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Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Neogenomics First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to the host, Executive Chair of Neogenomics, Lynn Pedro. Please go ahead.
Lynn Pedro
Thank you, Kelly, and good morning. I'd like to welcome everyone to Neogenomics First Quarter 2022 Conference Call. Joining me for this call from our Fort Myers headquarters are Bill Bonello, our Chief Financial Officer, Doug Brown, our Chief Strategy and Corporate Development Officer, and Charlie Edson, our Director of Investor Relations. Joining on the call via phone is Dr. Shashi Kulkarni, our Chief Scientific Officer and Executive Vice President of Research and Development. Before we begin our prepared remarks, Charlie will discuss the forward-looking statements and non-GAAP measures used on this call.
Kelly
This conference call includes forward-looking statements about our 2022 initiatives, 2022 financial outlook, growth opportunities, and anticipated operating results and performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these risk factors appears under the heading forward-looking statements in the press release we issued this morning and in the risk factors section of our annual report. on Form 10-K for the year ended December 31, 2021 that is filed with the Securities and Exchange Commission. The forward-looking statements made during this call speak only as of the original date of the call, and we undertake no obligation to update or revise any of these statements. In addition, during this conference call, in order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. These non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP, should not be considered to be measures of liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table available in the press release we issued this morning. Before turning the call back to Lynn, I want to let everyone know that we'll 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 one per person in order to give more people a chance to ask questions within the one hour that has been allotted for this call.
Lynn Pedro
Thank you, Charlie. For today's call, I will begin by sharing my perspective on the state of our company and the actions we have taken since we announced the departure of our chief executive officer on March 28th. Bill Bonillo will then review our first quarter financial results, including some of the factors underlying the underperformance of the business, and outline the near-term actions we are taking to improve our performance and return to profitable growth. Finally, I will introduce our new chief scientific officer, Dr. Shashi Kulkarni, and the new president of our clinical division, Dr. David Sholivar. These two talented executives are experts in oncology diagnostics and will play leading roles in our company's future. Each of them will share their background and reason for joining NeoGenomics and offer their early insights on our business and their critical priorities since joining in early March. We will then have time for questions and answers. I would like to begin with some historical context. I have served on the board of NeoGenomics for seven years and became lead independent director in 2020 before taking over the board chair role in October 2021. During the majority of that time, our business performed very well with consistent top-line growth, strong operational efficiency, increasing market share, and a world-class culture. Unfortunately, our performance over the past year has been inconsistent with that historical track record, as evidenced by slowing growth and decreased profitability. The company experienced a number of challenges in 2021. including the transition of our longstanding chairman and chief executive officer, Doug Van Ork, continuing headwinds from COVID, and shifting dynamics in the external environment. Though the company's market position remains strong and our overall strategy is sound, our execution over the last year was poor. The board of directors took decisive action last month to change leadership in order to restore the operational performance of the business and better position the company for long-term success. Since March 28th, I have had three main priorities. First, we have moved quickly to stabilize the organization. I and other members of the management team have visited many of our sites and met with leaders and employees at all levels to share our direction, hear their feedback, and engage them in our efforts. And I am consistently impressed with the degree of commitment that our people have to our mission and their desire to improve our performance. Second, the Office of the CEO, together with other members of the management team, have worked swiftly and collaboratively to identify actions to improve performance. Bill will describe some of these positive changes later in our prepared remarks. The addition of Dr. Kulkarni and Dr. Solovar to the management team, with their extensive experience and deep expertise, has helped us identify additional opportunities for improvement, and you will hear from them later on in our prepared remarks. Third, the Board of Directors and I are making progress in our search for a new CEO. We have developed a list of key criteria, and Russell Reynolds is in the process of sourcing qualified candidates. In summary, we recognize that there is significant work to be done, but we're confident that in time we will return to the growth and operating efficiency that drove our success for many years. Our long-term strategy remains intact, in particular, We see great strategic value in marrying new technologies such as radar with our longstanding channel leadership. And finally, the board and I are confident that our strong executive leadership team will advance the execution of our strategy while we recruit an outstanding chief executive officer. I will now turn the call over to Bill.
