NeoGenomics Prioritizes the Public Good During COVID-19 Slowdown

Many businesses will be negatively affected by the policy decisions made during the coronavirus pandemic. That includes oncology reference lab NeoGenomics (NEO -1.74%). While investors might expect cancer testing services to be essential, a significant number of oncologists are playing it safe and temporarily delaying care to protect vulnerable patients. As a result, the company reported a 25% to 30% decline in test volumes throughout April compared with the year-ago period.

The slowdown is occurring during what was supposed to be a transformative year for the business, which had plans to invest increasing levels of earnings and cash flow into expansion. Despite the unexpected change in market conditions, NeoGenomics has decided to stay the course and bolster its long-term competitive position. No employees have been laid off or furloughed, facilities have been de-densified without affecting operations, and labs have even been retooled to process COVID-19 swab tests and serology tests. 

It's a refreshing bit of good news during trying times -- and investors with a long-term mindset should doubly appreciate the company's forward thinking strategy. Here are the highlights from the first-quarter 2020 earnings update from NeoGenomics. 

Image source: Getty Images.

By the numbers

NeoGenomics provides oncology testing services for doctors and pharmaceutical companies. The clinical services segment offers a wide range of cancer diagnostics and tests, processes samples in one of 11 global locations, and returns the data -- annotated if needed -- to customers. The pharmaceutical services segment provides similar value to customers conducting clinical trials, in addition to helping customers develop diagnostic tests of their own.

Investors were already prepared for a departure from the company's growth trajectory. NeoGenomics wisely set expectations with a preliminary update on April 9. At the time, the business expected first-quarter 2020 revenue of $106 million and reported a 20% year-over-year decline in test volumes in the final two weeks of March and in early April. 

The revenue projection turned out to be spot on, but test volumes deteriorated as April progressed. On the first-quarter 2020 earnings conference call, NeoGenomics disclosed that it has experienced a 25% to 30% year-over-year decline in testing throughput April, although management cautiously stated the decline appears to have stabilized. 

That still suggests second-quarter 2020 operating results will decline from the performance in the first quarter of the year. 

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

In the first quarter of 2020, NeoGenomics experienced a 7% increase in test volumes compared with the year-ago period, although growth was negatively affected by stay-at-home orders issued during the last two weeks of March. Investors should expect a decline in both test volume and revenue in the second quarter.

The decline will reflect decisions by doctors to delay care, ranging from surgeries to routine monitoring, for cancer patients. That's not surprising considering cancer patients might be at greater risk of severe COVID-19 complications. 

NeoGenomics told shareholders to brace for a similar impact to its pharmaceutical services division. Roughly half of the segment's revenue is derived from clinical trials, but customers have not been able to initiate new studies during the coronavirus pandemic. That's not surprising, either, considering pharmaceutical companies must travel to enrollment sites to train physicians. 

Rather than make a kneejerk reaction to lay off staff during the slowdown, NeoGenomics has decided to go all-in on its long-term focus and suffer a short-term impact on earnings. Management provided an interesting reason for its decision.

Image source: Getty Images.

Positioning to respond to COVID-19 -- and for a rebound

As a business that generates revenue from well-equipped laboratory facilities, it wasn't too far of a stretch to imagine NeoGenomics retooling here and there to dedicate capacity to coronavirus testing efforts. That's exactly what it did.

Most coronavirus tests used to determine whether an individual has been infected by the SARS-CoV-2 virus ("swab tests") require polymerase chain reaction (PCR) machines, which are a fairly standard piece of equipment. NeoGenomics developed its own diagnostic and will be able to process 5,000 COVID-19 PCR tests per day by the end of April, with the potential to provide significantly more capacity if needed. That could help to relieve the burden on local and state labs as national testing demands ramp up. 

Meanwhile, coronavirus tests used to determine whether an individual has antibodies that protect against the SARS-CoV-2 virus ("serology tests") require a different set of expertise and equipment. NeoGenomics invested in new hardware and capabilities to prepare, and will soon offer COVID-19 antibody tests through its facilities. 

Management said it's too soon to estimate the financial impact of COVID-19 testing capabilities, but investors might not want to get heir hopes up. Revenue from COVID-19 tests will likely be insufficient to offset declines from cancer testing services. For example, a 25% decline in test volumes would reduce revenue by tens of millions of dollars during the second quarter of 2020.

Nonetheless, the company says it doesn't expect to lay off or furlough any employees. An estimated two-thirds of workers are engaging remotely, while those that do report to laboratories have received small cash bonuses. Other companies haven't hesitated to release employees to reduce operating expenses, but NeoGenomics said it remains focused on the long term -- and an inevitable recovery:

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.

Investors with a long-term mindset should be encouraged by that strategy, even if it comes at the expense of short-term growth.

Keeping a cool head during a trying time

While the coronavirus pandemic will negatively impact NeoGenomics in 2020, the company has decided to deprioritize short-term earnings. Instead, it will keep its vision fixed on the horizon, doubling down on its commitment to employees and retooling facilities where possible to extend its expertise to the public health crisis. 

Oncologists and cancer patients can only delay treatment for so long, which suggests the slowdown in test volumes will be temporary. That's not the same thing as painless, but investors with a long-term mindset might not care too much in the end.