NeoGenomics Slumps in Q2 but Readies for Second-Half Rebound – The Motley Fool

The coronavirus pandemic hit the business pretty hard, but NeoGenomics (NASDAQ:NEO) had been preparing investors for months. Properly setting expectations turned out to be a great move.

Shares of NeoGenomics reached all-time highs shortly after the company announced second-quarter 2020 operating results. The financial metrics weren't pretty, and there's lingering uncertainty about the course of the coronavirus pandemic and its effects on the business, but investors are largely confident in the long-term strategy.

Can the growth stock maintain its expensive valuation?

Image source: Getty Images.

NeoGenomics is an oncology reference lab operating two business segments: clinical services and pharma services. The former collects patient samples from doctors, performs the test(s) selected by customers from a comprehensive menu, and returns the data. The latter helps biopharmaceutical companies to identify biomarkers for drug development, access oncology-specific datasets from pathologists, and develop and validate companion diagnostics.

When first-quarter 2020 operating results were announced, management prepared investors for a sour showing in the second quarter. The coronavirus pandemic was expected to impact clinical trials, which would hurt both business segments. However, NeoGenomics announced it wouldn't furlough employees and would continue investing in the business.

For the second quarter of 2020, total revenue slipped 14% compared to the year-ago period -- a sharp contrast to the double-digit growth investors have grown accustomed to in recent years. Gross profit sank due to lower revenue per test and higher costs, leaving investors with a relatively weak first-half showing for the business.

Metric

First Half 2020

First Half 2019

Change (YoY)

Clinical services

$166.9 million

$175.2 million

(5%)

Pharma services

$26.1 million

$22.1 million

18%

Total revenue

$193.0 million

$197.3 million

(2%)

Gross profit

$74.4 million

$96.1 million

(22%)

Operating income

($24.2 million)

$7.0 million

N/A

Net income

($13.8 million)

($0.4 million)

N/A

Operating cash flow

($5.0 million)

$1.4 million

N/A

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

Pharma services revenue was the only bright spot, although the increase was entirely explained by the recent acquisition of assets from Human Longevity.

Despite the tough operating environment, management didn't flinch. On the second-quarter 2020 earnings conference call, CEO Douglas VanOort laid out a six-part business update comprising strategy and investments. Two developments in particular stood out.

NeoGenomics has converted a portion of its lab space to run up to 10,000 SARS-CoV-2 diagnostic tests per day, which could increase in the future. The business has also made a $25 million investment in a liquid biopsy start-up called Inivata. The equity investment gives the oncology reference lab the exclusive option to acquire Inivata.

More important, the investment provides NeoGenomics the option to commercialize the company's InvisionFirst-Lung liquid biopsy test. The diagnostic tests 37 relevant genes to drive care decisions for non-small cell lung cancer (NSCLC), is covered by Medicare and multiple private insurance payers, and is one of only two next-generation sequencing (NGS) tests with specific Medicare coverage.

NeoGenomics ended June with $331 million in cash, which is more than enough to weather a prolonged downturn. Management acknowledged the uncertainty of the coronavirus pandemic, but has already begun to see signs of a rebound.

In April, test volumes were down 30% compared to the year-ago period. By June, test volumes were back in line with the prior-year period, although they were about 15% below pre-pandemic expectations for 2020. Volumes had not recovered to pre-pandemic expectations through July.

But management remains confident in the long-term plan. NeoGenomics is well-positioned for a strong recovery if and when the market permits. The business doesn't need an exceptional recovery -- a "V-shaped" recovery, if you will -- to climb back to profitability or growth. What's more, it could take advantage of the economic effects of the pandemic to acquire smaller peers that might be struggling.

That said, shares of NeoGenomics are certainly expensive. Is that the price to pay for profitable growth in an uncertain world? Perhaps, but investors might be better off waiting for a pullback, as the current valuation (as with many stocks right now) appears unsustainable in the near-term.

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NeoGenomics Slumps in Q2 but Readies for Second-Half Rebound - The Motley Fool