Neogenomics Inc

NASDAQ:NEO

Earnings Call Analysis

Raised Guidance on Strong Q3 Performance

In the third quarter, revenue reached $152 million, a healthy 18% increase from the prior year, as a direct result of greater clinical test volumes and a shift towards high-complexity tests. Despite dampened growth in Advanced Diagnostics due to macroeconomic headwinds, the company's adjusted EBITDA surged by 129%, achieving a positive $3 million. With over 60% of revenue growth contributing to this leap in adjusted EBITDA, the firm is demonstrating impressive operating leverage. Consequently, the company's leadership has upwardly revised the full-year revenue guidance to $585 million-$592 million, indicating a 15%-16% growth, and improved adjusted EBITDA expectations to a negative $4 million to negative $1 million—a midpoint enhancement of 95% from the previous year-end.

Revenue Growth and EBITDA Improvement

The company reported an increase in third-quarter revenue to $152 million, up 18% from the same quarter the previous year, and a 3.4% rise compared to the second quarter of 2023. Growth was attributed to an increase in clinical test volumes, a shift towards more complex tests, and higher revenue per test due to an improved business mix and revenue cycle enhancements. As a result, adjusted EBITDA saw a significant boost, climbing 129% from the previous year to a positive $3 million, marking the fourth straight quarter of year-on-year growth in adjusted EBITDA. Much of the revenue surge trickled down to EBITDA, with more than 60% of this growth contributing to the bottom line.

Segment Performance and Future Expectations

Clinical Services revenue grew by 20% to $128 million, fueled by a 7% increase in test volume and a 12% rise in revenue per test, now at $440. These numbers are indicative of successful sales efforts and an optimized sales force strategically engaging with healthcare professionals. Despite these successes, Advanced Diagnostics (ADx) revenue experienced slower growth of 8%, impacted by broader economic factors and a strategic paring down of global testing sites and low-margin business. The company expects this trend to persist into the fourth quarter and early 2024, although profitability and margin enhancement efforts are underway, as evidenced by a $6.4 million or 32% improvement in adjusted gross profit for ADx and a 440-basis point increase in adjusted gross margins on a year-to-date basis, compared to the prior year.

Updated Financial Guidance

Due to its strong performance, especially in Next-Generation Sequencing (NGS), the company revised its financial outlook for the year positively. The initial revenue projection range of $565 million to $575 million, representing 11% to 13% growth, has been uplifted to forecast revenues between $585 million and $592 million, indicating an improved growth estimate of 15% to 16%. Moreover, the outlook on adjusted EBITDA improved from a range of negative $13 million to negative $10 million to now being between negative $4 million and negative $1 million. This adjustment points towards an anticipated enhancement of about $46 million or 95% from year-end 2022.

Investment and Operational Efficiencies

The company maintains a strong financial position, with $402 million in cash and marketable securities, and demonstrates judicious cash management. Operating cash flow has shown significant improvement, up $11 million or 66% in Q3 2023 over Q3 2022. Year-to-date cash flow also increased by $43 million or 68%, and the cash burn rate improved by $36 million or 50% over the same period in 2022. The management has aligned to focus on driving operational efficiencies while also continuing to invest for future growth. Despite recognizing harder comparisons in the upcoming fourth quarter, the company expects to deliver robust financial results supported by a solid foundation and a committed team. This dual focus on tight operational control and investment in growth opportunities aims to position the company for sustained long-term success.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings. Welcome to the NeoGenomics Third Quarter 2023 Earnings Call -- third Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions] Please note, this call is being recorded, and an audio replay will be available on the company's website. Kendra Sweeney, Vice President of Investor Relations, you may begin your conference.

[Kendra Sweeney, executive]

Thank you, John. Good afternoon, everyone, and welcome to the NeoGenomics third quarter 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 Vishal Fikry, President of Advanced Diagnostics; Warren Stone, President of Clinical Services; and Melody Harris, President of Enterprise Operations.

This call is being simultaneously webcast. We will be referring to a slide presentation that has been posted to the Investors tab on our website at ir.neogenomics.com. Starting on Slide 2. During this call, we will be making forward-looking statements regarding our anticipated future performance.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to our most recent Forms 10-K, 10-Q and 8-K we filed with the SEC to identify important risks and other factors that may cause our actual results to differ materially from the forward-looking statements.

The forward-looking statements made during this call speak only as of the original date of the call, and we undertake no obligation to update or revise any of these statements. During this call, in order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.

The non-GAAP financial measures presented should not be considered an alternative to the financial measures required by GAAP, should not be considered measures of liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table available in the press release we issued this afternoon.

I will now turn the call over to Chris Smith, Chief Executive Officer of NeoGenomics.

[Christopher Smith, executive]

Thanks, Kendra, and welcome, everyone. Thanks for joining us this afternoon to go through our third quarter financial results. As always, I want to begin with our mission and our vision statement because it's what motivates our company and teammates on a daily basis.

Our mission at Neo is to stabilize by improving patient care. Before we dive in, I also want to thank the 2,200 teammates for the impact they're making on patients' lives every single day. Now let's move to Slide 4 and get into third quarter highlights. As you can see, we had another very strong quarter, growing revenue 18% over prior year. Clinical Services revenue increased 20%, driven by strong volumes across our modalities and an increase in revenue per test.

