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

Good morning, everyone. Welcome to Bank of America's 2022 Healthcare Conference coming to you live from Las Vegas. I'm Derik De Bruin, the Senior Life Sciences and Diagnostic tools analyst from Bank of America. And it is our pleasure to kick off this morning with NeoGenomics. With me today are Charlie Eidson, IR and Bill Bonello, Chief Financial Officer. Gentlemen, thank you for being here.

Thanks for having us.

So get running into it, NEO's had a little bit of rough start in 2022. Your guidance in the summer mutes the management team have transitioned, you've put your hiring plans to hold cost structures and issues, a lot to unpack here. So I think the first question is like why do you think Neo's core business hasn't bounced back as the COVID headwinds have eased like some of the other companies?

Yes, I think you have to look at it on a couple of different fronts. Let's start with the revenue piece. I think over the past couple of years, we've seen perhaps a more pronounced transition to adoption of larger complete genomic profile NGS panels, then maybe the pace we had anticipated. We had, had really strong NGS growth for a long period of time through our targeted NeoTYPE panels -- and -- but I think coming out of COVID, we didn't see the rebound we expected, and I think some of that is just because the market has shifted a little bit. We're in the process of developing our own NGS only rather than multimodality panels that are also complete genomic profiling and sort of more on par with what are in some of the competitive panels as well as improving our turnaround time. But I think that's a big chunk of it. If we look at the growth rate in our legacy modalities. It's maybe been a little bit more slow coming out of COVID than we would have expected, but it's not radically different, but the big driver of having lower clinical growth is on the NGS front. And then on our Pharma side, we continue to book new business at kind of record levels, so we're winning projects. What hasn't been happening is the revenue conversion at the pace that it historically has converted. I think -- some of that probably is still a little bit of COVID legacy of trials, maybe serving up a little bit more slowly rebounding a little bit less quickly. Some of it is a mix shift to more trial-oriented work, which is bigger but takes longer to start up and get going. Some of it is just our need to be a little bit more proactive in taking control of projects in a way that we're bringing in samples and whatnot to be focused not just on winning new business, but on delivering on the revenue front as well. So that's the -- that's, I think, in a nutshell why we haven't recovered.

Yes. I mean is some of this potentially to your just geographic mix is a little different than some other players.

I don't think so. I really don't. I mean we're pretty national in our scope. Obviously, we have a large concentration in Texas and Florida and California. But I really don't think it's that.

Yes. And when you look at some of the newer -- I mean, yes, you're right. I mean it's gone from, I would say, in the last 3 years, anybody -- it's funny. At one point, it was really special to be doing genomic panels now with anybody with a sequencer protocol book can do it -- on the one hand, that's good. On the other hand, it's just create -- this creates new competition and on this. And so when you look at expanding your panels. I mean don't -- is it still an issue then now where you've got to price more aggressively because there's going to be some -- as I said, the genomics, the target selection therapy profiling, that type of stuff or therapy selection, that type of stuff has -- it has become a little bit more commoditized.

It's possible that down the road, that could be an issue. Right now, price is actually a driver for us. And I don't mean that we're out raising prices with our managed care payers. I wish I could say that. But we're doing a much better job of actually getting paid for the NGS panel work that we're doing. And so as a result, our average revenue per test and the NGS panel is going up meaningfully. So that's actually been positive. At some point, could that play into it? It could, but I don't see prices as a major part of the competition.

And just remind us what is the split between your legacy business and your esoteric?

Yes. So we don't sort of -- we -- you could argue everything we do is esoteric. I don't know if that's -- So we'd say that NGS is about 20% or so of our revenue.

Got it. So if you think about where the top line could go, I mean, you were targeting something in the mid-teens like there -- and is -- why you sort of work through this process, is if you look the last couple of years, it's sort of been in the high single-digit-ish range. Is that sort of like a good baseline to sort of think about things at least until you get a little bit more clarity on.

Yes. I mean we don't have guidance out there, -- right now, -- and so I'm reluctant to sort of speak to that. But I think -- we're hopeful that eventually, we get back to that low double digits range, but that will definitely take time.

And on the Pharma side, is some of this sample delays and complexity of trial increasing some of that type of stuff is moving through it as well?

Yes. I think that is -- that is some of it. Again, as our mix gets into larger and more complicated trials. If you think of how it works, you win the business, it's quite a bit of time before that project even starts up. So that impacts your conversion. And then, yes, these trials can go on for an awful long period of time.

And what's your major competitive differentiation on the Pharma side?

