NeoGenomics Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 16 speakers on the call.

Operator

Welcome to the NeoGenomics Second Quarter 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a listen only mode. Please note this call is being recorded and an audio replay will be available on the company's website. Kendra Sweeney, Vice President of Investor Relations, you may begin your conference.

Speaker 1

Thank you, Jenny. Good morning, everyone, and welcome to the NeoGenomics 2nd Quarter Financial Results Call. With me today to discuss the results are Chris Smith, Chief Executive Officer and Jeff Sherman, Chief Financial Officer. Additional members of the management team are available for Q and A, including Vishal Sikri, President of Advanced Diagnostics Warren Stone, President of Clinical Services and Melody Harris, President of Enterprise Operations. This call is being simultaneously webcast.

Speaker 1

We will be referring to a slide presentation that has been posted to the Investors tab on our website at ir.neogenomics.com. Starting on Slide 2, during this call, we will make forward looking statements regarding our future performance, such as our operational and financial outlooks and projections, our assumptions for that outlook, opportunities and strategies for our products and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to our most recent Forms 10 ks and 10 Q and the 8 ks we filed with the SEC to identify important The forward looking statements made during this call speak only as of the original date of the call, and we undertake no obligation to update or revise any of these statements. During this conference call, in order to provide greater transparency regarding our operating performance, we will refer to certain non GAAP financial measures that involve adjustments to GAAP results.

Speaker 1

The non GAAP financial measures presented should not be considered an alternative to the financial measures required by GAAP, should not be considered measures of liquidity and are unlikely to be comparable to non GAAP financial measures provided by other companies. Any non GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measures in a table available in the press release we issued this morning. I'll now turn the call over to Chris Smith, Chief Executive Officer of NeoGenomics.

Speaker 2

Thanks, Kendra, and welcome, everyone. Thanks for joining us this morning to go through our Q2 financial results. We like to begin every presentation we do, whether it's to our teammates, our customers or our investors with our mission and vision statement because it's what motivates our company and our teammates on a daily basis. Our mission is to save lives by improving patient care. And before we dive in, I want to thank all our teammates for the impact that they make on patients every single day.

Speaker 2

Now let's move to Slide 4 and get into the Q2 financial highlights. We had another strong quarter as we continue the momentum from Q1 into Q2. 2nd quarter revenue was $147,000,000 an 18% increase over the prior year. Clinical service revenue increased 17% driven by strong volumes across our modalities and an increase in revenue per test. Notably, the 2nd quarter was the 9th consecutive quarterly increase versus prior year in revenue per test.

Speaker 2

In addition, we had significant NGS revenue growth well above our 20% stated internal target. Advanced Diagnostics revenue, which includes Pharma Services and Informatics increased 22% from prior year, driven by the strength of our core pharma business, informatics and the ramp up in radar. Adjusted EBITDA improved 87 percent to a negative $2,000,000 and adjusted gross profit was $65,000,000 representing a 44% margin and a 33% increase over prior year. Turning to Slide 5, our 2nd quarter financial results contributed to strong numbers for the first half of twenty twenty three. For the HAP, revenue was up 17% versus prior year to $284,000,000 driven by an increase in both clinical and advanced diagnostics Revenue.

Speaker 2

Adjusted gross profit was $124,000,000 representing an adjusted gross margin of 44%. Adjusted EBITDA was a negative $9,000,000 an improvement of $26,000,000 or 74% over the first half of twenty twenty two. During the first half of the year, we served well over 300,000 individual patients, which is a testament to the mission of our company and a leading indicator of the improved operational capacity within Going back to Q2 on the next slide 6, the 2nd quarter delivered sustained performance improvement in revenue, Gross margin and adjusted EBITDA. We are proud of this year over year accelerated growth because it's a direct result of the strong execution by our Neo teammates and the growing demand for our products from our existing clients as well as new customers. Our operating and revenue cycle initiatives implemented in the second half of twenty twenty two continue to enable accelerated growth and we believe we have the ability to continue to drive improvement in the business throughout the second half of twenty twenty three and beyond.

Speaker 2

As we move to Slide 7, let me remind you of the strategic priorities we laid out at the beginning of the year. Probably grow the core business, accelerate advanced diagnostics, drive value creation and enhance people and culture. As we look at transforming the business, it's about focus, collaboration and execution, and our team continues to deliver results against these strategic initiatives. We have a great team at NeoGenomics and continuing to enhance this team and our strong mission driven culture is critical to our long term success. While much of this won't be visible to outside the organization, this work is foundational for everything else we do operationally.

Speaker 2

This morning, I'm going to focus on our other three priorities. Turning to Slide 8, let me touch on a few highlights from these strategic priorities for the quarter. We continue to see strong growth in clinical volumes across all modalities. Our product offering and our sales force optimization continues to deliver Significant NGS revenue growth as well as growth in revenue per test. Additionally, we continue to refine our laboratory operations.

Speaker 2

We set an internal record for the number of tests processed in the quarter and thanks to our teammates in the lab who support this core business growth. Even with these strong volume trends, we continue to grow revenue faster than volume. Following our last three quarters of significant improvement in turnaround time, We saw a more normal improvement of 3% in the 2nd quarter aligned with a significant growth in volume. In July, we received our 1st Medicare coverage decision for RADAR in breast cancer. Following this approval, which effective Retroactively, as of March 24, 2023, the RADAR assay is now covered for certain Medicare patients in the U.

Speaker 2

S. With HR positive and HER2 negative breast cancer. This decision is a major milestone for us following our acquisition of Innovada. We always believe Radar's superior sensitivity and specificity would enhance patient care and improve outcomes and are thrilled that the sporting clinical evidence met MolDX In June, our RADAR assay received its first pan cancer commercial coverage by Blue Shield of California. This decision is a good indicator of the progress we and the industry are making as commercial payers are beginning to acknowledge the clinical and economic utility of radar in the MRD setting.