Charlie
Thank you, Lynn. This morning I would like to review our first quarter financial results. provide some additional color on the factors that have been impacting revenue growth and margin, and provide some detail on some of the actions that we're already taking to return to profitable growth. While we will not be providing formal revenue or EBITDA guidance today, we will provide some directional commentary with respect to both revenue growth and profitability. Before I walk through the numbers, I wish to point out that the growth rates we cite exclude prior period revenue from COVID-19 PCR testing. We've made this adjustment to make the year-over-year comparisons more useful as we stopped performing COVID testing during the first quarter of 2021. Revenue increased 3% year-over-year to $117 million, with clinical services revenue up 4% year-over-year and pharma services revenue down 4% year-over-year. Clinical revenue was $99 million in the quarter. Clinical division test volumes increased 2% year-over-year. The Omicron variant had a significant impact on test volume during the month of January, with volume down 7% month-over-month and flat on a year-over-year basis. While volume grew both sequentially and online, year over year in both February and March, we have not yet returned to pre-COVID growth rates. Our volume growth is being impacted by a couple of factors. First, our test mix is weighted to legacy modalities and disease-specific NGS offerings, while the market is moving towards larger, more comprehensive panels. Operational challenges have made it difficult to add new business at our historical rates. We are taking a number of steps to upgrade our NGS product offering and improve our lab operations, which Dave and Shashi will discuss in greater detail later in the call. Average revenue per test increased 2% year over year to $371, with positive contributions from ongoing strategic reimbursement efforts partially offset by Medicare rate cuts. Pharma Services bookings were $41 million in Q1, and we ended the quarter with a backlog of $282 million, which was up 6% sequentially and 30% year-over-year. While backlog was up, Pharma Services revenue decreased 4% year-over-year to $18 million. We view this year-over-year decline as an anomaly and not a trend. as we faced a very tough prior year comp. Revenue was quite a bit lower than we had been expecting in March of this year, as one large project got pushed out to later in the year. By contrast, March 2021 was a record revenue month for pharma services. We are taking action to drive near-term pharma revenue, including increasing our efforts to secure preclinical business which tends to convert more quickly than clinical trials work, even as we continue to build out our backlog of large clinical studies. We are also implementing processes designed to pull revenue through earlier in the life cycle of a project. Our informatics business, which is reported as pharma services revenue, continues to grow at a rapid clip, and we're excited about the progress of these initiatives. Our GAAP gross margin was 32.6%. Adjusted gross margin, which excludes Nevada-related non-cash amortization expense, was 36.8%. Adjusted gross margin declined 380 basis points year-over-year and 310 basis points sequentially. There are several factors that contributed to the decline in adjusted gross margin and we are taking immediate action to mitigate these trends. First, in late 2021, we significantly increased the size of our laboratory workforce in preparation for a return to pre-COVID growth rates. As noted earlier, volume growth did not rebound to the extent that we had expected. As a result, we have scaled back our laboratory hiring plans to better align with near-term volume trends. Second, like most companies, we've experienced wage and supply cost inflation. In response to this cost pressure, we are implementing price increases in both our clinical and pharma businesses and pursuing strategic reimbursement opportunities to increase value capture for the services that we are providing. Third, we did have extra costs associated with the transition to our new Fort Myers lab. While this move will drive productivity and efficiency improvements over time, we incurred extra costs related to operating two different Fort Myers facilities during the transaction. We expect this transition to be completed around the end of Q2. In addition to these factors, we've seen a notable decrease in lab efficiency over the course of the past year. This decrease is largely attributable to increased complexity of both our product offerings and our lab processes due in part to efforts to respond to customer requests for customization. We are already taking action to reduce this complexity. These actions include eliminating low margin services, streamlining our NGS processes to drive reductions in labor, supplies, and bioinformatics costs while simultaneously improving turnaround time, and implementing AI to increase lab tech productivity. We estimate that these actions plus our pricing actions could contribute at least $15 million of annualized gross profit once we fully implement them. Moreover, We have every expectation that we will identify additional near-term actions as we continue to engage the organization. Finally, as we've discussed in the past, our pharma lab expansions, including both our international labs and our La Jolla facility, continue to be a drag on adjusted gross margin. While our international labs are important to our long-term growth strategy, and allow us to bid on larger global clinical trials, these labs are operating well below capacity. Our La Jolla lab, which we acquired through the acquisition of the oncology assets of human longevity in 2020, and which is where we perform whole exome and whole genome sequencing, is also operating below capacity. While lab expansion remains an important component of our PharmaGrowth strategy, we are working to better align capacity expansion with growth. In addition to these near-term actions, we are also developing a long-term plan to drive step function improvements in productivity and efficiency. We will do this through automation, process improvement, product-payer and customer mix, and pricing. Operating expenses increased $34 million year-over-year and $3.8 million sequentially to $90 million. Approximately $13 million of the year-over-year increase is related to ongoing operating expense at both Innovata and Trapello, which were acquired in the second quarter of last year. In particular, we continue to make significant investments in radar, supporting what we believe is a leading assay for minimal residual disease and recurrence testing. In addition, another $11 million of the annual increase is related to non-cash stock option compensation expense and other non-recurring items that have been excluded from our calculation of adjusted EBITDA. The sequential increase in operating expense is related to increased legal and accounting costs associated in part with operations of Innovata and Trapello, as well as the ongoing compliance matter, CEO transition costs, and increased product development expense related to our informatics business. We are taking steps to reduce our G&A expense run rate, but there is more work to be done. Given the factors we just discussed, adjusted EBITDA loss was $19 million. Turning to the balance sheet, we exited quarter one with $481 million in cash and marketable securities. DSOs were 85 days and at the high end of our normalized range. The increase in DSO is primarily driven by the intra-company cadence of revenue with March being the highest month of the quarter. We expect DSOs to normalize as the year progresses. Having reviewed the first quarter results and the immediate actions that we are taking to improve both revenue growth and margins, I'd like to spend a little time discussing our outlook for the remainder of the year. As a reminder, we withdrew our 2022 revenue and EBITDA guidance in March in conjunction with the departure of our CEO. We continue to believe that it is important for the new CEO to influence and feel comfortable and feel accountable for the guidance we eventually provide. That said, We understand that our decision to withhold formal revenue and EBITDA guidance makes it difficult for investors to assess our current financial situation or evaluate our near-term prospects. Therefore, we would like to share some additional thoughts regarding near-term trends in both revenue and profitability. We view 2022 as a rebuilding year, where our primary focus is to improve our current product offering drive operational efficiency, generate clinical evidence in support of radar, and lay a foundation to support sustainable, profitable growth in 2023 and beyond. We expect revenue to be up sequentially in Q2 and up modestly year over year for the full year. Similarly, we expect that our quarterly adjusted EBITDA will improve modestly sequentially each quarter as the year progresses. Looking to 2023, we expect revenue growth to accelerate and we expect to be adjusted EBITDA positive exiting the year. We believe that the actions we are taking today are important first steps to achieving these goals. I will now turn the call back to Lynn who will introduce Dr. Kulkarni and Dr. Sholovar.
