Neogenomics Inc (NEO) Q4 2022 Earnings Call Transcript

Good morning. Welcome to the NeoGenomics Fourth Quarter and Full Year 2020 Earnings Conference Call. As a reminder, this call is being webcast live and recorded, and there will be references to a slide presentation in conjunction with remarks. Because there is a short delay between the live telephone audio and the presentation being shown on the webcast, for the best experience, please either use the webcast for both the audio and video content or if you're dialed in by phone, please download the slides on the Investor Relations site at www.ir.neogenomics.com, and advance the slides yourselves. I will now turn the call over to Chris Smith at NeoGenomics.

Thanks, Paul, and good morning, everyone. I'd like to welcome you to NeoGenomics' fourth quarter 2022 conference call. Joining me for this call are Jeff Sherman, our Chief Financial Officer; Vishal Sikri, President of our newly-created Advanced Diagnostics Division; Warren Stone, President of our Clinical Service Division; and Melody Harris, President of Enterprise Operations. Before we begin our prepared remarks, Jeff will discuss the forward-looking statement and non-GAAP measures used for this call. Jeff?

This conference call includes forward-looking statements about our 2023 initiatives, 2023 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 in our annual report on Form 10-K for the year ended December 31, 2022 that will be 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. The non-GAAP financial measures presented should not be considered to be an alternative to the financial measures required by GAAP, should not be considered measures of liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table available in the press release we issued this morning. Please be advised 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, Jeff. On today's call, I will begin by discussing our fourth quarter and full year financial operating results. And then, Jeff will review the fourth quarter in detail and provide 2023 guidance before turning the call back to me to share our goals and key areas of focus for 2023. We'll then open up the line for Q&A as we conclude the call. If you look at our mission, it's the way we love to start all our presentations, whether it's with an investor, our teammates, or even our customers, because it's what drives and motivates our organization on a daily basis. And before I dive into the call, I just want to thank all our global teammates for all they do every single day to transform so many patients' lives. Turning to Slide 5. We finished 2022 on a high note as some of our strategic operating initiatives began to show results. Revenue was $139 million, a 10% increase over the fourth quarter of last year and up 8% sequentially, also the fourth quarter in a row of sequential growth. This revenue increase was driven by both our Clinical Services business and significant recovery in the Pharma Service business. In the quarter, we saw an improvement in revenue per test from the prior year for the seventh consecutive quarter. Adjusted gross profit was $62 million, representing an adjusted gross margin of 44.5%, which was a significant improvement from both Q4 last year and sequentially. Adjusted EBITDA loss was $1 million. These significant improvements were driven by both higher gross profit and lower operating expenses and highlights the operating leverage in this business. We finished building out our executive team in the quarter as Jeff Sherman joined us as CFO; Warren Stone joined as President of our Clinical Services Division; and Melody Harris joined us as President of Enterprise Operations. Finally, we initiated an organizational restructuring process, including integrating the Inivata business. We believe that this reorganization will result in approximately $25 million of annualized operating savings while helping us to accelerate revenue growth. I would note that not all these savings will flow through the income statement as we continue to invest in strategic initiatives to drive long-term sustainable growth. This includes investing in the right strategic priorities, including the expansion and optimization of our commercial sales force, investing in RaDaR, investing in revenue cycle management, as well as strategic R&D efforts. In addition, we are investing in automation to help drive efficiencies in the business as well as improving our turnaround times for our patients and our customers. Turning to Slide 6. For the full year 2022 results, revenue was up 5% versus prior year to $510 million, driven by an increase in both Clinical and Pharma revenue. Adjusted gross profit was $207 million, representing an adjusted gross margin of 41%. Adjusted EBITDA loss was $48 million. During the year, we served over 625,000 patients and had over 1 million test orders, which is a testament to the mission of the company. Now on Slide 7. I'm pleased that the fourth quarter continued the trend we have shown throughout 2022 of consistent sequential improvements in revenue, adjusted gross profit, adjusted gross profit margin, and adjusted EBITDA. Notably, our revenue growth has accelerated each quarter throughout the year. While we are pleased with the improvements shown throughout the year as some of our operating initiatives have taken hold, we believe that we have the ability to continue to drive improvement in the business in 2023 and beyond. Turning to Slide 8 and highlighting the Clinical Service results. Revenue increased 4% over the fourth quarter of 2022. Revenue per test was up 1.6% and volume increased 2.3%, even as we saw a continued mix and shift towards the higher value and larger panel tests. We are pleased that some of the investments in the field resources that we made earlier in the year are beginning to pay off. Turning to Slide 9. Pharma Service showed strong recovery in the second half of 2022. Both Q3 and Q4 represented record revenue quarters, with the fourth quarter showing 41% revenue growth over the prior year. Performance was driven by project prioritization in addition to a focus on moving to higher-margin modalities like NGS, ensuring that the lab was able to deliver in a timely manner. We saw especially strong growth in RaDaR for Pharma with the fourth quarter seeing over 300% of growth from the prior year. This RaDaR performance highlights the value of data sets presented at ASCO and other key conferences, and we expect strong growth in RaDaR as we continue into 2023. Lastly, the Informatics division delivered a record revenue quarter as well driven by solid growth of 38% over revenue from the prior year.