Speaker 2

The pan cancer coverage highlights the breadth of our data across various cancer types, which we believe is a key differentiator. Looking forward to the rest of the year, we think there are opportunities to expand coverage with additional indications. We published compelling data at ASCO in June with 5 poster presentations and 1 oral abstract in lung, breast and head and neck cancers. These posters highlight our radar's accuracy and sensitivity over current standards of care and its use across tumor types and settings. We have data complete or in progress and additional indications where we can pursue payer coverage.

Speaker 2

We have focused on driving value creation from a financial perspective and are pleased that we have delivered even further margin expansion from Q1 and have generated significant operating leverage as revenue favorability fell through to the bottom line. Last month, we added 3 excellent directors to our Board of Directors. I'm confident that their varied backgrounds, experience and professional accomplishments will provide Neo with additional skills and insights that will enhance our execution against our strategic priorities and long range planning. Now let me turn the call over to Jeff to review our financial results in more detail. Jeff?

Speaker 3

Thanks, Chris, and good morning, everyone. I'll begin with a little more detail on our operating results for the quarter. As Chris said, we continued the year with revenue experiencing accelerated double digit growth in both clinical and advanced diagnostics over prior year. 2nd quarter revenue was $147,000,000 an 18% increase over the prior year and a 7.1% increase from Q1 of 2023. Revenue growth was driven by growth in clinical test volume, A continuing shift to higher complexity tests and improvement in revenue per test.

Speaker 3

Adjusted EBITDA improved $14,200,000 from prior year to negative $2,000,000 Q2 marks the 3rd consecutive quarter that adjusted EBITDA increased from prior year. We generated significant operating leverage as revenue favorability fell through to the bottom line. Looking at Slide 10, clinical services revenue of 123,000,000 was an increase of 17% year over year, driven by an 8% increase in volume and an 8% increase in revenue per test. Higher volume is driven by growth within our existing client base as well as new sales and demonstrates that our sales force optimization strategies Enabling us to reach oncologists and pathologists continue to show progress. Turning to Slide 11, Average revenue per clinical test increased by 8% to $4.17 representing an improvement for the 9th consecutive quarter versus the prior year as we maintain our focus on higher value tests and revenue cycle management initiatives.

Speaker 3

On Slide 12, Advanced Diagnostics revenue increased by 22 percent to $24,000,000 compared to the Q2 of 2022, driven by both price and higher NGS volume in legacy Pharma as well as growth in informatics and radar revenue. Adjusted gross margin improved 770 basis points, representing the 4th consecutive quarter at 600 basis points or more of Improvement over prior year. At our Investor Day in April, we shared our strategy with you relating to profitability and growth in our Advanced Diagnostics One of the ways we plan to accelerate profitable growth was through rationalization of our global testing sites and contracts, which meant walking away from some of our smaller unprofitable contracts that also didn't deliver meaningful revenue. As we execute on this strategy, especially on what new projects we take on, we may begin to see a temporary pullback in pharma revenue We don't believe this will be material to the overall growth projections for the company. Looking at the income statement on Slide 13, adjusted gross margin was 44.1%, an improvement of 505 basis points over the Q2 of last Adjusted EBITDA was negative $2,000,000 a $14,200,000 or 0.87 percent improvement over the Q2 of 2022.

Speaker 3

These significant improvements were driven by both higher revenue and gross profit and highlight the operating leverage in the business. Regarding operating expenses, sales and marketing expense was $18,900,000 as we continue to invest in the expansion of our sales force, G and A was $60,300,000 and R and D expense was $7,500,000 In addition, there was $3,100,000 in restructuring costs in the quarter related to the previously announced organizational restructuring and footprint optimization, which was part of our value capture program to gain operating leverage. Turning to the balance sheet on Slide 14. We ended the Q2 with cash and marketable securities of 409,000,000 We continue to make good progress in diligently managing our cash burn and are focused on accountability and disciplined oversight of operating expense. This cash flow from operations improved by $32,000,000 or 69%.

Speaker 3

Our strong financial position provides us the financial flexibility to continue to invest in the business and achieve our strategic and financial objectives. Given our Q2 financial performance and continued progress executing on our strategic priorities, we are revising our revenue and adjusted EBITDA guidance for the year. Turning to Slide 16. We previously had revenues at $555,000,000 to $565,000,000 representing 9% to 11% growth in 20 We are revising that range upward and now expect total revenue between $565,000,000 $575,000,000 for the year, representing 11% to 13% growth. This includes the expectation of slower revenue growth in Advanced Diagnostics in the second half of twenty twenty three Due to the very strong revenue performance in the Q4 of 2022 and repositioning the business for more profitable contracts.

Speaker 3

Adjusted EBITDA was negative $22,000,000 to negative $18,000,000 and is now negative $13,000,000 to negative 10,000,000 representing a 73% to 79% improvement. We continue to see strong revenue growth and an increase in NGS product mix and are very encouraged by the opportunities for radar and other new tests, which provide accelerated leverage to the bottom line. As we stated at the beginning of the year, our year over year comparisons will get more difficult as the year goes on, but we believe we have a strong foundation and dedicated teammates While we continue to be focused on driving operational efficiencies, we will also continue to invest in the business to capitalize on our future growth opportunities. Our strategic focus remains to deliver long term sustainable growth.

Speaker 4

With that,

Speaker 3

I'll turn it back over to Chris.