Lynn Pedro
Thanks, Bill. We are delighted to have both Dr. Kulkarni and Dr. Sholovar officially on board as Chief Scientific Officer and Clinical Division President, respectively. Both executives are already having a major impact on our business, despite having joined less than two months ago. I've asked them both to provide some background on some of their relevant experience, express why they chose to join Neogenomics, and discuss some early areas of focus for them, including any quick wins they see for improving our business. With that, I'd like to introduce our new Chief Scientific Officer, Dr. Shashi Kulkarni.
Bill
Thank you, Lynn. It's great to speak on the earning calls today, and I'm pleased to be representing NeoGenomics. My career in clinical genomics spans over 30 years. and most of my career has been spent in the field of molecular genetics and next-generation sequencing. I've held numerous academic, scientific, and operational leadership positions at Washington University School of Medicine in St. Louis, Baylor College of Medicine, and helped build and facilitate operational and financial turnarounds at both institutions. I have a strong passion for using genomic and multiomic precision oncology tools to improve human health. I've written a book on NGS that is widely adopted and popular amongst medical professionals. And I have managed Cancer Genetics LCPA Journal as editor-in-chief for more than seven years. I've also authored many best practices guidelines related to NGS by co-working with organizations such as A&P, ASCO, CAP, and CDC. And I frequently serve as an expert panelist at FDA for NGS. I joined NeoGenomics because of the company's unparalleled leadership position in oncology for multimodal diagnostic solutions. I see the company's longstanding customer relationship with pathologists and oncologists as a key strategic asset and believe that the fundamentals are there to be a market leader for many, many years to come. While my focus will be primarily on next-generation sequencing, I believe I can help drive improvements in operational productivity through process improvement and automation across the laboratories. I will look to develop and launch cutting-edge NGS solutions for our clinical and pharma divisions and create an NGS center of excellence. Neogenomics has a strong market position covering the continuum from diagnosis to monitoring, and I'll be proactively working to optimize a service menu with sound business principles. In my short tenure here at NEO, we have identified several operational and informatic improvements that we're already working to implement. These initiatives are expected to reduce our turnaround time and lower our cost of testing and could be completed over the next six months. I see multiple areas of improvement within our processes that I would consider low-hanging fruit. I'm immensely impressed with the scientific talent at NEO, as evidenced by over a dozen presentations at the recent AACR conference in New Orleans. One exciting action that we have already completed is the launch of our new lung cancer DNA RNA NGS-only offering. This comprehensive panel includes genomic and transcriptomic and multimodal readouts driven by clinical evidence which differentiates it from other leading cancer, lung cancer offerings on the market. Eli Lilly has selected this panel for a sponsored testing program, which we have launched to our clients on Monday. Additionally, we're bringing beginning validation on larger pan cancer panels, NGS panels. Outside of our NGS products for therapy selection, I'm impressed with the outstanding sensitivity and strong data from radar assay for minimal residual disease and recurrence testing. I share the team's belief that radar could be a leading MRD solution. And in 2022, we are prioritizing data generation and are actively involved, engaged in discussions with several different pharma companies for larger late stage opportunities. I feel it.
Lynn Pedro
Thank you, Shashi. I'm also pleased to introduce our new clinical division president, Dr. David Cholvar.
