do we interact with our customers in a different way and we are being very proactive and how we are really positioning ourselves going forward to make sure that we are at the forefront of the playbook and making sure that we are thinking about what marketing and client retention and client acquisition looks like going forward because I think it’s going to be this way for a bit.

Understood. Got it. That’s super helpful. And then just lastly on the gross margins in Pharma Services, great progress there, what is the goal I guess as far as gross margins for Pharma Services, especially considering the implications of the Informatics business, I assume that that’s a higher revenue or a higher gross margin revenue stream?

Yeah. We clearly had capacity. Some of our international sites aren’t fully up to capacity yet, even though La Jolla laboratory we said that Human Longevity would be a drag on our margins in 2020, that laboratory is in a capacity either. That’s exciting though for us because we have a large backlog. So, certainly, we are expecting margin to rebound and certainly you saw that in the third quarter and hopefully you will see even more progress in the fourth quarter. So, again, long-term we have said that we expect them to get around the 50% margin where Clinical was and certainly we are still anticipating that if we can fill up our capacity. But right now we had to separate from our Clinical division. We just grew to the point where our projects were so large. We had to build our own infrastructure. So that depressed our margins in the short run, but certainly, we expect to grow into the capacity we have.

And you are right, Informatics ought to come in at higher gross margins as we go forward. So we are looking forward to improved margins in those areas.

Okay. Great. Thank you very much.

Okay.

Next we go to the line of Andrew Cooper with Raymond James.

Thanks for sneaking me in guys. I will keep it quick because a lot’s been asked. But just to kind of drill in maybe a little bit more on what volumes were late October and as you think about it, they don’t dramatically change with COVID. If I am kind of doing my math right here, 2% core growth in the quarter, exited 8% higher month-over-month, should get us back to sort of a double-digit type trajectory. So maybe just confirm that and then help me think about, I know as we look at other places outside of testing and outside of oncology, folks are talking about utilization kind of in that 90%, 95% range in a lot of ways. But that last leg seems to be the hardest part that’s not coming back. So just any thoughts on what it takes or what that might look like as we continue through the fourth quarter and 2021 would be great.

Sure. Let me try and take a crack at that. I would say that, our volumes are improving, no question, the stats that you mentioned are correct. Now there is some seasonality in our business. So October typically is a bit higher on a daily rate than September. So you have to take that into consideration too. But we are certainly moving into the range of double-digit growth and we hope that that will move more firmly into that range. We are not yet back to pre-COVID test volume levels in terms of what we expected. So when we budgeted, when we gave guidance early in the year, long-term we would expect our Clinical volume growth to be in the kind of a 12% to 15% range and we are not yet at that level, but we are moving in that direction.

Okay. That’s helpful. And then, maybe just one last one, as you think about kind of drilling in on the margins in that core Clinical Testing segment. Can you maybe help us back out how much of the impact might be from sort of that deconsolidation of the Pharma Services piece versus other moving parts when we think about, obviously, mix and things like that. How much is just sort of procedural versus, hey, we got some mix and some volume and overhead of [Audio Gap]

Speakers, please go ahead.

Well, we lost the call, so we are rejoining, sorry.

Mr. Cooper, if you could please re-signal, so I could put you back in the queue and you could finish your question. Please go ahead, Mr. Cooper.

Yeah. I was just asking about sort of gross margin in the core Clinical Services -- Clinical Testing business, if you could just help us think about when we look at the trajectory, how much of a headwind is the decoupling in kind of separating out the Pharma Services piece versus what’s more operational in nature and how we should think about that going forward, obviously understanding kind of the pricing headwinds and the mix components we have already talked about?

Yeah. So I think that the margin that you have seen over the last couple quarters was pretty indicative of what you would expect going forward. Clearly, we are seeing some of that impact in the short-term. But as we go forward into 2021, we are fully expecting that we are able to gain some efficiency as that has decoupled. So I really think if you look over to not Q2 per se, because Q2 was definitely impacted by the pandemic, but looking back at Q4 and Q1 of 2019 and 2020, more indicative of our short-term expectations was improvement from there.

Great.

Okay. Operator, I think, we are going to wrap it up.

Okay. We will return to Mr. VanOort for finishing, excuse me, for final comments.

All right. Thank you. I’d like to recognize the approximately 1,680 NeoGenomics team members around the world for their dedication and commitment to our company and to building a world-class oncology diagnostics program. And on behalf of the whole team, I want to thank you for your time joining us this morning and for those of you listening that our investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Good-bye.

Thank you. This does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time. Have a great day.