All right, I guess we're ready to go. Okay. Hello, everybody, I'm Dave Westenberg, the diagnostics analyst here at Piper. Joining me today is NeoGenomics, Chris, Jeff, and Warren, the whole team. So we'll just start off here with Chris, you've been here for four complete quarters. What accomplishments are you most proud of?
Thanks for having us, by the way, and t hanks, everybody, for being here. I lost the over-under today on how many people, so it's good to see a group in here. Look, I'd say the things that I'm probably most proud of is the company went through an amazing amount of change, and I think it had to. I think if you think about Neo, it was a great franchise, but had kinda lost its way and had gone from a company making money and growing revenue to revenue flat to declining and losing millions of dollars. So I think the company had to change, which meant starting with our leadership. I think when you go through a change management, Dave, it starts with people and culture, to get that right.
And I think for a company to absorb the amount of change that the team has absorbed, and that's like, you know, it's about 2,200 people, and then to perform the way they've performed, I is probably what I'm most proud of. I think they've done an incredible job because we've pushed the organization in a different direction, and it's been really well-received by the team, and they're performing well.
Gotcha. Well, why don't we dive into, you know, some of those tangible improvements in Neo? What are some of the tangible improvements you've, you know, operationally, you've seen in the last, you know, four quarters?
Yeah. So I'll take that kinda high level and then maybe ask Jeff and Warren, who kinda lead to the big groups, who, by the way, are part of that change. Both are new-
Mm-hmm.
... within the last 12 months also. But look, I think the first thing was I would say, again, it's culture-related, and a lot of times in an investor conference, you probably don't talk about that. But for us, it was about embracing the mission and getting the team to focus on the patients. And I think, you know, sometimes public companies, I think, get caught too much in the share price and other things, and I think that was a situation at Neo, and so I think first of all, it was a mission. I'd say the second thing, it was about getting the right leaders.
I think, you know, when we came in together, Neo was maybe a $500 million revenue company, but I think from a leadership perspective, we probably had people that were really good to build it to a $250 million. So kinda what got you here is not gonna get you there. So I think bringing in seasoned leaders who have been there and done that and seen how you transform business. So I think the second thing is from a leader perspective. I think the third one was really getting focused on customer experience, and if you think about our business, in our industry, while we have some proprietary technologies from a testing perspective, a lot of the tests are performed by other competitors, and so you have to win on customer experience.
If you don't win on customer experience or from a service perspective, you're not gonna win. So I'd say lifting our performance there, and then I'd start to say, really more financial tangibles, is driving operating efficiency. I think we just were not driving that. If you think... Jeff will talk about this, probably, but I think converting, you know, a significant amount of revenue into cash, and maybe that's a good time to hand it off to you. And then, Warren, the last one is probably sales optimization, which is really Warren's group, but do you wanna-
Yeah, sure -
- kinda take?
I think the other thing was the focus on what are the levers that are gonna drive the operating performance of the company. And so Warren can certainly talk about volume. We've seen a significant improvement in volume. We've seen a significant improvement in our revenue per test, moving more into the NGS business, and as Chris said, also getting operating efficiency. So we're getting good operating leverage, both on the gross margin line and on the adjusted EBITDA line. And we've been converting 55%-60% of our net revenue to the adjusted EBITDA line. So as you look at 2022, you know, we finished the year at -$48 million in adjusted EBITDA and just updated our guidance, you know, for the third quarter, almost getting to break even in one year.
So just an overall significant improvement in revenue, that revenue converting to gross margin, and that gross margin and then converting with operating efficiencies to the Adjusted EBITDA line. And then from a liquidity perspective, you know, significantly improved our liquidity as well during that process.
So maybe, maybe building on that. So, I mean, in, in our quest to serve more patients and, and also, improve revenue growth and profitability, there's principally three things we focused in on, and I'll touch on two. The one was volume growth, the second one was portfolio mix, and the third one was RCM, and I'm sure that's gonna come up again in the discussion. But, you know, I think, from a commercial point of view, particularly on the clinical side, one of the first things we did is we invested commercially. We recognized that we were underinvested in terms of our penetration and coverage within the market.
So we've invested in those resources, not only in more resources, but ensuring the effectiveness of the resources that we have, and then deployed a relatively simple commercial strategy, which is protect, expand, and acquire. And sort of dissecting the prior business performance, one of the biggest challenges was we were losing too much business. We were winning business, but we were losing too much, so therefore, the sort of incremental gains were somewhat suppressed. So really started to focus on protecting existing business. That comes back to the customer experience side of things that Chris was talking about, and we really made phenomenal inroads in kind of slowing that loss.
