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

Good morning and thank you for standing by. Welcome to NeoGenomics Business Update Call. [Operator Instructions]. Please be advised that today's call is being recorded. I will now hand the call over to Kendra Sweeney, Vice President, Investor Relations. Please go ahead.

Thanks, Holly. Good morning, everyone and welcome. Today, we're joined by Chris Smith, our Chief Executive Officer; Jeff Sherman, Chief Financial Officer; and Ali Olivo, General Counsel and Head of Business Development. Additional members of the team are available for Q&A, including Tim Forshew, Head of Science and Innovation; Dr. Nate Montgomery, Vice President of Medical Services; and Warren Stone, Chief Commercial Officer. Please note that during the call, management will make projections and forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the company. Actual results may differ materially from today's forward-looking statements depending on a number of factors, which are set forth in our public filings with the SEC. I will now pass it over to Chris.

Thanks, Kendra and welcome, everyone. I appreciate you joining us this morning for an MRD business update. We have received several inquiries from investors, so we wanted to share the latest with the public. As always, I want to first thank our teammates for their commitment to our mission and our vision of saving lives by improving patient care. You will always be at the forefront of all we do. We have stated previously, we are committed to providing patients with comprehensive cancer testing menu that improves patient care and gives patients and providers actionable information. We believe we are a leading oncology lab in part because of our offering along the cancer care continuum. With that, I'm excited to announce that we've updated our RaDaR technology and this updated assay is now through the feasibility stage. We are proceeding with design and development stage and CLIA validation, which we are targeting for the first half of 2025. We believe this new version will be free and clear of IP Natera asserted against the original RaDaR product. It's important to note that the bioinformatics or our secret sauce is maintained in this new version. The update in the new version involves modifications to the early steps of DNA processing, which differentiates it from RaDaR 1.0 while retaining the exceptional overall performance. We invested in and later acquired Inivata to expand our offering into the MRD through the RaDaR platform. It wasn't just about a product. It was about a platform and that first product happened to be RaDaR 1.0, which has exceptional high sensitivity. The strength of the platform has been and continues to be our proprietary bioinformatic steps, which are protected by a portfolio of patents. The platform was developed by Tim Forshew, who is our Head of Science and Innovation. And Tim is joining us today for Q&A. Tim and the R&D team have continually iterated on various versions of RaDaR assay with a focus on improving insights for patients and providers. The preliminary injunction brought by Natera forced us to take RaDaR off the market which we believe was detrimental to patients, which brings me to where we are today. This new test provided us the opportunity to resolve the litigation with Natera as to RaDaR 1.0 and allows us to focus our efforts on advancing that technology, which was always planned for the company going forward. We decided in the best interest of patients and the Neo to accelerate our update through R&D rather than to litigate a version we knew we would retire in the future. That process was already underway. And with the strength of our R&D resources, we were able to accelerate this update in record time. The terms of the settlement with Natera are confidential. But we can confirm that the settlement is not material to Neo's bottom line and does not impact our adjusted EBITDA guidance range or liquidity expectations. The resolution of the legal case against RaDaR 1.0 includes Natera no longer asserting the 035 patent against either RaDaR 1.0 or the updated RaDaR product, I just mentioned. The permanent injunction is still subject to carve-outs, the court previously addressed, including existing patients in clinical trials, which we believe allows patients to continue with their care without interruption. While Natera claims the updated RaDaR assay may infringe the 454 patent, we disagree and believe the product does not infringe Natera's patent and that the patent is invalid. This case is scheduled to be heard sometime in the second half of next year with a jury trial. We believe the MRD product is one of the most attractive and strategic opportunities in the oncology testing and that patients deserve to have a choice in testing as the modality becomes increasingly important in delivering personalized care to patients. We are committed to ensuring our patients and customers have access to an MRD product. As we've shared with you in the past, we are actively pursuing partnership opportunities that will bring us an array of complementary technologies to our RaDaR platform, which we believe could drive new and unique MRD products into the market for years to come. On that, I'm going to go ahead and open up the line for Q&A.

