Neogenomics Inc (NEO) Q1 2024 Earnings Call Transcript

Welcome to the NeoGenomics First Quarter 2024 Financial Results Conference Call and Webcast. Please note this call is being recorded, and an audio replay will be available on the company's website. Kendra Sweeney, Vice President of Investor Relations, you may begin your conference.

Thank you, Holly. Good morning, everyone, and welcome to NeoGenomics First Quarter 2024 Financial Results Call. With me today to discuss our results are Chris Smith, Chief Executive Officer; and Jeff Sherman, Chief Financial Officer. Additional members of the management team are available for Q&A, including Warren Stone, Chief Commercial Officer; Melody Harris, Chief Operations Officer and President of Informatics; and Ali Olivo, Executive Vice President, General Counsel, and Business Development. This call is being simultaneously webcast. We will be referring to a slide presentation that has been posted to the Investors tab on our website at ir.neogenomics.com. Starting on Slide 2, during this call, we will make forward-looking statements regarding our anticipated future performance. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to our most recent Forms 10-K, 10-Q, and 8-K we filed with the SEC to identify important risks and other factors that may cause our actual results to differ materially from the forward-looking statements. The forward-looking statements made during this call speak only as of the original date of the call, and we undertake no obligation to update or revise any of these statements. During this 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 an alternative to the financial measures required by GAAP, should not be considered measures of liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measures in a table available in the press release we issued this morning. I will now turn the call over to Chris Smith, Chief Executive Officer of NeoGenomics.

