Neogenomics Inc (NEO) Q2 2021 Earnings Call Transcript

Good morning, everyone, and thank you for joining the NeoGenomics Second Quarter 2021 Earnings Call. I am now pleased to introduce your host, CEO Mark Mallon. The floor is yours, sir.

Thanks Kait and good morning, everyone. I'd like to welcome everyone to NeoGenomics' 2021 Second Quarter Conference Call. Joining me this morning from our Fort Myers headquarters are Kathryn McKenzie, our Chief Finance Officer; George Cardoza, President and Chief Operating Officer of our Lab Operations; Bill Bonello, President of our Informatics Division; Doug Brown, our Chief Strategy and Corporate Development Officer. Joining on the call via phone from California is Dr. Waller, President of our Pharma Services division and via phone from the United Kingdom is Dr. Clive Morris, President of Inivata. Before we begin our prepared remarks, Doug will read the standard language about forward-looking statements. Doug?

Good morning. This conference call may contain forward-looking statements, which reflect our current expectations and beliefs regarding our operations, performance, financial condition, and growth opportunities. Any statements made during this call that are not historical facts are considered forward-looking statements. These statements inherently involve significant risks and uncertainties, some of which are beyond our control. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove to be incorrect, actual outcomes and results may differ significantly from those indicated in the forward-looking statements. Any forward-looking statement is valid only as of today, and we have no obligation to update any such statements to account for events or circumstances that arise after today. Before I hand the call back to Mark, I want to inform everyone that a copy of our prepared remarks for this morning's call will be made available in the Investor Relations section of our website shortly after the call ends.