Shashi
Thank you, Lynn. And I'm excited to be at NEO and for the opportunity to speak with everybody today as well. Including my time in medical school and residency for pathology, I've spent over 30 years of my career in and around diagnostics in the laboratory space, and I believe my experience and passion for patient care fits well with my new role at Neogenomics. Over that time, I have served in significant commercial and general management leadership positions at both J&J and Quest Diagnostics in the IBD and lab services businesses, respectfully. As a result, I have experience with a wide range of relevant diagnostic technologies, including liquid biopsy, molecular diagnostics, NGS, anatomic pathology, and digital pathology. Each of these positions that I've held came with full P&L responsibility, and I often assumed these positions when the businesses were experiencing challenging circumstances and I have a demonstrated track record of helping to drive improved business performance. In terms of why I chose to join NIO, personally, I feel there is no more relevant field to being in healthcare than helping cancer patients, as well as their caregivers and physicians, navigate the increasingly complex world of cancer diagnostics and care. I also believe that NIO is well-placed to be a market leader, emerging from a position of strength between earlier stage companies that lack breadth of menu and large diagnostic labs that have difficulty selling specialty testing. I saw an exciting future ahead for Neo, and I wanted to be a part of it. During my time at Neo thus far, as Shashi has, I've been digging in with the team and working to prioritize areas of immediate focus. I believe that there are some near-term actions we can take to improve commercial productivity, operational efficiency, and our overall service to customers. Shashi has touched on exciting immediate-term opportunities we have to launch new high-value tests and make our turnaround times more reliable, I also see near-term commercial benefits by expanding our already excellent sales force with precision medicine managers focusing on the oncology channel, as well as introducing new tools to manage the sales process and pipeline more effectively. In addition, we are establishing cross-functional process excellence teams to streamline our approaches in the lab and develop tools in a few key areas to increase productivity and expand margins. Longer term, I'm focused on reinforcing our foundation and building a platform for sustainable growth. While there is significant work ahead of us, I see the challenges we are facing as familiar and addressable. I expect that we can drive improving results and return to faster growth and improving profitability over time. I'm all in and I'm energized and ready to get to work. I will now pass it back to Lynn for some closing comments.
Lynn Pedro
Thank you, David. In closing, while we are disappointed in our Q1 results, we are taking immediate actions to improve our performance. This year, as Bill said, will be one of rebuilding to improve our lab operations and drive greater cost efficiency. In addition, we will continue to make strategic investments to improve our current product offering, drive clinical evidence in support of radar, and lay a foundation to support sustainable, profitable growth in 2023 and beyond. We see tremendous opportunities to build on our leading position in the oncology marketplace and achieve our vision of becoming the leading cancer testing and information company. I will now hand the call over to Charlie Edson to lead us through the Q&A.
Kelly
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.edson at 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 number of questions to one so that we may hear from everyone and still keep within the one hour allotted for this call. Operator, you may now open up the call for questions.
Operator
Certainly. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold just one moment while we poll for questions. Your first question is coming from Brian Weinstein with William Blair. Please pose your question. Your line is live.
Brian Weinstein
Hey, guys. Good morning. Thanks for taking the questions. I wanted to ask you on the clinical side of the business, you've identified some potential some NEO-specific things, obviously. But any thoughts on what's going on maybe in the broader market right now? Do you anticipate that there's a kind of a broader slowdown that may be contributing to some of this, recognizing, of course, that there are some very clear issues that you guys have to deal with? But, you know, just thoughts on, you know, kind of what that broader market may look like. And then for Shashi, a question for you on the panels here and the expansion there. What kind of timeframe are we thinking about to see kind of these broader NGS panels and how competitive do you expect that they are going to be when you initially launch them? Thanks, guys.
Lynn Pedro
Thanks, Brian, for your questions. I'll ask Dave to address your first question and then Shashi the second one. Dave?
Shashi
Sure, sure. Thanks. Yeah, so, I mean, for broader issues, you know, Bill touched on it. You know, when we take a look at our legacy business, I mean, there's no doubt that a lot of those modalities are mature, you know, in their market segments. And over time, I've seen some price pressure. So, you know, I think that that's the, you know, the biggest dynamic related to the legacy business. When it comes to the market dynamics related to NGS, we actually touched on this as well. We are seeing bigger and bigger panels coming from some of these emerging companies, more than emerging at this point, where we have not kept up. So part of NGS and actually part of your follow-on question to Shashi is how can we catch up to that? And internally, we're talking about how do we get to the standard before we can become the standard, if you will. And I think that we have some work to do there. So just to summarize it, I'll emphasize actually what Bill said previously. I think the market dynamics in our legacy business are probably not unfamiliar to more mature modalities. And then with the NGS and the new stuff, we actually have to get better to responding to the market needs as they evolve.
Lynn Pedro
Great. Thanks, Dave. Shashi?
Bill
yeah i think um you know i was asked about the timeline so we are working on a a competitive um uber panel if you will um and and we we expect um our launch to happen sometime in next six months and the validation work for that big panel which will be um not only competitive, but would be the best in class, would be ready in six months' timeframe.
Operator
Your next question is coming from Matt Sykes with Goldman Sachs. Please pose your question. Your line is live.
