Q4 2023 NeoGenomics Inc Earnings Call

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Welcome to the Neogenomics fourth quarter and full year 2023 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.

Kendra Sweeney: You may begin your conference.

Thank you John and good afternoon, everyone and welcome to the Neogenomics fourth quarter and full year 2023 financial results call.

With me today to discuss the results are Chris Smith, Chief Executive Officer, and Jeff Sherman, Our Chief Financial Officer.

Additional members of the management team are available for Q&A, including Vishal victory President of advanced Diagnostics Warren Stone President of clinical services Melody Harris President of Enterprise operations, and Alio, Levo General counsel and head of business development.

Call is being simultaneously webcast, we will be referring to a slide presentation that has been posted to the investors tab on our web site at IR Dot Neogenomics Dot com starting.

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.

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 are under no obligation to update or revise any of these statements.

During this call in order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.

The non-GAAP financial measures presented should not be considered an alternative to the financial measures required by GAAP should not be considered measures of liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies.

Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table available in the press release, we issued this afternoon I will now turn the call over to Chris Smith, Chief Executive Officer of Neogenomics.

Hey, Thanks, Kendra and welcome everyone. Thanks for joining US this afternoon to go through our fourth quarter and full year financial results as always I really want to begin with our mission and vision statement, because it's what motivates our company and our teammates on a daily basis are mentioned and neo has stabilized by improving patient care and we just had our global sales meeting at the end of Jan.

And many of our teammates shared how cancer is impacted them or their families and how we're making a difference in their lives. It's always a great reminder of why we do what we do and I'm. So proud of the impact we're having on patients in local communities we serve.

Now, let's move to slide four and get into the fourth quarter highlights as you can see we had another strong quarter growing revenue, 12% over prior year to $156 million clinical services revenue increased 20% driven by strong volumes across all of our modalities and another increase in revenue per test as a highlight ngls grew in excess of 40.

<unk> percent and now represents over 25% of our clinical revenue.

The strong growth in clinical services helped to mitigate the expected lower revenue in <unk> due to a strong comparable in <unk> in Q4 of 2022 as well as macro conditions in pharma sector and margin optimization initiatives that we took in 2023.

From an adjusted EBITDA perspective, our progress has outpaced our internal plan, we achieved positive EBITDA.

EBITDA in the third quarter of 2023 and significantly improved again this quarter. Adjusted EBITDA was 900 up 900% as compared to Q4 last year to a positive $9 million.

Adjusted gross profit was $73 million, representing a 46, 7% margin an improvement of 225 basis points compared to Q4 and 2022.

Turning to slide five for the full year 2023 results revenue was up 16% versus prior year to $592 million driven by penetration in the community oncology market higher volumes, a shift to higher margin modalities.

And improvements in revenue cycle management.

Adjusted gross profit was $264 million, representing adjusted gross margins of 44, 7% and adjusted EBITDA was positive $3 million for the full year, an improvement of $51 $5 million or 107% versus prior year.

Now on slide six I'm pleased that the fourth quarter continued the trend that we've seen throughout 2023, a consistent sequential improvement in revenue adjusted gross profit and adjusted EBITDA.

Notably our revenue growth has been strong each quarter of the year, we built up momentum of reaching positive adjusted EBITDA in Q3 and carried that into Q4, we believe that we have laid solid foundation for growth in 2023, and expect that momentum to continue as we move throughout 2024.

Let's move on to slide seven.

As you may recall at the beginning of the year, we laid out our four focus areas for 2023. They included profitably growing the core business accelerating advanced diagnostics driving value creation and enhancing our people and culture.

The more time I spend in the business the more impressed I am with our unique competitive position in the marketplace with a breadth of cancer tests, our operational capabilities and passionate team mates that lead our business every single day.

We are a leader in oncology testing with significant share of patient test volume in the U S. Our deep relationships with community pathologists and oncologists provide us an advantage in the market and our focus on oncology testing has allowed us to develop extensive patient databases and relationships and we view ourselves as a collaborative partner to pathologists oncologists.

<unk> Biopharma companies we serve.

Beyond these market conditions, it's a strong execution by our teammates enable us to deliver such strong quarterly and full year results to our stakeholders. Our teammates are the foundation of our company and we have strengthened our team throughout the year with key hires at all levels of the organization, including sales lab operations and corporate functions.

These new hires joined a highly talented group of individuals are varying backgrounds and experiences can contribute towards extinguished culture that reflects our commitment to diversity.

Equity and inclusion.

This afternoon, I'm going to focus on our three financial priorities.

We continue to profitably grow our core business as we execute on our commercial strategy protect expand and acquire.

Which has contributed to our strong volume growth increased AEP and improved mix.

Execution of this strategy enabled us to serve more than 600000 patients during the year. Our continued improvement and turnaround time has contributed to or add at or above market growth rates across all modalities. In addition, the mix shift towards higher value modalities and test has supported the delivery of yet another quarterly improvement in revenue.

Per test over the last 18 months, we've doubled the size of our sales force increasing coverage and penetration. We also introduced neo access and <unk> software solutions to support providers in their clinical decisions and inform patients with upfront benefit checks as well as to identify patients who may be mark biomarker eligible for new therapies or a clinic.

Trial.

As a result of our increased coverage clinical support and patient centric mentality, we maintained our customer experienced leadership in the market with a three point improvement in net promoter score, which is now at 70.