I think on the Pharma side, it's really that we do nothing but oncology. And so we're a specialized oncology laboratory to Pharma. And because of the size that we are and the breadth of our menu, we're able to work in a pretty specialized fashion with most of our clients as opposed to some of the larger CROs, where they obviously have great oncology profiles, but it may sort of be -- you can have any labor ice cream you want as long as it's vanilla, we're going to work with you more to customize an assay, et cetera. I think that's been the primary way that we've taken business.

Got it. So why is the cost structure so out of whack?

Yes. So I think there's a couple of things that have happened. Obviously, they're -- like everybody, there's the near-term impact of both the supply cost and the wage inflation that's out there. But I think in addition to that, as we went through a couple of years of COVID, I think we candidly lost our way a little bit in terms of we were out as a company that came out and prided ourselves on continuous improvement in cost per test. We had a slide in our investor deck that people loved to look at, which showed cost for test going down every single quarter. And I think as we struggled through that period of time dealing with sort of variable volume, et cetera. We lost touch with some of -- 2 things. One, we lost touch with some of the key processes that were driving that continuous improvement. So I think that's a part of it. And that's why I think there is low-hanging fruit. There's some basic blocking and tackling that we can put into place really quickly and start to drive margin improvement. That we can put things in place really quickly. It doesn't mean we're going to show benefit necessarily, really quickly. The second piece is during that period of time. Candidly, we weren't making some of the moves that we should have been making to continue to introduce efficiency and productivity into our laboratory, automation, utilization of AI, some process improvement, et cetera. And we allowed a lot of increased complexity to come into the laboratory in the way that we do things. So it's -- I wish I can point to some external factor that would sort of absolve us. But I don't think -- I think outside of the normal cost inflation, a lot of it is just basic execution.

Do you have to sort of revamp the portfolios or like to look to that -- are there incremental costs have to come in while you're -- do you happy before you sort of see some of the some the inefficiencies come out of the business.

Not so much. I think the cost of developing the new NGS products is actually relatively minimal. And I think when we come out the other end of those products, not only are we going to have products that are more competitive from a product feature standpoint, with better turnaround time, they're going to be lower cost per test actually when we get to the end of that, but there's not a huge incremental investment that needs to be made in that.

And so you talked about realizing the $15 million gross profit improvement. And so that's being driven just by what?

Yes. So that's a combination of revenue and cost-saving initiatives. And we said we have identified near-term activities that we should be able to exit the year with a run rate improvement of about $15 million. And so it's a combination of strategic reimbursement initiatives of continuing to get made more for the NGS panels and other panels that we're performing. There is a little bit of price increase that's built into that. And then it's a number of sort of low -- what I would call, low-hanging fruit opportunities. So areas where we look at a way that we're doing particular testing and it's not efficient and the fix is actually pretty darn simple, and we can put that into place. And that's kind of what's building up. And I think that number will grow as we work with the teams to identify additional near-term opportunities. And then distinct from that is sort of going through and lab optimization and those kinds of things.

Yes. So, a lot of companies that are sort of doing NGS testing, they're feeding their data into their clinical trial recruitment or stuff like that CARES have this foundation they all have to like that model. Is that sort of like exchange happening here? I mean are you collecting data? Do you have data since they're building data basis. Basically, you have a bioinformatics push. I mean this is the segue questions like what are you doing on the bio [indiscernible] side? And is there a data opportunity?

Right, we definitely have a data opportunity, and we built an informatics business that is actually growing pretty rapidly. Since it's really a data services business. And obviously, the foundation of that is all the data that we're getting from our clinical testing from our Pharma testing but from our clinical testing. And I think what our value proposition, part of our value proposition with Pharma there besides just doing 1 million tests a year, so we have a significant amount of data it's that we have paired data. So you might be able to look at the imaging, digital imaging and then marry that with biomarker information because for that same patient we didn't only do the IHC work and the digital imaging, but we did the NGS work, and we have the bio-marker information. So I think that puts us in a nice competitive position on that front. What we're not really doing with the bioinformatics business is internally having a bunch of data scientists that are trying to sort of create product out of -- clinical product out of the data that we have, we're more working with Pharma and other partners who are trying to use the data to do that.

Got it. So the -- you've made a big investment in Vita and sort of entering the minimal residual disease, solid tumor market -- detection market. So could you walk us through your expectations that you had sort of like the purchase of the company and sort of like where you are today versus what you thought? I mean, has it delivered the expectations or -- has it turned out to be -- but again was it a pressure in your cost structure more than you had anticipated? Because trials are expensive.