Speaker 2

Thanks, Jeff. We are very pleased with our year over year progress, including strong revenue growth of 18% significant improvement in adjusted EBITDA. We now have our 1st radar commercial payer pan cancer coverage and our 1st Medicare approval in We saw meaningful progress in the execution on our strategic priorities and therefore we are raising our guidance for the full year results. We are well on our way to becoming the leading cancer testing Information and Decision Support Company. We will continue to build on the foundation we have laid over the past several quarters to deliver long term sustainable growth.

Speaker 2

I'm excited for our teammates and our customers and most of all for the patients that we serve on a daily basis. Thanks for your time. And now I'll turn it back over to the operator for Q and A.

Operator

Thank you, Chris. At this time, we are opening the floor for questions. Thank you. Your first question is coming from Dan Brennan of TD Cowen. Dan, your line is live.

Speaker 2

Hey, Dan. Hey, Chris.

Speaker 5

How are you doing? Thanks for the questions. Congrats here on the quarter. Maybe the success you guys had Obviously, gets people excited here and just kind of looking at the full year guidance, a nice raise. Maybe could you just unpack a bit How we think about clinical and advanced diagnostics at the back half of the year.

Speaker 5

You called out tough comps, which you do have, but it still feels like Maybe you're baking in some cushion in the back half of the year. Just kind of can help us think through that back half of your guidance?

Speaker 2

Well, Dan, you're like, I mean, It's just right here calling me out saying we've got cushion. Look, to unpack it, and I've got Vishal Warren here. But I think the way to think about it is, first of all, as you know, we had a big Q4 last year in pharma and a lot of that early radar In the pharma. So we've got a big comp in pharma. In addition, when Vishal took over that business and we dug into it, I think there was a We talked about this in prior calls that there was a big focus on bookings and not revenue and we were booking unprofitable small, I think projects and we had opened up labs in places like China and Singapore and just weren't seeing the pull through.

Speaker 2

So I think the strategy was to re kind of transform that business, which meant that we had to cut loose some of those Unprofitable smaller projects. And so I think that Michelle and Dennis and the team have done a fantastic job of rebuilding that field organization and focusing them really kind of on the top 30 Pharma, so what you'll see is, I mean, I think you'll still see nice growth. But between the comparable in Q4 and kind of this transformation they're going through, We think it will slow a little bit and then we'll get a nice recovery as we go into the second half of next year. If you look at the clinical side of the business, look, I would say the difference there is things are happening Faster than I think we originally had projected and that business is growing at a much faster rate coming off a very low performance in Really in 2021 and the beginning of 2022. And so I think that conversion to NGS and our focus on driving NGS growth, The field force and the optimization we think gives us good continued growth.

Speaker 2

But I don't do either one of you guys I know I just kind of threw a lot, but

Speaker 6

The other thing I'd say the trajectory from a clinical perspective in the second half of the year looks very similar to what we're seeing in the first half of the year is probably how it's summarized. That's

Speaker 3

I

Speaker 4

think Q4 of 2022 was a very strong revenue quarter for us. And With our refocus that we've had, I think we've been a lot more strategic against the high margin accounts that we've been going after.

Speaker 5

Great. Thanks for that. Maybe just one on radar. Congrats on the MolDX coverage. It looks like that was probably based on the chirp study, given the 5 year post kind of surveillance.

Speaker 5

Just kind of wondering, can you help us think through what that opportunity looks like for you? And then secondarily, I know you talked about you have other indications in breast that you either filed for or you have some data that are you're submitting. So I'm just wondering, could you speak a little bit to kind of what's forthcoming later this year From a perspective and then if you can share any insight on the other two indications. Thank you.

Speaker 2

Yes. Look, obviously, we're excited about getting that approval. But Dushyant, do you want to What's going on? Yes. Your guys' time lines?

Speaker 4

Yes. So we haven't broken it down by quarter yet, but our plan is to expand our breast coverage. We did use the CHIRP study data to get the initial coverage on breast cancer, really showed that we understand now what it takes to go through MolDX from our And we want to expand on that with the additional breast coverage that we will go through. And then we haven't really listed out yet what are the other two applications That we're applying for beyond the breast cancer, but more to come on that in the near future.

Speaker 3

Yes. I would say I would add to that. I think the takeaway is we learned From previous submissions, and I think we are where we expected to be and on track with our MolDX coverage As we reformatted our plan to go back to MolDX for breast.

Speaker 5

Great guys. Thank you very much.

Speaker 7

Thank you.

Operator

Thank you. Your next question is coming from Andrew Brackmann from Blair. Andrew, your line is live.

Speaker 2

Hey, Andrew.

Speaker 7

Hey, guys. This is actually Dustin on for Andrew. Thanks for taking our questions. Just to start on the Advanced Diagnostics segment. Just wondering where the pipeline stands on the fee for service radar business today?

Speaker 7

And then secondarily, how much does Radair have the ability to reduce those clinical trial costs? And how does that stack up versus

Speaker 2

Yes. So a couple of things. So we do not on the pharma break out individually what percent of the pharma revenue is radar. I think probably know we started moving there a year before really getting clinical coverage. So I'd say that's one thing just to think about is that we started that process really Last year.

Speaker 2

On the clinical side, we've been pretty clear that we don't have any material revenue in Our plan and that has not changed even though we've gotten coverage. I mean, obviously, we're out selling it and there's coverage. But I think Our view is that we're building for the long term. And so we still have a clinical evaluation program going on and we kind of think our strategy is brick by brick, but I would not say any of the raise was built into that. As far as the clinical trials and helping it offset, I don't know Vishal if you want to?

Speaker 4

Yes. I mean, we are obviously in a lot of discussions with the different pharma companies and building that into their clinical trials, but it's Relatively early still in how MRD is going to be looked at even from a FDA perspective, Well, from a clinical surrogate biomarker perspective, there's a lot of discussions ongoing. So at this time, I would say we're still early on with that process.

