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

Hello, everyone. Thank you for coming. My name is Zach Conte, I'm a member of the healthcare investment banking team at JPMorgan. It's my pleasure to introduce you to NeoGenomics. Today, here, we have Chris Smith, CEO; we've got Jeff Sherman, CFO; Vishal Sikri, President of Advanced Diagnostics; Warren Stone, President of Clinical. And I'll hand it off.

Thanks, Zach. And for all of you loyal investors, I appreciate you being here, considering it's 7 and nothing in Michigan over Washington in the first quarter. I actually asked, could I put a slide in? It really is the score. I hope I didn't blow it if you're not recording it, but I know it's been a long day, so I appreciate you being here. We're going to give you an update on the business and kind of the state of the business. I will say, from a financial perspective, we haven't changed our '23 guidance. And our last time we reported results was Q3, and we didn't prerelease. So I'll give you more probably year-to-date type of thing financials as through Q3. But let's jump in. And look, I think from our company perspective, obviously, we've got our safe harbor. I'm sure everybody has this memorized in this room at this point. But look, we always lead with our mission. And I think I see some familiar faces in the room that have gotten to know us a little bit. And we really believe this at the heart and soul of the company that we really have the ability to change or make an impact on people's lives. When we talk about you can go anywhere and make money, but there's very few places where you can change the world. And it really is that, I think, that motivating factor that helps the team move forward every single day. And when you think about cancer, you look at the prevalence and how it's on the rise and 1 in 2 men and 1 in 3 women will get cancer in their lifetime. So when you think about from a business perspective, you want to be in growing sometimes underserved, but growing markets. And if you think about this market, cancer in itself is probably growing between 6% and 8% a year. So it is generally a good growth business, unfortunately. But when you look at how that relates into our opportunities, these are the categories that we really compete. And if you look at the diagnostics testing, it's about $9 billion, pretty penetrated. It's about 90% penetrated. That would be things like Flow and fish and cyto. And it's about -- we think it's growing probably around 4%, 5% a year. If you look at therapy selection, obviously, this has been the big growth -- this is NGS is what's been going on in the market. And we'll talk a lot about that throughout the day. That business is growing anywhere from 15% to 20% a year, but it's still relatively underpenetrated. It's only about 20% penetrated from a perspective. And so a lot of the things that you see in the first diagnostic testing is moving into NGS as it continues to grow. The third big category that we compete in is MRD, again, we'll talk about this as we go throughout the day, but that's going to be about a $20 billion market and it significantly underpenetrated, less than 5%, but it's growing faster than 25% a year. And then the final one is really what we look at is pharma services because we have a pharma business. And if you look at the top 30 pharma companies, we're spending about $150 billion in R&D. So really good opportunities in that space. And you can see what these drivers, the market drivers down at the bottom. That's what's going to continue to move this business forward, which is we think it's a really great place to be with our company. We think we have an incredibly unique position in the market. And what I mean by this is if you think about these large clinical reference labs, the Quest, the LabCorps of the world, they're growing single digits and making money, and they offer several thousand tests a lot of times. If you think about the other side of our industry, it's kind of these niche oncology companies. And these are companies that are growing double digits, but historically burning a lot of cash. Most of them are losing tens of hundreds of millions of dollars, and they have a limited menu, maybe 15 to 20 tests. And if you think about our business, we have the ability, we think, to go right kind of down the middle. We think there's a unique opportunity to have a business that grows high single, low double digits from a revenue perspective and grows in the mid-teens from a profitability perspective. We'll talk a lot today about having over 600 tests. So you can see from a competitive perspective, when we're out calling on, especially on community hospitals, community oncologists, we have a wide array of oncology tests. And we really are, I think, the industry leader when you look at specialty companies in the oncology space. And for several reasons you can see here is a list a few of them. But we have -- I mentioned a comprehensive test menu, approximately 600 tests. One of the things that's relatively new is that we're starting to drive more and more innovation that happened through the Nevada acquisition of RaDaR a few years ago. If you go back to Neo 10, 15 years ago, it wasn't really probably an innovator, it was a fast-to-market follower, but on lab-developed tests, we'll continue to do that. If you think about our business, about 80% to 83% of our business is in our clinical services. And that's really selling to community oncologists and pathologists our full array of products. And today, we have 2 sales forces calling on that group because they are very different buying patterns. If you think about a pathologist or a hospital compared to a group practice community oncologist. And so what we've decided to do over the last really 18 months is segment our sales force is that community oncologist continues to grow. We generated over 100 million data points every year. So data is significantly important. We'll talk about our Informatics business in a little while. We have about 2,200 teammates, and we have this broad network of labs. And that is a real differentiator for us in the market and why there's costs associated with having multiple labs. We believe it gives us a key differentiator on turnaround time and on service. If you think about the way that we think about the business, it's the right test for the right patient at the right time. And that's one of the reasons that we have this lab footprint that you see there. And to give you