As a highlight, NGS grew in excess of 35% and now represents approximately 25% of our total clinical revenue. Advanced Diagnostics revenue, which includes pharma services and informatics, increased 8% from prior year, driven by continued growth in informatics and a ramp in RaDaR.

As we continue to execute on the transformation of the business, our progress has outpaced our internal plans. We started the year with the outlook that we would be adjusted positive in the fourth quarter. However, in the third quarter, adjusted EBITDA significantly improved 129% as compared to Q3 of last year to a positive $3 million.

Adjusted gross profit was $67 million, representing a 25% increase over the prior year or 44%. For the tenth consecutive quarter, we saw an increase in revenue per test versus prior year. NGS growth continues to be a driver of improvements in revenue per test and is growing well above the estimated market growth.

In addition, revenue cycle management and pricing initiatives also are contributing to revenue growth per test. In terms of other key quarterly business updates, we completed 3 submissions to MolDX, including 1 additional breast application as well as 2 new indications, 1 in lung and 1 in head and neck.

Slide 5 demonstrates the consistent performance with third quarter delivering sustained improvement in revenue, gross margin and adjusted EBITDA. We are proud of this year-over-year accelerated growth because it's a direct result of the strong execution by our Neo teammates and the growing demand for our products from existing clients as well as new customers.

Our operating and revenue cycle initiatives implemented in the second half of 2022 continue to enable accelerated growth, and we believe they have the ability to continue to drive improvement in the business through the end of the year and beyond. Let's move on to Slide 6. We've kept a narrow focus on our strategic priorities laid out at the beginning of the year, profitably grow the core business, accelerate advanced diagnostics drive value creation and enhance people and culture.

Our Neo teammates are the foundation of the company and continuing to enhance this team and our strong mission-driven culture is critical to our long-term success. This afternoon, I'm going to focus on our other financial priorities. We continue to properly grow our core clinical business as we execute our commercial strategy, which is protect, expand and acquire.

This has helped us deliver strong volume and improved mix. Our continued improvement in turnaround time has allowed all modalities to grow faster than the market. In addition, the mix shift towards more comprehensive panels has supported the delivery of yet another quarterly improvement in revenue per test.

Clinical adjusted gross profit increased to $13 million or 28% versus the prior year. Our newest NGS CTP panel for key malignancies, Neo Comprehensive Heme was launched a few weeks ago and strengthens our leadership position in the heme oncology services. We also launched the therapy selection panel, providing comprehensive overview of biomarkers for detecting early stage lung cancer.

Finally, we continued our sales force expansion that we disclosed in Q2. Within Advanced Diagnostics division, which includes pharma services, informatics and R&D, we continue to focus on innovation. As mentioned during the third quarter, we submitted 3 RaDaR applications to MolDX. Collectively, we now have 27 studies in progress utilizing RaDaR technology. Some of these are interventional trials, including Meridian and head and neck, CAN, HER2 in breast and a randomized cTDNA lung trial.

In December, additional RaDaR breast cancer data will be presented at the San Antonio Breast Cancer Symposium, and we also have 3 closers [indiscernible] other neo Heme modalities accepted at ASH. We hired a new Head of R&D, who will implement a new structure focused on accelerating new product development and driving innovation that will benefit both our clinical and our pharma customers.

While still early days with RaDaR, we are very pleased that our technology is setting low positive clinical samples, highlighting the value of sensitivity for RaDaR. We have focused on driving value creation from a financial perspective and are pleased that we've delivered even further margin expansion from Q2 and have generated significant operating leverage as revenue favorability fell through to the bottom line.

As we continue to optimize our lab operation, we achieved approximately a 20% improvement in turnaround time over Q2. Because of several key acquisitions over the last 5 years, we have been operating under multiple LIMS systems. To further enhance operating efficiencies, we launched a key initiative to move the organization to 1 LIMS system.

This project will provide a new system, which will become the backbone of digitization of our labs, allowing for tighter integration between our CRM system, ordering systems and ERP back end and allow increased efficiency across our entire enterprise. We'll start to see the benefits in 2024.

To further reduce costs and improve margins, we've completed the consolidation of our international labs into 1 lab in Cambridge, U.K. and have improved processes on procurement and supply chain. We expect to see these benefits continue in 2024 and beyond.

Before I turn the call over to Jeff, I want to take a minute to address the FDA's proposed unilateral regulation of lab developed tests as medical devices. Given the substance of the proposed rule is in draft form and the agency has requested public comments on the topics that includes grandfathering, it's important to note that many instances around this topic are still hypothetical.

That being said, Neo has a strong history of complying with CAP and CLIA regulatory standards, and we have also been working with MolDX coverage termination. We believe these factors taken together give us a head start over many other reference labs and providers performing similar testing. We have operated our business in preparation for regulations for some time now and have executives and teams in place who have experience with the FDA approval process, including quality, regulatory and R&D.

Furthermore, our assay development over the last 12 to 18 months has been incorporating FDA design control and preparation for future submissions. As a member of ACLA, we will work with the association to ensure the continuation of patient care with limited business impact.

Now let me turn the call over to Jeff to review our financial results in more detail. Jeff?

[Jeffrey Sherman, executive]

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

Third quarter revenue was $152 million, an 18% increase over the prior year and a 3.4% increase from Q2 of '23. Revenue growth was driven by growth in clinical test volumes, a continuing shift to higher complexity tests and improvement in revenue per test driven by business mix and revenue cycle improvements.