Thanks, Kendra, and welcome, everyone. Thanks for joining us this morning to go through our first quarter financial results. As always, I want to begin with our mission and vision statements because it's what motivates our company and teammates on a daily basis. Our mission at Neo is to save lives by improving patient care. And before we get into the financial results, I just want to thank our teammates for everything they do every single day to make a difference in so many patients' lives. Now let's move to Slide 4 and get into the first quarter highlights. As you can see, we delivered another quarter of strong revenue growth, growing 14% over the prior year to $156 million. Clinical Services revenue increased 17% to $135 million, primarily driven by execution of the commercial strategy and increased adoption of our NGS products. The compounding effect of volume and revenue cycle management initiatives, including an AUP lift, enabled NGS growth of over 50% and now is approaching 30% of our total clinical revenue. As growth rates accelerate and NGS becomes a larger portion of our base business, the comparables will become tougher as the year progresses. Advanced Diagnostics revenue declined by 3% over the prior year, in part due to macro conditions in the pharma sector and margin optimization initiatives from 2023. As a business, adjusted gross profit was up 19% to $71 million, and adjusted EBITDA improved 149% or $11 million over Q1 of last year to a positive $3 million. Now on Slide 5. I'm very pleased that the first quarter continues the trend we've seen since the fourth quarter of 2022 of consistent year-over-year improvements in revenue, adjusted gross profit, and adjusted EBITDA. This is especially noteworthy as we did not see the typical industry seasonality in Q1, with total revenue actually increasing sequentially from the fourth quarter. We believe that we've laid a solid foundation for growth in 2023 and expect that momentum will continue as we move forward. Let's move on to Slide 6. On our full year 2023 call, we laid out our strategic priorities for 2024. They included profitably growing the core business, accelerating advanced diagnostics, driving value creation, and enhancing our people and culture. Our people are our greatest asset, and we are devoting time and resources to enhance teammate development and engagement. Everything we do internally is centered around developing a customer-oriented growth mindset, and our teammates show each day their dedication to improving patient care. This morning, though, I'm going to focus on our 3 financial priorities. As we continue to properly grow our core clinical business as we execute on our commercial strategy, which is protect, expand, and acquire, this has contributed to our strong volume growth, increased AUP, and improved mix. The mix shift towards higher-value modalities in testing has supported the delivery of yet another quarterly improvement in revenue per test. Even with the focus on growing NGS, we continue to see growth in clinical volumes across all modalities. To win in Oncology, we have the breadth of menu and the products that deliver value in real-world clinical settings through high-quality, actionable, differentiated tests that help support treatment decisions as well as a best-in-class customer-focused mindset. Earlier this month, we announced senior leadership promotions as part of our ongoing efforts to optimize our operating structure. Warren Stone is now Neo's Chief Commercial Officer and will lead our Clinical and Pharma Service commercial teams. Melody Harris is now Neo's Chief Operations Officer and President of Informatics and will oversee data-oriented teams and continue to manage all enterprise operations. Warren and Melody have shown exceptional leadership and performance in their roles, and I'm confident their new responsibilities will strengthen the commercial synergies and drive growth as well as improve operating efficiencies. As a result of these changes, the legacy pharma business is now reporting to Warren. Informatics is now under Melody's leadership, and R&D will be reporting to me. We remain focused on R&D as we believe that innovation is a turbocharger for growth. Specifically, we're committed to offering an MRD product to patients and healthcare providers, and we believe we have several viable pathways to accomplish that. As we noted over the past several quarters, macro trends as well as operational challenges continue to impact our pharma revenue. Building on the strength of our go-to-market strategy seen in our clinical business, we are integrating the pharma commercial organization under Warren's leadership to leverage the success and the commercial execution seen in the clinical business. We are expanding our pharma sales organization as it moves under Warren's leadership and expect to see benefits from this initiative in the future. In addition, our margin optimization efforts in ADx have continued to improve adjusted gross margin performance. Informatics revenue continues to grow as we drive increased investment and look to expand product offerings. We continue to focus on the acceleration of innovation in our R&D, including the launch of a new liquid biopsy comprehensive genomic profile test expected in late 2024. Additionally, building on the success of the Neo Comprehensive 1.0, we are focusing on the development of our next-generation broad Solid Tumor panel, which is targeted to be one of the largest solid tumor CGP panels on the market while providing industry-leading turnaround times. We believe this new, large NGS panel will provide additional growth opportunities in clinical, pharma, and the informatics space. We remain focused on driving value creation from a financial perspective. In late 2023, we kicked off our LIMS project that will consolidate fragmented systems into one end-to-end solution, which will serve as the foundation for our digital transformation strategy while enhancing operating efficiencies. We are driving gross margin expansion through investing in automation and lab and supply chain optimization. We also continued to invest in our quality programs to improve our products and services as well as to prepare the company for increasing regulatory oversight. Yesterday, the FDA released its final ruling regarding regulation of lab-developed tests. Our initial view is that the rule is favorable to our business. The rule significantly expands LDTs that would not be required to get premarket approval from the FDA, including tests marketed before May 6, 2024, and those approved by the New York State. This enforcement discretion is favorable to our broad test menu and should reduce the anticipated cost of compliance. We've been preparing for the increasing regulation, and we believe we're well positioned to comply with the rule. From a legal perspective, we are vigorously defending our RaDaR technology. A hearing to appeal the preliminary injunction against RaDaR was held on March 29 in the Federal Circuit Court, and we are awaiting that outcome. The North Carolina District Court case is currently in discovery, and the jury trial is scheduled for March of 2025. We have also filed IPR petitions with the U.S. Patent and Trademark Office seeking to determine that Natera's 2 patents at issue are unpatentable in view of prior art. With that, I will now turn the call over to Jeff to review our first-quarter financial results in more detail. Jeff?