Thanks Doug. So we are really pleased to announce strong quarter two results highlighted by 40% annual revenue growth to $122 million for the quarter. All three of our divisions grew significantly over a depressed Q2 from a year ago. Importantly, we grew our core revenue 7% sequentially over Q1 of this year. I'm especially pleased to note that our strategic growth areas of pharma services, informatics, and the NGS testing and clinical services were strong contributors in the quarter. These growth areas now account for greater than one third of our total company revenue. Clinical revenues of $101 million represented 37% year-over-year growth. In our clinical business experience a noticeable recovery versus quarter one, and this number included no contribution from COVID-19 PCR testing revenue. On a sequential basis, our core clinical cancer volume increased 8% with a record 281,000 clinical tests performed in the quarter. While the quarter two recovery in volume is encouraging and strong volumes have continued into Q3, we are monitoring a few market-related factors that may impact continued volume uptake in the back half of the year. We have anticipated that our sales team would have full access to their customers by quarter three, but that remains to be seen in certain territories. We believe that much of this can be attributed to the recent spike in COVID-19 cases driven by the Delta variant. Additionally, market data shows that many patients are still not going in for critical screening appointments in key cancers which continue to be underdiagnosed. We believe our strong sequential volume growth in quarter two is evidence that our clinical business will benefit as the reopening of offices continues even if at a slower rate in some parts of the country. Our pharma services business continued to shine during the quarter, putting up record revenues of over $20 million with year-over-year growth of 55%. Demand was also robust during the quarter as more than $40 million in new bookings grew the contract backlog to a record $238 million exiting the quarter. This backlog gives us confidence that as we exit 2021, our pharma segment will be approaching $100 million in revenue on a runway basis, up from just $20 million annually a few years ago. It's also worth noting that our pharma services business continues to migrate up the value chain of our biopharma customers as we are winning a larger percentage of phase two and phase three opportunities. These larger contract awards demonstrate the strong confidence our customers have in Neo, awarding some of their most important drug development projects to our pharma services team. Our informatics capabilities, which improve the ability of biopharma companies to identify patients for clinical trials and provide these clients with commercial analytics to support product launches, continue to be in high demand. Informatics is the fastest growing of our three operating divisions and the team continues to make strong progress. While still relatively small, this business posted record revenues again in quarter two and you'll hear more from informatics division President Bill Bonello later in our prepared remarks. During the quarter, our team also successfully closed on two important acquisitions. We are excited about the addition of Trapelo Health and Inivata into NeoGenomics. While still very early days, we can already see multiple opportunities to drive growth in support of our overall strategy of bringing innovation to the community oncology market. Trapelo Health closed in April and the acquisition is now fully integrated as a subsidiary of our informatics division. You'll hear more about Trapelo in the informatics updates later in the call. Inivata closed in June, and our integration activities are well underway. We plan to leverage the advantage of NeoGenomics' strategic position in commercializing our residual disease and recurrent assay or RaDaR with a multi-pronged strategy for success. As we've discussed, our first priority is ensuring rapid submission of RaDaR. We reviewed the plans and progress of the team and we remain on track for submission around the turn of the New Year, assuming a typical review period, and we'll be able to launch into the clinical market in the middle of next year. Since we have acquired Inivata, we've accelerated the acquisition and retrospective testing of multiple cohorts of samples in multiple tumor types to support the initial submission and launch in future areas. Another priority is to gain biopharma support for RaDaR. Our pharma services team is now fully engaged in supporting Inivata in pulling through a large and growing portfolio of pharma opportunities. There's been a clear recognition by biopharma teams of the leading sensitivity and specificity of the RaDaR assay. We expect to leverage our strong relationships with nearly 200 biopharma companies to generate revenue and aid in building an evidence base for treating minimal residual disease with RaDaR. MRD testing will play an important role in the development of therapies, particularly in places like the new adjuvant setting, as well as in recurrent monitoring. Studies in the adjuvant setting are one example of how MRD RaDaR specifically can be used to transform drug development, and it could be an opportunity for quick successes. Today, approximately 70% of patients with early-stage cancer are cured by their initial treatment. However, it's difficult to know which patients, and as a consequence, patient enrollment into adjuvant clinical studies includes large numbers who do not have residual cancer. By utilizing a test like RaDaR to facilitate more effective trial enrollment, pharma responses can help healthy patients avoid unnecessary treatment, reduce trial sizes, improve the quality of readouts from the trial, and reduce costs along the way. We believe biopharma adoption will be an important part of success in the clinical market. We will utilize the relationships and oncology expertise of our base clinical sales team, who have been calling on our key clients for an average of six years or more. We recently built out an additional precision medicine managers team to focus on driving the next generation sequencing and liquid biopsy adoption. This team will be in place ahead of our planned RaDaR launch, and it will be tasked with helping drive uptake. Also earlier this year, we struck an important commercial arrangement with leading breast cancer oncology testing company Agendia to co-commercialize RaDaR with breast cancer focused physicians upon launch. We view the partnership with Agendia and the growing U.S. sales force of over 40 breast cancer specialists as a focused way to gain more traction in the field at a reasonable cost. We've already received multiple inquiries from other companies who have sales teams of a similar size and reach that are focused on various other cancer sites and we're actively evaluating these opportunities. We believe that RaDaR's best-in-class published analytic sensitivity of 97% at 20 parts per million of circulating tumor DNA or 0.002% variant allele frequency is a true differentiator. This elite level of sensitivity at such low concentration allows RaDaR to make calls that other assays fundamentally may not be sensitive enough to detect. We believe these other potential partners are recognizing the assay's differentiation as well. Finally, we believe that RaDaR clinical decision support software can be a technological multiplier for our sales efforts as the platform is adopted and additional clinical evidence is published for minimal residual disease testing and treatment. Fast reimbursement, comprehensive evidence generation, success with biopharma customers, and targeted disease opportunities with quick wins are factors that we believe will be success factors in making RaDaR a leader in the MRD market, and we are rapidly working on all these fronts. Overall, I'm proud of our team’s performance in quarter two, particularly in my first quarter as CEO of NeoGenomics, and excited about the early progress from our two recent acquisitions. From a big picture perspective, I've been very impressed by several strengths of Neo in my first 100 days on the job. First, it's just how comprehensive the oncology platform and NeoGenomics truly is. As I have dug in, I see how broad our portfolio of services provides a valuable proposition to all the constituents of the oncology ecosystem: providers, pharma, payers, and of course, patients. Our portfolio of multi-modality solutions is comprised of hundreds of assays that provide time-sensitive biomarkers for market-specific answers for oncologists, pathologists, research scientists, and pharma trial teams. Our customized targeted panels allow us to provide the right information at the right time for providers and patients at the right price for our direct bill and third-party payers. That broad menu base that differentiates us in clinical is also of great value to our biopharma customers. It is the real driver of growth for us. As we test nearly half a million patients per year, the value of the data and related informatics capabilities we are gathering only continues to snowball every day. Critically, these strengths have translated into leadership in three key franchises. We are a clear leader in the diagnosis of hematologic cancers with an especially strong position and have strong franchises in both breast and lung segments, where we run more than 100,000 tests annually. These are real platforms for both today and in the future. I must say that I've been equally impressed by our culture; having now met hundreds of my fellow teammates at NeoGenomics, there is truly a feeling of patient-first mentality at all levels of the organization. As I have visited many of our facilities, it's obvious that our lab employees are dedicated to patient care. This consistent dedication has translated into industry-leading turnaround times in many of our test modalities and is also reflected in both our strong Net Promoter Scores and our extremely high customer retention rates. I know we can do much more. We believe that the commercialization of the RaDaR assay can help transform the cancer care paradigm for millions of patients in need of cancer recurrence monitoring. We see opportunities to drive broad adoption of our leading clinical decision support for our oncology customers to help them navigate appropriate testing presentations from both technology and cost-benefit perspectives. While we are the leader in the U.S. oncology market, I see so much more opportunity outside the U.S. as we look to further globalize our offerings. We have multiple facilities around the world that have ample capacity to scale, and we have ongoing discussions with various biopharma companies regarding our ability to further support them globally. Along with these organic growth opportunities right in front of us, we also have corporate development and inorganic growth opportunities that we have no intention of slowing down on. We are strategically well-positioned and are well-capitalized for further deal-making, as we look to keep pace with the constantly changing and highly competitive marketplace in oncology. When I put it all together, I see a very well-positioned, diversified player in one of the most attractive end markets in the world. I believe the opportunity in front of us puts us in a position to accelerate our historical mid-teens top line growth rate over time, which will enhance our margins as we fill up our laboratories and continue to implement efficiencies. You can tell I am very excited to be part of NeoGenomics, and I could not be more optimistic about the future of our company. I'll now turn the call over to Kathryn McKenzie to discuss some other details of quarter two financial results.

