Neogenomics Inc (NEO) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NeoGenomics Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Chris Smith, CEO of NeoGenomics. Chris, the floor is yours.

Thanks, Jenny, and good morning, everyone. I'd like to welcome you to the NeoGenomics Third Quarter 2022 Conference Call. Joining me for this call from our Fort Myers headquarters are Bill Bonello, our Chief Financial Officer; Vishal Sikri, our President of Pharma Services Division and Inivata; and Dr. Shashi Kulkarni, President of Lab Operations and our Chief Scientific Officer. Before we begin our prepared remarks, Bill will discuss the forward-looking statements and the non-GAAP measures used on this call. Bill?

This conference call includes forward-looking statements about our 2022 initiatives, 2022 financial outlook, growth opportunities, and anticipated operating results and performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these risk factors appears under the heading 'Forward-Looking Statements' in the press release we issued this morning and in the 'Risk Factors' section in our annual report on Form 10-K for the year ended December 31 2021 that is filed with the Securities and Exchange Commission. 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.

In addition, during this conference 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 to be an alternative to 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 morning. Before turning the call back to Chris, I want to let everyone know that a copy of our earnings presentation is available on section of our website. We also want to let everyone know that we are going to limit the number of questions to one per person in order to give more people a chance to ask questions within the one hour that has been allotted for this call.

Thank you, Bill. As you look at the first slide, one of the things that you'll begin to see in all of our presentations is that we'll talk directly about the mission and the number of patients that we're able to impact on a daily basis. And I'm really excited about joining you for my first earnings call with this great team at NeoGenomics. For today's call, I will begin by discussing our recent performance. Bill will then review our third quarter financials in detail before turning it back to me to provide some initial observations from my first three months with the company on the current state of the business, and highlight some of the actions we're already taking to drive improvements. We will then have time at the end for questions and answers.

However, before we jump into our third quarter performance, I want to talk a little bit about our team. As most of you know, at the end of the quarter, on September 28, Fort Myers, Florida, where our corporate headquarters and one of our testing labs is located, was severely impacted by Hurricane Ian, a strong Category Four storm. And while I was only a few weeks into my role here at Neo, I was able to be part of a team from a response perspective, and I couldn't be more proud of how we reacted. Our team was prepared and responded as well as I could have hoped for, coming together to ensure that patient care disruption was very minimal, but they were also there for each other. Some of our employees were significantly affected by the storm. And one of the reasons I was so excited to join Neo was the dedication to the mission of serving the patients and the culture of NeoGenomics that I've heard so much about. The team's response just reinforced my enthusiasm about the passion towards the patient care and the great opportunity that we have ahead of us. I want to thank everyone for their dedication during such a trying time.

Now let's move on to the third quarter performance. Third quarter results are encouraging. Revenue growth increased 6%. Pricing was strong and increased 5%. Adjusted gross margin improved sequentially and adjusted EBITDA loss declined for the second quarter in a row. We also saw meaningful improvements in turnaround time, a key indicator in our markets. While we have a lot of room for improvement, we are definitely moving in the right direction. We have seen consistent sequential improvement in all key categories throughout the year. As I mentioned, revenue increased 6% year-on-year to $129 million, driven by improvements in revenue per test in our clinical business, and high teens growth in our pharma service business. I'm especially pleased to report that we've already performed over 800,000 tests and have helped approximately 450,000 patients year-to-date.

As we move to the individual divisions, Clinical Service revenue increased 4%. Revenue per test increased 5% and volume declined 1%. We did see an uptick in volume at the end of the quarter, which continued into October despite the impact from Hurricane Ian. And importantly, we saw better growth in our high-margin modalities, including NGS. And as a reminder, as more and more customers move from multiple single gene tests to NGS panels, we will see a decline in volume but a positive impact on our revenue. Revenue per test increased year-over-year for the sixth consecutive quarter. This improvement has been driven by our strategic focus on higher-value tests, and improvements in reimbursement and collections. While we are encouraged by the opportunities for revenue per test, I would remind everyone that it's not unusual to sometimes see volatility in this metric from quarter-to-quarter. Pharma Services' net revenue grew 18%, driven by strong NGS volume from our large pharma partners. While we are encouraged by this improvement, Pharma Services is still not performing at the profit level we expect, and we are pursuing initiatives to improve profitability and drive innovation in this business. I will discuss these initiatives in greater detail later in the presentation. I will now turn the call over to Bill, who will review Quarter 3 financials in greater detail.

Thank you, Chris. Chris focused on the revenue results. I will highlight on the rest of the income statement. GAAP gross margin was 38%. Adjusted gross margin, which excludes Inivata-related noncash amortization expense was 41.7%. Adjusted gross margin declined 120 basis points from the third quarter of last year, primarily due to wage inflation, higher supply costs, and increasing logistics costs. Adjusted gross margin improved 270 basis points sequentially, driven by the combination of increases in clinical revenue per test and decreases in clinical cost per test, along with leverage and increased pharma services revenue. We are encouraged by a steady sequential improvement in gross margin, and see opportunity for continued improvement over time. In addition to the revenue and cost-saving opportunities that we've identified through Project Catalyst, we also expect to benefit from improvements in revenue cycle management and continued mix shift to more profitable offerings, a strategic repositioning of our pharma services business, and the opportunity for RADAR revenue.