It actually isn't pressuring our cost structure more than we had anticipated. I think we get a lot of questions to that effect. Oh boy, should you have done Inivata and look, you're EBITDA negative now, and we always love the fact that you were EBITDA positive. And candidly, my response is that was, if our core businesses were performing as they should be, we wouldn't be having this conversation about Inivata. You guys would be saying, Hey, your initial thesis was absolutely right. you can go out and buy a growth business and a really good product and fund it out of the cash flow from your existing businesses, which is rather unique, and we appreciate that. So the problems in our core business. I would say Inivata really is pretty consistent with where we would expect to be right now, but the cash burn is not necessarily any greater than we would have expected it to be. We're working on MolDX reimbursement. We had way back when that we were targeting midyear on our most recent call, we said we're back and forth discussions with MolDX and less committed to that exact timing, but I think we feel positive about how our discussions with MolDX are going. And we've said for a while that we thought clinical revenue would be insubstantial until at least 2024. And then any near-term revenue opportunities would be from Pharma. And we continue to have a lot of discussions with Pharma. I mean the priority right now for Inivata is absolutely data generation. We know it's a great assay. We have to demonstrate to the world through evidence that it is as good as we know it to be and then securing some of this Pharma revenue as well.

So if I mean if you look at that competitive landscape with the tumor-informed MRD detection, you've got -- at the one end, you've got Natera with the 16 marker assay, which I don't know if you call it more economical, but let's put it in that -- "on that" and then the high end, you have person analysis as the company is trying to do 20,000 whatever, how many markers -- billions of marker -- this -- just trying to go after the entire genome, just something like that and sort of make it more complicated, you've got 48 marker assays or fall somewhere between -- I'm a little perplexed and just in terms of how all these assays are like shake out and why does Pharma need a whole range of these. And there's others coming, right? I mean everybody -- if you got a sequencer in a dream, you can go out and sort of like try to do this, right? So to me, so the question becomes it's like what is the competitive differentiation versus other ones? And why would Pharma choose to partner with you versus one of these other players?

Sure. I'm going to let Charlie take the lead in answering that question.

Yes, I can take a shot and you can let me know if I -- you need further clarity here. So with RaDaR, as you mentioned, we track 48 variants. It's not genes as a portions of genes. So it's not actually much sequencing power as you think of sort of a therapy selection covering genes. And we have ran RaDaR with 16 variants tracked in our analytical validation. And you can see sort of our analytical performance with 48 and 16. And the cost difference, we get that a lot, isn't significant between those. We don't know sort of what other competitors' costs are, but we can imagine the whole exome sequencing piece is probably similar with us. And then the bespoke assay is probably not all that different. If our cost difference between 48 and 16 isn't that different. -- where the cost difference really comes into play is with some of these other players who might be doing whole genome sequencing to have a baseline, which has a significantly different cost structure than whole exome sequencing. And if you're doing thousands versus a couple of dozen variants that you're tracking, it's a difference in cost. And so what we think the differentiator for RaDaR is for sure against the whole exome players, is sensitivity. And when I say sensitivity, it's sensitivity at a certain level of concentration of cancer DNA in your blood, and so we've shown that RaDaR can get down to 11 parts per million of DNA concentration level at 95% sensitivity and 100% specificity. And so if you look at some of the other competitors, you mentioned the leading one, Signatera, you go to their website, they're around maybe 100 parts per million. with the same sensitivity and specificity. And so what we believe that will translate to in the data is more accurate assumption of whether -- or I guess, accuracy in terms of figuring out adjuvant therapy was curative. And then in the monitoring setting, potentially catching cancer quite a bit sooner as much as a couple of months sooner. And we've seen that in the early retrospective data sets.

Right. But as I said, I think we're I get a lot of questions from investors and just like, well, I'm more sensitive, no I'm more sensitive, now we're the most sensitive. And I think there's just a lot of confusion as nobody has run head-to-head studies on this right -- it's not like there's some Pharma company bake-off and has said that not publicly -- not public should bake off, let's put it that way. I'll do that. It's not like there's some sort of like paper out there that says like we've compared all these different assays and this one is by far the most sensitive. So I think there's probably a little bit of skepticism in the market on that.

