Q1 2024 Neogenomics Inc Earnings Call

Participants

Kendra Sweeney; Analyst; Neogenomics Inc

Christopher Smith; Chief Executive Officer, Director; Neogenomics Inc

Jeffrey Sherman; Chief Financial Officer; Neogenomics Inc

Alicia Olivo; General Counsel, Company Secretary; Neogenomics Inc

Warren Stone; President - Clinical Services; Neogenomics Inc

Melody Harris; President - Enterprise Operations; Neogenomics Inc

Mark Massaro; Analyst; BTIG

Puneet Souda; Analyst; Leerink Partners

Dan Brennan; Analyst; TD Cowen

Andrew Brackmann; Analyst; William Blair & Company

Tejas Savant; Analyst; Morgan Stanley

Michael Matson; Analyst; Needham & Company

Michael Ryskin; Analyst; Bank of America

Mason Carrico; Analyst; Stephens Inc.

Matthew Sykes; Analyst; Goldman Sachs

Andrew Cooper; Analyst; Raymond James

Presentation

Operator

Welcome to the Neogenomics first-quarter 2024 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

Thank you, Holly. Good morning, everyone, and welcome to the Neogenomics first-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; and Ali Olivo, Executive Vice President, President, General Counsel, and Business Development.
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 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, 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 measures in a table available in the press release we issued this morning.
I will now turn the call over to Chris Smith, Chief Executive Officer of Neogenomics.