Thank you, Mark. Second quarter clinical division revenue grew 37% year-over-year, driven by a strong bounce back in clinical volume compared to the depressed volumes during the initial wave of the pandemic in the second quarter last year. As a reminder, we made the decision to wind down our COVID-19 PCR testing capabilities in quarter one, and we had no contribution from COVID-19 testing in quarter two compared to $2 million in the same period last year. Clinical division revenue per test was $360 in quarter two compared to $362 for the full year of 2020 and $351 in quarter two of 2019. Pharma services revenue grew 55% year-over-year, continuing its rapid growth trajectory. Demand continues to be very strong, and we signed over $40 million in new bookings, exiting the quarter with a record $238 million in backlog. Our total gross margins of 43.5% in quarter two included amortization of intangible assets related to the technology acquired through the Inivata acquisition. Excluding the amortization of these acquired intangible assets, our gross margins improved to 44.1% in quarter two, driven by efficiencies on increased volume in clinical and higher revenue in our pharma services division; more consistent sample volumes allowed for more predictable staffing levels, and we were able to see more normalized leverage on our largely fixed-cost COGS infrastructure. Gross profit increased $11 million sequentially on only $6 million of revenue growth. Compared with a year ago, gross profit increased $25 million on a $35 million revenue increase. These levels of incremental gross profit provide confidence that gross margins can improve as we continue to grow. We believe that over a series of quarters, we should be back to previously achieved gross margins approaching 50%. However, we've continued to see the same temporary labor and supply chain constraints that the rest of the country is experiencing. These capacity constraint challenges combined with high demand are continuing to affect service levels and cost pressures. Operating expenses increased $28 million year-over-year to $75 million, primarily driven by one-time acquisition-related costs, expense contributions from the recent acquisitions of Inivata and Trapelo, increased commercial costs on higher revenues, and additional investment to support growth. Concurrent with the completion of the Inivata acquisition, we recorded a gain of $97 million within other income related to our prior minority investment in Inivata. This gain represents the amount by which the fair value of the company's minority investment in Inivata immediately prior to the acquisition exceeded the carrying value of its previous equity interest in the purchase options. Adjusted EBITDA of $4.6 million in Q2 reflects improvement in our core cancer business, offset by expense contributions from the recent acquisitions of Inivata and Trapelo, and higher payroll and commercial costs due to certain personnel-related expenses. Turning to the balance sheet, we exited quarter two with $572 million in cash and marketable securities, which excludes an additional $4 million in restricted cash designated for the construction of our new state-of-the-art laboratory and global headquarters in Fort Myers, Florida. During the quarter, we utilized $390 million in cash to exercise our purchase options to acquire the remaining equity in Inivata, and raised gross proceeds of $200 million in a related strategic private equity transaction. We also utilized $36 million in cash for the acquisition of Trapelo, which was announced in March and closed in April. We are maintaining our previously provided annual revenue and adjusted EBITDA guidance based on strong second quarter results. I will now turn the call back over to Mark.

Thanks, Kathryn. As we've done in previous quarters, we'd like to dedicate some time on this call to providing our investors with a progress update on one of the most exciting areas of our business. For this call, I've asked the President of our informatics division, Bill Bonello, to discuss the exciting projects he and his team have been working on. I'll turn the call over to Bill now. Bill?

