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Neogenomics Inc (NASDAQ:NEO)
Q1 2020 Earnings Call
Apr 28, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the NeoGenomics First Quarter 2020 Earnings Conference Call. [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.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Well, thank you, Jess, and good morning, everyone.

I'd like to welcome everyone to NeoGenomics first quarter 2020 conference call. Joining me from our Fort Myers headquarters with social distancing precautions in place are Kathryn McKenzie, our Chief Financial Officer; Rob Shovlin, President of our Clinical Division; and Bill Bonello, President of our Informatics Division and Director of Investor Relations. Joining the call via phone from locations across the country are George Cardoza, President of our Pharma Services Division; Dr. Larry Weiss, our Chief Medical Officer; and Doug Brown, our Chief Strategy and Corporate Development Officer.

Before we begin our prepared remarks, Bill Bonello will read the standard language about forward-looking statements.

William Bonello -- President, Informatics Division & Director, Investor Relations

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 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're 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 allocated for this call.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Well, thank you, Bill.

The format for today's call will be a little different than that of our typical quarterly conference call. I'll begin by discussing our response to the COVID-19 pandemic and the impact that we are seeing on our business. Kathryn McKenzie will then provide a more detailed review of the quarter one financial results, and I will wrap up with some thoughts about our strategy for operating and growing the business in these difficult times. We'll then of course have time for questions and answers.

Let's begin with a discussion of our response to the COVID-19 pandemic. Fortunately, we were in a relatively good position going into this challenging time of COVID-19. Our business is strong, it's profitable and we have a good solid balance sheet with available borrowing capacity. We had positive momentum going into this crisis with both revenue and volume tracking at or above expectations prior to the onset of the virus.

We strongly believe that we will come out of this crisis with positive momentum as well. Our services are critical for cancer patients. We fully expect that when it is safe for cancer patients to seek treatment and when their oncologists and hospitals resume more normal patient schedules again, our test volumes and growth rates will gradually return to normal levels.

In responding to the crisis, our guiding principle has been, first, to secure the safety and well-being of our employees and thereby to maintain the continuity of our critical oncology testing for cancer patients. Our response was also influenced by our desire to emerge from this crisis in a relatively superior competitive position. As a result, rather than implementing layoffs or furloughs, we focused on short-term actions to invest in our workforce, strengthen our culture and focus on the initiatives and strategies designed to strengthen our long-term competitiveness.

To protect our employees, early on, we de-densified our laboratories and facilities, adjusted laboratory shifts to put space and distance between our people, restricted visitors to facilities, restricted employee travel and implemented an emergency paid-off time policy for employees who are personally affected by the virus. We also quickly implemented a remote work environment and provide training and support for that. For the past several weeks, we have had well over two-thirds of our employees working productively from home. We communicated extensively with our employees and implemented a comprehensive array of actions in response to employee feedback as well as medical, scientific and governmental guidance. We have also been managing our supply chain carefully to ensure that we have adequate inventory to continue testing. In certain cases, we added months of supply to our inventory levels.

These actions have worked. Importantly, all of our main lab facilities have remained open throughout this crisis, and we have been able to continue all of our testing services with excellent quality and turnaround time without interruption or delay. We've also responded by doing our part to help our country. Although we are an oncology company, we do have extremely strong expertise in molecular testing we have dedicated a number of R&D and laboratory experts to develop COVID-19 testing capabilities. Like some other commercial laboratories, we are now offering the PCR test, and are ramping our capacity up quickly. Within a week, we will have capacity to perform over 5,000 COVID-19 PCR tests per day. If there is demand, we can quickly ramp that up significantly higher.

We also have invested in instrumentation and other equipment to be able to offer the COVID-19 serology test and should be ready soon. At this point, it is too early to estimate the financial impact from the COVID-19 test offering. We do know that testing is critical to help people safely get back to work. A number of organizations have reached out to us for help, and we are doing this because we feel it's the right thing to do.

Overall, our team feels very good about the actions that we've taken in response to COVID-19. However, the pandemic has had an impact on our business. Although clinical test volume was quite strong for most of the quarter, it was only up 7% for the full quarter compared with last year because in the last two weeks of March, it was down by approximately 20%. In April, clinical test volume declined slightly more and was down between 25% and 30% year-over-year, although it has appeared to stabilize on a week-over-week basis.

The volume decline is understandable. In many regions of the country, oncology practices reduced their hours of operation and postponed or canceled patient appointments. Similarly, many hospitals reduced surgeries as they devoted resources to COVID-19 preparations and urgent needs. Cancer patients, some of whom have compromised immune systems, were reluctant to see physicians even if they were available. We believe this is a temporary condition.

We have also seen an impact on our Pharma Services division revenue as some clinical trials projects in our backlog of signed contracts have been delayed due to COVID-19. Sponsors have told us that they are unable to start certain new clinical trials as that effort typically involves visiting enrollment sites to train on-site staff. Clinical trials typically account for about 50% of our business.

