Neogenomics Inc (NEO) Q1 2022 Earnings Call Transcript

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the NeoGenomics First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to the host, Executive Chair of NeoGenomics, Lynn Tetrault. Please go ahead.

Thank you, Kelly, and good morning. I'd like to welcome you to NeoGenomics first quarter 2022 conference call. Joining me to this call from our Fort Myers headquarters are Bill Bonello, our Chief Financial Officer, Doug Brown, our Chief Strategy and Corporate Development Officer, and Charlie Eidson, our Director of Investor Relations. Joining on the call via phone is Dr. Shashi Kulkarni, our Chief Scientific Officer and Executive Vice President of Research and Development. 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, financial outlook, growth opportunities, and anticipated operating results and performance. Each forward-looking statement is 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. 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 this conference call in order to provide 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 financial measures required by GAAP 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 measure, and a table is available in the press release we issued this morning. Before turning the call back to Lynn, I want to let everyone know that we will be making a copy of our prepared remarks for this morning's call build on the Investor Relations section of our website shortly after the call is completed. We also want to let everyone know that we're 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.

Thank you, Charlie. For today's call, I will begin by sharing my perspective on the state of our company and the actions we have taken since we announced the departure of our Chief Executive Officer on March 28. Bill Bonello will then review our first quarter financial results, including some of the factors underlying the underperformance of the business and outline the near-term actions we are taking to improve our performance and return to profitable growth. Finally, I will introduce our new Chief Scientific Officer, Dr. Shashi Kulkarni, and the new President of our Clinical Division, Dr. David Sholehvar. These two talented executives are experts in oncology diagnostics and will play leading roles in our company's future. Each of them will share their background, reason for joining NeoGenomics, and offer their early insights on our business and their critical priorities since joining in early March. We will then have time for questions and answers. I would like to begin with some historical context. I have served on the board of NeoGenomics for seven years and became lead independent director in 2020, before taking over the board chair role in October 2021. During the majority of that time, our business performed very well, with consistent top line growth, strong operational efficiency, increasing market share, and a world-class culture. Unfortunately, our performance over the past year has been inconsistent with that historical track record, as evidenced by slowing growth and decreased profitability. The company experienced several challenges in 2021, including the transition of our longstanding Chairman and Chief Executive Officer, Doug VanOort, continuing headwinds from COVID, and shifting dynamics in the external environment. Though the company's market position remains strong and our overall strategy is sound, our execution over the last year was poor. The board of directors took decisive action last month to change leadership in order to restore the operational performance of the business and better position the company for long-term success. Since March 28, I have had three main priorities. First, we have moved quickly to stabilize the organization. I and other members of the management team have visited many of our sites and met with leaders and employees at all levels to share our direction, hear their feedback, and engage them in our efforts. I am consistently impressed with the degree of commitment that our people have to our mission and their desire to improve our performance. Second, the Office of the CEO, together with other members of the management team, have worked swiftly and collaboratively to identify actions to improve performance. Bill will describe some of these positive changes later in our prepared remarks. The addition of Dr. Kulkarni and Dr. Sholehvar to the management team, with their extensive experience and deep expertise, has helped us identify additional opportunities for improvement, and you will hear from them later on in our prepared remarks. Third, the Board of Directors is making progress in our search for a new CEO. We have developed a list of key criteria, and Russell Reynolds is in the process of sourcing qualified candidates. In summary, we recognize that there's significant work to be done, but we're confident that in time, we will return to the growth and operating efficiency that drove our success for many years. Our long-term strategy remains intact. In particular, we see great strategic value in marrying new technology such as RaDaR with our longstanding channel leadership. Finally, the board and I are confident that our strong executive leadership team will advance the execution of our strategy while we recruit an outstanding Chief Executive Officer. I will now turn the call over to Bill.