Thanks, Chris, and good morning, everyone. I'll begin with a little more detail on our operating results for the quarter. As Chris said, we started the year with revenue experiencing double-digit growth over the prior year. First-quarter revenue was $156 million, a 14% increase over the prior year and higher than the fourth quarter of 2023. Revenue growth was driven by growth in clinical test volume, a continuing shift to higher-value tests, and improvement in revenue per test driven by business mix and revenue cycle improvements. Adjusted EBITDA improved 149% from prior year to a positive $3 million. Q1 marks the sixth consecutive quarter that adjusted EBITDA increased from prior year as we continue to generate significant operating leverage on our revenue growth. Looking at Slide 8, Clinical Services revenue of $135 million was an increase of 17% over the prior year, driven by an 11% improvement in revenue per test and a 5% increase in volume. The optimization of our sales force, along with the increased adoption of our NGS products, continue to drive higher volume growth. NGS growth continues to be strong and is helping to drive revenue growth and earnings. Turning to Slide 9. Average revenue per clinical test increased by 11% over the prior year to $447, the third consecutive quarter of double-digit growth, and represents an improvement for the 12th consecutive quarter as we maintain our focus on higher-value tests and revenue cycle management initiatives. As we shared with you in the past, NGS is a strategic priority and is approaching 30% of our total clinical revenue. The focused efforts of our sales team to penetrate new and existing oncology accounts and drive adoption of our higher-value NGS portfolio accelerated NGS revenue growth. Turning to Slide 10. Advanced Diagnostics revenue declined 3% over the prior year in Q1 as a result of macroeconomic conditions and pharma and R&D spend, as well as a continuation of 2023 decisions to rationalize our global testing sites and low-margin contracts. The focus on profitability and margin growth is driving performance in ADx, with adjusted gross profit and gross margins increasing versus the prior year. Looking at the income statement on Slide 11, adjusted gross profit increased by 18.6% over the prior year and adjusted gross margin was 45.3%, an improvement of 182 basis points over the first quarter of last year. Regarding operating expenses, sales and marketing expense was $20 million as we continue to increase our commercial investment, and R&D expense was $7.6 million. G&A expense increased by $4.2 million over the prior year, primarily driven by legal costs associated with the ongoing Natera litigation and costs related to the closure of the lab in La Jolla, California. The ongoing costs for this litigation, as well as the costs related to the lab closure, are being added back to adjusted EBITDA as nonrecurring items in the quarter. Turning to the balance sheet on Slide 12. We ended the first quarter with cash and marketable securities of $385 million. Cash flow from operations decreased by $13 million in Q1 over the prior year. The first quarter is typically the largest use of cash when annual bonuses are paid. In addition, cash collections were impacted by approximately $5 million in the quarter due to the Change Healthcare data breach as our hospital and payer clients struggled to manage their claims adjudication and payments. We have started to recover some of this collection shortfall in the second quarter. Our strong cash position gives us the financial flexibility to address our 2025 convertible notes, with a principal balance of $201 million maturing in May 2025. These notes will become current liabilities on our balance sheet in the second quarter. Given our liquidity profile, our current expectation is to use our existing cash and marketable securities to retire the 2025 convertible notes when they mature. However, we are starting to evaluate strategic M&A opportunities, which could ultimately impact our capital structure decisions. Now turning to our 2024 financial expectations on Slide 13. We are reiterating full year revenue guidance of $650 million to $660 million, representing 10% to 12% growth, and expect to be at the high end of the adjusted EBITDA range of $21 million to $24 million. In summary, Q1 continues the revenue, margin improvement, and earnings growth from 2023 and positions us well to achieve our goals for the year.

Thanks, Jeff. I'm very proud of our team's first quarter progress, including strong revenue growth and significant improvement in adjusted EBITDA. In addition, we saw meaningful progress in the execution of our strategic priorities. We believe we are well on our way to becoming the leading cancer testing information and decision support company. The investments we have made in our teammates, labs, commercial organization, and R&D position us well to execute through the next stage of our growth. And while it's still early days, we believe the initial read on the FDA final rule is favorable to our business. I'm excited for our teammates and our customers, but most of all, for the patients we serve daily. Thanks for your time, and we'll now open it up for questions.

Your first question for today is from Mark Massaro with BTIG.

Chris, congratulations on a strong quarter in Q1. I’ve heard some intriguing comments about your evaluation of M&A opportunities. I also heard that you plan to engage in the MRD market in some capacity. Those are my words, not yours. Can you share your level of confidence regarding the RaDaR litigation? Additionally, can you elaborate on the types of opportunities you're considering? Are you looking at partnerships or potential acquisitions? Also, what are your observations regarding the marketplace? It seems like valuations are quite low, so perhaps an outright acquisition could be a viable option.

Yes, Mark. I'm going to hit it at a high level, and then I'll let Ali kind of take it because she is our General Counsel but also leads BD. So she can discuss it. But look, I think all along, we talked about that the first 12 to 18 months, we're going to be very internally focused on getting the house back in order and starting to put wins on the board. That really means delivering double-digit growth and improving the operating earnings at a faster rate, and that's gone incredibly well. That being said, we believe there are some interesting opportunities that we think strategically would help our mission and kind of vision for the company to grow. And so Ali took on the role of BD at the beginning of the year. We have built out a team there just to start to explore this. So I think we see that as an opportunity because we believe we're very uniquely positioned to lead this oncology diagnostics testing business from a reference perspective. But Ali, do you want to talk a little bit more about BD and then just touch on how we're feeling about the legal matters here?