The other half of our Pharma Services business is largely in support of pharma companies' research and development work and that has not been affected by the pandemic so far. Significantly and encouragingly, we have not seen an impact on the amount of new pharma services contracts we are signing. In fact, we signed contracts for an additional $28 million of new business during the quarter, our second highest bookings quarter of all time.

Like most companies, NeoGenomics has not been immune to the impacts of this unprecedented situation. Unlike a lot of companies, though, we have not furloughed employees or reduced our employee levels. Although it may reduce short-term profitability, we are investing in our people and our culture. We're providing more training, more development and even a small cash bonus of appreciation to those employees that are on the front line working in one of our laboratories during this critical time.

Our employees are responding very positively, and we believe the level of employee engagement and our culture is as strong as ever. A strong team is an important competitive strength of our company. I think you would be as proud as I am about our NeoGenomics employees' response to this unprecedented situation. Throughout this crisis, they have continued to provide critical testing services to cancer patients with excellent quality, turnaround time and customer service. My hats off to them.

I will now turn the call over to Kathryn McKenzie, our Chief Financial Officer, to discuss some of the details of quarter one financial results.

Kathryn B. McKenzie -- Chief Financial Officer

Thank you, Doug, and good morning, everyone.

I will give a brief overview of first quarter financial results. Consolidated revenue increased 11% year-over-year to $106 million. First quarter results include modest contribution from the acquisition of the Oncology Division assets of Human Longevity [Technical Issues] January 10. The Genoptix acquisition was completed on December 10, 2018, so Genoptix results are fully reflected in the 2019 comparisons. We estimate that the COVID-19 pandemic reduced first quarter revenue by approximately $4 million due to reductions in Clinical Services' testing volume and delays in Pharma Services' work.

In the fourth [Phonetic] quarter, Clinical Division test volumes increased 7% year-over-year. Prior to the impact of COVID-19, we were once again seeing growth across all testing modalities, with particular strength in next generation sequencing and molecular testing. We estimate that the COVID-19 situation reduced clinical volume by at least 4% during the quarter. As Doug mentioned, clinical volumes were down approximately 20% in the last two weeks of March and between 25% and 30% in April. Clinical Division revenue per test was essentially flat both year-over-year and sequentially at $371. Revenue per test was not significantly impacted by the COVID-19 pandemic.

Pharma Services revenue increased 39% year-over-year to $13 million. This increase was primarily due to additional next generation sequencing work associated with our acquisition of the Oncology Division assets of Human Longevity. As discussed on prior calls, we did have two very large projects complete in quarter four of last year. Also, several large projects that have been scheduled to start late in the quarter have been delayed by several months due to COVID-19. Despite the challenging environment, the Pharma team continued to sign new contracts and grow the backlog of signed contracts. New contracts signed in the quarter were $28 million, and the backlog of signed contracts increased 47% year-over-year to $148 million. The acquisition of HLI-Oncology increased backlog by approximately $15 million. Excluding the contribution from HLI-Oncology, the backlog grew approximately 32%.

For the first quarter, Clinical Services gross margin was down approximately 300 basis points year-over-year to 47.4% and our average cost of goods sold per clinical test, also known as our cost per test, increased by 7% year-over-year to $195. These impacts are mainly due to the lower than expected volume levels and additional expenses caused by COVID-19.

Pharma Services gross margin decreased to 17.7% in the first quarter, primarily due to lower revenue resulting from the timing of projects. As a reminder, we have been building an independent testing capacity for the Pharma Services business to support our growth projections, and this has resulted in a temporarily negative impact on Pharma Services' gross margin. With a signed contract backlog of more than $145 million, the Pharma Services business has reached a scale which necessitates its own testing infrastructure.

We believe that having pharma testing decoupled from clinical testing will enhance efficiency in both divisions over time. However, this change results in short-term decreases in cost effectiveness in each division. This quarter also reflects the acquisition of the Oncology Division assets from HLI on January 10, 2020, and we expect the acquisition to be dilutive to gross margin this year. Gross margin was also impacted by costs associated with the COVID-19 pandemic. We continue to expect that Pharma Services gross margin will expand to levels at or above Clinical division margins over time.

General and administrative expenses increased 13% or $4 million year-over-year to $36 million, in large part due to the addition of HLI-Oncology and the associated acquisition related expenses.

Sales and marketing costs increased 18% year-over-year to $13 million, driven by the expanded size of our overall sales team and commissions on higher revenues.

While we will continue to fund our key growth initiatives, we are being prudent in evaluating our operating expense and other costs and reducing or delaying certain capital expenditures where appropriate.

Fourth [Phonetic] quarter adjusted EBITDA was $7.1 million, which was approximately $1 million lower than the guidance that we provided in February. The shortfall relative to guidance is due entirely to the COVID-19 impact. As we discussed on our last earnings call, first quarter adjusted EBITDA was negatively impacted by a number of factors in addition to the COVID-19 impact. Most significantly, our Pharma Services revenue was lower than normal simply due to the timing of new project starts and stops. As we noted earlier, our new business wins remain robust.

