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

My name is Casey Woodring. I'm a member of the life sciences tools and diagnostics research team at JPMorgan. Today, It's my pleasure to introduce the management team from NeoGenomics. [Operator Instructions] And with that, let me turn it over to Doug. Doug?

Okay. Thank you, Casey, and thanks for inviting us to the conference this year. We're really pleased to be able to share the NeoGenomics story. And we think it's a story that's getting better and better, and we have enormous potential for the future. Now for those of you looking at the presentation, I think we can bring up the slide deck. Let's turn to Slide 3, and we'll give you a quick sense for who we are. We're a comprehensive oncology diagnostics company, and we really exist because cancer patients need help with precision therapies. And we're in the business of precision medicine, and that's what we do. Our emphasis and our employees are driven by this compelling idea that they're saving lives, and they are saving lives. And that idea is central to our culture. Our culture is really important to the way we do business, and we spent a lot of time on our values and our purpose and our vision for the company. And our culture really is a strength of ours, and it helps us to attract like-minded employees and partners. We are bashful about our vision either, and that's to be the world's leading cancer testing and information company, and we're working very hard on it. So if you turn to Slide 4. I'd like to give you a little snapshot of where we are today. There's some key takeaway points here. We're a leading oncology diagnostics company with a unique competitive position. We have a history of taking market share. We serve the community oncology markets where 80% to 85% of cancer care takes place. And we have 3 different business units, which are synergistic with one another. We have really excellent customer service and I think good brand recognition, and we operate in a growing market. So that's a great combination of attributes. And you'll see from the financial metrics on the right-hand side of the page for 2019, our last full year of operations, some of the key metrics. And in our most recent quarter, where our revenue is annualized to be about $500 million. Now 85% of that is clinical services. The pharma and informatics part of our company is about 15% in the last quarter, but it's growing the fastest. If you move to Slide 5, I mentioned that we have 3 different business units, and all of them are providing innovative diagnostic and information solutions to our customers. And we're the leader in both the clinical and Pharma Services divisions with comprehensive test menus. Now on the Clinical Division, we serve hospitals and pathologists and oncologists as an oncology reference lab. We have excellent quality and service, and our customer satisfaction levels are very high. I'll show you that in just a minute. And this division is growing in the low to mid-teens rate annually. The Pharma Services Division serves the biopharma industry to support drug development globally and also research in clinical trials. And this division is growing nearly twice as fast as the Clinical Services Division. I think that we have a good reputation in both of these businesses. And we have a terrific sales team. They're very talented and tenured, and we have a lot of strong, competitive advantages in each of these different divisions. Now Informatics is a relatively new business for us. We started it actually in 2020, and it uses data generated from about 1 million annual clinical division tests that we do and offers products largely for pharma clients to do things like match patients with therapies or match patients with clinical trials. And these 3 businesses are very synergistic with one another, and they're actually getting more synergistic. If you turn to now Slide 6, please. I'll show you, we currently have 13 lab locations around the world, having just got the keys, frankly, to our new China lab a couple of weeks ago. Our headquarters are in Southwest Florida. We have 3 very large labs in Southern California, and others are spread around the globe. Now if you turn please to Slide 7. We'll talk a little bit about the market because we're operating in a growing market. We believe our markets for oncology testing are growing at a rate of about 6% to 8% annually, but there's a lot of potential for that rate to actually increase in the future. And there are 3 really powerful reasons to expect the market growth to continue and perhaps even accelerate. The first factor is demographics. We all know cancer affects people at later stages of life. And certainly, the U.S. population is aging. Secondly, there's a revolution occurring really in cancer treatment precision medicine, as I said, and new drugs that are being developed to target mutations or immune system conditions very specific to a patient. And these are changing cancer care. So testing in the era of precision medicine is both medically necessary and it's economically necessary also. And then new technologies enabled primarily by next-generation sequencing like liquid biopsies are just beginning to be accepted with the potential for things like minimal residual disease testing to monitor patients who are living with cancer. And these are very important dynamics that are supporting strong market growth. And if -- on the next page on Slide 8, let's dive into a few of these. So one of the most well understood of the market dynamics of fueling market growth is demographics. And it's really 2 things. One is our population is aging, as I just said, and the incidence of cancer is higher among older people. But the other thing is that cancer treatments are improving and allowing cancer patients to survive longer. And monitoring survivors for residual disease and recurrence is going to be more and more important as we go forward, particularly as the sensitivity of testing continues to improve. So these 2 dynamics around demographics are going to drive more testing in the future. In addition, if you move to Slide 9, there's another important dynamic, and this is precision medicine. This is driving a lot of market growth because cancer treatments are improving, and new therapies are often informed by and targeted based on biomarker testing. So this graphic here shows the growth in approved precision therapies, and precision therapies require precision testing, very simply. Testing is significantly less expensive than the therapies, but it's required to understand if the therapy is going to work or essentially