Thanks, Mark. It's great to be able to speak about our informatics initiatives. The informatics division is building data and technology solutions to improve patient care and drive growth. In two short years, we've grown from a standing start to a team of nearly 60 people and are progressing nicely toward our longer-term goal of establishing a $100 million business. In our core informatics business, we provide products and services to life science companies to support clinical and commercial analytics, clinical trials, and digital pathology. Over the past two years, we have engaged in over 59 contracted projects with 26 different companies. We have nearly 100 unique projects in our pipeline. We are engaged with many of the largest global pharmaceutical companies, often for multiple projects, as well as several leading contract research organizations. I'd like to highlight just a few of our current projects to give you a better sense of the type of work that we're doing. In one case, we helped support the commercial launch of a non-small cell lung cancer therapy by analyzing biomarker testing patterns among both oncologists and pathologists. We used this information to identify potential sites for a phase two clinical trial as well as gaps in tests. We also constructed patient cohorts to identify individuals who might benefit from the therapy or need follow-up biomarker testing and shared this information with treating physicians within 48 hours of FDA approval. Finally, we implemented a sponsor testing program to alleviate patients' financial burden. We have several other projects where we're identifying patients that might be candidates for specific clinical trials, proactively following up with the treating physician, and facilitating enrollment. We also have several other projects where we have identified gaps in biomarker testing to support commercial initiatives. Another area where we have engagements is around digital pathology and image analysis. We are engaged with several companies to provide annotated digital images, in some instances supported by our own proprietary machine learning algorithms. We're also very excited about Trapelo Health, which we acquired in March of this year. Trapelo Health is a precision oncology company focused on clinical decision support for both test and therapy selection, as well as streamlining prior authorization for both testing and treatment. This comprehensive order-to-result perspective differentiates Trapelo from any other clinical decision support tool on the market. As we all know, for precision medicine to work, patients must be tested for the appropriate biomarkers in order to even know that they're candidates for a therapy or clinical trial. On the front end, Trapelo identifies which biomarkers should be ordered for a specific patient and which specific lab tests include those biomarkers. The product is designed to be lab agnostic, enabling providers and payers to designate their own preferred laboratory networks. Real-world data underscores just how important this biomarker guidance is. We know that up to 35% of patients with non-small cell lung cancer have actionable genetic mutations, and up to 55% of patients with metastatic non-small cell lung cancer risk clinically relevant mutations. Nevertheless, less than 25% of non-small cell lung cancer patients receive testing for all four of the most common biomarkers, and just 7% of patients receive testing for all seven genes included in clinical guidelines. And that's just one example. On the back end, Trapelo identifies which therapies in clinical trials may be appropriate for an individual patient based on the test results and other clinical information. This guidance is also critical in ensuring the highest quality patient care. About 80% of treatment occurs in the community, and most oncologists are seeing a very broad range of cancers, making it next to impossible to keep up with current science and guidelines. Also, guidelines alone can change rapidly; sometimes a guideline for a specific cancer can change as many as six times over the course of the year. All of the recommendations for both testing and treatment are supported by scientific evidence that has been collected and curated into a proprietary knowledge base supported by our own team of PhD curation specialists. While it's still early days, client response has been overwhelmingly positive, and we are in active discussions with a large number of provider organizations, payers, and electronic medical record companies. We will also be integrating the testing portion of clinical decision support into our NeoGenomics online order process and hope to have that product available to select clients in the fourth quarter of this year. Now, I will turn the call back over to Mark for some closing remarks.

Thanks, Bill. So in summary, I believe our Q2 results have confirmed that our strategy is working and we will ensure value creation for shareholders and patients. We achieved 40% growth driven by record test volumes in our clinical service division and grew gross profit ahead of revenue. Fully one-third of our business now comes from our growth drivers: pharma services, informatics, and NGS testing. We aim to drive more growth through potentially transformative innovations in cancer testing with the acquisition of Trapelo and Inivata with the RaDaR MRD test. We remain laser-focused on transforming the lives of cancer patients by being a leading cancer testing and information company. Doug, do you want to take us to Q&A?

Thanks, everyone. We would now like to open the call for questions. If you're listening via webcast and want to submit a question, please email us at [email protected] during the Q&A session, and we will address your inquiries at the end if they haven't already been covered by our call-in listeners. Operator, please open the call for questions.

Thank you. Ladies and gentlemen, we are now ready to take your questions. Our first question comes from David Westenberg at Guggenheim. Your line is live.

I had a mute issue earlier. Okay, perfect. Okay. Good quarter. And nobody's raising guidance, because nobody knows what's going on with patient volumes and I guess the Delta variant. But when we ask about July, people say they're coming in, we just can't detail the sales force. So I don't mean to be overly pointed here. But how genuine is this concern in the back half of the year in terms of patient volumes? And how should we model the cadence of volumes for the rest of the year given this kind of dynamic? If he can walk through kind of the genuine Delta case, the genuine 'I can't detail', and the sales force can't detail kind of case, and the puts and takes with that; and since my question is complicated, I'll just stop with that one question and get to the next.

