Neogenomics Inc (NEO) Q4 2021 Earnings Call Transcript

Good day ladies and gentlemen and welcome to the NeoGenomics fourth quarter and full year 2021 earnings call. At this time, all participants have been placed in listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chief Executive Officer Mark Mallon. Sir, the floor is yours.

Thanks, Holly. Good morning everyone. I’d like to welcome you to NeoGenomics fourth quarter and full year 2021 conference call. Joining me on this call from our Fort Myers headquarters are Bill Bonello, our Chief Financial Officer, George Cardoza, President and Chief Operating Officer of our lab operations, Doug Brown, our Chief Strategy and Corporate Development Officer, and Charlie Eidson, our Director of Investor Relations. Joining on the phone are Dr. Gina Waller, President of our Pharma Services division, Dr. Clive Morris, President of Inivata, and Clynt Taylor, President of our Informatics division. Before we begin our prepared remarks, Charlie will discuss the forward-looking statements and the non-GAAP measures used on this call.

This conference call includes forward-looking statements about our 2022 initiatives, 2022 financial outlook, growth opportunities, and anticipated operating results and performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these risk factors appears under the heading, Forward-Looking Statements in the press release we issued this morning and in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2021, that is filed with the Securities and Exchange Commission and available at www.sec.gov and our website at www.neogenomics.com, as well as subsequent filings with the SEC. 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. In addition, during the conference call, in order to give greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. These non-GAAP financial measures presented should not be considered to be an alternative to the financial measures required by GAAP, should not be 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. Before turning the call back to Mark, I want to let everyone know that we will be making a copy of our prepared remarks for this morning’s call available on the Investor Relations section of our website shortly after the call has completed. We also want to let everyone know that we are going to limit the number of questions to one per person in order to give more people a chance to ask questions within the one hour that has been allotted for this call.