be wasted. So precision medicine is fueling market growth as well. And on Slide 10, you can see that this precision medicine phenomena itself is expected to grow pretty substantially. This graphic shows late-phase oncology targeted therapies in drug development, and that number has increased about 100% over the past decade. And this is driving growth both in our Pharma Services business and will drive future growth in our clinical markets. So the market is growing, but NeoGenomics is actually growing quite a bit faster, almost twice as fast as the overall market. And we can see that on Slide 11. Historically, we have grown twice as fast and there are a number of reasons for that, and some of those reasons are shown here on this graphic. We have a number of competitive strengths that differentiate our company in the eyes of our customer, and they range from -- we have a very comprehensive test offering. We have consistently excellent service, a very tenured and capable sales team. We have hundreds of managed care contracts. Our medical and scientific team of over 120 MDs and PhDs, I think, are terrific. We have an outstanding market presence and a unique combination of capabilities all under one roof at NeoGenomics. And while these strengths are driving organic growth, we've also been -- managed to augment organic growth with some well-executed acquisitions. And we can see that on Slide 12. This is actually one of my favorite charts. They say it's taped to my refrigerator door. But this chart shows revenue growth over 10 years in our Clinical Services Division, and the result is a compounded annual growth rate of about 31%. And it was an interesting 10 years. The first half of that decade saw extreme price pressure, which weakened, frankly, a lot of players in the marketplace in our industry so much so that in the second half of this decade, we were able to acquire our 2 largest competitors. Clarient was a company we acquired in 2015. Interestingly, it was about 4x larger than NeoGenomics back in 2009. And that acquisition in 2015 doubled the size of NeoGenomics. Genoptix, which we acquired in 2018, was 6x larger than NeoGenomics back in 2009. And we acquired them, and that company now is fully integrated with NeoGenomics. So I think a key point here is that our team can pivot And we can win in a variety of environments, and we've positioned the company that way. Now on Page 13, the next slide, you can see that what we do is we bring the same innovative, high-quality oncology testing as you might expect to receive a leading academic center to communities across America. Now I think I mentioned 80% to 85% of cancer care occurs in community settings, and this is where we focus. And we have an outstanding market presence in communities around the country. We are essentially the go-to reference lab for thousands of hospitals and hospital systems pathologists and oncologists. And we are offering often a unifying force encouraging collaboration between providers within a community. And we're a one-stop shop for providers in the community. And often, because we're a one-stop shop, we are their go-to reference lab. And part of the reason for that is, you can see on Slide 14, we're -- we have a company that has the -- virtually every kind of test and testing technology that an oncologist or a pathologist needs, including both hematologic and solid tumor testing. Now if you look at this chart, you can see that there are a lot of technologies here. Some of these are older essential technologies, and some of these are newer and very innovative. Now we believe our test menu is the most comprehensive menu for oncology of any competitor in our industry, and we're constantly updating it and adding new tests. And we're doing that as technology changes and as medical practice evolves. Now our marketing approach as a result of this comprehensive oncology test menu is to be consultative with our clients. We want providers to choose the right test for the right patient at the right time, and they can count on us to have that test. Now on Slide 15, we'll talk a little bit about the fastest growing of the tests on that chart, which is really next-generation sequencing. As many of you know, NGS is a technology that allows us to interrogate a number of genes all simultaneously. And there are a lot of different applications for next-generation sequencing. There are small panels and large panels and targeted panels, DNA panels and RNA panels and some with both DNA and RNA. We can use next-generation sequencing for tissue samples or for circulating tumor samples, also referred to as liquid biopsy, and more. And consistent with NeoGenomics' comprehensive approach to our test menu, we also offer a wide variety of and range of next-generation sequencing tests. And this is one of the things that differentiates NeoGenomics. And we believe that we have a very high quality capability to meet the needs of merely any client, and we continue to invest heavily in next-generation sequencing, and we are determined to be a market leader for next-generation sequencing. Now why don't we move to Page 16. And you can see here that while our comprehensive menu is valued by clients, so is quality and service and a number of other things. And quality and service, frankly, is a huge focus area for us, and we measure customer satisfaction rigorously. This -- here on this page, you can see the last Clinical Division customer satisfaction survey results, which are really just hot off the press. This is the last quarter's results that just ended, and it includes results from over 1,000 clients that responded to the survey. Now those of you who are familiar with the Net Promoter Score measurement technique will appreciate that a score of 66 is regarded as world class. And if you think about it, 73% of the respondents to our survey rated NeoGenomics a 9 or 10. And I think maybe I'm a hard marker, but I typically really am discriminating about what customers or what suppliers I rate as a 9 or 10. So our customers are very satisfied with our service, and our customer retention rates are very strong. On Slide 17, I'll explain how some of these attributes come together to give NeoGenomics a unique position in the industry. On the left-hand side of this diagram, we've listed some large competitors who have a diversified focus and serve many, many health care providers. And these are all very good companies. And similarly, on the right-hand side of the page, we've listed very good competitors who have specialized testing, typically with maybe limited test menus and maybe a limited focus. Now NeoGenomics competes