Adjusted EBITDA improved 129% from prior year to a positive $3 million. Q3 marks the fourth consecutive quarter that adjusted EBITDA increased from prior year. We generated significant operating leverage as revenue favorability fell through to the bottom line with over 60% of revenue growth flowing to adjusted EBITDA.

Looking at Slide 8. Clinical Services revenue of $128 million was an increase of 20% year-over-year, driven by a 7% increase in volume and a 12% increase in revenue per test. Higher volume is driven by growth within our existing client base as well as newly acquired customers and demonstrates that our sales force optimization strategy is enabling us to reach the oncologists, pathologists and other physicians and providers we serve.

Turning to Slide 9. Average revenue per clinical test increased by 12% over prior year to $440, representing an improvement for the tenth consecutive quarter versus prior year as we maintain our focus on higher-value tests and revenue cycle management initiatives. As we previously noted, NGS growth is a focus of our sales team with NGS revenue approaching approximately 25% of our total clinical revenue for the year. As a result of our strong performance in NGS and the expansion in our sales team, we continue to see accelerated growth in NGS.

On Slide 10, as we noted on our Q2 call, Advanced Diagnostics revenue growth slowed in Q3 with an increase of 8% versus prior year. ADX revenue grew slower in the third quarter due to macroeconomic conditions and pharma R&D spend as well as our decision to rationalize our global testing sites and low-margin business. This is expected to continue into the fourth quarter and early 2024.

However, the focus on profitability and margin growth is driving performance with adjusted gross profit for ADX improving by $6.4 million or 32% and adjusted gross margins improving by 440 basis points on a year-to-date basis versus prior year. Looking at the income statement on Slide 11. Adjusted gross margin was 44.2%, an improvement of 27 basis points over the third quarter of last year.

Adjusted EBITDA was positive $3 million, a $15 million or 129% improvement over the third quarter of 2022. These significant improvements were driven by both higher gross profit and lower operating expenses and highlight the operating leverage in the business. Regarding operating expenses, sales and marketing expense was $17.6 million as we continue to invest in the expansion of our sales force.

G&A was $61.5 million, and R&D expense was $5.3 million. We did have a favorable R&D tax credit related to fiscal year 2022 of $1 million in the quarter. In addition, there was $2.1 million in restructuring costs in the quarter related to the previously announced organizational restructuring and footprint optimization, which is part of our value capture program to gain operating leverage.

We have revised our original restructuring plan costs and timing of projects, and as a result, now anticipate these costs extending into 2024. These charges will ultimately result in enhanced operational efficiencies as we continue to optimize our geographic presence.

Turning to the balance sheet on Slide 12. We ended the third quarter with cash and marketable securities of $402 million. We continue to make good progress in diligently managing our cash burn and are focused on accountability and disciplined oversight of operating expenses. Cash flow from operations improved $11 million or 66% from Q3 2022.

On a year-to-date basis, cash flow from operations improved by $43 million or 68% and the year-to-date cash burn improved by $36 million or 50% over the first 9 months of 2022. Our strong financial position provides us the financial flexibility to continue to invest in the business and achieve our tragic and financial objectives.

Given our Q3 financial performance and continued progress executing on our strategic priorities, we are revising our revenue and adjusted EBITDA guidance for the year. Turning to Slide 14. We previously had revenues of $565 million to $575 million representing 11% to 13% growth in 2023.

We are revising that range upward and now expect total revenue between $585 million and $592 million for the year, representing 15% to 16% growth. Adjusted EBITDA was negative $13 million to negative $10 million and is now negative $4 million to negative $1 million and at the midpoint represents an improvement of $46 million or 95% from year-end 2022.

We continue to see strong revenue growth and an increase in NGS product mix and are very encouraged by the opportunities for RaDaR and other newly launched tests, which provide accelerated leverage to the bottom line. As we stated at the beginning of the year, our year-over-year comparisons will be more difficult in the fourth quarter, but we believe we have a strong foundation and dedicated teammates to deliver financial results.

While we continue to be focused on driving operational efficiencies, we will also continue to invest in the business to capitalize on our future growth opportunities. Our strategic focus remains to deliver long-term sustainable growth.

With that, I'll turn it back over to Chris.

[Christopher Smith, executive]

Thanks, Jeff. As you can see, we are very pleased with our year-over-year progress, including strong revenue growth of 18% and significant improvement in adjusted EBITDA.

We now have 3 pending submissions for RaDaR with MolDX and we are generating additional data that will support expanded coverage in the future. We saw meaningful progress in the execution of our strategic priorities and therefore, are raising our guidance for the full year results. We are well on our way to becoming the leading cancer testing information decision support company.

We'll continue to build on the foundation we have laid out over the past several quarters to deliver long-term sustainable growth. I'm excited for our teammates and our customers, but for most of all the patients that we get to serve on a daily basis.

Thanks, and we'll turn it back over to the operator to open the call up for questions.

[Operator]

[Operator Instructions] The first question comes from Mark Massaro with BTIG.

[Unknown Analyst]

This is Vivian on for Mark. Congrats on the strong quarter. I'm just wondering what key data points should we be keeping an eye out for RaDaR out of the 27 clinical trials. Specifically, when might be when might we be able to see a head-to-head comparison with a competitor, MRD Tech?