Thanks, Charlie. For today’s call, I’ll briefly review our full year 2021 highlights, provide updates on each of our four businesses, including key 2022 initiatives, and discuss an exciting new addition to the NeoGenomics leadership team, a new Executive Vice President of R&D and Chief Scientific Officer, Dr. Shashi Kulkarni. Bill Bonello will then provide a more detailed review of the financial results and introduce our 2022 financial outlook. We will then have time for Q&A. 2021 was an eventful year for NeoGenomics. Our team successfully navigated the constantly changing environment and took important steps in executing our growth strategy. I’m incredibly proud of the resolve our employees showed in providing excellent care for cancer patients, often under very difficult circumstances. Our teams also took on the challenge of moving our Fort Myers lab operations into our new lab and headquarters facility. The majority of the move is complete with the final stage set to occur in April. The new laboratory triples our capacity in Florida and will support our growth in the near and long term. In 2021, our labs processed almost 1.1 million clinical tests and generated revenue from over 1,000 pharma projects, ending the year with $484 million in consolidated revenue. This represents 16% year-over-year growth excluding COVID PCR testing revenue. These are strong results given the extraordinary environment. During the year, we also executed on two highly strategic acquisitions that we believe will boost our growth in the years ahead. Both Inivata and Trapelo are fully integrated into the organization and are proving to be strong cultural fits with NeoGenomics. I’ll touch on some early progress by both groups later in my remarks. While our acquisitions are certainly exciting, the foundation of our company is our clinical business, which represented more than 80% of our revenues in 2021. We have continued to strengthen our leadership position in the market through our comprehensive menu of tests focused only on cancer, our exceptional service levels, our managed care and hospital relationships, and our overall partnership approach. These critical differentiating factors support new growth and drive high levels of customer retention. In 2021, our average customer accounts ordered more than 250 tests during the year and many of our customers view us as their primary reference lab for cancer testing. This dynamic is supported by the results of a national survey of independent labs and hospitals conducted in December 2021 by Laboratory Economics, in which NeoGenomics was named as the number one preferred reference lab for cancer testing by pathologists. I’m also pleased to share that Neo again achieved a net promoter score in excess of 60, a world-class result. I want to thank our committed employees who are the key to our strong customer relationships and our track record of delivering elite service. As we turn the page to 2022, we have confidence that the formula we have used to drive market share gains for years will play out as we emerge from the pandemic. To ensure we can meet this additional demand, we’ve expanded our lab operations staff in 2021 and will continue to do so in 2022 as needed. With that said, similar to previous waves of the COVID-19 pandemic, our clinical business was heavily impacted by the omicron variant in January. February has been much better than January and we anticipate an even better March, but our quarter one to date has been challenging. Many of the strengths I highlighted on the clinical side of our business also apply to our pharma services business. Our biopharma customers clearly appreciate our strong focus on cancer, our comprehensive service menu, and our outstanding service levels. Our global footprint and our ability to launch a test through our leading clinical channel in the U.S. are additional reasons why biopharma clients view us as an excellent partner. Demand through the pandemic across our pharma service offerings has been strong, and over the course of 2021 we booked $172 million in new signed contracts and ended the year with $267 million in backlog. Our pharma services revenue grew 29% year-over-year in 2021 despite COVID-19 impacts. While COVID-19 conditions have slowed our pace of converting backlog into revenue, we believe that many of these projects will convert as conditions normalize. This will put us in a great position to grow this business in 2022. We also made progress with our global pharma services strategy during the year and successfully opened up a new laboratory in Suzhou, China. The demand from biopharma customers for capabilities in China has been extremely strong. We expect that lab to be strategically important as we look to compete for global clinical trials with study arms in China and for China-based clinical studies. We believe our global network is now largely set. In 2022, we will focus on filling our international labs and using the power of operating leverage to improve our pharma services profitability. Our informatics efforts continue to progress rapidly and our growth trajectory in this business has been largely unaffected by COVID-19. Our team launched a cloud-based cohort builder in January that is already getting very good feedback from biopharma clients. We anticipate this software-as-a-service tool will accelerate our sales results. The Trapelo Health team is also making progress on scaling the next-generation clinical decision support tool for oncologists, and we anticipate launching a web-based quick start version by the middle of this year. For our Trapelo clinical decision support platform, adoption by oncologists is the most important key performance indicator and we are monitoring it closely. Our primary goal will be to accelerate adoption over the course of 2022. It’s been less than a year since we announced the Inivata acquisition, and we are proud of the progress the team has made towards realizing the potential of our leading minimal residual disease and recurrence test RaDaR. The assay’s ability to detect circulating tumor DNA in blood down to levels as low as 11 parts per million with 95% sensitivity and 100% specificity is differentiating, and this is resonating with our biopharma clients. Our sales pipeline is robust and growing quickly. We expect to sign our first significant clinical trial contract this year, which will add to the pharma backlog over time. Evidence generation remains a focus for the team, and we have a number of patient cohorts anticipated to read out over the course of 2022 with multiple data sets expected to be published in peer-reviewed journals. Earlier this month, we were pleased to announce the LIONESS prospective head and neck cancer cohort data was published in the British Journal of Cancer. This represents the first peer-reviewed publication for RaDaR. In the LIONESS study, blood samples taken from 17 patients with stage 3 or 4 head and neck cancer who received curative intent primary surgical treatment were tested using RaDaR to detect circulating tumor DNA as evidence of minimal residual disease and recurrence pre and post-surgery. All patients had detectable ctDNA prior to surgery. In longitudinal monitoring after surgery, ctDNA was detected in five patients at levels as low as six parts per million with lead times ahead of clinical confirmation ranging from 108 to 253 days. In the remaining 12 patients, there was no recurrence detected, indicating 100% clinical specificity of the RaDaR assay and confirming post-operative tumor clearance. This is a remarkable result. The team has also made considerable progress on the reimbursement front, and we announced two important regulatory milestones in January. First, we received CE Mark for RaDaR, which we believe will be important for biopharma and allow us the ability to make this test available to clinics and hospital systems throughout Europe to support patient management and clinical research. Second, we achieved our goal as planned of submitting RaDaR for U.S. reimbursement of our first indication via the MolDX pathway. This submission keeps us on track to commercialize the assay in the clinical market around the middle of 2022. To summarize, we are incredibly excited about our market position and the progress we are making across our businesses towards becoming the world’s leading cancer testing and information company. The attributes that have made Neo successful in the past remain as foundational drivers for growth. We’ve added new differentiating capabilities that will boost our growth trajectory over the coming years. I see a truly bright future ahead for NeoGenomics. Part of working towards that bright future is adding top talent, and so before I pass it over to Bill, I’d like to highlight an important upcoming addition to our leadership team. Earlier this month, we announced the appointment of Dr. Shashi Kulkarni as Executive Vice President of R&D and Chief Scientific Officer. Dr. Kulkarni is considered a world-renowned expert and key opinion leader in cancer genomics with a focus on the application of genomic and multi-omic technologies to improve the understanding of human disease and the precision of clinical diagnosis, prognosis, and treatment. He is also an experienced commercial laboratory leader, having played key roles in commercial laboratories at Washington University and in Baylor’s partnerships with Miraca Holdings. He brings a unique combination of world-class clinical, scientific, commercial, and regulatory talent to the role. We are thrilled to have such a well-respected global oncology genomics authority like Dr. Kulkarni leading our research and innovation teams. Dr. Kulkarni will be a vital member of our executive team, drawing on years of research expertise, a strong network of peers, and a passion for innovation and precision medicine. He joins us officially on March 7, and I know he’s very excited to get started. I’ll now turn the call over to Bill, our CFO, to discuss some of the other details of our quarter four financial results. Bill?