We exited quarter one with $125 million in cash, including $39 million in restricted cash designated for construction of our new state-of-the-art laboratory and global headquarters in Fort Myers, Florida. Cash was reduced by approximately $37 million during the quarter with the acquisition of the oncology division assets of Human Longevity. We ended the quarter with $104 million in total debt, including our financing obligations. We have approximately $103 million of available borrowing capacity on our credit facilities.

DSOs increased 5 days sequentially to 86 days due to revenue from retroactive rate increases secured late in the quarter and timing of pharma and informatics revenue.

Cash used in operations was approximately $7 million for the quarter. Cash from operations was reduced by approximately $6 million from increases in inventory as we adjusted our supply chain management strategy for our COVID-19 environment and $3.3 million for costs related to the construction of our new Fort Myers headquarters, which is included in operating cash flow, as well as acquisition-related expenses.

As a reminder, we withdrew our full year 2020 financial guidance on April 9, 2020 in light of the COVID-19 pandemic.

I will now turn the call back over to Doug to provide commentary on our key growth initiatives.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Thank you, Kathryn.

I would like to take some time to discuss further our strategy for operating and growing the business in these difficult times. We believe that we are well positioned competitively with excellent growth potential and plans, and we are continuing to invest in important and compelling growth initiatives.

Obviously, we're closely monitoring and containing our costs. While we're continuing construction of our Fort Myers laboratory and headquarters facility, we are substantially scaling back or postponing plans for changes and upgrades to all other facilities. We are not hiring unless it's strategically important. We are continuing to invest in automation as that will allow us to continue our long-term improvement in cost per test.

While volume levels remain lower than normal, we are engaging employees in activities to better prepare for that growth by sustainably improving processes to improve turnaround time, enhance customer service, strengthen our test menu and decrease cost. Our sales team is also engaged in value-added activities and planning, and I must say, they are fired up.

As I mentioned, we are also redeploying a certain number of employees to be able to perform COVID-19 PCR and serology testing in order to help fill the capacity to support America's needs. We realize that some may question our decision to retain employees during this temporary volume slowdown, and we are also aware that it will have a short-term impact on earnings. However, we believe this is an investment worth taking. Based on our experience in this business, having an experienced, skilled and loyal workforce is necessary to accommodate the rebound in test volume we expect as the crisis wanes. We feel fortunate that our Company is strong enough that we can invest in our workforce in this current environment, and we believe that this investment will allow us to retain our strong Company culture for years to come.

Strategically, we intend to be prudently aggressive. We will continue to make growth investments, particularly in next generation sequencing, pharma services, informatics and companion diagnostics. Next-generation sequencing remains an area of particular focus for us. We plan to continue our substantial investment in this area and expect to introduce several new products in 2020. Liquid biopsy is one area of particular interest for us. Although the market is still relatively small, we expect it to grow quickly. Our validation of a pan-cancer assay is proceeding, and we expect to introduce a pan-cancer liquid biopsy test by the middle of this year.

We are also expanding our offering of RNA-based next-generation sequencing assays for both solid tumor and hematologic malignancies. We are developing a rapid next-generation sequencing panel designed for acute myeloid leukemia which often requires prompt treatment. This panel will replace the rapid AML therapeutic panel comprised of both single gene molecular and FISH assays that we released earlier in the month. Finally, we continue to investigate assays for identifying minimal residual disease, particularly for hematologic neoplasms.

Another area of focus is Pharma Services. While we are seeing some near-term disruption in clinical trials projects due to delays in the timing of clinical trials, we continue to sign new contracts for future work. Our broad global testing capabilities to perform both research type work and clinical trial support continues to be in strong demand. Our multiplexed immunohistochemistry, expanded flow cytometry and new next-generation sequencing capabilities are unique, and companion diagnostics projects are growing rapidly.

As many of you know, we made an important strategic move to expand our Pharma Services next-generation sequencing capabilities with the acquisition of the Oncology Division assets of Human Longevity, Inc. in early January. This lab provides germline, whole exome and whole-genome sequencing specifically for pharma companies. This business generated approximately $10 million of revenue in 2019 and ended the year with a backlog of approximately $15 million of signed contracts. Thus far in 2020, the business is performing in line with our initial forecast, despite the COVID-19 situation.

We are also continuing to invest in our Informatics division both in terms of product development and early commercial engagement. We expect this division to be an incremental source of revenue in the long term while strengthening our competitive position in both the Clinical and Pharma Services divisions. We are still in the very early innings in terms of product development, but we already have significant engagement from various stakeholders, including global pharmaceutical firms, large national health systems and major managed care payers.

Importantly, we continue to create synergistic opportunities across our three divisions, particularly with regard to companion diagnostics. We have agreements with several large pharmaceutical companies to provide day one commercial launch services and advanced analytical support for companion diagnostic testing associated with drugs in the late-stage pipeline. Few labs have our same ability to take an oncology companion test across the continuum from development through clinical trials and into the market. While we will be particularly sensitive to liquidity in this current environment, we will continue to consider select strategic financially prudent acquisitions and investments, particularly in the areas of growth opportunity that I just discussed.

