NEO - NASDAQ

Welcome to the NeoGenomics Second Quarter 2024 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Please note this call is being recorded and an audio replay will be available on the Company's website. Kendra Sweeney, Vice President of Investor Relations, you may begin your conference.

Thank you, John. Good afternoon, everyone, and welcome to the NeoGenomics second quarter 2024 financial results call. With me today to discuss the results are Chris Smith, Chief Executive Officer; and Jeff Sherman, Chief Financial Officer. Additional members of the management team are available for Q&A, including Warren Stone, Chief Commercial Officer; Melody Harris, Chief Operations Officer and President of Informatics; Dr. Nate Montgomery, Head of Medical, and Karim Saad, Head of Strategy and Transformation. This call is being simultaneously webcast. We'll be referring to a slide presentation that has been posted to the investors tab on our website at ir.neogenomics.com. Starting on Slide two, during this call, we will make forward-looking statements regarding our anticipated future performance. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to our most recent forms 10-K, 10-Q, and 8-K we filed with the SEC to identify important risks and other factors that may cause our actual results to differ materially from the forward-looking statements. The forward-looking statements made during this call speak only as of the original date of the call, and we undertake no obligation to update or revise any of these statements. During this call, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The non-GAAP financial measures presented should not be considered in an alternative to the financial measures required by GAAP and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measures in a table available in a press release we issued this afternoon. I will now turn the call over to Chris Smith, Chief Executive Officer of NeoGenomics.