G&A expense increased $1 million, or 7%, year-over-year to $17 million, primarily due to the expansion of our precision medicine sales team. G&A expense increased $400,000, or 1%, year-over-year to $64 million, primarily due to inflation. The sequential increase in G&A expense is primarily related to nonrecurring costs associated with Project Catalyst. Reducing G&A expense is a major area of focus for the company. We've already initiated a number of cost saving programs and expect to take additional actions in the months to come. Chris will talk about some of these initiatives later in the call. Adjusted EBITDA loss was $12 million for the quarter, which is a $5 million improvement for Q2, but an $8 million greater loss than Q3 of last year.

Turning to the balance sheet. We exited quarter 3 with $444 million in cash and marketable securities. DSOs were flat sequentially at 80 days, consistent with our normalized range. I would like to spend a little time discussing our outlook for the fourth quarter. As a reminder, we went through our 2022 revenue and EBITDA guidance in March, in conjunction with the departure of our previous CEO. But we did provide some guardrails on our Q1 and Q2 calls, and we'll do so again today. We expect revenue to be flat to up modestly on a sequential basis in Q4, and up modestly year-over-year for both the quarter and the full year. We expect adjusted EBITDA to improve modestly from Q3 levels. We continue to view 2022 as a rebuilding year where our primary focus is to improve our current product offering, drive operational efficiency, generate clinical evidence in support of RADAR, and lay a foundation for long-term, sustainable, profitable growth. We expect to incur certain onetime charges as we make investments to drive improvements in both growth and profitability longer term. We intend to reinstate annual guidance and provide a more detailed review of our strategy and growth outlook when we report Q4 earnings in February. I will now turn the call back to Chris.

Thanks, Bill. And we'll turn to Slide 13. Since joining the company in mid-August, I have spent the past two and a half months meeting with customers, patients and teammates, both in the field and in our labs, to gain deeper understanding of our business. After two and a half months, I truly do believe that NeoGenomics can be the leading provider of cancer testing, information, and decision support. In a sense, owning the category in oncology testing. I especially see this in community settings where the vast majority of care occurs and where we already are the market leader. We have a strong foundation in the market, having established deep and long-standing relationships with thousands of community pathologists and oncologists, many of whom send us the vast majority of their testing. The breadth of our test menu is still a competitive advantage even with the proliferation of large NGS panels.

But the connection with our customers runs much deeper than our test offering. These physicians see Neo as a true partner in delivering care to their patients. Our teammates are deeply committed to our mission of improving patient care, and that commitment matters to our customers. We've also built a solid foundation to service biopharma companies with offerings that cover the continuum of pharma activity, from discovery and translation medicine all the way through commercialization. With the expansion of our precision oncology, decision support, and informatics capabilities, we are very well positioned for the next phase in our journey.

That said, there is no doubt that we need to significantly improve execution. I believe that we've had some of the elements of an effective strategy in place for years, but we simply have not executed on those initiatives. From a customer-facing standpoint, we need to enhance the customer experience and win on service. This includes reducing turnaround time, making it easier to do business with us, expanding and optimizing our field and sales organization while improving our product offering. I'm confident that when we do these things, we will start to accelerate growth, move more market share, increase our volume growth and ultimately improve profitability. From a financial perspective, we need to increase the productivity and efficiency of our labs. We need to begin to tightly manage our SG&A spend, and focus investment on the chosen few and not try to be all things to all people.

And finally, we need to get paid for the work that we're doing, which means that we need to significantly increase our focus on revenue cycle management. I spent the first 60 to 90 days learning the business, including our strengths and areas where we need improvement. And over the next 60 to 90 days with the team, we will finalize our strategic direction for the business going forward. In the short time that I've been with the company, several people, including teammates and investors, have asked, "Will we focus on revenue growth in lieu of profits?" or, "Will we sacrifice growth to drive profitability?" Candidly, I believe we need to and that we can do both. From the get-go, we will target building sustainable long-term profitable growth. As we do this, we will balance our focus between efforts to drive operational efficiency, and investments to drive innovation and growth. We will set clear priorities of which opportunities to pursue and importantly, not to pursue. And then ultimately, we will focus the entire organization on execution.