Within our advanced diagnostic Division, which includes pharma services informatics and R&D, we continue to focus on acceleration of innovation and R&D AVX gross margins improved 368 basis points over Q4 of 2022.

We built a robust product development roadmap to maintain a competitive position and solid tumor therapy selection MRV and <unk> with the goal to gain market share in solid tumor and maintain our leadership position in heme.

On the R&D front, we launched 12, new or upgraded assays across heme and solid tumor in 2023.

Within informatics, we announced a collaboration to advance heme research and AI solutions with a data set that covers over 1 million patient lives across more than 1000 oncology clinics.

The progress and innovation was displayed throughout the year as we presented new data at several conferences.

We are focused on driving value creation from a financial perspective, and we are pleased that we have delivered even further margin expansion in Q4 with efficiencies driving enhanced operating leverage.

Our enterprise operations team has delivered yet another quarter of progress and turnaround time, ending the year with 28% improvement over Q4 of 2022.

We have now completed the consolidation of three international labs, primarily into our Cambridge UK location.

Earlier this year, we kicked off our lens project that will bring all of our prior acquisitions that were utilizing separate limb systems onto one platform, which will further enable our digital transformation strategy.

We have now completed the first phase of user requirements and expect to begin to see the benefits of <unk> in the back half of 2024.

Before I hand, it over to Jeff I do want to address the ongoing litigation regarding radar.

It's our policy not to comment on ongoing litigation How's.

For an administrative stay in a stay pending appeal from the Federal Circuit Court that briefing was completed February 20th.

Now, let me turn the call over to Jeff to review, our Q4 and full year financials in more detail Jeff.

Thanks, Chris and good afternoon, everyone I'll begin with a little more detail on our operating results for the quarter as Chris said, we continued the year with revenue experiencing double digit growth over prior year.

Fourth quarter revenue was 156, million% to 12% increase over the prior year and a two 4% increase from Q3 23.

Revenue growth was driven by growth in clinical test volume, a continuing shift to higher value test and improvement in revenue per test driven by business mix and revenue cycle improvements.

Adjusted EBIT improved 900% from prior year to positive $9 million Q.

Q4 marks the fifth consecutive quarter that adjusted EBITDA increase from prior year, we generated significant operating leverage as revenue favorability flowed through to the bottom line with over 60% of revenue growth slowing to adjusted EBITDA.

Looking at slide nine clinical services revenue of $130 million was an increase of 20% year over year, driven by a 13% improvement in revenue per test and a 6% increase in volume.

Growth and optimization of our sales force along with the effective execution of the commercial strategy resulted in higher volume growth.

Turning to slide 10 average revenue per clinical test increased by 13% over prior year to $441, representing an improvement for the 11th consecutive quarter versus prior year as we maintained focus on higher value test and revenue cycle management initiatives as we shared with you in the past.

<unk> is a strategic priority and accounts for over 25% of our total clinical revenue for the year, New NGL portfolio additions and the focused effort of our sales team continued to fuel accelerated in GFS growth.

Turning to slide 11, as we forecasted on prior quarterly calls advanced diagnostics revenue declined 17% over the prior year in Q4, but it was up 5% sequentially to $26 million AVX.

<unk> revenue did grow each of the first three quarters of 2023 versus 2022. However, Q4 of 2022 was an unusually strong AVX quarter with revenue growth of over 40% versus prior year the.

The expected decline in revenue was partially due to macroeconomic conditions in pharma R&D spend as well as our decision to rationalize our global testing sites and low margin contracts.

The focus on profitability and margin growth is driving performance and AVX with adjusted gross margins expanding by 368 basis points versus the prior year.

Similar to our clinical strategy in 2023, we are expanding our AVX sales organization in 2024 to further accelerate profitable growth and expect to see benefits from this initiative as the year progresses.

Looking at the income statement on slide 12, adjusted gross profit increased 17, 8% over prior year and adjusted gross margin was 46, 7% an improvement of 225 basis points over the fourth quarter of last year, adjusted EBITDA was positive $9 million and $11 million or 900% improvement versus.

Prior year.

These significant improvements were driven by both higher gross profit and disciplined cost management, which highlight the operating leverage in the business.

Regarding operational expenses sales and marketing expense was $18 1 million as we continued to increase our commercial investment G&A was $59 8 million and R&D expense was $7 1 million.

Turning to the balance sheet on slide 13, we ended the fourth quarter with cash and marketable securities of $415 million. We continue to make good progress and diligently managing our cash and are focused on accountability and discipline oversight of operating expenses cash flow from operations was a positive <unk>.

$18 million in the quarter, an improvement of 21 5 million or 583% from Q4 of 'twenty two.

Now, let's review our full year 2023 financial results starting on slide 15 for the year, we increased revenue by 16% over prior year driven by increases in test volume revenue per test and in GFS revenue and clinical services adjusted gross profit increased by 27 five.

5% to $264 million as a result of higher revenue and effective cost management adjusted EBITDA improved 51 5 million versus prior year due to improvements in revenue and gross profit.

Looking at the balance sheet on slide 16, we ended the year with cash and marketable securities of $415 million.

Cash flow from operations improved $64 million or 97% from 2022.

This strong performance and reducing our cash burn and provides us with multiple avenues to address our upcoming convertible notes due in 2025, we expect.

To provide more clarity on our near term maturities on our Q1 2024 financial results call.