Thank you, Lynn. This morning, I would like to review our first quarter financial results, provide some additional color on the factors that have been impacting revenue growth and margin, and provide some detail on some of the actions that we are already taking to return to profitable growth. While we will not be providing formal revenue or EBITDA guidance today, we will provide some directional commentary with respect to both revenue growth and profitability. 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 during the first quarter of 2021. Revenue increased 3% year-over-year to $117 million, with clinical services revenue up 4% year-over-year and pharma services revenue down 4% year-over-year. Clinical revenue was $99 million in the quarter. Clinical division test volumes increased 2% year-over-year. The Omicron variant had a significant impact on test volume during January, with volume down 7% month-over-month and flat on a year-over-year basis. While volume grew both sequentially and year-over-year in both February and March, we have not yet returned to pre-COVID growth rates. Our volume growth is being impacted by a couple of factors. First, our test mix is weighted to legacy modalities and disease-specific NGS offerings while the market is moving towards larger, more comprehensive panels. Second, operational challenges have made it difficult to add new business at our historical rates. We are taking several steps to upgrade our NGS product offering and improve our lab operations, which Dave and Shashi will discuss in greater detail later in the call. Average revenue per test increased 2% year-over-year to $371, with positive contributions from ongoing strategic reimbursement efforts partially offset by Medicare rate cuts. Pharma services bookings were $41 million in Q1, and we ended the quarter with a backlog of $282 million, which was up 6% sequentially and 30% year-over-year. While backlog was up, pharma services revenue decreased 4% year-over-year to $18 million. We view this year-over-year decline as an anomaly and not a trend, as we faced a very tough prior year comp. Revenue was quite a bit lower than we had been expecting in March of this year, as one large project got pushed out to later in the year. By contrast, March 2021 was a record revenue month for pharma services. We are taking action to drive near-term pharma revenue, including increasing our efforts to secure preclinical business, which tends to convert more quickly than clinical trials work, even as we continue to build out our backlog of large clinical studies. We are also implementing processes designed to pull revenue through earlier in the lifespan of a project. Our informatics business, which is reported as pharma services revenue continues to grow at a rapid clip, and we're excited about the progress of these initiatives. Our GAAP gross margin was 32.6%, adjusted gross margin, which excludes Inivata-related non-cash amortization expense, was 36.8%. Adjusted gross margin declined 380 basis points year-over-year and 310 basis points sequentially. There are several factors that contributed to the decline in adjusted gross margin, and we are taking immediate action to mitigate these trends. First, in late 2021, we significantly increased the size of our laboratory workforce in preparation for a return to pre-COVID growth rates. As noted earlier, volume growth did not rebound to the extent that we had expected. As a result, we have scaled back our laboratory hiring plans to better align with near-term volume trends. Second, like most companies, we've experienced wage and supply cost inflation. In response to this cost pressure, we are implementing price increases in both our clinical and pharma businesses, and pursuing strategic reimbursement opportunities to increase value capture for the services that we are providing. Third, we did have extra costs associated with the transition to our new Fort Myers lab. While this move will drive productivity and efficiency improvements over time, we incurred extra costs related to operating two different Fort Myers facilities during this transition. We expect this transition to be completed around the end of Q2. In addition to these factors, we've seen a notable decrease in lab efficiency over the past year. This decrease is largely attributable to increased complexity of both our product offerings and our lab processes, due in part to efforts to respond to customer requests for customization. We are already taking action to reduce this complexity. These actions include