Hopefully get that just 2 follow-ups on that. One, we -- that's part of the reason we think that early wins from Pharma are going to be important, not that you're necessarily going to be able to announce a specific project or a specific Pharma company, but as we can build up our announced Pharma backlog I think it gives some endorsement to, hey, you've got to imagine that these Pharma companies were considering multiple assays and there's a reason they chose RaDaR versus another. So that's 1 thing. But to the broader point, I absolutely agree. I think there's been a strange period of time over the last several years where -- the basis of competition in oncology testing has shifted more towards product differentiation than sort of customer service and the elements that traditionally that drove market share gains. I personally think that trend is going to swing that a little bit, exactly because of what you're saying because all of these things eventually become if not commodities, they certainly become assays that lots of different laboratories can provide. And so then the basis of competition that moves away a little bit from the actual features. And we think we have a very competitive assay based on the features. But what we also have is super strong relationships with community oncologists and pathologists and hospitals and a broad payer mix and coverage and the history of strong customer service and I think ultimately is going to matter a lot to where clinicians decide to send their work.

Well, in that sense, I mean -- but also you've got Quest and LabCorp sort of expanding their same for funds. So I mean Quest was talking about beefing up sort of this product portfolio on their last conference call and sort of moving with it. I'm -- look, I've been with NeoGenomics pool for a long time and sort of like what we believe is it's just like the market is -- and I agree with your point, the market is getting it's looking more like a traditional diagnostic market now versus a gee wiz, look what we can do with a sequencer. So a couple of mundane questions. You got a lot of investors worried about recessions and slowdowns like how has the business performed over some of these down cycles, I mean it should be seats before...

It has historically, I don't -- there hasn't been sort of a huge correlation between what's been going on in the broader economic market and our volume. Obviously, the COVID situation was currently different but economic factors have -- there hasn't been much correlation.

Any questions from the audience? So a couple of ones. Just looking for a new CEO, you're -- you've had a number of management changes. There were some things in the press a few months ago about potentially people being interested in the company. So like sort of what's your thought on -- given where the company is right now, I mean it's given back all of its gains from the multiple expansion from is essentially back to where it was right before you did the Inivata deal.

Well below that. from a multiple standpoint, it's probably at the lowest it's been in 5, 6, 7 years. I'm not saying -- but yes. I mean I think we're -- look, we're heads down. We believe that the operational challenges in the business are absolutely addressable. We believe that we have a team in place that can drive that improvement. It doesn't mean that we couldn't build on that team to further drive that improvement, but we do have a team, as I said, we've identified a number of near-term initiatives we need to lay out a more comprehensive longer-term operating efficiency plan on the product side, we also believe that we are moving in the right direction. We have a new Chief Scientific Officer who is quite strong. We have -- are moving down the path already on our assay development for more competitive assays, that whole process will also help on the operating and cost side. So that's really where our focus is, we're not trying to -- we haven't announced anything about strategic -- exploring strategic alternatives or anything to that front. I mean like any company, we have a fiduciary duty to our shareholders, and we will think through this things very seriously, but our focus is running the business.

There's no questions from the -- there is, couple.

[indiscernible]

Great. Yes, thanks for that question. We have said we expect to exit 2023 EBITDA positive. And just to be clear, we're not saying that we will be EBITDA positive for all of 2023, we're saying we should exit 2023 at a positive EBITDA run rate. And we absolutely think that the company can be a sustainable cash flow generator. We've said that we think we can get our gross margins back up towards the 50% level over time and that we can get our EBITDA merchants back up to the mid- to higher teens again over time. So -- but that's a multiple year process to get to them.

[indiscernible]

I mean we haven't really put out any kind of hurdle rate or -- so I mean, I think you can use the parameters that I -- it's not an intensive -- it's not a capital-intensive business, right? So you can -- I think you can use this profitability parameters that I gave you to sort of draw conclusions on ROIC.

Is there another question? Great. Final closing remarks, it's like what do you think is underappreciated about NEO?

I don't think it's underappreciated. I think we -- despite the challenges that we've had, and we've been, I think, pretty transparent about them. we still have a really solid position in the oncology testing market. We have literally thousands of clients. We do 1 million-plus tests in a year. We have a comprehensive test that continues to be a competitive advantage and a reason that customers do business with us, we continue to get really high Net Promoter Scores when we survey our customers. We have a broad portfolio of managed care contracts, et cetera. So I think the base business that has always been NeoGenomics and has made us competitive and has allowed us to take share for years and years that still exists. We've got some fine tuning to do to get back to the profitability that we always had. But those aren't -- that's not rocket science. It's blocking and tackling and execution. And so people miss that. I don't know if they're missing that, it may be a matter of to what degree do you really believe that or how quickly do you think that sort of turnaround happens. But I think that's the core thing.

Great. Thank you very much. Thank you, audience, for attending. Thanks for joining the conference, and we appreciate your support. Thank you very much.

Thank you, Derik.