[Christopher Smith, executive]

Yes. Why don't I let Vishal take that. You can talk a little bit about some of those key trials that we've got ongoing.

[Vishal Sikri, executive]

So 1 of the trials will have some initial data coming out at San Antonio, which is the TRACER clinical trial. The other ones will see data readouts throughout the year in 2024. In terms of head-to-head, that's still something that we are considering. It's not something that is a main focus for us where our focus is developing our own clinical data to get published and also to get MolDx approval.

[Unknown Analyst]

Okay. Perfect. Yes. And then what levers could you pull from here with respect to operating leverage and OpEx management. Should we think about most of the improvements from here to be a drop-down in revenue growth -- and what are some areas you might be looking to optimize from here on taking out any additional costs, if any?

[Christopher Smith, executive]

Yes. I think as we've said in previous quarters, I think from an operating leverage standpoint, we continue to see a lot of different opportunities that can continue to drive results. We've seen good progress on the volume front this year and continue to see opportunities to drive volume growth. We've seen good growth in pricing as we focus our attention on higher complexity tests. We talked about NGS growth. It represents only about 25% of our total clinical revenue today, and it's growing faster, much faster than the overall market growth. And so that area is going to drive performance as well.

We continue to see opportunities to grow the ADX business. And we've talked about a few things from the margin perspective. Implementing a new LIMS system is going to help us be more efficient to drive more improvement on the adjusted gross margin line, better procurement and systematic buying will also help us drive performance there.

And then below the line on the OpEx side, we're continuing to look for opportunities to get more efficient there as well. You see our year-to-year is down year-to-year both in the quarter and on a year-to-date basis, and that's before even taking into account restructuring costs that we're hitting this year.

So I think as we think about our drivers, we see a lot of opportunity to continue to do what we've done this year, and we'll talk more about 2024 when we give our Q4 guidance in February, but we still see a lot of runway to drive improved performance.

[Operator]

The next question comes from Andrew Brackmann with William Blair.

[Andrew Brackmann, analyst]

Maybe if I could start on the durability of growth for that revenue per test metric. Can you maybe just sort of talk about how you're thinking about some of those drivers or sort of some moderation in that rate over time. Just trying to figure out how much juice is left to squeeze just from internal initiatives.

[Christopher Smith, executive]

So I'll hit at high level, but I'll let Jeff kind of walk through because there are like really 3 main levers. But I think, look, 1 of them obviously has been mixed around NGS. And this is the first quarter, as you know, we've kind of come out and disclose the growth on NGS and the amount of revenue.

And look, it's being only 25% of clinical revenue, it gives us lots of runway because of where the ASP is. And so that mix, we're able to continue to manage, especially as we expand the sales force and continue to expand our presence with the oncologist versus pathologists and hospital. But Jeff, do you want to kind of talk through the levers in the way because I know you in the team and Warren spent a lot of time there.

[Jeffrey Sherman, executive]

Yes. If you go back to 2021 and 2022, our revenue per test was growing anywhere between 2% and 7%. We've clearly seen an uptick in 2023 with our revenue per test with our NGS growth now averaging almost 10% for the year.

So I think we're going to continue to stay focused on growing NGS and expect to continue to see growth over time in revenue per test. I'm not sure I would extrapolate 12% in 1 quarter over time. And I think we continue to expect to see growth. And then I think there's 2 other areas that we have focused initiatives on.

The first is our revenue cycle, just collecting more for the work we're currently doing. We've seen good improvements in that for the year. And I think we actually have a multiyear opportunity there. And then the last area is just price. We are seeing price increases with our direct line build contracts, and we're working on taking a more coordinated approach with our managed share pricing as well.

And this is an area where we think dedicating some resources and some talent is going to help drive that revenue. So I think as we stand back and look at -- we've had very strong growth this year, but we still see, I think, a multiyear opportunity to see revenue per test grow over time.

[Christopher Smith, executive]

Yes. So I think from a durability perspective, we see that continuing to run for the next several years.

[Andrew Brackmann, analyst]

Okay. That's perfect. And then I appreciate you guys actually giving that color around sort of the NGS mix here. I wanted to ask on the non-NGS side because I think by my math, you guys put up growth, call it, in the low teens to mid-teens in the quarter.

Can you maybe just talk about the durability of growth in that category as well, just as we look at those more traditional tests.

[Christopher Smith, executive]

Well, I think look, I would say that a couple of things are impacting that. One is look, I would say -- and we shared this pretty publicly starting at the end of last year that we are winning much more now than we're losing. So we're moving share and moving share is obviously helping move modalities.

And I think when you think about those modalities, they would grow, I guess, anywhere from probably 2% to 4% would be normal market growth rates. We're growing faster than market in every single 1 of our modalities. But in addition, what Jeff just talked about, this whole strategy that we're having around revenue cycle management doesn't just help with NGS, but it helps across the board.

And so that's helping us from a revenue perspective in all those modalities. So we're seeing really nice growth there. And I think that's -- look, we still -- when you look at the whole market, there's still lots of runway where, from a market share perspective, where we believe that we can -- we can only -- not only win new accounts but also expand.

And I think, Warren, he here so we can throw it to Warren. But I think 1 of his strategies hasn't been just going into accounts, but going to your current accounts, we don't have the business and start moving share there. But Warren, is there anything else you...

