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

Good morning, everyone. Welcome to Bank of America's 2023 Global Healthcare Conference coming live from Wynn Encore Hotel here in Las Vegas. I'm Derik De Bruin, you guys know me, and along my colleague, Mike Briskin, we cover the life sciences and diagnostics tools space. And our next company up is NeoGenomics. And with us today is CEO, Chris Smith; and Jeff?

Sherman.

Before a user here, thank you. Good to meet all of you. [indiscernible], sitting in the back.

My apologies, definitely I have a mental breakdown there for a minute, but thanks for being here. Thanks for coming in and doing this. You just reported Q1 results on Monday, -- good quarter. Stock responded nicely, good rebound in the business. Do you want to recap that? Or do you want to jump right in the certain Q&A?

Look, I think whatever works best for you. But look, I think it was a great quarter. A lot of the initiatives that we started to put in place in Q3 we saw pay some dividends in Q4, and then that continued into Q1, and we did a really great job.

Yes. I think we had strong clinical volume growth of over 7%. We had strong revenue per test growth of over 8%, 17% overall revenue growth. We saw a very strong flow-through on the bottom line. We converted over 60% of the revenue beat on the adjusted EBITDA line year-over-year. So I'd say we thought it was a very solid start, a strong start to the year and positions us well for the remainder year.

Great. So Chris, let's start. You -- since our conference last year, NEO has had a really big transformation. It's completed a leadership transition, [indiscernible] organization, you launched with new products. Can we sort of talk about what were some of the main issues you found since you joined?

So to be fair, I wasn't at your conference last year.

I know you weren't. But I mean the transition was I think you've been announced.

Was announced in the summer and started in August.

Okay. So but anyhow.

Maybe around that time.

So -- but anyway, since the last year, the company has had a massive change because doing this one last year to your predecessors that were here were stumbling, shall you say when they were having it. I mean so the business has gone through a lot, and you've had really good strong results in the first quarter. I guess the question is like what were some of the issues that you saw and what's fixed? And I guess is -- how much more work needs to be done in the business?

Yes. So look, thanks for that. I would say a lot of transformation. One of the things that we really like when you looked at the business, it did have a great franchise. And if you think about cancer and the ability to do cancer testing, that market, depending on the data you see is anywhere from 6% to 8% in volume and 8% to 10-plus percent in revenue. So coming in a good franchise. It was really in an underserved and growing market and so there was no reason why the business probably shouldn't perform given especially our franchise with pathologists. And for those that don't know the business, NEO and business over 20 years had really always been a pathology or hospital-based business. And I would say there are many reasons why they've gone south, but one of them was the business had started shifting to being more of oncology driven, especially with next-gen NGS technology. And I would say, candidly, the biggest issue is people and culture. And I think when you go into a transformation, it has to start with people and culture. And so we spent a lot of time starting in August around the culture and also the people. So we changed out almost the entire leadership team and a lot of reasons why. But some is that what got you here is not going to necessarily get you there. And I think the business had been built to probably $250 million, and we were at $500 million. We really want to be on our way to $1 billion. So I think, brought in a relatively new leadership group, and we focused a lot of time on our teammates. A lot of people that come to work at NEO are there because of the mission, and we really focused and set up, for example, in the old days you could find the share price everywhere in the company. And today, you can't find it anywhere. But what you can find is the ticker talking about the number of patients that we help per day. And you -- I think sometimes companies lose focus on why people want to be a part of it. I think the second thing was, I mean, I would say it was a company yearning to be led, yearning the high levels of transparency and communication. So we became very transparent with our teammates. We have about 2,200 teammates. And the last one was we lost this will to win. And I think the company was playing not to lose instead of playing to win culturally. And so we set forth really focusing on 4 key strategic pillars and underneath those pillars that what we've talked about publicly is kind of our growth drivers, which is really around we had to get back to driving the base business, making it profitable, and that was really around commercialization and operating efficiencies. We had to accelerate advanced diagnostics, which meant we had to plan the NGS in the MRD market. And the last one, the fourth one is people, but the one we talked about publicly in our earnings was we had to create value for our shareholders, for our teammates, for our patients. So I would say all of those created path -- really work streams that we started to work on. And I think the nice thing about this business it's very different from other businesses in diagnostics where you put an analyzer in the basement of the hospital, and there's a 5-year contract. Here, there's not, right? So you can move business pretty quickly. So if you start to get things right, improve turnaround time, improve service, bringing in strategy around pricing. There's a lot of things you can start to do to move the business. And so look, we still think it's early days. We'd say we're probably only in the second inning. But I think the building blocks now are being put in place for that long-term sustainable growth, and that's what we keep talking about. It's not about a one-hit wonder. It's how do you consistently build a business for the next 20 years, not the next 20 days. I can have a long answer.