with all of these different players. And we've reviewed already in this presentation some of our competitive strengths, which you can see listed in the center of this slide. So all of these competitive strengths in combination are actually quite formidable, and they've allowed us to sustain high growth rates historically. And we think these attributes are increasingly important in the competitive landscape, and they also enable us to do quite a bit of innovation, which you can see on the next slide, Slide 18. The strength of our core clinical oncology business, which is the bulk of NeoGenomics today and which itself is growing at a rate greater than 10% is self-funding, it generates cash, and it's allowed us to invest in and create new growth engines for the company. Now we estimate that nearly 1/3 of our estimated 2021 revenue will be from areas that were either insignificant or did not even exist 5 years ago. Next-generation sequencing is now a much larger part of our Clinical Division. And we've created 2 other fast-growing businesses, the Pharma Services business and the Informatics business. And on Slide 19, you can see that our Pharma Services business is growing about twice as fast as our clinical business. Now this chart shows the last 5 quarters of growth metrics for our Pharma Services business. And the light blue bars show the amount of new contracts for future work that were signed during that quarter. And that blue bar far exceeds the quarterly revenue that you see in the slightly darker blue bar to the left of that. And that means that we're expecting more revenue in the future. So for example, in the last 2 quarters, we signed an average of about $37 million of new contracts with pharma companies. And our average revenue for those 2 quarters was about $15 million. So we're putting more contracts in backlog, and you can see that in the tall blue bars, which is the total backlog of signed contracts. And at the end of quarter 3, that number was $185 million. So there's a lot of growth embedded yet to come in our Pharma Services business. And if you move to Slide 20, you can see why we're growing that business so nicely. The business is actually relatively uniquely positioned. This chart shows some of the reasons why we're winning business and why we're growing. The combination of attributes that you see across this page are quite unique in our industry. Our focus is in oncology. We have a comprehensive test menu and service strengths. We're global. We have labs across the world. We're very strong in companion diagnostic capabilities, and those things and more are driving a lot of growth for us. Now increasingly, Pharma Services as a division for us is synergistic with the rest of NeoGenomics, and particularly with our clinical services business due to things like companion diagnostics and sponsored testing programs and also to our Informatics business. And because companion diagnostics and the ability for us to leverage our vast oncology database is so important, we created an Informatics business just last year. And if you move to Slide 21, you can see that Informatics is our newest business. We're basically leveraging our vast oncology database to help meet the needs of pharma companies and providers and payers, and in the future, even patients. Now because we have one of the largest cancer databases, I mean, this is driven by hundreds of thousands of patients that we've tested over the years, and we're currently performing over 1 million clinical tests annually. And the data that we have are very unique and very valuable. It's allowing us to solve real-world problems for other players in the oncology ecosystem. The pharma industry, in particular, is an important focus for us today for our Informatics business, and we've signed a number of contracts for our informatics services. And move to page -- to the next slide, Slide 22. You can see that we have a number of different products, Informatics product offerings that we're commercializing. When a patient presents with a specific biomarker or a genetic anomaly and matching patients to either clinical trials or matching patients to therapies that are based on precision therapies and precision medicine. So we're quickly scaling up our Informatics business. Currently, we have about 35 people working in this division, developing products, building capabilities and interacting with customers to design offerings from them and for them. So we're developing a whole new revenue stream for NeoGenomics with our informatics business, and I think we're gaining a lot of traction. We're very excited about it and very pleased. If you move to the next slide, Slide 23, we want to make an important point here that strategically, these 3 businesses, Informatics, Pharma Services and our Clinical Services Division, are all -- they're all focused in oncology and they're increasingly synergistic with one another. There are new products and services that are really enabled by having these 3 businesses all under one roof, and they include new offerings like clinical decision support services for our Clinical Division, sponsored testing programs and companion diagnostic services for our pharma clients and a multitude of products to help our pharma clients with their research and clinical trials initiatives. So the businesses clearly benefit from one another. And most importantly, all of these activities benefit cancer patients, and we feel really great about that. So on Slide 24, I would just summarize here by saying NeoGenomics has really become a clear leader in oncology diagnostics. We're a very unique company with a unique and very extensive capabilities. We're experts in oncology. The company has really founded in science. We have a strong set of values, a very strong culture. And as one of my colleagues just recently coined the phrase, when you invest in NeoGenomics, you invest in all of oncology. And I think that's a great summary of who we are because we're a very comprehensive player. And if you turn to the final slide in this deck, you'll see that we really are one company, one lab company that has comprehensive capabilities for a lot of different players in the oncology ecosystem. And we think we're positioned for growth, particularly in this real revolutionary time that we find ourselves in, in cancer care. And we believe that we're transforming care, bringing these vital answers to the community setting and making a difference in the lives of countless numbers of cancer patients. And that's our purpose. So with that, I will open it up to questions, Casey, and we can bring in the rest of the team.