Thanks, Mark. Before I walk through the numbers, I wish to point out that the growth rates we cite exclude prior period revenue from COVID-19 PCR testing. We’ve made this adjustment to make the year-over-year comparisons more useful as we stopped performing COVID testing in the first quarter of 2021. Fourth quarter consolidated revenue increased 7% year-over-year to $126 million. Clinical division revenue increased 6% year-over-year with test volume up 2% and average revenue per test up 4%. Consistent with our experience throughout the pandemic, our volumes decline during COVID surges and then recover quickly as COVID subsides. We saw a steady volume recovery in October and November as the delta variant receded but saw volumes decline again in December with the emergence of omicron. Clinical division revenue per test of $383 increased 4% from the fourth quarter of 2020 and 2% sequentially. The Q4 improvement in revenue per test is primarily driven by billing and reimbursement initiatives which drove reimbursement that was higher than initially anticipated. For all of 2021, revenue per test increased 2% year-over-year. Looking forward, we would expect that AUP will be in line with or modestly above our full year revenue per test of $370. Pharma services revenue increased 13% year-over-year to a record $22 million in the fourth quarter. For the full year, pharma services revenue increased more than 29% to $80 million. New bookings were strong once again for the quarter at $49 million, leading to a year-end backlog of $267 million. Cancellations and projects classified as dormant were $21 million, primarily driven by a few larger project cancellations. We are optimistic about the strength of this business as we look forward to 2022 and beyond. Our total GAAP gross margin was 36%, reflecting a sizeable impact from Inivata-related non-cash amortization. Total adjusted gross margin, which excludes non-cash amortization related to the Inivata acquisition, was 39.9%. Gross margin was impacted by lower than typical clinical volume growth and pharma services revenue growth on our largely fixed COGS infrastructure coupled with both wage and supply cost inflation. In addition, during the fourth quarter we moved into our new Fort Myers lab facility. While this move will drive productivity and efficiency improvements, we did incur extra costs related to operating two different Fort Myers labs during the transition. Our gross margin was also impacted by a $3.8 million reversal of prior period credits related to the employee retention tax credit, or ERTC. While we continue to believe that the company may be eligible for certain credits from the ERTC, the IRS guidance related to ERTC eligibility has evolved over the past two years, leading us to conclude that a reversal of prior period credits is appropriate unless or until we have new evidence in support of the credits. The change in ERTC credit reduced gross margin by roughly 300 basis points in the fourth quarter. Excluding this prior period reversal, fourth quarter consolidated gross margin would have been 43%, or essentially flat sequentially. Omicron and inflation notwithstanding, our gross margin is not where it should be. We are taking near-term action to address our cost structure and we are developing a long-term plan to drive step function improvements in productivity and efficiency through automation, process improvement, product, payor and customer mix, and pricing. Driving gross margin expansion is a top priority for me as I step into the CFO role, and I am confident that we can return to approximately 50% gross margin or better over time. Operating expenses increased $35 million year-over-year to $87 million. The increase was primarily driven by the acquisitions of Inivata and Trapelo as well as additional investments to support growth. Adjusted EBITDA loss was $10 million in Q4. The loss is attributable to significant investments to develop and launch new assays, including our MRD assay, RaDaR, offset by contribution from the core clinical and pharma services business. The previously discussed reversal of prior period credits related to the employee retention tax credit reduced adjusted EBITDA by $5.9 million in the quarter. Excluding this change in accounting estimate for prior periods, adjusted EBITDA would have been a loss of $4 million in the quarter. Turning to the balance sheet, we exited quarter four with $515 million in cash and marketable securities. We believe our balance sheet positions us well to fund our growth initiatives with optionality to pursue M&A as well. Next, I’ll discuss guidance. We expect full year revenue of $530 million to $550 million, which equates to top line growth of 10% to 14%. We expect adjusted EBITDA to be in the range of negative $40 million to negative $25 million. Our guidance reflects Q1 revenue and adjusted EBITDA that is both down sequentially and lower than we would see in a typical year. As we discussed during the call, our January revenue was significantly impacted by the spike in COVID-19 cases. While we have seen a nice recovery of volume in February, the January impact is sizeable enough to impact our quarterly results, therefore we expect Q1 revenue to be in the range of $118 million to $120 million. From a profit perspective, we have continued to staff our labs at full capacity so that we are able to handle increases in test volume that will come as COVID incidents recede. We are also seeing a significant impact from both wage and supply cost inflation. With these factors in mind, we anticipate that Q1 adjusted EBITDA could be in the range of negative $15 million to negative $12 million. Our view on first quarter results is not indicative of our view of the underlying growth and profit profile of our business. We anticipate that Q1 will be a significant outlier and expect to see growth and profitability increase as the year progresses. Our full year revenue guidance of $530 million to $550 million implies a return to mid-teens revenue growth for the remainder of the year with outsized growth in the third and fourth quarter as we begin to reap benefits from our expanded sales force. We also anticipate that EBITDA loss will decline sequentially each quarter as we realize increased revenue and leverage our fixed cost structure. We also expect 2022 to be an outlier year in terms of adjusted EBITDA. We are making a substantial investment to support and launch RaDaR, including clinical studies to support evidence generation and publications, an increase in the size of our sales force and medical science liaison team, and associated marketing costs. These expenditures will be incurred before we’re able to generate significant revenue from this new product. As we look beyond 2022, we anticipate that our continued investments in RaDaR will be offset by both MRD revenue and increased profitability from our core businesses, and we expect to turn EBITDA positive once again in 2023. I will now hand the call over to Charlie Eidson to lead us through Q&A.