eliminating low-margin services, streamlining our NGS processes to drive reductions in labor, supplies, and bioinformatics costs, while simultaneously improving turnaround time, and implementing AI to increase lab tech productivity. We estimate that these actions, plus our pricing actions, could contribute at least $15 million of annualized gross profit once we fully implement them. Moreover, we have every expectation that we will identify additional near-term actions as we continue to engage the organization. Finally, as we've discussed in the past, our pharma lab expansions, including both our international labs and our La Jolla facility, continue to be a drag on adjusted gross margin. While our international labs are important to our long-term growth strategy and allow us to bid on larger global clinical trials, these labs are operating well below capacity. Our La Jolla Lab, which we acquired through the acquisition of the oncology assets of human longevity in 2020, and where we perform whole exome and whole genome sequencing, is also operating below capacity. While lab expansion remains an important component of our pharma growth strategy, we are working to better align capacity expansion with growth. In addition to these near-term actions, we're also developing a long-term plan to drive step-function improvements in productivity and efficiency. We will do this through automation, process improvement, product, payer, and customer mix, and pricing. Operating expenses increased $34 million year-over-year, and $3.8 million sequentially to $90 million. Approximately $13 million of the year-over-year increase is related to ongoing operating expenses at both Inivata and Trapelo, which were acquired in the second quarter of last year. In particular, we continue to make significant investments in RaDaR, supporting what we believe is a leading assay for minimal residual disease and recurrence testing. In addition, another $11 million of the annual increase is related to non-cash stock option compensation expense and other non-recurring items that have been excluded from our calculation of adjusted EBITDA. The sequential increase in operating expense is related to increased legal and accounting costs associated, in part, with the operations of Inivata and Trapelo, as well as the ongoing compliance matter, CEO transition costs, and increased product development expense related to our informatics business. We are taking steps to reduce our G&A expense run rate, but there's more work to be done. Given the factors we just discussed, adjusted EBITDA loss was $19 million. Turning to the balance sheet, we exited quarter one with $481 million in cash and marketable securities. DSOs were 85 days and at the high end of our normalized range. The increase in DSOs is primarily driven by the inter-company cadence of revenue, with March being the highest month of the quarter. We expect DSOs to normalize as the year progresses. Having reviewed the first quarter results and the immediate actions that we are taking to improve both revenue growth and margins, I'd like to spend a little time discussing our outlook for the remainder of the year. As a reminder, we went through our 2022 revenue and EBITDA guidance in March in conjunction with the departure of our CEO. We continue to believe that it is important for the new CEO to influence and feel comfortable—feel accountable for the guidance we eventually provide. That said, we understand that our decision to withhold formal revenue and EBITDA guidance makes it difficult for investors to assess our current financial situation or evaluate our near-term prospects. Therefore, we would like to share some additional thoughts regarding near-term trends in both revenue and profitability. We view 2022 as a rebuilding year, where our primary focus is to improve our current product offering, drive operational efficiency, generate clinical evidence in support of RaDaR, and lay a foundation to support sustainable profitable growth in 2023 and beyond. We expect revenue to be up sequentially in Q2 and up modestly year-over-year for the full year. Similarly, we expect that our quarterly adjusted EBITDA will improve modestly sequentially each quarter as the year progresses. Looking to 2023, we expect revenue growth to accelerate and we expect to be adjusted EBITDA positive by the end of the year. We believe that the actions we are taking today are important first steps to achieving these goals. I will now turn the call back to Lynn, who will introduce Dr. Kulkarni and Dr. Sholehvar.