In summary, the short-term environment will be challenging. We are seeing an impact on revenue in both our Clinical and Pharma Services divisions and we are likely to see a near-term impact on earnings. However, these near-term challenges are entirely attributable to the COVID-19 pandemic and should dissipate with time. We remain excited about our long-term opportunities for growth. Our leading position in the market is proving to offer significant sustainable competitive advantages today, and we are working hard to make our competitive position even stronger in the future as we pursue our vision to become the world's leading oncology diagnostics company.

I'll now hand the call over to Bill Bonello to lead us through a question-and-answer session.

William Bonello -- President, Informatics Division & Director, Investor Relations

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

Operator, you may now open the call for questions.

Questions and Answers:

Operator

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

Puneet Souda -- SVB Leerink -- Analyst

Hi, thanks. So, first on the recovery sort of post COVID. I know timing is hard to nail down here. But could you give us a sense of the strength of recovery that we should expect here in the community setting? After all, majority of the clinical business that you have is in the community setting and you have good visibility there. Could you give us a sense of sort of what we should expect as we get into sort of post the apex of COVID here in the broader country?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah. So good morning, Puneet. Thanks for the question. The timing of recovery is uncertain, I think we can all agree, and it will differ geographically. I would say, there is no reason though to believe that our growth rates won't return to what we have explained [Phonetic] in the past when the pandemic subsides.

So we expect fully that our Clinical division will return to the mid-teens volume growth that we've experienced in the past. We expect that our Pharma division would return to the same kind of growth rates that we've experienced, and we've expected greater than 20% revenue growth there. If anything, I would say that the reimbursement environment in the Clinical division looks better than it has previously, and our Pharma division new sales activity is every bit as strong as we could have hoped.

I think that we should look to what's happening state by state. Hospitals are beginning to reopen. I think when we start to see hospitals perform elective surgeries again, that will be a good sign. I think physician offices, when they open for more normal business hours, so that will be a good sign and we fully expect when those things happen to see a return to our normal kinds of volume and growth rates.

Puneet Souda -- SVB Leerink -- Analyst

Okay. Thanks. And on Pharma Services, I mean, it's great to see the strength in the contracts here in Pharma Services. Could you help us understand, are those new trial starts that are being planned during these times or those were planned pre COVID? And how should we think about sort of the recovery in Pharma Services? Again, timing is hard to say here, but what are you hearing from the pharma customers and what is the appetite for those customers longer-term as we emerge from sort of a post COVID -- in the post COVID environment, what do you think the appetite will be there?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Our Pharma Services division sales team is just doing a great job. And for the quarter, I think Kathryn mentioned, as I did, that we had $28 million in new bookings. Those are signed contracts which are on pace with -- in fact better than we would have expected. There are delays in setting up trials. Certainly, there are delays in setting up new trials, and even trials that have been existing have slowed down some.

But the pace of activity in new sales is -- it really considers both the clinical trials part of our business as well as the research and development side of our business -- and we don't really see a slowdown in the appetite for pharma companies to engage us in support for their drug development activities at all.

Puneet Souda -- SVB Leerink -- Analyst

Okay. Great. And if I could squeeze in a last one on the NGS focus, which is a big, important driver for you here. Could you just update us briefly on the FDA and how should we -- on the multi-gene panel that you have submitted to FDA and also on the regulatory timeline for the liquid biopsy assay, if you could elaborate what should we expect this year, if any updates? Thank you.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

We continue to make good progress on the FDA submission. We are engaged with the FDA, we have a good dialog with them, we've made a lot of upgrades to our infrastructure. Frankly, a lot of those upgrades to our infrastructure are benefiting to some extent already our Pharma business because we have FDA compliant systems in place. I would say it is a complicated process. I think we're working systematically and rigorously through the process, and we're making good progress with our multi-gene panel submission to the FDA.

Regarding liquid biopsy, we have been, as we've said before, validating a pan-cancer liquid biopsy product. That validation is going quite well, and we would expect really before the end of the second quarter to have a liquid biopsy product, a pan-cancer test, available. Now, I would say that we're also looking very closely at other liquid biopsy products and initiatives and trying to understand how best to develop those products and add those products to our product line.

There's one other thing I would mention, and that's that last year we invested a lot of money in next-generation sequencing. We upgraded both our solid tumor and our hematologic assays. We're very pleased that recently, in the last month or so, we received the designation for our solid tumor panel to be a comprehensive genomic profile and we've gone through a rigorous validation for that, and the reimbursement actually has improved from what we've seen before. So we're seeing a lot of progress with our next-generation sequencing assays and work and we're continuing to invest in this area.

Operator

We'll go next to Brian Weinstein, William Blair.