Thanks, Kendra. Good afternoon, everyone, and thanks for joining us today. On today's call, we'll discuss the highlights of our strong second quarter performance and provide an update on the progress made in accelerating profitable revenue growth. Before we discuss our financial results, I want to thank all of our Neo teammates for their continued commitment to our mission and vision. Together, we are serving patients and saving lives. Let's get into the highlights on the next slide. We continue to execute on our goal to deliver double-digit year-over-year growth. In Q2, revenue grew 12% as compared to the second quarter last year. To achieve this result, we grew both volume and revenue per test and expanded gross margin. NGS continues to be a key driver for growth, increasing approximately 40% and representing 30% of our total clinical revenue. We are also proud that we have delivered the fourth consecutive quarter of positive adjusted EBITDA and are generating even more leverage in the business. On the operational front, the alignment of our clinical and pharma teams into a single commercial group is taking hold as pharma business begins to stabilize. Our LIMS project reached a key milestone this quarter and is on track to support several aspects of lab automation and improved efficiencies as we grow volumes with new product launches in the second half of this year and into 2025. All of this puts us in a great position to raise our revenue guide for the year and to significantly increase our adjusted EBITDA guide. Turning now to our progress on our strategic priorities, these priorities are directly aligned with our goal to grow revenue double digits, expand gross margins, and generate long-term sustainable earnings growth. Today, I'm going to focus on our three financial pillars, profitably grow the core business, accelerate advanced diagnostics and innovation, and drive value creation. Our clinical business continues to execute on our commercial strategy to deliver volume growth, increase AUP, and improve mix driven by strength in NGS. We continue to increase our presence in market leadership in HEIM. We will launch a rapid AML test in the second half of the year and this, combined with our exceptional customer service, continues to position us well in this space. Through RCM initiatives, we're continuing to expand our commercial coverage and having success in reducing denials to ensure we're getting paid for the work that we do. The combination of the large cancer market opportunity with our continued commercial success enables us to accelerate our investment in the commercial team to capitalize on this opportunity in the outlying years. Our January 24 expansion is beginning to show positive return on our investment. And as we look to 2025 with the launch of new products and our goal to further expand our reach deeper into community oncology segment, we will continue to expand our commercial resources before year end. The effectiveness of our sales force, meaning time they spend on high impact selling activities, continues to improve quarter over quarter through the use of digital tools and strategic targeting informed by proprietary CRM data. Productivity will continue to increase over the next few years as we incorporate guided selling, AI tools, and other enabling investments. The advanced diagnostics and innovation pillar looks to the future of the industry with new technologies and data. Utilizing our current resources and executing on the right opportunities position us well for long term sustainable growth. We believe innovation is a turbo charger for growth, so we'll continue to focus on bringing in new innovative products to the market to enhance patient care. We operate in a growing attractive market. We know cancer incidence and prevalence are on the rise. Statistically, one in two men and one in three women will develop cancer in their lifetime. They will become part of a patient population that is seeking answers from oncology testing that will give them the best opportunity for positive outcomes. We are focused on developing innovative tests and diagnostic and therapy selection markets that will provide actionable insights to inform patient cancer journey. Our breadth of menu with over 600 tests is a key differentiator for the oncology customer segments that we serve, and we are committed to expanding our product offering by adding new tests to help deliver innovative care for patients and a more seamless experience for physicians that care for these patients. We have three innovative NGS tests in the late stage development and are targeting to launch two of these tests over the next six months. If you turn to slide 10, the heme segment comprises approximately 20% of the opportunity and is growing approximately 11% annually. NIO has traditionally been viewed as a market leader in this segment, and we intend to continue leading with differentiated suite of products in the integrated superior customer experience, which our customers have come to expect from us. A liquid biopsy CTP test will launch commercially for pharma this quarter, and a rapid AML test will launch by year end. Let me take a minute to talk about why I think these tests are important. There are over 20,000 cases of acute myeloid leukemia that will be diagnosed this year, and we have a strong presence in this market. Our new NIO AML Express is an enhanced NGS panel that detects DNA and RNA biomarkers for AML that are most relevant to diagnosis, therapy selection, and critical clinical trial options. Most importantly, NIO AML Express has a rapid two to three-day turnaround time, up to two days faster than any other tests on the market, including our own industry-leading test. This means an AML patient who is admitted to the hospital and waiting for their diagnosis could be tested using AMLExpress, and begin their treatment up to 48 hours sooner than with other tests. In pharma setting, AMLExpress delivers a rapid and detailed insights that may stratify patients by prospective clinical trials within 72 hours. We anticipate this test will launch in both clinical and pharma segments in Q4. The Neo PanTracer liquid biopsy is a large panel NGS assay for genomic profiling from whole blood samples. The panel detects all major variant classes as well as signatures, including MSI and TMB. It provides genomic profiling results from ctDNA, even when sufficient tissue samples are unavailable. We believe this assay has the potential to be a differentiator for pharma because of its large panel size, minimal sample input and highly competitive sensitivity and specificity. In the clinical setting, Neo PanTracer will be one of the most comprehensive and highly sensitive liquid biopsy panels on the market, complementing traditional tissue testing for therapy selection in advanced state solid tumors. The results will be available in a few of seven days, which is appealing to providers as it accelerates the speed at which they can treat their patients. We are targeting the clinical early access launch for lung in late Q4 and the Pan-Cancer in Q1 2025. Beyond providing insights to optimize patient care in the clinical setting, these new tests will help improve operating margins in our pharma business as well as continue the transformation of that business as well as deliver more robust and valuable real-world data to fuel our informatics business. Speaking of informatics business, let me give you a quick update on where we are today. If you take a step back and think about the number of tests we've run over the last few years across the cancer continuum for over 0.5 million patients annually, you see we are sitting on a valuable asset of oncology diagnostic data. Even more so, we are using multiple testing modalities with digitized images for most solid tumor samples and creating depth in that data. Pharma uses our diagnostic results in a combination with raw data to enhance the biomarker discovery, expand R&D to drive their pipeline, support regulatory filings and ultimately, advance our commercialization. So as we increase the volume of our testing from our clinical business, we likewise expand the breadth and depth of our data assets, which increases our monetization of capacity for our informatics data customer. To further drive operating efficiencies, we continue to optimize our lab footprint and invest in productivity. Our lab in La Jolla has been decommissioned, and other sites have been validated for testing specimens that were historically routed there. Meanwhile, the expansion of our Raleigh Lab is well underway. Automation and increased productivity are leading to improvements in turnaround time and margin expansion. Our digital transformation is well underway through the implementation of our new LIMS system, which will include a customer digital portal and enhanced enterprise-wide technical architecture. This enables us to further improve stickiness and increase our focus on integrations with our customers' EMRs. Finally, our new LIMS and digital transformation are being implemented in a way that positions us well to comply with future regulations of lab developed tests. From a legal perspective, we remain committed to ensuring patients will, once again, have access to our RaDaR technology. On June 6, MolDX granted approval for recurrence monitoring and resectable HPV negative head and neck cancer. RaDaR is currently the only MRD test with MolDX approval for this indication. On July 12, the appeals court upheld the preliminary injunction against RaDaR, but did lay out the possibility for Neo to go back to the District Court to modify the injunction to carve out head and neck cancer. With this news, we are evaluating our options. We will continue to vigorously defend our technology in the district court for the benefit of all cancer patients. Beyond litigation pathway, we continue to develop new MRD assays as well as evaluate opportunities for in-licensing or strategic partnership arrangements to enhance and bolster our efforts to drive innovation and bring optionality to patients who can benefit from MRD testing. As we've stated in the past, we are committed to being in the MRD market and supporting patients through their cancer journey from diagnosis to monitoring. Now let me hand it over to Jeff so he can go through a little more detail on our financial results.

