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

All right, good morning, everybody. I'm Luke Sergott. I cover life sciences and diagnostics for Barclays -- sorry. I had something caught in my [indiscernible]. With me, I have, Tony Zook, CEO -- incoming CEO of NeoGenomics. We have Jeff Sherman, CFO. And we have Warren Stone, Chief Commercial Officer. Thank you again for -- everybody, for making it.

Thanks for having us.

Thank you.

Yes, it's a pleasure.

So Tony, I guess, as you're coming into the seat, talk about things that you are excited to carry, go on. And I mean you guys are kind of at an inflection point, anyway, and transition and building out the business, so talk about things that you -- obviously you don't want to disrupt what's going right; fix what's going wrong, if there is anything, but just kind of give the overlay of the land, what you see as incoming and planned.

Sure, yes. No, I appreciate the question. I think, first and foremost, I've had the advantage of being on the Board for the last few years, so I've seen the outstanding work that Chris and the management team have done in taking a business and getting it laser focused. They have a compelling mission. There is this patient-centric idea across NeoGenomics that's contagious. People really believe in what we're trying to achieve. They've also, I think, invested very, very wisely in building up the sales force and taking advantage of the opportunities that are found within the portfolio. And so I looked at the opportunity and thought, wow, you have an outstanding management team that's built not just for today but for the growth that we anticipate. I think, the way Warren and his team have leveraged the portfolio, there is a real strength for NeoGenomics in our selling channel, especially in that community hospital environment. And I think that's something that we will continue to leverage over time, and so I have the opportunity of coming in and being able to say full-throated this isn't a change, right? This is just the evolution of what is the next steps of the strategy. Because I think the foundational elements are outstanding. And so I try to tell people right away what's not changing, right, the financial discipline that the company has exhibited. They've done a lot of work, and Jeff can go into more detail. And so we're not throwing that away. We want to make very, very prudent decisions as we continue to drive the business forward. The focus on our sales force efficiencies and the sales force excellence and launch excellence parameters that Warren has put in place, that's not changing. Our oncology focus, that's not changing. I think what we will do is start to evolve, all right? We want to make sure that we're not just surviving but thriving into the future as well, so that means bringing an element of innovation into the portfolio. And again, doing it responsibly over time, I think, is probably an area that we will start to shift our attention -- and we have an outstanding leader in Andrew. And so bringing new technologies into the company will be a priority both organically and, when it's right, inorganically.

Got you. And let's talk about building on that foundation. And one of your competitive moats or where you're very good at strategically is in that community setting. Talk about why that is -- why your decision was to go into that market. Because there's -- a lot of others are going into the big academic medical centers. Just talk about like the positioning there and competitively and why you guys are...

Warren...

Great question. So we -- obviously it's -- market segmentation is about decisions. And the intel that we have -- and many market research documents point to the fact that 75% to 80% of people are actually served in the community. So that's where the bigger population is. And then sort of in, within the community setting, the sort of standard of care is very much guideline-driven. Oncologists, pathologists, interventional radiologists look to guidelines, NCCN and other guidelines, to really direct how they go about their diagnostic testing and then ultimately their treatments. And we -- because of the prevalence, the 80% of the population going to the community and the fact that it's guideline-driven give us a very clear path in terms of what are the tests that we need to have within our menu. How do we need to ensure that they fit with the guideline needs? And that in itself then drives a secondary benefit around sort of reimbursement, which translates into profitability.

Right. And as you talk about adding innovation around that, talking about building out the portfolio, talk about -- and I know you're obviously focusing on oncology. And as that continues to move into more of the community setting, talk -- where in your portfolio are you planning to continue to innovate and add? Where can we see that evolution of the business go?