an example, our goal is if you're living in Paducah, Kentucky, to get the same type of cancer testing care that you would get at Sloan Kettering. And that's what I think has made NeoGenomic successful in the years, and that's what we continue to do, and that's why you kind of see this footprint that we manage today from a lab perspective. If you think about as we move into 2024, we talk about really 4 strategic pillars in the company. I'm going to talk primarily about 3 of them today. The fourth is enhance our people and culture in the company. And look, that I would say is our greatest asset is our team. But I'm going to talk to you about kind of the financial drivers of the business. The first is we have to profitably grow kind of our core business. That's a clinical service business. That's a community oncologist or community hospital. And to do that, it's really a focus on increasing our volume. It's one of the things that we've done really nicely this year, started growing that volume at or above market, but it's also continuing to move NGS at a more rapid rate. Later in the deck, you'll see a slide that talks about 25% of our clinical service revenue is in NGS and is growing faster than 35%. And that's one of the reasons if you follow our company, you've seen this lift in the average selling price, is our ability to continue to shift that mix. The second is we need to win commercially. And I think it's one of the great strengths of the company is our commercial organization. And it's not just the ability to win in that new space, which is oncology to the kind of community colleges and group practices, but it's really our ability to optimize the selling organization. Let me just to give you an example, Gartner will come in and give an evaluation of how does the company perform from a sales effectiveness and efficiency perspective. And best-in-class is north of 50, which means that a salesperson is spending more than 50% of their time selling, and they may be spending the other 50% doing minutiae, things like administrative. And when we came together as a leadership team about a year ago, we were only at about 25% penetrated. So why we have 100 full-time people today in the field, we believe by continuing to drive efficiencies and bringing tools and to support that organization, we can accelerate our selling time. And that's a key for us as we go into '24. And then the last one is we got to continue to win on revenue cycle management. We talk a lot about this. I think if you're going to be in this space, it needs to be core competency, something we've really committed to. It's one of the reasons you see us driving at a higher AUP increase quarter-on-quarter compared to a lot of our peers because I think you got to get paid for the work that you do. And historically, in this industry, I think a lot of companies have accepted that you don't have a prior authorization to run the test anyway. And our view is, look, we need to make sure that we're doing things the right way to continue to drive that. So revenue cycle would be a big one. If you think about our next business, it's really this Advanced Diagnostics. And one of the things we need to do is accelerate that Advanced Diagnostics. Vishal is with me today and will be with us for Q&A. But if you think about this group, it's really what I call the tip of the spear, it's where we're driving R&D, it's where all our new innovation is coming out of. And we need to continue to bring new products to market. You see that in late '24, early '25, we'll bring 2 key markets, products to market. One will be this new comprehensive solid tumor and then the other one will be our liquid biopsy CGP product. We need to continue to develop evidence both clinically and from a reimbursement perspective to drive payer coverage for MRD. So MRD is starting to get covered by Medicare, but it's still early days with the private payers. And so much of this business sits with private payers. And why we today have over 200 contracts with private payers, it's going to be important that we continue with MRD to bring those products forward. And then the last one, we've talked very openly about improving pharma margins. We did that was a big focus for us in 2023. It continues to be a focus in 2024. We made a conscious decision earlier in '23 to move away from unprofitable business and bring that business back to being profitable. And that's been a huge win for us in '23, but it will continue in '24. And then the last one is we need to drive value creation. And look, everybody thinks about the shareholders, but it really isn't just the shareholders. It's the stakeholders of the company. So it's the teammates, it's our customers, it's our patients as well as the shareholders. And to do that, we've spent a lot of time improving the gross margin this year. We got to keep driving operating efficiencies. We've publicly gone out and say that we need to do about $10 million to $12 million in value capture this year. If you look at '23, we probably will have about north of $25 million that we picked up through value capture. So it's really rightsizing this business from a cost perspective. Lab management system is important for us. We, over the last 5 years have done about 4 acquisitions that all had different lab management systems. We're moving all that onto one platform. It will probably be about a 24-month project, but it really starts this year. As a matter of fact, that group came together in late fall where we carved people out of their day jobs and move them over on to this team. So rather than putting it on the side of your desk and getting to it, we've actually carved out a large number of people to help us implement our new lab management system. Automation and digital is a huge, I think, opportunity for us. When we acquired Nevada, that RaDaR lab was pretty automated, but the NeoGenomics of the old had not brought a lot of automation into the market, and so I think bringing in automation. And then finally, it's around FDA readiness. I think, look, I just spend in every meeting that we've had with investors today is what's going to happen with the FDA around lab-developed tests. And look, our view is that the FDA is trying to come and so they're coming. So if you look at our leadership team, they all come out of regulated environments. They're all our new teammates, including head of quality, all our new technology from an R&D perspective is under design control. So we believe that you got