Great. Thank you for that. That was a great overview. I just got a question to start from an investor here now. It says your balance sheet now is something like more than $700 million in cash after the latest raise. Are you looking at larger M&A targets than you maybe had historically? And is germline BRCA testing an area of interest to round out your oncology menu from a capital deployment standpoint?

Well, let me introduce the players that are with me. Kathryn McKenzie is our Chief Financial Officer. We have Dr. Weiss, who is our Chief Medical Officer; Charlie Eidson, who's our Manager of Investor Relations; and Doug Brown, who overseas Investor Relations but also is our Chief Strategy Officer. And Doug, would you like to take that question?

Sure. Just in the back half of it, as far as germline testing, I wouldn't say that's a priority right now. We understand the complementary of what we're offering with somatic and germline, but I would say the areas of focus in 2021 post this last capital raise would be either an NGS, liquid biopsy, Pharma Services as well as Informatics and then hopefully touching all four before the year is over. So that's where the focus is right now.

Okay. And then maybe we can talk first about volumes. They recovered pretty nicely in 3Q from April lows, down 30%. Have you seen any impact from a resurgence of cases in terms of volume trends heading into 2021? And maybe on the Pharma Services side, what percentage of your customer activity is still delayed and/or pushed out?

Sure. Kathryn, would you like to take that one?

Yes. We'll start on that one. And so clearly, the pandemic has caused some volume issues with not only us but others who are in the health care industry, specifically related to [indiscernible] very impactful since they are immunocompromised. And what we are concerned about is that some of the volume declines we've seen in that list is going to result in less cancer being diagnosed. So we did see the impact predominantly in April. We saw the big decline of 25% to 30%. And we talked about in our third quarter call that we saw a lot of that volume coming back, and we described it then as a V-shaped recovery as we were seeing 10% increase from September, from July and then even higher in October. But clearly, in Q4, the resurgence of COVID has continued to impact the recovery of that volume, albeit not quite to where we saw back in April and in Q2. What we have noticed is that a lot of providers in the second resurgence have really remained open. They have procedures in place to continue to see patients. And so we haven't seen the significant decline that we saw in Q2. But it would be safe to assume that we not only expect it and saw that impact in Q4, we can see that continuing into Q1 until COVID does come back down as in those cases come back down. Our pharma division has really 2 key revenue streams. Not only we have clinical trials, but we also have research. The research side is not as impacted related to COVID, but the clinical trials, we have seen an impact on volumes as it's difficult to get the patients to the clinical trial sites. As that comes back, we haven't seen significant cancellations, but we have seen some delays. As we were saying, we don't have a specific percentage that's been delayed, but we haven't seen significant cancellations there.