At this point, we would like to open up the call to questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel free to email us during the Q&A session, and we will address your questions at the end if the subject matter hasn’t already been addressed by our call-in listeners. As mentioned at the beginning of the call, we would like to ask each person to limit their questions to one so that we may hear from everyone and still keep us in the one hour allotted for this call. Operator, you may now open up the call for questions.

Your first question for today is from Brian Weinstein. Please state your affiliation and then ask your question.

Hey guys, I think you all know - Brian Weinstein, William Blair. Thanks for taking the question. Bill, just to hit on some of the comments that you made on the guidance to get that out of the way, you talked about a significant - and I caught the inflection in tone there - the significant impact on revenues in January, as well as the significant impact that you guys have seen on wage and cost inflation in general. I was hoping you could provide a little bit more context for how significant that impact really was. As we think about what we heard last quarter from you guys as it relates to delta, there seemed to be more of a lingering effect as a result of not being able to get in with customers and have conversations with them, but I’m not hearing that kind of conversation this time, so can you talk about maybe the difference between the lingering effect from delta that you called out and what I’m not hearing, a lingering effect on omicron be. Hopefully that all made sense.

Sure, absolutely, Brian. Thank you very much. Great questions, and I’m happy to elaborate. First of all, when you think in terms of the impact of omicron on volume and revenue in Q1, we do think of ourselves as normally a mid-teens revenue grower, and implicit in our Q1 guidance is the fact that we will be a mid-single digit, on the low end of mid-single digit grower of revenue in Q1. The vast majority of that impact is going to be from what we saw in January. We’re starting to see recovery in February and we expect it to be greater in March, so that gives you some sense of the magnitude of the COVID impact on revenue that we saw just from the month of January. In terms of wage and supply cost inflation, we are seeing things in the range of 6%-plus on an apples-to-apples basis in terms of payroll expense, and that’s significantly higher than what we would have seen in prior years, which might have been more in the 3%, 2.5% to 3% level, so absolutely that is a change in what we’re seeing and that will have an impact on Q1 results, and obviously results throughout the year as well. We don’t expect that to subside anytime quickly, and that’s why we are taking some of the margin actions that I discussed. In terms of your question about the lingering effects, we are optimistic. We are seeing green shoots. We are starting to hear that our sales team is getting back in front of clients. As you know, historically about half of our growth has come from market share gains. It’s very difficult to achieve that when you aren’t out meeting face to face with your clients, so we’re very optimistic about the growth rates picking up as we move throughout the year now that things are opening back up, as well as any rebound, obviously, in utilization of patients being tested and treated. We’re also seeing things begin to open back up on the pharma services side and seeing some green shoots on that end. You could see that we won a substantial amount of business. Our team has done a great job through the pandemic of winning business, but it’s difficult to convert that to revenue when clinical trials aren’t enrolling, or are enrolling at a much slower pace, so we’re starting to hear wins of those trials picking back up and activity starting, and so yes, much less of a trailing factor than what we discussed with delta.

Great. I’ll respect the one question rule and talk to you guys later. Thanks.

Thanks, Brian.

Your next question is coming from Mark Massaro. Please announce your affiliation and pose your question.

Hey guys, thanks for the question - Mark at BTIG. Bill, I heard you talk about obviously 2022 being an outlier year as it relates to spending for Inivata, etc. I think on the Q3 call, you talked about plans to add 50 sales reps, and I believe 10 medical science liaisons. I’m curious if you can just give us an update on that, and if you’re able to quantify or give us any additional details about the investment going into Inivata versus other areas and headcount, that would be helpful.

Absolutely. I’m going to turn that one over to Mark to talk about what we’re doing with the sales force, and if he wants, I can add a couple of comments around it.

