Strong Growth From NeoGenomics No Match for Economic Anxieties

Investors are increasingly concerned about the economic impact of the novel coronavirus and the efforts to contain it. The S&P 500 declined by double digits in the last week of February alone.

On the one hand, a drop of that magnitude was a little easier to achieve considering the stock market was trading at a historic premium. On the other hand, that offers little consolation to shareholders of growth stocks, which have borne the brunt of the correction.

NeoGenomics (NEO 2.35%) is one example. On Feb. 27, the cancer genetics testing company reported full-year 2019 revenue and earnings that beat Wall Street expectations. It also provided full-year 2020 revenue guidance that exceeded analysts' expectations. But shares fell more than 20% the day earnings were released before recovering to a high single-digit loss. Here's what investors need to know about the latest operating results.

Image source: Getty Images.

By the numbers

NeoGenomics is a leading oncology genetics reference lab. It boasts 10 global locations, serves 2,600 hospitals, and processes 1 million tests annually. Doctors send in patient samples and select from a menu of testing options, and the company performs the requested run-up. The results -- and an interpretation of the results -- are sent back to doctors so the next step in treatment can be determined. 

For example, a microsatellite stability test might show a patient's prostate cancer is likely to respond well to treatment with a specific drug. Or a liquid biopsy could show a patient has no evidence of disease. Essentially, NeoGenomics allows smaller hospitals to have access to the latest lab equipment and diagnostics they otherwise couldn't afford and helps larger hospitals with expert data interpretation. 

The successful execution of the niche has served customers and shareholders well to date. The company turned in a solid year of operations in 2019. 

Data source: SEC filing. YoY = year over year.

To be fair, much of the company's growth last year was driven by the roughly $145 million acquisition of Genoptix that was completed in December 2018. At the time of the acquisition, Genoptix was expected to contribute $85 million in revenue in the first year of integration with NeoGenomics. That would have represented about two-thirds of total revenue growth in 2019. 

Investors might expect more consolidation in the genetic testing industry, which remains relatively fragmented and ripe for acquisitions, especially as the biggest players continue to get bigger. In fact, NeoGenomics acquired the oncology division of Human Longevity for $37 million in early 2020. The assets are expected to contribute on the order of $10 million in revenue this year. 

While that won't move the needle much in the near term, the deal bolsters the pharmaceutical services business of NeoGenomics. The segment provides testing services for pharmaceutical and biopharmaceutical customers, including validation and development of diagnostic products. It generated only $48 million in revenue in 2019, roughly 12% of the company's total revenue, but began 2020 with a backlog of $130 million. The backlog represents contracts that will be completed over the next several years, although it remains a significant source of potential growth. 

Looking ahead

NeoGenomics beat Wall Street expectations for full-year 2019 revenue. It also issued full-year 2020 revenue guidance much greater than the $448 million average expected by analysts. While the coronavirus-induced sell-off played a major role in the stock's recent tumble, investors might be rightly disappointed by income projections for the year ahead. 

Data source: Press release. YoY = year over year.

What's the issue? Full-year 2020 guidance suggests NeoGenomics will spend heavily to capture organic growth opportunities without receiving much of a boost to the bottom line. 

To be fair, that was going to occur eventually. Acquisitions are great for a quick growth injection, but at some point newly acquired assets need to be integrated and positioned for long-term success. Therefore, the relatively ho-hum improvements in income in 2020 might set the stage for more durable profits in the next several years. 

For example, at the time of the Genoptix acquisition, NeoGenomics expected to achieve $25 million in annual cost savings by the end of 2021. Although full-year 2020 guidance suggests investors will need to remain patient, management said those cost savings will be more visible in the second half of 2020. If true, then investors might expect higher profits in 2021.

A solid growth stock for the long haul

Given initial full-year 2020 guidance, investors might be hoping NeoGenomics makes another major acquisition to bolster growth. That can never be ruled out in the highly fragmented genetic testing industry, but investors with a long-term mindset shouldn't be too concerned with financial projections for the year ahead. Management still expects the Genoptix acquisition to deliver significant cost savings by the end of 2021 (the original time frame), although the longer-term benefits obviously aren't reflected in current guidance. A successful track record to date suggests management deserves the benefit of the doubt at this time.