Now turning to our 2024 outlook.

We continue to see strong revenue growth and an increase in NGL product mix and are very encouraged by our new and updated tests, which provide higher operating leverage to the bottom line.

We have made the necessary and appropriate investments in our teammates to ensure that we have a world class group of people, who are aligned with our mission of serving patients and saving lives as we continue to build this business brick by brick I am more confident in our future than ever.

Moving on to slide 18 for the full year 2024, we expect revenues of $650 million to $660 million, representing 10% to 12% growth in adjusted EBITDA to be in the range of 21% to $24 million, representing 600% to 700% growth.

In summary, 2023 represented a strong year of execution and financial performance, which positions us well to continue the momentum in 2024, we will continue to invest in growth initiatives, including investments in sales force optimization and expansion in our clinical and AVX businesses.

And increasing investments in R&D product and business model innovation to further enhance our menu of tests.

In addition, we will be making targeted investments in operating efficiencies, including automation and consolidating and or multiple limb systems into one consolidated platform over the next 24 months.

These investments will drive long term margin growth in the future and are reflected in our annual adjusted EBITDA guidance range.

On our cost structure the revenue growth in 2024 will drive operating leverage and our adjusted EBITDA growth will exceed our revenue growth.

We anticipate and we anticipate the seasonality of our business to be reflected in each quarter of 2024. Therefore, we expect revenue to be down sequentially. In Q1, 24 in a range of $148 million to $151 million, representing 8% to 10% growth over prior year and expect our strategic initiatives to do.

A higher growth rate as the year progresses.

Based on our strong performance in 2023, and our confidence in our strategic initiatives in 2024 and beyond we are increasing our long range revenue growth target in outlying years from 7% to 9% to 10% plus in our core business excluding MRV.

Thanks, Jeff.

I'm very proud of our team's Q4 and full year progress, including the strong revenue growth of 16% for 2023 and significant improvement in adjusted EBITDA and cash flow from operations.

Meaningful progress in the execution on our strategic priorities and therefore, we're able to reach the high end of our raised guidance.

Our guidance for 2024 and beyond reflects our confidence in our business. We believe we are well on our way to becoming the leading cancer testing information and decision support company. We will continue to build on the foundation, we have laid over the past several quarters deliver long term sustainable growth I'm excited for our teammates and our customers and most of all for the patients with <unk>.

Serve on a daily basis.

Speaker Change: Thanks for taking time to connect with us today and I'll throw it back to the operator.

Speaker Change: Thank you at this point, we will open the line for questions. The company asks that each person limit their questions to one so that we may hear from everyone within the hour allotted for this call. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two.

If you'd like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Thank you.

Okay.

Okay and the first question comes from Alex Nowak with Craig Hallum. Please proceed.

Okay. Good afternoon, everyone, Hey, congrats on the results I am pleased to give you a lot of questions on the call around the guidance and digging into it but I guess I wanted to ask one around the FCA and the LPG and the potential of SBA coming out and issuing final rules, depending on the definition of an LDC Neo <unk>.

Have a wide variety of units portfolios I'm, just curious what you talked a little bit in the past, but what does the team internally doing now just in case. The FDA does decide hey, we're going to move forward and issue a final rule.

Yes, thanks for that look I mean, obviously, we like other companies in our sector are watching that closely we're on the CLA Board and so I think we've seen it coming look I would say a couple of things I would say our progress of our focus on this started probably 18 months ago. When we came together as a management team we started bringing in people.

Who come from regulated background. So if you think about like the folks on this call. The three division presidents myself, Jeff all of those come from FDA regulated backgrounds. I think we started to build a quality system that way, we moved to one quality system. We took all of the acquisitions and move them to one all of our R&D projects are now under design control. So we've kind of been starting to <unk>.

Operate for leaving this is coming that being said, there's still a lot to unfold. Once a ruling comes out I think there is.

There's a lot of people in the industry, who wonders if it's if it's constitutional but from our perspective, we think it's probably not if it's probably win and it looks like even if all of these things occur companies are going to have three to three and a half years to get prepared so we feel very confident in our ability to manage that as it comes on look a lot will depend.

And on what is grandfathered and what what is not but I think we feel really good about our position in the marketplace and we think for companies like us it could be end up becoming a competitive advantage.

Alright, thank you so much.

The next question comes from David Westenburg with Piper Sandler. Please proceed hi.

Hi, Thank you hey, great great job guys.

So I really like the update on the if I heard it right you updated long term plan to 10% growth can you talk about specifically because thats, a big 150 basis points at least swing there. So what specifically is happening versus that long term grant growth plan, where you feel confident that this is not just <unk>.

Trent This is multi year and long term and that's assuming I heard that correctly.

Yes, you did I think Jeff put it in there at the end I'll just kind of like some of the best news and it was like right.

I'll say something and then maybe I'll have Jeff comment more but look I think when we gave long term guidance in April of last year, we were pretty new management team and I think as we've come together and now had well over a year under our belts, we understand the levers to pull on the business much better we understand the market significantly better we understand I understand things around revenue cycle.

Management, and accelerated growth and where the gaps are and the products and so we guided this year for 2410% to 12%, but what we're seeing in that core business just because of the market dynamics of the market growth our leadership position. The things that we can do we feel very confident in that 10, plus number but do you want to yes, I would add to that we've made mulch.