Thanks, Bill. We are delighted to have both Dr. Kulkarni and Dr. Sholehvar officially on board as Chief Scientific Officer and Clinical Division President, respectively. Both executives are already having a major impact on our business despite having joined less than two months ago. I've asked them both to provide some background on some of their relevant experience, express why they chose to join NeoGenomics, and discuss some early areas of focus for them, including any quick wins they see for improving our business. With that, I'd like to introduce our new Chief Scientific Officer, Dr. Shashi Kulkarni.

Thank you, Lynn. It's great to speak on the earnings call today, and I'm pleased to be representing NeoGenomics. My career in clinical genomics spans over 30 years, and most of my career has been spent in the field of molecular genetics and next-generation sequencing. I've held numerous academic, scientific, and operational leadership positions at Washington University's School of Medicine in St. Louis, and Baylor College of Medicine. I've helped build and facilitate operational and financial turnarounds at both institutions. I have a strong passion for using genomic and multi-omics precision oncology tools to improve human health. I've written a book on NGS that is widely adopted and popular amongst medical professionals. I've managed Cancer Genetics Elsevier Journal as Editor in Chief for more than seven years. I've also authored many best practices guidelines related to NGS by co-working with organizations such as ASCO-CAP and CDC, and I frequently serve as an expert panelist at the FDA for NGS. I joined NeoGenomics because of the company's unparalleled leadership position in oncology for multimodal diagnostic solutions. I see the company's long-standing customer relationships with pathologists as a key strategic asset and believe that the fundamentals are there to be a market leader for many years to come. While my focus will be primarily on next-generation sequencing, I believe I can help drive improvements in operational productivity through process improvement and automation across the laboratories. I will look to develop and launch cutting-edge NGS solutions for our clinical and pharma divisions and create an NGS Center of Excellence. NeoGenomics has a strong market position covering the continuum from diagnosis to monitoring, and I'll be proactively working to optimize a service menu with sound business principles. In my short tenure here at Neo, we have identified several operational and informatics improvements that we're already working to implement. These initiatives are expected to reduce our turnaround time and lower our cost of testing, and could be completed over the next six months. I see multiple areas of improvement within our processes that I would consider low-hanging fruit. I'm immensely impressed with the scientific talent at Neo, as evidenced by over a dozen presentations at the recent ACR conference in New Orleans. One exciting action that we have already completed is the launch of our new lung cancer DNA, RNA, NGS-only offering. This comprehensive panel includes genomic and transcriptome and multimodal readouts driven by clinical evidence, which differentiates it from other leading lung cancer offerings on the market. Eli Lilly has selected this panel for a sponsor testing program, which we have launched to our clients on Monday. Additionally, we're beginning validation on larger pan-cancer NGS panels. Outside of our NGS products for test selection, I'm impressed with the outstanding sensitivity and strong data from the RaDaR assay for minimal residual disease and recurrence testing. I share the team's belief that RaDaR could be a leading MRD solution and in 2022, we are prioritizing data generation and are actively engaged in discussions with several different pharma companies for larger late-stage opportunities. Back to you, Lynn.

Thank you, Shashi. I'm also pleased to introduce our new Clinical Division President, Dr. David Sholehvar.

Thank you, Lynn. I’m excited to be at Neo and for the opportunity to speak with everybody today as well. Including my time in medical school and residency for pathology, I have spent over 30 years in and around diagnostics and laboratory space. I believe my experience and passion for patient care fits well with my new role at NeoGenomics. Over that time, I have served in significant commercial and general management leadership positions at both Johnson & Johnson and Quest Diagnostics in the IBD and Lab Services businesses, respectively. Thus, I have experience with a wide range of relevant diagnostic technologies, including liquid biopsy, molecular diagnostics, NGS, anatomic pathology, and digital pathology. Each of these positions that I've held came with full P&L responsibility. I often assume these positions when the businesses were experiencing challenging circumstances, and I have a demonstrated track record of helping to drive improved business performance. In terms of why I chose to join Neo, personally, I feel there is no more relevant field to be in healthcare than helping cancer patients, as well as their caregivers and physicians navigate the increasingly complex world of cancer diagnostics and care. I also believe that Neo is well placed to be a market leader, emerging from a position of strength between earlier stage companies that lack breadth of menu and large diagnostic labs that have difficulty selling specialty testing. I see an exciting future ahead for Neo and I wanted to be a part of it. During my time at Neo, as Shashi has, I have been digging in with the team and working to prioritize areas of immediate focus. I believe that there are some near-term actions we can take to improve commercial productivity, operational efficiency, and our overall service to customers. Shashi has touched on exciting immediate-term opportunities. We have launched new high-value tests and made our turnaround times more reliable. But I also see near-term commercial benefits by expanding our already excellent sales force with precision medicine managers focusing on the oncology channel, as well as introducing new tools to manage the sales process and pipeline more effectively. In addition, we are establishing cross-functional process excellence teams to streamline our approaches in the lab and develop tools in a few key areas to increase productivity and expand margins. Longer term, I’m focused on reinforcing our foundation and building a platform for sustainable growth. While there is significant work ahead of us, I see the challenges we are facing as familiar and addressable. I expect that we can drive improving results and return to faster growth and improving profitability over time. I’m all in and energized and ready to get to work. I will now pass it back to Lynn for some closing comments.