Matt Sykes
Hi, good morning. Thanks for taking my questions. Maybe one for you, Bill. Just on that $15 million annualized improvement in gross profit, Can you put some timeframe around that and when you could start realizing that? I understand it's an annualized number, but just looking for when that could start shifting. And then secondly, just on the broader panel, over the next six months, Sasha, that you just mentioned, in terms of costs for launching that, is that within sort of the relative cost budget that you have over the course of this year, or would that be incremental costs in launching that new panel? Thanks.
Charlie
Yeah, so thanks for the question, Matt. In terms of the cost savings, so we are already beginning the actions. It will take some time before the actions are implemented and start to generate cost savings. And so I think those will increase throughout the year. So we should see some sequential improvement in margin as we move our way through the year. But the thought is that we will exit the year with the $15 million run rate. So that's really going into 2023 with $15 million of annualized cost and reimbursement benefit based on the activities that we have already identified and started to pursue.
Lynn Pedro
And do you want to respond? Yeah.
Charlie
Actually, I'll respond to the budget question, too, if that's okay. The answer is yes. We absolutely have the cost of new NGS panel development. factored in to our budget. And if it wasn't clear from Shashi's comments earlier, the exciting thing about the improvements that we're going to be making is in addition to ending up with a better product that also has improved turnaround time, we will end up with a product that has lower ongoing costs than what we're currently performing.
Operator
Your next question is coming from Andrew Cooper with Raymond James. Please pose your question. Your line is live.
Andrew Cooper
Hey, everyone. Thanks for the questions here. Maybe first just kind of a high-level one. On some of the comments around optimizing the service menu, how do we think about or how do you think about balancing that and pulling out some of these customizations folks have asked for with the historical language around being that one-stop shop, having the broad menu, keeping that NPS really high, just as you think about narrowing down that menu a little bit, is there anything we should be considering or anything we should think about in terms of the relationships with customers there as that happens?
Lynn Pedro
Thanks, Andrew. I'm going to ask Dave to respond to that.
Shashi
Yeah, and when we talk about rationalizing or optimizing the menu, you know, I don't know that we're necessarily, you know, talking about the, you know, some of the assays that we've have launched on the advanced diagnostic side that folks like. And we're finding that given our customer breadth, if you will, from smaller community-based oncologists and pathologists all the way through to large medical centers, that having that variety of targeted versus comprehensive panels and things like that does have relevancy. I think when we're talking about optimizing our patients the complexity of our offerings and things like that. It's more about some of the lower margin, lower volume tests that still require time in the lab to produce a result and really streamlining it on the lower end rather than rationalizing the higher end.
Andrew Cooper
Okay, helpful. And then if I can just sneak in one last one. In terms of, I think, Bill, you mentioned some of the costs stemming from the compliance matter. Just wondering if you could give an update there if if anything's changed or it's just continuing to work through, but what you've accrued for is still what you expect.
Lynn Pedro
Thanks, Andrew. There have been no changes with regard to the compliance matter, so we remain where we were in terms of any accruals.
Andrew
Okay. I'll stop there to let others ask. Thanks again.
Operator
Thank you. Your next question is coming from Derek DeBruin at Bank of America. Please pose your question. Your line is live.
Derek DeBruin
Hi. This is John on for Derek. So given that other clinical labs haven't noted any slowdown in oncology testing, I was wondering if there's more competition now or any particular competition that's causing share loss or if there's anything special about your geographical mix that's hampering growth.
Lynn Pedro
Thanks, John. I'm going to ask Bill to address it.
Charlie
Sure. I just guess I'd reiterate what we talked about earlier in that, you know, we are seeing some increased competition on the NGS front as panels move or as customers move to demanding larger, more comprehensive NGS-only panels, and our offering is, you know, more oriented towards smaller targeted panels. So I think that is the competitive dynamic that we're experiencing and probably why you see a differentiation in our growth rate relative to those of some of our competitors.
Derek DeBruin
And thanks for the color on the, uh, uh, the, um, the NGS matters earlier, but, um, more specifically, how does, how does your NGS turn around time compared to peers now?
Shashi
Yeah, I mean, honestly, it's still a work in process for us. I mean, that is, you know, one of the key areas we talked about the, the process excellence team to streamline. to streamline our approaches in the lab in a few key areas, and that's actually one of our few key areas. So more to come on that. Okay.
Operator
Your next question is coming from Alex Nowak at Craig Hellam Capital. Please pose your question. Your line is live.
Alex Nowak
Great. Good morning, everyone. I was just hoping you can give us some more detail around the CTO search process. Is the company looking entirely externally here or also looking towards board members at NEO or internal to the company? And then just when you go back a year ago, NEO had a very different cost profile than we do now, something like 150 additional spend has been added. So maybe just to keep it simple, trying to cut through the noise, where has that additional 150 million gone to? And I guess how much is available to be cut here as you look at cost containment?