All comments about adding sales force.

People to our team and sales force optimization and really focused on how do we help them be more efficient and so we actually think we can get a lot of operating leverage just new technology and back office support for our salespeople are both in our clinical team and in our AVX team and so I think that is another big component.

Been growing faster than the market across all modalities, we have a strong focus on Ngls and are clearly seeing positive results. There. So I think our view is our confidence level has increased based upon our performance in 2023 as well as Chris said the team overall, just getting more comfortable.

With our teams with our position in the market and where we're investing dollars to raise our long term growth target to that 10% plus yes, and David I would say the other one I mean, if you look at NGL, especially solid tumor we're incredibly under indexed and you can see that business is growing rapidly and that market is still relatively penetrated but growing double.

So I think there are a lot of factors that we feel really good about where we are from a positioning perspective.

Great that's a great segue to my second one because.

Youre launching into liquid.

So could we expect an accelerated timeline into liquid or like a market traction just given what you are doing right now in Hematological malignancies, and then you transfer that into solid tumor which is this spend.

And really fast let me.

Obviously, a lot going on but that sits in kind of the R&D group with the Shaw and under development Vishal do anything anything you want to share just kind of what we're doing with liquid and some of the products that we've disclosed yet David.

Thanks for your question. So on the liquid side, we will plan to launch CGP assay or liquid biopsy going into 2024.

Towards the second half of 2024, but we will accelerate on the on the clinical side also is that we're looking into but I do think there is a place for liquid by both the pharma and the clinical side, which we'll see an acceleration in terms of penetration into that market, especially on the pharma side in particular, because we're hearing a lot about pharma companies that they just don't.

I have enough tissue to spread it along with all the testing they want to do so this really gives them the opportunity to choose both liquid or solid from.

From that perspective, yes, and youll, probably see that in pharma in late.

Late half of the year and then moving into clinical in 2025 early Jeff.

Yes.

Awesome, great job on the quarter.

Thank you David.

Up next we have puneet <unk> with Leerink partners. Please proceed.

Hey, guys.

Jeff Thanks for taking the questions.

Yes.

Thanks, Chris.

I'll wrap my question into two questions sort of into one.

Obviously again congrats on the MRP increase here.

Maybe can you elaborate what is the clinical volume growth that we ought to think about in that sort of long term.

Guide I mean at one point neogenomics used to grow that number at 15% growth, but I know the mix has changed today, there's more ngls in here. So maybe could you elaborate on that and then how should we think about that.

And the clinical volume growth. This year in 2020 for the AEP has continued to ramp throughout the year for clinical in 'twenty. Three so I'm just wondering sort of how should we think about that for 'twenty four thank you.

Yes, maybe.

I'll take a little bit of that and throw it to Jeff but look the way we think about our business is really a portfolio effect and so if you think about it we really we have informatics. We are pharma, we have clinical and obviously when we look at building out both this year's guidance and next is outline years guidance. We've taken into account all of those factors we have not broken.

Down specifically the units or the AAP I will say, though on the AAP.

Two things significantly are driving and Jeff will give you more of a one as is our mix right. We're selling a lot more NGL. So the other thing is we think we have a lot of runway on revenue cycle and just the amount of when you look at this industry as a whole I think it's woeful and its ability to get paid for the work that it's doing and I think where our team is really becoming masterful as I.

<unk> those levers, which is probably 15 different levers within that group, but Jeff do you have anything else more on yes, I think yes, I mean, we haven't disclosed specific than we did when we gave original guidance in disclose volume our A&P, but I think as.

Chris said, given our given our positioning on both our clinical sales force and execution as well as our anticipated additions on the ADM side, we certainly feel good that we're going to achieve that revenue growth I think on the revenue per test for AEP as closely as Chris said Theres a few things.

Speaker Change: Driving that in the quarter that Ngls mix I said this last quarter is driving over 60% of the increase in.

So just the Ngls volume continue to accelerate as driving meaningful upside in revenue per test and you can see that stepping up throughout the year in 2023, and then the other factor as Chris also said were revenue cycles specific initiatives. The first is on just getting paid for the work we're doing a lot of specific initiatives.

Speaker Change: Is to drive that we saw good improvement in that in 2023, and then there is also the pricing side, where we're having some success in getting price increases as well where that hasnt historically been a strength of ours. So again I think the way I think about the revenue side is we have volume drivers. We have mixed drivers we have pricing drivers and we have ours.

<unk> drivers and Theyre going to hit at different intervals in different paces throughout the year, but the overall.

Combination of those is going to get us to our revenue growth over time.

Got it helpful. Thank you.

Thank you.

The next question comes from Matt <unk> with Goldman Sachs. Please proceed.

Hey, Matt Hey, good afternoon.

Guys How're you doing Ah congrats on the quarter, maybe just following up on <unk> question, but focusing on the mix side of it.

Obviously, the NGL mix you guys have talked about and that's driving a lot of that.

But I'm just wondering in terms of like as you think about the runway for mix shift there is clearly probably customer groups, where it was easier to kind of switch them into ngls or market. The NGF to them does mix shift get harder you think over the course of this year and into 'twenty five or do you just see a lot of runway and lack of awareness, where youre able to continue to drive that mix shift over time and then just.

My second part just a quick one for Jeff just any views on the gross margin outlook for 'twenty four within that guide.