At the same time, with the added penetration and market coverage, we focused on driving growth, and particularly growth with regards to NGS and other higher-value tests, so that's helping out the mix. And really, the combination of more growth from a volume perspective, which allows us to leverage fixed cost leverage in our lab ops, higher value test, i.e., NGS and FISH, is really what's allowed us to see both a very strong top-line development from a revenue point of view, but also bottom-line profit.
Yeah. Thank you. So back to NeoGenomics generally, can you talk about the advantages of being a one-stop shop in oncology?
Yeah, I think Warren would-
Yeah, certainly. I mean. So we have a broad portfolio, more than 600 tests. We cover both heme and solid tumor oncology testing, and I think the key thing to say is we only do oncology. So, you know, as we you look at the customers that we serve, and there's principally at a high level, there's probably three different segments that we would look at. There's academic hospitals, that's a relatively small segment. There is a community hospital, and then there's community oncology. And one of the common denominators across all of these segments is kind of resource constraints and just general profitability. These are the pain points that these institutions are facing, and they're looking for partners who can provide a solution to those resource constraints, the productivity challenges, and profitability.
A broad portfolio really allows them to optimize their send-out strategy. So most oncology testing today is sent out to a third-party provider. The fewer suppliers that you have in order to do that, the more you can optimize workflows and get efficiency. So that's a big benefit for us. You can principally send most of your oncology requirements to us, and we'll be able to address it for you through one of our labs. So the breadth of portfolio certainly helps there. The second aspect, which is really attractive for us, is you know, many of the pathologists who's our key core point within the hospital setting, can see a reference lab as somewhat as a threat, because we have pathologists as well that do the interpretation and the resulting.
But we introduced a concept called TCPC, which is technical component, professional component, whereby we would happily do the wet work, the technical component, but allow the pathologist in the hospital or the independent pathologist to actually do the professional components and bill it. So it kind of created sustainability for them, which drove a lot of stickiness within the pathology segment for us. So that TCPC service is another huge value driver that we have across most of our 600 tests. So that's, you know, that's a second aspect, but, you know, if you move higher up the decision cycle to sort of the C-suites, et cetera, it really is about economies of scale.
Limiting the number of suppliers that they have and looking for ways to drive efficiency within their institutions, which ultimately allows them to improve profitability, which is a major pain point for them.
All good answers. So, you know, going back, I mean, I think you're the share leader in oncology. However, it's a pretty fragmented market overall.
Mm-hmm.
So where do you think your share is in oncology testing? You know, maybe factor in into that total equation, anatomic pathology or without anatomic pathology, what share would you be at? And then you keep noting share gains in your calls. Who do you think you're taking share from, and do you think it's from internal hospital's internal labs, or do you think it's from competitors generally? So where are these share gains all coming from?
Yeah, I think, maybe I'll have you talk a little bit-
Okay.
You know, I think about, you know, the market share, but I think as far as it being, you know, out in the market, there's so many different segments. So if you look at Heme, for example, we'd be the market share leader, which is probably 25%. But if you look at solid tumor, which is this fast growth NGS business, we would only have 1%-2% market share. So I think it really depends on the sector. I would say that we would be in the lion's share, market share leader, but at a very small percentage - because of how broad it is, because you have the Labcorps and the Quest, but then you have the Oncotypes, like the, you know, the Guardants and the Tempuses and things.
Mm-hmm.
But do you want to talk a little bit about where we're moving? Because I think that has been a big-
Yeah.
... lever that we've been winning.
So I think there's... It is not one place. It's actually broad-based, and it does depend on the customer segment. So in the hospital settings, it's actually we're winning more from some of the bigger reference labs that are out there. So, big box reference labs, who just from an oncology perspective, just haven't got the level of service and the scientific and clinical expertise that the pathologists, et cetera, are demanding for. So that's where we see it in the hospital setting, because as Chris said, in the solid tumor side of things, which is much more in the community setting, we have a very low market share. So it's not difficult for us to kind of penetrate and take share. We kind of bit of a Trojan horse type approach there.
So within the community setting, it's certainly the Oncotype, the Carises, Foundation, Tempuses, et cetera, where we see certainly a lot of our share gains actually coming from, driven by operational benefits like turnaround time, in some instances. In other instances, also differentiation of test from a specification and a clinical utility point of view.
