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

Hey, everyone, good morning. I'm Tejas Savant, and I cover the life sciences here at Morgan Stanley. Before we begin, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep. So it's my pleasure to host NeoGenomics today and speaking on behalf of the company, we have CEO, Chris Smith; CFO, Jeff Sherman; and Warren Stone, who's the Commercial Officer. So good morning, thanks for joining me on the stage, guys. Appreciate it.

Maybe, Chris, just to kick things off, could you just outline NeoGenomics' key accomplishments this year in your view against a decidedly tough macro backdrop. What are you particularly proud of?

Well, that's a great question. We could spend the whole time on that today. So I think if you followed the Neo story, I would say one thing I'm particularly proud of, which started last year and continued this year, is that the company has gone through an amazing amount of transformation. And this was a business that was a great franchise, it's a 20-year-old company, kind of built the cancer testing market, especially to community hospitals, grew through acquisitions in a business that was growing fast and making money went to not growing at all and losing money. And so I'm particularly proud of how well the team has come together and gotten the business back on a very nice growth trajectory, growing double digits, taking a business that lost $50 million adjusted EBITDA a couple of years ago to actually make money last year. And just recently in our recent guidance or a recent quarter, we raised guidance. And the thing that -- I would say, the second thing particularly proud of, more and more cancer care is occurring in the community setting. So if you think about 85% of cancer patients are treated in the community. And what we've always said is that we want to be able to bring cancer testing to the patient in [indiscernible] Kentucky, so they can get the same kind of care that you get at Sloan Kettering. And I think the team continues to do that, and we see an incredible need for our products.

Got it. Yes. Maybe let's start with the clinical side of things. You've demonstrated really good ability to improve AUP. I think last quarter was the 13th consecutive quarter, where your AUP went up. As you look to next year, what do you think are the main levers you intend to pull? Is it predominantly that NGS mix? Or do you see room from the RCM initiatives as well?

Yes, I'll kind of give high level and then maybe let Jeff and Warren kind of chime in there. But I think for us, we were under-indexed on solid tumor NGS. So without a question, as we grow our share in the NGS, it has -- it contributes, but also bringing up new products. And so, we've seen a big lift in AUP because we launched key products in Q1 of last year and Q3. But those comparables get tougher in the back half of this year, but we have two major product launches and maybe Warren can take the two major product launches that we have in the middle of next year. And so I think all those factors, but do you want to kind of talk specifically how...

Yes. Sure. I think the NGS mix has been a big driver of the AUP improvement this year. We've talked about that. And as Chris said, there was a pretty big step up in Q1 and then an even bigger step-up in Q -- excuse me, it's Q2 and an even bigger step-up in Q3 of last year. We continue to believe that NGS growth and penetration is going to drive AUP. New products that Warren going to talk about will help drive that even more. And then that's one aspect. That's probably -- that's driven roughly 60% of the AUP increase. The other drivers are the rest of the business, there's mix as well. So if you're still hitting higher-value tests in the rest of the business, that can drive AUP. And then there's the RCM element. And the RCM element, the first is price. We've been successful in getting price. 2/3 of our clinical business is actually billing hospitals directly, and we've been successful in getting price there. Then the remaining 1/3 is managed care and Medicare. So managed care, we have pricing opportunities as well. And then just getting paid for the work we're doing. So the biomarker legislation will be a tailwind for us. We believe over time as more states pay or mandating the payment for larger panel tests. So we, as well as others, have struggled with getting paid for those tests. So -- and then just core RCM, just getting paid for the work we're doing, prior authorization, medical necessity, medical records, we have teams focused on all of those. So we actually see a multiyear opportunity to continue to drive AUP, both from a mix perspective and then an operational RCM perspective.

Got it. Makes sense. You talked about NGS being as a percent of the clinical services revenue, could reach a north of 50% down the road. Everyone wants to know the slope of that curve, right -- versus the 25% or so you're at today. What are the main drivers of adoption that you're focused on? And as we think about the next, say, 3 years, are there sort of step function increases that you envision? Or is this one of those situations where every year, it should go up by, I don't know, maybe like 3% to 4%?