Thanks, David. Yes. Unfortunately, the evidence of an impact on sort of access to offices is real. We've been getting examples from pretty much across the country of hospitals that have had limited access for sales representatives closing. What I think we are taking seriously is that a number of these are in places that hadn't closed before. Particularly we're seeing reduced access in places like Florida and Texas, which are setting records for COVID cases. On the positive side, our sales team has been working with customers both face to face and virtually. We've built up a lot of capability in this area and they are super passionate about continuing to make a difference for cancer patients. We will work hard to keep driving the volume. We have good momentum coming out of the second quarter. But I think it's really too early to say what's going to happen; we know the spike is occurring and it is causing changes in practices in multiple institutions around the country. The question is: how long will this last? I don't think we can give you any more guidance than that. Did I answer your question?

I did want to get the cadence; should we model a down Q3 and then maybe move up Q4 just as a clarification there?

Yes. Definitely based on what we're seeing with the spike in COVID cases and the access, that would be a good assumption. Again, it's unknown as to what the impact will be in Q4 at this point, but I would expect a softer Q3 compared to Q4 as we get our handle on this.

Thank you. Our next question today is coming from Brian Weinstein at William Blair. Your line is live.

A little bit about the pharma services side. You talked about kind of moving into phase two and phase three trials here. I'm just curious about what that means in terms of size of deal that that brings on and the opportunity there. And then, as you think about the broader pharma services side, you highlighted ways that you're winning. But can you be a little bit more specific on when you win, why you win, and where there may be some gaps where competitively you continue to need to fill things out in order to be even more effective there. Thank you so much.

I'll say a word or two about the shift upstream with pharma companies, and I'm going to ask Kathryn to talk about one of the reasons why we win when we win. You can expand on the first part of the question as well. We are moving into phase two and phase three for a couple of logical reasons. One, we've had tremendous success in some of the earlier phases over the last couple of years. We've built really strong relationships with multiple companies, so it’s natural that projects want to continue with a company that's having great success. The other thing that supports moving into the later stages is that we have significant capacity and capabilities. Organizations want to work with those that can deliver; we’ve shown how to do that. This is exciting for us, because once you can get to phase two or phase three programs, they can be quite large, and that can secure test revenue for several quarters. Of course, the time to test can take longer, so we need to monitor how our Q4 evolves. But overall, we're super excited about this because it represents incremental business in some of the most important work our customers are doing. Kathryn, do you want to talk about why we're winning?

Sure. Thanks, Mark. In terms of the shift from research/phase one to phase two trials, one of the large contributing factors is our global capabilities. With the opening of our sites in Europe, Singapore, and now China, we provide a global solution to our pharma companies' needs. We are at the table for those phase three discussions, and when it comes to providing full services in oncology, I think we win across the board in terms of that global solution. Key areas include being able to provide companion diagnostic services ex-U.S. We provide a holistic and terrific service within the U.S. and seek to bring that ex-U.S. because that is what our clients are looking for. Does that address your question?

Yes. It does. I appreciate it. Thank you.

Thank you. Our next question today is coming from Alex Nowak at Craig-Hallum Capital Group. Your line is live.

Great. Good morning, everyone. The company last quarter spoke to a number of investments that the team is making on the RaDaR asset to get it ready for prime time. But I'd say at the same time, the two main competitors out there are spending very large amounts of money getting their respective assets ready. Can you maybe expand on the competitive environment now that you've had some more time within Inivata under the hood? What additional investments does Neo need to make to prepare the test for a clinical launch next year?

Sure. Let me say a couple of words about how I'm thinking about it, but then I would like Clive to talk a little bit more about specifically what we're doing to get ready. The first thing when considering launching new technology is the product profile. Clive can comment more on this, but as I've come in and really seen the data we’ve published, I'm confident that our ability to detect low levels of cancer before recurrence is outstanding. In terms of the investments, companies are making investments both in evidence generation and in sales forces; those are typical. These companies are starting from a position where they don't have large customer bases, significant initial volumes, and a long history in oncology. Conversely, Neo has all of those. We have a customer base of over 4,000, we conduct a million tests a year on half a million patients, and we've built an experienced sales team of over 60 salespeople. We have a substantial customer service group and over 100 pathologists. We have an incredible infrastructure and starting point, as we move into this. We will certainly define the additional resources we need to have ready for launch mid-next year. I'll pause there and let Clive say a few more words about the product profile, and remind us why we're excited about that profile and how he's thinking about competing in the marketplace. Clive?