Speaker 7

Understood. Our next question is on NeoComprehensive. Just a general update on How the uptake has been on that panel and the feedback from the community there? Thank you.

Speaker 2

Yes. So I think as you probably know, I mean, we've been the market leader in heme, and I think we continue to do fantastic on heme. We felt like we were behind on Solid tumors, so we brought that product out. I would say that we're already developing our next generation of solid tumor, which will come out. Our target is probably Q2, Q3 of next year in the clinical side of that business and earlier in pharma.

Speaker 2

And I think the way that we're really thinking about it now that we have a competitive Solid tumor offering is a portfolio. And what we're really focused on in the whole portfolio of NGS is that we want that to grow above 20% Because the market is growing above that or at that or above that. So look, I think as we stated in the script or in the prepared remarks that we're growing significantly Faster than that, we don't really break out like individually how much in Heme or how much in Neo comprehensive. But I think it's a product where we're getting out In front of our customers and a lot of times it's new customers where we just hadn't had solid tumor business or we had Possibly lost it in prior years because we didn't have a competitive offering.

Speaker 6

Yes. And maybe just building on that in terms of the sort of portfolio aspect. In addition to the physical We launched some of the sort of about the test elements, which was the NeoAccess, NeoSeq, which are digital tools, which are really enabling the oncologists, etcetera, which is Also proving to be very positive amongst both existing customers and new customers, which was obviously part of the strategy acquiring new customers for this portfolio.

Speaker 7

Got it. Appreciate the responses there. Thank you.

Speaker 2

Thanks.

Operator

Thank you very much. Your next question is coming from Alec Nowak of Craig Hallum Capital Group. Alec, your line

Speaker 5

is open.

Speaker 2

Hey, Alan.

Speaker 7

Great. Good morning, everyone. Hey, with regards to radar in the breast indication by Medicare, could you just kind of walk through the logistics of procuring Tumor samples in patients 5 years after diagnosis, just how many patients can you still get access to that tissue sample, Call it a longer time after the diagnosis actually

Speaker 4

occurs. Rishan, you want to take that? Yes, I can

Speaker 2

take that.

Speaker 4

Hey, Alex. So one of the things that we've been out there now since March and we started what we call the clinical evaluation program. And we've focused our energies with the clinical evaluation program and applications that we know we were going after in So this is one of the things we did look at, how hard has it been to get access to the samples that are post by here. And I would say that because of our relationships with the hospitals that we have, actually that hasn't been the biggest challenge For us at this point as to getting access to the tissue. Through our clinical evaluation program, we are getting tissue in the door and educating the oncologists As to the value of the radar test even in this type of setting, which is more surveillance.

Speaker 7

Okay. Excellent. That's great to hear. And then there's been some more talk recently about the FDA putting out another proposal to regulate lapped and we'll obviously have to see if that Proposal even comes out or if the proposal will even go final. But maybe just to preempt it a little bit, remind us how many LDTs does Neale sell to date and any rough Game plan that he's talking about internally, how to push these through a regulatory pathway if it ultimately if we go final?

Speaker 2

Yes. So look, I think as you probably know, I mean, ACLA is pretty close to that and a lot of us in the industry are on that board. And I think there's a lot of dialogue going back and forth. I think that our belief is that the FDA is definitely going to have an influence in this industry. And so I think when we all got together as a leadership team about a year ago, we brought in someone to run the quality kind of regulatory side of our business that had deep FDA experience.

Speaker 2

And so we've started that process already internally, with the belief that things are coming. I think Look, I don't want to speculate on this because there have been a lot of speculations whether old tests that have been around for a long time gets grandfathered, Are university hospitals carved out? Is it going to be stuff around NGS? So I think, Again, we're waiting. We think something's going to come out in late August or September.

Speaker 2

And I think our view has been really over the last 6 months to begin to prepare For when something does occur that we're ready to react.

Speaker 7

All right. Excellent. Appreciate the update. Thank you.

Speaker 2

All right. Take care.

Operator

Thank you very much. Your next question is coming from David Della Hunt from Goldman Sachs. David, your line is live.

Speaker 3

Hey, Dave. Hey, guys.

Speaker 8

Congrats on the strong quarter. So really pleased to see the first Positive MaldX coverage decision for breast. I'm curious if you could Help us understand what the broader coverage definition could look like that I believe you said you're going to Pursue later this year. And it sounds like this is more of a surveillance purpose. Are you going to pursue Coverage for therapy response monitoring at some point?

Speaker 2

Yes. So two things. I'm going to hit the high And then I'll turn it over to Vishal. Look, I think as you probably know, this is a pretty competitive market right now, not only in MRD. A lot of people Have products under development or a lot of activity there and obviously in places like NGS.

Speaker 2

And so we really Don't disclose kind of the details, but I think Vishal can probably give you more coverage about how we're thinking about stuff going forward.

Speaker 4

Yes. I mean, if you look at where MRD is being utilized, right? So if you surveillance is one Thanks. And what's really nice about looking at surveillance 5 years post is that a lot of women do recur 5 years And oncologists are worried about these women and it's such a tool that we can provide now to help in that effort. But going into the adjuvant setting, going into the neoadjuvant setting is another place where we're obviously paying very close attention to And are working to words studies and coverage in that area as well.

Speaker 4

So I think you'll see that, but I think our focus is very much in commercializing now post 5 year, but also at the same time Coming out with publications in the other settings where MRD is being used, which is in the neoadjuvant and the adjuvant setting.

Speaker 8

Great. Thanks. And it's good to see the increased profitability and gross margin. So any updates you could give us about the lab automation efforts in California and Florida?