[Warren Stone, executive]

I think that's probably the high level, Chris, is that ultimately, our commercial strategy that we're continuing again. So we're losing less than what we have in the past. That's a fundamental for us to build on. And expanding share of wallet is obviously significantly easier at existing customers. And we've actually been really, really affected that. That's been probably our area of largest growth.

And then lines obviously winning new customers, which is as we've expanded our sales resource with that another area that we're focused in on. And we feel that a lot of the wins that we've secured in 2020 with end 2024, which obviously provides some tailwind as we move into next year. That's really effective execution of the strategy, which is driving above-market growth with these other.

[Christopher Smith, executive]

And then I think we clearly see a correlation between improved turnaround time and sales growth as well. So as our operational efficiencies continue to improve, it's helping us drive incremental volume. .

[Operator]

The next question comes from Alex Nowak with Craig-Hallum.

[Alexander Nowak, analyst]

Really strong NGS gains, as we've talked about here so far on the call. The company lost market share in NGS in the molecular business over the last couple of years really before the new team has joined. So is this really taking back market share from those gains that were lost? Or is this better penetration of NGS into your existing customers that maybe haven't used NGS to the full extent?

[Christopher Smith, executive]

I would say yes. I mean, it's really both. I mean I think we have the market growing 15% to 20%. So when we're growing 35% plus, not only are we growing at the market, but we're moving share. So it's really a combination of both.

[Alexander Nowak, analyst]

Okay. Got it. And then the breast MolDX resubmission here, is that going to be to grant a broader MRD and recurrence label versus the 5-year recurrence label we have today?

[Christopher Smith, executive]

Let me let Vishal kind of take that 1 to talk about what's going on with our products in multi-end.

[Vishal Sikri, executive]

Yes. So that is correct. It's going to be an expansion to our current approval that we have for MolDX both in the recurrent and surveillance space.

[Operator]

Next, we have David Westenberg with Piper Sandler.

[David Westenberg, analyst]

Congrats on a really good quarter. So I mean I appreciate all the commentary on the -- the NGS growth. The ASP lift, I mean, it was really big. And so I want to actually just cut in a little bit more into that life revenue cycle management piece.

I mean I don't know if you can quantify it, but kind of help us frame the size of that lift, how much meaningful would is there to chop in terms of revenue cycle management. And then just maybe even in this quarter, was there any onetime in this quarter from that revenue cycle management just to be aware of as we're modeling ASPs because I think you beat the Street by like $40 or something like that in the quarter.

[Christopher Smith, executive]

Yes. Let me maybe take it a couple ways and let Jeff kind of get into the detail. So we haven't disclosed how much the opportunity is. But we built the way we thought about the business over the next several years, there's opportunity to continue to move that out.

And David, I think we may have even talked about this when we met in San Francisco that being new to the industry I'm incredibly surprised at just general how bad the industry is getting paid for the work that we do. And I think we believe that reimbursement and billing should be a core competency of the company. So we're spending a lot of time, resources and energy. I would say, doing innovative things that we think will significantly improve our ability to get paid for what we do. But Jeff, do you want to give more...

[Jeffrey Sherman, executive]

Yes. From an overall NGS perspective, look, I think roughly 60-plus percent of the revenue per test is driven by just NGS mix and price within NGS and then the balance would be revenue cycle initiatives and other modalities that we're seeing growth in. And so again, with that relatively low penetration percentage as a percentage of our total clinical revenue our continued focus on driving that, we do see an opportunity to continue to drive that.

Again, I wouldn't extrapolate 1 quarter, but we've got 10% revenue per cash year-to-date, and it has clearly stepped up from where we've been the previous 8 to 10 quarters before that.

[David Westenberg, analyst]

Got it. And just a quick one, well, maybe it's not really that quick, but just thoughts on PAMA, if and when it returns, how we should think about that for '24 or '25 in terms of our model.

[Christopher Smith, executive]

Do you want to take that, Warren?

[Warren Stone, executive]

Yes. I mean, if and when it returns. I mean -- it's difficult to actually understand exactly how it'll impact. Certainly, some of the lower value modalities is certainly where some of the cuts are slated at the end of the day. As we look forward into the future, we don't see that as a material impact to our performance.

Certainly, if it does materialize, it will be a marginal headwind to AUP, but nothing too material because it is with the lower value modalities that are in focus.

[Operator]

The next question comes from Tejas Savant with Morgan Stanley.

[Unknown Analyst]

This is Madison Patrick on for Tejas. Congrats on the strong quarter. Just looking at the guide what it implies the fourth quarter, could you maybe give us some color on why you think about the sequential -- like flat sequential growth for top line is a fair assumption for the quarter? And is there any conservatism baked into the guide? And what are you assuming on a budget flush there for pharma at the midpoint?

[Christopher Smith, executive]

Yes. I lost you in the middle part of your question. Can you say that -- last one, Jeff, did you get her -- I lost you in the middle. Can you say that again, you're talking about the conservatism in the guide, but...

[Unknown Analyst]

Yes. Yes. Just wondering what kind of conservatism is built into the guide for the fourth quarter? And if you're assuming kind of any budget flush, just looking at -- it looks about flat sequentially from third quarter to fourth quarter. So trying to parse out some color there.

[Christopher Smith, executive]

Yes. I mean the midpoint is roughly flat, but it is a range of performance for Q4. So I wouldn't call out anything unusual in Q4. We expect to see continued improvement as we have throughout the year. But clearly, as we think about guiding for Q4, I wanted to give a range that we thought made sense.