[Operator Instructions] Your first question for today is from Dan Brennan with TD Cowen.

Maybe the first one would be, I mean, investors kind of waiting and the patent is also [Technical Difficulty] Nonetheless, it would be helpful to, oh sorry.

I am sorry, you broke up, you broke up a bit. That's okay. Just say that last line, the last line.

Yes. No. I'm just saying kind of looking in the patents is always a difficult endeavor for investors. But I'm wondering if you could help us think about what gives -- what should give investors confidence in your stance on the version [Technical Difficulty] sorry about that versus the 454 patent.

Yes. Well, they are 2 completely different patents. And the issue with the injunction was around the 035 and that was at the front end kind of the process. I think from a legal perspective, maybe will have Ali give you a little more specifics on that. Ali, do you want to...

Sure. The 454 patent was part of the original case as well, just not the preliminary injunction and we're not going to reveal our legal strategy but what we can say is that we believe that we do not infringe, that continues to be the case and that we believe the patent is invalid. We had filed an IPR on the 454 patent as we previously disclosed. The PTAB did not institute the IPR. It was based on administrative grounds, not substantive grounds as a procedural. So we're going to continue to pursue and defend RaDaR from any claims of infringement.

And then maybe just secondarily, could you give us any color on how we should think about, while it's early, what the performance metrics would look like to the extent you are successful in bringing this version 1.1 to market versus 1.0? And then ultimately, timing, I mean, just assume you are successful, at what point do you think you'd actually have something in front of Medicare? Is that 1 year or 2 away?

Well, I think -- look, so a couple of things to think about. We -- when we acquired Inivata, Tim and the team had multiple versions. And just like, if you think any R&D pipeline, they're at different places. And so I would say that when all this went down with the injunction, we pivoted resources to focus on where the injunction was and to find a way to get that patent resolved and really look for the new products. And so one of the reasons we moved forward with this settlement agreement as opposed to continuing on that with that part of the case was that the new product had gone through feasibility. So when you think about the timing, that's why we talk about kind of design and then validation and verification and then CLIA in the first half of next year. So everything follows kind of after that. It's hard to put a time on it but that's really kind of a point in time that we always look for is, when can we submit the CLIA and when do we get through that part of the R&D process.

And anything on performance that you would suggest is the same -- have the same high level of sensitivity that version 1.0 has?

It does. Yes, that's a really good point. Yes, it does. So we are still working on 2 other versions. One in the future, which will be focused much more as sensitivity becomes more and more important but this was really focused on making sure that the clinical outcomes were similar to the way it performs.

Your next question is from Andrew Brackmann with William Blair.

I'll stick to one. Chris, in your prepared remarks, you sort of talked about continuing to look at multiple avenues to participate in this MRD market, be that internal or even external. I guess how does this announcement change that strategy or approach? Do you sort of still keep all doors open? Or does moving this one forward sort of close some of the doors?

Yes. I think it's a really good point. And look, I think when you look at RaDaR/Inivata, I mean, I think we had best-in-class R&D, especially around tumor informed. And we still believe that, that's -- from where things are today into the marketplace, probably the best avenue. That being said, I do believe that there's technologies that are moving in tumor naive. And I think, as a company, if we're going to own kind of a comprehensive test menu, kind of the end-to-end and we want to have customers be able to access the best technology, we think we have to look at things like that. There's also other ways of getting to -- there's multiple technologies that get there and some focus on turnaround time, some focus on cost, some focus on sensitivity. And so look, we just think it's a big market. As you guys probably know, there's a lot of innovation out there. And so look, while we're not going out and looking to do big acquisitions, there are some innovative companies that are looking for a strategic partner that has a very strong distribution channel. And I would say that our distribution channel, especially into the hospital is best-in-class and it's getting better every single day in the community oncology. So that's what -- so we just want to be in the MRD space and we don't think it's 1 product.

Your next question for today is from Puneet Souda with Leerink.