Thanks, Chris. I'll start with a little more detail on our operating results for the quarter. We delivered a strong overall performance in Q2, led by yet another quarter of double-digit revenue growth, increasing 12% over the prior year to $165 million. The combination of clinical test volume growth, the ongoing shift to higher value tests and improvements in revenue per test due to RCM initiatives continue to drive revenue growth. Adjusted gross profit was up 20% to $78 million and adjusted gross margins improved by 320 basis points to 47.3%. Adjusted EBITDA improved 630% from prior year to positive $11 million. As Chris said, Q2 was our fourth consecutive order of positive adjusted EBITDA. Clinical Services revenue of $141 million was an increase of 15% over prior year, driven by a 9% increase in revenue per test due to mix and pricing and a 6% increase in volume. Sales force penetration into the community oncology setting is increasing adoption of NGS testing and driving higher volume growth. The strong demand for NGS testing and the insights it provides continues to fuel revenue growth and earnings. As a reminder, we saw rapid growth in our NGS business in 2023, including the introduction of the large panel Neo comprehensive solid tumor at the end of Q1 and myeloid disorders tests in Q3 of last year. While we continue to expect strong growth in our NGS business in the back half of this year, the annualization effect of these tests will result in tougher comps as the year progresses. We delivered the 13th consecutive quarter of improvement in revenue per test, up 9% over prior year to $454. NGS testing and RCM initiatives, including improved pricing, remain the biggest contributors to these improvements. Last quarter, we announced the restructuring of our commercial organization, leveraging the success of the clinical business as a blueprint for the Pharma commercial business. Under Warren's leadership, this segment is stabilizing and delivered a quarter better than we forecasted. With Melody taking the reins for informatics, the business is developing a comprehensive plan to further expand the monetization opportunity of our data assets. With pharma and informatics combined into advanced diagnostics, revenue declined 3% over the prior year to $23.1 million, but did increase sequentially by $1.4 million or 6.5% over Q1. The year-over-year decline was primarily driven by international site closures, restructuring activities and other macro pharma market conditions. However, our plan to optimize margins continues to improve ADX adjusted gross margins by 470 basis points over prior year, and we believe the business is now on the right track towards resuming year-over-year growth. Looking at the income statement. Adjusted gross profit increased by 20% over prior year as a result of revenue growth and operating leverage, generating higher adjusted gross profit and margins. Adjusted gross margin was 47.3%, an improvement of 320 basis points over the second quarter of last year. Regarding operating expenses, sales and marketing expense was $22 million, R&D expense was $8 million and G&A expense was $63 million. And as a highlight, adjusted EBITDA improved 630% or $13 million versus prior year to $11 million as we work to generate additional leverage in the business. Turning to the balance sheet. We ended the second quarter with cash and marketable securities of $388 million. Cash flow from operations was a positive $14 million, an improvement of $15 million or 997%, as we recovered from payment delays, primarily driven from the Change Healthcare data breach in the first quarter. Our May 2025 convertible notes, with the principal balance of $201 million, are now presented as current liabilities on our balance sheet. Given our strong cash position and liquidity profile, we plan to use our existing cash and marketable securities to retire the 2025 notes in May. Now let's move on to our revised guidance. Given our strong performance in the first half of the year with revenue growth of 13% and our expectations for continued momentum, along with our sales force expansion and new product launches later this year, we are in a position to raise our revenue guide for the year and significantly increase our adjusted EBITDA guide. Previously, the revenue guide was $650 million to $660 million. We are now expecting revenue in the range of $655 million to $667 million, representing 11% to 13% growth. The pacing of the second half revenue growth will be more heavily weighted in the fourth quarter, with new product introductions, securing new business in the final stages of closing and the continued success of our sales force optimization and expansion efforts. The previous adjusted EBITDA guide was $21 million to $24 million. We are now completely resetting that range with our revised guidance range of $33 million to $37 million, representing growth of over 1,000% versus last year and a 55% improvement from the original guidance at the midpoint. And with that, I'll hand it back to Chris to wrap up.

Thanks, Jeff. It's been a great quarter, and I'm proud of our teammates for working so hard to sustain performance that delivers these results. We plan on launching three exciting products over the next 12 months to further strengthen our strong position in hospitals with pathologists and better position us with community oncologists. In addition, we continue to gain operating leverage on the business as we execute priorities. With all these things, we're confident in the remainder of 2024 and therefore, are raising guidance. We'll end our prepared remarks there and open it up for questions and turn it back over to the operator.

[Operator Instructions] And our first question comes from Andrew Brackman with William Blair. Please proceed.

Hey, good afternoon. Thanks for taking the question. Maybe if we could start, just on the NGS side of things. Obviously, another nice quarter of growth there in Q2. But I guess as we sort of think about the growth levers there, is there any color that you can share on the mix of that business between solid tumor and heme today? And I guess related to that, how are you sort of thinking about the strength in heme creating a bit of halo effect across not just solid tumor, but the entire rest of the testing menu here as we move forward?