Right. I think the -- look, the two big step-ups that I think you would see is number one, the new products. So we have been very strong on heme and in heme, obviously, hema NGS, but we were well behind on solid tumor. We launched one product last year. We'll launch a very large tumor panel in '25. And then the other big one is we're not in liquid today at all, liquid biopsy. And so those tumor new products will lift that significantly. And I think the second one is really our field expansion. And maybe, Warren, I'll throw that off to you and talk a little bit about what you're thinking about from the field and how we're doing it and why that would be another step up, yes.

Let me go one back to new products first. So -- because that's a key part of the strategy, obviously. And in the first quarter next year, we'll launch a pan-cancer liquid biopsy test, 500 genes recording as PanTracer liquid biopsy. 500 genes in the first quarter. And I think that's important because today, we only have IVFL, which is a lung liquid biopsy. So it gives us, obviously, greater utility, and as guidelines are changing around concurrent testing first in lung, but probably going to broaden from there, I think it's important that we have access to that technology as well. And that -- that's a nice add to our portfolio. The second area is this larger whole genome sequencing panel that we're going to bring out second quarter. That's attractive because it gives us access into the academic community and in the academic hospitals, which is an area where we haven't necessarily focused on, and certainly a strong growth opportunity. In addition to the value of that test into the academic space, also the downstream data benefits of that, that we can obviously then power into our informatics business will be attractive too. So certainly, product is key. Over the last couple of years, we've expanded our commercial team extensively. We did an expansion in January of this year, and we've communicated the fact that we're going to expand again effective January of this year again. And the primary purpose of the expansions are, is broadening our focus from where we've traditionally been strong, which has been community hospital and broadening our focus to community oncology. And what we've learned through the process of accessing community oncology over the last year is that frequency -- there's a higher frequency need. The business is more fickle. It's not as sticky as what we see in the hospital. So we need to increase the frequency of our visits to ensure the stickiness of our products. So the investments into additional resources will allow us to get a broader reach, get some of those more community oncology practices that are more rural, but also increase the frequency. And the combination of our broad portfolio, the new portfolio and the additional commercial resources is, I think, the key elements that are going to drive the growth from where we are right now, the ratio from roughly 30% to the 50% that you were talking about.

Got it. Fair enough. Maybe talking about sort of your leadership position within heme. Can you speak a bit to how you're leveraging that there to expand into new accounts within the community setting and also using that to drive further adoption of the rest of your NGS portfolio?

Yes. So again, I think it's a similar strategy in terms of hospitals versus community oncology. But as you say, we consider ourselves market leader within the heme space. And obviously, what's interesting in the heme space, it's a different set of competitors that we're up against. When we think about heme, we think more towards larger reference labs than we do towards some of the oncotechs. And what that actually does because a lot of the heme cancers are treated within the hospital. It creates us a very strong position within hospitals. And it actually allows us to sort of become the oncology provider of services within these hospitals. And once you integrate it in there, and you've got interfaces, et cetera, it becomes very, very sticky business. And we leverage our commercial strategy of protect, expand and acquire very much around using that position within the hospitals to expand our portfolio, both within the heme, but also expanding into the solid tumor. And what we find attractive there is as more and more hospitals are acquiring outreach community centers, we're actually able to use this hospital leverage to also drive growth within to these community settings with regards to heme and solid tumor. Second aspect, if you think about the more independent community oncology practices, there is a need for heme. So we offer a service today to many community -- independent community oncology practices and have a good standing. We're well regarded. And we're leveraging that position again to expand into solid tumor, particularly as more and more of the products we're bringing out are relevant to the community oncology setting. And the products that we launched in late quarter 1 last year, so near comprehensive solid tumor, the DNA/RNA lung, those were really relevant for the community setting, and we've leveraged our position from a heme point of view to pull those through.

Got it. One, maybe -- this one's for you as well. Talk to us about just how much further investing in the commercial team you need to do? And I think, Chris, you flagged about using AI tools for increasing the sales force effectiveness. Talk to us about where you are on that journey and how much more you can do there?

Yes, you want to take this.

So I think, again, we've had a significant amount of investment on commercial team. And even with this expansion that we're going to do in January, we indicated that it was going to be a roughly 35% increase in size. If we look at the community oncology market per se, which is, is still the bigger market for solid tumor. We're still underrepresented relative to a number of our peers. So I think within the sort of long-range plan, I think there's definitely expectations that we will further invest, especially as these new products start to mature and we get back on the market in terms of MRD in the future. But an additional strategy that it's not just about how many people you have, it's how effective your people are out there. And that's were using tools and AI to help target and increase the effectiveness is going to be a critical part of that strategy.