Speaker 2

Yes. I mean, I think and Melody is on the call and Melody can add some additional color. I mean, I think there's we talked about this is back when Catalyst It was initially formed last summer that kind of rolled into what we call value captured. A lot of those initiatives were around driving operating efficiencies within the lab. I would say the bigger longer term is around automation.

Speaker 2

I would say that depending on the lab, we have a level of automation. But Melody, do you want to kind of update

Speaker 9

And so we are in the process of adding what I would call a little bit of opportunistic automation. So we're adding liquid handlers and things into those lines. We are just kicking off an effort that will explore wider end to end automation and that's something that you'll be seeing from us in the coming quarters.

Speaker 2

Thanks, Mali.

Speaker 8

Great. Thanks, guys.

Operator

Thank you. Your next question is coming from David Westenberg from Piper Sandler. David, you're welcome.

Speaker 5

Hi. This is actually John on for Dave. Thanks for taking the question. So we got the sense that lab Utilization was high across the industry in the quarter. What's your sense for if you're gaining share?

Speaker 5

Thank you.

Speaker 2

Yes. Look, I think we believe that we are I mean, I think we've talked about this that each quarter we've been winning more than we're losing. I think that's an important indicator. I think the other thing is if you look at all our modalities, they were up pretty close to right at High single or double digits and a lot of those modalities are growing 2% to 4% per year. So we're growing faster In the market, obviously NGS, we grew significantly more than 20%.

Speaker 2

So our belief is that we are moving share. Warren, do you want to comment a

Speaker 4

little bit more?

Speaker 10

Chris, I think it's a

Speaker 6

high note. I think The growth was really brought back. It came from all of the modalities and both some of the sort of legacy or traditional modalities grew, as Chris Well above market as far as we're concerned. And then the cherry on the top remains our strategy to focus on NGS. And it's a combination All of those 2 in the disciplined execution that's driving the results.

Speaker 5

Great. Thank you.

Speaker 2

Thank you.

Operator

Thank you so much. Your next question is coming from Mark Massaro of BTIG. Mark, your line is open.

Speaker 11

Hey, Mark. Hey, Chris. Congrats on a great quarter. So about 5 months ago, you guys launched a neo comprehensive solid tumor and neo comprehensive myeloid disorders. And of course, you also launched Radar into the clinic.

Speaker 11

Can you just give us maybe an update as to which of those Might have benefited you in Q2. And can you give us a sense for what some of the gating factors Would be I would think reimbursement would be one of them, but just general commentary about those product lines and how they might have contributed in Q2?

Speaker 2

Yes. I'm going to let Warren kind of take that because we really do talk about this portfolio, but I do know there were some good reimbursement as post of launch Of NeoConference. But do you want to give more color?

Speaker 6

Yes. So I think again as Chris said earlier, it's really around and you touched on it too, a suite of products that we launched In the latter part of quarter 1, all of them NGS focused. And ultimately, if we look at that Performance in aggregation, we're very pleased in terms of how things are developing and they're actually collectively ahead of internal expectations that we set ourselves. From a reimbursement perspective within the suite of products that we launched in quarter 1, it was only radar where We were working towards reimbursement at that particular point, and I think Vishal has covered that on the call already. In addition, we have seen some we do see some opportunity down the road for some further enhancement from a reimbursement around the suite of products that we launched, which was sort of part of the strategy that led us to actually develop these products in the 1st place.

Speaker 3

Yes. And I would add, I mean, they're relatively new products, so they're ramping. So some impact, but not a huge impact in the second We're expecting to see more as the quarters progress.

Speaker 11

Okay, great. And then just second question here, Wanted to get a sense for how you see your NGS volume continuing to grow. I know occasionally I get questions from investors That don't even understand which NGS products you have because it generally hasn't been a focus for NEO over the years. But Maybe just giving us a sense for what's been driving the growth. I think I imagine it's probably some of the smaller panels, But when do you see maybe the bigger panels starting to kick in as we think about 2024?

Speaker 6

Again, it's a great question. So I think If we look at the NGS portfolio per se, obviously, we have portfolios where both in the heme and in the solid tumor. The heme has been more, I would say, And we classify ourselves as a market leader in that space. And despite that, we're still seeing very attractive growth rates, Probably above market in terms of how we would define market growth in the Heme space. The solid tumor is where we did launch the suite of products earlier on this year.

Speaker 6

And those are obviously as a percentage, obviously growing exponentially more, but it's off a smaller base. And As Jeff said a few minutes ago, those are the ones that continue to ramp. So we're really benefiting from strong demand from NGS on the heme side Things where we have a strong base, which is being supplemented by some very solid growth coming from new products, Also supported again by those above the test solutions that we launched in conjunction, so NeoAccess and NeoSeq. Yes, Mark, I think

Speaker 2

a couple of things to think about. I think you highlighted, I think we were behind candidly on NGS. And I think there's been a significant focus. I think In the quarter, kind of 2 unique people. We hired a Vice President, really of Payer Relations on the reimbursement side and Vishal hired a new Vice President of Global R&D.

Speaker 2

And I think if you think about where we're spending our time right now, it's expanding that portfolio and NGS especially solid for the years to come. So look, there's I think high expectations internally that we need to be bringing new innovations to market because we're behind. So I would say that there's a huge Focus in the organization there kind of getting back to where we believe Solid was going and making sure we're getting more than our share. I think the other thing that Warren Touched on that, I think we've really under talked about was these wraparound services. I mean, this is a service business and everybody can run an NGS test and get a result, but It's really around the customer experience.

Speaker 2

And I would say that all of the stuff that we're even talking about today, whether it's products to them, it really is about this service Offering this focus on patients and customer experience and how do we make it easy to do business with Neo, which I don't know that it always was. So that would be the other thing I think that's helping us.