Yes, Thanks, Matt look I think when you look at this business one of the things that we really like as we've gotten to know the business well is that we're very under indexed both on Ngls as a total percentage of revenue for the company as well as in solid tumor and do you think there's going to be some earning calls that come up in 90% of the revenue is Ngls and so I think we believe.

Very strongly I think in that ability on that mix shift I would say the second big one is I think you could argue this year should be better because of our increased focus going to oncology.

Speaker Change: Community oncologists versus just the hospitals and the pathologists and expanding that sales force there and to be able to go out and spend time with one of our lever points is that we're the market leader in heme and really using that to be a door opener for us for solid, but maybe and I, probably shouldn't say as much they did warrants here, where maybe worn if.

More maybe more.

I think everything you just said I agree with 100% I mean, we've communicated and right now the ratio is roughly 25% of this business I think cap.

Asset ratio increased to 60 against marginally harder, but I wouldn't discount. The fact that we have launched new products last year. It was probably mid year by the time, we were starting to see some traction take place.

Looking to benefit from the annualized <unk> of those new products that were launched in last year, particularly those are the MGH related.

The next one net certainly will provide opportunity for us and then as Chris said the continued penetration into the community oncology segment, which is where we've invested a lot of incremental sales resources into is another reason why we believe we can drive growth in Ngls, which will support that mix shift.

Speaker Change: Thank you and then.

Speaker Change: And then on the margin side.

Matt I would look at just the gross margins increasing in a range of 150 to 175 basis points over the next.

Over the next year or 2024.

Great. Thanks, guys.

Thank you we have Andrew Bregman with William Blair Andrew. Please proceed.

Hey, guys. Good afternoon, Hey, Chris Thanks for taking the questions maybe on the inorganic front I guess as you guys are making progress year on increasing profitability can you just wanted to talk about balancing that dynamic with your sort of appetite for adding to the bag here over time any considerations that we should sort of be thinking about thanks, Andrew I got to tell you I missed the very <unk>.

First thing you said.

Glenn <unk>.

Inorganic growth, Okay, sorry, I missed that.

Yes look I think it's a unique scenario when a company looks at accelerating growth and how much do you put on the bottom line versus how much do investment. We believe that this business has a very unique opportunity to grow low double digits on revenue and mid teens plus on profitability I think for us are.

We look at where we can invest the dollars that we think are going to give a long term ROI. So we spend a lot of time as a leadership team talking about what these initiatives are in winter, we're going to strategically invest in them. So for example, this year one of the big ones is wins last year, a big one was expanding the clinical sales force. So we believe that you can have is that balance like Jeff always says it's not.

Its not either or it's an and I think our view is that we want to grow revenue faster gross margins faster than growth in operating profit fastest and I think we run our business to do that so I think we feel really good about that balance, but Jeff do you want to get from a financial perspective, Yes, I think I think the other thing that gives us confidence.

As just our capital structure as well and our ability.

To really significantly change, our cash burn and actually position ourselves for actually starting to produce gas in 2025, So I think having having.

Clear path to being adjusted EBITDA positive for all of the 23 and certainly we expect effort for 'twenty four.

And then really it's an investment I think rigor and discipline.

We have used over the last.

12 months.

Where are we going to be investing dollars and how are we doing that in a strategic fashion over time to drive the business and I think as Chris said, clearly with with having ROI projects that are going to pay for themselves over time and I would just say we've had a lot more rigor and discipline into the process.

Which gives us confidence in the investments we've made.

Okay. Thanks, guys.

Up next we have Mark Massaro with BTG. Please proceed hey, Mark.

Hey, Chris has it gone.

Good.

Yes, congrats on the quarter.

Lots of great progress on the clinical side I guess my question is more on pharma services I know your predecessors talked a lot about pharma services and informatics and there is a large precision oncology company out there that's monetizing big data.

With some pretty sizeable revenue so I'm just curious like.

You guys are doing a great job just growing revenue and profitability.

Maybe just give us an update on how you see the pharma services business shaping out how you can monetize some of the big data and maybe just give us a sense for how youre thinking about the growth of that business going forward.

Yeah. Thanks Luke.

I think when we came in I mean, I think the first thing is we made a very conscious decision that that business had a lot of pieces to it that were not profitable and so our focus was and we've talked about this in the whole company, but especially in pharma, let's get the house in order and let's get let's get this gross margin.

Moving and you can see that we've made great progress on there I think when we think about the pharma business. So we do believe is kind of the tip of the spear from a technology perspective, because the pharma companies go well in front of clinical on new innovations and new technology and we saw that for example in R&D. So we believe it's a place to be but before we could start accelerating growth we had.

The baseline right and Thats, what 'twenty three is all about and now you have heard that Jeff one of our <unk> last year, we spent a lot of money and time expanding the clinical sales force, we're expanding now the pharma and the informatic salesforce because we feel like there is great growth opportunities there, but we felt like we had the right kind of right. The ship first on informatics.

Speaker Change: We have significant points of data because of our the patients that we test and I think as Vishal and I'll, let vishal step in and maybe talk more about the informatics, but I think as it is.

As Vishal and melody come together and kind of look at the things that we can do there is runway, but theres a lot of work to do and I think that.

Vishal: As the company Youre, probably referring to it was not our top priority, but it is becoming more of a priority, but I think for US again, it's about the portfolio, we got to be able to performing clinical and all of AVX do you want to talk more about especially informatics and the data, yes, I think as we look at the data that we have within the company one of the nice things about what neo has.