Brian Weinstein -- William Blair & Company -- Analyst

Hey guys, good morning. Thanks for taking the question. First question is, what do you think all this means for competition in the industry? How do you expect this COVID-19 situation to change that? Will it lead to further consolidation of the industry and do you think that you're poised to pick up share as a result?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Thank you for the question, Brian. All of what we've said, our investment in our workforce, our investment in our long-term strategy is all designed to ensure that NeoGenomics emerges from this crisis in a superior competitive position. Because we fully believe that the stronger players are going to be able to strengthen their position. Over the last several years there have been a lot of smaller players that have begun operations and are losing a lot of money and are relying on capital markets to support their operations, and we've never subscribed to that theory.

And so, as I mentioned, we're coming into this crisis in a relatively strong position. Through the crisis, we are really investing to make our position even stronger. I think that there will be consolidation. We are, I think, in a very good position to continue to consolidate the market and you can bet that we're looking very carefully at that.

Brian Weinstein -- William Blair & Company -- Analyst

Okay. And then, just curious, what it means for your clinical business if patients who may be usually referred to the lab after something is found in kind of a routine blood work situation associated with the wellness isn't happening, when they do come back, if cancer is more late stage, how does that impact your business, if at all, versus seeing patients that are kind of earlier in the diagnosis?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Well, we had a sort of an internal debate, Brian, about whether when the crisis wanes we get a bolus of specimens in. And let me give you both sides of that debate. On one side, as you point out, the specimens that we receive are from cancer patients who are ill, and they need to be tested and they're going to continue to be tested. And if they haven't been tested, they're going to need to go to the doctor to get tested. So that would suggest that our volume will recover very quickly.

On the other hand, we have to understand there are practical limitations on the capacity of physicians to have office hours and for surgeries to take place. There is only limited capacity. So I think there are two sides of that debate in our Clinical division. But I think as the return to more normal levels -- as I said, there is no reason to expect that our growth rates won't return to the rates that we've experienced in the past, and frankly, we're encouraged by some of what we're seeing on the reimbursement side. So, there are some encouraging signs out there, longer-term.

Brian Weinstein -- William Blair & Company -- Analyst

Can I sneak here just a real quick one in? Did you guys receive any kind of payer-backed [Phonetic] payment? I know that there were payments being made to certain providers for Medicare fee-for-service. Did you guys get anything like that? Not referring to PPP, but just a separate payment?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yes, we received recently $3.9 million from the Medicare program. This is not the program that provides reimbursement as the paycheck provider or protection program. This is a Medicare program, CMS program, designed to support providers that have billed Medicare in 2019 at a particular rate based on their billings last year. So that was $3.9 million received a couple of weeks ago.

Operator

We'll go next to Andrew Cooper with Raymond James.

Andrew Cooper -- Raymond James -- Analyst

Thanks, guys. Just a few from me. I think we hit some of the highlights already. But when you talked about expenses tied directly to COVID-19 and investing in your employees and all of those things, can you help us slice out what was maybe a little bit unusual in the quarter above and beyond, and how much of that might persist versus what's just sort of lack of overhead absorption when we think about margins?

Kathryn B. McKenzie -- Chief Financial Officer

Yeah. So, when you think about our cost structure, we have about 25% that can flex with our volumes. So between supply of commissions, we also have some reduced travel expenses, clearly as we've reduced travel. But some of that gets offset by what you were mentioning as the one-time costs. So even as far as spacing out the lab can create some inefficiencies in productivity as well as [Indecipherable] the thermometers and the additional time and expenses that it takes just to make sure that we are ensuring the safety and well-being of our employees first. So there are some offset costs.

When you think about how much we can really control, we do have about 25% of variable costs that are more closely tied with the revenue and the test. But again, we are being very prudent in the rest of our operating expenses and watching very closely the timing of the even planned expenses and making sure we're being prudent on which initiatives we are continuing and which we may be postponing.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, just to build on that. In addition, we're piloting, even as we speak, COVID-19 testing for our own employees to make sure that they continue to come to work safely. We've given expense or premium pay to some of our workers. There are variety of things that we've done in support of our culture and our workforce.

The other thing that we've done is, we've added expenses to bring up COVID-19 testing for both molecular and serology testing. And I think, as I mentioned, we have capacity now for the molecular test, and we'll have capacity very shortly for a very high quality antibody test.

Andrew Cooper -- Raymond James -- Analyst

Okay. That's super helpful. And then I guess jumping to Pharma. The quarter was maybe a little bit stronger than we expected. So just curious if there's anything in particular that maybe accelerated or anything like that relative to what you talked about in the last quarter. And then, two, as I recall, you had talked about a significant number of new trial starts in April. I know you talked about things -- pushing a little bit two major projects. But just maybe a little bit more detail on some of the dynamics there and as you look at the backlog as it builds, any sort of aging of that or commentary on when you expect to get sort of back to normal on some of that would be great.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah. I will answer part of it and then maybe ask George if he can answer remotely to help fill in. The quarter was stronger, Andrew, than we expected it to be when we talked with investors toward the end of February. And I think that speaks to the diversity of our Pharma Services business. So not only is it geographically global in structure, but we also have a fair amount of research-oriented activities as well as clinical trials activities. So while the clinical trials have slowed down, the research related activities both in next-generation sequencing and in multiplexed immunohistochemistry work have actually increased a little bit and we saw a lot of strength as the quarter ended.