So I guess we'll start backwards. So there are 3 pathways that we kind of alluded to in our prepared remarks. One is obviously the litigation, and we see that via the district court matter as well as our IPRs that were filed against both patents that are asserted by Natera. The other is certainly with our R&D activity and our continued development of tests, including MRD tests. And then the third being in M&A. That could take many forms. You're right, valuations are depressed. It could take a full acquisition. It could also be tech transfer licensing, all of these things. And so all of these pathways are viable, and we're evaluating all of them.

Your next question is from Puneet Souda with Leerink Partners.

It's great to see that AUP continues to perform well. Congratulations on that achievement. However, you came in $7 million ahead of our expectations and those of the market, yet you are not raising the full year guidance. I'm curious about where the moderation is occurring. Is it in the pharmaceutical business or on the clinical side? You mentioned a weaker pharmaceutical environment, which we can observe, but I would like to know what other factors we should consider.

Yes. I'm going to let Jeff kind of hit it, kind of getting into detail. But look, at a high level, you did hear me just talk about not only the macro issues in pharma, but also some operational challenges in that business. And I would say, from a strategic perspective, bringing Warren over to lead that business, I think some of the strategies that we've implemented in clinical around sales force optimization and our go-to-market have worked significantly well. Warren has a lot of experience in the pharma sector and key roles at Millipore which we believe will make a difference in the back half of the year. But as far as specific guidance, let me let Jeff comment.

Yes, sure. Thanks, Chris. Yes, so Puneet, I think as we looked at guidance, we're only a couple of months out from giving our annual guidance. I would remind everyone when we started the year, our initial guidance was over $20 million higher than consensus when we started the year. As we looked at our Q1 performance, we're about $6 million ahead of consensus in Q1. We had a strong Q1 from an execution standpoint. We did not see the typical seasonal slowdown in clinical that we've seen in prior years, so I think that's a testament to our commercial teams and the execution we've seen, particularly on the NGS growth side. But we also have just put the pharma commercial sales team under Warren, so we want to give Warren a little time to get his arms around it and look at the business. We have been adding sales reps there as well. So I think more of our expectation is that ADx has been a challenge over the last couple of quarters as well as what’s happened in the overall macro situation. So we want to give Warren time to get his arms around the business. We'll look how performance happens in Q2, and we'll reevaluate guidance as we exit the second quarter.

Got it. That's helpful. I have a quick follow-up regarding the FDA LDT rule. Thank you for your comments; it's reassuring to see that the majority of our portfolio is protected despite the rule. Chris, as you consider the next round of tests and the upcoming product launches that will go through the FDA approval process, how do you view the associated costs? Do you anticipate an increase in those costs, even with the process extending over the next 3 to 4 years? Additionally, could you share your thoughts on how you expect the implementation of the FDA LDT regulation to unfold?

Yes. So look, I think the ruling was very favorable. I'll start by saying that. I think also just to say that, look, we're a board member to ACLA, and we're kind of aligned that we don't believe it's medical devices. And so we'll see how that unfolds. But as far as cost and the impact on the business, one of the things that we did as a leadership team is everyone that we brought on has come from a regulated FDA environment. So the person that runs quality risk and compliance grew up in only FDA regulations. So we started probably 18 months ago putting the systems in place, including design control and new products. We've been going through that process. We've got 2 key products that are under development now that are running through that process. And while there will definitely be costs associated with it, we believe we can manage it in day-to-day business. There won't be a significant change to our outlook or our forecast to manage that business.

Your next question is from Dan Brennan with TD Cowen.

Sorry about that. Can you speak a little bit just to the core clinical business? Just wondering, ex NGS, kind of what you guys saw in the quarter. It looks like the results are okay there, and kind of how you're thinking about the progression of maybe volume and price as we look out into Q2 and beyond.

Yes. Look, I mean, I did mention in our prepared remarks that we did grow in all modalities, but Warren's here, so maybe I can let Warren kind of give you the high-level piece of it, and then maybe Jeff can provide more specifics.

Yes, certainly. Thanks, Chris. Dan, Q1 was a strong quarter as Chris said. And from our data, we feel that we continue to grow from a volume perspective above market across all modalities. That really speaks to our account penetration strategy that we have from a commercial perspective. Yes, we over-index on NGS because of its relative importance. But the overarching sales strategy does target account ownership, and we're seeing the benefits of that to all of our modalities. We feel based on the fact that it's broad-based across multiple customers and geographies in the United States that it should be sustainable.