Yeah, maybe two points on that. So this turnaround time, if you think about a service business, getting the result quickly, and I would say if you went back two years ago, our turnaround time for a test may have been seven days, and we weren't even getting to seven days. So imagine—like we talk about from a patient perspective, you go with your dad to the oncologist, and they tell you they don't have the result yet, right? No one wants to have that happen. So I would say that we took something that was a significant disadvantage two years ago, and I believe today we're probably the best. Like, I think that we've done a significant improvement, and we talked about in the quarterly call that we're up another 20%, so four quarters in a row with big gains on turnaround time.
Because I think there's been a-
Massive-
... a really, really big effort there, and I think that's made a difference. The other thing is that we like from the market share perspective, is that we only do about 25% of our business in NGS, and that is really this high-growth market. So we have tons of runway-
Yeah.
I think as we move share. And the reason I think we've been able to do it in the Oncotypes with these community oncologists is they're doing testing with us anyway. We just weren't getting maybe solid tumor, because as a heme leader, we may have been doing some heme work. And so I think it's been a lot of times, not just a brand new, you know, account, but a lot of this expand.
Yeah.
How do we go into an existing customer and expand their portfolio? I think that's been the-
And maybe-
... the other piece here.
One additional aspect is that when you go to the community oncology setting, the block retrieval process still comes through the pathologist in the hospital because that's where the tumor was removed. Because we have great relationships with most of the path labs, because that's our sweet spot, it allows us to simplify the block retrieval process. I wouldn't want to say it makes it easy, but it simplifies it because we have the relationships, we have sort of daily interaction with those pathologists because we're doing their hospital work as well.
... Well, I'm just gonna ask, I'm sorry, one question on the quarter. Of course, the ASP stood out pretty strong. I mean, it was like $40 more than I think my number. So just can you just dive in again a little bit more, break that down into what it is? I know, you know, NGS, and I think there was some a lot more collections, but if you can dive into-
You wanna take it?
Sure.
The details of that.
Yeah, so-
How sustainable that is.
So we said on the call, so the NGS was driving approximately +60% of the overall ASP. So, that's 25% of our business growing over 35%. That's continuing to drive revenue, and at higher margin revenue as well. And so we're seeing the pull-through effect of that. The balance is basically two other components. One is just net price gains. And so we are seeing price gains. About 2/3 of our clinical business, we're billing directly to hospitals. We haven't historically done a lot of rate increases there, so we've now started on an annual process of doing rate increases. Those will occur over time. These contracts expire throughout the year, so you won't necessarily see a spike in any one quarter, but we are getting price increases there.
The other third of our clinical business is managed care contracting, where, again, we haven't been as sophisticated or coordinated in our approach to getting price increases there. So we've taken a systematic approach and are starting to see some benefits there in getting managed care pricing. Then the final bucket is just revenue cycle management. I've talked about this before on some of our previous calls. It's getting paid for the work we're already doing, and so there is still a fair amount of work being done in our industry, that doesn't get paid for a variety of reasons, be it prior authorization, medical necessity, medical records, et cetera. So we've really focused our efforts on how do we close that gap between what we're contractually expected to be paid and what's actually being paid, and we're seeing good success there. And we think this isn't...
We think this is a multi-quarter opportunity for us. It's not just kind of one and done. It's, it's complex. You know, reimbursement is complex, and I think we have to simplify it as much as possible and make sure we're getting paid for the work we're doing. And obviously, when we do that, we're already incurring the cost to do the test, so it's basically 100% accretive to, to revenue, gross margin, and Adjusted EBITDA.
Got it. You know, I think I wanna dive into the sexiest part of that, and that's the NGS mix, of course. There's blocking and tackling, which is good, too. So how fast do you see that growing over the next five years? I mean, just how underpenetrated are you in that category? How fast can you expect that to be in the next, say, five years?
Yeah, well, if you look at NGS as a category, especially in solid, you know, the market, all market indicators have it growing 15%-20% as a, as a sector, right? So that's kind of... So look, high water is gonna lift all boats kind of thing. The whole market is growing, so I think that helps us a lot. I think the, the second thing is we've been significantly behind from a competitor perspective in our portfolio offering on solid tumor. We launched a new solid tumor product at the end of Q1, beginning of Q2, and I think that, I think bringing innovation into that was important, you know, for us. I think, you know, Jeff talked about this, you know, why it's 25%, it's growing above 35%.
