NeoGenomics, Inc. (NEO) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day 1 of the Morgan Stanley Healthcare Conference. We are very excited to have NeoGenomics here with us. We have CEO, Doug VanOort; CFO, Kathryn McKenzie; and the Chief Strategy Officer, Doug Brown; and the rest of the management team as well. And before we get started, I just need to read a disclaimer here for everyone. This webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. It is not for members of the press, and if you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. So with that, Doug, welcome. Thank you for joining us. Very exciting to have you with us. So maybe just to set the stage, cancer testing is a very exciting field these days. Can you give us a quick overview of the story and where exactly Neo fits within the cancer testing paradigm?

Yes. Good morning, Tejas. Thank you very much for having us here. We appreciate it. Yes. So cancer testing market for what we do, we think is in the $6 billion to $8 billion range, and it's growing at the rate of about 6% to 8%, mainly because of demographics, but there's a lot happening beneath that, and it's a very interesting market because it's really a revolutionary time in oncology care. It's because of all these advances in medicine and technology and science. We're starting to understand a lot more about cancer. So where we fit in, in the industry, is that there are very large companies that do oncology testing along with us. Those large companies are companies like Quest Diagnostics and LabCorp and Mayo and others. And those companies have very, very broad menus to do, a lot of other things in addition to oncology. And then there are some specialty players, typically operate with only 1 technology or in 1 disease state, and then we have NeoGenomics that's right in the middle. So what we do is, we are a one-stop shop for clients, physicians, pathologists, hospitals and pharmaceutical companies. We use every kind of testing modality that you can use for cancer, including some of the fast-growing new ones, like next-generation sequencing, but we do everything. So we're a one-stop shop. And today, we're a market leader. We have a very strong, deep presence in the oncology space.

Got it. And so Doug, that actually is a nice lead into my next question. Obviously, the clinical services offering has evolved a fair bit for you guys over the last few years. I mean it started with the Clarient acquisition from GE in 2015 and then Genoptix kind of pushed you into the community channel. What is it about the offering that really resonates with your customer base? Because like you said, on the one hand, you have highly specialized companies doing comprehensive genomic profiling and liquid biopsy and so on. And then you have the LabCorps and Quests of the world who are doing sort of a pan disease testing approach, so what about cancer and specifically your test menu really appeals in that community setting?

Well, as -- and let me just pick up on that point because the community setting is where roughly 80-plus percent of cancer care occurs in this country, and so we have very deep relationships with oncologists and pathologists. What they like about NeoGenomics is they don't have to split a sample because they know if they send a sample to NeoGenomics, we can do immunohistochemistry, FISH testing, flow cytometry, molecular testing, next-generation sequence, et cetera. So we can do it all. And in fact, many of our tests use multi-modalities in the diagnosis. So that's very important. The other thing is that I think they trust us. So we have very high levels of customer satisfaction, very high levels of customer retention. And when we -- we're sort of technology-agnostic. So when a new test we feel is high enough in terms of quality, we will offer it to our customers. And they trust us and they rely on us for that. And so I think that, that's helped us grow. In fact, we've grown because of those relationships and those competitive advantages about twice as fast as the market as a whole.

Got it. And do you ever run into a situation where your -- some of your customers, not all of them view you as competitors? And I know you, there's a portion of your customer base that essentially does -- buys technical analysis from you. And there's another fraction that is going the full distance and getting the interpretation and the consulting as well. How does that mix -- I mean, what is that mix, first of all? And how do you navigate that potential challenge?

Well, we treat all of our customers really as partners. And many of our hospital customers do some of the testing that we do, in fact, most of them do. So what -- we're a reference lab. We will do testing that they have chosen not to internalize, for the most part. Now we also extend that partnership in a unique way by -- for some of the test modalities, like FISH, immunohistochemistry and flow cytometry. They can send us a sample, we can do the technical laboratory work and send them data online, so that if you're a pathologist client, you can do the interpretation of those test results of that data. And so we partner with our customers in that way as well. But many of our hospital customers will have their own immunohistochemistry lab, some of them do flow cytometry themselves, but they use us for testing that they don't do. That's been really a great way to go-to-market because we do -- we don't compete with our customers, we augment the capabilities that they already have.

Got it. Makes sense. And then you mentioned sort of molecular and NGS testing. It's about 15% of your revenue today and only about 5% of volume. I mean over what time frame do you envision next-generation sequencing becoming more meaningful? Because in a sense, this is a question that's important not just for you guys from a financial model standpoint but from the industry and then sort of health care's perspective in general, whether this kind of broader testing is resonating in the community setting. And I can't think of a better, sort of, company to ask that question to the new guys?

Well, it's important for a lot of reasons. I mean one reason is, just playing patient care because as we understand more about mutations at a deeper level, there are a lot more therapies that are targeted for those particular mutations; it's precision medicine. And so there are a lot of advantages to next-generation sequencing. We are investing heavily in next-generation sequencing, and it is an important part of our business. It's the fastest-growing part of our business, and we think it will be for quite some time. Now when you think about NGS, there are a lot of different aspects to it. So we have a very, very high quality, solid tumor next-generation sequencing assay that we break down -- we have over 300 genes in that solid tumor assay, and we do things like micro satellite instability; tumor mutation burden, TMB; but we also break this down to disease state. So if a physician wants to order a colon panel or a brain cancer panel, we will only offer the mutations of significance to that particular disease type and we bundle those, as I say, with other test modalities. So we also have a very, very important hematologic assay with about 300 genes. We're investing a lot. So we just invested in a liquid biopsy offering. We've rolled out 3 liquid biopsy tests, which are a next-generation sequencing assay. And we just bought a company back in January of this year, seems like ages ago now, that does whole exome sequencing for pharma industry. So we're investing a lot in NGS. I think it will continue to grow for a long time.