Christopher Smith

Thanks, Kendra, and welcome, everyone. Thanks for joining us this morning to go through our first quarter financial results. As always, I want to begin with our mission and vision statements because it's what motivates our company and teammates on a daily basis. Our mission at Neose is to save lives by improving patient care. And before we get into the financial results, I just want to thank our teammates for everything they do every single day to make a difference in so many patients' lives.
Now let's move to Slide 4 and get into the first quarter highlights. As you can see, we delivered another quarter of strong revenue growth, growing 14% over prior year to 186 million. Clinical Services revenue increased 17% to 135 million, primarily driven by execution of the commercial strategy and increased adoption of our NGS products. Compounding effect of volume and revenue cycle management initiatives, including an AUP lift, enabled NGS growth of over 50% and now is approaching 30% of our total clinical revenue as growth rates accelerate and NGS becomes a larger portion of our base business, the comparables will become tougher as the year progresses.
Advanced Diagnostics revenue declined by 3% over prior year in part due to macro conditions in the pharma sector and margin optimization initiatives from 2023 as a business, adjusted gross profit was up 19% to 71 million and adjusted EBITDA improved 149% or $11 million over Q1 of last year to a positive 3 million.
Now on Slide 5, I'm very pleased that the first quarter continued the trend we've seen since the fourth quarter of 2020 to have consistent year over year improvements in revenue, adjusted gross profit and adjusted EBITDA is especially noteworthy, as we did not see the typical industry seasonality in Q1, with total revenue actually increasing sequentially from the fourth quarter. We believe that we've laid a solid foundation for growth in 2023 and expect that momentum will continue as we move forward.
Let's move on to Slide 6. On our full year 2023 call, we laid out our strategic priorities for 2024. They included profitably growing the core business, accelerating advanced diagnostics, driving value creation and enhancing our people and culture. Our people are our greatest asset, and we are devoting time and resources to enhance teammate development engagements. Everything we do internally is centered around developing a customer oriented and growth mindset. And our team made show each day their dedication to improving patient care. This morning, though, I'm going to focus on our three financial priorities as we continue to profitably grow our core clinical business as we execute our commercial strategy, which is Protect, Expand, acquire this has contributed to our strong volume growth, increased AUP and improved mix mix shift towards higher value modalities and tests have supported the delivery of yet another quarterly improvement in revenue per test. Even with the focus on growing NGS, we continue to see growth in clinical volumes across all modalities to win in oncology. We have the breadth of menu and the products that deliver value in real-world clinical settings through high-quality, actionable, differentiated tests that help support treatment decisions as well as best in class customer-focused mindset.
Earlier this month, we announced senior leadership promotions as part of our ongoing efforts to optimize our operating structure. Warren Stone is now Neo's Chief Commercial Officer and will lead our clinical and pharma service commercial team's ability here is now Neo's Chief Operations Officer and President of informatics, and will oversee data oriented teams and continue to manage all enterprise operations. Foreign and Melanie have shown exceptional leadership and performance in their roles, and I'm confident their numerous responsibilities will strengthen the commercial synergies and drive growth as well as improving operating efficiencies. As a result of these changes, the legacy pharma business now reported is now reporting to warn informatics is now under maladies leadership and R&D will be reporting to me. We remain focused on R&D as we believe its innovation is a turbocharger for growth. Specifically, we're committed to offering an MRD. product to patients and health care providers, and we believe we have several viable pathways to accomplish that as we noted over the past several quarters, macro trends as well as operational challenges continue to impact our pharma revenue, building on the strain and our go-to-market strategy. As seen in our clinical business. We are integrating the pharma commercial organization under Warren's leadership to leverage the success and the commercial execution seen in the clinical business. We are expanding our pharma sales organization as it moves under Warren's leadership and exec expect to see benefits from this initiative in the future. In addition, our margin optimization efforts in ADX have continued to improve adjusted gross margin performance. Informatics revenue continues to grow as we drive increased investment and look to expand product offerings. We continue to focus on the acceleration of innovation in our R&D, including the launch of a new liquid biopsy comprehensive genomic profile test expected in late 2024.
Additionally, building on the success of the NEO comprehensive 1.0, we are focusing on the development of our next-generation broad solid tumor panel, which is targeted to be one of the largest solid tumor CGP. panels on the market, while providing industry-leading turnaround times. We believe this new large NGS panel will provide additional growth opportunities in clinical pharma and the informatics space. We remain focused on driving value creation from a financial perspective in late 2023, we kicked off our lamps project that will consolidate fragmented systems into one end to end solution, which will serve as the foundation for our digital transformation strategy. While enhancing operating efficiencies. We are driving gross margin expansion through investing in automation and lab and supply chain optimization. We also continue to invest in our quality programs to improve our products and services as well as to prepare the company for increasing regulatory oversight.
Yesterday, the FDA released its final ruling regarding regulation of lab-developed tests. Our initial view is that the rule is favorable to our business. The rose significantly expands LTT.s that would not be required to get premarket approval from the FDA, including test marketed before May sixth, 2024 and those approved by the New York State. This enforcement discretion is favorable to our broad test menu and should reduce the anticipated cost of compliance we've been preparing for the increasing regulation, and we believe we're well positioned to comply with the rule.
From a legal perspective, we are vigorously defending our radar technology, a hearing to appeal the preliminary injunction against radar was held on March 29th in the Federal Circuit Court, and we are waiting that outcome. The North Carolina district court case is currently in discovery and the jury trial is scheduled for March of 2025. We have also filed IPR petitions with the US Patent and Trademark Office seeking to determinant Inotera's two patents at issue are untenable in the view of prior art.
With that, I will now turn the call over to Jeff to review our first-quarter financial results in more detail.

