Neogenomics Inc Q3 FY2024 Earnings Call

Welcome to the NeoGenomics Third Quarter 2024 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Please note this call is being recorded and an audio replay will be available on the company's website. I would now hand the call over to Kendra Sweeney, Vice President of Investor Relations. You may begin.

Thank you, Jenny. Good afternoon, everyone, and welcome to the NeoGenomics third quarter 2024 financial results call. With me today to discuss the 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; Andrew Lukowiak, Chief Innovation Officer; Dr. Nate Montgomery, Head of Medical; and Kareem Saad, Head of Strategy and Transformation. This call is being simultaneously webcast. We'll be referring to a slide presentation that has been posted to the investors tab on our website at ir.neogenomics.com. Starting on slide two. 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, 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 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 a press release we issued this morning. I will now turn the call over to Chris Smith, Chief Executive Officer of NeoGenomics.

Thanks, Kendra. Good morning, everyone, and thanks for joining us today. On today's call, we'll discuss the highlights of our strong third quarter performance and provide an update on the progress made in accelerating profitable, sustainable growth. Before we discuss our financial results, I do want to take a moment and acknowledge the communities in North Carolina and Florida, including our headquarters in the city of Fort Myers, which have shown incredible resilience following the impacts of Hurricane Helene and Milton. I'm especially grateful to our NEO teammates for the continued commitment to our patients, our mission and our vision. It's a testament to our one NEO culture that our labs throughout the country stepped up and covered an increased workload to ensure there was minimal disruption to patients while our employees in the storm's path were seeking shelter. So, thanks to all of our teammates. I believe our people are what makes NEO such a special place to work. On the business side, our position between large reference labs and the niche oncology companies is what sets us apart. Our value proposition stems from our mission to be a comprehensive oncology testing and information partner to providers serving cancer patients in the community setting. Approximately 85% of all cancer patients are traditionally seen in the community setting, and we believe that trend is likely to persist for the foreseeable future given the convenience, cost effectiveness and level of personalization that can be delivered to cancer patients in that setting. We believe NeoGenomics is leading the democratization of precision oncology testing and information and enabling cancer patients in rural America to have access to the same level of care as a patient has access to at an NCI-designated cancer center in a large metropolitan setting. NeoGenomics has and will continue to build the industry-leading community oncology translation platform which is where a vast majority of our investment is being directed today. This platform comprises three layers. First, an industry-leading customer experience layer with the flexibility and the versatility to deliver a comprehensive oncology solution portfolio with internally developed and externally sourced products across heme and solid tumor indications and that are fit for the community generalists. Second, an increasingly automated production capability where our geographically balanced footprint drives operational efficiencies across all test modalities and delivers best-in-class turnaround times and cost-effective solutions to patients and providers. And finally, a data interoperability layer that allows us to deliver integrated, seamless and user-friendly clinical reports and associated insights to our customers. Combined, these three building blocks of our community oncology translation platform are what we believe continue to lead to sustainable competitive differentiation for NEO as the leading comprehensive cancer testing and information partner. Now let's get into the Q3 highlights on the next slide. We continue to execute on our goal to deliver double-digit year-over-year growth. In Q3, total revenues grew 10%. In the clinical business, revenues grew 14% compared to the third quarter of last year and it was a record quarter in total test volume and revenues. To achieve this result, we grew volumes by 9% and revenue per test by 5%. NGS continues to be a key driver for growth, increasing 26% and representing 31% of our total clinical volume and revenue. We are also proud that we've improved adjusted EBITDA by $10 million, or 305% from prior year, making that five consecutive quarters of positive adjusted EBITDA. We are seeing the benefits of the investments that we made in our commercial business over the last few quarters. Sales optimization efforts with a focus on support team and customer experience are increasing the effectiveness of our salesforce which has enabled us to serve more patients in a single quarter than ever before. Since our Investor Day last year, our focus has been set on delivering long-term sustainable growth core to achieving this optimization of our commercial business. Our clinical business continues to execute on our commercial strategy to deliver volume growth enhanced by success of our customer connectivity digital strategy and increased average unit price, improved mix driven by the strength of NGS. NeoGenomics drove significant organic volume