Yes. And I would had to just cut -- just from my lens, I've been with the company about 5 months. One is a sense of urgency to get things done; number two is accountability; and number three, really a rigorous disciplined focus on execution as well. I think there are things that have really been enhanced over the last 6 to 9 months.

Great. Well, one of the questions I was going to ask is that given your prior gig at Ortho, which was a completely different diagnostic business than this is.

It was.

So -- but -- and I want to go into the competition things because you have -- I think when we were having these conversations last year and we have been doing some work on the private markets. I mean you were losing some share in this market, right?

Yes.

And so I think one of the questions we've gotten asked about the company is like how do you sort of compare to Quest and LabCorp or also in terms of Caris and Tempus for the other 2 ones that come up with it, like what were these companies offering that NEO wasn't? And can you tip that around what do you offer the competition doesn't?

Well, I think very different businesses, and we really don't want to be either of those, and I'll kind of talk about the reason why. I think what happened as far as losing market share. One of the interesting things is we really weren't losing accounts. We were losing modalities in accounts, in particular, NGS. We had a weak solid tumor offering. And I think some of the specialty companies, whether it's Caris, Tempus, Foundation, Guardant. I think we're doing a very good job calling on the oncologist where a lot of this cancer market was starting to move, and we were still in the pathologist and our service levels had dropped. So I think we lost market share. I think if you look at the LabCorp and the Quest, those are businesses that are slower growth, but make money and very broad away. And we're kind of in between the 2. Like our goal -- we do -- we offer about 5 to 600 especially oncology tests, so significantly more tests than the Caris, than the Tempus but not the 20,000 or whatever LabCorp. Quest would be like cholesterol and triglycerides. So we're very focused on that niche. And we believe in this world that we can grow 8% to 10% and that we can drive double-digit profitability. And I think that's a lot different Caris's and the Tempus's of the world. That strategy has been to build to burn hundreds of millions of dollars. I think if you look at the LabCorp, it's been very profit but slow growth. We believe we can kind of be in between the 2 and be a high-growth or growth business in that 8% to 10%, but make double digits. And so I think that's kind of where we have focused. We definitely did lose market share. I'd probably say more to the specialty than we did the LabCorp and the Quest. But it mainly was because we were very pathology focused. And when the industry pivoted, we didn't pivot. And that's what's happened really now over the last -- one of our initiatives was to build an oncology sales force. So I think one of the things I love about our business compared to our competitors is that we have 2 very different sales forces because the call points and the selling cycle is completely different with an oncologist that's not in a hospital, than a pathologist who's in a hospital, which has contracting and purchasing. And that's much more of a kind of a gatherer business where this is more of an under business. So now what we've done is we're building a sales force into both. They share a number, they share the same regional manager. So they work together, but it's very different kind of call points.

Got it. And how -- can you talk about some of the revamps you've done on sort of like some of the new products you launched in genomics. What exactly have you transformed? What you upgrade? And sort of like, once again, how are they differentiated amongst what the other competitors are?

Yes. So if you look at NGS, which has kind of been -- which is kind of the sexy high-growth area of the market, probably growing 15% to 20%, depending on where you look. We had always been the market share leader in heme and we're actually still are the market share leader in heme. But on solid tumor, which is where a lot of the industry was moving, we did not have a competitive offering. And so I think that allowed also our competitors to start to move share. So in March, we launched NEO Comprehensive, which is a competitive solid tumor, kind of a similar number of genes, 10-day turnaround time. I would say that we did some wraparound services that are pretty unique. You have to remember, this business of the service business. So a lot of times, not a lot of differentiation in the tests. So you have to differentiate on service. And so I would say that it's a competitive product. We did not leapfrog competition with this test. Our view was to get a test to the market that was competitive, which we've done. I think a lot of our innovation will come out in '24. We've talked about kind of our next-gen NGS product, which we do believe will leapfrog. But for this product, it was just more for us to be competitive and really go back to customers that want to do business with us, but we didn't have the turnaround time of the offering. And so hopefully, we'll be able to move back some share.

I mean, it doesn't sound like there's much differentiation at the customer level in terms of what the panels are offering from all these different vendors?

Look, again, I didn't grow up in the industry. So my view may be different than some companies. But when you really look at it, a patient has cancer, needs to be able to get a broad panel and I think companies -- everybody offers a pretty competitive product now. I would say the other one is really MRD. And as you know, we acquired Inivata with RaDaR. We do believe the industry is in a eventually going to be a $20 billion market. We -- I would say that our sensitivity of our test is significant compared to other players in the market, but that's early days for us, too. We just started to roll that product out.

Yes. That's right. I was going to go next. I just want to finish one thing on. And your overall, which you would consider your genomics portfolio, NGS portfolio, how much of that is the overall?