Lynn Pedro
Okay, thanks, Alex. I'll take the first question and let Bill handle the second one. In terms of the CEO search, we are making good progress. We are looking... Exclusively externally with Russell Reynolds helping us to source qualified candidates with regard to any individuals who serve in our current board We don't make any comments about individual candidacy for for the role But we are moving quickly as quickly as we can and it is my and the board's number one priority Hey So thanks for the question Alex.
Charlie
I'd say the the cost increases have come from a A variety of factors. One, obviously, we did acquire two companies, both Trapello and Innovata. And so there is a significant amount of incremental cost that is associated with those two companies without any offsetting revenue yet at this point in time. So that's one. Two, you know, not unique to us, but obviously it's an inflationary environment, and we have said that we've seen our labor costs and our supplies costs going up about 6% on a year-over-year basis. Three, as I mentioned, we did staff up in our laboratory to prepare for a rebound in in volumes coming out of COVID. We haven't seen those to the extent that we expected. And so we will, you know, very tightly manage any additions in the lab right now. Four, we talked about the increased complexity of our lab operations, which is driving a decrease in efficiency or productivity. And, you know, causing us to take more people to do the same amount of work that used to be done with less people, I guess is the simplest way of putting that. We also had a little bit of technical debt that we had to make up for and adding in some of our G&A structure. So those all have contributed. I don't want to put a number right now in terms of how much cost we can take out. As I mentioned, we've identified a number of immediate actions and we put a dollar amount around that. We're still in the process of developing a more comprehensive plan to drive, as I said, step function improvements in productivity and efficiency and a return to profitable growth. And until we have that plan established. I just don't want to, you know, throw out any preliminary targets.
Alex Nowak
Yep, understood. Appreciate the update. Thanks.
Operator
Thanks, Alex. Your next question is coming from Mark Massara with BTIG. Please pose your question. Your line is live.
Alex
Hey, guys. Thanks for the questions. Maybe one for Dr. Kulkarni. You know, it's one thing for a market leader in the space to come out with an 80 or 300 gene panel, but there are some labs coming out with full exomes. So I guess I'm just curious, you know, where do you think you'll play in terms of the depth of sequencing and scale? Is it in that 80 to 300 or 500 gene range, or could it go all the way up to a full exome? And then I also wanted to ask if Radar is still on track. So I think you guys were planning a commercial launch in mid-22. Would love to hear an update as far as to what extent do you have the sales force in place now leveraging your existing sales force versus having to make some incremental hires and how does that marry with your cost reduction plan?
Lynn Pedro
I'll ask Shashi to respond to the first part. I'll give a general update on the status of Radar and ask Dave to comment on the Salesforce. Shashi?
Bill
Yeah, thank you, Lynn. So, in terms of the content of our new offering in NGS comprehensive genomic profiling, the content we are looking at would be more than 500 genes. And as far as the whole exome is concerned, yeah, I think once we, like Dr. Shalivar mentioned, we have to get to the standard and then set the standard later on. We are going to first get to the industry standard and become competitive in the NGS panel offering. And then the next step is to obviously look at whole exome sequencing. One very exciting thing which I'm looking forward to develop is using whole exome sequencing as the diagnostic therapeutic selection test and then using the data from that for our bespoke radar assay so that it has, it creates a single solution from diagnosis to disease monitoring. But we first need to fix what we have, and then that would be our next step. So, whole exome, whole transcriptome, tumor normal, and then following up with minimal residual disease is what I would be working on once we get to the next stage.
Lynn Pedro
Thanks, Joshi. So, with regard to your question, Mark, about radar, we are in active discussions with MoldyX as we speak, and We anticipate either we will be on that mid-year timeline or we won't be. Some of that is not within our control, given those ongoing discussions. Dave, you want to comment on Salesforce?
Shashi
Sure. Thanks, Lynn. Yeah, so we're actually preparing for success, honestly. I mean, we are hiring for the, we call the PMMs. That's our precision medicine managers that call in the oncology space. So we are hiring through May. to get that Salesforce ready and trained. And then as far as internal preparation for training for the broader organization and all the other things that you do in prep for a launch, we are continuing those as well. So from a commercial perspective, we are preparing for success as planned.
Operator
Your next question is coming from Puneet Sudha with SVB Securities. Please pose your question. Your line is live.
spk12
Yeah, hi. Thanks for taking my question. Maybe first one on pharma, if I may ask. Could you maybe just give us a sense of, you know, why that number declined despite the significant backlog that you have, and how should we think about the backlog conversion there? And how is labor inflation or cost inflation, anything there that's impacting the pharma business? How should we think about the pharma business overall through the year?
Lynn Pedro
Sure. Bill, go ahead.