Moving to Slide 5, while we need to execute better, we are pointed in the right direction with Project Catalyst, which is really all about execution and driving efficiency. This program has been a framework for identifying, prioritizing, and executing operational improvements and will become the foundation for our annual value capture movement going forward. Let me tell you about some of the actions that we're taking in Project Catalyst to improve customer experience, accelerate growth, and drive profit. One of the key areas of focus has been on LAM optimization. We've deployed deep neural network, or DNN, technology to automate cytogenetics analysis with over 40% efficiency gains. We've also deployed automation platforms for FISH and molecular that will deliver major improvements in the lab throughput. We are developing a digital pathology solution for NGS that will improve specimen flow and improve turnaround time. And we also are working to rationalize our lab footprint to enhance workflow, achieve economies of scale, and create testing centers of excellence. We've already begun to see improvements in both turnaround time and cost per test throughout the quarter as these initiatives are taking hold, but there's definitely still opportunity for improvement.

As part of the competitive growth pillar, we have established an enhanced revenue cycle management program to further improve revenue per test, improve billing practices, and enhance strategic reimbursement. Revenue cycle management will be a focus area in Q4 and a top priority in 2023. We are also continuing with efforts to improve both our product mix and our client experience. We're currently validating an improved NGS panel that will cover approximately 500 genes, include both DNA and RNA, and report MSI, TMB, and CNVs. We expect this new assay to have significantly better turnaround time than our current panels. We have additional initiatives underway in all the pillars, and we will update you on these activities as they continue to occur, and then more around our strategic direction on our Q4 earnings call next year.

Moving to Slide 16, I want to spend a minute on RADAR. I'm also personally very excited about the prospects of RADAR, our proprietary assay for the detection of MRD and reoccurrence. And I want to talk just a bit about our plans to commercialize this test. As we noted in our press release on October 28, we were informed by MolDX that additional clinical evidence is needed in order to secure Medicare coverage for RADAR for colorectal cancer. As a result of our discussions with MolDX, we decided to initiate a multipronged approach in launching RADAR. First, we will work with MolDX and begin additional data collections for colorectal cancer. But second, because of the strength of our published clinical data in breast cancer, we have decided to accelerate our commercial launch of RADAR for breast cancer into Q1 of next year, along with the launch of colorectal cancer. We already have a body of published clinical data, including a peer-reviewed study published in the Journal of Clinical Oncology and presented during the primary session at ASCO this summer. Our initial focus will be to continue to gather clinical data but to gain early adopter experience and generating evidence to support both reimbursement and adoption. Our managed care and our field organization team will work to secure payment from commercial payers and private pay patients why we continue to work closely with Medicare and other payers to gain coverage.

While we were disappointed in the decision for MolDX, we remain confident in the assay's performance. We will expand our clinical research studies for colorectal as well as other cancers and remain incredibly confident in our ability to secure reimbursement from Medicare and other payers. But as a reminder, as we previously disclosed in these calls, we did not anticipate generating any meaningful clinical revenue from RADAR until at least 2024.

As we move to Slide 20, I want to talk about reimagining our pharma service business. We are repositioning our pharma service business first to improve profitability and drive innovation, and then to accelerate growth. Over the past couple of years, we have focused too heavily on bookings at the expense of being selective about the types of projects that we perform and the profitability of the business. This transition is more about discipline than it is about capabilities, as we have most of the capabilities that we need to deliver high-value projects. That said, we need to sacrifice some near-term revenue growth as we work to improve our mix of business and enhance innovation partnerships with our pharma partners. We expect our pharma services business to be an important engine for ongoing innovation for the entire company. And under Vishal and Shashi's leadership, we are building a product roadmap that will increase our presence in precision oncology and afford us the opportunity to work closely with our clinical partners to enhance patient care in the community setting. Importantly, we will be strategic in our approach of innovation, focusing our investments only on the chosen few projects that have high potential to drive significant improvement in patient care. We will also be mindful of the return on these investments, consistent with our strategy of pursuing profitable growth. We expect that these initiatives will have a meaningful impact on both revenue growth and profitability over time. While we do expect to drive improvements in margin, we may choose to reinvest some of these gains for the future growth of the company.

In summary, we are pleased with the progress that we made this quarter and are confident that we are starting to move the company in the right direction. We still have a lot of heavy lifting in front of us, and we acknowledge that some of the improvements will take time, but we are laying a solid foundation. We look forward to providing more detailed plans when we report our fourth quarter earnings next year.

At this point, we'd like to open the call for questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel free to e-mail us at bill.bonello@neogenomics.com during the Q&A session, and we will address your questions at the end if the subject matter hasn't already been addressed by our call-in listeners. As mentioned at the beginning of this call, we would like to ask each person to limit their questions to one, so that we may hear from everyone and still keep within the hour allotted for this call. Operator, you may now open up the call for questions.

Thank you, Bill. Ladies and gentlemen, the floor is now open for questions. If you do have any questions or comments on the phone lines, please press star-1 on your phone handset. We ask that while posing your question, you please pick up your handset if you're listening on a speaker phone to provide optimum sound quality. Please hold while we poll for questions. Your first question is coming from Alex Nowak of Craig-Hallum Capital Group.