Yes thanks, Mark. And thanks for the question. Yes. The company obviously endorses everything that Mark just said. The sensitivity and specificity we see in the assay are absolutely critical for early-stage cancer patients who've already undergone treatment and are being tested for microscopic disease. The blood traces of DNA are very low. We believe that the RaDaR assay has a fantastic, compelling profile to win in that space. We are working on a range of different aspects, as you talked about evidence generation and getting ready for clinical launch. We have numerous clinical cohorts that we are exploring across a variety of tumor types. We are looking for submission for initial reimbursements around the turn of the year, which can lead to launch with a reimbursed test toward the middle of next year. We see many potential indications we could approach with RaDaR and we're building that evidence using ongoing or archival study cohorts where we can access them but also increasingly looking at prospective studies which may be more practice-changing in the long term, but take longer to bring through. We’ll start with observational data then move into interventional and ultimately prospective studies, which will drive long-term outcomes here. We're embedding that within prospective studies with academic collaborators, cooperative group collaborators, and, indeed, with biopharma, as Mark mentioned. So we're building that stable now. Overall, we believe we are at the beginning of the evolution of this clinical testing market, and we’re likely to see additional tests and indications being reimbursed. As you know today, colorectal cancer coverage exists, and there is pan-cancer coverage more generically from the multi-x group that Neo and others will also look to utilize. I expect to see increased indications building over time, and as Mark said, we aim to be part of that process.

It does. Very helpful. Thank you.

Thank you. Our next question today is coming from Mark Massaro at BTIG. Your line is live.

Hey, guys. How's it going? Thanks for the questions. I guess if I can ask a two-parter. The first is curious if you're seeing any increased adoption of the Envison First Lung test. I wanted to ask Bill Bonello about several interesting digital pathology, machine learning, AI type companies raising money this year and over the last 12 to 18 months. Have you had a chance to evaluate your internal initiatives relative to some of the other leading platforms in the industry? Maybe Bill can you remind us how long you've been developing your algorithm and how you think it's differentiated relative to others in the field? Thank you.

Let me take an update on Envision First Lung. It's something I've been looking closely at. We've seen steady growth since the beginning of the year, which is positive. But we want to do better, so we're taking steps to accelerate growth in Envision Lung. This will be the number one focus of the new precision medicine managers team, which includes 10 sales representatives dedicated to oncology, in addition to the 50 that are already supporting the product. These people come from a background in oncology, selling the most advanced tests. We're excited about that. We're also adding dedicated resources to our customer service team to expedite reimbursement and focus on where we can reflect solid tissue tests back to Envision Lung and really improve that. Importantly, we're moving forward with a new positioning that talks about the patient-first approach in the lung cancer space. Fully 60% of lung cancer patients are eligible under the current LCD for Envision First Lung, and it's the best choice for these patients. We're going to emphasize that; these are patients who are medically contraindicated to do a biopsy, and physicians are clear that they probably won't be able to get enough tissue. We can go right to Envision in the first line, which is a great profile. With added emphasis, clearer messaging, and further resource investments, we can take what is a growing test and make it grow even faster. So we'll be focusing heavily on the second half of the year. Bill, you want to address the second part?

Sure. Thanks for the question, Mark. We know most if not all of the companies that you're referring to. In many instances, we're working with those companies in various ways. The types of algorithm work we’re doing in our projects are fairly basic and make the R&D work easier for pharma customers who are using digital images for their research. This includes things like slide circling, tumor calculation, histology detection, etc. The distinction from those other companies is that we're currently not working on any clinical assay. That isn't within the scope of what we're trying to do. However, that could be considered in the future. We’d need significantly expanded resources and capabilities to do that. One advantage we have that differentiates us is we likely process more digital images per year than anyone else in the marketplace. We have dozens of pathologists that assist with training, evaluation, and validation of algorithms created. That’s one reason why many of those companies want to work with us, as do many pharmaceutical companies. So hopefully that gives you a sense of where we're at.

Thanks, Bill. Thank you for your question.

Thank you. Our next question today is coming from Tejas Savant at Morgan Stanley. Your line is live.

Hey, guys, good morning. So just a couple of quick follow-ups on Inivata, then I have a separate question for Kathryn. So on Inivata, Clive, do you envision different versions of RaDaR for the recurrence detection versus response monitoring indications? How important is FDA approval for broader adoption of MRD as a modality in general? And then for Kathryn, can you just give us an update on when you expect the Fort Myers lab to be fully operational? Any color on OpEx cadence as you head into the back half of the year?

Clive, you want to take the first part? And actually, since we’ve got George Cardoza here, who is responsible for our lab operations, I'll ask him to give you an update on Fort Myers, if that's okay.

Sure. Yes, the beauty of an assay like RaDaR is it's completely suitable for both residual disease detection following surgery and ongoing monitoring for recurrent disease. We create a highly sensitive output; we're tracking a high number of variants, looking at 48 known variants per patient with great sensitivity. This means that even if there are changes in the genomic landscape of the patients, the majority, if not all, will be conserved, leading to a very good detection rate. Early data presented in breast and lung cancers shows that we can detect recurrence months earlier than using conventional mechanisms. We can use the same test for both scenarios, which is the short answer to the first question. Regarding FDA, the assay was built with a view to moving through the LD as an LDT initially, and then potentially seeking future FDA approval. We've sought FDA breakthrough device designation already and have been discussing this with pharma. Initially, FDA approval ability and access is key; as drugs tested become companion diagnostics for those therapeutics, we want to be ready for regulatory trials under the appropriate oversight. As those trials read out, with positive results, they will naturally partner us with pharma to establish companion diagnostics. FDA approval will further reinforce clinical use and guidelines for testing, helping long-term adoption.