Yes. Well, I think we definitely view it as a portfolio. And I think without question, heme has enabled us to, I think, gain a better presence in the solid because of our market leadership. I'll ask -- Warren is here as well as Jeff, but we don't break it out by heme or solid. But do you want to talk any more about that Warren? Do you want to start?

So Andrew, great question. So I would say the following that, certainly, we've had a presence from an NGS perspective, heme, obviously, a significant amount of time, and that has a much larger revenue base associated with it. Certainly, a product that we use as an entry strategy into the community and using that as a basis to drive growth into solid tumor NGS. I'd say that's working very effectively for us. And as a percentage growth, obviously, we see solid tumor growing at a faster rate than we do heme. But in absolute term heme still is growing at a positive rate.

Yes. And I think we've seen good uptick throughout 2023 in the solid tumor panel I noted at the end of Q1. And then the myeloid panel, we introduced in Q3, we saw a good uplift as well. So I think those new products are helping to drive more NGS growth.

Great. I’ll keep at one. Thanks guys.

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

Great. Thanks for taking the questions here. Maybe one on the margins and the guide. So obviously, as I think you discussed, Jeff, kind of just a complete reset of the EBITDA outlook here, so well, like mid-single-digit margin versus, I think, we had you guys somewhat barely profitable. Just kind of what you discussed a lot what's driving it, like better payments, sales force traction, maybe top line growth? Can you just speak to kind of the durability of that? And how we think about the pace of improvement that's possible as we look out beyond 2024 now that you've had this big acceleration?

Yes. I think it's been multifaceted. And we always talk about we have multiple drivers to drive the business. Certainly, the volume growth in the mix and revenue per test are all helping to drive gross margin improvement and adjusted EBITDA improvement. I would also say we've done a lot of work with lab optimization in terms of our footprint, how we're operating. And we've done a lot of work on productivity as well, just how we're staffing the business. As both the clinical and pharma operations have fallen under Melody, I think we have optimized the lab and how we're working there. The LIMS, we believe, is going to further help us do that as well. And then I'd say on the IT side, I think we've done a lot of work as well, rationalizing IT systems. And again, I think the LIMS will allow us to retire some redundant systems as well. And so I think there's a lot of activity. Finally, I would say on the procurement side, we really, I think, been more rigorous and disciplined on the procurement side over the last year, and that would include logistics as well. So I think we have teams of people kind of looking at cost infrastructure across the company and are using technology to get better. And so as we think about durability, we still think that's a multiyear opportunity to continue to get better and see margin improvement over the next couple of years continuing to improve and getting operating leverage, therefore, on the gross margin and the adjusted EBITDA line.

And I think the other thing is we continue to shift our mix more towards NGS, that's obviously a big driver for that as well.

Got it. And then maybe as a follow-up, just on NGS. Just on the PanTracer, can you speak a little bit to how like you size that opportunity? I'm sure you've got a pretty good handle on what the market dynamics are and what your customers are currently using today. So what kind of impact do you think PanTracer could have? And you talked about turnaround time is a key differentiator. Any other color you can give about the product profile?

Yes. Dan, I'll let Warren take that one.

Yes. So I mean, as Chris articulated, Dan, certainly a product that we believe will be very competitive. It's a panel sized over 500 genes. And it's got indels, SMBs, CMBs, TMB and certainly, limited detection are very, very competitive. And coupled with less than seven days’ turnaround time, we feel that it will be very well placed in the market to compete with competitors out there. It will be a big upgrade over the panel we have today, the IVF, which is just a lung panel. So we feel that we can leverage the expertise and knowledge that we believe from IDFL to an expanded pan-cancer solution. It will also allow us to sort of play into what's becoming more and more popular in terms of concurrent testing and especially as we launch our PanTracer solid tumor, which is slated for next year. That will really allow us to offer sort of a pan-tumor testing solution from a concurrency perspective as well. We recognize that there are other players in the market, but we still feel with our footprint, both within the hospital setting, but also as it's growing in the community setting, through the expanded sales force that we feel we can make a significant growth to this product.

Great. I’ll keep it at two. Thanks a lot.

The next question comes from Tejas Savant with Morgan Stanley. Please proceed.

This is Madison on for Tejas. Thanks for taking the question. I just want to start out, congrats on the quarter. It looks like the top line guide has been raised for the B plus, an additional a couple like maybe $3 million. So I was just wondering there if you could kind of parse out what are the main drivers you're seeing playing out better in the second half than you had initially expected when you set the guide?

