Field Notes I Cancer Testing I A Healthy Debate on NEO(+)

Overview

We had a great discussion with a former NeoGenomics (NEO) executive (>2 years removed) that remains active in the laboratory industry with a private molecular diagnostics/next-gen sequencing (NGS) company. He has over 10 years of relevant experience, having held senior strategy, business development, and marketing roles in the industry. Our contact expressed a more cautious view of the outlook for NEO than we've heard from providers, and when coupled with feedback from our Black Book presentation, we came away from the discussion with a few things to work on and double-check with NEO management. At the end of the day, the industry is evolving, and cancer testing looks like a primary beneficiary of the #reopen. We believe NEO, which remains a Best Idea on the long side of our Position Monitor, is aware of the risks and evolving too.

Point & Counterpoint Highlights on NEO

1. "NEO has been slow to adapt and adopt molecular, which could be an issue down the road." Hedgeye - This may be true, however, NEO's legacy testing business is growing, and has funded organic and inorganic growth (e.g., Informatics and pharma services, the acquisitions of Trapelo, Inivata, etc.). 
2. "A 750-test menu is too large/overly complex - it's easier to get everything you need from Guardant." Hedgeye- NEO is likely to simplify their menu by cutting low-volume tests while they grow molecular volumes from single-digit percentages.
3. "The change in leadership ("Doug is well-respected") has created some uncertainty among senior management and NEO has lost some key people." Hedgeye - While this may be true, it is almost always the case, and we agree that former CEO Doug VanOort is well-liked. He's still involved, and Mark Mallon seems quite capable and a good fit for the CEO role, in our opinion.
4. "Inivata's data wasn't/isn't great." Hedgeye - We believe this comment is related to the InVisionFirst Lung assay.  For treatment selection, sensitivity and specificity in the high 90%s are fine/acceptable. For the RaDaR MRD test, the studies are retrospective and on the smaller side, but posters for the tissue-informed, custom panel (which leverages 48 variants vs. Singatera's 16) have shown upward of 100% sensitivity and specificity.
5. "NEO's main pitch is the TCPC split - it's very, very popular and they've mastered it; however, with things like comprehensive genomic profiling getting faster/cheaper, oncologists cut out the pathologist and send out to Foundation, Guardant, Caris, etc. and you get an answer for every biomarker (i.e., everything in IHC and more can be detected in RNA and you don't need to do FISH)." Hedgeye - We don't totally disagree but think it will take time for community oncologists to adapt and move to comprehensive testing (i.e., it's hard to change behavior).
6. Hospitals and providers will move testing in-house over time via partnerships or otherwise to avoid paying NEO, Foundation, or others, especially for high-price tests ($4k+ per sample sent). Early adopters are moving now. Hedgeye - This is not a new risk and NEO has been navigating the headwind and consolidation among hospital clients for over a decade. Per our prior field notes, the volume of testing needed to justify an internal effort is a significant hurdle, although our contact disagreed.

Other Call Notes

• Volume is growing - but not sure how much we should expect from people that put off/delayed treatment. If you're sick, you're sick, and we're seeing increases overall. It's hard to attribute.
• Turnaround times are everything - if NEO slips, it's bad for business. Fort Meyers is not a commercial hub, which is part of the reason to be in Atlanta so as not to hold samples up. California usually doesn't have weather issues, but still.
• If you get molecular turnaround times down to 7 days, it eliminates the advantage of single-marker tests and it's worth waiting a few days longer.
• Caris' 22k gene assay is overkill - there's a ton of noise in there.
• Tempus is trying to do what's right, but it's "messy" (mostly good science, in his opinion, but has heard the critique from others).
• TCPC is popular - allows the pathologist to make money because the components are split.
• Productivity has improved with more automation, but we won't ever get to the point where AI and ML replace the review by a trained molecular pathologist entirely.  
• It will be hard for NEO to reset/build to a 100% molecular platform - it's a good growth story, but Foundation, Guardant, Invitae are all doing it, and it's not simple to replace. In the meantime, molecular isn't being cut by CMS, but FISH and flow cytometry are.
• The menus aren't interchangeable - the future is molecular. NCCN and ASCO are starting to come out w/ more molecular in guidelines, and companies like Elevation Oncology are all about comprehensive genomic profiling. Pharma wants it - the point is to give the patient the best chance by getting the prescription right.

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Thomas Tobin
Managing Director


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Justin Venneri
Director, Primary Research


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William McMahon
Analyst


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