Speaker 11

All right. Thanks so much.

Speaker 2

Thank you.

Operator

Thank you. Your next question is coming from Tejas Savant from Morgan Stanley. Tejas, your line is

Speaker 4

now open. Hey, Tayo.

Speaker 10

Hey, guys. Good morning and congrats on the strong quarter here. Maybe one on ADX for you, Chris, and Vishal, feel free to chime in as well. You talked about the tougher comps in your pursuit of profitability here heading into year end in the first half of twenty twenty four. But how do you see that sort of unfolding in light of the tougher macro backdrop and perhaps push back on pricing from some more budget conscious customers?

Speaker 10

And is there anything in the back half guide that you're baking in for those headwinds?

Speaker 2

Yes. Look, I think I mean, obviously, pricing is always a challenge, right? I mean, I think I don't know that I've ever been in a business Or a time in healthcare, I don't know, 35 years where it wasn't. I feel like we have not been impacted By that, I think we've been pretty open and honest about that we did do price increases and we believe that we were in certain cases out of market from a pricing So the thing that I love about it, it creates a conversation with a customer. And so why we may have a set target internally on our price increase, we may not get all of that, but we get So I don't know that, that has had a big impact.

Speaker 2

I will say closing some of these international Pharma Locations has impacted our business and we knew that kind of going in when we made that tough decision, but I feel like That's all been taken into account when we raised the guidance on revenue growth. Do you want to I got Vishal here and Tejas maybe let Vishal comment a little about the pharma and what's going on in the macro.

Speaker 4

Yes. Avi, Tejas, I mean the way I look at this is that because of the broad offering that we have, we're not just offering one test, Which is what some of our competitors are doing. We have multiple tests that we offer, whether it's an IAC, Cyto, FISH, NGS. It's all about having that balance In general, right? So I think where we see potentially where in the past where we were focusing heavily on, let's say, IHC, Now we're focusing more on the NGS side of things so that we can actually have better margins accordingly.

Speaker 4

So it's really this balance. So because of the broad offering That we have right now, I think we're able to manage that accordingly,

Speaker 2

which is similar strategy in the clinical, right, that we think that You can really come to NEO and meet all your cancer testing needs, which you can't do with a lot of our competitors.

Speaker 10

Got it. And then a quick follow-up The exit trends in 2023 and into 2024. Chris, I mean, is there any reason why you wouldn't be able to grow the top line in that Low teens range next year. Gross margins, I mean, you've done you've had some terrific progress there over the last few quarters here. Obviously, it can't continue up like in the several 100, but certainly on a full year basis Approaching sort of 50%, is that sort of a fair yardstick to use as we think about 2024?

Speaker 2

Yes. I'm going to let Jeff kind of Highlight a couple of the specifics, but look, we believe that there is significant opportunity in this business. And I think if we talk about this, I had it in my prepared remarks, It really was about focus and execution. And I think what you're starting to see is our ability to really Utilize this broad footprint of our lab, but also our commercial organization that's not just focused on oncologists, but also Pathologists and be able to pull through multiple tests. So I think that's helping us on the revenue.

Speaker 2

If you think about the operating efficiencies of the profit side, it really is about improving that gross And then being more diligent on OpEx. I think look candidly, we were kind of out of control Several years ago on spending a lot faster than revenue was growing. And I think that hurt the business. So I think a lot of this is around diligence and execution. But as far as How far we can go, Jeff, do you want to comment?

Speaker 2

I know you talked about this publicly.

Speaker 3

Yes. So I would say, first of all, in this year, We've seen very strong revenue growth and we've seen very strong pull through on the bottom line. And I think we're focused on what are the levers that are going to drive our So top line revenue growth is certainly one being more efficient on the gross margin side through automation and some of the things that Melody and her team are working on To drive adjusted gross margin is another. And then really getting operating leverage on the OpEx line as well. So I would say we're not going to get into 2024, yes.

Speaker 3

I think we had good momentum in the business. We're continuing to invest in our sales force. You're going to continue to see resources being added there. We clearly think we're seeing the benefit from that on the top line revenue growth. And so as we look at 2024, it's really about what are those levers again that are going to drive improved margin performance.

Speaker 3

So it's top line revenue growth, It's focusing on higher margin tests, NGS growth, continuing to see revenue cycle management improvements, which we've benefited from this year, And then getting operating leverage from a cost management side. So I think the team feels good that we continue to have a lot of opportunities To capitalize on as we go into 2024 and we'll certainly talk more about that as we exit Q4 and give guidance for next year. We think we're on a good trajectory and we expect to see continued improvement as we go into next year.

Speaker 2

Yes. You kind of remember this from our old life together where I was. Look, high water covers a lot of stumps. And I think especially, Look, if you're driving revenue above market in a market that's growing, pick a number 6% to 8% in unit, like I think it creates huge opportunities, especially when we look at things like NGS, which have higher margins. So I think that's been a big focus on ours is driving revenue growth.

Speaker 10

Very helpful guys. Appreciate the color.

Speaker 2

Thank you. Take care.

Operator

Thank you very much. Your next question is coming from Derik De Bruin of Bank of America. Derik, your line is

Speaker 2

live. Hey, Derik.

Speaker 12

Hi, good morning. Thanks for taking my question. Just sort of following up on some of the things that Tejas was asking. On price, Obviously, there's a lot of companies that are introducing or have solid tumor and heme panels on the market. What's the pricing dynamic in that thing?

Speaker 12

I mean, are you pricing on par with peers? Are you I'm just sort of curious in terms of how the competitive dynamic on that is since there's a lot of companies that are out there doing it.