[Unknown Analyst]

Got you. That makes sense. And anything you're assuming there on the budget flush?

[Christopher Smith, executive]

I don't know what.

[Jeffrey Sherman, executive]

That's just flash.

[Christopher Smith, executive]

I'm not sure what you mean by budget flush. I'm sorry?

[Unknown Analyst]

Sorry, I don't know if -- yes, I'll just move on to the next question. Can you talk a bit about any conversations you've been having with biopharma customers and feedback you've been getting from them? And I know you talked a bit about the tougher macro environment in ADX. So any color there you've been seeing?

[Christopher Smith, executive]

Vishal, do you want to take that?

[Vishal Sikri, executive]

Yes, I can take this. So we do hear from our pharma customers that there is consolidation in terms of the number of clinical trials that they're running, a number of compounds that they're focusing on. .

A lot of it was earlier on in the small biotech, but we're hearing this a little bit on the larger -- on the larger pharma companies also. So based off that, I mean, that's why we saw a little bit of a slowdown in Q3 compared to the previous quarter, and we do expect it to continue a little bit going into Q4 and early 2020. But we're hearing consolidation, especially when it comes to the programs that they're focusing on the limited number going into 2024.

[Christopher Smith, executive]

And I think our broad menu of testing does help us soften some of that impact because we're not just focused on a couple of different single modalities. Yes. We talk a lot about the importance of the portfolio effect. I mean having informatics and pharma and RaDaR and clinical, if 1 of those slows down a little bit in the quarter, even though you see good long-term opportunities, the others covered. And I think that's what you really saw here in the quarter.

[Operator]

The next question is from Mike Matson with Needham.

[Unknown Analyst]

This is Joseph on for Mike. Congrats on the quarter. Maybe just a couple around RaDaR. I'll try to just put this all into one. But for breast, looking just at the expanded coverage, do you think that time line could be a little bit quicker than the other 2 submissions just given that you've already had dialogue with them and a previous submission.

And then just a reminder, I know you guys said it before, but under the current reimbursement profile for breast that you guys have, about what percentage of that potential MRD volume for breast cancer patients is there with that current reimbursement? And then just looking at the other 3 submissions that you guys announced -- can you maybe just talk about your confidence on those submissions if you have enough evidence with those?

I know you guys didn't necessarily get awarded for colorectal. Are you looking at more evidence for that? Maybe could you put a time line of when you're expecting that submission if it could be by the end of the year?

[Christopher Smith, executive]

Okay. There's a lot of questions. A lot on there. So I would say that we do expect a faster time line on expanded breast compared to what we saw with the colorectal as an example. We were able to go out and get the initial breast indication. And we believe that we have a relatively good handle as what is expected by MolDX now.

On terms of the number of MRD coming from breast cancer patients versus our current submission, we haven't broken it down by type of cancer so far. So I think we're going to leave it at that. But we obviously focus a lot of breast cancer because of our high sensitivity value proposition that you need in breast cancer.

Confidence in the other submissions. I think for head and neck and for long, as we have mentioned, we have submitted. One of the big things that we had with colorectal -- that we did not have with colorectal that we do with these submissions are publications that we feel are strong and we are -- feel will add a lot of value, especially when it comes to patient care. So we've utilized those as part of our submissions. And in CRC, at this point, we're probably be looking at something with CRC in 2024 and not in 2023. I think I can those everything.

[Joseph Conway, analyst]

Yes, that's great. I'll just do 1 more quick 1 then on RaDaR, and it will just be a single question. I guess just looking into 2024, maybe this time next year in 2024, you could have radar clinically in multiple different cancers.

I was just wondering if you could kind of frame up maybe the gross margin for those. I guess the high bar, the low bar, what type of gross margin you could -- gross margin improvement you could see from these tests as they start to ramp clinically?

[Christopher Smith, executive]

Yes. Yes. I admire, you're trying to get that question, but we obviously haven't given guidance for '24. And look, it's early days with RaDaR. So I think -- look, I think what we believe it's important to get coverage. And the way to get coverage is to make sure you're running the right clinical trials and getting those published.

So look, this is the first time we've ever talked publicly about how many ongoing clinical trials. We have to give color -- there's a lot going on with RaDaR. So I think as that starts to come to fruition, we'll update you, but we're not giving any kind of financial guidance around gross margins or anything on RaDaR for next year.

[Operator]

The next question comes from Tom Stevens with TD Cowen.

[Thomas Stevens, analyst]

Massive quarter, congratulations. I just had a quick one, again, just to kind of beat the dead horse on your kind of CGP portfolio and kind of just where you're winning there? I mean you talked about operational efficiency. You talked about more specialist sales force. Is that as simple as fast turnaround times and being in front of clinicians? Or is there something more going on?

[Mark Massaro, analyst]

Well, I think there's a lot of things at play. I mean, I think a lot of these fit under our sales optimization strategy and our focus. And as you know, we started adding field people towards the end of last year and then into this year to start to focus more on community oncologists because we've been pretty heavy on the pathologists to hospitals.

I think that's definitely making an impact. We were really a nonplayer in solid until we launched the product in March. It takes the time to get the product moving. And look, we continue to be the heme leader and we continue to bring new innovations out on the heme side. So I think it's multiple things, but maybe let me give Warren to maybe give even a little more color around...