Got you. Okay. And then maybe just on your COVID testing capabilities specifically. Maybe first, can we talk about how you responded to the pandemic and the decisions that you've made regarding personnel and choosing to serve as an overflow lab instead of maybe shifting more resources towards the COVID testing build out, capacity build out of some of your peers? And maybe can you talk secondly towards the utilization of your lab currently and where you think that's headed in 2021 for COVID testing specifically, sorry?

Yes. Let me take the COVID testing platform and then maybe Dr. Weiss can weigh in a little bit about utilization. So early on in the pandemic, we decided altruistically to try to help America and set up our own COVID PCR testing capability, which we did early on. And our strategy was to remain very focused on our core oncology business but to bring up this testing really as a service and as a network lab. So our strategy was to serve other either hospital laboratories or other commercial laboratories when they had too much testing, and we're at over 100% of capacity utilization. And that gave us some testing volume and revenue in quarter 3. The revenue and COVID testing in quarter 3 was higher in the first part of the quarter than it was at the end of the quarter. But since the pandemic has reared its head again, wouldn't be -- it's likely to -- you can assume that we will have done some other COVID testing even in quarter 4 as there's been some resurgence. I think we have a good testing capability for COVID testing, but it's not our core business, and we're treating it as such. In the rest of the company, I think we've got pretty good capacity that is coming online. We have very -- a lot of capacity unused in our pharma business, and we're bringing up a Fort Myers lab here in about 5 months. It's coming up very quickly. And that's going to give us quite a bit of capacity. But Dr. Weiss, you may want to comment on capacity for things like next-generation sequencing.

We have good capacity for the current time. We have good capacity to the future. With the Fort Myers laboratory coming online, we should double our NGS capacity. And we are developing new tests all the time. In 2020, we developed our liquid biopsy potential. And we just opened up a new Fusion assay, and we hope to have several new assays within the coming year.

Got it. Next question, can you talk a little bit about your expectations for Inivata in 2021? I think a lot of investors are thinking about how the capital raised last week now impacts your ability to fully acquire the company. And maybe just talk a little bit about what's sort of attractive around the MRD-specific testing capabilities that the company has?

Yes. Great, Casey. Let me set the stage, and then I'll turn it over to Doug Brown to get into more detail. So in 2020, we made a minority investment in a company called Inivata. It's a terrific company that's developed really great liquid biopsy capability, both for the lung test, which we are currently commercializing, and for a minimal residual disease test, which is in development. We really like Inivata as a partner of ours. And Doug, you can maybe expand on that to answer Casey's question.

Sure. Of course, we've got many questions on this last week with the funding. But Inivata, there are really 3 value drivers for why we structured that deal about, I guess, 9 months ago. First and foremost was the envision first long test, which we have in the market. And it's very complementary to our tissue first offering. So we were able to offer this test as a complement in sort of a consultative fashion where historically, we've offered tissue and now we have a liquid option because some of our customers have been asking for that. So that's one. The second driver and perhaps the biggest driver is the RaDaR assay. So the MRD market, we all know, is quite massive with the number of patients that are living with cancer, potentially 15 million patients in the country that could in theory test 4x a year. So that market is enormous. And all the scientific data that we have so far on the RaDaR assay is quite compelling. The sensitivity is very, very good, perhaps one of the leaders. And so we're excited about that. And then finally, the third pillar of strength of the company is a very strong R&D department at Cambridge. Unfortunately, through COVID, we haven't had a chance to spend much time with their R&D team. But we're excited about getting to know them better over the course of the year. I don't know if Dr. Weiss, you'd like to add anything about the RaDaR assay. You're on mute, Dr. Weiss.

We've seen some validation data, and the sensitivity of this assay is really outstanding. We're very excited about it.