Got it.

Yes, I think one of the big misnomers I think, in this business as we came in is just how ineffective the sales channel were. And so we use a Gartner index, and we've talked a lot about this and -- to manage the effectiveness, and best-in-class would be in the high 50%, 60%. And I think this industry was in the low -- high teens, low 20s. And so I think a lot of our strategy has been to bring in those tools that frees up minutia and takes time that it has been taken away from -- in front of the customer selling and taking those off our sales force. And that has been a big, big lift to our sales force's effectiveness, and using AI to do that sell business. Yes.

Fair enough. One on the nonmolecular side of things, what's the status there on just the price degradation to anticipate going forward? And could we see you rationalize the offering there as you focus more heavily on NGS? Or does the importance of being a truly sort of comprehensive one-stop shop outweigh the benefit, particularly in the community setting?

Yes. Look, I mean, we would love all -- every category or modality that we're in to grow 20%. So NGS, we have growing...

Right.

North of 20%. I would say things like cyto FISH flow, we have those growing 2% to 4%. And so our mantra is that we need to grow those faster than markets. So if markets at 2% to 4%, let's grow them faster. But I think that our sweet spot is the ability to offer that end-to-end comprehensive. I think that's what makes us differentiated. I think the big reference labs really don't have the service levels or I'd say, the depth in oncology that we have, and I think these oncotechs are offering 5 to 10 products. And so one of the things that I've always loved is that all our competitors on solid tumors, their customers are buying something from us. So it gives us a [ development ]. So I -- look, I think you have to accept I think those things that are -- the ability to provide your customer all the solutions, if you're going to be kind of the end-to-end comprehensive cancer testing company, and that's what we believe that we are and that we -- and we think there's a huge opportunity for a company to lead the way there.

Got it.

Yes. And again, I would add to that. So again, with 2/3 of the business being billed directly to hospitals, and it's getting price increases there, we may see degradation in a small percentage from a Medicare, 1% or 2%. But the overall, even for those lower value tests, the overall AUP is still going to be going up, we believe.

Got it. Got it.

Maybe adding one of this the additional element there in terms of the importance of breadth of portfolio. When we look at the requisitions that come in on a day-to-day basis, only 22% to 24% of those requisitions are for a single test. The other sort of 74%, 78% of those requisitions were multiple different tests within our portfolio. So a big part of the strategy for us is sort of what we call concurrent testing, and get as many tests as possible on a single sample.

Got it. I want to switch to PanTracer, which you mentioned, Warren just now.

I love that you already know the brand name. Everyone [indiscernible] we love that.

What differentiates PanTracer from the other liquid biopsy CGP tests in the market? Is what you just said about the portfolio approach and then being a one-stop shop, enough of a hook to get physicians to try you and switch eventually their liquid biopsy needs over to you?

Yes, that's a great question. I think it's -- there's no one thing, to be frank. It is -- it's a combination of multiple aspects. We believe the product, the PanTracer liquid biopsy being a 500-plus gene panel that we're going to bring to market is a very competitive product in terms of its limited detection, the number of genes, et cetera. We're not in the market yet, but we believe based on the runs that we've been doing in preparation for validation, et cetera, that's going to be a very competitive turnaround time, something that's critically important, especially if you're thinking about running concurrents or you're using liquid to get an initial indication. So it's a combination of a very competitive test, a fast turnaround time and the fact that we were able to offer the solid tumor, if you're thinking about that from a concurrent perspective or any other tests that you may actually need within that setting. So it's a combination. It's not one thing. And...

Got it. What's the degree of concurrent testing that you see today between -- well, I guess, a bit of an unfair question because you're not really live in liquid yet. But eventually, what do you expect to see in terms of the overlap between tissue plus liquid? And then what about sort of RNA testing in addition to tissue? Because both of those seem to be increasingly ordered together.