Thanks, Chris. I'm very excited to join NeoGenomics to help advance the company's mission and drive long-term sustainable growth and profitability. Turning to Slide 10. We finished the year with accelerating revenue growth and improving financial performance in the fourth quarter. Revenue growth of 10.3% was driven by clinical test volume growth of 2.3% and improving mix of higher complexity tests, pricing improvements, and strong results in our Pharma business. GAAP gross margin was 41%. Adjusted gross margin, which excludes Inivata-related amortization expense, was 44.5%, an improvement of 460 basis points over the fourth quarter of last year. The adjusted gross margin performance demonstrates our ability to generate operating leverage in the business with revenue growth while also reducing our cost per test. Adjusted gross margin also improved by 280 basis points sequentially, with most of the revenue growth over Q3 falling to the adjusted gross profit and adjusted EBITDA lines. Turning now to operating expenses. Sales and marketing expense increased by $1.2 million or 7.7% year-over-year to $17.1 million, primarily due to higher commissions from the revenue growth. This expense category will fluctuate some from quarter to quarter. G&A costs decreased by $4.5 million or 7.3% year-over-year to $57.9 million. On a sequential basis, G&A decreased by $3.5 million or 5.6%. As Chris noted, we started a reorganization in the fourth quarter in an effort to optimize our G&A spend and enable execution of our strategic priorities.

Thanks, Jeff. Turning to Slide 14. The more time I spend in this business, the more impressed I am with our unique competitive advantage and position in the marketplace and the assets we can leverage to progress the business going forward. We are a leader in oncology testing with a significant share of the patient test volume in the United States. In particular, our deep relationships with community pathologists provide us with an advantage in the market. Our primary focus on oncology testing has allowed us to develop extensive data, patient databases, and relationships, and we view ourselves as a collaborative partner to pathologists, oncologists, and biopharma companies. As Jeff has indicated, we believe this should allow us to drive meaningful top-line growth while returning to being a profitable company.

All right. Hey, great. Good morning, everyone. So, yes, a lot of stuff going on here, a lot of places we could ask questions on. I want to ask this one first on the sales organization. I think the split in the organization makes sense. But how is the sales force going to be structured here going forward, just to ensure that they're still going to be selling the core products, but also they're going to be selling and focusing on the higher growth advanced diagnostics business as well?

Thank you, Alex. I'll provide a brief overview and then let Warren elaborate since we've been collaborating on this plan. Our perspective is to establish two distinct sales teams due to the different target markets, but they will report to the same regional director. This setup will allow us to leverage synergies and partnerships effectively. Additionally, in oncology, we've been dedicating time to next-generation sequencing and initial discussions around RaDaR, yet we haven't fully tapped into our complete offerings there. Our focus has primarily been on pathologists, but we see significant opportunities for cross-selling. Now, I'll let Warren discuss how we plan to differentiate our approach between next-generation sequencing and our core business.

Thank you, Chris. Appreciate that. So, certainly, two separate sales forces reporting to a single regional director, that's clearly the strategy. We understand that the two touch points of the pathologists and oncologists are different, with higher touch points required from an oncologist perspective. And so hence, that's part of the expansion as well. I think it's imperative for us also to expand the amount of portfolio that our oncologist sales team has available to them to drive increased value and wrap the services they are able to provide with our sales team to the oncologist market segment.

Thanks, Chris. Yes, I think as we're looking at 2022 and then looking at 2023, we're expecting to see consistent performance throughout the year. And as you look at our revenue guidance and our adjusted EBITDA guidance, I mean, if you took the midpoint, we're growing revenue by $40 million at the midpoint of our guidance and adjusted EBITDA improvement of $24 million. So, we're getting pretty good conversion of the revenue growth, almost 60%. And as you think about the drivers in the business and our ability to generate operating leverage, I think Q4 was a great example of adding incremental revenue and holding costs and seeing cost improvements. And I think as we think about margin improvement throughout 2023 and into the future, we think we can do both. We think we can continue to generate top-line revenue growth and see margin improvement and get that operating leverage. So, I think that will be the formula going forward. We said we expect to be EBITDA positive in the fourth quarter. And so, I think you should see a progression throughout the year, similar to what we saw in 2022.