Jeffrey Sherman

Thanks, Chris, and good morning, everyone. I'll begin with a little more detail on our operating results for the quarter. As Chris said, we started the year with revenue experiencing double digit growth over prior year first quarter revenue was $156 million, a 14% increase over the prior year and higher than the fourth quarter of 2023. Revenue growth was driven by growth in clinical test volume, a continuing shift to higher-value tests and improvement in revenue per test, driven by business mix and revenue cycle improvements. Adjusted EBITDA improved 149% from prior year to positive $3 million. Q1 marks the sixth consecutive quarter that adjusted EBITDA increased from prior year as we continue to generate significant operating leverage on our revenue growth.
Looking at slide 8, Clinical Services revenue of $135 million was an increase of 17% over prior year, driven by an 11% percent improvement in revenue per test and a 5% increase in volume. The optimization of our sales force, along with the increased adoption of our NGS products, continued to drive higher volume growth. Ngs growth continues to be strong and is helping to drive revenue growth and earnings.
Turning to Slide 9. Average revenue per clinical test increased by 11% over prior year to $447, the third consecutive quarter of double digit growth and represents an improvement for the 12th consecutive quarter as we maintain our focus on higher value tests and revenue cycle management initiatives. As we shared with you in the past, NGS is a strategic priority and is approaching 30% of our total clinical revenue focused efforts of our sales team to penetrate new and existing oncology accounts and drive adoption of our higher-value NGS portfolio accelerated NGS revenue.
Turning to slide 10, advanced diagnostics revenue declined 3% over the prior year in Q1 as a result of macroeconomic conditions in pharma and R&D spend as well as a continuation of 2023 decisions to rationalize our global testing sites and low-margin contracts. The focus on profitability and margin growth is driving performance in IDX with adjusted gross profit and gross margins increasing versus the prior year.
Looking at the income statement on Slide 11. Adjusted gross profit increased by 18.6% over prior year, and adjusted gross margin was 45.3%, an improvement of 182 basis points over the first quarter of last year.
Regarding operating expenses, sales and marketing expense was $20 million as we continued to increase our commercial investment and R & D expense was $7.6 million. G&a expense increased by $4.2 million over prior year, primarily driven by legal costs associated with the ongoing material litigation and costs related to the closure of the lab and La Hoya, California. The ongoing cost for this litigation as well as the costs related to the lab closure are being added back to adjusted EBITDA as nonrecurring items in the quarter.
Turning to the balance sheet on slide 12, we ended the first quarter with cash and marketable securities of $385 million. Cash flow from operations decreased by $13 million in Q1 over prior year. The first quarter is typically the largest use of cash quarter when annual bonuses are paid. In addition, cash collections were impacted by approximately 5 million in the quarter due to the change healthcare data breach as our hospital and payer clients struggled to manage their claims adjudication and payments. We have started to recover some of this collection shortfall in the second quarter. Our strong cash position gives us the financial flexibility to address our 2025 convertible notes with the principal balance of $201 million maturing in May 2025. These notes will become current liabilities on our balance sheet in the second quarter. Given our liquidity profile, our current expectation is to use our existing cash and marketable securities to retire the 2025 convertible notes when they mature. However, we are starting to evaluate strategic M&A opportunities, which could ultimately impact our capital structure decisions.
Now turning to our 2024 financial expectations on slide 13, we are reiterating full year revenue guidance of 650 to 660 million, representing 10% to 12% growth and expect to be at the high end of the adjusted EBITDA range of 21 to $24 million.
In summary, Q1 continues the revenue margin improvement and earnings growth from 2023 and positions us well to achieve our goals for the year. I will now turn it back to Chris for his closing remarks.

Christopher Smith

Thanks, Jeff. I'm very proud of our team's first quarter progress, including strong revenue growth and significant improvement in adjusted EBITDA. In addition, we saw meaningful progress in the execution on our strategic priorities. We believe we are well on our way to becoming the leading cancer testing information and decision support company. The investments we have made in our teammates, labs, commercial organization and R&D position us well to execute through the next stage of our growth. And while it's still early days. We believe the initial read on the FDA final rule is favorable to our business. I'm excited for our teammates and our customers. But most of all for the patients we serve on a daily basis.
Thanks for your time, and we'll now open up questions.

Question and Answer Session

Operator

(Operator Instructions) Mark Massaro, BTIG.

Mark Massaro

Congrats on the strong quarter in Q1. So I heard some interesting commentary about I think that you're starting to evaluate M&A opportunities? And then I heard that you're planning to participate in the MRD market one way or another. If those are my words, not yours, but can you just give us a sense for maybe your confidence about on radar litigation? And then can you speak to maybe the types of things you're looking at? Are you looking at partnerships or potential all out acquisitions and just give us a sense for what you're seeing in the marketplace. It appears to me that valuations are pretty depressed, so maybe an outright acquisition could make some sense.

Christopher Smith

Yeah, Mark, I'm going to hit a high level and then I'll let Ali kind of take it because she is our General Counsel, but also leads BD so she could hit it. But look, I think all along, we talked about that the first 12 to 18 months, we're going to be very internally focused on getting the house back in order and starting to put wins on the board. And that really does is really still delivering double digit growth and improving the operating earnings at a faster rate and that's gone incredibly well. I think that now being said, we believe there are some interesting opportunities that we think strategically would help our mission and kind of the vision for the Company to grow. And so Ali took on the role to be the beginning of the year. We've hired we brought on and build out a team there to start to explore those. So I think we definitely see that as an opportunity because we really think we're very uniquely positioned to kind of lead this oncology diagnostics testing business, right from a reference perspective. But Ali, do you want to talk a little bit more about BD and then just touch on how we're feeling about the legal costs, which are administrator.

