NeoGenomics, Inc. (NASDAQ:NEO) Q1 2024 Earnings Call Transcript

NeoGenomics, Inc. (NASDAQ:NEO) Q1 2024 Earnings Call Transcript April 30, 2024

NeoGenomics, Inc. beats earnings expectations. Reported EPS is $-0.02, expectations were $-0.03. NEO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the NeoGenomics First 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. Kendra Sweeney, Vice President of Investor Relations, you may begin your conference.

Kendra Sweeney: Thank you, Holly. Good morning, everyone, and welcome to the NeoGenomics first 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; 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’ll be making 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 company.

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.

Chris Smith: 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 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 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 continued 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 and growth mindset and our teammates show each day their dedication to improving patient care.

This morning, though, I’m going to focus on our three financial priorities. As we continue to profitably grow our core clinical business as we execute on our commercial strategy, which is protect, expand, acquire. This has contributed to our strong volume growth, increased AUP and improved mix. The mixed shift towards higher value modalities and tests that 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 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 commercial synergies and drive growth as well as improving 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 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 and 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 it’s 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 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 continue 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 LTTS that would not be required to get pre-market 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 29th 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 two patents at issue are unpatentable in the 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?

Jeff Sherman: 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 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 to 149% from prior year to 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 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 continues 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 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 in 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 prior year and adjusted gross margin was 45.3%, an improvement of 180 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 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 cost for this litigation as well as the costs related to the lab closure are being added back to adjusted EBITDA as non-recurring 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 prior year. The first quarter is typically the largest use of cash quarter 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 the 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. I will now turn it back to Chris for his closing remarks.

Chris Smith: 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 on our strategic priorities. We believe we’re 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 on a daily basis. Thanks for your time. And we’ll now open up for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question for today is from Mark Massaro with BTIG.

Chris Smith: Hi Mark.

Mark Massaro: Hi, guys. Hi, Chris. Congrats on a strong quarter in Q1. So I heard some interesting commentary about, I think, that you’re starting to evaluate M&A opportunities. And then I heard that you’re planning to participate in the MRD market one way or another, if those are my words, not yours. But can you just give us a sense for maybe your confidence about RaDaR litigation? And then can you speak to maybe the types of things you’re looking at? Are you looking at partnerships or potential all-out acquisitions? And just give us a sense for what you’re seeing in the marketplace. It appears to me that valuations are pretty depressed. So maybe an outright acquisition could make some sense.

Chris Smith: Yes, Mark. I’m going to hit 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 hit 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. And that really to us, is really delivering double-digit growth and improving the operating earnings at a faster rate. And that’s gone incredibly well. I think that now being said, we believe there’s some interesting opportunities that we think strategically would help our mission and kind of the vision for the company to grow. And so Ali took on the role of BD beginning of the year.

We’ve hired, we’ve brought on, built out a team there just to start to explore those. So I think, we definitely see that as an opportunity because we really think we’re very uniquely positioned to kind of lead this oncology diagnostics testing business, right, 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 amendment to RaDaR?

Ali Olivo: Sure. So I guess we’ll start backwards. So there’s three 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. And that could take many forms. It can, you’re right, valuations are depressed. It could take 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.

Mark Massaro: Okay. Great. I’ll keep my question to one.

Chris Smith: Thanks, Mark.

Operator: Your next question is from Puneet Souda with Leerink Partners.

Chris Smith: Hi Puneet.

Puneet Souda: Hi, Chris. Hi, Chris. Hi, thanks for taking my questions. So, just one on the clinical beat that you had. It’s really great to see AUP continues to work, so congrats there. But you came in $7 million ahead of us and the street number, I believe, as well. But you’re not raising the full year guide. So just wondering, where’s the moderation? Is it on the pharma business or on the clinical side? I know you talked about a weaker pharma environment. Obviously, we’re seeing that on the pharma side. But just wondering what, are some things that we ought to consider?

Chris Smith: Yes, I’m going to let Jeff kind of hit it, getting into the detail. But look, at a high level, you did hear me talk about not only kind of the macro issues in pharma, but also kind of some operational challenges in that business. And look – I would say from a strategic perspective, bringing Warren over to lead that business, and 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. And, Warren grew up a lot in the pharma business, key roles at Millipore and being able to call on that. And so, we think that’s going to make a difference in the back half of the year. But as far as specific guidance, let me let Jeff kind of comment.

Jeff Sherman: Yes, sure. Thanks, Chris. Yes. So, Puneet, I think as we looked at guidance, we’re only a couple 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. And as we looked at our Q1 performance, we were about $6 million ahead of consensus in Q1. So 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 do 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 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. And we’ll look how performance happens in Q2, and we’ll reevaluate guidance as we exit the second quarter.

Puneet Souda: Got it. That’s helpful. And then just a quick follow-up on the FDA LDT rule. I mean, thanks for your comments, and it’s great to see the majority of the portfolio is protected here, despite the rule. When you, Chris, when you think about the next round of tests and the products yet to be launched, for those to go through the FDA approval process, how are you thinking about the cost? Do you think it raises the cost for those, even though that process is over the next, three to four years? And maybe just talk to us at a high level, how do you see this FDA LDT regulation implementation playing out?

Chris Smith: Yes. So look, I think it’s, 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 at 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 of the business, one of the things that we did as a leadership team is everybody that we brought on has come from a regulated FDA environment. So the person that runs QRC grew up in only FDA regulated. So, we started probably 18 months ago of putting the systems in place, including design control and new products. And so, we’ve been going through that process. We’ve got two key products that are under development now that are kind of running through that process.