Yes, yes, great question. I mean, as we look at the continuum, maybe starting at a high level, you have hereditary cancer screening. You have early detection, diagnosis, therapy selection and then surveillance or MRD. We're incredibly strong in the diagnosis side of things and have a good foothold in therapy selection. Our strategic intent is to continue to sort of move to the right, so we get further entrenched in therapy selection. It's an attractive space. We believe it's $12 billion-plus, only about 35% penetrated and growing because there's more and more therapies that are coming to market from pharma companies both in the solid tumor and the heme space, so that's definitely an area of focus for us, and investing there. And then further to the right, MRD, is the next area where we're investing heavily, both internally in terms of own R&D capabilities but also looking externally. And very recently we signed an agreement with Adaptive on their clonal SEQ (sic) [ clonoSEQ ], which is an MRD technology on the heme side. So because of the strength of our channel into the community that you touched on, where Adaptive only focuses on the academic medical centers or largely focuses on academic medical centers, it was a perfect fit to leverage our channel to bring their product to the community setting, but expect us to invest more, as Tony said, from a portfolio point of view into therapy selection and MRD.

And we're really trying to take kind of a balanced approach of growing double digit from a top line revenue perspective, seeing significant margin expansion. And then that -- ultimately that adjusted EBITDA or earnings is helping to fuel and drive that incremental investments that both Warren and Tony were talking about.

I think it's interesting as well because you bring up our strength, which is in that community setting. And Warren is also now making investments as well in the community oncology marketplace, so we're going to have a very strong foothold there. And a lot of these technologies and markets, the penetration rates are very, very low still. There is still tremendous runway in NGS. And MRD is, in our view, a nascent market, especially when you look at the community hospital, so we think we're well positioned to compete in those and we're going to take advantage of our strength.

And in that NGS segment. I mean, last year, we grew that 34%. So it's about 30% of our clinical revenue is growing and, we believe, significantly above the market growth, so we're seeing more expansion there. We're capturing market share. We're seeing expansion of share of wallet with existing customers. And that's really building on our commercial footprint and commercial go-to market strategy and channel. And we believe we can continue to capitalize on adding new tests into that channel to further drive revenue and earnings growth.

And on the therapy selection as you think about your biopharma relationships in getting that and building that portfolio out. I mean, what areas or indications are you guys going to continue to focus on? What do -- what areas do you see as a bigger opportunity in that community setting? Because I mean we're talking about some pretty crowded and competitive markets, especially in the MRD setting which we'll touch on eventually, but like, are there indications that you see an opportunity that you can work with pharma and get those therapy selection and -- which is where you're really strong? Is it particularly suited to the community setting versus other parts of the or other segments of the market?

Yes. I think our strategy is broad-based. It's not only in terms of partnering with pharma to sort of identify and develop biomarker specific tests. I think that's one avenue that we would look at but also sort of larger, more pan-cancer solutions where one product that we could offer at scale would address multiple needs. And sort of it's -- that's a longer sort of strategy. Because, my earlier comment with regards to guidelines, those sorts of large panels are not in guidelines as yet. I believe it will come in the future, but in the interim until that starts to -- it sort of fully emerge, we continue to focus on some of the smaller panels, more targeted indication panels, whether it be breast, lungs. You pick the indication and the stage. So our philosophy is really to, a, meet our customers. And in this case, it's the community oncologists, the community pathologists and sort of where they are. Today, it's very much a guideline-driven strategy, but we definitely see this evolution to larger panels. And we're skating to where that puck is going to be with products that we've recently launched and will launch later this year to satisfy that need.

Got you. And we're -- just talking about the growth of the NGS business in the community setting. I mean this is -- I've covered this space for a long time, and we're talking about sequencing moving into the clinic. It seems like it's always 3 years down the road, right? Every year, we've been saying, "Oh, in 3 years, we'll have a lot more sequencing." It's taken a really long time to hit that community setting. And the growth that you guys are seeing is well above what we've seen from the market, so like, where do you think we are in that adoption rate of broader adoption of sequencing-based testing in that community setting? And like, is that inflecting? And then as you guys think about your position there, it's like we should even expect this to accelerate -- not to put it like guidance around anything or...