to be ready, if and when the FDA comes. I mentioned these 2 businesses. I'm just going to touch on them briefly, but I think this slide does a great job of highlighting the. The first one is our clinical services business, which is just north of 80%. One is it getting back to this portfolio and having the ability to offer 600 tests. And if you think about in that category, we are the market leader in heme, and heme today still makes up about 35% of the cancer market. So our ability to use that leadership as we start to expand more in things like NGS for solid tumor, it gives us the ability to do that. There's commercial execution. I talked a lot about this, how do we become more efficient with our selling organization. There's a lot of activities that are going on there, making sure that we have scalable business support. So I think as our business continues to grow, making sure that we have the fundamentals in place through the CRM system and other things with our customers like connectivity to the customers becomes incredibly important. And then the last one is just the whole thing around operational excellence. And look, when we all came together about 15 months ago, we were not winning on turnaround time, from a company perspective. If you think about this business, it's a service business the #1 driver is turnaround time to hospitals and patients. You don't want a patient coming in for a follow-up appointment and not have the results. So we've spent a lot of time and energy of taking that from a, I would say, not the premier leader to becoming the leader. And to give you an idea, NPS, some of you guys may follow Net Promoter Score, but we're at about 70 in this group, which is pretty high in our industry. And so, I think the team has done a good job on executing these 4 and we'll continue to do that. If you pivot to the Advanced Diagnostics, this is where I talked about earlier, the tip of the spear. It's really where the R&D sits and reports up to Vishal. It's where we run our pharma services business because historically, pharma companies are moving before the clinical and new technology is a great example as MRD or RaDaR that they moved in that business long before physicians. Informatics have talked about the data points that we capture and the ability of taking all that data and be able to repackage it and sell it, especially to pharma customers. And finally, about what we're going to be doing around new technology and some of the things that are coming in the future. I do want to spend a minute on MRD and RaDaR a little bit because we do think it's kind of changing the paradigm. This is a great pull together multiple studies that compared us to the standard of care, which historically has been imaging and how much earlier you can detect cancer with an MRD product, and you can see whether it's breast, head and neck or lung, you're picking it up significantly faster. So we were one of the believers that we think MRD will be the NGS 5 to 10 years from now, the way NGS is today. And so I think it's important to be there with a sensitive informed assay. And this just gives you a highlight of what's going on with RaDaR. So today, we have 28 studies underway. We have validated that product for breast, lung, colorectal and head and neck. And we've gotten one approval for Medicare on a limited indication for breast, but we have 3 other submissions currently sitting with MolDX, which is expanded breast, head and neck and lung. So really good opportunity there. This gives you an update on how we're doing through Q3. So this is not the third quarter numbers. This would be year-to-date through the third quarter. Our business was up about 18%. You can see our adjusted EBITDA is up 88%. I think some other things that jump off the page is cash flow from operations north of 60%. And then that whole thing about NGS, growing that NGS business faster than 35% is giving us that return. And that's where you see the 10th quarter in a row where we had improvement on our ASP. This is what the current guidance is. Again, this has not been updated. This was through Q3, but you can see that we raised -- we beat our quarterly consensus and then raise guidance. So we should finish the year 15 to 16 up on revenue, and you can see adjusted EBITDA up about 92% to 98%. So pretty nice range of how we've been continuing to improve that business. If you look at the adjusted EBITDA, again, I don't know how many of you follow the company, but we lost approximately $50 million in 2022. And our goal was to cut that in half. So you can see we've been performing significantly faster from the adjusted EBIT. And it's really about getting leverage on this business and understanding the levers that we can pull to drive operating profit, which is obviously revenue growth, but also a lot of things that we're doing fundamentally inside the business. And so look, the momentum continues. I love this slide because I think this talks about as we started to come together as a team, which was really Q3 of last year, but you can see consistently growing each quarter. The green bar is the midpoint of guidance. I will say that so far this year, we've beaten guidance every quarter. I'm not saying that I want to make sure you saw the forward-looking statement, but the business has continued to perform well. And then how are you converting it into adjusted EBIT. And you can see we had publicly gone out and said, we'll make money in Q4, we actually made money in Q3. So we're ahead of our timeline. But we really see that momentum continuing as we move into 2024. And look, just the key takeaways, and then we'll get to Q&A because I think that's really where the meat of these presentations is, look, it is a huge addressable market, and we have a great leadership position with over 600 tests. We're continuing to bring new innovations to market, but it really is about getting that community oncologist or community hospital built to access that care that you get an MD Anderson or a Sloan Kettering. There's strong volume and revenue. So we've got a tailwind as we move into -- from '23 into '24 and feel really good about where we're headed this year. And I think we're really well positioned to win in this space and build long-term sustainable growth. So on that, I'm going to pause. I can check the score, but you guys have phones also. I know Zach who's hosting us is a Michigan grad so it's killing him to be here. But let's turn it over to you Zach and the team for Q&A.