Okay. Great. Good morning, everyone. Chris, great to hear from you for the first time at the Q&A here. Look forward to working with you. A lot of questions to ask. And maybe just one from me. Maybe expand on some of the internal changes you're making at Neo to the sales force. Legacy, there's been one team calling on pathologists. Another team was ramping late last year to call on oncologists for the precision medicine function, although that plan has been halted now. There really hasn't been a hunter and gatherer structure at Neo either. So, how are you thinking about the sales force now, and also going after the four operating units that you outlined on Page 13?

Yes. Thanks, Alex, for the question. And look, I think ultimately, in our business, our field organization is one of our greatest assets. And as you probably know, I mean, we have these deep relationships with pathologists that we capitalize on. But as we introduce RADAR, and I think as the industry pivoted to more precision medicine, a lot of that business, as you know, has moved to oncologists. So the strategy to hire a separate sales force to call on the oncologist, which is in a different setting, usually than the pathologist, I think was a great idea. I will say the one place that we have changed is that we now have one leader of all of sales into our clinical customers. So, we will not have two sales leaders. We'll run it through one leadership team, but we will have separate folks calling on them. That being said, I think we probably have underestimated the breadth of our menu and the impact it can have on the oncologist as well. So, that historically wasn't a call point. Whether it's things like NGS that we've had for a while or our full menu, we think we're going to get more pull-through from that group rather than just the RADAR product or NGS. And so what you'll see now more is a partnership out in the marketplace with our two reps working hand in hand, trying to provide the best possible coverage and the best possible care.. I hope that answers your question.

It does, yes, thanks for the update. Thank you.

Your next question is coming from Andrew Brackmann of William Blair.

Hi guys, good morning. Thanks for taking my question. Obviously, you've seen continued sequential improvement throughout the year, where we are in the calendar. Can you maybe just give building blocks you're thinking about as it relates to 2023, as we're working to fine-tune our models heading into next year?

Yes. Look, I think we shared some of those in the call. But I think the way you think about it... I mean, I go back to that one slide, it's about driving customer engagement or customer experience, and then driving operating profit. And I think one of the things the company did a great job of in the middle of this year is rolling out this Project Catalyst. Think about it as a souped-up value capture program, just to focus on driving efficiencies. And I think you're seeing that come through. I will say one of the new ones that we've already gotten traction on, even in the short time that I've been here, is this revenue cycle management. So you're going to see a lot of lift there because I think, candidly, in our business, we're not getting paid for all the work that we're doing. And I think we're creating a focus to do a much better job there. I think you'll see a lot more cohesive, and a lot broader, sales reach next year. I think that's one of the places, from a company perspective, that we can do a much better job at is optimizing the field organization. And candidly, as you probably saw in the 8-K that was filed, we've made a change there, and I think that's going to be positive for the company going forward.

I'd say the next one for me is really around lab operations. And candidly, we're starting to call it enterprise operations because it really is the end to end, where we think we can get significant improvement on the margin in the labs. And some of this includes the footprint, which you heard me touch on briefly, but it's also about doing what we do better every single day. And then finally, I think it's new product innovation. I think one of the challenges for the company -- without question, I think RADAR will be a significant product for us. That was a large acquisition that changed the dynamics of this company from a financial perspective. But there's a lot of innovation internally. And I think with Shashi and Vishal's partnership, I actually believe you'll see some things coming over the next 12 to 24 months that are pretty significant as we get in the front side of that care. So I know it's a little bit of a smorgasbord. We'll give you a lot more insight. We plan to roll out the strategic plan to all our investors and analysts when we do Q4. So we'll hit on the Q4 and the year-end results, but then we're really going to dive deep into giving you a detailed road map of where we're going. But I joke with the team here, you trip over opportunity here. And I think part of us is with prioritization. I think we tried to be too many things to too many people. And I think our ability to focus on the chosen few and execute is going to have a remarkable impact on the business.

Thank you very much. Your next question is coming from Matt Sykes of Goldman Sachs.

This is Dave on for Matt. Chris, congrats on a strong start to your time at Neo. Can you tell us more about RADAR? How many indications do you expect to be applicable in the next two to five years? And of the more than 125 pharma partners you currently have, what percent of them do you expect to use RADAR eventually?

Yes. Thanks for that, Dave. Look, I think RADAR is one of our most exciting things, in that as you look out at this company's horizon for the next three to five years and where cancer care is going, I think it's going to be one of the major innovators. We've got Vishal with us this morning around the table, who's just living and breathing that every day, including the pharma side. Vishal, do you want to give a little more color?