Yes. So a lot of people ask that we've never disclosed kind of what percent of the revenue is. But what we have said is if the market is growing 15% on low and 20% on the high, we need to grow faster than 20%. And so we said, for example, in the first quarter, we grew significantly faster than 20%. And -- and I think as long as we keep growing faster than where the market is, that means we're moving share and growing our business. And so we feel pretty good about that.

Got it. And I did want to go on to the MRD, I mean we picked up coverage of NEO right when they were raising cash to do the Inivata deal. So I mean that's sort of how we came into it. And I think at the time, there was a lot of hype in the market and a lot of sort of like aggressive expectations on things. I think one of the things we sort of noticed in looking at the space is, it often takes longer and costs more money than people participated to sort of like bring these products out. So how much are you spending on that product, right? And I guess it goes to the questions like the company was sort of borderline profitable when they did the deal, then it wasn't.

Been very unprofitable.

We've been very unprofitable. But now you fixed a lot of the issues that are there. So just trying -- so it's a question like if we were to back that out, what would be -- what the...

Yes. So think about it this way. When we bought that business, they're burning $40 million to $50 million cash. I think they did a lot of things well, especially around R&D. As a matter of fact, we've now turned Cambridge into our R&D center, which is really where that product from a technology perspective was created. I'd say they were doing that well. But the challenge was when the acquisition happened, we didn't integrate back office. And if you even go back to -- we did 4 acquisitions in 5 years without a lot of integration. So one thing that we did very rapidly is what I would call all the back-office functions. We integrated it. We went out and disclosed that we had taken $25 million of annualized costs out of the business in the first quarter. Now that number has actually gotten larger because we're finding synergies -- so -- and Jeff can talk more about the profitability, but we've been pretty clear that we'll be profitable by the fourth quarter with Inivata, right? So I think that there were a lot of clinical data that we had done early on that all starting to come out. ASCO will have a lot of presentations on that technology. If you look at the CHIRP data that came out of Harbor, it really talked about the difference in breast, where if you think about our technology, it's really made ideally for very sensitive cancers where it's hard to pick up cancer cells. And so things like colorectal where you have high shedding rates is probably not is because that's -- everything can pick that up. But these places were head and neck, lung, breast, we think that's where it'll be different. And I would say the other great thing about when you talk about the cash burn, I think some of our competitors in front of us have built this MRD market. They've given away hundreds of thousands of tests. That's not our strategy. We're not going to do that. I think that we'll definitely be able to run head-to-head comparisons with clinicians, whether you take [indiscernible] you run your own thing, but we're able -- we think it's good to be a fast follower in this business versus spending hundreds of millions of dollars to burn cash and build -- so we're coming in behind it.

So -- but -- and look, I mean, definitely, the data would suggest that you and many other the companies that are coming on are certainly more sensitive than what's currently the market leader out there, given how that was built -- do they have some sort of like inherent market, basically, is the fact that they've got coverage and they've got this -- are those barriers that prevent them from sort of getting swapped out for technology?

Look, I think -- so a couple of things. So first of all, I do think they've done a nice job, especially with clinical trials, and I would say getting coverage. At the end of the day, this is a pretty nonsticky business. No one's signing long-term contracts. What we found pretty quickly is we have relationships in the market as well, and I think people want to try our test. So I would say just because you ran a test with another company for a year, if you can find a better mousetrap doesn't mean that you're not going to move. So I think it's going to come down to relationships, our rep relationships and the outcomes that you get for patients. And I think our customers are driven by outcomes for patients. And so I don't know that just because they were first means that they -- or because they got reimbursement first. I think what you'll start to see, look, we're already working, for example, on third-party payers. We probably have more contracts because of our 600 other tests in the markets with the United and the Blue Cross. So we already have relationships there. And so our ability to -- we believe to get private payer coverage will be good. Obviously, getting MoIDX and Medicare reimbursement will be key. But we think eventually, this market will -- look, if it's a $20 billion market, there's really room for all of us to go, I think, help grow market and treat patients.

Got it. And the -- are there going to be -- you mentioned doing some head-to-head studies, is there anything that's going to be published because I think one of the questions that we get a lot from investors is like, my test the most sensitive. No, my test is the most sensitive, my test is most sensitive, right? I think there's just a lot of questions about how do you sort of do this. I mean every day, because I had Quest just bought Haystack, right? I did my fall conversation, they were like, well, no, our test is going to be the most sensitive on the market. We're going to be...

So I think the really data shows a sense like on the Quest thing, I think that's good for the market that they bought them, but that's a pre-revenue company. Look, just I can tell you from learning with Inivata, it's a long way to go to get that product to commercialize the product. But look, I think we'll see on the sensitivity. I think there is some published data. It's pretty easy to take samples from 5 patients and run the exact same test on those 5 patients and see there is some published data that shows that, for example, the [ word ] 10 times is more sensitive than the leading market player. But look, we'll see as the market grows.

And how do we think about what you're doing in terms of your biopharma relationships? Can you talk a little bit about some of your partnerships there?