Charlie
Yeah, I'd be happy to do that. So first of all, in terms of the year-over-year decrease, we did mention a couple of things. One, it was a very tough Q1 comp, as I noted. March of 2021 was the strongest revenue quarter that we've ever had in our pharma services business. Secondly, we did have one big project that we were expecting a lot of work to happen in March that got pushed out until later into the year. So that caught us a little bit by surprise on that front. In terms of conversion from backlog to revenue, you're absolutely right that we have seen a slowdown there for a while. Part of that was obviously attributable to COVID and trial activity slowing down during COVID. And it's possible that some of it is, you know, still related to a maybe slower than anticipated bounce out of COVID. But I think part of it is also related to the mix of the business that we have. Early on, we had a weight of business that was heavily on preclinical work, which tends to convert very quickly. Over time, more and more of the backlog consists of clinical trials work, sometimes work that takes four years or longer. to totally complete. And so that is impacting the pace of conversion as well. In light of that, that's why we are pursuing some of the activities that I described. One, trying to secure more preclinical work, not at the expense of trial work, but in addition to, so that we can better balance out on the revenue front. And two, there are things that we can do to pull through revenue more quickly than we typically would on given projects. In terms of inflation, we talked about 6% inflation on wage and supply costs, and I don't think we've really seen any significant difference in our pharma services business than we have in our clinical business. I would like to reiterate that we are passing some of that through in the terms of price increases in both of those businesses. We haven't seen the benefit from that yet. So that would be something that would show up later in the year and into 2023. But we are trying to respond to that inflationary pressure with the price lever.
spk12
Okay. No, that's very helpful. On the oncology piece, can you just clarify both for NGS and MRD side? I think at one point you had plans to increase the sales force to 50 or so reps, maybe even more. But where does that stand today? And what's the new updated plan on that front? And where do you stand today with the reps? Thank you.
Lynn Pedro
Thanks. I'll ask Dave to handle that.
Shashi
Yeah, so we've actually decreased the high end of that number. So we're actually hiring into the low 20s for PMMs. As I had mentioned, that hiring is actually a little bit more than halfway done right now. As I had mentioned, we're trying to get everybody on board by the end of May so that we can continue their training, the new people's training, as we continue to train those that we have and also expose the TBMs as well. that are calling on oncologists in preparation for radar.
Andrew
Okay. Thanks, guys.
Operator
Your next question is coming from Dan Brennan with Cowen. Please pose your question. Your line is live.
Dan Brennan
Great. Thank you. Thank you for taking the questions. I guess I had a multi-part question. I guess the first one is just on your base business, base clinical business, XNGS. I think we've Come to understand that business grows volumes high single digits, you have a little pricing pressure. So the revenue growth rate somewhere still in the high single digits. Could you just speak to whether or not that's still a valid algorithm? Obviously, this year, things are off the table. But given the pressure on the base business, which you've discussed from these larger NGS offerings, I'm just wondering if you could address that and specifically within those within your quick key modalities, IHE flow and fish, which of those to the extent that they're facing more pressure from NGS is, you know, most subject to a kind of a D rating in growth. That's the first part of the question. The second part is just on competing in the larger NGS area. I guess what can we look for to measure your early traction there? The larger labs that you're looking to compete with spend a materially higher level of revenues on R&D and I'm wondering should we expect R&D to step up materially as you look to push into that area?
Lynn Pedro
Thanks, Dan. I'll ask Bill to address the first part of the question and then let Dave comment.
Charlie
Hey, Dan. Thanks a lot. Thanks a lot for the question. I think in terms of growth in our legacy, modalities, you know, candidly, the jury's out a little bit. Clearly, growth was impacted over the last two years because of COVID. We expected to see a greater rebound coming out of COVID than what we have seen, and so You know, we are in part getting our arms around what is the sort of real market growth rate in those underlying modalities today and what is our ongoing opportunity to continue to take share. Because remember, historically, our growth has been a combination of underlying market growth and market share gains. and I don't think we believe there's any reason that we can't continue to take market share as we look forward. But in terms of what the underlying market growth is, we probably need to do a little bit of work on that. In terms of the modalities that are most impacted by NGS. I would say where we see it in the most pronounced way is probably in solid tumor FISH testing, where things that were looked at using that modality can now effectively be analyzed through an NGS panel, particularly when you have combination RNA DNA panels, and you can do fusions by NGS. And so I think that's probably where the greatest impact is. You know, there's certainly no real, you know, cannibalization at this point, I would say, of cytogenetics or flow cytometry. We see it less in heme fish, and candidly, you know, Most of the NGS work that happens today on the solid tumor side still needs to be accompanied by IHC work. So probably most significantly on the solid tumor side.
Shashi
Yeah, so on the cost side, I guess I have a couple perspectives on this. I mean, one, to a certain degree, you know, the frontrunners that have spent, you know, the vast majority of the... resources and money and time, honestly, as well, are really driving into new ground and new territory. And to a certain degree, some of the things that we're doing as a fast or not so fast follower will benefit from them plowing that field a little bit for us. So I would say that being the first mover when it comes to some of these technologies and proving them out both analytically but also clinically, you know, there's a higher cost in that with us now trying to prove analytical equivalency. The second part, I'll talk a little bit to something that Bill mentioned, which is, you know, I think was a quick comment, but one that actually benefits us, and that's the capacity of the pharma business. So, you know, a lot of these technologies actually are being used and capacity is available, you know, through the facilities for pharma as well that we can actually tap into And so the infrastructure's already there, I guess is my point. So us leveraging that infrastructure allows us to keep the cost somewhat constant in that regard, but then also improving utilization of those facilities at the same time.