Yes, I can. Thanks. So if you look at the indications that we've already have publications on, those are in breast cancer, and head and neck cancer, a little bit in I/O, and also in bladder. So I think we're going to expand on those indications and get those out as fast as we can. But also, we're getting a lot of interest from pharma across other indications like pancreatic as an example, like ovarian as an example. So we're building that evidence. I think over the next three to five years, not just on the published side... Well, we have published, but also expanding those indications is going to be key for us. But if you look at it on the pharma side, we went from very little, I would say, pharma using RADAR of our existing customer base to now getting a lot of interest on RADAR and after our ASCO preliminary presentation that we had. And I think that's where we're starting to see the start. We've actually integrated the Inivata pharma team and the Neo Pharma teams together because the call points were the same, and that's also helped us reach a lot more people within the pharma companies and give them visibility to RADAR. So, we're going to see a lot of that going into 2023.

Great, thanks.

Your next question is coming from Puneet Souda of SVB Securities. Puneet, your line is live.

Hi, Chris and Bill. So NGS is obviously an important growth driver for you and the conversion towards molecular is happening across the company, obviously, across oncology. Could you maybe remind us what was the growth you saw there in the quarter? And what is the NGS growth that's baked into the guardrails of the guide? And then on MRD spend, could you, Chris, maybe characterize for us what's the level of moderation there versus before? And how should we ought to think about the spend and OpEx here? Obviously, this was a big focus before, but it seems like there is moderation here. But at the same time, you want to continue to invest because this is an important category for you.

Yes. A lot in that question. So let me try to break it up into parts and start with the NGS side. And then you talked about, I think, the pace of spend. I think you mentioned it with RADAR, but really, I think, it's the whole business. But look, on molecular, we're really excited about where the company is in molecular. I mean we had incredibly strong double-digit growth in molecular and really in NGS, which was significantly even stronger in the quarter. (Audio Jump 00:31:18) If you remember in the past, we would have only gone through our pathology sales force. And really, in the quarter, we had our oncology group start to sell that product. And we've just gotten up to the 21 people. I think the last two or three were hired in the quarter. So that's had a huge impact. And the interesting thing about it is as you're coming in, you're new in this business, and so you're coming and you look at what's being reported or models. I think where we haven't done as good a job is when we talk about units. But you have to remember, if I'm selling three single gene tests, and now I'm moving you to an NGS panel, your actual growth has gone down negative two units, right? Because you're doing one test versus three, but our revenue has increased significantly as is our margin. And that's what I think you're really going to start to see in the business going forward, is this accelerated growth in NGS, which is going to improve AUPs. It's going to improve operating profit. But it will have an impact on units. I would tell you that we've talked about what we're going to disclose on NPS. I don't think we've settled in on that, but I would say every single quarter, that is like one of the two or three metrics that I keep an eye on, because most of these customers that we've maybe not gotten the NGS business from, we own all their other testing. So it is a great cross-selling opportunity.

Look, if I move real quick to spend, I think it's about balance. If you think about Inivata as a business, it was... Back in the heyday of a lot of these cancer companies that were running really hard at innovation and ultimately trying to get to revenue and spending, I don't think is under control. To be fair, we never integrated that company. So we're going through the process just right now to integrate that company into Neo, where we think we will get big cost savings. But that being said, we probably underinvested in R&D and other parts of the business. So it is going to be about this blend and how we pace it. But I think what you'll find is that we are focused on long term. Again, not a quarter: long-term, sustainable, profitable growth. And that's what you'll see as we start to move forward as a company.

Got it. That's helpful.

Your next question is coming from Andrew Cooper of Raymond James.

Hey, everybody. Maybe just a little more detail in terms of validating the broader NGS panels would be great, in terms of what that offering is made up of, whether you've gone a little bit more off the shelf or doing something a little bit more LVT internally drive,n and when we can expect that validation to be completed in the product to launch? And then secondly, just on pharma. If you could maybe give us a little bit more sense of when you say, "potentially give up a little bit of near-term revenue." Can you size that a little bit and help us think about what we should be expecting from a near-term growth perspective in that business given the backlog that you do already have today and stuff there.

I love you guys, because you guys are taking two very different questions and building it into one. So we'll address both of them. I'm going to start with NGS. And I'm going to give a highlight, and I'm going to throw it over to Shashi, who probably is one of the most renowned leaders in the world in this space. And I think we're really fortunate to have him as the guy now steering that chip. But if you look at NGS, I would say we're going to end up doing both. I think one is pretty innovative to the market. That's in the pipeline. And one, I think, is to accelerate our ability on turnaround time. And both of those will come to the market in the next 18 months. Our goal would probably be one in the first half of next year, and one probably in the first half of the following year. But Shashi, do you want to just give a quick glimpse of what you're thinking about for the investors?

Yes. So very quickly and briefly, we have been working on validating an assay, which is market-leading. About 500-plus genes, which will have DNA and RNA together, so we can build for comprehensive genomic profiling, which will have all the six horsemen of apocalypse, if you think about it. Including all the features we need to capture to help our patients. But we are not going to stop there. That's just our quick way to get into the competitive lab. We have already been investigating and looking into a lot of options where we will have a much more comprehensive whole exome, whole genome, and whole transcript on type assays. And also looking at other options for liquid biopsy, which we're all working on together. So I hope that answers your questions.