In terms of trial starts and backlog, let me turn that over to George to ask for his input.

George A. Cardoza -- President, Pharma Services

Yeah. And I'd just piggyback on what Doug said. We are fortunate to have a fairly diverse offering in terms of product offerings. And not only do we see strength across, that what Doug mentioned, but we also saw a nice uptick in data and informatics sales, and we've really seen an increase in that from our Pharma sponsors as well, which has been helpful.

On the clinical trial side, yes, I mean, I think we've even heard some frustration from some sponsors there. Unfortunately, the sites just aren't able to enroll the patients the way they used do. So one in particular said as soon as some of these states start to open up, that's where they're going to go first to open up some sites. Others, they've been maybe a little bit more cautious and are figuring more maybe July or August. So you do kind of have the spectrum.

But I think the demand is still there for the clinical trials, and I think if anything, there is some more frustration on the Pharma side because they want to move forward on these projects and unfortunately the sites are closed or [Indecipherable] limiting hours, limiting elective visits and that really is cutting down the patient flow. One of our biggest sponsors, a top 20 pharma firm, said across all their oncology trials they're seeing about a 50% reduction in patient flow. So they're seeing it, but certainly their hope is that ramps up as soon as possible, and I do think in the coming months they're going to push hard to try to get those numbers up as best they can.

Andrew Cooper -- Raymond James -- Analyst

Great. That's very helpful. I'll leave it there. Thanks, guys.

Operator

We'll go next to Alex Nowak at Craig-Hallum Capital Group.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Great. Good morning, everyone. Doug, of the lower testing volumes, do you think this is all lost revenue or should there be a catch-up in Q3 and Q4? Because cancer doesn't go away. So I've got to imagine there is going to be some sort of catch-up once the states' clinics and labs are to reopen here.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Alex, that's the subject of great debate among our team. As I mentioned, I think there is one school of thought that says, yes, these patients need testing. If they haven't had testing, they're going to want to get testing as soon as possible. And I think that's a compelling argument to suggest that our volume will come back strong.

On the other hand, we really do have to understand that there are practical limitations of capacity by physicians, by community-based oncologists and by hospitals and their surgery centers. So there is a sort of a cap on how much that can come back. But you're absolutely right. The work we do is for cancer patients, patients who are ill and they need to be tested and it's an essential service and that's why we're so confident that our business is going to return to normal when things return to normal.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

That's helpful. And is there any timeline for when you would expect to launch the minimal residual disease test and what sort of additional investment or work needs to be done there to get that test ready for prime time?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Let me explain first of all that we already have a minimal residual disease test by a test modality called flow cytometry, which is useful and we are marketing that and will continue to market it.

The MRD test that a lot of people talk about are next-generation sequencing based. And we are investing in MRD next-generation sequencing to complement our flow cytometry work. There are a number of innovations in this area. We're looking at internal development as well as potentially external sources for that. We expect that MRD is going to be an important test in the future, but there is a lot of development that has to take place really in the near term to make that viable commercially.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Okay, understood. Thank you.

Operator

[Operator Instructions] We will go next to Jacob Johnson at Stephens.

Jacob Johnson -- Stephens -- Analyst

Hey, thanks for taking the question and thanks for your efforts on the pandemic. You mentioned that...

William Bonello -- President, Informatics Division & Director, Investor Relations

Are you on mute?

Jacob Johnson -- Stephens -- Analyst

Can you hear me?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Jacob, are you there?

Jacob Johnson -- Stephens -- Analyst

Can you hear me now?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

We seem to have lost Jacob, Jess.

Operator

We'll move to Paul Knight at Janney.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Oh, no. we lose everybody.

William Bonello -- President, Informatics Division & Director, Investor Relations

Jess, are you there?

Operator

Yes, you are connected. I can hear you.

Paul Knight -- Janney Montgomery Scott -- Analyst

Hey, Doug, Paul Knight.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Hey, Paul, go ahead and ask your question. I guess we will manage this on our own.

Paul Knight -- Janney Montgomery Scott -- Analyst

I'll ask four questions. Just kidding.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Go for it.

Paul Knight -- Janney Montgomery Scott -- Analyst

The backlog build, as I look at your success on the Pharma side -- Pharmaceutical Services side, is it oncology? Is it your technical capabilities? What's creating the win success versus peers, do you think, Doug, or George?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, Paul, thanks...

George A. Cardoza -- President, Pharma Services

[Speech Overlap] our sales team. Certainly, we do have an outstanding sales team. But I also think it's sort of our comprehensive strategy. Doug talked about the synergies between the divisions. We do have the number one position in oncology. So that's extremely attractive for a pharma firm to work with NeoGenomics on all their upfront research and phase trials, and then when we reach day one, NEO's out there helping them with literally thousands of oncologists and pathologists bringing the test to market.