So I think we don't have a lot of experience here today because it's not something we have. I mean one of the areas that we do think about is how many times do we get a QNS TMP when we run a solid sample because that would be an obvious opportunity now for us to drive that to liquid. So -- I mean, we have those as a ratio, and we continue to look to improve the quality or the effectiveness of our solid tumor panel. But -- I mean that is in the range in sort of the high teens at this particular point. So there's an initial proxy for us to say, okay, we could get as much as high teens in terms of concurrent testing because we're receiving a QNS TMP, but that's more of a reflex than a concurrent. So it could be more than that. But I think I'm speculating if I were to provide any more detail.

Right. And very different than you doing RNA, DNA separate if that's what you're question is.

It was both really. I mean it was tissue plus liquid and tissue DNA plus tissue RNA.

Yes.

Yes. It's a question that's come up often today actually, and it's probably something we need to dig into. I mean we obviously have RNA [ stand-alone ] panels. We have people are looking for fusions and those types of things, and certainly not something that we've factored into our business case, but we've got a fair amount of airtime today. So something we haven't seen...

Yes. Look, I think at the end of the day, our belief is we're going to provide the best care possible, and we're going to run our business to do that. We're not going to run our business to gain a little bit better, initially, pricing strategies, especially if it's flying close to the flames. And I think there's been some discussion about, can you bill for both? Do you not bill for both? Look, I think at the end of the day, I think our view has always been that you're going to take the high road and we follow the guidelines that are in place. And I think that's serving us well, maybe away.

Got it.

The medical necessity question is that we continue to [indiscernible]. There's medical necessity, we'll drive for that. But again, we have that within our portfolio. So this is really -- that's the question. What's the medical necessity, yes.

Got it. Fair enough. Quickly on the MolDX process on PanTracer, where do things stand?

So our -- right now, we are starting to work towards validation of the test at this particular point. Once we've done that, we're going to start doing various studies, which will be required, obviously, to submit to MolDx. And if I look at timelines, early in -- well, in the first quarter and you need to submit to MolDx and [indiscernible]...

So we've already started enrollment in one of our big -- the big trial. We have not running those tests yet, but we've already engaged our investigators starting to run enrollment. So I think that we'll be pretty early on from the time we go to market as when we're going into MolDX on that, which I think is going to be [indiscernible]. Yes.

Maybe on just the launch of a bunch of these new tests that you have in the hopper. How are you thinking about the impact to margins when they initially launch and scale up? Will you be sort of gearing volumes ahead of broad reimbursement? Or do you think there's some merit in building mind share so that once the reimbursement comes, you're already live and people are aware of the offering?

Look, I think it's combination of both. I mean I think you definitely want to have physicians, early adopters get the product early, and we'll do things like a control market release to be able to do that. That being said, it has not been our custom policy to give away hundreds of thousands of tests. And so we try to move very quickly on the reimbursement side. I think fortunately, for both of those tests, there's pretty established reimbursement in the marketplace that we think that we can follow. And that's why I think starting these MoIDX clinical trials early on helps. In addition, while a lot of these new tests are very focused on the community oncology, over 60%, about 2/3 of our business today is in hospitals, and none of that goes through third-party payers. That's direct bill of the hospital. And so we think that a lion's share of these products will start there. We'll continue to grow [indiscernible] thing. So I think it will be very different than if we were just doing all through third-party payers. So I think we'll get payment coming out of the gate.

Jeff, one for you and just you've done a bunch of restructuring activities in advanced diagnostics and you now expect to return to year-over-year growth. What gives you confidence in that outlook in the remainder of this year and then to '25? Pharma customers, still seem to be grappling with budget constraints and reprioritizing pipelines. There's some sort of renewed IRA and patent cliff concerns that some of the preclinical CROs have been talking about as well in June and July. So just talk to us about that?

Yes, I'll start, and then I'll ask probably Warren to add in as well. So coming out of Q1, we said expect Q2 and Q3 to be in a similar range as Q1 from a revenue perspective. Keep in mind, some of this was self-selection where we decided to exit some unprofitable contracts as well. So even though our revenue is going down, our actual adjusted gross margin was actually increasing from a dollar perspective, and our margin performance has gone up 400-plus basis points in the second quarter. So I think what we set out to do was happening. We said we expected growth to start kind of reoccurring in Q4 and starting into next year. And really, I would say a lot of that is the work Warren and his team is doing to drive that. And I'll let Warren kind of expand on that.