Thanks for the question, Mark. As we communicated in the third quarter, we’re on track to expand our precision medicine team. We’re setting up a second team in the second quarter. We’re also going to be bringing on board really our first medical science liaison team, both of those to support RaDaR and our other NGS assays in reaching out to oncologists. We will get that team started to expand in the second quarter, in line with when we receive the reimbursement from MolDX for RaDaR, and then we will expand that through the course of the second half of the year to make sure that we’ve got the right level of resources behind RaDaR in offices with oncologists, and supporting our total NGS portfolio with oncology.

Did that answer your question, Mark?

Yes, I'm sorry. I may have missed it. Can you clarify if the headcount additions refer to 50 representatives and 10 liaisons? I apologize if I overlooked it.

The plan that we announced is the plan we’re continuing with, so we did talk about up to 50 and up to 8 to 10 MSLs, but that will be through the course of the year, right? We’re going to start getting that team set up in the second quarter and then we’ll expand that in line with the opportunities we see.

Excellent, thanks guys.

Your next question is coming from Alex Nowak. Please announce your affiliation, then pose your question.

Good morning everyone. Referring back to the revenue guidance and Brian’s question, could you elaborate on the expectations for the increase in cancer cases and diagnoses in the second half? Additionally, how quickly can the new representatives make an impact, and what kind of visibility do you have regarding this and RaDaR’s contribution? I realize I have posed several questions, but I am trying to gain a clearer understanding of these factors.

Alex? Anyone? Operator?

Alex, did you go on mute accidentally?

I think we understand the question. I can respond to that so others on the call can hear it, and if Alex returns, he can add to the answer. Regarding our expectations on COVID, at the high end of our guidance, we anticipate being closer to a steady recovery. We project a 15% revenue growth for the remainder of the year, which is a solid growth rate in a typical environment. We provided a wide range of revenue guidance because predicting COVID has been very challenging. The lower end of the range accommodates the possibility of ongoing virus activity throughout the year. As for the impact of the new sales force, we expect them to contribute to revenue in the second half of the year, primarily through sales of our other NGS products in the oncology market, rather than from the RaDaR assay itself. However, we do anticipate preliminary RaDaR sales in the latter half of the year, especially once reimbursement is secured. Additionally, we expect some revenue from RaDaR in our pharma services sector, which will be the main contribution from RaDaR to revenue in the initial years, with the clinical market gradually increasing over time.

Okay, great. Appreciate the update, and thank you.

Your next question from today is coming from Puneet Souda. Please announce your affiliation, then pose your question.

Hi Puneet.

Hey Mark, thanks. I have just one question. What growth in clinical and pharma are you factoring in? It seems that volume decreased in the first quarter, so how should we view the average selling price? Is it consistent with the fourth quarter or the $370 figure you mentioned? Also, should we anticipate costs to rise from current levels into the first quarter? I believe there are several questions regarding the first quarter guidance. As a brief follow-up, what indications will you pursue for RaDaR right at launch and for submission to MolDX? Thank you.

Let me address the revenue growth and indications questions, and then I'll allow Bill to comment on some of the specific numbers you raised. We believe that as we move past the impact of COVID that we experienced early in the quarter, we will align with our expectations for both our clinical and pharmaceutical divisions. In clinical, we anticipate growth in the low teens, while pharmaceuticals are projected to grow over 20% over time. Overall, considering the past three quarters, we are targeting mid-teens growth for the remainder of the year. We have the necessary resources, products, and a motivated team, and with access improving and assuming no further complications from COVID, we feel positive about the upcoming three months. Bill, would you like to add anything? Regarding indications, as we mentioned previously, we will not disclose specific indications until we secure reimbursement, as that information is competitively sensitive. RaDaR is a comprehensive pan-tumor assay; we have already shared data across various cancer types, including breast and lung. We view this as a valuable tool for a wide array of solid tumor types, and we are actively pursuing both regulatory approvals and clinical programs in these areas.

Sure. On the average revenue per test and in terms of cost inflation, I will just reiterate what we said on the call - we would expect average revenue per test to be in line with the full year amount of $370 to up modestly. We do have a number of interesting reimbursement initiatives that could drive some upside to that. On the flipside, there is some pressure from the Medicare physician fee schedule, and so we think that’s a pretty prudent number to put out there. In terms of inflation, again we’re seeing payroll inflation around 6% or so - that’s significantly higher than in other years, and so that is contemplated as part of the Q1 guidance as well as part of the full year guidance. The big challenge for Q1 from a profitability standpoint is, as we said, we expect revenue to be down sequentially. We aren’t going to make a bunch of immediate cutbacks to our laboratory staff as a result of a temporary resurgence in omicron. We need to be prepared to handle the volume when it comes back, as it has started to do, but when you have the overhead there and the volume not, that’s a big hit on profitability for that particular quarter.

Okay, thanks guys.

Your next question from today is coming from Dan Brennan. Please announce your affiliation, then pose your question.