As data across all of our modalities, whereas others, maybe will have it primarily in Ngls, but as we grow our NGF product portfolio. Our data will also grow at the same time. So while we can get to in a couple of years, it's going to be much different than where we are today in terms of our data offerings as a whole and on top of that the lips investment that we're doing which.

It will allow us to structure the data in the right way will also make us successful for the informatics side. So all together for the next couple of years, we still have a long way to go there I mean, I think we have to build it in the right steps, but how we're building. It is more important right now for the next year and getting a two years out as to what we can do with that data from where we are today.

It sounds good congrats on the progress.

Thanks Mark.

The next question comes from Mike Matson with Needham and company. Please proceed.

Hi, guys.

I just wanted to ask one on the <unk> project. So you mentioned you could start to see some of the benefits of that in the second half. So just curious what the benefits could be.

Is it margins.

Turnaround time.

Market share or all the above.

Speaker Change: Yes look I think there's a lot of it's probably alibaba melodies on the call as well.

Alibaba: <unk> you want to take that initially and then Jeff maybe you can talk about financial stuff with melody.

Well I think first and foremost Mike it's really around operational efficiency and productivity in the lab. So I think we're going to we're expecting to see a lot of that.

With regard to leverage there because we currently are on multiple different systems, and obviously that causes a lot of cutting and pasting and things like that that.

We are hoping to eliminate.

But it's far then vishal.

Al mentioned the ability to use our data better it's really an overall enterprise digital architecture that we're working in women's is the start of that but we're also leveraging.

Various platforms for better connectivity to our patients better connectivity to EMR.

Better connectivity into our billing systems in our backend ERP and <unk> system is really the big driver for all of that for us.

Jeff's comments on the cost structure.

Yeah, and I would add.

One other thing as well I mean, it will give us better visibility from a client service perspective on where our tests are in the process and allow for for really self service on where our tests are in the process. So I think it helps our our client communication and given them up to date on where we are with the testing process and then we are making.

Capital investments that we will have some operating expenses.

With that over the next two years. So we have factored in those operating expenses.

Into our guidance and again I think this is one of those investments that is going to pay long term dividends, we will start seeing it on the gross margin side as Melanie noted from an efficiency standpoint, and I think over time, it could have top side benefits as well as we improve our client service, yes, maybe Warren you can talk to this but look we are spending.

<unk> as much on the customer experience component as we are in the lens as far as Digitization.

It's interesting I think in this business for us to ultimately get to where we want to go we got to win on customer experience and we got to win on the ability to serve the patient and I think you wanted to just given what we're doing on the on the Digitization and the platform that sort of tie to list.

Building on what many said in terms of lenders being this sort of foundational element for us and started digital transformation. This is providing the building blocks for us. Additionally, we're investing in in a what we call a digital trends more to customers, which will be the platform for self service in a liability platform to a lab.

Estimates to track the status of test in real time is something that is there any missing today and ultimately allow us to increase stickiness to those customers, which is an important element format.

Expand acquire at commercial strategy something else that we look to expect to see value in the latter part of 2024.

Great. Thanks.

Okay. Our next question comes from Mason Curico with Stephens Inc. Please proceed.

And Nathan.

Hey, guys. Thanks for the question here so for the <unk> business.

You would called out.

Framed it up in previous quarters. These the headwinds that you would be facing rationalizing some testing sites low margin business as well as you are facing some macro conditions. So I.

I guess the question is could you kind of break out I guess, how much of an impact each of those two buckets have and as we look ahead into this year. When do you think we start to lap kind of rationalizing that that low margin.

Business going forward and really how are you thinking about accelerating growth in this business this year.

Yes, why don't I take it upfront and then Michele.

Can pick it up I mean, we made that decision, but those contracts took some time, so I think youll start to see.

That piece start to kick in probably in the second half of the year, we haven't broken out where the impact is but I think even more importantly, vishal maybe talk about strategically all of the things that your team is doing in other modalities, just mgs and why that's still relatively new and why give confidence in the acceleration of the growth if you look at where.

Pharma is coming up to us for rate, we are still investing heavily.

Modalities, what I call, our traditional modalities like IAC, that's not going anywhere from an oncology pharma pharma perspective.

Our bread and butter, but as we launch new products and the NGL side in particular, and we're seeing that trend and as Chris mentioned, usually what we see in pharma.

<unk> is moving towards technologies three to five years ahead of clinical we're already seeing that trend moving from fish as an example to lgs. We didn't have the right products until we launched them last year. So we're starting to see that momentum to more and more use cases, and Ngls, which also have higher <unk> for that matter. So we're also investing.

Our BD team will be invested a lot in the clinical side from a sales perspective, we're investing now on the ADM side of rebuilding that BD team and making sure that we have the tools and expertise that will allow us to grow in 2024, mainly talking about liquid biopsy, because thats going to be.

Liquid biopsies are something that we get approached by pharma all the time, we do a lot of tissue testing right now, which is what we have built our business, but on a liquid diet, especially for solid tumor and as Chris mentioned earlier, we're very much underpenetrated on the solid tumor side, because we didn't have the right product mix and now we're launching our liquid.

<unk>, which will allow us to make that offering to pharma, where they don't have tissue to give to us samples that have been sitting around three five to 10 years old from clinical trials that have been completed so we're able to go back and actually try and get some of that business with our new offerings that we're planning to launch this year.