growth in the third quarter across the portfolio as our commercial and our lab operations team continued to execute. We believe all of our modalities grew faster than the overall market based on the review of industry data. Growth is especially robust across NGS with revenue growth of 26% driven by competitive account wins, improved mix and adoption of larger test panels. As we discussed on our last quarter call, we will continue to invest in our commercial team to drive incremental volumes and capture market share. This is taking hold as we experience our highest quarterly retention rate and had several key hospital wins. To further drive market penetration into community oncology, we are expanding our commercial resources. These new teammates are joining at a very exciting time for NEO as we look to launch new tests in the coming months. In October, we launched NEO AML Express, a rapid AML test to help patients diagnosed with AML begin their treatment up to two times faster than our previous test. AML Express, when combined with our exceptional customer experience, enhances our position as the market leader in heme. We also gained conditional approval in New York State for NEO Comprehensive solid tumor. This approval broadens patient access to our NGS tests, delivering better diagnostic value and cost effectiveness than single gene testing. We are only scratching the surface of potential customers and with more reach and frequency of an expanded commercial organization, we will continue to penetrate both new and existing accounts with our comprehensive menu of oncology testing solutions. Through RCM initiatives, we are continuing to expand commercial coverage and having success in reducing denials to ensure we're getting paid for the work that we do. The most important factor in growing the commercial business is keeping the patient as our top priority. We know the difference today can make while waiting for test results, so we put a premium on turnaround time. I am pleased to say that this quarter our lab improved turnaround time by 10% compared to Q3 of 2023 even with a significant increase in test volumes. With a focus on customer satisfaction in early 2025, we will launch NEO Helix, an exceptional end-to-end digital experience for our customers. NEO Helix is an intuitive platform that supports physicians and patients from order to results, provides guideline-driven decision support and future patient education. Turning to slide eight, let's talk about innovation. We believe innovation is a turbocharger for growth and as we look to the future of the industry with new technologies and data, utilizing our current resources and executing on the right opportunity positions us well for long-term sustainable growth. In the last 18 months we brought several new and upgraded products to market to improve patient care. I just mentioned our newly available AML Express test. NEO PanTracer, a liquid biopsy comprehensive genomic profiling test, launched commercially for pharma in Q3 and will launch commercially in the clinical business in the first half of next year. In the clinical test setting, PanTracer liquid biopsy will be a comprehensive and highly sensitive liquid biopsy test complementing traditional tissue testing for therapy selection in advanced stage solid tumor patients. To further accelerate our innovation, I'm pleased to share that Andrew Lukowiak has joined NEO as our Chief Innovation Officer. With nearly 25 years of experience in the clinical diagnostic industry, Andrew brings a wealth of experience specializing in developing strategic programs and processes to introduce innovative regulated products to the market. As CIO, Andrew will lead our new Office of Innovation, driving cutting-edge R&D while ensuring continuous advancement and integration of new technologies. Finally, we are executing on margin expansion initiatives to deliver sustainable, profitable growth. Through a combination of efforts including automation, staffing efficiencies and technology investments, we drove 355 basis points of gross margin improvement in the quarter. Earlier this year we shared our plans to improve and upgrade our lab information management system. In Q3, we successfully launched the first LIMS module and have accessioned over 350,000 new cases in the quarter through this new system. Additionally, version one of the new test compendium has launched and is now being populated. The migration to one single LIMS system is a multiyear process and these milestones represent significant progress. From a legal perspective, in September we announced that we had negotiated a settlement relating to the ongoing litigation with Natera in which we agreed to a permanent injunction on Radar 1.0 as we focused our efforts and resources on the development of Radar 1.1. Importantly, the carve-outs in this preliminary injunction remain in place so there is no disruption to patients already utilizing the technology. Radar 1.1 is now through the feasibility stage and progressing through development and is expected to clear CLIA validation in the first half of 2025. Beyond the litigation pathway, we continue to develop new MRD assays as well as evaluate opportunities for in-licensing and strategic partnership arrangements to enhance and bolster our efforts to drive innovation and bring optionality to patients who can benefit from MRD testing. As we stated in the past, we are committed to being in the MRD market and supporting patients throughout their cancer journey from diagnosis to monitoring. And now let me hand it over to Jeff to go through the financial results.