[Warren Stone, executive]

I think the multiple things is exactly -- it's a number of things acting in constant. And I think 1 of the first things I want to call out is the work we've done operationally from a turnaround time we spoke about that on the call. But obviously, with the importance of the NGS to overall performance, we give that extra focus and we've done really well there from a turnaround time.

I think added resources in the field is the second factor here that's really contributing to the success. And then thirdly is the execution of the sales strategy that I spoke about earlier coupled with new products that we've brought to market, not only the CGP panel that we brought to market in March of this year, but also the new Heme Neo Comprehensive that we launched earlier in quarter 3. Those also contributed -- just a number of factors in content that are sort of compounding on now that's driving the performance.

[Thomas Stevens, analyst]

Wonderful, yes. So I guess I'll follow up with the 2 parts of that. I guess, just on the back of that going into next year, should we expect these kinds of growth rates going into within the NGS portfolio given the number of launches and the sequence you've had this year? And then just the second one, a bit emulated is kind of have you guys thought about or outlined kind of the net gross margin benefit you get from this LIMS reorg?

[Christopher Smith, executive]

So internally, we have -- I mean I think this LIMS was a huge project and give you an idea, even the planning of it took us several months to really get to a place where we felt good about it. We've carved it out of the business, so -- and given a dedicated resources to ensure that we're able to get the focus on the execution.

But when you've done 5 acquisitions over the time history of the company and running on multiple LIMS systems, the inefficiency from a gross margin perspective is significant. As you know, when you put 1 of these in, it's like doing an ERP project, it takes time. So you're not going to see this starting January 1, right? We believe we'll get some positive impact starting in H1 of '24, but it really is an ongoing that we think we'll see a 4.5, take it to say, over a 2-year period, we'll see continued impact on that. Add anything...

[Jeffrey Sherman, executive]

Just on the NGS growth, look, we continue to expect NGS is going to grow next year, but we'll give more color on that as we give our guidance calling into next year.

[Thomas Stevens, analyst]

Congrats on the quarter.

[Operator]

[Operator Instructions] Up next, we have Matthew Sykes with Goldman Sachs.

[Unknown Analyst]

This is Prashant Code on for Matt. Congrats on the quarter. So do you -- could you clarify on the additional breast MRD submission? I know it's been talked about, but is that for triple-negative breast cancer?

[Christopher Smith, executive]

Vishal, go ahead.

[Vishal Sikri, executive]

Matt, yes, it is for triple-negative breast cancer.

[Unknown Analyst]

Got it. Okay. And then how much market share do you see radar capturing over the longer term given the competitive landscape?

[Christopher Smith, executive]

Well, look, I think the way to think about a lot of you all right in the market, the analysts have been writing that it's a $20 billion market. And less than 1% or 2% penetrated. So there's a lot, a lot of runway. I mean, obviously, there's a company in front of us.

There's multiple companies coming out. But look, I would not say that we were publicly disclosing what the shares. I would say, look, what we're seeing is our sensitivity is significant, and we're seeing that really makes a difference in disease cancer states where sensitivity matters, places like breast, lung, et cetera. So I think it's just too early to try to speculate how the share will all wake up. But look, a big, big market with lots of opportunity.

[Unknown Analyst]

Got it. And just -- and lastly, any color on the sales force expansion.

[Christopher Smith, executive]

Yes. So we continue to expand our sales force in the latter part of Q3 and into Q4. A lot of the work we're doing in good transparency really culminates into sort of redeployment that we're kicking off very early in 2024 that will position us to continue the momentum that we've experienced in 2023 thus far. .

[Operator]

Next question comes from Mason Carrico from Stephens.

[Unknown Analyst]

This is Jacob on for Mason. Congrats on a strong print. So I appreciate all the color around the NGS growth. Lot's been covered there, but maybe just digging a little bit deeper in there. Could you talk about how the growth trended during the quarter in NGS across heme versus solid tumor?

[Christopher Smith, executive]

So we build all our NGS kind of together, so we don't break out what's keen or solid. So I think we've been pretty open publicly that we were really a nonplayer in solid until we launched our new panel in March, but we don't disclose which -- how much is team or how much of it. And we don't really talk about inter-quarter performance either. So we prefer to just talk about in quarterly increments.

[Unknown Analyst]

Okay. Yes.

[Christopher Smith, executive]

And it's really for competitive reasons. It's not that we don't want to give any color, but look, it's a highly competitive place. And I think we're really pleased with where things are going. And we just from a competitive perspective, don't disclose that.

[Unknown Analyst]

Yes. No, that makes sense. So on that new launch, Neo Comprehensive it's been out there. in the market for a little bit now. Could you maybe talk about how adoption trended? And maybe more specifically, do you think you're converting docs away from competing offerings have been on the market for a little bit? Or do you think the majority of the growth is just coming from broader market expansion?

[Warren Stone, executive]

Yes. It's a combination of both. There's certainly in many cases that we can cite where there's been conversions that we've managed to accomplish. And in other cases, we have brought a market expansion the growth in the market that we're actually benefiting from. So it's a combination of both. And again, I reiterate the fact that the investment from the sales team perspective is really worth...