Yes. And I think I would expect a similar kind of flow of revenue, Dan. Q1 is generally our softest quarter. It tends to ramp in Q2, and Q3 are in a similar range. Then we finish the year stronger in Q4. So I would expect a similar sequencing of clinical performance this year. Yes. And I guess the last thing on that, Dan, remember, we went through a field expansion where we probably over an 18-month period doubled the size of our field organization. So I think what you see in this business really does take 6 to 9 months of time and grade to get flowing from a sales perspective, whether it's new products, new processes, new customers, or new business. So I think we're starting to see the benefit of that. And to a point where I think it's something we've got to continue to evaluate is kind of what we call feet on the street, and making sure we have the right amount of coverage because we believe the opportunity is significant. So it's about capturing it.

And maybe just one follow-up, just on the sequencing side. So the liquid test. So is anything baked into the guide for that? I know you said it's later in '23. Like is that a fourth-quarter event? Just any more color on kind of what the impact of that being from a timing perspective.

Not expecting any material revenue from that this year, Dan.

Yes. Late in the year.

The next question is from Andrew Brackmann with William Blair.

Maybe on Neo Comprehensive, I think it's been just over a year since you launched that product. Can you maybe just give us a sense of the scale for that business and that product line? And I guess just related to that, any color you can provide on sort of success rate with cross-selling initiatives or sort of what accounts we're really seeing a lot of uptick in.

Yes, Andrew, I'll take it high level, and then I'm going to let Warren kind of get into the detail on that. But remember, we've talked a lot about this that from a heme perspective, we're a market leader in NGS. But from a solid tumor, we would have very low single-digit share. So we knew that when we launched that product. But let me let Warren provide more details.

Yes. Just a correction there for Chris, we have low single-digit share in solid tumors. You said double digits. And one of the reasons why we had a low single-digit share in solid tumors is effectively we didn't have this broad CGP panel. And as you correctly pointed out, we launched this in late March of last year, and we've done an upgrade on the product as well. Our penetration continues to evolve very favorably. We see it coming across in 2 areas. Obviously, our area of strength lies within the hospitals, and we're tapping into that opportunity. We estimate that sort of 20% of the market potential comes from the hospital side of things. And the balance of the opportunity is the community oncologists. Sometimes they're independent, sometimes they're affiliated, but that's where we have a lot of opportunity to grow in the community oncology space, because we have largely underpenetrated it for lack of a portfolio. We see robust growth quarter-over-quarter in terms of volume within that space as well. And ultimately, this is one of the leading drivers to the 50% growth in NGS we spoke about earlier today.

Your next question for today is from Tejas Savant with Morgan Stanley.

So maybe just to kick things off, Chris. You raised your long-term targets to north of 10% on the last earnings call. Three years out, where do you expect NGS test mix to be in terms of your clinical revenue? It's about 25% today. Just given the growth you're seeing here, is there a scenario in your mind where over the course of those long-term targets, NGS mix could essentially be approaching 50% on an ex MRD basis?

Well, look, I think when you think about it, Tejas, and you talk about it over the timeline that you mentioned, we will be launching other products along the way. So for example, we're really excited about this liquid product that we're going to be launching. There will be new products that will come in, but without question, we believe we have a ton of runway on NGS. I mean, I think all the data that we see is that the NGS market is probably only penetrated 30% to 40% and growing at 20% to 25% per year. So we think that we will get our share of that growth. I think as we bring out even our next large panel, we think that will be a product that will make a significant impact in the market. So it's hard to say percentage-wise, but I would tell you, we're starting from a low base, especially compared to our competitors. If you look at Foundation, Tempus, and Caris, they're probably doing high double digits of their business in NGS and solid, and we just haven't been. So we believe there continues to be a lot of runway there.

Got it. And a quick follow-up on informatics, actually. Chris or Melody perhaps, I'm just curious as to your updated thoughts there on better monetizing your informatics offering. And on a somewhat related note, you've talked in the past of your products sort of moving towards more data-intensive formats, whole genome sequencing, whole exome, etc. As you trend in that direction, do you envision an additional level of investment that's needed to build the infrastructure to support those back-end analytics and so forth for those kinds of tests?