Speaker 2

Yes, Warren,

Speaker 4

do you

Speaker 6

want to take that? Yes. I don't think there is a significant difference in price in terms of how we're going after gaining market share here. We're very much in a very similar ballpark. And obviously, as you know, it also depends on how we build to the various customers, whether it's a client bill, if we're building to 3rd party payers, etcetera.

Speaker 6

But I can't say that when we look at larger panels and compare it to the competition that our price positioning is in any way meaning to be different from those That we are competing with. It's in a very narrow band.

Speaker 2

Yes. I think, Derek, a lot of it's not only the pricing, it's the pull through On reimbursement, and I'm surprised that this industry, just in talking with my peers, how many people are not getting paid for the work they do. And that's been a huge initiative For us, and I would say we talk about building out sales, but I would say it's really building up the commercial organization and being innovative and strategic making sure that we're getting paid for the work that we're doing. And that's look, we think we have years to go there on what we call our revenue cycle management initiatives. But That has been a huge impact, so helping our pricing because we're getting paid.

Speaker 12

Yes. You actually just preempted or started to go on to my next question on this one in terms of the payer dynamic. And obviously, there's A lot of these companies out there is like what is the pushback from payers and they don't pay you, right? Obviously, there's value in sort of doing the NGS testing, but when you don't get paid, What is the pushback and how do you offset that?

Speaker 3

I mean, there's a whole host of issues. Sometimes it's Prior authorization, sometimes it's medical necessity, sometimes it's medical records. And so I think and Sometimes we may not even have a contract. And so I think there's a host of reasons for us. And I would say we're focusing on kind of driving all of those down Using automation, getting information more upfront even before we start the testing process.

Speaker 3

So I think it's It's been a focus area of our team really starting in the back half of last year and we've seen good progress throughout this year and still think there's a lot of runway. Then on the Managed Care pricing side, it's really about how we go to market there, what are What getting tests covered isn't just pricing, it's getting tests covered as well. And so we've added some resources with expertise to help us not only get Contracts but gain coverage for individual specific tests.

Speaker 2

Yes. And I think the one thing that is a little bit different from us and some of our competitors is we have a lot of contracts over We have over 200 contracts with payers. So I think it's a lot different when you have a contract versus you're running a test without a contract. And I think that's been a Strategic decision is that we will have contracts and we will have GPO contracts.

Speaker 6

And I

Speaker 2

think that's probably helping us as well. Great.

Speaker 12

Thank you very

Speaker 2

much. Thanks, Eric.

Operator

Thank you. Your next question is coming from Mike Matson from Needham and Company. Mike, your line is live.

Speaker 2

Hey, Mike.

Speaker 13

Hey, everyone. This is Joseph on for Mike. Maybe starting off with S and M, it's been ticking up the last few quarters. You're in this like, I guess you could say soft launch of Radar. I believe you kind of had mentioned that you won't be given out free, but But as you are as you have received reimbursement from Medicare and One private payer, is the decision to start ramping that expense a bit more or do you think it's The idea is more way for expanded breast or another indication covered before we start seeing that ramp up?

Speaker 2

Yes. Look, we've talked pretty openly about our field expansion plan this year and that we had talked about, I think, adding More resources in the second half of the year. That's built into the guide. So what we've guided you on that has that additional expansion in the field organization. I think from there as we go into 2024, we've also talked about, look, I think that this industry does not operate very efficiently from a sales force perspective or what we call sales optimization.

Speaker 2

And so a lot of focus on tools and resources to make our current field organization significantly more efficient. And so not spending time doing things that aren't Driving revenue. And that's really a 2024 activity. So you won't see a huge expansion in 2024 because we believe we can get significantly more efficient and Go to market with what we've got and get to the numbers that we want to get to.

Speaker 13

Okay. That's helpful. And then maybe at the Investor Day, you guys have detailed the Expectation to return the historical margins by 2026.

Speaker 10

Maybe given all the success so

Speaker 13

far on the top line and The operating leverage you guys have seen plus the comments on the call today is, is there any reason why that Couldn't come sooner, say in 2025. But yes, I just wanted to get your thoughts on that.

Speaker 3

Yes. We're clearly ahead of where we said we were going to be For this year and we see a lot of room, as I said, a lot of drivers are going to help improve the company's performance. And The team is clearly focused on that. We're not going to get into any more long term guidance at this point, but I think, look, We're headed in the right direction. We have good momentum.

Speaker 3

We have a lot of leverage we're executing on. And so we expect to see the performance continue to improve, and we're clearly ahead of where we Thought we would be at Investor Day and have raised guidance now 2 quarters pretty materially from where we started the year. So I'd say, yes, we expect See continued progress and we're definitely ahead of where we expected to be at Investor Day.

Speaker 5

Okay. Thank you. Congrats on the great quarter.

Speaker 2

Thank you. Thank you.

Operator

Thank you very much. Your next question is coming from Mason Carrico from Stephens. Mason, your line is live.

Speaker 2

Hey, Mason.

Speaker 14

Hey, Chris. Maybe just a couple of quick ones here for me on the breast cancer indication. First off, just high level, what's demand look like in this patient population? How often are these patients, 5 years post diagnosis, no active disease, seeing their oncologist for a follow-up and what does compliance to that follow-up schedule look like generally?

Speaker 4

Yes. So if we look at the population itself, right, I mean, we did get it in the most common subtype of breast cancer, which makes Approximately 73%, 74% of all breast cancer cases. If you look at post 5 years, you'll have over 27% of all breast cancer living with a personal history. And they do go in and see their oncologists on a regular basis because one of the concerns oncologists are telling us that they have with this population Is that a large percentage of these women do recur post 5 years. And the only tool that they have, primary tool that they have right now is looking at imaging.

Speaker 4

So any tool we can provide them to help with that effort does help. So from that perspective, we imaging is typically Once or twice a year depending on the oncologist. And we really have mimicked based off that as to how frequent the testing will occur. And that is what is also shown in the coverage that we got.