Dan Brennan
Great, thanks for that. Maybe just one quick follow-up. Just on radar, so it sounds like, I know the guide has been for a while, mid-year, and I know now you're basically saying it's kind of out of your hands. Has something changed on that front? I mean, I understand... making timelines on regulatory decisions is really difficult, because it is out of your hands. But net-net, the guidance has been consistently mid-year. So has anything changed on that front? And then related to that, I guess we had been anticipating high single-digit revenue contribution. I know there's no official revenue guide for 22, but it sounds like that high single-digit revenue number probably may not be valid anymore. Thanks.
Lynn Pedro
Sure. Thanks for that additional question. So I'll have Dave come in on the first, and then Bill on the last question.
Shashi
Yeah, so, I mean, the timing of the Moldex thing is really not for anybody that submitted something for reimbursement or for a coverage decision. You know, it's basically the request for, you know, additional samples, if you will, additional statistics, and not a large amount. So, we're actually negotiating with them right now. We're not negotiating, discussing with them right now what that looks like. And, you know, so that's the binary thing. So, you know, we have a plan. based on feedback from our most recent conversation with them. We were going to review that plan hopefully in early May with them. And, you know, if the plan is accepted, then, you know, we'll be moving forward. And if there's additional questions, then, you know, we'll respond to them in time.
Charlie
Yeah. And what I would say on the revenue standpoint is that we had not expected any kind of meaningful clinical revenue from RAID. Our probably before 2024 for all practical purposes. So while we were going to have launch-related activity to kind of seed the market, so to speak, the revenue that we had pointed from was on the pharma side. And we remain optimistic. We certainly have a lot of ongoing conversations with pharma companies For radar related projects and and some of them are actually quite sizable But you know, we'll have to we'll have to see which of those make their way over the finish line Yeah, and if I could just also because then that you know that begs the question What are we doing with you know, 20-something TMM's?
Shashi
if there's a if it doesn't go, you know go our way and So just to kind of get ahead of that question, I'm sure it's on people's minds. So we actually have these other launches that Shashi was talking about, you know, with the DNA-RNA long and comprehensive. And we also have an Envision first lung product as well. So we're actually expanding the bag that the PMMs will carry regardless of what happens with, you know, with radar. So, you know, those will not be stranded costs. Those will actually be productive costs as the plan is.
Operator
Okay. Your next question is coming from Tejas Savant with Morgan Stanley. Please pose your question. Your line is live.
spk05
Hi, guys. This is Edmund Narfitejas. Thanks for the questions. Two questions for me. First, on your pharma services business, what does the preclinical and clinical work mix look like right now in your pharma backlog today? And over what timeframe do you expect the backlog conversion to start taking higher? And the second question would be on margins. You talked about increasing pricing. What underlies your confidence that the demand will hold up and recover to pre-COVID levels as you guys increase your prices? And how much pricing increase are you guys thinking of in terms of BIPs? Thanks.
Lynn Pedro
Thanks, Edmund. I'll ask Bill to come on both of us.
Charlie
Sure. So, you know, let me answer the second question first, which is it will take some time to, you know, see a meaningful shift in the rate of backlog conversion. You know, these are long, large, you know, longstanding projects. And while we will, you know, work to add more quicker converting projects to that mix, It's going to take, you know, take some time for you to see it in terms of percentage. I would say today the backlog is comprised, you know, probably 75 to 80 percent of clinical trial work versus preclinical work.
Andrew
What was it? I'm sorry, was there another question?
spk12
What was the question?
Lynn Pedro
And then do you want to repeat the question about pricing in pharma? Or just pricing increases in general, I think, was the question. We're thinking about whether demand will hold up.
Charlie
Oh, okay. Sorry about that. So, you know, A, as we said, we are implementing price increases. We're not particularly worried. We've done this on the pharma side. We've seen really no pushback. We will be doing it on the clinical side. I think the impact that any one customer is going to experience will be relatively modest, and I think we're in an environment where people are expecting and used to getting treatment
Andrew
price increases.
Operator
There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Lynn Petro for any closing remarks.
Lynn Pedro
Thanks, Kelly. As we end the call, I'd like to recognize the over 2,125 NeoGenomics team members around the world for their dedication and commitment to building a world-class oncology diagnostics and information company. And on behalf of our Neogenomics team, I want to thank you for your time and joining us this morning. And for those of you listening who are investors or are considering an investment in Neogenomics, we thank you for your support and interest in our company. Thank you.
Operator
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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