Yes. It is -- I think it's continued volume performance. The mix continues to be strong, as Chris said earlier. So we're getting good leverage on the NGS growth that we're seeing. And then I think we're continuing to manage costs well. So again, I don't think it's any one factor. I think it's a combination of factors that are giving us the confidence that the improved performance will be sustained in the back half of the year.

Awesome. Okay. If I could just squeeze one more in. I know you mentioned NGS mix, and the quarter was about, I think, 30%. I was just wondering how much of that growth is being driven by adoption in the community setting versus hospital setting?

Yes. We -- look, I think it's coming from both segments, obviously, but we don't break out as far as which segment is going into which market.

Understood. Thank you.

The next question comes from Mike Matson with Needham & Company. Please proceed.

Hey guys, this is Joseph on for Mike. Thanks for taking our questions. On the AMLExpress, you guys have talked about a two-day turnaround for that. I'm just kind of wondering, is that -- that turnaround time, can that be transferred to other tests? Is this kind of specifically for AML that gives you that rapid turnaround time? Or just kind of wondering what's the drivers of that? And if we can see any turnaround time improvement in other tests?

Yes. I'm going to bring in Dr. Nate Montgomery. You guys, I don't think have met it, but he runs medical, and let him talk a little bit about that test.

So I think in the near term, we expect this to be specific to AML. Longer term, the sort of technologies that we're talking about here will apply to other tumor types. Today where we are, speed usually means a little bit smaller of a footprint of the assay in terms of how many genes we're testing. So if this isn't something immediately that would be applicable to all hematologic malignant solid tumor, but we do see opportunities growing in the rapid panel format for many indications.

Okay, that’s helpful. Yes, I think we’ll just keep it to one this time. But thank you for taking the question.

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

So, I’m going to shift actually. I just wanted to Jeff. You talked about the three products that you're launching. Was that previously in guidance? Or was that always -- or did you get maybe some timing on that? And then just in terms -- I think you also mentioned a new customer win. Can you give us some color on what that new customer win would look like? And don't worry, we won't get too crazy with modeling next year. But I mean shouldn't these be next year drivers as well?

Yes, I'll show that. So look, we've talked about probably more about the large solid tumor. And I think -- and so I don't know that I would say that we guided, but we've talked openly about the products. And I think we just -- we had a lot of questions in between Q1 and Q2. We just thought it was better to give some more clarity, especially since we're further in the development cycle of those products. So if you think about three big products coming out over really the next 12 months, 1 kind of in Q3, Q4, 1 in kind of Q4, Q1, and then 1 kind of at the end of Q1 into Q2. And we think all three of those will be major products for us, but we had not -- I would say that we've not given the level of detail that we gave today. Look, as far as customer wins, I think as you know in this business, I think when you go through the process and start to win accounts, it does take a time line to have those accounts onboarded. And I think what Jeff was referring to, and Jeff can chime in here. But I think what Jeff was referring to is we were looking at the second half and a lot of that stuff is happening on that account is Q4, so that it was a little bit -- our second half is kind of weighted a little bit more towards Q4 than Q3.

Yes. And I would -- so I would add. So we did have some initial product launches in the original guide, and they were always happening towards the end of the year anyway. So some impact, new business wins will drive revenue in Q4 as well. And so we would expect Q3 to be higher than in Q2, a little bit higher in Q2 and then more of that earnings growth come in the fourth quarter as we look at the back half of the year, but things we have pretty good line of sight on.

Got it. And I know from a volume standpoint, NGS is not that high, but you did cite 30% revenue. Where do we kind of think that could peak at in terms of percent of revenue? And again, I know you have a long-term guidance of 10%. You can't keep going with these teams forever in that clinical growth business, but just trying to get a sense for that peak.

Yes. Well, look, look, a couple of things, I think, to think about it. It's 30% of the clinical business, and the base business of that clinical side is still growing as well outside of NGS. But if you look at a lot of our competitors, 80% of their revenues, 90% of the revenue is coming from NGS. So we think there's a ton of runway. Now I'm not saying that we're going to be at that level. But you can see this going significantly more than 50% of the clinical revenue. So we think that, again, there continues to be a lot of runway. Yes, best as we go into community oncology.

And I think it's a focus of ours. It's a higher revenue, higher margin profile. We're clearly from a sales perspective, focusing on it as well. And we're seeing the results of that focus drive through from a revenue perspective and from a margin and earnings perspective.

Yes. And that's why we're -- I think we're expanding the field sooner than we probably had talked about in prior quarters. We're getting a lot of sales force optimization and efficiency. But at the same time, we have a relatively -- the size of our sales force, compare to what the opportunity is. We just need to continue to invest, and that's why we're going to accelerate that investment.

Thank you.