That's helpful. Thanks, guys.

Excuse me.

Up next we have Andrew Cooper with Raymond James. Please proceed.

Andrew Cooper: Andrew Hey, guys. Thanks for the time.

Maybe just first focusing on place for a little bit here or I should say can you just give a sense for how much more runway is there in that 40% of the increase that come from.

RCM in price or maybe asked another way what can we expect that to contribute on a yearly basis.

Once a mixing stabilized aura in the scenario, where kind of on an apples to apples basis, we think about mix being stabilized.

Yes.

Without without it without kind of getting into granular specifics.

We said earlier.

Earlier in GFS was driving about 60% we are still seeing mix improvement in other aspects of the business, which is driving a component of our revenue per test as well.

I think in terms of the initiatives, we think pricing.

As a multi year opportunity for us.

And we also think the revenue cycle initiatives that are just increasing the amounts where we're getting paid for what we expect to be paid as a multiyear opportunity. So I think we have excuse me we have <unk>.

<unk> year opportunity to continue to close the gap between what were expected to be paid and what we are being paid and again as I've said in prior calls it.

It is multifaceted I mean, there are some other clearly identifiable areas prior authorizations or medical necessity or medical records that were dealing with and then theres. The payer policy aspects, which are a little bit harder, particularly with the larger panel tests and so as some of the biomarker legislation gets improved gets approved.

And in the states over time that will also help close the gap from FERC for a specific test, where we may not be getting reimbursed today or were not being reimbursed fully so again I think theres a lot of different areas that we've identified that we have teams working on to close that gap and see a multiyear runway.

<unk>.

Okay, Great and then maybe just one more.

On the ERP update obviously, great to see maybe just any context for what that does or doesn't do to the EBITDA margin expectations that you laid out back in.

In April and whether that number can be a little bit higher for 'twenty six or maybe how we think about even beyond that timeframe, where adjusted EBITDA margins might go in the event.

And of that a little bit faster revenue growth.

Yes, so what we said.

Almost a year ago was we expected EBITDA margins to be in the mid to high teens by 2027, obviously going towards the higher end of going above the high end of that range I think will help accelerate that I don't know that it changes mean meaningfully when we achieve that mid <unk>.

High teens, but it could it could pull forward I think a period of time.

Also just our ability to generate operating leverage off that revenue growth I think will help the adjusted EBIT adjust.

Adjusted EBITDA growth over time, as well and we initially said we expect it to be adjusted EBITDA positive in 2024, obviously, we achieved that in 2023, so again, almost probably pulling forward somewhat a year on that front. So I think as we look at our ability to generate operating leverage on our revenue growth.

It clearly will benefit our long range plan from from an adjusted EBITDA and adjusted gross margin basis, Yes, Andrew I think as we like I talked about earlier is we've seen the levers and the ability to.

Pull multiple ones.

To get <unk>.

Average and pull through on this business you saw this year there is significant amount of our growth drop into the bottom line and so I think that.

Thats enhanced kind of our confidence in some of these things and now we still have things like value capture program, where we wanted to go get anywhere from $10 million to $15 million a year, we want to improve gross margins and get gross margin leverage by 100 basis points every half I mean, all of those are fundamental but I think now like when you think about melody on her side on the operations. She now has the detailed plan.

In place and we can see that so I think it just gives us a greater sense of confidence in our ability to deliver.

Okay, I'll I'll stop there thanks again guys.

Okay.

The next question comes from Derik de Bruin with Bank of America. Derek. Please proceed.

Hey, Derik.

Hey, Good afternoon, you have John Kim for Derek here.

Speaker Change: I'm going to try to ask this one more time.

Great Great to hear that 2024 guide and update on the long term guide here.

Any other details that you could share on what the split is going to be between the clinical services in advanced diagnostics.

I think you previously talked about how the clinical services would be a bigger portion of the sales but.

Yes, it would be helpful to know any additional thoughts that you might have yes.

Yes, we havent as Chris said earlier, we really view it as an overall portfolio and when we guide on a portfolio basis. So we haven't haven't.

We haven't broken out.

That individually, we do expect both of them to grow in the year, we just haven't broken it out and don't plan on breaking it out in our guidance.

Gotcha and.

I did want to ask about the patent infringement ruling against radar that was in December.

Speaker Change: Any expectations as to.

I know it is not included in the guidance, so not expecting any financial impact there on the top line or the bottom line, but.

Any expectations in terms of.

When you think this might get resolved or.

Like if.

If it comes to getting rid of it what.

What impact that could have on the bottom line.

Yes, im going to let Ali addressed legal questions with two quick points. So our guide does not include any radar.

Number one but number two we do believe <unk> import so ill just put that in and then I'll throw it to Ali to let her kind of walk through.

Now the legal side sure.

We don't have any visibility to the timing what we know is that we've requested expedited an expedited hearing and we've been granted that expedition and the hearing was as Chris said on Mark is scheduled for March 29.

And the various factors kind of contribute to the federal Circuit Court of appeals timing on a decision, including whether or not the decision is precedential, whether theres a dissenting opinion on the panel of prejudge. It we have also.

May of motion for a stay pending the appeal.

That motion was fully briefed by Chris that as of today and so timing on that is within a couple of weeks.

That's sort of what we know in terms of timing on the appeal.