First one, Chris, first one, on the 6 clinical trials that we're running with the version 1, can you just remind us what's the status there? Would they shift over to this new assay, is it really hard to move the clinical trials? And then was that revenue material for -- on those clinical trials? And maybe just high level, what is the clinical trial strategy for this v2?

Yes, I'm going to let Ali kind of start with kind of a legal and what we're disclosing publicly and then I'll let Jeff kind of talk about the revenue stuff. So Ali, do you want to start with the 6 clinical trials and how we're managing them internally.

Yes, sure thing. So the permanent injunction is still subject to the carve-out the court previously approved as part of the preliminary injunction. So those 6 clinical trials will continue. So that's going to allow continued use of RaDaR for existing patients and clinical trials, as well as pharma. And like Chris said, we believe that, that allows patients to continue with their care without interruption. As to the revenue, I'm going to turn it over to Jeff for that one.

Thanks, Ali. Yes, Puneet, so even before the preliminary injunction was put forth, we were not expecting RaDaR revenue to really be a significant contributor in 2025. And obviously, with the inability to sell to new clients because of the preliminary injunction, it was even less than we were originally expecting. So it's not really material right now to the company's overall financial performance. We still have revenue but it's not a big number. It's not material.

Got it. That's helpful. So my second one is really on clinical evidence. And I'm sure you're going to run analytical validity and clinical utility studies here but the benchmarks that one might assess these assays have moved in the marketplace. Sensitivity remains important but really, there are assays that are -- have a strong dataset for adjuvant chemotherapy. Indication expansion has happened. And so just given the stage where -- we're one of the leading competitors in the space is, can you elaborate on, #1, in terms of clinical studies, what are you planning to build clinical evidence here? How does that change your expectations for overall expense this year and then to 2025? And then just ultimately, how much of an impact do you think that these studies can make? And then obviously, it's going to take some time to do so because you're -- there is some -- a little bit of a time loss that has happened.

Yes. So Puneet, maybe kind of address a couple and I make sure I try to hit it all because there's a couple -- I got to unpack a couple of questions there. But look, I think from a clinical trial perspective, we are a huge advocate that we need to have clinical validity of the technology and also outcomes data. And so we -- when we started going down this path, we had ongoing conversations going on with many clinical investigators about trials that we were going to run specific around disease states. And so I would just say that we knew that we were -- this is a product that we've been working on. I would say that we pivoted, a couple of things, the reason we're calling on it -- as I said 1.0 is the one that was for injunction but there's multiple products. And so I would say, where you lose time a lot of times with clinical trials, is negotiating with investigators and IRBs and things like that. So that has not stopped and discussions have happened about the product. We haven't disclosed those trials because candidly, as you can imagine, it's becoming a highly competitive market with MRD. And so we're not going to put those out till the time is right. But we feel very comfortable with where the clinical movements going with what we need to be able to support this product in the market. And not only this product, I think the products in the future. So I think as far as the cost, so all those clinical trials are baked into our updated guide that we gave after Q2 for this year as well as in the long-range plan. So there will not be -- we're not changing our -- any of our plan. We had already baked all that in.

Your next question is from Mark Massaro with BTIG.

This is actually Vivian for Mark. I just wanted to check in on how you're weighing the importance of a clinical MRD test relative to your longer term, I believe it's 10% revenue target. I think your '24 guide and long-term guide both exclude clinical MRD revenue but I just wanted to confirm that.

Yes, I'm going to let Jeff take kind of the guide questions. Do you want to take that, Jeff?

Sure. You are correct. It did include -- it did exclude clinical RaDaR. So when we guided last year at our Investor Day a long-term growth rate of 7% to 9% that excluded clinical MRD RaDaR revenue. And when we updated our guide earlier this year to 10% plus revenue growth, that also excluded any clinical RaDaR revenue. So you are correct that the long-term guide does not include clinical RaDaR revenue.

Okay. Great. And then I think this has kind of been alluded to in the prior questions but just based on your guidance current understanding, do you need to reapply for Medicare coverage on v2 of RaDaR?