Alicia Olivo

So I guess we'll start backwards. There's three pathways, one that we kind of alluded to in our prepared remarks. One is obviously the litigation, and we see that via the District Court matter as well as our RIPR.s that were filed against both patents that are asserted by the tariffs. And the other is certainly with our R&D activity and our continued development of tests, including MRD test and then the third being in an M&A and that could that could take many forms that currently you're right. Valuations are depressed. It could take a full acquisition. It could also be tech transfer, licensing, all of all of these things. And so all of these pathways are viable and were we're evaluating all of them.

Operator

Puneet Souda, Leerink Partners.

Puneet Souda

Hey, Chris.
Hey, thanks for taking my questions. So just one on the clinical I beat that you had. It's really great to see a UP. continues to work, so congrats there. But you know, you came in $7 million ahead of us and the Street number, I believe as well, but you are not raising the full year guide. So I'm just wondering, you know, where is the moderation? Is it on the pharma business or on the clinical side? I know you talked about a weaker pharma environment.

Christopher Smith

Obviously we're seeing that on the pharma side. But just wondering if what are some things that we ought to consider.
Yes, I'm going to let Jeff kind of hit it getting into detail, but look, but high level, you did hear me talk about not only kind of the macro issues in pharma, but also kind of some operational challenges in that business and look weak, I would say, from a strategic perspective, bringing more in over to lead that business. And I think some of the the strategies that we've implemented and clinical around sales force optimization and our go to market have worked significantly well and Warren grew up a lot in the pharma business with key roles at Millipore and being able to call on that. And so we think that's going to make a difference in the back half of the year. But as far as specific guidance, let me let Jeff kind of comment.

Jeffrey Sherman

Yes, sure. Thanks, Chris. Yes, So Puneet, I think as we looked at guidance, you know, we're only a couple of months off from giving our annual guidance.
No, I would remind everyone, when we started the year, our initial guidance was over $20 million higher than consensus when we started the year. And as we looked at our Q1 performance, we're about 6 million ahead of consensus in Q1. So we had a strong Q1 from execution standpoint, we did not see the typical seasonal slowdown in clinical that we've seen in prior years. I think that's a testament to our commercial teams and the execution we've seen, particularly on the NGS growth side, but we also have just put the pharma commercial sales team under worn. So we do want to give one a little time to get his arms around it and look at the business, we have been adding sales reps there as well. So I think more of our Our expectation is ADX. It has been a challenge over the last couple of quarters as well as what's happened in the overall macro situation. So we want to give more time to get his arms around the business, and we'll look at performance happens in Q2, and we'll reevaluate guidance as we exit the second quarter.
Got it.

Puneet Souda

That's helpful. And then just a quick follow-up on the FDALDT. rule.

Jeffrey Sherman

I mean thanks for your comments, and it's great to see the majority of the portfolio is protected here despite the rule when you, Chris, when you think about the next round of test and the products yet to be launched for those to go through the FDA approval process, how are you thinking about the cost?

Christopher Smith

Do you think it raises the costs for those, even though that process is over the next year, three to four years? And maybe just talk to us high level, how do you see this FDA LDT regulation with the implementation playing out?
Yes. So look, I think it's I think the ruling was very favorable. I'll start by saying that I think also just to say that look we're Board member ACLA, and we're kind of aligned and we don't believe it's medical devices. And so we'll see how that unfolds. But as far as cost and the impact of the business. One of the things that we did as a leadership team as everybody that we brought on has come from a regulated FDA environment. So the person that runs QRC grew up and only FDA regulated. So we started probably 18 months ago putting the systems in place, including design control and new products. And so we've been going through that process we've got two key products that are under development now that are that are kind of running through that process. And so while there's definitely a big cost associated with it, we believe we can manage it in the day-to-day business. There won't be a significant change to our outlook, our forecast to be able to manage that business.

Puneet Souda

That's super.

Operator

Dan Brennan, TD Cowen.

Dan Brennan

Again, thanks for the question. Sorry about that on. Hey, guys. Can you speak a little bit just to the core clinical business. Just wondering, you know, ex NGS, kind of what you guys saw in the quarter looks like the results were okay there and kind of how you're thinking about the progression of maybe volume and price as we look out into Q2 and beyond?