Thanks, Chris. I'll start with a little more detail on our operating results for the quarter. We delivered a strong overall performance in Q3 with yet another quarter of double-digit revenue growth, increasing 10% over the prior year to $168 million. The combination of clinical test volume growth, the ongoing shift to higher value tests, and improvements in revenue per test due to RCM initiatives continue to drive revenue growth. Adjusted gross profit was up 19% to $80 million, and adjusted gross margins improved by 355 basis points to 47.8%. Adjusted EBITDA improved 305% from prior year to positive $13 million, an improvement of $10 million. As Chris said, Q3 was our fifth consecutive quarter of positive adjusted EBITDA. Clinical services revenue of $146 million was an increase of 14% over prior year. The increase in clinical service revenue reflects a 9% increase in testing volume and an increase in average unit price due to more higher value NGS tests and strategic reimbursement initiatives. Volume growth is especially noteworthy as Q3 has historically been a seasonally weaker quarter impacted by fewer patient-provider interactions and general summer travel. As our expanded salesforce penetrates deeper into the community oncology setting, we are seeing increased adoption of NGS testing, which is driving higher volume growth. The strong demand for NGS testing and the insights it provides continue to fuel revenue growth and earnings. Despite the annualization effect of our large panel NEO Comprehensive tumor and myeloid disorder tests which were introduced last year, we still experienced double-digit growth in NGS in the face of tough comps. We delivered the 14th consecutive quarter of improvement in revenue per test, up 5% over prior year to $463. NGS testing and RCM initiatives including improved pricing remain the biggest contributors to these improvements. Earlier this year, we announced the restructuring of our commercial organization, bringing pharma services under Warren's leadership. We noted on our first quarter call that we expected ADX revenue to be in a similar range in Q2 and Q3 of this year to our Q1 performance. Q3 results were in line with our expectations with revenue declining by 10% over prior year to $22 million. The decline was primarily driven by international site closures, restructuring activities and lower Radar 1.0 revenue. However, our prioritization efforts led to adjusted gross profit growth of 6% and expanded adjusted gross margins by 644 basis points over prior year as a result of consolidation of work and standardization of operations. We expect ADX revenue to begin to accelerate in the fourth quarter. We also see the expansion of our NGS business and success of larger panel tests will be a future driver of our Informatics business as we continue to produce more data and information that pharma research teams are looking for. We are developing a comprehensive plan to further expand the monetization opportunity of our data assets. Looking at our third quarter financial overview on slide 15, adjusted gross profit increased by 19% over prior year as a result of revenue growth and operating leverage, generating higher adjusted gross profit and margins. Regarding operating expenses, sales and marketing expense was $20 million, R&D expense was $8 million and G&A expense was $67 million. The $5 million increase in G&A over prior year was primarily due to an increase in legal and professional fees including a settlement payment for IP litigation. We ended the third quarter with cash and marketable securities of $388 million, flat with the second quarter even with increased capital expenditures. Cash flow from operations was positive $9 million, an improvement of $15 million from Q3 of last year as a result of improved operating results. Our May 2025 convertible notes with the principal balance of $201 million are now presented as current liabilities on our balance sheet. Given our strong cash position and liquidity profile, we maintain our plan to use our existing cash and marketable securities to retire the 2025 notes in May. Let's move on to our revised guidance. Given our strong performance through the first three quarters of the year and our disciplined approach to operating the business, we are in the position to again increase our adjusted EBITDA guide. The previous adjusted EBITDA guide was $33 million to $37 million, up from our initial guidance of $21 million to $24 million. We are further revising our guidance range to $37 million to $40 million, representing growth of over 1000% versus last year and an over 70% improvement from the original guidance at the midpoint. Given our consistent and strong revenue and earnings growth in 2023 and year-to-date in 2024, our plan is to provide an updated long-term revenue growth target when we report full year 2024 results in February of next year. And with that I'll hand it back to Chris to wrap up.

Thanks, Jeff. It's been a great quarter and I'm proud of our teammates for working so hard to sustain performance that delivers these types of results. We plan to expand our portfolio with the launch of NEO PanTracer, a liquid biopsy, to further strengthen our strong position in the marketplace in the coming months. Our broad menu and customer experience have enabled us to serve more patients than ever in a single quarter. In addition, we continue to gain operating leverage on the business as we execute on our priorities. We're confident in our approach to the final quarter of 2024. So, now let me hand it back over to Jenny for questions.