Yes. It really does vary, certainly adoption in terms of large panel and sequencing tests. The adoption is greater in academic medical centers. There's no question about that. And it sort of pieces out as you go into the community, and it's driven by different things. I would say -- and it's a high proxy for you. Independent oncology practices in Paducah, Kentucky, as an example, probably has the least adoption because they're really only influenced by the guidelines, but if you have an affiliated oncology practice that's linked to a community hospital, they're probably getting pressure from their administrators to actually start to move to latest technology. So their adoption is a little higher, but we still feel the market is only 30%, 35% penetrated and, as I said earlier, about a $12 billion market So it's a large market. It's probably growing high single digits, low double digit; and only 30%, 35% penetrated, so a huge opportunity in the community. And our footprint both from a commercial standpoint but also an operational standpoint is incredibly well suited to address that demand today and in the future.

And then there's also a reimbursement angle as well, particularly with larger panel tests, which are more challenging to get paid for from managed care companies. State biomarker legislations that have been passed, ultimately, we believe, will be a tailwind requiring the coverage of these larger panel tests, so a reimbursement component will be helpful to drive further adoption as well in the future.

Yes. I mean that's always been the pricing issue and -- not an issue but the pricing dynamic. And for the test to get adopted, it was -- from a diagnostic company, it's like you have to have a very strong fortitude because you're coming up with an incredible technology, giving it away for free, hoping to get paid for it [indiscernible]. And doctors, once you get reimbursed, it's always going to be more expensive or have a co-pay. And doctors are like, "Oh, I don't want to do that to my patient." And so driving that clinical utility is number one, but then education and converting them -- so talk like -- how much of the commercial [ work ] is out there still educating these guys? Or we -- kind of like they're like starting to come to you and saying, "Oh, I read about this test. And do you guys offer this?" Like, where are we in that?

Yes. So it's a delicate balance. And it's an evolution. I'll start off by saying we have contracts with more than 300 commercial payers, so we clearly understand the need to limit bills for patients. It's a fundamental concern for practicing physicians, that their patients don't get these outrageous bills. And we leverage that by making sure we've got a comprehensive network of third-party payers -- and as I said, over 300. And again, we have the one set of portfolio which is [indiscernible] [ which we'll get ] and will ensure that your patient does not get a bill. So we always have that option, but at the same time, our salespeople are working in terms of developing that market and talking to that oncologist around the benefits of a larger panel and how that will help to inform their treatment decisions or talking to them about the benefit of a liquid panel that allows them not only to understand the tumor-specific mutations but also the tumor microenvironment around it. So using these different diagnostic solutions in combination can also help to inform their therapy decisions, et cetera. So it is an education in the community setting. We do that through our commercial organization and we do that at conferences. We do that through other marketing activities to bring people along, but what's important is we have choices for those practicing physicians and we want to meet them where they are. And we are ready on both on -- in both elements, where they are today and where they're likely to be in the future.

And as you said, it's a balance, all right? And so you are educating, but I -- at the end of the day, you also have to get paid for what you do. And I think that this is where, again, NeoGenomics, over the last few years, has instilled a much stronger awareness and discipline in that regard. I think Jeff and his team have done an outstanding job in a lot of our RCM initiatives and just in the pricing strategies and how they position the company and that a high proportion of our businesses in the hospital does give us some advantages in that space.

It's a great segue into the pricing dynamic. You guys, you had 4% last year. I mean -- not bad. So talk about the strategies that are working right now [ in sustainability ]; and how we should think about this over the next 3 years, 4 years.