The next question comes from Matt Sykes with Goldman Sachs. Matt, please proceed.

Good afternoon. Thanks for taking my questions. Congrats in the quarter. Maybe just two quick ones. I'll ask them both upfront. Just on revenue per test, you guys have had a pretty impressive back record of being the revenue per test up. And I know you've cited focus on higher-value test price mix and also revenue cycle management. I know the answer is all of the above, but would love to hear like of those areas, where is the most runway for you guys? Do you feel to continue to drive that revenue per test up? And then second question is just, Jeff, a quick one. OpEx, for the balance of the year, you've been kind of growing at, I think, mid-single digits. Is that what we should be assuming for the balance of the year on the OpEx side? Thanks.

I'm going to let Jeff take both of those, Matt.

Yes. I think on the OpEx side, that's a reasonable assumption, Matt, for the back half of the year.

Just blank on the first half or the first part of the question.

Revenue per test.

So revenue per test, the drivers, the NGS mix continues to be a big part of that. And I've said over 60-plus percent. And we did introduce several new tests, as we've said, in 2023. And so we are starting to annualize on those. And so both Q1 and Q3, we had some new tests. So while we expect that's going to continue to grow, I think you'll see that pace in terms of that revenue per test percentage growth will slow, but we still think it's going to go up. On the revenue cycle side, I still think there's a lot of opportunities there. Our biggest challenge there continues to be the large panel tests. And the state biomarker legislation, I would say, is getting momentum in terms of the number of states approving biomarker legislation. However, once the state approves it, it's not a flip that switch is that payers are going to start paying. We still have a lot of work to do to get payers to pay even when the states say they are supposed to pay or Medicare is paying. So I think we continue to look at that as an opportunity -- and I would say we believe it's a multiyear opportunity to continue to drive higher payments for work we're already doing. I think we have a lot of focused effort on it. I do think there's momentum from a legislative perspective to help us there, but it's still, I would say, down in the trenches work to work with the payers to get those payments, but we are seeing continued success there.

Thank you.

The next question comes from Michael Ryskin with Bank of America. Please proceed.

Hey, good afternoon. This is John Kim for Michael. So the sales force, you guys obviously, made a lot of investments, and you guys are starting to bear the fruit of your labor there. But is -- are you looking to expand that further? And should we think about incremental costs in the second half in '25? And separately, I think you guys talked about the 40% of the sales force time being focused on the community oncology setting versus the balance in the hospital setting, how is that looking? Ha that balance shifted at all?

Yes. So we did talk about that we're expanding the field organization. So that's kind of in the slides and in the script. And when you think about it, we are getting a return, and so we're going quicker. So there would definitely be costs though associated with it in the back half of the year as well as into '25, but that is built into the guide. Yes. And as far as we've never said specifically the amount of time that we're spending really in one place or the other. We have two separate sales forces. One group focus is primarily in the hospital pathologists and the other group focuses primarily on the community oncologists. And so both of those are continuing. But we see the big growth opportunity with the Community Oncology segment.

Yes. And I would say we are having success with this commercial expansion, and it has been a growth driver. And our adjusted EBITDA growth has been faster than we expected, both last year and this year. So we look at that as enabling us to continue to invest in the sales force expansion and optimization efforts really to drive growth over the next several years. So I think that's the way we're thinking about it. We've said we're going to be measured and measure investment with revenue and earnings growth. And as we do better, we have the opportunity to invest more, and that is how we're thinking about it as we go into the back half of this year and into 2025.

Got it. Thank you for that. And then if I could just squeeze in one more. On the RaDar, I think you guys mentioned that you would be pursuing both the legal strategy and the internal RNA -- sorry, R&D. Are you still considering any sort of tech transfer or licensing or a full acquisition?

Yes. I'm going to -- you guys have not met Karim. I'm going to introduce Karim who kind of runs meeting with Ali and also strategy to come in and kind of talk about that. But obviously, the answer to the first part is R&D. Absolutely. But do you want to talk a little bit?

Yes. John. So as we mentioned, we are looking at the full spectrum of potential partnerships and in-licensing opportunities. So more on that to come, but we're not leaving any sort of stone unturned, both internal development but also in-licensing on partnership.

Got it. Thank you.

The next question comes from Mark Massaro with BTIG. Please proceed.

Hey, how’s it going Chris? Thanks for taking the questions. And Karim, welcome to Neo. Good to hear from you again.

Thank you, Mark.

Yes. So I guess the first question, you guys continue to grow really in a robust way in NGS. And so I have to imagine you are taking share in NGS. Can you just maybe touch on any specific indications where you're getting the strongest traction from? And then outside of NGS, in areas like flow, fish, IHC, how do you see those sort of sub-segments growing over the next couple of years?