Thank you very much. We will now be conducting our question-and-answer session. Thank you. Your first question is coming from Andrew Brackman of William Blair. Andrew, your line is live.

Hey, Andrew.

Hi, guys. Good morning. Thanks for taking the question. I wanted to ask on the profitability evolution here. You're making some nice strides on expanding margins. I think the incremental margin on revenue growth has been averaging about 60% the last few quarters. So, I guess, how should we be thinking about you balancing continued investment into growth opportunities while also expanding that moving forward? And I want to also point on Q4, it does imply a little bit of a decline in margin. So, I guess, just any thoughts there are appreciated. Thanks.

Yeah. Thanks, Andrew. I'll let Jeff take some of the financial. But just strategically, look, I think Melody and the team in ops, we had a lot of opportunity to expand gross margin. And I think through the first couple of years a big focus was on improving turnaround time. While doing that, we are just now beginning to bring things like our new LIMS system and automation to play. So, we continue to feel very confident that we can do that. I think it's about balancing priorities. So, as a leadership team, we look at the opportunities in the market and we think the market continues to be basically frothy with opportunity where we can provide those services. So, we have to invest in places like new products and sales, but at the same time making sure that we're driving expansion in gross margins so we can accelerate the bottom line. So, I think that strategy is working. But maybe Jeff, do you want to give more color to the drop-through?

Yeah. I think as you pointed out, Andrew, we continue to have very good net revenue conversion to our adjusted EBITDA line and expect that we're going to have continued favorability as we progress forward. As this year progressed, we did talk about some of the investments we are making and those investments will occur in Q4 as well. The continued salesforce expansion will be a driver in Q4. We're investing in the liquid biopsy and some of our product development as well. So, I think those will impact some of the Q4 numbers. But overall, I think as you look at our performance year-to-date, we've had very good conversion and we continue to see opportunities across volume opportunities, with pricing, with RCM opportunities driving margin improvement and continuing to get operating leverage on the OpEx line as well. So, as we look at 2025 and we'll give guidance in February, we still see a lot of opportunities to expand our margins.

Great. I'll keep it to one. Thanks, guys.

Thank you very much. Your next question is coming from Tejas Savant of Morgan Stanley. Tejas, your line is live.

Hi, this is Yuko on the call for Tejas. Thank you for taking our questions.

Hi.

Several CROs have noted soft demand from some large pharma customers due to reprioritization of portfolios from the IRA as well as cost realignment initiatives in the post-pandemic era. Could you comment on whether you're seeing any of these dynamics? And then separately, given the pricing pressures noted by a few CROs from competition, are you seeing any trickle-down effect on your pricing within the Advanced Diagnostics segment?

Yeah. I'll take that high level and I'm going to have Warren pick it up, because Warren now leads that business for us. But I think as everybody knows, there's been some industry dynamics that were causing some compression in the industry. I think Warren can correct me if I'm wrong, but I think 19 of the top 20 pharma companies, oncology is their largest spend in R&D. So, I think we feel good going forward. Warren, do you want to add a little more color to the question?

Yeah, thanks. Certainly. You're absolutely right. Nineteen of the top 20 pharma companies have oncology as their number one focus area from an R&D investment perspective. And with that as a backdrop, it's a very large and attractive market opportunity. But it is certainly fair to say that like many other peers in this space and CROs, we have seen a slowing of market growth and that is one of the factors that have impacted the performance of the pharma business in 2024. I'd say from our perspective, looking at activity levels and those sorts of things, we feel it's bottomed out and starting to show signs of recovery — by no means returning to pre-pandemic levels, but we're starting to see indications of an upward swing and we're looking to capitalize on that in terms of early-stage opportunities. In terms of the pricing side of things, I can't say that we're seeing increased price sensitivity at this particular point in time as it relates to the services that we bring to the market.

Got it. Thank you for the color. And then, also I know you don't have multi-gene panels for behavioral health, but in light of United's decision to no longer cover these, how do you think the challenges that some of the private payers have faced recently on spiraling costs are weighing on the enthusiasm for genetic testing more broadly, including perhaps using more stringent prior authorization requirements?

Yeah. I'll add payer relations. Jeff, look at the high level for us. We've been really pleased with the movement on biomarker legislation in the states and I think that's ultimately going to have a dividend. But Jeff, do you want to add more color because we're not in that behavioral health space?