So I think holistically, if you look at the strategy, we're kind of in a unique position where they can get great service pre-FDA approval, but then they've got the same partner helping them to launch it. And I do think it's very powerful and it really is helping drive our sales.

Paul Knight -- Janney Montgomery Scott -- Analyst

And Doug, when you look at the states across the US, of course, I know eight or so are allowing elective surgeries as of May 1. Is it patients just not going in or doctors not in at the clinical settings, in your view?

Robert J. Shovlin -- President, Clinical Services Division

Hey, this is Rob. So we've seen a mix in the different geographies. We've seen oncology practices that have reduced their hours to say just half days each week or even are only seeing new patients on Fridays only and they've canceled six month and annual follow-up appointments. And we've seen cancer patients whose elective or are considered elective, even though you won't imagine it to be, treatments are being pushed off right now. So, as Doug said, until those patients can get access to oncology practices in hospitals, we need to wait for that to return to normal to see the volume.

Paul Knight -- Janney Montgomery Scott -- Analyst

And lastly, do you see within these guidelines -- I see elective surgery, which obviously not much to do with you, but are you using guidelines as well surrounding clinical lab opening state by state or are they giving that specific?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Well, Paul, I've been surprised at the definition sometimes of elective surgery. We've seen cases where cancer patients have not been able to have surgery potentially because it was described as elective. But I've heard cases of, for example, patients with prostate cancer or breast cancer that were unable to get surgery or the surgery was postponed because of the situation.

So, I would say in response to the question about clinical laboratories, most clinical laboratories that I know, especially the large commercial laboratories and labs like NeoGenomics have put in place enough protections for their people that their labs have continued to stay open. And we've certainly had that situation. We've worked very hard to maintain the operation of our laboratories, and we continue to work hard to make sure that we're able to deliver the kind of service with the same kind of quality, same kind of turnaround time. In fact, our turnaround time has frankly improved during this pandemic. So thanks for the question, Paul.

Paul Knight -- Janney Montgomery Scott -- Analyst

Okay. Thank you. Bye-bye.

Operator

We'll go to Jacob Johnson at Stephens.

Jacob Johnson -- Stephens -- Analyst

Can you hear me now?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah.

Jacob Johnson -- Stephens -- Analyst

Okay, great. Thanks for taking the question. Just two. First, you mentioned that Human Longevity would be dilutive to gross margins. Are the projects you've added to your Pharma Services backlog from Human Longevity any different from your legacy business in terms of pricing and margin or is this just some excess capacity?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

George, do you want to try and answer that or should I?

George A. Cardoza -- President, Pharma Services

Yeah. No, absolutely. Generally the margins are fairly comparable to what we've seen historically on the Pharma side. So really I don't think there is much of a difference there. Yes, that laboratory, a beautiful laboratory, but it's well under capacity right now, and that was one of the reasons it was attractive to buy. I think we did -- we looked at -- we had 37% internal growth last year. So we were looking for a laboratory where we had the space to grow. Matter of fact, we are bringing up sufficient cytogenetics testing in that facility and locally as well.

So certainly our goal is to fill that lab up. It is well under capacity here. We knew this was going to be dilutive in the first year. I think we had just $1.4 million of depreciation just in the first quarter. And that doesn't affect EBITDA but it certainly had a big impact on the margins that you're seeing. But we're still very bullish about the laboratory. It's beautiful, and certainly our goal is to fill it up in the next year.

Jacob Johnson -- Stephens -- Analyst

Got it. Thanks for that, George. And this one may be for you as well. But I was getting your letter and the Pharma Services client regarding COVID. In it, you mentioned that you have increased your work on vaccines in the past year. So two questions here. First, are you doing any COVID work in your Pharma Services segment? And then, two, just in general, how much vaccine work do you do in Pharma Services today?

George A. Cardoza -- President, Pharma Services

Yeah. About a year ago, we actually started down that path because, obviously for things like HPV, we had seen cases where vaccines are certainly trying to prevent cancer. And we also had requests from our sponsors. So we sort of migrated into that. But certainly now the demand pull has gone up substantially. And yes, we do actually have a couple of COVID projects in our Houston facility. So the dream would be one of the projects we work on actually is what the world is waiting for. But certainly, it's still a fairly small part of our business but certainly one that we think has very bright growth both prospects in the next year.

Jacob Johnson -- Stephens -- Analyst

Great. Thanks for taking the questions.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Thank you, Jacob.

Operator

We'll go next to Steve Unger at Needham.

Stephen Unger -- Needham & Company -- Analyst

Hi, good morning. Could you give us an update on your Informatics strategy? And are you planning to continue to spend at the levels that you guided to initially?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, I'll take that, and then Bill may want to weigh in here as well. So, we are investing in Informatics. We feel great about our strategy in Informatics. I think today we have a little over 25 folks, maybe 26 folks in the division. So, it is an investment. But I must say that the level of engagement that we're getting from pharma companies and from payers is proving that what we're doing is relevant to their business.