Yes. So maybe start with the back and then take the front. So if you look at -- we show that slide that kind of shows that diagnostic business growing approximately 5%. I think we've said publicly they historically grow 2% to 4%, but we're still seeing nice -- really nice growth there, well above market in some of those modalities. And I think it kind of leads to your next one is where we would potentially be moving share. And I think part of it is the difference between us and some of these large reference labs and hospitals and the ability to come in and really kind of provide an end-to-end solution for their cancer patients and doing the testing. So we -- I don't think we've gone out and said specifically any one company from a market share perspective. And it's really because every territory is every territory, right? It depends on the geography of the country, who's stronger and how we do things. But without question, our team has helped us really, I think, get a quicker entree into some of these other modalities than we probably early days thought.

Okay. And then for my follow-up, can you give us a sense for when we can expect to see data on PanTracer liquid? And maybe just walk us through -- I know you touched on less than seven-day turnaround time. I think the market leader is around that time as well. So can you just give us a sense for when we might see some data and then walk us through your expectations around Medicare and how you're going about and planning to obtain Medicare coverage in the clinic?

Yes. So look, I think we're doing a couple of different things there. I would say that we're running what I would consider more traditional clinical trials with head-to-head to be able to come out and show some data. And obviously, I mentioned this on the call, we're going to start with lung and then move into pan-cancer. But I think you'll start seeing early data in Q1. Obviously, this is a process from MolDx what we've got to go through clinical trial, and that is already underway. And so I think, again, I would say maybe late Q1, I think the question becomes is how we release that product at some point into Q1, whether we wait from MolDX or just we're seeing traction in the early kind of clinical release. We'll do kind of a soft market launch to get early clinical data with key customers and then depending on that will make it a bigger decision as far as the timing of MolDX and that data. But I say market is probably going to be latter part of Q1.

Okay, great. Thanks guys.

Next, we have Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Good afternoon. And thanks for taking the questions. Maybe first up, last quarter, you had mentioned that there was some disruptions because of the changed health care situation. I'm just curious if that has all been reconciled at this point? You've gotten caught up there?

Yes. So we estimated about a $5 million impact coming out of Q1 in terms of collection shortfalls. We've collected most of that through Q2, probably another -- probably it was probably $1 million, $1.5 million that flowed into Q3. But I would say, as of this point, we are caught up now on that shortfall.

Got it. And then regarding the PanTracer test that you plan to launch. How -- what will be the key differentiator there versus the Illumina panel? Is it the turnaround time? Just any differentiation there would be helpful. Thank you.

Yes. So look, we are using Illumina platform, but it's really the bioinformatics, which would be the big key differentiator that we're developing internally. And so I think the turnaround time, think about that more against other competitors, and that's where we're kind of targeting that seven-day to make sure that we're at or better than the other competitors on the market.

Got it. Thank you very much.

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

Just one more follow-up maybe for Warren, I guess. I guess a lot of the increase in the commercial team has kind of been focused on the clinical side. Warren, I think you did say that ADX is kind of on the right track to resume year-over-year growth. So I guess -- and apologies if you already stated this, but did you add any sales reps on the pharma side and ADX side in the quarter? What are the plans for increasing headcount there? I think last we had heard it was around 10, but I could be wrong on that.

Yes. So I think your estimations there are accurate. And certainly, I think we've got to a point where we've stabilized the form of business now. And in the short term, no intention to add any incremental hedge to that business. But more refocused. We -- as I've looked at the business more closely, our prior approach was may be quite fragmented, and our strategy moving forward is a much more focused approach I think we can, therefore, gain significantly more leverage with the resources. We have, and as we start to gain traction in that business, again, we'll then look to make further investments. But in the short term, i.e. for the rest of this year, not planning on making any further investment.

But we can capitalize, as we said in our prepared remarks, on the commercial enablement infrastructure that was built on the clinical team is now being also utilized for the pharma team as well.

Okay, great. That makes sense. Thank you very much.

The next question comes from Puneet Souda with Leerink Partners. Please proceed.

Chris, thanks for the questions here. So first one is on the headcount increase. Can you provide us a little bit more into that? And where do you think the headcount needs to be eventually? And then how long will it take for some of these reps to be fully productive?

Yes. So look, I think one of the things -- because I know when you think about head count, I mean, I think the first thing that pops to mind is the OpEx. But a lot of -- I would say, when we came in and looked at this business, it wasn't so much the amount of money we were spending -- it's what we were spending it on. And I think what you're seeing is we're getting efficiencies in other areas of the business. And then being able to release some of those resources into the commercial organization, which we believe was -- we were under-indexed. And so I think that when you look at it, I think that's really -- we're looking at driving it, and it's in the back half. Do you want to share anything more about?