I think there's at least 12 or 13 states now that have passed biomarker legislation. As we've said on previous calls, the fact that a state passed the legislation doesn't mean it automatically flips a switch for us to get paid. We still have to do the work in the trenches and work with the payers to get the work covered. I think at the end of the day for us, we firmly believe our tests are being used to diagnose and treat patients and we should be paid for them. Sometimes the testing is ahead of some of the guidelines. I think overall the biomarker legislation is going to be helpful. Over time as these larger panel tests become more prevalent, there will be more overall acceptance. We know from our clinicians that our tests are being used to diagnose and treat patients. For us, at the end of the day, that's going to be the driver for further reimbursement.

Thank you very much.

Thank you. Your next question is coming from Dan Brennan of TD Cowen. Dan, your line is live.

Hi, guys. This is Tom on for Dan. Thanks for taking my question here. I wanted to focus more on NGS in the quarter. Clearly, still very impressive, up 26%, but a modest deceleration on a two-year stack. How do you see the broader market? I mean, you had NEO Comprehensive lapping there. Looking forward from today, how do you feel about the headroom for comprehensive genomic profiling in the market and your ability to continue to gain share in a more competitive, tighter environment?

Thanks, Tom. I'll hit it a couple different ways and then maybe have Jeff or Warren or Kareem chime in as well. I think the market still has a lot of runway when you look at the penetration level. We continue to believe that we have big upside there. When you looked at our growth compared to other quarters, remember that Q3 last year was when we had launched products in Q1 and then in Q3. But I would still say we feel very strong, especially because we are still very early days in the community oncology setting. We have a strong presence in the community hospital, but it's those community oncologists where the majority of these large solid tumor panels are coming from. When you look at NGS, we probably have a very high share in heme and a very low share in solid tumor. So, we think we continue to have a lot of runway. The other reason we like that is because the majority of those customers that are buying large panels from our competitors are buying something from us. So, we're already in there. We already have a relationship. I think what you're starting to see in this volume growth is that our customers don't want to buy from multiple vendors. Having this comprehensive menu has turned out to be a strength. Warren, do you want to mention anything on the market?

I'll add a couple things. We've continued to expand the commercial organization to gain better penetration into this market. Although our NGS growth was a bit lower this quarter, we're still up almost 40% for the year in NGS revenue. So, it's robust growth and as Chris said, with some new products being introduced and getting more traction on the solid tumor side and still significant growth on the heme side, we like our position. We're investing resources from R&D and commercial perspectives and think there's a lot of incremental market share to grab.

Maybe two additional points. One is that the launch of PanTracer liquid in the first half of next year will fuel growth from an NGS perspective. Today we don't have a PanTracer liquid solution and that's a space which is growing rapidly and is underpenetrated. Secondly, we recognize the importance of product attributes and we're looking to add additional attributes to our NEO Comprehensive. Numerous avenues exist for us to increase attractiveness from a portfolio perspective. Couple that with a market that's still attractive and growing as well as investments in the commercial organization, I think that trifecta places us in a very strong position to continue the growth trajectory into 2025 and beyond.

Right. That's really helpful. And then just a quick follow up on your base business. That continues to be impressive from both a volume and pricing standpoint. I guess, were you surprised with the lack of cannibalization you're seeing in that business? I think the thesis maybe a year or two ago was that market might decelerate as new modalities come to market. Why aren't we seeing that? Has that changed your view of where the base clinical business can go over the next three years?

There's certainly some cannibalization as customers move to larger panels. That is happening, and we offset that with growth. What's working for us is the commercial strategy. The biggest element paying dividends is the 'protect' side of things: we're losing far less business than in the past. Any accretive wins layer onto a business which we're losing at a much slower rate compared to historical levels. So that's driving growth. It's a combination of factors, but effective execution of the commercial strategy is a big driver. We still see numerous additional commercial targets in the rest of this year and in 2025 to bolster growth of that base business.

Awesome. Thanks very much.

Thank you very much. Your next question is coming from David Westenberg of Piper Sandler. David, your line is live.

Hey, good morning, guys. Thank you for taking the question. So, now that you are EBITDA positive for a number of quarters and cash position is strong, what are you thinking about capital deployment? Are tuck-in acquisitions available to you now? And would you consider buybacks at this level? Also, are oncology outreach programs available to you from national labs? Thank you.