Yes. If you look at our revenue per test. A significant portion, almost 60%, of our revenue per test increase has really been driven by the mix of moving into the higher-value tests of NGS. And we certainly expect that trend to continue. We expect to be growing faster than market in that segment of the business. Our clinical business: Roughly about 60% of our clinical business, we're billing hospitals directly for the care. We're not billing a third-party payer. And we've been able to do price increases in that business over the last couple of years and expect we'll be able to do an annual type of price increase there. The balance is managed care. And we've had some success in getting managed care increases as well. Those take longer. They're more challenging, but we still think we have good upside there. And then the last piece really is just RCM initiatives. As Tony just mentioned, we spend a lot of time and resources just working on denials, prior authorizations, medical necessities, et cetera. The state biomarker legislation that I talked about earlier will also help, so we think we have a multiyear opportunity to continue to get paid more for the work we're already doing, which will be fully flowing to revenue, gross margins and adjusted EBITDA; and see that's going to help drive long-term revenue and earnings growth for many years to come.

Got it. And as you talk -- we keep coming back to innovation. Your kind of idea is like, "Okay, we're going to offer these community settings where the guidelines are," right? That's where you're getting reimbursed and keeping your pricing, but how do you balance to stay ahead of developing the tests where you think the guidelines are going, right? I mean you talk about MRD. Where would you like to invest there? Like, where -- talk about the portfolio building. And as that comes through, like, talk about timing and how you think that, that market ultimately shakes out for you.

I'll start...

Yes. So if you look at our -- I mean our R&D -- a significant amount of our current R&D spend is actually focused on MRD. So we have just come out with a new version of our RaDaR, 1.1. It's being clinically validated. We're going to be submitting that for MolDX approval shortly. And we're in litigation on this one. And so we have a court case expected in October on 1.1. We feel good about our case. We believe we have prior arts for the 2 patents at hand, and we'll see where that plays out. That's kind of our 2025 strategy in terms of MRD, but really, for next-generation MRD, we have Andrew Lukowiak, who's actually here in the audience, help leading our drive. And it is the research team that really developed the RaDaR platform. It's still with the company in Cambridge in the U.K. and really working on the next generation of MRD investments in technology. And we've done a full sweep of the landscape. It'll be an entirely new platform building on the knowledge we have but clearly understanding what's in the space from an IT perspective today so that -- we've committed. We're going to be in MRD. And so it isn't just working on 1.1, which we'll have clarity on in October with our court case. It's really investing in the next generation of MRD as well and we're committed to do that. And I think our kind of balanced approach of growing learnings, growing revenues and reinvesting that is going to help drive that as well.

I think maybe I'll build on that only by saying, I mean, one of the big advantages that we have is we're only in oncology. So we're very focused already. And our strategy is very clearly in that continuum I mentioned earlier is to move to the right. And although therapy selection is a very attractive market, $12 billion-plus, MRD is even more attractive. We estimate it at about $30 billion. Others have estimated it larger. And it's still very nascent. It's probably 5% penetrated. It's not in any guidelines. And I think you will see that the investments that we will make both organically and inorganically will largely center in that space, targeting tumor-informed strategies because that allows for increased sensitivity but also recognizing that there is a very clear space for tumor naive. And those are the sort of primary areas where [ you're likely to see ] investment in the future.

The only thing I would add to that conversation, Luke, is that, you don't always have to be the first mover into the marketplace, right? They should be rewarded for it. They took the risk. Congratulations, but I think, as long as we find the white space that we can penetrate, we are quite comfortable coming in. If it's a 1 year or 2 later, that's okay because then we bring the power of an entire organization and a portfolio that others can't match. And so we have to balance that risk of trying to be the first mover all the time and be very selective in those decisions.

And from -- when you're talking about that white space, I mean, are you talking about specific indications? Or are you talking about certain gaps and where that -- the community setting kind of gives you an advantage? Like talk about both of those.