Yes. Look, well, I think when you think about MolDx coverage criteria, we'll ensure that we do everything for all tests and test updates but we're not disclosing kind of our MolDx or Medicare strategy.

Your next question is from David Westenberg with Piper Sandler.

Chris, hope you're doing well. So just one really basic clarification question here. Just on -- I mean, in the press release, it's resolved. So is this like a low-level financial transaction? I mean, can you just give a little bit more clarity on exactly what's happening? And sorry if I'm missing is, I'm not very good at legalese or any kind of thing there. And then just in general, I think always the key differentiation of RaDaR had always been the low level of detection. So where do we see the white space in the market? Do you see this as maybe a deescalation of therapy, specialization? I'm just trying to think about your go-to-market strategy particularly in the sense that this is now, with the new strategy, you might be 2 or 3 years later to market than legalese thought. So it would be great to just see kind of where that white space is in your mind.

So I'm going to unpack that in 3 ways. I'm going to take the very last part and then I'm going to let Tim and Nate talk from a science perspective. Look, I don't think we are -- this piece, without question, we were out marketing a product and having an injunction and taking off the market definitely slowed us down. And I think our team has did an incredible job pivoting and continuing the growth because it was still very early days. If you remember back when we were selling, it was not material to the revenue. But all that being said, we had multiple R&D projects going on. And so I think our pivot to be able to bring this forward has not significantly -- really hasn't delayed our version 2 or 3 that we were working on. And so those time lines -- so we feel pretty good about where we want to be if you look out 5 years with where we'll be on the technology. So while we're not getting into detail about it, I would say that we feel pretty good. I think that without question, off the market for a certain amount of time with 1.0 but we feel like we'll get back quickly but it doesn't change the new products. I'm going to then take your first question, which was around the financials. And I'll start with that, if Jeff has something I'll have Jeff add and then I'm going to turn it over to Nate and Tim. But as we talked about in the call, so we've reached the settlement, like, look, we made the decision because of the success and how quickly this new product was able to move through feasibility, we made the decision to reach a settlement agreement. And that settlement agreement has no impact on our adjusted EBITDA guidance range and it doesn't materially change adjusted EBITDA reconciliation or liquidity expectations. So while we're not -- the terms are confidential, it didn't change it. And Jeff, I don't know if you want to add anything on that and then we'll throw it to Tim and Nate to talk about technology.

Yes. The only thing I would add is, if you look at the adjusted EBITDA reconciliation in our earnings release, it starts with net income or loss, the GAAP number. We don't expect that number to change either. So really no impact from where we thought we would be when we updated our revised guidance in the second quarter, starting with net income and going all the way down to adjusted EBITDA.

And that's after we raised the guide in Q2. So all right. So I want to make sure we get around your question, David. So Tim and Nate, do you guys need him to kind of rephrase some of that? Are you guys good to take that piece of his question? Tim?

I think maybe I perhaps could start with the white space. I think it's -- thanks, Chris. We've been -- in particular, have been working on the RaDaR technology since 2010. And we continue to look at ways that we can improve the assays in various different ways. And I don't think I can discuss precise details on the call today. But to say that as a team, we continue to look to innovate. And I think there's clearly lots of different ways we, as a group, have to make tests that become more sensitive, more practical. And I think you'll see these over the coming years. And Nate, I don't know whether you want to add to that.

I'll let Nate take it clinically.

Yes. I think the only piece that I would add in terms of the opportunity, I agree, RaDaR has, as initially launched has been an MRD product specifically, right? Certainly, the technologies that drive plasma-based, tumor-informed biomarker detection are applicable to other things like dose deescalation, as the question raised. The technology will guide us. I think we see that we have a really strong technology and the applications of that, I think, will evolve over time as the assay comes to market.

Your next question is from Mike Matson with Needham & Company.

So just a quick one on Medicare. I know there was a prior question but I mean, is this -- does this essentially mean you're going to have to go back to sort of square one here? Or is there any chance that any prior MolDx submissions would still be applicable?