Yes, I'm going to let Melody kind of get into the detail with you. But now remember, she's only had it officially for like 2 weeks. But look, I think, high level, we believe that there's opportunities, especially in these markets that are growing double digits, and we need to invest in them. I think our view is that we think that the business in its entirety can grow double digits. So I think Informatics is no different from our other businesses where we think if we invest the right amount, we can drive growth. But some of that has to do with product and strategy. And on that, let me kind of throw it to Melody to give you more insight on that.

Yes. So 2 weeks I've been here, Tejas, on this project, so just looking at it and learning, but I do feel we have quite a bit of opportunity. We are only now, with our LIMS system, really transforming the underlying system such that we have the data structured for the back-end analytics that you mentioned. As we get into new product offerings, with whole genome sequencing, with liquid biopsy, a lot of the magic of those products is in the back-end pipeline. We're already building that infrastructure for that, which then also lays the foundation for us for purposes of monetizing that in a meaningful way. If you think about data being the new oil, this means that we're going to have more oil production coming from whole genome sequencing and liquid biopsy. So the team's very excited about those new product offerings and what that means for our product offering down the road.

And I think from an investment perspective, we are continuing to capture gross margin savings and efficiencies throughout the company and have several different work streams going towards that. Some of those savings can be reinvested into things like informatics and R&D as well. There will be profit growth from that, but also some reinvestment from operational efficiencies that we garner over the next couple of quarters and years.

Yes. And speaking of the LIMS, obviously, that's going to be a big cost saving to move multiple systems onto one platform, and we've talked a lot about the LIMS, but that really is the turbocharger for informatics growth. It's been very hard from an informatics perspective, with multiple LIMS systems to aggregate all that data and let data scientists create the things that we needed. So the LIMS project, think about it almost as an R&D campaign for informatics. It's going to create that.

Your next question is from Mike Matson with Needham & Company.

Just one on the patent litigation. So with this hearing on March 29, I guess, what is the next step? And is it just the decision on your appeal? And what's the expected timing of that decision?

I'll let Ali take that.

Sure. So yes, what was appealed was the preliminary injunction. Typically, decisions take 1 to 4 months, depending on various factors, including if there's a dissenting opinion, sort of who the judges are, whether it's precedential in nature. We're about 1 month out, so we don't really have greater visibility into the timing other than generally 1 to 4 months, with the 4 months being if it's precedential or has a dissent.

Okay. With the new liquid biopsy test you mentioned, how does that relate to the previous RaDaR? Is this essentially an upgraded version of RaDaR? Would you consider selling both versions of the test if the preliminary injunction is overturned?

So the liquid that we're looking to launch in the latter part of this year, it doesn't relate to MRD. It's really a liquid CGP pan-cancer test that we're launching so that we're able to offer concurrent testing opportunities with solid tumor and liquid biopsy.

Your next question is from Michael Ryskin with Bank of America.

This is John Kim on for Mike. You mentioned that you'd actually be looking at the higher end of the adjusted EBITDA guidance, so I wanted to ask on the price and the mix. I think you previously talked about the NGS contributing more than 60% of the increase in AUP last quarter. I'm wondering what that was this quarter. And looking at the 2024 guide and looking at that adjusted EBITDA, if you had any change in your AUP expectations. Yes, and I guess, related to that note and how much improvement you're seeing in the revenue cycle. I know you talked about it being a multiyear opportunity, but what sort of upside is left this year?

Yes. In terms of the pricing question, NGS continues to drive over 60-plus percent of the AUP increase. That trend has continued. In terms of revenue cycle, we have a lot of initiatives under that umbrella. We have what you would consider your historical billing and collections, denials management piece. We're having success there. There is a conversion of tests from single panel to larger panel tests that fall under revenue cycle initiatives as well. We have payer policy movements as well. State biomarker legislation continues to be passed, which is long-term favorable for us. That's going to take time to matriculate through our performance and getting payers to pay. Finally, there’s the rate aspect where we're seeing rate increases. I would say we continue to have success across all of those.

Understood. Concerning the doubling of the sales force as it transitions under Warren, how should we view this additional investment in the commercial team? What kind of impact will this have on the financial statements?

Yes. I would say, look, all of our strategies are built into our guidance, so anything that we would do investing this year is already built into the guide.

Your next question for today is from Mason Carrico with Stephens.

You gave some color on this in a previous question, but to ask it more directly, for the ADx business overall, is this still a business that you believe can consistently grow double digits? And if so, what needs to happen to get there? And how do you think about the timeline to return to that level of growth?