And then, Doug, in terms of the liquid biopsy sort of portfolio that you spoke about, can you share some color on early traction? I mean, obviously, you launched InVisionFirst; now you have NeoLAB, which is your pan-cancer liquid biopsy panel; and then you have the companion diagnostic for Piqray as well. So is it still too early days, I mean, to talk about sort of traction yet? Or have you actually seen more traction than you envisioned because of the pandemic as people move towards liquid biopsy because of an easier sample collection process?

Yes. We're very excited. We just launched this recently in the last couple of months. So it's a little too early to tell in some respects but you have a couple of different dynamics going on. One is that we believe the uptake for liquid biopsy is going to be very strong. And we've got a lot of existing clients that have never used liquid biopsies before and also some dedicated clients that we think use us for everything else. So we think we've got a very nice market there. On the other hand, for the last 3 months, most of our salespeople have been cooped up at home. You have a couple of different dynamics going on there. I would say that we feel very good about all 3 of those assays, particularly the InVisionFirst and the pan-cancer test, which we think has a broad market appeal. And so we're very excited about this.

And walk me through your choice of Inivata to partner on InVision lung? And then obviously, they have MRD assay, which has gotten a lot of people excited, given the interest in recurrence monitoring. It sounds like they take a very similar approach to, say, a Natera with Signatera, which is a tumor informed, kind of, like, way to set up your panel. What drew you to them as you surveyed the landscape as an appropriate partner to take the liquid biopsy, sort of, offering further?

We've been looking at the liquid biopsy space for quite some time and evaluating a lot of different technologies. And we like the Inivata test and the technology very much for a lot of reasons: one, is very, very high quality. And we put that test up against any -- the InVisionFirst test up against any liquid biopsy test that's available. The other thing is they have some technical ability, because of the way the assay is designed, the turnaround time theoretically could be as much as a day quicker than other tests that are on the market. Turnaround time still is a very important metric and measure for clients. And so -- and we also get to know the team at Inivata. We liked very much not only the assay but as you point out, they have a very interesting minimal residual disease assay that they are validating, and we're keeping a close eye on that. As you know, part of our deal is, we have a minority interest in Inivata with the option to buy the company. And so we have a nice collaboration with them. I think it's working very well, and we're just as excited about the assay now as we were before we launched.

Got it. So I just had a question come in via e-mail. In terms of the Medicare PFS proposed rule, I mean, they had spoken about sort of a 9% cut. Do you have any updated views here? I remember back when we spoke about this a few months ago, I think you'd mentioned that there were some offsets in your portfolio in terms of increases in FISH versus decreases in IHC and flow. Has there been any evolution in your thinking there in terms of how it impacts your non-NGS sort of portfolio?

Yes. Actually, Kathryn probably has more details or Doug, but let me just say, at a broad level, our payer mix is a bit different than I think a lot of the companies because in our clinical division, roughly 60% of our payers are hospitals that we have under contract. And so they are unaffected by the Physician Fee Schedule or the clinical lab fee schedule changes. So of the remainder, about half is Medicare, half is commercial insurance. Now some of the commercial insurance does follow the Medicare rates. But -- so there's less impact than one might think in terms of impact on the Physician Fee Schedule. The other thing I would say is, yes, it's a mixed bag this year. And often, Medicare does make changes before they finalize the fee schedule in, I think, usually October. So there are some pluses and minuses. We don't think it will have a significant impact. But Kathryn, do you have anything to add about specifics on the Physician Fee Schedule?

So I think you are right. The biggest impact is really -- and the biggest thing to consider is that payer mix and how that impacts how the Physician Fee Schedule really affects our AUP. Now that being said, we do feel some of that pricing pressure when Medicare does lower rates, but it's much less than a lot of other payers. So we also have a lot of other reimbursement initiatives that we're continually working when it comes to commercial, when it comes to just getting the claims clean out the door and getting the right information. So we're continually working to offset any of that pricing pressure that comes through.

Got it. Makes sense. And then, Doug, I mean, just the obligatory COVID update post the second quarter. I mean you spoke about sort of volumes being down 30% in April, but returned to growth in July. And what have you seen since? And are you seeing any evidence of pent-up demand there? Because obviously, cancer diagnosis went down dramatically at the height of the pandemic. And are you sort of benefiting from that at all or not really?

Well, I would say there are a couple of things. One is, we also have a pharmaceutical services business as well as the clinical business. And on the Pharma Services side, we saw a big reduction in quarter 2, but we didn't see any cancellations. So in terms of pent-up demand, a lot of those clinical trials are now beginning to start -- to start up again. And so I would expect that we're going to see as the year progress, the rest of the year progress, some pent-up demand there. The clinical division, it's interesting, it's tracking about as we expected, in terms of our oncology business. We're continuing to see improvement month-over-month, almost week-over-week, but it's improving, but it's not at the levels that we would have expected [indiscernible] COVID, yes. And I think that improvement will continue, we expect, through the rest of the year. I'll tell you what I'm worried about, frankly, is I'm worried about a lot of patients that are going to their physician, and I'm worried that in a year from now, we're going to see and a lot of providers are going to see patients that present with advanced cancer for the [indiscernible]. And we're quite worried about that. I think a lot of folks are. But to get back to your question, yes, it's improving.