Yes. No. I drive by the Fort Myers headquarters every day. It looks fantastic. It has come a long way and looks beautiful. The team is very excited. There are two buildings: the admin building, which will serve as our corporate headquarters, and that one will move fairly soon. The laboratory is open right now, and we are conducting equipment validations and testing validations. All of these tests need to be revalidated in the new facility, which will take some time. But the team is working hard, and our expectations right now are that we will be operational, testing in the new laboratory facilities by the fourth quarter. The team is excited, and the new facility will allow us to streamline workflows—the Fort Myers facility we currently operate is outdated and cramped. We're excited for the new open-concept lab, which will enable efficiencies and allow scalability for growth over time.

In terms of OpEx, we’re seeing some pressure due to capacity constraints that could impact the third and fourth quarters related to COVID. However, there are no significant other impacts between the quarters.

Got it. And Kathryn on OpEx?

Sure, Kathryn. Do you need to repeat the question?

Yes. Can you repeat the question on OpEx?

I just wanted to get your views on OpEx cadence heading into the back half of the year. I mean, anything particularly noteworthy for Q3 versus Q4?

No, consistent with what we said before. We're seeing some pressure in capacity constraints that could impact in the third quarter and fourth quarter related to COVID. But there are no significant other impacts between the quarters.

Thanks, Kathryn. I want to clarify or point out something that may be oversimplified; as Kathryn answered the question on OpEx, we have in place 60 experienced salespeople at Neo preparing for the RaDaR launch. We have partnered with Agendia, which will add 40 highly experienced people. So, a year before launch, we have in place 100 highly experienced people actively selling these markets backed by our substantial customer and medical service teams. We will define the additional dedicated resources needed for launch. But make no mistake, we have the resources to compete in this market, and our people are already experienced and in place. I wanted to highlight that and ensure we're clear. Can I take the next question?

Thank you. Our next question today is coming from Mike Matson at Needham & Company. Your line is live.

Yes. Thanks. Hi. Thanks for taking my questions. I guess just following up on the count you just made about the number of reps you'll have selling RaDaR. I was wondering, is it realistic to assume that this could add a couple points to growth in the 2023 timeframe, if not 2022? If you're working with something like $500 million in revenue, that would be adding $5 million to $10 million in pretty short order. That's a significant amount.

It's not crazy. To be clear, we believe we can have a material impact on growth in 2023. We've stated that 2021 and 2022 focus on reimbursement and ensuring resources and all activities are in place while building evidence. But we expect sales to start coming in on RaDaR in a material way, especially in 2024. I think you’re thinking about it the right way.

Okay, great. And then I wanted to ask one on M&A. You've done a couple of deals recently. It sounds like you called that out in the prepared remarks, as you're still looking at other areas. The deals you've done seem more technology-oriented, but is that the main deal type you're targeting? Would you do deals for scale or breadth? Can you give an overview of your approach?

That's a great question. I'm going to have Doug answer that, please.

Yes. Thanks, Mike for the question. You're right. There's been an evolution in how we have approached M&A. The first couple of deals were about scale, and the last three we've done are about technology. We're adding a test. When we consider more scale transactions, frankly, it's on the pharma side; those would likely be from a global perspective. In clinical, it may be about adding more technology into the channel. In informatics, we could also look for scale there as well. We have plenty of opportunities we're evaluating, and as Mark echoed, it continues to be a primary driver of growth here.

Thank you. Our next question today is coming from Matthew Sykes at Goldman Sachs. Your line is live.

Good morning, everybody. Thanks for taking my questions. Just two for me. The first one, my apologies if you guys have outlined this in previous calls, but any additional color on the economics for the commercialization agreement with Agendia or RaDaR? What percentage of volume do you expect to run through Agendia versus your own in-house sales? I know you mentioned a figure of 60 in-house salespeople versus 40 at Agendia but expectations for how that volume might look?

We haven't communicated specifics about the economics of the agreement with Agendia, as we see that as confidential. In terms of volume, it would be premature to estimate going through Agendia. What I can say is Agendia is a successful organization in the breast cancer market with strong growth of their existing products like mammoprint and blue print. They have impressive capabilities, particularly in evidence generation. Together with Neo, which holds a leading position in breast cancer testing and conducts over 100,000 tests a year, there are numerous opportunities for us and for patients in need of MRD tests for monitoring recurrence. Clive, do you want to add anything?