Thanks - Dan Brennan from Cowen. Hey guys, how are you? A couple-part question. First, I was wondering if you could break out a little bit, given the ’22 guidance, what’s the expected contribution from Inivata, from Informatics, if you could comment at all on NGS, that would be helpful as well. Then secondly on the net promoter score, which you talked about, how does this compare to the recent trend, in particular I’m interested in what the feedback has been given on prior calls, you’ve discussed some staffing issues given COVID, so I’m wondering how you’ve managed through that and what you’re hearing from the field.

Dan, I will address the second part of your question while Bill will handle the first. We continue to maintain our net promoter score in the 60s, which is an impressive achievement for this metric. For those unfamiliar, it represents the difference between those who would actively recommend our services and those who would criticize them. It's a significant benchmark. We have consistently kept it in the 60s, and I am proud of the team for sustaining this level of customer service despite COVID and access challenges. This reflects the strong relationships they have developed over the years and the dedication they've shown in the last two years. As access improves, I am confident that increased face-to-face interactions with our customers will further advance our clinical business. Achieving such a score in the biopharma sector is challenging, yet we provide the same high-quality service to biopharma clients. We are also seeing a revival in this area with more interactions resuming. The return of face-to-face conferences is particularly vital for connecting with biopharma customers. There are many encouraging developments to look forward to this year from our sales teams.

Sure, so Dan, we don’t guide specifically to the growth rates for the individual businesses. We have said longer term that we expect our pharma services business to grow north of 20%, and we expect our Informatics business to grow north of 25%. We had said initially at the time that we acquired Inivata that we would expect it to have a modest contribution, maybe somewhere in the single digits of revenue in its first year, and so that’s what we’d be expecting in 2022 in terms of revenue. I think I would look at the growth rate from pharma and from Informatics to be more or less consistent with our long-term growth rates, and then some modest contribution from Inivata as well.

Got it, okay guys. Thanks.

Your next question is coming from Andrew Cooper. Please announce your affiliation, then pose your question.

Hi everybody, Andrew Cooper from Raymond James. Maybe just to ask it another way, I know you’re not disclosing the indications that you’re going for first on RaDaR, but can you give a sense for maybe the pacing of additional submissions, how many do you think you might have ready to go this year, and what’s that build-up to what you call pan-cancer applicability looks like over time?

Thanks, Andrew. I’m going to ask Clive to take that question. Clive?

Thank you, Mark. I hope you can hear me well. As you pointed out, we haven't shared details about the specific indications we've worked on initially. The best way to approach this is to view it as a journey, as there is a significant potential market. We see RaDaR's potential across various tumor types and consider this a multi-year initiative aimed at expanding the evidence base, starting from the initial indications and then extending into new ones while also deepening the data for each indication. We haven't specified how many additional submissions we might have this year. We believe there will be more submissions this year, but we’re not revealing the tumor types at this point. However, you can expect that as we start presenting data at conferences, it typically takes six to nine months for that data to appear in peer-reviewed publications. We will need that data to support reimbursement applications. If you keep an eye on what we published last year and what we will publish this year at major conferences, where we anticipate several presentations, that will give you an idea of what to expect in peer-reviewed publications, though there will be a slight delay. Furthermore, it’s a competitive landscape, with many other companies operating in this space, and as any company secures reimbursement, it alters that environment. We have our plans but will also be responsive to what others are doing.

Great, thanks. If I could quickly ask another question for Bill, you mentioned some of the reimbursement initiatives influencing the ASPs in the fourth quarter. Can you clarify how much of that was due to prior period adjustments compared to the $370 figure you mentioned for the full year?

Yes, of course. Again, because looking forward we would expect the AUP to be in the range of $370 to slightly higher, I think you could assume that most of the benefit in Q4 was being able to realize revenue that we had not previously anticipated, and that’s through a number of different initiatives that allow us to get paid in terms of working through denials, etc. Again, the proactive opportunities going forward, a number of them would drive ongoing and permanent increases in reimbursement if we’re successful.

Great, I’ll stop there. Thanks everybody.

Your next question is coming from Derik de Bruin. Please announce your affiliation, then pose your question.

Hi, it’s Derik de Bruin from Bank of America. I’ve got a few short ones. First of all, can you update us on the regulatory matter and what are the incremental costs associated with that - that’s one. Just list pricing for RaDaR and your anticipation for reimbursement levels, that’s two; and then assumptions for amortization and depreciation in ’22. Thanks.