Thank you, David. In closing, while we are disappointed in our Q1 results, we are taking immediate actions to improve our performance. This year, as Bill said, will be one of rebuilding to improve our lab operations and drive greater cost efficiency. In addition, we will continue to make strategic investments to improve our current product offering, drive clinical evidence in support of RaDaR, and lay a foundation to support sustainable profitable growth in 2023 and beyond. We see tremendous opportunities to build on our leading position in the oncology marketplace and achieve our vision of becoming the leading cancer testing and information company. I will now hand the call over to Charlie Eidson to lead us through the Q&A.

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

Certainly. The floor is now open for questions. Your first question is coming from Brian Weinstein with William Blair. Please pose your question. Your line is live.

Hey, guys. Good morning. Thanks for taking the questions. I wanted to ask you about the clinical side of the business. You've identified some Neo-specific things, obviously. But do you have any thoughts on what's going on in the broader market right now? Do you anticipate that there's a kind of a broader slowdown that may be contributing to some of this, recognizing, of course, that there are some very clear issues that you guys have to deal with? But just thoughts on what that broader market may look like. And then for Shashi, a question for you on the panels here and the expansion there. What kind of timeframe are we thinking about to see these broader NGS panels? And how competitive do you expect them to be when you initially launch them? Thanks, guys.

Thanks, Brian for your question. I'll ask Dave to address your first question, and then Shashi the second one. Dave?

Sure, thanks. So, I mean, with regards to any broader issues, Bill touched on it. When we take a look at our legacy business, there is no doubt that many of those modalities are mature in their market segments and have over time seen some price pressure. I think that's the biggest dynamic related to the legacy business. When it comes to the market dynamics related to NGS, we actually touched on this as well. We are seeing bigger and bigger panels coming from some of these emerging companies, which we have not kept up with. Part of NGS is how we can catch up to that. Internally, we're discussing how we can get to the standard before we can become the standard, if you will. So, to summarize, I'll emphasize what Bill said previously: I think the market dynamics and our legacy business are probably not unfamiliar with more mature modalities, and with the NGS and the new stuff, we have to get better at responding to market needs as they evolve.

Great. Thanks, Dave. Shashi?

Yes. I think I was asked about the timeline. So we're working on a competitive Uber panel, if you will. We expect our launch to happen sometime in the next six months. The validation work for that big panel, which will be not only competitive but will be the best-in-class, will be ready in a six-month timeframe.

Your next question is coming from Matt Sykes with Goldman Sachs. Please pose your question. Your line is live.

Hi, good morning. Thanks for taking my questions. Maybe one for you, Bill. Just on that $15 million annualized improvement in gross profit, can you put some timeframe around that and when you could start realizing that? I understand it's an annualized number, but I'm just looking for when that could start shifting. And then secondly, just on the broader panel over the next six months, Shashi, that you just mentioned, in terms of costs for launching that, is that within the relative cost budget that you have over the course of this year? Would there be incremental costs in launching that new panel? Thanks.

Yes, so thanks for the question, Matt. In terms of cost savings, we are already beginning the actions. It will take some time before the actions are implemented and start to generate cost savings. So, I think those will increase throughout the year. We should see some sequential improvement in margin as we move our way through the year. The thought is that we will exit the year with the $15 million run rate, so that's really going into 2023 with $15 million of annualized cost and reimbursement benefit based on the activities that we have already identified and started to pursue.

Yes. Actually, I'll respond to the budget question, too, if that's okay. The answer is yes. We absolutely have the cost of new NGS panel development factored into our budget. And if it wasn't clear from Shashi's comments earlier, the exciting thing about the improvements that we're going to be making is, in addition to ending up with a better product that also has improved turnaround time, we will end up with a product that has lower ongoing costs than what we're currently performing.