Yes, Andrew, one other thing on that, and you heard me talk about one of our key initiatives this whole thing around revenue cycle management, I started talking about that in the Q3 earnings. And look, we're still unpacking that. But we believe just because of the history of the company and just the way we've built the business, we think there's a lot of opportunity around revenue cycle management, where we just haven't spent the time. We're investing in the resources. And so, look, it's going to take time to continue to do that, but that obviously is going to also help us drive margin improvement.

Okay. I will keep it to one. Thank you.

Hey, Chris. How is it going?

Great.

Thanks for taking the questions. Congrats on the recovery here. I guess, can you just give us a sense of some of the puts and takes with respect to the drivers of the volume increase? I know the prior year, you guys had some challenges. So maybe if you could just walk through some of the product lines or maybe some high-level perspective on where you're seeing the growth come from? And then, related to that, as you see 7% to 9% for the full year, what are some of the areas of the business that you think will pick up? And maybe if you could just speak a little bit more about the strength you're seeing in Pharma Services? Do you think this is an industry trend? Or do you think this is more company-specific?

Sure, I'll address all three parts of your question. It was undoubtedly a good quarter. In Q3, we mentioned that while many traditionally focus on unit growth, we're intentionally shifting business towards NGS. When you transition to selling an NGS panel, you might forfeit three single-gene tests. Although you are losing two tests in volume, you're actually increasing revenue and gross profit. In the fourth quarter, we experienced strong unit growth not only from the shift to NGS but also from solid growth in our core business. Earlier this year, we believed we lost market share, but after expanding our oncology team with over 20 reps in the middle of last year, we began to regain some share. While we didn't lose entire accounts, we did lose segments, and we are now seeing some positive movement. However, it takes time, maybe around six months for new sales reps to have an impact. Looking at our guidance of 7% to 9% growth for the year, we believe this reflects a portfolio effect in our business. Our core business with pathologists is crucial, but so are the higher-value tests we're rolling out, particularly RaDaR and our new NGS offerings through both sales teams, along with Informatics and Pharma. What occurred in Q4 is expected to continue throughout the year, where we can leverage multiple elements. Lastly, regarding Pharma, I'd like to acknowledge Vishal for his vision and the new sales leader he brought in during the second half of the year. We implemented governance and discipline in that group, focusing on identifying the right customers and profitable tests. This isn't just an industry trend; it's our company capitalizing on strong opportunities created by deep relationships. We've diversified our testing menu, and credit to the team for their superb execution with RaDaR in the fourth quarter, which resulted in that business increasing by 300%. I believe I've addressed everything.

Yes. That's helpful. Thanks, guys.

Hey, guys. Hey, Chris, how are you doing? Good morning, and thanks for taking the questions. Maybe just on the EBITDA guide here, obviously, improvement expected there. But I guess, sort of as we think about the longer term here, how are you guys thinking about the incremental margins moving forward? I'm just sort of trying to gauge a little bit around the progression of that over the intermediate term, just sort of given the leverage that you're starting to see in the model? Thanks.

Yes, Andrew, let me just hit a high level and I'm going to throw it to Jeff. But look, and you know this business without a question, you have the opportunity to get leverage. I think as you started to drive growth. And look, we had to rightsized the business with some operating expense, tough decisions that we made. But there really is the opportunity there. But maybe let me have Jeff give you some more insight on how he's thinking about the margins.

Thanks, Chris. Yes, I think as we're looking at 2022 and then looking at 2023, we're expecting to see consistent performance throughout the year. And as you look at our revenue guidance and our adjusted EBITDA guidance, I mean, if you took the midpoint, we're growing revenue by $40 million at the midpoint of our guidance and adjusted EBITDA improvement of $24 million. So, we're getting pretty good conversion of the revenue growth, almost 60%. And as you think about the drivers in the business and our ability to generate operating leverage, I think Q4 was a great example of adding incremental revenue and holding costs and seeing cost improvements. And I think as we think about margin improvement throughout 2023 and into the future, we think we can do both. We think we can continue to generate top-line revenue growth and see margin improvement and get that operating leverage.