Okay. Maybe one on the Informatics side. Doug, you spoke a little bit about it in your presentation. Is there any sort of details you can share regarding future projects, initiatives or partnerships that maybe you're excited about on the side in 2021? And what revenue opportunity could Informatics present in, say, 5 years' time?

Well, we're very excited about Informatics. And we're learning about the capabilities as we speak because we're meeting with and talking with a lot of pharma companies, and they're coming to us and say, "Can you help us? We've got a precision therapeutic that we're trying to put through the development cycle, and we need patients for our clinical trials. We can't find them. They have a rare mutation." And even in certain cases where pharma companies have developed a therapy and had it approved, it's very difficult for them sometimes to find patients who are eligible for that therapy. And so we're experimenting with a number of different product offerings with pharma We're seeing very good demand for our services. Our dream -- this is not something that we talk about a lot, but our dream is that we would be able to generate a $100 million in annual revenue in several years out. But that's a big goal of ours. And we're trying to develop products and capabilities that allow us to develop those kinds of capabilities and products for the future so that we can achieve that kind of vision. But it's very exciting for us. And what's really exciting is not only will we be able to have a separate revenue stream, but it also, at the same time, strengthens our existing capabilities in our Clinical Services Division and our Pharma Services Division. So we're investing in it, and we expect to continue to generate revenue. And the revenue from Informatics is included in our Pharma Services segment for external reporting purposes, so you'll see it categorized there.

Okay. Then maybe one more on NGS. Is liquid biopsy the key growth driver here to watch moving forward for NeoGenomics? And then how comprehensive -- how does your comprehensive portfolio targeted tests may be differentiated from the rest of the market's sort of large panel approach in terms of NGS?

Yes. Let me say just a couple of things, and then I'll turn it over to Dr. Weiss. So we have -- as I mentioned and I showed that slide about our comprehensive test capabilities, we have a lot of tissue testing that we do, and we think tissue is the gold standard in diagnostics for oncology today. But certainly, liquid biopsy is becoming more and more important. And we will bring whatever test the market desires to market, so we are continuing to evolve our test menu. I think we've got a very comprehensive set of next-generation sequencing. It's growing very, very nicely, and we expect liquid biopsy as one part of that to grow even more quickly. But Dr. Weiss, you might want to add to that.

In terms of panel size, we offer smaller panels. We offer intermediate panels, and we offer the large big-box panels that many of our competitors have. In medical schools, they tend to like the large panels. But out in the community and payers as well, they prefer the small panels. And we have very flexible -- a wide variety of small panels, and that's both for DNA and for RNA. So we service everybody, and we'll give what everybody prefers, even if it's single-gene testing. We have single-gene testing as well. So we cater to all clients. We're not going after one versus another segment.

Okay. And then maybe last one. Just in terms of the Pharma Services backlog, I know that you guys noted that you had about $185 million in backlog last quarter. How can we -- how fast can we expect this burn to continue to go forward in as far as book-to-bill progress is concerned through 2021?

Sure. Kathryn, would you like to handle that?

Yes. What's been really interesting about watching our pharma backlog grows really the change in the types of business that we are getting in the variety. So what's nice about watching that form of backlog growth, especially over the last year, even among -- amidst COVID, we've seen great demand in several areas. We're also seeing a diversity and especially in clinical trials and other areas, where some of those are -- where they might have been shorter-term contracts before are getting longer and longer. So we have some Phase III clinical trials, and we're continuing to see great diversity in that backlog, which is important when we look at the conversion. Not only do we have a variety of companies in the backlog but different types of projects. So what that does is that it makes it really nice as far as diversity. It makes it really hard to forecast necessarily the time frame that will be recognized over. Well, what we have seen is we haven't seen a significant amount of cancellations like I talked about before. We feel very good about the quality that's in our backlog as well as the types of contracts that are in there. Some of the Q1, the Q4 and the Q1 volume and revenue is being impacted like we talked about before because of COVID. But overall, we feel very good about the ability to convert majority of that backlog into revenue over time. Doug, anything else you'd add there?

No. I think that's exactly right.

Great. Well, it looks like we're out of time. So I guess we'll leave it at that. Thank you all for presenting today. We appreciate you taking the time to be with us.

Well, thank you, Casey. We appreciate you including us in your conference.