Yes, I believe the business can achieve double-digit growth. However, we need to ensure that our commercial optimization strategies are effective. The new tests we are introducing are expected to contribute significantly to our growth. While Neo Comprehensive 1.0 offers a wide range of options, launching our next-generation big panel, which will likely be one of the largest available, will also make a notable difference, along with advancements in liquid biopsy. When it comes to working with pharmaceutical companies, marketing these new products effectively will be important. The market exists, but our focus should be on implementing the right strategies and executing them. That said, it may take several quarters to see this come to fruition.

I think the other point is we have a relatively new sales force that has come on over the last couple of quarters, and so I think there's also the component of this of just the natural ramp there. We have built a comprehensive sales structure, support structure under Warren on the clinical side that will now be really available for the pharma side as well.

Your next question is from Prashant Kota with Goldman Sachs.

This is Prashant on for Matt. Lots have been covered already, but despite the increase sequentially in clinical revenues for this quarter, how much erosion of clinical testing volumes could have been attributed to winter seasonality? And then how are you thinking about investments in digital pathology across your business?

So it's 2 questions. So do you want to talk a little bit about that first? Then I'll give Melody the second one.

Yes. As Jeff mentioned in his commentary, we didn't initially see a meaningful change in our demand patterns in Q1. Actually, from a weather perspective, maybe there was margin pressure in this year versus last year, but it wasn't materially different. We didn't see as large a dip as what we have seasonally seen in Q1. So we saw what I would define as robust volume demand across all of our modalities in the first quarter. You want to take this?

Yes. On digital pathology, we do have a couple of internal initiatives. We do, to some extent, employ a level of digital H&E and other circling methodologies today. But to really do it at our full production scale, we're not seeing digital pathology AI vendors in the marketplace that have the breadth of our menu. We're trying to figure out ways to piece that together in a full-scale production method. Today, we've done it opportunistically by digitizing some of the higher pain points. But as far as across-the-board digital pathology solutions, we don't see that they're quite out there yet today.

Your next question is from Andrew Cooper with Raymond James.

A lot has already been asked, but maybe one more on MRD and the mention of sort of the various different pathways you could go down. Just would love high-level thoughts on how you think about the value of time from that perspective. With the trial potentially starting in 2025, with the IPRs underway, the timeline of seeing those through to the end versus potentially going another route where you could do something faster, even if it may cost more. Just help us think about how you balance those things as you think about what the next step should be to add MRD to the portfolio from a commercial point of view.

I think it's a good question. Look, we do have a lot of confidence in the legal strategy because I think especially the IPRs have gone under the radar through all of this because we're going through the natural steps, but those are now filed to see if we can get those patents overturned. I think from a RaDaR perspective, we like that technology a lot, and the team had already started working on the next-gen RaDaR product. We're not abandoning that path. But our ability to evaluate other options, I think, is prudent on our part. It's one of the big projects that Ali and her team are looking at. There are a lot of interesting innovative early-stage companies out there. Timing is critical, as a lot of that product is still not getting reimbursed. We think this is going to be a long game with MRD, and as the leading cancer company, that's important, but also about being prudent in making sure that we have multiple opportunities.

Awesome. That's super helpful. Maybe just one more, in terms of some of the sales force commentary, can you just remind us from a numbers perspective sort of where you sit in that precision oncology versus the traditional call points and then as well in ADx and maybe versus those numbers where you'd like to be end of the year or long term to the degree there's material change there?

Yes. As Chris said earlier, we've sort of doubled our sales force in the last 18 months, meaning we now have an authorization that's north of 100 on the clinical side. If you think of allocation of time, roughly 40% of the sales force time is now focused on the community oncology setting, with the remaining roughly 60% focused on more traditional core points with the hospital pathology. On the pharma side of things, we have less than 10 people targeting our pharma customers. I think there’s a real opportunity for us to make investments here, but not necessarily traditional investments. We must drive a much more sophisticated commercial strategy and sales deployment to support that.

We have reached the end of the question-and-answer session, and I will now turn the call over to the management for closing remarks.

Okay. Thanks so much, Holly. And everybody, thanks for taking the time to catch up with us today. As we talked about, it was a strong quarter, and we're pleased with the progress that we continue to make, and we'll look forward to catching up with you next quarter. Thanks, and take care.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.