Yeah. I'm going to let Jeff take the capital deployment and then Kareem can talk about M&A and opportunities.

We finished the quarter with almost $390 million in cash. We've said we've got a convertible note coming due next year that we plan to retire with cash. That still gives us a lot of liquidity, and we expect to be producing cash in 2025. As we think about strategic priorities, we've hired Kareem in a corporate development role to take advantage of opportunities. There are opportunities coming and I'll let Kareem comment on that. From an overall capital deployment strategy right now, we've got plenty of liquidity to run the business and continue to invest in it. We'll always look at stock buybacks as an option and discuss those with the Board. I'll let Kareem talk about the M&A side.

David, we've been proactively looking at opportunities to acquire businesses to give us leverage, geographical reach, and grow our delivery footprint, especially as it relates to new NGS modalities. There are plenty of opportunities out there. We're cherry-picking and being selective in terms of opportunities that we can rapidly and efficiently integrate that are complementary to our capabilities and that we could leverage in the community channel, which is where we shine. We're also looking at opportunities to supplement our product portfolio, whether that be in MRD, which we've discussed before, but also in other modalities of testing. Today we have a bigger presence in diagnostic testing modalities in solid tumor and much more in heme; we haven't really played in the germline space and we're slowly but deliberately getting into the MRD space. We're starting to look at these areas. There are a lot of opportunities and we're pursuing them; hopefully you'll hear more in the future.

One other thing to think about is that any M&A would be very strategic, especially where we're underserved from a turnaround-time perspective in a lab. Otherwise, it's about finding strategic partners or in-licensed technology to take it through our strong distribution channel. We think we have one of the best commercial organizations, and there's a lot of innovations out there that don't have a way to reach customers. It's still early days in that process, but we're committed to driving both the top line and the bottom line.

Thank you. That was a thorough answer. Just on operating leverage — how much of the improvement has been low-hanging fruit in terms of cuts versus what remains? You're expanding the salesforce, so human capital reductions may not be feasible. Where do we think about operating leverage on a go-forward basis?

Focus on NGS, which is higher revenue and higher margin, has been a driver. We're adding higher-value business while getting more efficient. In this quarter, even with record volumes, we saw improved turnaround time, so operations are executing to increase throughput. Automation investments and the new LIMS will help over time. We're expanding higher-margin tests, there's capacity in existing labs, we're expanding our lab in Raleigh, and we have pricing and RCM initiatives. On the OpEx side, we're getting good operating leverage as well. The combination still presents a strong runway to expand margins over time.

Got it. Thank you.

Thank you very much. Your next question is coming from Mike Matson of Needham & Company. Mike, your line is live.

Hey, guys. So first, with regard to the hurricanes, was there any sort of impact to your revenue in the third quarter, or do you expect any sort of impact in the fourth quarter?

Minimal impact in the third quarter. We have seen some slowness in the October time period in the Florida and Carolina regions. We expect we'll recover that, although timing is hard to predict. Some oncologists have adjusted hours to accommodate patients, so there's likely a little impact rolling into the fourth quarter. Over time that should even out; it's primarily a timing issue.

Okay. Got it. And then just as far as the new NGS tests, PanTracer and AML Express, can you talk about the market opportunity or TAM for those?

We launched PanTracer commercially for pharma in Q3 and expect to launch clinically in the first half of 2025. This is a panel greater than 500 genes, including TMB and MSI, and we feel confident we can offer competitive turnaround times. Recent research suggests TAM is larger than previously anticipated and more underpenetrated. This is within therapy selection, a significant opportunity to supplement our current solid tumor portfolio and address a gap in our portfolio strategy. Regarding AML Express, we launched early in Q4 targeted toward diagnostic use in the hospital setting where we have high market share in heme. We've seen early demand based on the health economic value of getting results up to two days earlier, which can reduce inpatient costs. Demand is ramping quickly and operationally the test is performing well.

To frame the AML test market opportunity, it's hospital-based, not community oncology, so it's a smaller market than the community oncology TAM. But it's a space where we've been the market leader and saw substantial room to expand with that test.

Okay. Great. Thank you.

Thank you very much. Your next question is coming from Matt Hewitt of Craig-Hallum Capital Group. Matt, your line is live.