Yes. I think I mentioned it earlier. So I think -- look, one of the things, I mean, we're obviously still -- we have a court case that's probably going to hit the docket in the second half of next year. So obviously, we're still in litigation and we're in a highly competitive market. And we think there are multiple aspects strategically. I think everybody gets into long-term strategy, or I just think from our clinical strategy as well as any payer relation strategies, we just feel like that, that's pretty proprietary because we think we have some innovation there and not going to kind of put out. But we feel very good about our pathway forward.

Okay. And then just -- it sounds like you're pretty confident that this new version, there's not going to be any kind of infringement issues with Natera or anyone else but I guess what kind of gives you confidence that, that is, in fact, the case?

Yes. That's a little bit of a legal question. Ali, do you want to take that without going deep into the technology?

Sure. Obviously, we learned a lot through the preliminary injunction proceedings and subsequent appeal. And so we've taken what we've learned and this resolution sets us up well for the next wave of litigation. So it's basically applying what we've learned without saying too much about our legal strategy.

Your next question is from Tejas Savant with Morgan Stanley.

Perfect. So just a couple of quick cleanups. So first on those carve-outs, you mentioned, Chris, is the head and neck carve-out also still in place beyond the ongoing clinical trials that you mentioned? And second, would you consider launching the new version of the assay at risk if you don't have legal clarity on the outcome of that trial in the back half of '25?

Okay. You broke up that last piece. Can you -- I'm sorry, could you say that last piece?

Yes. I was just saying, would you consider launching the assay at risk if you don't have clarity on the [indiscernible] trial outcome in the back half of next year?

Okay. So let me kind of try to take that in a couple of ways. So head and neck is not carved out. Ali can talk kind of more about that. Look, I think for us as a company on launching products, so we have -- look, when we go through a product launch, there are several steps that you go through. And I think the biggest one is, you got to get through CLIA at the very end of it. And so the way that we've looked at it is that we want to make sure that we get through that in the kind of the first half of the year. So we're evaluating as far as market launch. Some of that has to do with what we're going to do clinically. And also the timing of when we're going to launch [ pan tracer ] liquid and solid tumors. So as we get closer, we'll provide more information. But at this point, I mean, I think our big thing was, is that to be ready to offer the product to the market, you got to get through the CLIA piece and then I think we'll tie that in with our clinical strategy. So we haven't -- we're not -- we're still evaluating what the optimal launch is going to be.

Got it. And then just a quick follow-up. I know you said you're changing the upfront sample processing in the new version of the assay. Can you comment on whether this new version is based on a whole genome sequence as a backbone rather than whole exome, like the original version? And what are your thoughts in terms of going in that direction, down the road, Chris, we've seen Personalis and Myriad, I mean we've seen their IP together and so on. So it sounds like that might help you sort of work around that 454 patent.

Yes. So I'm going to let Ali take the legal side and Nate, if you want to first hit kind of the clinical side of that and then Ali.

Sure. So I don't know how much we're saying about the design of the current assays. But I think with a point in terms of our long-term vision for RaDaR on exome versus genome, I think we are thinking about, we're going to be in the MRD space. And over time, the technologies that we use to drive tumor informed and even tumor-naive MRD are probably not going to be singular. And so I may not get into the specifics about the approach that we're taking with the new version of the assay but in general, I think our approach clinically will not be singular because we see a lot of different clinical issues that we will ultimately want to address with different products.

And do you want to talk about WES, also Tim?

Go ahead, Tim.

Well, I think I can say that for this current product that we're talking about, this initial version will be, it's the same performance as current RaDaR. And so this version will be also [indiscernible]. But to Nate's point, we see an evolution and a very -- various range of products in future.

And even though we're not talking specifics on the technical differentiators, again, the bioinformatics process is what differentiates RaDaR and has some patent protection. The difference in this product is an alteration in the early sequencing step that doesn't affect downstream performance of the test. And to your question on Myriad and Personalis and licensing, as Chris talked about in the prepared remarks, we are talking to various partners and others who can leverage our commercial channel and it is in complementary technologies to the RaDaR platform.