Yes. And, Andrew, one other thing on that, and you heard me talk about one of our key initiatives this whole thing around revenue cycle management, I started talking about that in the Q3 earnings. And look, we're still unpacking that. But we believe just because of the history of the company and just the way we've built the business, we think there's a lot of opportunity around revenue cycle management, where we just haven't spent the time. We're invested in the resources. And so, look, it's going to take time to continue to do that, but that obviously is going to also help us drive margin improvement.

Thank you, Chris, for handling the questions. Could you remind us about the growth for NGS? How should we view the AUP improvement from current levels for 2023 within the guidance? Also, can you share some details about the current turnaround time improvement and your goals for the future?

Yes, thanks, Puneet. We haven't shared specific details about the growth and modalities, but we are definitely seeing significant growth in NGS. Historically, we have lagged in this area, but we are starting to catch up. We are very optimistic about Q1. Looking ahead, the launch of Neo Comprehensive, which will be our NGS offering in Q1, is expected to give us a strong competitive position in the market, particularly in solid tumors, where we may have fallen behind. We continue to focus and excel in this area, which we believe will be crucial for our progress. Additionally, I wanted to mention the turnaround time...

And then, finally, on AUP or revenue per test, we're continuing to see as that business shifts to the higher complexity panels, that's helping drive some revenue per test. We are continuing to see some pricing improvement, and we'll expect to see some of those throughout the year. And finally, as Chris already noted, we think we have revenue cycle management opportunities to further drive our revenue. And obviously, one of the bigger benefits there is that typically that is going to be falling almost 100% to the bottom line.

Good morning, everyone, and thank you for your time. I have a question regarding RaDaR and a broader question about your guidance philosophy. Chris, you mentioned strong traction in the Pharma sector. Could you provide any updates on your discussions with CMS following your conversation about CRC? One of your competitors recently received a decision on breast MRD. Does that influence your data generation strategy or potentially your reimbursement timelines? And for Jeff, could you explain the conservative approach you've adopted with the new management team? Investors are keen to understand this, especially regarding your assumptions around the NGS mix shift, which is likely to significantly impact future numbers.

Yes, Tejas, let me address it briefly, and then I will pass the first part of that to Vishal, and Jeff can follow up with details related to NGS. We believe it's positive for the market that Natera received approval for breast. We have publicly disclosed that we consider this our significant advantage in areas where highly sensitive testing is crucial. Breast cancer testing is very important to us as we prepare for our launch in the upcoming month. We think gaining traction in this area is beneficial for the industry, which remains significantly underpenetrated. Vishal, would you like to provide additional insights on how you view RaDaR and the rollout?

Yes. I mean, as Chris mentioned, we're rolling out with four separate indications going into Q1. So, I think that's going to be a good start for us. With Natera getting breast indication, it really shows that CMS is looking at expansion opportunities, and this will help our adoption out there in the marketplace. So, we actually view this as a very strong signal that this is a good sign for the practice from a clinical perspective, also that there's more adoption occurring there.

Yes. And I think we've publicly disclosed that we will be submitting breast in the first half of the year, colorectal in the second half of the year, as well as one other indication this year is kind of where we're at and know that we want to beat all those timelines, right, as far as Medicare.

And then, on the guidance, look, I think we're guiding to what we think we can realistically achieve in the year. We try to factor in anything that could happen negatively as we think through that. But we've talked about it already, we have cost savings that have been baked into our annual operating plan. But we're also making investments. We're investing in our sales force. We're investing in technology. We're investing in RaDaR as well. And so, I think as you look at that, I think it's a balanced approach to 2023. I think we finished the year strong and saw performance improving each quarter. I think we're looking at it continuing to get better as we go through 2023. But I would say we believe it's realistic and achievable, and the team is definitely committed to delivering it.

Yes. When Jeff discusses this, our primary focus is on long-term sustainable growth. It’s not just about achieving strong earnings this year and then being uncertain about the future. One challenge the business faced was envisioning what it would look like in five, ten, or twenty years. A significant portion of the $25 million we gained from rework is being reinvested for dividends that we expect to see in the next two to three years. That’s why we aim to continuously build sustainable long-term growth, brick by brick.

Hey, Chris. Thank you for taking the question and congrats on really a lot of progress here. So, I'm going to stick with the NGS and kind of the molecular. I think historically, molecular PCR plus NGS has been really kind of small 25% of the business, and then NGS was kind of a fraction of that. Can you talk about a little bit more color on where NGS is kind of taking this from? Is this taking it from PCR? Anything around there? Is the molecular as a whole growing as a whole? And then, can you kind of maybe talk about how that conversion to NGS is kind of looking? Are we looking from single-gene to hotspot testing or hotspot test to comprehensive? And does Neo Comprehensive kind of change that equation even more positively? And then, finally, just on the NGS is, is this purely a conversion? Or is there even maybe some share taking overall in the business? And I realize that was a really long question, so...