Yes, I would support that. The partnership with Agendia focuses exclusively on breast cancer, whereas RaDaR has utility across other tumor types like lung and colorectal. Agendia will drive the breast cancer channel alongside efforts at NeoGenomics. Their agreement also covers the EU, not just the U.S. So again, in terms of building a breast cancer channel and commercialization, we believe this is a great opportunity.

Helpful. Yes. That's very helpful. And then just lastly, more broadly, when you were discussing pharma services, it sounds like there's an opportunity for ex-US. You mentioned diagnostics. I'm sure there are other things. Do you have a plan in mind for expanding that business outside the U.S. and growing it?

Sure. We evaluate several ways to achieve that. Companion diagnostic offerings include various factors like reagent quality, compliance. We're considering whether to build versus buy and assessing what we have and what we might need. This is somewhat vague, but there are diverse options to pursue expansion, including building it ourselves or looking for M&A targets. Something I'll add is that our pharma services business has been successful at partnering. Collaborating with other labs, CROs, and device test kit manufacturers has proven valuable. We've announced exciting partnerships in China that allow studies to run locally. To succeed globally in the lab business, it is vital to forge partnerships since diagnostic testing is driven by local markets. Neo has enabled us to maintain customer focus in clinical lab services, providing significant client satisfaction.

Does that answer your question?

Yes. That's great. Appreciate it. Thank you, guys.

Thank you. Our next question today is coming from Derik De Bruin at Bank of America. Your line is live.

Hi, good morning. Thanks for taking the question. Most of them have been answered, but I just want to clarify a couple of things. Can you talk a little bit more about R&D investment and how that's going to ramp up? With Inivata coming in, that's going to pick up significantly, and then I have a follow-up.

Yes. The addition of Trapelo and Inivata definitely increases our future R&D expenses. We've mentioned before that Inivata consumes approximately $3 million a month in cash. Much of that focus is on R&D. In the back half of the year, you'll see increased R&D related to Inivata, particularly as we prepare for the expected submission around the turn of the year, which could be around $13 million to $15 million a quarter. Going forward, we anticipate looking at future years to support the further development and commercialization of RaDaR.

Great, thanks. That's what I was looking for. I just wanted a bigger question on the MRD market. The data from the literature indicates that you need to add an epigenetic component to the analysis versus the personalized approach. What are your thoughts on the need to expand the assay to look at epigenetic markers, and when can we expect to see some comparative data on studies comparing the two approaches?

Clive, do you want to take that?

Sure, thanks for the question. Understanding sensitivity to levels of cancer DNA in early patients who have undergone therapy is very low. Traditional sequencing panels tend not to be sensitive enough. People have pursued two avenues: personalization and looking at other factors that could be more abundant. Both can improve sensitivity. However, we’re very pleased with the level of sensitivity already presented in RaDaR. There is room for improvements by potentially adding other markers but, for now, we feel confident in the current profile. Comparative studies can be challenging to conduct, but we'll likely see these evolve as more tests come through. While we’re validating independent tests, more cross-trial comparisons may emerge with equivalent patient populations. However, it will take some time.

Thanks for that question, Derek and Clive. I hope that answered your question.

Yes, thank you.

Thanks for all the great questions. We’ll take one more, and I apologize for running over. But we’ll take one more question and then wrap up.

Thank you. Our final question today will be coming from Andrew Cooper at Raymond James. Your line is live.

Hey everyone. Thanks for sneaking me in here at the end; lots has been asked. But maybe just on the RaDaR partnering with Agendia, seems to be a focus. As we think about where you focus your efforts on prospective data generation particularly with pharma, what are some of the indications you feel should be prioritized? Do you want to be a fast follower with a good assay or carve out some cancers where there is less data from competitors? How do you think about the ordering and priorities?

I can't answer that succinctly; all of those options are possible. Some assays already exist for colorectal cancer, for example, so we wouldn't be first if we entered that space, but we believe we could still be a strong competitor. The market is very nascent, so we believe we can act as a fast follower. At the same time, we think we can take the lead in certain areas. Our high levels of sensitivity may present opportunities in further indications where competitors struggle. Additionally, our assay's personalized nature allows it to be somewhat tumor-agnostic, requiring evidence development for each indication as we proceed with different tumor types.

Thanks again to everyone for the great questions. I would like to end by saying how incredible our 1900 NeoGenomics team members worldwide are while working on behalf of cancer patients. As I’ve visited labs and participated in video calls throughout the site, I've been impressed with their commitment. Every NeoGenomics employee carries cancer patients in their hearts, and the passion they bring in their commitment to patients takes my breath away. Thank you to all my colleagues; I truly appreciate it. Thanks everyone.

Thank you. Ladies and gentlemen, this does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.