Your next question is coming from Andrew Cooper with Raymond James. Please pose your question. Your line is live.

Hey, everyone, thanks for the questions here. Maybe first, just kind of a high-level one on some of the comments around optimizing the service menu. How do we think about or how do you think about balancing that and pulling out some of these customizations folks have asked for with the historical language around being that one-stop shop, having the broad menu, and keeping that NPS really high, just as you think about narrowing down that menu a little bit? Is there anything we should be considering or anything we should think about in terms of the relationship with customers there as that happens?

Thanks, Andrew. I'm going to ask Dave to respond to that. Yes. So when we talk about rationalizing or optimizing the menu, I don't know that we're necessarily talking about some of the assays that we have launched on the advanced diagnostic side that folks like. We're finding that given our customer breadth from smaller community-based oncologists and pathologists, all the way through to large medical centers, that having variety in targeted versus comprehensive panels and things like that does have relevancy. I think when we're talking about optimizing the complexity of our offerings, it's more about some lower-margin, lower-volume tests that still require time in the lab to produce the result, and really streamlining it on the lower end, rather than rationalizing the higher-end.

Thanks, Andrew. There have been no changes with regard to the compliance matters, so we remain where we were in terms of any accruals.

Your next question is coming from Derik de Bruin at Bank of America. Please post your question. Your line is live.

Hi. This is John on for Derik. Given that other clinical labs haven't noticed any slowdown in oncology testing, I was wondering if there's more competition now or any particular competition that's causing share loss, or if there's anything special about your geographical mix that's hampering growth?

Thanks. I'm going to ask Bill to address that.

Sure. I'd reiterate what we talked about earlier, in that we are seeing increased competition on the NGS front as panels move, or as customers move to demanding larger, more comprehensive NGS-only panels and our offering is more oriented towards smaller targeted panels. I think that is the competitive dynamic that we're experiencing, and probably why you see a differentiation in our growth rate relative to those of some of our competitors.

Your next question is coming from Alex Nowak at Craig Hallum Capital. Please pose your question. Your line is live.

Great. Good morning, everyone. I was just hoping you can give us some more detail around the CEO search process. Is the company looking entirely externally here, or are you also looking towards board members that Neo have internal to the company? And just when you go back a year ago, Neo had a very different cost profile than we do now. Something like $150 million of additional spend has been added. So maybe just to keep it simple, trying to cut through the noise, where has that additional $150 million gone to? And I guess, how much is available to be cut here as you look at cost containment?

Okay. Thanks, Alex. I'll take the first question, and let Bill handle the second one. In terms of the CEO search, we are making good progress. We are looking exclusively externally with Russell Reynolds helping us to source qualified candidates with regard to any individuals who serve in our current board. We don't make any comments about individual candidacy for the role, but we are moving as quickly as we can, and it is mine and the board's number one priority.

Hey. So thanks for the question, Alex. I'd say the cost increases have come from a variety of factors. One, obviously, we did acquire two companies, both Trapelo and Inivata, and there is a significant amount of incremental costs that are associated with those two companies without any offsetting revenue yet at this point in time. Two, in an inflationary environment, we have seen our labor costs and our supplies costs going up about 6% on a year-over-year basis. Three, as I mentioned, we did staff up in our laboratory to prepare for a rebound in volumes coming out of COVID. We haven't seen those to the extent that we expected. As a result, we will tightly manage any additions in the lab right now. Lastly, we talked about the increased complexity of our lab operations, which is driving a decrease in efficiency or productivity and causing us to require more people to do the same amount of work that used to be done with fewer people. I guess, it's the simplest way of putting that. We also had a bit of technical debt that we had to make up for and add to our G&A structure. So those all have contributed. I don't want to put a number right now in terms of how much cost we can take out. As I mentioned, we've identified a number of immediate actions and put a dollar amount around that. We're still in the process of developing a more comprehensive plan to drive, as I said, step-function improvements in productivity and efficiency and a return to profitable growth. And until we have that plan established, I just don't want to throw out any preliminary targets.