Your next question is from Mason Carrico with Stephens.

Just to rehash or get some clarification on some of the previous questions that were asked. So no change to the EBITDA guidance range. So is it fair to assume that there's no material change to how we should think about legal expenses going forward or maybe OpEx in general?

Yes. Jeff, do you want to?

Yes. I would say for 2024, there should be really no -- there's no change in our kind of overall bottom line number or adjusted EBITDA number. We haven't talked about 2025. But obviously, with the court case expected to go forward next year on the other patent that -- we'll continue to have some legal expenses. But for 2024, our guidance is not changing based upon the terms of the settlement.

Or our long-term guide like that we gave.

Got it. And then when it comes to prioritization of cancer types for v2, do you plan on initially focusing on the cancer types that v1 already has coverage for? Or would this be a different strategy? Any color there?

Yes. So look, I think it's an interesting point. There are -- we've had several studies that have continued in different disease states. So those trials that would get you coverage did -- have not stopped. And remember, the court case is completely different than Medicare or MolDX and that process. Look, we continue to believe we have a very strong position in all of lung, a strong position in breast, we think and not just in the MRD but in all our technologies. And I think places where we believe sensitivity is important are the disease states that we'll continue to focus.

Okay. And then I know this has been asked a couple of times already but I mean maybe based on that statement, is it fair to assume that you believe you may have the ability to leverage some of the work that you've already done related to clinical evidence and reimbursement for v1 shifting over to v2, it's not a complete start from scratch situation?

Yes. Look, I don't want you guys to speculate on it but I'm also trying to give you as much information as I can. So I'm just going to leave kind of the 3 other people that asked me, it's the way I answered earlier on that.

Your next question is from Matt Hewitt with Craig-Hallum.

Maybe the first one and I don't know, maybe it's too early to...

[indiscernible] question, let me just kind of finish up that last one with me. Look, we're just -- as far as coverage, we're very confident in the strategy to secure it. So I'll just leave it at that and move forward. So let me -- okay, I'm sorry. Let's go ahead and move forward [indiscernible]

All right. Maybe -- and this might be a little bit too early to know. But will the version 2.0 carry a similar margin expectation? Or does the workarounds impact your thoughts on margins?

Yes. Jeff, you want to give specifics on that? I mean, pretty much [indiscernible].

Yes, I would say we don't see any really change in our expected margin profile going forward as a result of the generations we're looking at. Most of the cost profile is going to remain very similar. So -- and I would say our expectations on reimbursement are going to be pretty similar to our original expectations as well. So I wouldn't think -- wouldn't expect there to be any change in our margin profile expectations for the new versions.

Got it. And then I know you've kind of touched on this a couple of times but with the resolution -- and Jeff, this might be a question for you. But with the resolution here, why wouldn't that reduce your legal expense? I realize you still have the ongoing with the -- I think it's the 454 in that trial, second half of next year. But with at least a partial resolution, why wouldn't that reduce your legal expense at least for 1 piece?

Yes. So I didn't go -- we didn't go into the specifics regarding legal expenses. What we've said is, the settlement is not changing our expectations of our financial performance for this year. And so I think you can interpret that as you will. But we didn't say our legal fees are going to be lower or higher for this year. We said the settlement does not change where we expect to finish the year at. And I would say, for 2025, we haven't given any guidance yet for 2025 but we do expect we'll have legal fees as we look to the court case that's going to be scheduled for next year.

We have reached the end of the question and answer session and I will now turn the call over to Chris for closing remarks.

Okay. Thanks so much and hey, everybody, thanks for joining us today. I know we gave prepared remarks and we definitely wanted to give you some color because a lot of things are going on. We're obviously super excited about getting through the feasibility stage with the new product, which allowed us to get this settlement done and get it behind us and really start moving to have this product back on the market. And so we'll continue to keep you updated. Obviously, we'll have an earnings call in several weeks. And if there's any new updates, we'll let you know then. But thanks and everybody, have a wonderful day. Take care.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.