As far as the infringement.

Matters are in district court those are ongoing.

And are in the discovery stage, the North Carolina case has been set for trial in March of 2025, and the Delaware cases been set for trial in October of 2020.

I appreciate all the color. Thank you.

So again, if you have a question or a comment please indicate so by pressing star one up next we have <unk> <unk> with Morgan Stanley. Please proceed.

Hey, guys.

Good evening.

I just wanted to.

Pushing that similar line of questioning there.

I was just curious.

Chris in terms of the comments you made in your prepared remarks about your options available here right can you give us a sense for how quickly you could pivot to perhaps a new version off radar.

As a workaround for the litigation and.

That's something we've seen other peers in the industry resort to in relatively short order and I was curious if that was an option that you were actively exploring at the moment as well.

Chris: Yes, Jay Thanks look I would say that we're actively exploring all options around <unk> with the first situation that we believe.

And it is really about our position from a legal so I mean, obviously, that's where we're going that being said we have been in development for additional MRV products.

Beginning probably 12 months before they even started so I would say that thats been.

Ongoing and I would say with US we believe like a lot of the products that we're trying to bring to market. We think there is incredible need from a patient perspective, especially for products that continue to improve sensitivity and I would say that the show on the team and R&D operate with an incredible sense of urgency but.

It's not just from a technology perspective, but it's from an it perspective that they're looking at us from a commercialization perspective, but we haven't given any timeline is just that we were operating with a sense of urgency on it.

Got it fair enough and then just one quick follow up for me on the on the biomarker Bill can.

Can you lay out Chris what proportion of your tests, you think could benefit from incremental commercial payer coverage.

Given even the states that have currently passed the legislation.

Chris: Alright.

Speaker Change: I don't think its.

So very exciting where we believe the value will come is on any NGA test, which is a panel of 50 or larger genes that were today reimbursement from a third party payer perspective is quite limited. So that's where we see the benefit in terms of I think what portion of our business that is exceptional.

Haven't commented on yet and one of the things we will talk more about some of the strategic priorities in 2004, when we get together after Q1, but one of them is to launch our neo comprehensive to point out which is a significant larger panel and so obviously that will be an important tool for us.

Got it that's helpful. I appreciate the time guys alright, thanks, Nick.

The next question comes from Dan Brennan with TD Cowen. Please proceed.

Hey, Dan Thanks, Hey, good morning, Chris Good afternoon excuse me.

Maybe just a question back to the liquid offering.

Any color on what type of reimbursement, we can expect and how should we think about framing the opportunity for Michael revenue potential perspective.

Now, let's take that and talk a little bit about what's flowing in the market. Yes. So the good news here is that I mean, there is.

Reimbursement is established to similar to what you see with the tissue test.

Dollar amount as what we see on the tissue side of things with potential for higher depending.

Depending on what kind of status, we get on this but the.

The reality is that we're also seeing CCI guidelines get updated at the same time and you saw that on the lung space in late 2023, where it changed from tissue not being available, especially in lung cancer to.

Tissue or liquid being done at the same time or with us.

Independent of each other so I think youre seeing the guidelines are changing and that also helps with the whole reimbursement story and the clinical adoption of course, especially in the community based setting. So I think having a liquid offering that is widespread is going to be critical for us or commercial growth.

Great and then maybe just sticking with NDS.

Clinical market volumes.

North of 30, just wondering for your volume growth.

Speaker Change: How much.

Thinking about like the market growth versus converting your customers from St legacy tests to Mds could you just give us a sense of like maybe I know you're not going to distill the exact numbers for each but I'm just wondering how far along are your customers aren't does that is that a big driver for you that you are kind of bringing forward. Some of these more community hospitals and doctors towards.

Yes. Thank you.

Yes, I'll, let Warren taken but remember we have three distinct strategies that we focus on and really from a field compensation perspective. They are incentivized on all of them do you want to talk a little bit about what's going on yes, I think there's a couple of dynamics that are taking place certainly we've got customers that may not be using <unk> using a different modality that we move.

Moving into <unk>. That's the first kind of emotion second is we have a number of smaller G single gene and smaller panels that are available and these can be moving customers and larger panels and then obviously, we have the dynamic of customers, which haven't been customers in the past.

Speaker Change: That are now we now address and this is particularly relevant in the community oncology setting. So those are kind of the three.

Three kind of areas, where we see sort of growth from an NGL perspective, and it really plays into without commercial strategy, which again is around protecting existing customers, but secondly, expanding share of wallet, where we drive various GAAP analysis strategy to identify which customers to target with <unk>.

A different ags offerings, which could be one of those three not using NGA moving to NGA. So using a single a small panel lines for large panel and then third the acquire elements of our commercial strategy, which is gaining new customers, which haven't been supportive neo in the past and that third one is obviously the toughest.

New customers was by far the biggest opportunity, where we just hadn't been spending time till starting about 12 months ago, which is those community oncologists.

Great. Thank you.

Thank you.

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

Okay. Thank you.

Look I just appreciate everybody, taking the time to get together.

To get some more color on what's going on inside the business, we kind of talked about the state side of the business and I think we feel.

Incredibly good about where the business is and where the business is heading I think we're ahead of where we thought the early plans are being and I think as we continue to go forward each quarter, we will try to give you more insight into the business and how we continue to build this long term sustainable growth again, thanks for your time today and take care.

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