Your next question is coming from Mark Massaro with BTIG. Please pose your question. Your line is live.

Hey guys. Thanks for the questions. Maybe one for Dr. Kulkarni. It's one thing for a market leader in the space to come out with an 80 or 300 gene panel. But there are some labs coming out with full exomes. So I guess I'm just curious, where do you think you'll play in terms of the depth of sequencing and scale? Is it in that 80 to 300 or 500 gene range? Or could it go all the way up to a full exome? And then I also wanted to ask if RaDaR is still on track. So I think you guys were planning a commercial launch in mid-2022. Would love to hear an update on the extent you have the sales force in place now, leveraging your existing sales force versus having to make some incremental hires, and how does that marry with your cost reduction plan?

Thanks, Mark. I'll ask Shashi to respond to the first part and give a general update on the status of RaDaR. I'll also ask Dave to comment on the sales force.

Yes. Thank you, Lynn. In terms of the content of our new offering in NGS comprehensive genomic profiling, the content we are looking at would be more than 500 genes. As for whole exome sequencing, yes, I think once we get to the industry standard and become competitive in the NGS panel offering, that will be the next step. The exciting thing I am looking forward to develop is using whole exome sequencing as the diagnostic therapeutic selection test, and then using the data from that for our bespoke RaDaR assay so that it creates a single solution from diagnosis to disease monitoring. But we first need to fix what we have, and then that will be our next step.

Thanks, Shashi. So, regarding your question, Mark, about RaDaR, we are in active discussions with MolDX as we speak, and we anticipate either we will be on that mid-year timeline, or we won't be. Some of that is not within our control given those ongoing discussions. Dave, do you want to comment on sales force?

Sure, thanks, Lynn. Yes. We are actually preparing for success, honestly. We are hiring for the PMMs, which are our Precision Medicine Managers that call on the oncology space. We are hiring through May to get that sales force ready and trained. As far as internal preparation for training for the broader organization and all the other things that you do in prep for launch, we are continuing those as well. From a commercial perspective, we are preparing for success as planned.

Your next question is coming from Puneet Souda with SVB Securities. Please pose your question. Your line is live.

Yes, hi. Thanks for taking the question. Maybe first one on Pharma if I may ask. Could you maybe just give us a sense of why that number declined despite the significant backlog that you have? And how should we think about the backlog conversion there? And how is labor inflation or cost inflation? Anything there that's impacting the pharma business? How should we think about the pharma business overall through the year?

Bill, go ahead.

Yes. I'd be happy to do that. So first of all, in terms of the year-over-year decrease, we did mention a couple of things. One, it was a very tough Q1 comp. As I noted, March 2021 was the strongest revenue quarter that we've ever had in our pharma services business. Secondly, we did have one big project that we were expecting a lot of work to happen in March that got pushed out to later in the year, so that caught us a little bit by surprise. In terms of conversion from backlog to revenue, you're right that we have seen a slowdown there for some time. Part of that was obviously attributable to COVID and trial activity slowing down during COVID. It’s possible that some of it is still related to a slower than anticipated bounce out of COVID. But I also think part of it is related to the mix of the business that we have. Early on, we had a weight of business that was heavily on preclinical work, which tends to convert very quickly. Over time, more and more of the backlog consists of clinical trial work, sometimes work that takes four years or longer to complete, and so that is impacting the pace of conversion as well. In light of that, that's why we are pursuing some of the activities that I described, one, trying to secure more preclinical work, not at the expense of trial work, but in addition to so that we can balance out better on the revenue front. Two, there are things that we can do to pull through revenue more quickly than we typically would on given projects. In terms of inflation, we talked about 6% inflation on wage and supply cost. We haven't really seen any significant difference in our pharma services business than we have in our clinical business. I would like to reiterate that we are passing some of that through in terms of price increases in both of those businesses. We haven't seen the benefit from that yet, so that would be something that would show up later in the year and into 2023. But we are trying to respond to that inflationary pressure with the price lever.