Yes. And maybe Vishal, if you can just follow up on Shashi. Just what you're finding, because the way we're doing RADAR, how quickly it allows us to move into whole exome.

Yes. I think with RADAR, the input going into RADAR is whole exome. So what's nice about it is that we already have that component built out. Now how do you get that into the clinical setting is the next part of the story her. Butt what's nice is that we already have it. Technologies already have it validated, and so on.

We already have the technology in place.

So we just need to get it into the clinical setting. That's something we'll work on with Shashi's help here.

And that's one of the things when I talk about how we really hadn't integrated the business. I don't think we looked at that at the time of the acquisition, "How can we transfer that over?" I think the second part of your question is how we're going to manage this pharma revenue piece going forward. And Vishal, you want to take that one?

Yes. I mean, look, on the pharma side, as Chris mentioned in his call earlier, right, I mean what's happened is that we've taken all types of work in the past without worrying about profitability. And I think that's something that we're paying a lot more attention to. Actually, we've put in a lot of tests going into the first half of this year, and we're seeing improvements there already. And I think that's something we just have to accelerate going forward and basically focus on projects where we see as going to add more value. Not just from a pharma perspective, but also from a clinical perspective. Which really means focusing on modalities like molecular. We can't give up stuff like IHC because we know that's part of oncology anyway. But where the growth will occur is more on the molecular side, and the whole exome side, and transcriptome. That is where we see a lot of requests coming from pharma, and that is where we are going to focus our energies.

Your next question is coming from Derik De Bruin of Bank of America.

Hi. Good morning. This is John on for Derik. If I could dig into it more, obviously the stronger adoption of NGS would be a headwind to the volume. But a tailwind for the pricing. Should we expect volume to taper down over the next few quarters? And on the ASP side, what stable growth can we expect? I think the question was asked earlier in terms of you reprioritizing your pipeline and prioritizing costability. What OpEx should we expect going ahead?

Let me start with the tail-end of the question and we'll come back to the front end. So we won't give guidance till next year. We really haven't talked about where we'll be. I think with the model with the guardrails that Bill gave, I think you're probably in good shape. Look, we move into NGS, it really is interesting. You're right. Your volume goes down, the revenue goes up. But remember that I think that from a sales perspective, we have not been out there optimizing the sales organization. So our focus in the next year is to accelerate market share growth. And as we do that, I would expect our volume to increase as well. So look, you have to run the blend of the two. A company that's starting to run again and move share, but also a company that's moving our testing to higher-value testing. You're giving up the lower value test. So again, I think when we come out in February, I think is when we're doing our call, we'll give guidance, and we'll be very specific, but we haven't disclosed any of that at this point.

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

Hey, guys and congrats, Chris, on a nice start at NeoGenomics. I wanted to drill down a little bit on your RADAR MRD strategy. So understanding that you will launch CRC and breast in Q1 of 2023. I know in your press release you mentioned that MolDX asked for a direct comparison with other MRD tests in use or a full clinical study. I guess I hadn't realized that you hadn't submitted a full clinical study previously. Do you have a sense for which of those two paths you'll do? Whether direct head-to-head with Natera and Guardant, or pursuing a full clinical study. And then sort of related to that, you're going to be driving some volumes without recognizing Medicare revenue in 2023. How do you think that may impact your overall ASPs?

Yes. Thanks for that. I'm going to take the first part of it, then I'll throw it to Vishal. But look, this was a unique thing in that we had a significantly more data on breast than we did on colorectal. And the reality of life is we could have gone back in time to when Vishal and I weren't here. We would have gone after breast first. We went after colorectal. We didn't have the data, so they came and told us. But you've got to remember, throughout this year, we've hired a rockstar sales force, and we've trained them. And for us, the thing is you can only launch your product when you have Medicare approval is crazy. Look, it's not going to be easy. You don't get me wrong. But we have physicians clamoring to get their hands on this product. And so our thought is, "Look, we're going to launch the commercial and private pay, and we really want to get early adoption. And what it will do, it will create momentum in the marketplace as we continue to work behind the scenes on things around reimbursement." But our breast is really where you see a differentiation significantly against Natera with this assay. And so that's why we wanted to get it out. As far as what we're going to do to get MolDx coverage, do you want to cover some of that?

Yes. I mean, look, we have both paths available to us whether we do a head-to-head or whether we do a bigger clinical study. We did submit some data. It wasn't clinical utility data in colorectal because that was our understanding with our previous discussions with MolDX wasn't needed, all right? So we're talking to them. We're on continuous discussions with them as to what makes the most sense. I don't want to give guidance one way or another yet as to which path we're taking, but we are in discussion. We're also looking at which samples are available to us to get it as fast as possible back to them. So because of that, I think we'll provide more guidance on that and probably in the Q4 earnings. But right now, I don't think we're going to provide that guidance.