Thanks, Derik. I’ll take the first question and I’ll let Clive answer the question on pricing for Inivata, and then I’ll let Bill come back to your question on amortization. Basically we don’t have significant updates to give on the submission that we made on the self-disclosure around the compliance matter. Our investigation continues, although a large part of it is complete, so we’ve taken all the necessary remediation actions and continue to do everything we can to meet any of the needs of the government through this self-reporting process. You will see in the 10-K a slight increase in the amount accrued for this - I think it was about $700,000, just up from $10.5 million to a bit more than $11 million, so not a significant change. Really, we’ve done everything we need to do and continue to do to meet the expectations of the government in this submission. Now the timing of additional news is going to largely driven by feedback from the government, which is hard to predict. As it was when I came here and through the past 10 months and looking forward, I have high confidence in the values and the commitment to compliance that this organization has. We’ve handled this exactly the way you would want this organization to do that. We’ve taken the remediation steps needed and we’re focused on driving the business going forward. Clive, do you want to talk about pricing for RaDaR?

Sure, certainly. We haven’t disclosed list pricing at this point, but I think the best way to think of it is broadly consistent with what you’ve seen across the market for high quality, high sensitive, high specificity tests like RaDaR. Clearly it’s tissue-informed, there’s the whole exome component and then the blood, so I think you’ve probably got good analogs out there in the market. Clearly we will establish pricing as the reimbursement comes through, so once the indication, our first one is through, we’ll share further details on that, but initially that will be through the MolDX pathway. We do see the potential for ADLT sort of status and reimbursement in the future, that’s on the back of the initial Medicare coverage of course, so that’s something that can be worked through, and of course at this point nobody really has any private payor coverage, but that’s something that we’ll get negotiated with the commercial payors and building on that. The data sort of comes onboard and of course the Medicare reimbursements, but that’s something that builds over the next few years. Hopefully that gives you some color on how to think about it.

And Derik, in terms of amortization, our guidance assumes an amortization amount of about $34 million for 2022. In case people wonder, we’re assuming about $38 million of depreciation. Amortization was about $23 million in 2021. The reason that you see such a big uptick is because of the timing of the Inivata acquisition and the amortization of the developed technology intangible asset, so we have a full year of that in 2022 instead of a partial year of that. If anyone’s curious, we do include a table on Page 13 in our press release that gets you from that income to adjusted EBITDA, and we give our guidance for items such as amortization and depreciation.

Thanks, Derik.

Your next question is coming from Matt Sykes. Please announce your affiliation, then pose your question.

Hi, good morning everyone. Thank you for taking my questions. This is Matt Sykes from Goldman Sachs. Bill, you mentioned an aspirational goal of achieving 50% gross margins over time. Could you help us understand the steps needed to reach that figure, particularly from 2022 onward? I'm interested in how much of that increase comes from fixed cost leverage in clinical and pharma versus any cost actions you might implement. I would like to know where you see the most significant opportunities to raise the gross margin to that target level.

Hey Matt, thanks a lot for that question. It will be a gradual progression back up to that 50% level. I think it will be driven by a series of factors. A big part of it will be leverage of the existing fixed cost structure as revenue rebounds and we emerge out of the COVID environment, and as we have a larger sales force that is hopefully generating revenue across that fixed COGS structure as well. That will be the immediate driver. The longer-term driver on gross margin will be efforts to drive continuous improvement in productivity and efficiency across the laboratory, and those are things such as automation, process improvement. We will also target selective pricing increases, the reimbursement initiatives that I talked about, and those are all things that take a while, they don’t happen overnight. They happen over a period of time. The one other factor over time that will drive gross margin is our product mix as well as we continue to see mix shift to higher gross margin products, and that will be particularly true as we secure better reimbursement on our NGS assays and over time as we ramp up on RaDaR. All of those factors will be drivers over time.

Thanks, Matt.

Your next question for today is coming from Mason Carrico. Please announce your affiliation, then pose your question.

Hey guys, Mason Carrico from Stephens. Maybe similar to the last question, could you provide some commentary on your expectations for how pharma services gross margins trend in 2022 and maybe what the drivers are there? Is it just filling up capacity, is there a shift to higher value projects, or any color on the expansion opportunities there would be great.

I’m going to ask George maybe to talk about the gross margin, and then maybe Gina can talk about our priorities for growth in the year.

Yes, certainly as Mark mentioned, one of our goals on the international side, we’re thrilled that China is open now, but with operations in the United States, with operations in Switzerland, Singapore, and China, we really believe that the footprint is built, and certainly we have capacity at those international labs and one of the main focuses of our commercial teams is going to be to fill those laboratories up. So again, we’ve got the infrastructure cost, and we have significant gross margin opportunities when we move revenue into those sites and fill those up, certainly, so that’s a big part of this. Obviously we continue to expect 20%-plus growth in the pharma services sector, which also fills up capacity. We are looking at some cost actions, as Bill said, and we even implemented a price increase earlier this year that impacts our clients, so certainly there’s a broad range of things that are happening but we believe the infrastructure is largely built and certainly our expectations are the pharma business is going to continue to grow rapidly and then we’ll fill that up. Gina, do you want to talk about some of the commercial initiatives?