Speaker 2

Yes. And I think if you look at the data we presented, Radar picks it up significantly sooner than imaging. And look, it's still early days with MRD. But I think if you look at All these aging population and doing annual checks whether it's breast or prostate or whatever it is, I think the reality of life is that Preventative Health, people are going to start checking more and more. So look at like we said, it's early days.

Speaker 2

I think the other thing is that we felt like we wanted to get A certain indication in through MolDX and get approval. I think this is a brick on brick process. I think where we made a mistake in colorectal is we, don't think we had a strategic approach. So I do want to be clear, we're not stopping with just a portion. Like as Vishal mentioned, we have we will submit on expanded rest before the end of the year.

Speaker 2

So it is an ongoing basis. It's just not one and done.

Speaker 14

Got it. No, that makes sense. And do you have the opportunity for ADLT pricing for this indication? How are you thinking about that? If you do, when do you plan on filing?

Speaker 14

Any color there?

Speaker 4

Yes. I think ADLT will be difficult for this indication in particular, but we're looking at for other applications more than just this indication. Got it.

Operator

Thank you very much. Your next question is coming from Andrew Cooper of Raymond James. Andrew, your line is live.

Speaker 15

Hey, everybody. Thanks for sneaking me in. A lot has already been asked. So maybe just one on the ASP trends to start. Trying to get an understanding of how much of this is mix driven versus Like you mentioned, Chris, earlier, better collections, better revenue cycle success.

Speaker 15

So can you give us a bit of a sense for kind of what's driving what In ASPs?

Speaker 2

Yes. Look, I think we talk about units and pricing, but we don't Breakout like individual. And I think the reason being is because it is a portfolio effect. And so I think it really isn't just one thing driving its multiple that Jeff you want

Speaker 3

Yes, I think that's right. And I think the mix will change from quarter to quarter. But I would say, we are seeing strong NGS growth Driving it, we're seeing pricing increases, both for our direct client bill and some of our payer contracts, and we're seeing revenue cycles. So I think those will shift and can change from quarter to quarter, but we've got teams focusing on all three of those and continue to see opportunities there Into this year into the back half of this year and into next year and I would say years to come really as we think about as Chris said, the revenue type opportunities And just overall pricing increases to help offset the cost increases we experienced as a company. We hadn't done that As effectively historically, I think we're much more focused on it now.

Speaker 15

Great. And then maybe just one more. Already sort of been touched on, but just as you've had your folks in the field specifically selling into the oncologists for a little bit of time now with NeoComprehensive, Really more recently with Radar and Radar with coverage, anything that's changed the way you think about that build out and that optimization of that sales force in terms of Where you send them, where they're focusing, anything on that front or anything that surprised you out of kind of the early days of each of these respective launches?

Speaker 6

Yes. I think we're certainly getting a lot more experience now than what we obviously had before we started. And I think some of our assumptions have held true, others have Changed slightly. One of the areas that transparency is obviously a space where we haven't had as much This is what we've maybe had in hospitals, etcetera. So access has proven to be a little bit more challenging.

Speaker 6

So we're equipping the team with much more specific targeting data And sort of very clear reasons to call, so to speak, so that we could address some of the access challenges. Also, as we look to recruit additional people through the investment, making sure we're getting those people with relationships is the second way that we're looking to address The access challenge as well. So that's the one. I think the second is also that maybe some of the selling or some of the It's going to take place significantly higher within organizations than maybe what we had perceived before. So not only a bottom up strategy, which is important when you Introducing new emerging technologies, but also focusing on the top down sort of strategy as well was maybe an area where we've identified And we're looking to calibrate moving forward.

Speaker 6

But I'd say the majority of our assumptions have held true.

Speaker 2

And I think the other one you've talked about is just it's a different Buying cycle than we used to and maybe highlight that we have our NPS is higher. We're talking about our overall NPS, but how it's higher.

Speaker 6

So maybe that's a good color. Thanks, Chris. So one of the things that we do regularly is get feedback from our customers and a broad cross section of our customers to understand Their experience with Neo and classical MPS processes and other processes. And what we definitely see is as we segment between our traditional hospital segment where you've been very strong and maybe some of the community oncology settings, there certainly is a delta in how we perceive. And it's got a little bit to do with Actually a lot to do with how sort of buying decisions are taken and the buying process in the community on cosy setting versus Hospitals.

Speaker 6

And we're adjusting our internal processes here to accommodate that. The Neo Access product that I spoke about earlier is a big lever for us here because That certainly streamlines the ordering process and provides access to a wealth of information that's relevant to that target segment. So Again, we are adjusting our processes internally to cater for a different market segment.

Speaker 2

Yes. And I think the other thing that we kind of learned is that by now and we talked about When we did it, we were going to pace the expansion of the field. And so rather than going out and hiring everybody, I think one of the things that we've done is We've learned and we've adapted. For example, we just had Neo University, which is our summer sales meeting where we brought in the whole field organization and it's all around training. So everybody does the sales meeting at the end of the year, which is kind of more pomp and circumstance and you set the goals and the strategies.

Speaker 2

But this was intense Training, and I think that's what you're going to see is that, look, we're going to make decisions, we're going to learn, we're going to adapt and we're going to keep moving forward. I think Learning about this buying cycle and how we do things is making it benefit. And I just got told by Kendra that we're out of time. So anyway, thanks everybody for the time today. We really appreciate you dialing in and spending a little bit of time hearing how the business is moving forward.

Speaker 2

And We look forward to talking to everybody soon. Take care.

Operator

Thank you, everybody. This does conclude today's Conference Call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
NeoGenomics Q2 2023
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