So look, I, we think the runway is pretty long because the penetration rate is significantly low on NGS. There's still a lot of... And I'd say it's probably less than 25%-30% penetrated in all of cancer. There's still a lot of single gene testing going on. So I think we see that continue to-- that growth, that market growth of +15% continuing out for outlying years, and we think we'll get our, our fair share, especially because of our presence and now our technology. We're just behind on technology is why we were, we were left behind.
That's great. Okay, so then my next question is actually already antiquated because I was gonna ask about PAMA, and it looks like it was just pushed back.
Yeah.
That's good. Maybe we can talk about PAMA in 2025.
Actually, yeah.
And risks in LDT regulation.
Yeah.
How you're positioning for that?
Yeah.
You know, what, what are the chances of that kind of thing? So...
So look, I, I think a lot of us believe the FDA is coming. I think the question is not if, it's when, and, and what level are they coming in at? I think there's a lot, you know, that's still under review with the FDA, and I think a lot of comments have just been received. But I will say that because we believe it's going to occur, we've been starting to run the business, thinking that under an FDA environment. So if you think about these change out that we did in the leadership team over the last 18 months, all the folks in the clin reg side we brought in to help us all come from FDA-regulated environments. For the last probably 18-24 months, all our new tests are being developed under design control. So I think we're putting the pieces in place.
For us, a lot will depend on grandfathering, so how many tests are grandfathered? And there's a lot of differing opinions on that. But, I think we feel pretty well prepared, and we think it actually, for companies like ours, will be a positive ... because I think we'll have the ability, I think, to be able to pivot as the industry starts to pivot.
Okay.
I think maybe just building on the positive, if I could, and it may be just a real example is, I mean, one of the risks that we see in our business is internalization. Labs that wanna run their own tests feel they have enough scale, with the additional regulatory burden that would come with an FDA regulation. Many labs would probably question that, and already having discussions with multiple labs who have internalized in the past, who now feel it's as marginal as it is, and this additional burden is actually gonna push it over the edge. So I think we may see some labs that had historically internalized to actually it continue to move back to an outsourced model just because the burdens are just so much higher. So there's some positive here as well.
Okay. And then again, I'm gonna jump back on you on PAMA, and-
Yeah.
... I'll just say, you know, I've covered Neo for a while, and, you know, when I learned about the company, I mean, it was, you know, Doug was telling me, "Just expect our ASPs to go down." And, you know, that's not happening, but I know on some parts of the portfolio, with PAMA being frozen, you probably aren't getting the down price? But, you know, how should we think about pricing in that part of the portfolio that's not NGS?
Yeah, you want to talk about-
More efficient-
You've seen that? Yeah.
Yeah, well, I think-
I see-
So I think it's important to note, you know, if you look at our clinical business, I mean, our government, you know, our government Medicare business is about 15% of our-
Yeah.
... of our total clinical business. So at first, it's a relatively small piece of our overall business, and where we have-
15 of 80.
Yeah, 15 of 80.
15 of 80.
15%-
Yeah.
... about 80% of the total revenue, and we're in this. In the past, we've had some revenue pressures from Medicare reimbursements going down 1% or 2%. You know, we are more than offsetting that with price gains that we're getting now on our client direct client bill and our managed care pricing. So I think that dynamic has changed. And then, if you add the mix component on top of that, where we're continuing to go to the higher value tests, you know, we see definitely runway for ASPs to continue to go up, you know, for the foreseeable future.
That's great. Okay. So maybe let's just pivot to MRD. I think that's one of the more exciting areas of the portfolio. How... You know, what do you think is your key differentiation in minimal residual disease?
Yeah, look, for us, it's definitely around the sensitivity. So I think if you even think about the indications that we're going after: breast, head, neck, and lung, where sensitivity is incredibly important. If you look at colorectal, I think one of the things about colorectal, it sheds a lot, and so I think multiple tests will pick it up. But our test is about, I think, it's 10 x more sensitive to the leading tests on the market, and that makes a huge difference in places like breast and head and neck, and lung cancer. So I think we feel really good about our positioning and more and more clinical data is coming out and showing that around the sensitivity.
Gotcha. And what do you have coming down the pipeline in MRD in terms of studies, in terms of submissions, in terms of what are the key catalysts?
Yeah.