Yes, absolutely. Thank you for the question, Mason. We have a terrific sales team that’s really created a strong backlog with a diverse portfolio of both clients and project types, and this includes the ex-U.S. sales team that has really taken off in 2021 despite obstacles that COVID had presented. We feel very confident that we are going to fill up those international adds, and the investments that we’ve made really set us up for growth with the strong backlog that we currently have.

Got it, thank you guys.

Your next question for today is coming from Mike Matson. Please announce your affiliation, then pose your question.

Yes, thanks, Mike Matson from Needham & Company. We’ve heard a lot about patients deferring care and there’s probably some cancer patients out there that have progressed to later stages, so I understand the whole concept of a backlog of testing and whatnot, but I guess I’m wondering if there’s any kind of second-order effect of these later stage patients. Do you have any feel for whether they require more tests per patient, maybe more expensive tests, or maybe the opposite of that? Is that a positive or a negative for your business, I guess, if you have any feel for that?

Thank you for your question, Mike. Theoretically, if individuals are diagnosed later, they are likely to be at a more advanced stage, which may involve additional complexities or complications. This could lead to an increase in testing requests. However, it’s still too soon to draw definitive conclusions. What we do observe in our cancer testing business is that when COVID cases decrease and patients return to healthcare facilities, we experience a notable rebound in testing volume, and we expect this trend to continue. Additionally, our sales teams are able to resume direct interactions with customers, which benefits existing relationships and is crucial for acquiring new accounts. While it's challenging to predict the impact of delayed diagnoses on testing needs, we remain optimistic about strong volume recovery.

Okay, got it. Thank you.

Your next question is coming from Tejas Savant. Please announce your affiliation, then pose your question.

Hey guys, thanks for the time here. Just a quick clean-up first on Informatics and then I have a follow-up on biopharma. On Informatics, I think you’d said in the past that you plan to launch a clinical product on the Trapelo side by year end. Could you just talk to whether this happened and what the early traction looks like over there? Then on biopharma, you spoke of delays last quarter, but I think this quarter you flagged some elevated cancels here, driven by a few large projects, which I guess drove your backlog to be flat sequentially. Just some color on what’s driving that, and I’m trying to sort of juxtapose it with comments from some CROs talking of RFPs being down significantly in January and so on because of perhaps a near-term breather in funding, especially for smaller biopharma customers. I’m just trying to juxtapose what you guys are seeing there with the elevated cancels versus some of that commentary. Thank you.

Right, so I’m going to ask Clynt to take the first question and can give an update on how Trapelo’s decision support services and some of the improvements that we’re putting in place, how that’s progressing, and then I’ll ask Gina to make a comment on the project cancellations. I’ll just say upfront that what was impressive again is that despite those cancellations, we did see an increase in the backlog from 261 to 267, so the strength of the underlying demand for our services still comes through, but Gina can say a word about the cancellations. But Clynt, do you want to start and give an update on Trapelo’s decision support services?

Sure, I'm happy to. We are in the process of launching a configuration of Trapelo called quick start, after a soft launch that has already taken place. We've learned over the past year that when teams consider integrating Trapelo, it can be daunting, so we've designed a version that allows for much quicker and easier implementation, typically within a few weeks. The response has been very positive; we've already secured our first contract this year and have another one in progress, with several more in the pipeline. It's been well received, and while there are many factors influencing decisions, this significantly reduces the obstacles to adopting something new in such groups.

Okay, thanks Clynt. Gina, do you want to comment on the cancellations?

Yes, absolutely. Thank you for the questions. We always expect some portion of our backlog to experience a cancellation, and that’s when the program at our client is no longer going to be supported because of some data that they’ve gotten. This quarter, we had some cancellations that were larger in dollar value, but definitely we expect that. We’ve also heard of some changes in demand from pharma, but we haven’t experienced this ourselves. I think that’s a testament to our sales, who have seen this and refocused on different types of clients and projects. As I mentioned before, we have a diverse portfolio in our backlog of projects, consisting of earlier phase research all the way to phase 3 pivotal clinical trials, and it reflects the diverse product offerings that we have to support all phases of clinical research for our clients, so we feel very optimistic about that even though we have been hearing of these changes.

Got it, helpful. Thank you.

Thanks.

There are no further questions in queue. I would now like to turn the floor back over to Mark for any closing comments.

Okay, thanks Holly. Thanks everybody for participating in this call. I’d like to close, as we always do, with on behalf of NeoGenomics leadership team to just say thank you to all of you, but importantly to also say thank you to all of our employees and all the great work that they do. I also want to say to those of you listening that are investors or considering an investment in NeoGenomics, we thank you for your support and interest in our company, and we look forward to continuing our dialog through the course of the quarter. Look forward to talking to all of you soon. Thanks so much.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.