[Christopher Smith, executive]

I think that's helpful a lot. And don't -- 1 of the things that's always been a strength of Neo has been the community setting. So think about the community oncologists. And a lot of them, there's a lot of our competitors who are living primarily in university or research institutions. And so our ability to continue to penetrate the community oncologists is a key factor to our growth. I mean lots and lots and lots of treatments going on in the community.

[Unknown Analyst]

Got it. And then if I can just squeeze in 1 final 1 here. On your commercial sales team, you talked about how you're continuing to expand in Q3 and Q4. But I think you previously, you mentioned that you really didn't materially plan on materially scaling that team in 2024. Is that still the plan? Or have your thoughts changed there?

[Jeffrey Sherman, executive]

Yes. I think most of the investments that we're going to do from a commercial expansion perspective are happening at the very back end of this year. And then some of it may roll into Q1, but it's all part of a larger plan for -- and as resources are really focused in terms of customer-facing, but also putting -- investing in the back office to ensure better enablement because this is where we're going to drive the productivity improvements of the sales team which is going to allow us to sort of do more with the existing team that we have.

So that's going to help to negate the need for investments certainly in 2024, but we'll reevaluate that later, probably this time next year in terms of what we want to do for 2025.

[Operator]

Next question comes from Puneet Souda with Leerink Partners.

[Puneet Souda, analyst]

Chris, maybe at a high level, and I apologize if this was covered, but I wanted to get your view on -- the revenue cycle management has been a big focus. Obviously, you're seeing improvement here in AUP that is remarkable. So maybe can you talk about where you are in that revenue cycle management transformation process, how far it's done? And sort of what's left to go? Maybe just talk about that at that high level, if you could.

[Christopher Smith, executive]

Yes. Puneet, I know it's a busy day with the markets close. We did cover some of it early, but we're happy to jump back into it. Look, I think 1 thing we talked a lot about is our mix. And by NGS being only 25% of the clinical revenue lots of runway. And so obviously, higher ASPs, et cetera. But what Jeff did kind of dive into a little bit more where the other levers do you want to talk about it. I mean, we did talk about revenue cycle is a multiyear strategy as we kind of looked at it. But do you want to give...

[Jeffrey Sherman, executive]

Yes, I would say we're still in the early phases of capitalizing on the opportunity and revenue cycle, Puneet. And what I said earlier on the call was roughly about 60% plus of our improvement in revenue per test was driven by NGS mix. And the balance was pricing, revenue cycle improvements and some mix in our other testing volume.

But as we think about what we're expecting to get paid and what we are getting paid, we still see room to improve there and it's not a 1 quarter or 2 quarter process. I think it's a multi-quarter process. We want to use technology more efficiently to make sure we're being efficient, making sure we're getting prior authorizations, making sure that where you have a medical necessity covered medical records covered. So there's a lot of different drivers and it frankly varies by payer where the opportunity exists, but I think we have a good handle on where we're not being paid and have plans in place to close that gap.

[Christopher Smith, executive]

Do you want to talk a little bit about contracting payer contracts, but how you got the managed care runway?

[Jeffrey Sherman, executive]

Yes. So managed share with another area, just pricing -- we also have a pricing lever, which is from our direct client bill where we can do pricing, and that's about 65% of our clinical revenue. And the remaining 1/3 is managed care contracting, and we've added resources to really go after in a more coordinated sophisticated way, pricing improvements in our -- on our managed care side of the business. So it's multifaceted, and that's why we think we have -- we're still have room to run over the next couple of years in this area.

[Puneet Souda, analyst]

Got it. Super. That's -- thanks for all the insights there. And then 1 more on labor inflation was a bit of a concern earlier on. And then the cost of goods was a concern continues to be a concern for some of the labs. But just maybe just talk to us overall about labor cost and inflation that you're seeing?

And do you see the layoffs among the biotechs and some of the diagnostics companies out there potentially giving you an opportunity in the hiring landscape to address some of those concerns in the market.

[Christopher Smith, executive]

Well, look, I definitely think when some companies have gotten out over their skis and they do some type of change from a financial perspective, we definitely look for great teammates. I mean I think our people are our greatest asset. So I think any time we can add there.

I think the other thing that's really helped us is we're pretty diverse on where we are. I mean we have wet labs in Houston, in Orange County, and Fort Myers and Raleigh. And so I think that we feel incredibly good about the labor pools in those markets and our ability to attract and keep great talent.

So we have not seen a big impact. Look, I will say that our view is that we want to make sure that we hire the best and we pay them fairly. But I wouldn't say that we've had a big impact. The 1 thing -- and again, this came out in my pre-remarks, is that we really -- Neo didn't really spend a lot of time around purchasing and procurement. And we spend -- as you can imagine, millions and millions and millions of dollars. And so 1 thing that has changed over the last 6 months to bring in a Chief Procurement Officer and our ability to put some systems in place that we think allows us to do a much better job of managing the purchasing side of the business.

[Puneet Souda, analyst]

Got it. Okay. Super. I think all the RaDaR questions are covered. So I'm good.

[Operator]

We've reached the end of the question-and-answer session. I will now turn the call over to management for any closing remarks.

[Christopher Smith, executive]

Okay. So for the folks that are still on, look, we really appreciate you taking the time. It was a busy day in our sector in the market. So -- thanks for hanging in there with us and learning a little bit about what will happen in the Q3.

And look, we look forward to coming back to you with the Q4 results sometime after the first of the year. Until then, take care.

[Operator]

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