That was, but that's okay, David. I'll try to unpack parts of it, and then I'm going to pass it to Vishal and Warren so they can provide some deeper insights. Looking back at your last question about moving share, I think one of our challenges was that with Neo, we created a niche in the specialty oncology testing market by offering a comprehensive suite of services. However, as NGS has gained traction over the past three to five years, we fell behind, particularly in the solid tumor segment, which may have led us to lose share in key accounts. This year, two things happened. First, we expanded our field organization by adding an oncology group last summer, originally aiming for RaDaRs for colorectal, which we achieved. We then pivoted this group to focus on NGS with oncologists in Q3 and Q4, allowing us to win new business that we wouldn't have had before. Additionally, our pathology sales force effectively regained share from existing accounts in NGS. It's important to recognize that we are either the market leader or one of the leaders in heme. Many positive developments came together for us due to key strategic decisions made around August and September, which contributed to the lift. To provide more detail about Neo Comprehensive and its implications moving forward, I'll turn it over to Vishal and Warren for their insights.

Yes. I mean your question on single-gene testing to hotspot or comprehensive genomic profiling, what we basically see is more of a movement to comprehensive genomic profiling. And if you look at the tests that we're launching this quarter, that's really the trend that we see continuing. And these are extremely strong product launches, which are coming out, both on the heme side but also the solid tumor side. But that's only a product perspective, right? It's the surrounding areas that make it even more, I would say, impactful, and we'll let Warren talk a little bit about that side.

Yes. Additionally, before I turn it over to Vishal, I’d like to mention two other points. First, we have seen a decrease in the number of clients we’ve lost, which means we are successfully retaining our clients. We have also been fortunate to acquire a few new clients. We have performed exceptionally well in the hematology area, although we have experienced some weakness in solid tumors. This is ultimately where Neo Comprehensive will play a significant role for us in the future.

Hey, guys. Good morning. This is John on for Derik.

Hey, John.

So, I wanted to ask about the guide. So, you have the 7% to 9% growth. And of course, in the quarter, you had a great growth from RaDaR and you had Informatics business growing nicely. Going forward, what kind of contribution are you expecting from the two segments, the Clinical Services and Pharma Services, given all these dynamics?

Yes. I would say, John, we haven't separated that in our guidance. There will be further discussions, and we'll share more detailed information during our Investor Day in early April. However, I want to emphasize that we believe it's about the portfolio effect. We spend considerable time analyzing all the aspects of our business that can be optimized. The challenge often lies in focusing on just one or two areas. What sets our business apart is our potential to excel in four key areas: Pharma, Informatics, pathologists, and oncologists. Therefore, our focus is on executing effectively in all four of these areas to achieve that portfolio effect. It's important to note that sometimes, some parts of our portfolio outperform, as we saw in Pharma, which had a record growth of 41% in Q4, particularly with RaDaR, which surprised us with its rapid progress. When that happens, it can exceed even our guidance. Our aim is to consistently achieve that, but we also recognize the need to manage our portfolio, which is reflected in our 7% to 9% guidance.

Thank you. I have a couple of questions regarding RaDaR. I apologize for joining the call a bit late, so you may have already covered this in your prepared remarks. You mentioned plans to submit for reimbursement for breast tests in the first half of the year and for colorectal tests in the second half. I recall that the previous management team indicated there was insufficient data for the colorectal tests and that more work was needed. Could you share your level of confidence in both indications to support MolDX?

Yes. We submitted for colorectal last year but did not receive approval. The colorectal submission was postponed to the second half of the year for two reasons. First, we have significantly better data for breast cancer. Our breast data is among the best in the industry regarding test sensitivity and the distinction between our MRD product and others available. We believe we should accelerate the breast submission due to this strong data and our capability to navigate MolDX. The delay for colorectal was primarily because we needed to gather additional data. While many expected us to repackage and resubmit in the first half, we deemed that imprudent for the business. We wanted to ensure we secure approval, which necessitated the collection of more data. In the process, we also aim to expedite the breast submission and add a third indication this year. By the end of the year, we will have submitted three proposals to MolDX for RaDaR.

Got it. All right. Thanks. Congrats on the quarter and improvements.

Thank you.

Thank you. At this point, we would like to open the line for questions. And the first question today is coming from Alex Nowak from Craig-Hallum. Alex, your line is live.