Good morning and congratulations on the good quarter. You commented that you've launched or upgraded 13 tests over the last 18 months. How much has that contributed to your growth during that period? And how should we think about new launches, particularly the ones you've commented on impacting your growth for next year?

In that timeframe there were three to four major products launched and several single-gene or line extensions. We were not competing broadly in the solid tumor market previously, so our push into that area last year is helping NGS growth. Because we've been strong in heme historically, a larger percentage of growth is still coming from heme. While launches are helping growth, I wouldn't say growth is driven solely by launches. Jeff, do you want to add?

We haven't broken out individual products. Some new and upgraded products have helped market receptiveness and pricing. NGS growth continues to be a primary driver of AUP increases and is likely responsible for roughly 60% or more of the increase in AUP. The move toward higher-end tests is driving revenue and we still see further market opportunity.

One big product we launched was the larger myeloid panel, which was a notable growth driver. The industry has been focused on solid tumor, but heme has been undervalued, and that market is still a great growth market.

That's really helpful. And you commented that you're adding to your commercial team. Could you give us a headcount, maybe exiting Q3 and your anticipated adds before the end of the year?

Last quarter we said we'd add 30 to 40 commercial people between Q2 earnings and the end of the year. We are aggressively pursuing that. Our big sales meeting is late January and our goal is to have those people in place by the sales meeting to train on new products.

Got it. Thank you very much.

Thank you. Your next question is coming from Matthew Sykes of Goldman Sachs. Matthew, your line is live.

Hey, guys. Congrats on the quarter. This is Prashant Kota for Matt. Can you talk about the pacing or timeline of R&D spend left in the development of the new Radar? And can you also help quantify the amount of R&D spend needed to fully develop this new product?

I'll give an overview and Jeff can talk numbers. Because we moved quickly on Radar 1.1 and negotiated the settlement, much of that cost has been absorbed this year. Radar 1.1 is expected to clear CLIA validation in the first half of 2025, which will get us a product to market. Radar 2.0 will take further time and investment. Andrew has been on board recently and will help direct R&D priorities during the annual operating plan process. We know we need to invest more in R&D because it's a turbocharger, but we'll allocate to the opportunities with the best return, with continued focus on heme and filling gaps like MRD and solid tumor.

I wouldn't expect incremental spend to change much from our base level today. As Chris mentioned, some things will fall off and new things will come on. The incremental decisions about where to direct dollars will be guided by Andrew. We see opportunities both from internal R&D and M&A and want to align investments with our strategy.

Got it. Thank you. Any color on how incremental the top-line step up could be longer term including the new Radar product?

We will provide long-range guidance in February when we report full-year results. Stay tuned.

Thank you. Your next question is coming from Mark Massaro of BTIG. Mark, your line is live.

Hey, Chris. Good to hear from you guys. On NEO PanTracer, how do you plan to compete on sensitivity and limit of detection? Should we expect any papers comparing data? Also, how quickly do you think you can turn on payer coverage for PanTracer liquid both from CMS and commercial? Could it contribute to 2025 revenue?

Mark, we view this market as very large — in the US there may be more than 700,000 patients per year and penetration is under 15%, so it's attractive. We expect to launch with CMS reimbursement in the first half of 2025, after which we will selectively pursue third-party payers. We'll run certain studies and validations to support coverage. We do expect this to contribute to revenue in 2025.

Andrew, would you like to discuss studies and sensitivity?

These diagnostics warrant a publication record to accompany launch. We have a couple of clinical studies in the queue for orthogonal comparisons to support the product; those are likely 2025 discussions. We're well poised to move forward and will generate data to support market adoption.

On sensitivity, until validation is fully wrapped up, we're cautious about sharing lower limit metrics publicly. We expect the test to be competitive in the marketplace. Regarding payers, we've had success with other products going through existing pathways and feel optimistic about the path forward.

Also keep in mind we have many payer contracts already — roughly 150 to 200 — because of our broad portfolio, which should help in moving coverage discussions more efficiently than companies without existing relationships.

Excellent. As a follow-up, Advanced Diagnostics has been under pressure. Can you walk through the key elements of staging a recovery in 2025? I understand you'll be going up against easier comps, but what are the key levers?