Yes. Thanks a lot, Chris. Just have a few questions and then we'll open it up to everyone else. But just given the PI, how does this impact your multi-X strategy moving forward? I'm sorry, strike that question. Anyways, just given the PI, like how does it impact your MolDx strategy moving forward?

Yes. So some of you may know that RaDaR has been out on the market and one of our competitors filed an injunction that had been awarded. And so today, that actually that injunction is not into effect because there are a few things from an administrative perspective that Judge had to redo. But look, our thing is we're continuing to run the business. We feel really good about our legal position. I've got Ali over here, who's kind of our GC and runs business development can step in. But I think we feel good about our position. And so as we go through kind of what we would call the appeal process, we're going to continue to invest and do the things at MolDx. I think we feel very good about where we're positioned.

That's great. And just given your past experience Cochlear, Ortho, how are you able to leverage that? And how will you be able to use that for Neo?

Yes. So I see Brian here. It's good to see a familiar face from Ortho. But look, I think, obviously, the businesses are a little bit different, but there are similarities. I kind of talk about Ortho Clinical Diagnostics first and similar to Neo had a great franchise. So if you think about Neo, we kind of built this specialty oncology testing business, Ortho had a great franchise. I've been around 80 years, but I had kind of lost its way from a commercial perspective, had lost its way from an R&D perspective. And the company was 7.6x levered have been bought out by Carlyle out of J&J. And so it really was also about driving operating efficiency. If you think about Neo, it's about how do we optimize the commercial organization drive faster revenue. I think without question, it was about investing in the right R&D projects, but also getting that operating leverage. So I think those two are very similar. But if I think about Cochlear or Cochlear implant when a CEO there, that was really a significantly underserved market where only 5% of the people that need a Cochlear implant got one. So it was really about how do you pioneer and build a brand and build a category. So is the market share leader, a great franchise around 40 years, but no one was getting one. So if you think about MRD, you think about NGS's low penetration rates, it's how do you make the category grow faster would probably be the one that would be most similar to Cochlear.

Nice. And then I guess one other question would be like kind of touched on -- you touched on the last question, but 2023, you guys really did a great job turning it around. You touched on a lot of the major drivers, the spears being a major driver as well. But how do you see that going into '24? And like what kind of drove '23 that you think will continue 2024?

