After navigating some rough waters in recent quarters, NeoGenomics is battening down the hatches with a new CEO and an 18-month plan that is expected to help right the ship – eventually.

The Fort Myers, FL-based cancer-testing firm has a number of significant issues to address, according to Mike Matson, a medtech analyst at Needham & Co., which downgraded the NeoGenomics stock from "buy" to "hold" on Monday morning. Revenue growth slowdown, gross margin contraction, and ballooning operating expenses are three of the more pressing concerns, according to Matson's report.

During its second-quarter earnings call, NeoGenomics introduced a new 18-month plan dubbed Project Catalyst, which is focused on lab optimization, people and capabilities, competitive growth, and insights and analytics. Lynn Tetrault, who served as the company's interim CEO after the departure of CEO Mark Mallon in late March, said the company expects these initiatives will "well outpace" $15 million in operational benefits.

Mallon's departure was a "mutual agreement," according to the company, but Matson noted in a March 29 report that he believes it was not a voluntary decision and may have been driven by the company's poor stock performance and the significant decline in its margins during his tenure. Mallon spent less than a year as CEO after taking over for Douglas VanOort, who served more than a decade in the position before retiring.

"Over the past two months, we have engaged employees at all levels to identify initiatives to drive improvements in efficiency, and effectiveness in these key areas. We have identified a number of critical projects each led by an internal 'change agent.' We have conducted a detailed analysis and estimated the time and net benefit associated with each initiative," Tetrault said, according to SeekingAlpha transcripts of the earnings call. "The leadership team is evaluating and prioritizing the most important initiatives in order to develop project plans and determine implementation timing. Some projects are already underway, and others will kick off in the coming months."

Matson characterized the company's turnaround as "daunting" and likely to take several years.

"Management believes that Project Catalyst should result in at least $15 million of operational improvements. While this implies ~3% of margin improvement, and we think it is a step in the right direction, the expected savings is small compared to the ~30% decline in [NeoGenomics'] EBITDA margin from 2018 through 2022," the analyst wrote. "We expect progress over the next 18 months but believe it will take significantly longer for [NeoGenomics] to even approach its former peak gross margin (high-40% range vs. current mid-30% range) and EBITDA margin (mid-teens percent vs. current negative mid-teens percent)."

Matson noted that 2023 is likely to be a transition year and he is less optimistic than some of his counterparts regarding revenue estimates for NeoGenomics over the next two years. While the consensus currently has the company's revenue growing by 9.3% in 2023 and 12.8% in 2024, Needham & Co. is modeling 5.8% growth in 2023 and 7.4% in 2024.

"With both cost and growth challenges to address, we think it will be difficult for [NeoGenomics] to tackle the cost side of the equation without at least partially compromising on the growth side of the equation," Matson wrote.

For example, the analyst continued, NeoGenomics has reined in its plans for its precision medicine sales force from ~50 reps to its current 19 reps, though this could change under the new CEO's leadership.

"In addition, given [the company's] larger revenue base of ~$500 million, we think it's unlikely to return to double-digit revenue growth," Matson wrote.

Chris Smith takes the helm at NeoGenomics

Tetrault said the company conducted a thorough and competitive CEO search process that attracted "many impressive candidates" from the diagnostic industry. The search committee interviewed "nearly 10" individuals, and then the board and the company's chief culture officer interviewed several finalist candidates. From that process, Chris Smith rose to the top.

Smith served as CEO at Ortho Clinical Diagnostics from 2019 to May 2022, when Ortho was sold to Quidel for about $6 billion. Prior to Ortho, Smith was CEO at Cochlear from 2015 to 2018 where he oversaw 35% organic improvement in annual revenue and increased profitability, Tetrault said.

"In addition to his proven success in operational delivery, profitable growth and the creation of shareholder value, Chris stood out from the others because of his dynamic and inspiring leadership style. What especially impressed us is how mission driven and patient focused Chris is, coupled with his passion for leading through people and culture," Tetrault said. "We concluded that out of all of the candidates we met in the search process for a CEO over the past several years, Chris is far and away the best fit for the culture of Neo."

Smith officially joined NeoGenomics last week, although he was present for an introduction during the company's earnings call on Aug. 9. During the call, he told investors he plans to spend the next few months out in the market with customers, patients, and the company's teammates both in the laboratories and in the field to gain a deep understanding of the flow of the business.

"As a clear market leader in the cancer testing and information market, NeoGenomics has had a critical role to play in the lives of millions of cancer patients," Smith said. "Given the company’s longstanding relationships with community pathologists and oncologists, I believe Neo remains ideally positioned to bring world class cancer care to where it is needed the most. Strategically, I see meaningful value in combining a strong clinical business with pharma services capabilities, informatics information, and Inivata’s liquid biopsy technology platform."

NeoGenomics acquired Inivata last year for about $390 million. The deal included Inivata's promising RaDaR minimal residual disease assay.

"Just as important, NeoGenomics is a company that puts patients first and has a very mission driven culture," Smith said. "The ability to be a part of a company in the oncology space with such an important mission was a central factor in my decision to join."

It seems at least one employee is already impressed by the new CEO. In response to news of Needham & Co.'s downgrade and Matson's commentary, Atufa Sherwani, a clinical scientist at NeoGenomics, posted on LinkedIn that Smith is "already taking a proactive leadership role by taking a more hands-on approach in getting to know the employees and making moves on the go."