[crosstalk]
So we have about 25-27 clinical trials or studies that are ongoing. I think San Antonio's next week, which is the big breast symposium, and we will have several papers there around breast. So we're, I think we're pretty excited about. We look to continue to expand that indication that we have on breast. The other thing is we've submitted to MolDX for head and neck, we've submitted to MolDX for lung. We submitted those in late Q3, so we think we'll hear back by late Q4. So I think for us, that's, those are really big pivot points. I think the next stage for those indications are really around the commercial payers.
... and what are we doing, starting to move commercial payers. Many, many states are starting to move to this biomarker, where, from a governing perspective, they're making reimbursement come. So I think we feel pretty good about that pathway. I think after that, we'll probably bring colorectal back. As you may have known, we missed on colorectal-
... on the front side. If you go back about 18 months ago, before we were here, but about... I think it was about 18 months ago-
Mm-hmm.
... we submitted MolDX, but we didn't submit with publications, and we didn't get approval.
Mm-hmm .
We now are doing a head-to-head trial against the one that has been, which is Signatera. But that probably won't read out-
Yeah.
... till the end of 2024 or early 2025.
Oh, okay.
Yeah, and then we do have. Sorry, we do have trials in melanoma, bladder, so many other areas.
IO as well.
Yeah, IO.
Perfect. All right, and then, maybe go to the Pharma Services business. You know, it used to be a fairly good business with a high backlog. I think there is a little bit more headwinds now with biotech spending-
Yeah.
... than you have relative. You know, how fast, and, you know, we don't have a crystal ball here. You know, when does that turn around, in your opinion, and-
Yeah. Do you wanna talk about how we've disclosed the financials, and then I maybe will come into some other-
Yeah. So I think, you know, we've said a few things about the pharma business. First, you know, we took a disciplined approach to looking at low margin business and made decisions to exit some contracts. And so that has been occurring throughout the year. But as we discussed on the last call, our gross margin has gone up over 400 basis points during the year. So that was a deliberate, you know, decision on our part to de-emphasize some lower revenue, lower margin business. We did start to see some of the macro impacts really in the second and third quarter, starting to hit, where we hadn't seen it previously.
I think focusing on the top 30 pharma, there's still a lot of spend there that's occurring. And so if you look at our pharma, you know, advanced diagnostics business, we grew at 16%-17% through the first three quarters. We expected it to slow in the back half of the year, and we saw that in Q3, and do expect we'll see a few more quarters of that. As we get into the back half of 2024, we'll probably expect more acceleration then.
Yeah.
Right. All right, and then, you know, I'm just gonna ask, you've been cashflow. Traditionally, I mean, I think of Neo as that company that always has that kind of the break-even cashflow. But, you know, well, philosophically, is Neo an investing company with some cashflow burn, a cashflow-generating business, or should we think of it as a cashflow-neutral business?
I think, yeah, I would say we're transitioning right now.
Yeah, yeah.
I would say, if you look at-
Interesting.
... the first three quarters of 2023 versus 2022, we cut our cash burn in half, and our cash flow from operations improved almost 70% from the first three quarters of 2023 versus 2022. We said we're gonna be Adjusted EBITDA positive in 2024. We thought we were gonna be Adjusted EBITDA positive in Q4. When we gave guidance initially in the year, we actually were positive in Q3. So we expect to be positive Adjusted EBITDA for all of 2024, and we've said we expect to be producing cash in 2025. And so that burn is decreasing, and but while, you know, we are still investing, we still have a very strong balance sheet. So I think our view is we're gonna do both.
We're gonna grow the business in a disciplined way, top line and bottom line. We're gonna manage our investments appropriately, but we're still gonna invest, but we're gonna reach that tipping point when we get into 2025.
Yeah, and I think... Look, I think that's been a big question. I mean, I think at the end of the day, from a business perspective, you have to build long-term sustainable growth. The thought of burning hundreds of millions of dollars of cash on, on the hope, and look, philosophically, we just disagree with that.
Yeah.
So I think you see that, like, one of the things that we're doing from a profitability perspective is we're reinvesting a lot of these savings back into the business, 'cause we want revenue growth. And we think in this industry, you can get 8%-10% revenue growth in mid-teens business and build that sustainable growth. And so I don't know that that has been philosophically, but I think as we've all come in and, and evaluated the business, we think that's realistic, and that's kind of what we' re driving to.
Yeah.
When the time is right, we'll look at the acquisitions and how we deploy other capital, but with the thought that we turn it profitably. We don't just buy revenue.