Okay. No, that's very helpful. On the oncology piece, can you just clarify, both for NGS and MRD side? I think at one point you had plans to increase the sales force to 50 or so reps, maybe even more. But where does that stand today? And what's the new updated plan on that front? And where do you stand today with the reps? Thank you.

Thanks. I'll ask Dave to handle that.

Yes. So we've actually decreased the high end of that number. So we're hiring into the low 20s for PMMs. I mentioned that hiring is actually more than halfway done right now. As I mentioned, we’re trying to get everybody on board by the end of May, so that we can continue their training, the new people's training as we continue to train those that we have, and also expose the TBMs that are calling on oncologists in preparation for RaDaR.

Your next question is coming from Dan Brennan with Cowen. Please pose your question. Your line is live.

Great. Thank you. Thank you for taking the questions. I guess, the multi-part question. I guess the first one is just on your base business, based clinical business X NGS, I think we've come to understand that business grows volumes, high single digits, and you have a little pricing pressure. So the revenue growth rate, some are still in the high single digits. But could you speak to whether or not that’s still a valid algorithm? Obviously, this year things are off the table. But given the pressure on the base business that you've discussed from these larger NGS offerings, I am wondering if you could address that, and specifically within those key modalities, IHC, FLOW, and FISH. Which of those, to the extent that they're facing more pressure from NGS, is most subject to a kind of derating in growth? That's the first part of the question. The second part is just on competing in the larger NGS area. I guess, what can we look forward to measure your early traction there? The larger labs that you're looking to compete with spend a materially higher level of revenues on R&D, and I'm wondering, should we expect R&D to step up materially as you look to push into that area?

Thanks, Dan. I'll ask Bill to address the first part of the question and then Dave to comment.

Hey, Dan, thanks a lot for the question. In terms of growth in our legacy modalities, candidly, the jury's out a little bit. Clearly, growth was impacted over the last two years because of COVID. We expected to see a greater rebound coming out of COVID than what we have seen. We are getting our arms around what the sort of real market growth rate in those underlying modalities is today, and what our ongoing opportunity to continue to take share is. Remember, historically, our growth has been a combination of underlying market growth and market share gains. We don't believe there's any reason we can't continue to take market share as we look forward. In terms of the modalities that are most impacted by NGS, I would say, it’s probably in solid tumor FISH testing where things that were looked at using that modality can now effectively be analyzed through an NGS panel, particularly when you have combination RNA, DNA panels that can do fusions by NGS. That’s probably where the greatest impact is. There’s certainly no real cannibalization at this point, I would say, of cytogenetics or flow cytometry; we see it last in HEME FISH. And candidly, most of the NGS work that happens today on the solid tumor side still needs to be accompanied by IHC work, so probably most significantly on the solid tumor FISH.

Yes. So on the cost side, I guess I have a couple of perspectives on this. One to a certain degree, the front runners that have spent the vast majority of the resources and money and time honestly are really driving into new territory, and to a certain degree, some of the things that we are doing as fast followers will benefit from them plowing that field a little bit for us. So, being the first mover when it comes to some of these technologies and proving them out both analytically but also clinically comes with a higher cost. We can now try to prove analytical equivalency. The second part I'll talk a little bit about is to something that Bill mentioned, which is the capacity of the pharma business. Many of these technologies are actually being used and capacity is available through the facilities for pharma as well, and we can leverage that infrastructure.

There appear to be no further questions in queue. At this time, I would now like to turn the floor back over to Lynn Tetrault for any closing remarks.

Thanks, Kelly. As we end the call, I'd like to recognize over 2,125 NeoGenomics team members around the world for their dedication and commitment to building a world-class oncology diagnostics and information company. On behalf of our NeoGenomics team, I want to thank you for your time and for joining us this morning. For those of you listening who are investors or are considering an investment in NeoGenomics, we thank you for your support and interest in our company. Thank you.

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.