Yes. Look, I think -- and again, it's good to have the group here because I think they can -- maybe we can break this into multiple parts. And Warren can talk about clinically, Vishal and the ADX and then Jeff financially. But look, I think the biggest play here was execution. And I think you brought in a new leadership team that needed time and grade. And so they come in and they assess their business. And a lot of times, they had to make changes. And so when you think about Neo or a company that loses its way, sometimes what got you here is not going to get you there. And I think we're building the business to be $1 billion revenue business. And I think it's about continuing to execute on those things. But you guys want to just maybe go down the line would that be okay just talk about what do we do in '24 and --

Starting a little bit in terms of '23. So I mean we identified a number of initial focus areas in '23 that will certainly last '23 and run into '24 and some instances into '25. And first and foremost, it was really around customer experience. We knew that in order to be successful in the longer term from a clinical service business because as Chris said, this is a service business, customer experience was absolutely imperative. So starting to build strong and robust processes around customer experience. Second was operational excellence, just making sure that we are able to deliver the types of turnaround time in a sustainable manner to meet client demands. Commercial execution was a big one. We wanted to put an organization in place that would be able to effectively execute against the strategy. And the last element was really around the people and the culture within the team. And we've systematically started to build on that. But if you synthesize that out and take a look at the sort of 3 things that we really wanted to focus on in 2023 to be successful, we wanted to drive volume because ultimately, that created a fixed cost leverage for us throughout our operational facilities, and that obviously helped the bottom line. We wanted to drive increased or incremental growth above market and NGS because that's a higher value test. Again, that drove profitability and supported bottom line. And then lastly, we wanted to get paid for the work we did and larger the whole RCM initiative, which ultimately, any work that we did there had an immediate bottom line effect. So the combination of executing against those 3 things really drove top line revenue improved bottom line profitability. And the positive execution came from those 4 pillars that I spoke about earlier. Those 4 pillars will remain in 2024 and I think a lot of the executional focuses will be similar, but better.

Yes. I think on the ADX side, look, in '23, we launched multiple products, which I thought were going to be competitive in '23 and we'll continue to do that in '24. The 2 big ones where we focused on in '23 was on the heme side of the business, which is a large panel on the myeloid side, which heme is our biggest portion of our business from an NGS perspective because Neo started off in heme. On the solid tumor side, we launched our largest panel for solid tumors in the NGS side, so that's going to carry us over going into 2024 as well. But the biggest focus, I would say, for us has been the improvement in our gross margins on the pharma side. We spent a lot of effort in improving our operations, how we do business with pharma, making sure that we focused on our high-value contracts, but also worked in the efficiencies within the company. So we have spent a lot of time addressing that, and that will continue also into 2024 because we do still see some upside there. And then on the informatics side, that's an area of the business, which is relatively new with Neo, but we have a lot of clinical data that we generate that we also license out to pharma and to AI companies. And if paid any attention in the space in the last year, the AI companies are making a lot of noise and there's a lot of value within the healthcare system that we can partner up with AI in this space. So we'll probably see that continue also into 2024.

Yes. I think financially, a couple of things. First, I think with Chris coming on board from just a leadership perspective, having a sense of urgency and having accountability throughout the company really increase. So I think from a starting point, we started with that. And then I think from a strategy standpoint, we were focused on what were the levers that we could pull as an executive team and actually drive performance. And you've heard a couple of them. Certainly, volume and commercial execution was one. We set out a strategy there, executed well against it. From a revenue cycle perspective and a pricing perspective, we started getting pricing increases, really a focus on that, starting to get paid more for the work we're doing, 100% accretive to both gross margin and the bottom line. And then really focusing from an operating efficiency standpoint -- how do we get more efficient. We took out over $25 million in costs at the beginning of the year. And we went through a period of time where costs were just growing faster than revenue and was not in a sustainable trajectory. So we really had to focus on where were the investments we can make to actually drive operating leverage, both on a gross margin perspective and from a below-the-line OpEx perspective. And I think starting from a position of strength fiscally with our capital structure and balance sheet that we're, I think, well positioned improving our financial performance, improved our -- significantly improved our cash flow performance, and I think positions us well as we exit 2023 to be -- continue to see that momentum into 2024.

Awesome. I'll open it up to the floor. Does anyone have any questions?