High level: this was a business that had been losing money in parts, and we made conscious decisions to change the go-to-market approach. We had foreshadowed the business would be relatively flat during restructuring. The team has driven significant gross margin expansion and handing the business over to Warren to create a new commercial strategy is starting to take root.

Mark, key aspects include market dynamics which we believe have bottomed and are starting to recover. We're launching a new go-to-market strategy for the pharma team at the end of January, with a new business model allowing increased focus on our sweet spot from a capability and profitability perspective. We're adjusting deployment of sales resources to this new model and building a robust pipeline of opportunities and statements of work. This is a long sales-cycle business, so temper expectations on speed, but in the longer term I see this as a major contributor.

We need to move on because we have limited time. Thank you.

Okay. Thank you very much. The next question is coming from Mason Carrico of Stephens, Incorporated. Mason, your line is live.

Hey, guys. I'll ask my two up front if that's all right. Could you talk about ordering patterns from doctors who start ordering larger solid tumor panels from you? Are they typically one-off orders or do they tend to move most of their volumes over once they start ordering? And second, do you think having the liquid assay could drive more NEO Comprehensive volume, given how clinicians might reflex from one to the other?

We expect PanTracer to help the solid tumor business. In our go-to-market work, we focus on accounts where we have relationships and influence. Community oncologists tend to be sticky if we manage the customer well. Customers sometimes start with one test but when we provide a strong customer experience, they move more volume to us rather than buying from multiple vendors. It's about using digital outreach with field reps and customers to increase stickiness.

Got it. Thanks.

Thank you very much. Your next question is coming from Michael Reiskin of Bank of America. Michael, your line is live.

Hello, good morning. This is John Kim for Michael. I think in the past you've talked about NGS reaching perhaps 50% of clinical revenues. Is there a clear timeline for that as we stand from the current 31%? And regarding Informatics, has there been any initial uptake or feedback on licensing the data to pharma?

On NGS share of clinical revenue: today we're at about 30-31%. It's hard to predict precisely if or when it will reach 50% because other modalities continue to grow as well. NGS is growing faster, but both sides of the business are expanding. On the Informatics/data licensing side, it's still early days with solid tumor data, and we'll continue to develop commercialization plans over time.

Noted. Thank you.

Thank you very much. Your next question is coming from Andrew Cooper of Raymond James. Andrew, your line is live.

Hey, guys. Good morning. Could you dive a little deeper on NEO Helix? You mentioned customer-facing and patient-facing technology, and clinical decision support. Is that integrating Trapelo or other acquisitions and what is the potential to monetize those products?

Hi, Andrew. The main push for NEO Helix is integrating all of our digital customer experience into a single platform. While it is capable of hosting clinical decision support and we will use some pieces of Trapelo on it, that's not our initial push. Our initial focus is a seamless customer experience with mobile enablement. This will be the first time NEO delivers a full mobile experience with our customer portal. The first rollout targets community oncology and will later include hospital-based segments. Rollout starts in 2025.

If I can sneak one more: there was a sizable deal announced in the space last night. How do you think about that M&A landscape and whether it changes the competitive landscape?

Every company has their own strategy. We assess opportunities based on payback and strategic fit. If the deal is right for them, we applaud it. We look at the same landscape and make decisions we believe are best for our shareholders long-term.

Great. I'll stop there. Thank you.

Thank you very much. And your last question is coming from Puneet Souda of Leerink Partners. Puneet, your line is live.

Given the AUP increase, you continue to see benefit from NGS for several quarters now. Is it safe to assume the AUP in the quarter is at least a baseline for 2025? And on the clinical side, can you provide how much of clinical revenues is commercial versus Medicare versus traditional hospital contracts?

On mix, we provide that in our 10-Q. In Q3, about 58% of revenues came from direct client billing, about 15% commercial and about 13% governmental. That's been fairly consistent over time. On AUP, we expect AUP to continue to grow over time, particularly as the NGS component grows. We are still having success with pricing increases and RCM initiatives, so it's reasonable to assume continued growth but we'll discuss pacing early next year.

Okay. Thanks, guys.

Thank you very much. Well, that's the end of our question-and-answer session. I'll now hand back over to Chris for any closing comments.

Yeah. Thanks, everybody. We really appreciate you taking the time. Really great questions. It was nice to have the leadership team here to give you deeper insights. We'll look forward to following up with you all soon and see you out in the market. Take care.

Thank you very much. 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.