I think it's on both of those levels. I do think there's different indications. And again, it's not only looking at indications. It's also looking where within indications. Are you thinking about this as a near-adjuvant, an adjuvant or a surveillance play with an MRD? So one can look at it from that perspective. And there are still many opportunities, particularly in lower-shedding cancers, head and neck, IO, lung to a lesser extent, where there actually isn't -- there isn't that much [ presence ]. There is a number of white spaces from an indication point of view, but the other aspect is, to a large extent today, community is very much a white space, underpenetrated, very low utilization of solid tumor MRD within the community setting. And again we're very well placed because the greater majority of our business today comes from that setting. And we starting to -- we're starting to see the awareness of MRD as a therapeutic tool starting to surface, but there's a long way to go still, so I'd say that the market that we penetrate or address strategically is white space per se.

I got you. And from the community setting, you have a few large reference labs that serve a lot of those.

Yes.

And so talk about the -- getting the access to the blood, right? I mean it's not like they like to draw blood from somebody else's test. So this has been kind of an unknown or a little secret, that you guys have been dealing with that...

Yes. It's something we -- I like the way you said it. It's a secret. One of our biggest advantages here is that we started our journey in heme cancers. And many would say, well, heme cancers are -- the market is less attractive. Yes, it is. It's a smaller market, but pharma now today is also starting to have many more therapeutics for heme cancers too, which will increase the growth rate there. But the reality is all of these community settings are needing to deal with us because we have a relatively unique solution for heme cancers, so we're there. That's our access strategy. And once we're in, we use that as a mechanism to pull through additional business. And our commercial strategy is very simply protect, expand, acquire: so protect the business you've got. Put wraparound services and provide a high degree of customer experience, but once you're there, expand share of wallet. So increase same-store sales. That's exactly our strategy and it's worked very effectively in the community. And the last element is acquire. That's about identifying new customers that are not supporting us yet today and acquiring them, and it's the same strategy. Once we're in, we work hard to protect by providing a very high degree of customer experience and start to expand. So it's a very simplistic yet very effective strategy. And heme, in certain instances, is our Trojan horse to do that.

And Warren, maybe you could just take a moment, if you don't mind, on [ the ] geographic opportunities that present themselves with this strategy as well like Pathline....

Yes, yes, yes. So actually, very recent -- it's a great callout, Tony. So I mean we look at the United States as well. And we look at it geographically in terms of where we have our highest penetration and our lowest penetration. And when we did that analysis, one of the elements that sort of stood out for us was a relatively low penetration in the Northeast of the United States. So think Pennsylvania and New York and sort of up. And this perplexed us for a while. And we actually realized that there were 2 primary drivers that were limiting our penetration. The first one was that New York State requires a different set of registration for tests. And we were a little late at -- in ensuring some of our key tests were registered. And we're working actively on that, but secondly, we realized that not having a lab presence in the Northeast was limiting our ability to offer a good customer experience on short-turnaround tests, particularly flow, which is critical in that first-line decision-making from a therapy point of view. The turnaround time is sort of 24 to 12 hours, and if you're wasting 6 to 12 of those hours in logistics and not testing, you're going to struggle from a competitiveness perspective. So earlier this week, we actually announced the definitive agreement to acquire Pathline, so roughly a 30,000-foot -- -square-foot lab in New Jersey, which is going to allow us to offer the same level of experience that we offer in many other parts of the country, now in the Northeast. So that represents a meaningful opportunity for growth for us in the future as well.

It was part of our -- what we said we were going to do from a growth perspective; from a corp dev, business development perspective; kind of fit-in-line, a tuck-in acquisition, roughly around $20 million of revenue. We got it for less than 0.5x revenue, so a good fiscal acquisition but actually a good beachhead to grow market share and actually pull in more of that NGS volume, so it fits very well into our strategy of how do we grow the business.

Yes. I mean it's like clearly a strategic bolt-on. You're gaining your presence.

Yes, certainly.

Thank you. This is great conversation.

Thanks for having us...

[indiscernible]

Thank you. We appreciate it.

Yes, this is great.