But coming back to the breast side, right? The only thing I would add here is that if you look at our breast data that we have, we got the chart, we've got the GEO OXO, the chemo NEO, and the survive studies that we have already published on. And if you look at, in particular, the GEO-OXO study that was published, what you will see is that 25% of the breast cancer patients in that population were below 0.01%, and we could detect them with RADAR. That is very unique to our technology. I think that's something we have to highlight because the RADAR technology is known for that, and that's the value proposition we bring to the market. And oncologists know that.

And that's why we want to get it out there now.

Your next question is coming from Mason Carrico of Stephens, Inc.

Congratulations on the quarter. Just looking at the volume improvements you saw in September and October. Is there any additional color you could give there, either quantitatively or qualitatively, in terms (Audio Jump 00:44:02) business versus legacy modalities.

Yes. Look, we don't give month-to-month. I think we gave you that a little bit of highlight. I think one of the reasons we did that is I mean our lab had to be shut down about five or six days with the hurricane. And to see relatively good volumes, in light of losing so many days in this business... But we didn't give month on month. Bill, do you want to give any more color around just kind of the unit?

Yes. I mean again, I don't think we want to provide quantification. But one of the things that Chris mentioned is that we've seen continuous improvements in our turnaround time over the course of the last several months. And as you start to see improvements in customer service, then you start to see improvements in growth as well. And so I think that probably is playing a role.

Got it. Thanks guys.

Your next question is coming from David Westenberg of Piper Sandler.

This is John on for Dave. And congrats on the good quarter. So traditionally, NeoGenomics has been a relatively low R&D spend company. How should we think about spending on R&D over the coming five or so years? (Audio Jump 00:45:26) for instance, or is it more part of a new model?

Yes. Look, when we come out with the guidance in our Q4 earnings or next year, I think you'll get much more clarity, but maybe just caveat a little bit. Most of our R&D was really deep. I would say there's a high percentage of the resources that we're already spending. Sometimes I find in R&D, it's not the percentage of revenue. You have enough money. It's just, "What are you spending the money on?" And I would say that's really our first step, as Shashi kind of really starts to dig into that leading that R&D team. So I would say that's one. Obviously, Inivata, a little bit different. It was in R&D. It was very much and R&D engine. And so as we go through the integrating of the two businesses, I think we'll get more clarity on that. But I would not... We pace all of our spending. So I wouldn't think we're going to move that. But I wouldn't say that's going to be significant, but I would wait until we come out from a percentage of revenue, I mean, until we come out and share guidance, we can't give you much more detail on that.

Got it.

Okay. Your next question is coming from Tejas Savant of Morgan Stanley.

Hey guys, good morning. Chris, it's good to speak with you again. A couple of questions for you here. First, just a quick point of clarification on what I think I heard you guys say on RADAR here. Did I hear Vishal say that MoldDX wants clinical utility evidence? And my question is really the incumbents in MRD who have reimbursement haven't been asked to provide that. They have some multiyear studies underway. So is this mainly a function of not being first to market? Or is it just a shift in standards we are seeing from MolDX? And my second question, perhaps, Bill, you can take a crack at that. You had noted that your backlog has skewed a lot towards longer clinical stage work and you wanted to shift it towards quicker burden pre-clin stuff. Is that now essentially deprioritized, and you'll go after profitable work irrespective of whether it's short or long cycle?

So I'll give that to Vishal. I'll make a comment on backlog at the end, but Vishal will take this.

Yes. So the first thing was on the RADAR side, right? I think we're seeing more clarification from MolDX as the way we will look at this. I think you're right, it is the function of not being first to market in the indications that we had originally gone for. I think you have to keep that in mind. There is a predicate device that's already out there and have asked us to basically show a comparison to that predicate device in some of the indications that are already out there. So you're seeing a little bit of that. When we talk about clinical utility, we talk about clinical utility here as to the value of an MRD test in detecting things earlier compared to standard of care. So that can be through a publication. It is not like what we're used to in a full-blown clinical utility perspective, it's more from a publication perspective. So that's what we're working on. And you can see that we have some of that already in the breast cancer side, with certain indications in breast cancer.

Then to the pharma side. It's not that we will not take on, or we will only take on, profitable because I think that's very much short-term thinking. We know that there are indications or there are situations where you start with something that is smaller scale, nonprofitable, that turns into much larger projects. But it has to be much more strategic and a longer-term view in discussions with pharma to be able to do that. And I think that's where we are at as to, "How do we take a look at all of our, for example, top 25, top 50 pharma customers out there, and look at where they're going with their drug programs? Do we have the capabilities internally to be able to meet those requirements as we see them? not just for the next quarter but also for the next two to three years out." Because guess what, pharma's always looking 10 years and 15 years out. And that's something we also have to take a look at.

Yes. I think it's also, as I said in the call, putting a lot more discipline into the way that we manage that business. The field, for example, was paid on bookings, not on revenue. And bookings change over time. If you think about the profitability of projects, there was not a big focus on that. And so I will say the big shift has been that we will continue to obviously manage bookings. And by the way, we had a great quarter from a booking perspective. But we'll start talking more about the pharma as what's going on from a revenue perspective.