Now, I would say that, as George said, even in quarter one, we experienced more revenue derive from our informatics work than we expected. And we're really bullish on the prospects here even in the short term. So we expected that this division might in the long term be a real revenue generator for us, but even in the short term, this is starting to impact our business and generate some revenue, and all of that revenue, by the way, once we cover the 26 folks that we have in the division, really falls to the bottom line.

William Bonello -- President, Informatics Division & Director, Investor Relations

Yeah. I mean, Doug really covered the highlights there. I would just say we've put together I believe an exceptionally good team with a lot of experience. And we're in the very early stages of building some products and services that we think are going to be really helpful to various stakeholders. And as we get later in the year, hopefully we'll be able to showcase some of those for you. And we're feeling good about where we're at on the revenue side so far.

Stephen Unger -- Needham & Company -- Analyst

Full steam ahead. And then as far as the COVID-19 patient testing opportunity. Was this at the direction of the federal government? And how should we frame reimbursement for, whether it's PCR test or the serology test?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

The COVID-19 testing that we brought up, we felt we should do as a good corporate citizen. And we've been working on this for a while. I mentioned the kind of capacity we have for the molecular test and bringing up the serology test. So we did not do this at the direction of the government, but we certainly are working very closely with American Clinical Laboratory Association and members to work with the government to make sure that we have enough testing capacity in this country.

Now, in terms of the reimbursement, the reimbursement for the molecular test has recently been increased. I think it started out at a reimbursement rate of around $51, and it's been increased to around $100 during this crisis. And I believe that the serology test, there is some discussion right now among CMS and HHS about the level of reimbursement for that. I don't think that's been determined yet. There is some crosswalk discussion and other things, but we don't really know an answer yet. But we expect to know that reimbursement rate relatively soon.

Stephen Unger -- Needham & Company -- Analyst

And would you care to offer what platform you will be providing in serology?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yes. We're using the AVIT [Phonetic] test for serology, we're using the Thermo Fisher test primarily for the PCR test.

Stephen Unger -- Needham & Company -- Analyst

Excellent. Thanks.

Operator

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

Bruce Jackson -- The Benchmark Company -- Analyst

Hi, good morning. Just a follow-up question on the companion diagnostics test that you're going to be launching later this year. I was wondering if you could provide us with some details on the launch cadence, what kind of cancers they're targeted toward, are they just going to be single marker tests or panel tests? And to the extent you can provide some more information on that program, that would be great.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Yeah. Bruce, let me put this in context, and maybe Bill or Rob can build on my comments. So we have roughly 30 companion diagnostic projects in our pipeline at NeoGenomics. And these are projects with a variety of pharmaceutical companies. They would involve our Pharma Services division and also, as George pointed out, our Clinical Division. Now, we had a variety of projects: sponsored testing programs with pharma, some that we've been operating for several quarters, and some that we're beginning to operate now; and we have a number of projects in the pipeline. So we're very bullish about our capability in companion diagnostics.

And Rob or Bill, you have specifics to...

Robert J. Shovlin -- President, Clinical Services Division

Yeah. This is Rob. I would add that we have a handful where we have signed contracts and we're putting together all the market planning. But it's really contingent upon FDA approval of the drug. So the timing isn't definitive right yet. So we're planning for this year, but it's dependent upon the pharma company and the FDA.

Bruce Jackson -- The Benchmark Company -- Analyst

And then just a quick follow-up on that. Could COVID-19 slow down the approval of those drugs? Or are these late-stage programs where they just have to get through the FDA?

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Well, we don't have a lot of visibility as to the discussions between our Pharma clients and the FDA relative to those companion projects. I think a lot of these have moved along quite well, and we really don't know whether COVID-19 is going to have an impact on those.

Bruce Jackson -- The Benchmark Company -- Analyst

All right. That's it for me. Thank you very much.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Okay. Thanks, Bruce.

Operator

With no other callers in holding, I will turn the conference back to Mr. VanOort for any additional or closing comments.

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

Great. Thank you. Jess. So as we end the call, I'd really like to recognize the approximately 1,685 NeoGenomics team members around the world as they have been so dedicated and committed to helping us build a world-class oncology diagnostics company. And on behalf of our NeoGenomics team, I want to thank you for your time, joining us this morning. And for those of you listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our Company.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Douglas M. VanOort -- Chairman of the Board of Directors and Chief Executive Officer

William Bonello -- President, Informatics Division & Director, Investor Relations

Kathryn B. McKenzie -- Chief Financial Officer

George A. Cardoza -- President, Pharma Services

Robert J. Shovlin -- President, Clinical Services Division

Puneet Souda -- SVB Leerink -- Analyst

Brian Weinstein -- William Blair & Company -- Analyst

Andrew Cooper -- Raymond James -- Analyst

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Jacob Johnson -- Stephens -- Analyst

Paul Knight -- Janney Montgomery Scott -- Analyst

Stephen Unger -- Needham & Company -- Analyst

Bruce Jackson -- The Benchmark Company -- Analyst

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