I think a couple of factors. I mean, as a commercial guy, I wouldn’t estimate what the last number is. We're never align in certainly. However, we have done numerous field expansions over the last 18 months, and I feel we've got the back office infrastructure in place now from a learning development perspective as well as tool point of view. So the speed to productivity post hiring is narrowing. And I think this is -- this is attractive for us. Again, I think also the labor market is going to become a little bit more attractive. So the time to hire is also reducing. So I think we feel confident in that we can reduce the amount of time from the time we make the decision to when somebody is actually productive significantly from when we started this 18 months ago. And we're probably within that sort of six-month range now and to end is what I'd probably estimate.

Got it. That's helpful. And then when we -- you talked a bit about informatics and can you elaborate a bit on where you're using AI, but where are you using informatics to drive more deeper into the accounts. It just appears that there's more competition on that front or at least perception of competition or new products that are emerging that are integrating more with the oncology EMRs and other approaches? So I just wanted to understand your approach there overall on informatics and how it integrates with the NGS assays?

Yes. I think when I talked about that we were talking about the new LIMS system, which I think is going to enhance or even better enable us to create that pathway with hospitals during the EMR. Do you want to talk a little bit about what's happening and how we've accelerated that?

Yes. So I think to answer your question, I think there's a few things we can talk about and also let Melody talk about informatics in general. But I think integrations with customers through the EMR system is a strategic focus area for us and certainly by directionally. So they can place orders that we can transfer reports and data to them and allow them to interrogate data, et cetera. So that's an integral part of the strategy where they're talking in the hospital setting or in the community setting. And I think the benefit there is that sort of frictionless experience and also really helping to improve sort of patient care by getting the information, whether it be a report or data to the practicing physician as quickly as possible. They're inherently is one of the key strategies that we've got and investing to accelerate that because it's -- frankly, it's become a demand from our customers. The second area is also certainly just the desire to have access to the raw data so they can look for trends within their patient populations, et cetera. we see that as in it's becoming more of a day-to-day type ask and sort of Neo-access provides a Neo-seek trust they provides a solution there, where oncologists can actually interrogate that data and look for trends within their patient populations. Melody, if there's anything you want to talk about generally from an informatics perspective?

On the informatics side, that's our revenue-producing licensing of data into the pharma industry. And so there we're growing productizing a little bit better and expect to see some good growth on that in the back half. But different than the digital transformation piece that Warren was just referring to on the clinical side.

But the mix of our business into more large panel NGS testing is going to give us more data ultimately to capitalize on from an informatics side over time.

Got it. Helpful guys, that’s great. Thank you.

[Operator Instructions] Up next is Tom DeBourcy with Nephron.

Thanks for taking the question. I just had a follow-up. I guess your MRD strategy at RaDar in the context of, I guess, the preliminary junction being upheld, I realized HPV negative head and back cancer might be carved out. But I guess, what concern of ours is really, I guess, the size of the potential liability that I realized you can't really articulate, but how do you think about making an additional acquisition? Obviously, this is before your time, but Nevada was acquired $450 million. So doing an additional acquisition in MRD with, I guess, maybe the size of the potential legal liability around RaDar still may not be node?

Yes. So for a couple of things. So as a company, we don't publicly discuss any ongoing lawsuits. But Ali is here who's our GC and can kind of maybe provide some more information. But do you want to?

Yes. I mean I'm not sure I understand your question, if it's around goodwill impairment or something like that, which we're not going to address.

I can clarify. I mean my question is really around how do you justify making an additional acquisition when you still don't know the size of potential liability that RaDaR may be owed to the tariff?

We have -- well, first of all, we have not said we would move additional acquisition. We discussed tech transfer, like licensing and strategic partnerships is what we're looking at right now. And then regarding our R&D, we have multiple MRD products in the development stage, one through feasibility that we're planning validate early next year and one not far along behind it. So we continue to develop MRD products with the resources that we acquired from Nevada.

In our prepared comments, we said we had multiple pathways, and that's basically one of the multiple pathways we have.

Yes. I think that's the way to think about it, right? There's really three avenues. One is litigation, which we're in the middle of, and we feel very strong about our position. We continue to go down that path. Second is, we've always been doing R&D around MRD, knowing that RaDaR from a sensitivity perspective, we beat that we would need a next generation. And third is we probably have one of the best distribution systems in the country for cancer, and there's a lot of innovative technologies from a licensing perspective, they are looking for avenue. So look, we're going down three paths, but we're really not disclosing much more than that at this point.

Thank you. I think we're near the end of time. So operator, I appreciate it. Everybody on the call, thanks for taking the time today to catch up. It was a great quarter, really happy with how things turn out, and we'll look forward to catching up with everybody soon. Take care.