Helpful. Thank you, guys.

Your next question is coming from Dan Brennan of Cowen.

Great. Thanks for taking my questions. I'm just wondering about the bigger picture view on the core clinical business, getting that business back up to say mid-single, high single-digit growth. Chris, just wondering how much of that is kind of in your own control? Meaning fixing service levels, turnaround times, things of that sort, versus having to deal with the increasingly competitive landscape? Or if you would clarify it like that, from some of the larger oncology clear labs and the risk that poses to some of your base business?

Yes. Look, I think it's all within our control. I think there are two pieces. One is how do we get better at what we do to make sure the customers that have been loyal have been with us for a long time. We stay sticky. But the other one is, look, I think we have to have competitive vigilance out there. The market is definitely much more competitive than it was five years ago when Neo was really going through some high growth, and was really a niche oncology testing company. But I think it's both, right? I use a sports analogy. We need to run our play, but we need to also stop the other team from running their play. And I will say there is a shift of a will to win going on through this organization right now. That we have this incredible competitive diligence that we will go out and we will compete. And so I feel really good about both, but they're both in our control.

And maybe just kind of one more on that aspect. I know there was a question earlier on NGS, but from what the company is doing internally and the development of your own larger tests, do you feel there needs to be a greater investment in that in terms of to compete? Or do you feel like you guys are on the right track in terms of creating these larger more esoteric NGS panels?

Look, I think the first one, the one that we'll look to try to bring out in the first half of next year; I think from a cost perspective, we're fine on that. I would say the second one, where Shashi is really spending time, we will have to do some investment. But again, I come back to what I said earlier, a lot of that's reallocation of where we're spending the money. And rather than trying to do 20 projects that only one will pay off, we need to narrow that list down to the five to ten projects where one or two will pay off. And I think part of that is putting more diligence and governance into our product pipeline process, which we're just beginning to do.

Great. Thank you.

Your next question is coming from Mike Matson of Needham & Company.

So just in terms of Project Catalyst, I think when you announced it, it was supposed to have about $15 million of savings. I think that equates to about 300 basis points of margin improvement. Taking a longer-term view of things: the EBITDA margin has gone from kind of mid-teens in 2018 to negative double digits this year. And I understand we've seen some good trends in the last few quarters. It seems to be headed in the right direction. But is $15 million really going to be enough? Or are you going to have to come back and do some additional restructuring or some type of other programs like Project Catalyst, Part II or Part III or something like that, to get you back to kind of double-digit EBITDA margins? And look, I know that's going to probably take some time. I'm not expecting it in one year, but the $15 million just doesn't seem like enough to get you even close to being EBITDA positive.

Look, there are a lot of moving parts in that question. I would say that Catalyst, the way that we did Catalyst, is to think of it more as a structure of the way we're going to run value capture going forward. And so one of the things we'll disclose when we come out in Q4 earnings is we'll disclose our commitment of how much value capture of catalyst money we're going to generate every year through these initiatives and saving money. Some of that is going to take some onetime costs to right-size the business and to make sure from a financial perspective going forward. So you're exactly right. We have to do better in lots of areas. I think what we did initially, I would say think of it today as more of a project and tomorrow, more as ingrained in the culture of the company and the way we run the company. I think our view is that we have got to get better every single quarter, and we can't go back and compete against 2018 sitting here in Q3 of '22. What I want to make sure we're doing is every single quarter, we're getting better and that we're not sacrificing long-term growth by just making a drastic decision in one quarter. So, that's why I go back to this. It's about pacing. And candidly, I think we can grow this business at a level that investors will be incredibly happy with, but also make money. And it's about how do you do that through the pacing? So it is going to take time. It's a brick-on-brick process, but I think you will start to see this consistent delivery of operating savings to our investors.

Okay. Got it. Thank you.

Your next question is coming from Derik De Bruin of Bank of America.

I think he had asked his question. So I think we're there. I think we're at the end of the call. And I just want to take a moment and thank everyone for the time that you've taken today to catch up with us. As we end the call, I really do want to recognize the over 2,000 Neo teammates around the world for their dedication and their commitment to building this world-class oncology diagnostic information and decision support company. I would say anytime a company goes through change, it's a challenging environment. One of the things that we've talked about to the team is to really lean into that. And I will tell you the one thing I'm really proud of is that the team was yearning for this. They were earning for this will to win and be back on the front foot. And I'm really excited about where the organization is and how quickly we're adapting and being agile. But for that, we're excited about where the business is headed. We will look forward to giving a lot of detail to you in the Q4, especially around the strategy and the direction. And hopefully, we'll see a lot of you guys out in the marketplace in the coming days. But thanks again for your time today and your support and be well. Take care.

Thank you, ladies and gentlemen, that does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.