Christopher Smith

Yes. Look, I mean, I did mention in our prepared remarks that we did grow in all modalities, but Warren is here, so maybe I can let Lauren kind of give you the high-level piece of it. And then maybe Jeff, kind of around more specifics in the detail you want to have Sidney. Thanks.

Warren Stone

Thanks, Kristin, and good morning. Qm has shown solid results from the data is presented on and from our data. We feel that we continue to grow from a volume perspective above market across all modalities. And that really speaks to sort of account penetration strategy that we have from a commercial perspective.
Yes, we over-index on NGS because of the relative importance of that. But the overarching sales strategy does target on sort of account ownership, and we're seeing the benefits of that through all of our modalities.
And then we feel based on the fact that it sort of broad-based across multiple customers and across the geography United States that it should be sustainable?

Jeffrey Sherman

Yes, I think, yes, I would expect a similar kind of flow of revenue down from a quarterly perspective?
You know, Q1 is generally our softest quarter tends to ramp in Q2 and Q3 are in a similar range and then we finish the year stronger in Q4. So I would expect a similar a similar sequencing of clinical performance this year.

Christopher Smith

And I guess lastly on that, Dan, remember we went through a field expansion where probably over an 18-month period, we doubled the size of our field organization. And so I think what you see in this business, it really does take six to nine months of time and grade get flowing from a sales perspective, whether it's new products, new processes, new customers, new business. And so I think we're starting to see the benefit of that. And to a point where I think it's something we've got to continue to evaluate is kind of what we call feet on the street and making sure that we have the right amount of coverage because we believe the opportunity is significant. And so it's about capturing it.
And then maybe just one follow-up. Just on the sequencing side. So the liquid test. So is anything baked into the guide for that? And they said later in 23, like is that a fourth quarter event? Is it just any any more color on kind of what the impact of that being from a timing perspective? Thank you.

Dan Brennan

Not expecting any material revenue from that this year, Dan?

Christopher Smith

Yes, it's late. It's late in the year.

Operator

Andrew Brackmann, William Blair.

Andrew Brackmann

Yes, good morning. Thanks for taking the question to Chris, maybe on the comprehensive, I think it's been just over a year since you offset pasta products. Can you maybe just give us a sense of the scale for that business in that product line.
And I guess just related to that, any any color you can provide on sort of success rate cross selling initiatives are sort of what accounts you're really seeing a lot of uptick and things?

Christopher Smith

Yes, Andrew, I'll take a high level of minimum 11 warrant kind of get the detail to it. But remember, we've talked a lot about this that from a human perspective, we're a market leader in NGS, but from a solid tumor, we would have very low double digit share. So it we knew that when we launched kind of that product. But let me maybe have Warren give more.

Warren Stone

Yes, just the correction in for Chris, we have low single digit share in solid tumors that way.

Christopher Smith

So you said double the China. So sorry, we had a single data point.

Warren Stone

I would say that, yes, I think that we have and one of the reasons why we had low single digit share in solid tumors. The fact that we didn't have this board CGP. panel and as you correctly pointed out, we launched this in late March of last year and we've done an upgrade on the product as well as penetrate. The penetration continues to evolve very, very favorably. We see it coming across in two areas. Obviously, you asked area of strength lies within the hospitals, and we're tapping into that opportunity. And we estimate that a 20% of the market potential comes from a hospital side of things and the balance of the opportunity is in the community oncologist. Sometimes they're independent. Sometimes they're affiliated, but that's where we think we have a lot of opportunity to grow in the human oncology space because we have largely underpenetrated for lack of a portfolio. We see a robust growth quarter over quarter in terms of volume within that space as well. And ultimately, this is one of the leading drive is this to the 50% growth in NGS we spoke about earlier today.

Operator

Tejas Savant, Morgan Stanley.

Tejas Savant

Hey, guys. Good morning. So maybe just to kick things off, Chris, you raised your long-term targets are north of 10% down on the last earnings call, three years out where do you expect NGS text test mix to be in terms of your clinical revenue? It's about 25% today, just given the growth you're seeing here, is there a scenario in your mind where over the course of those long-term targets, you know, NGS mix could essentially be approaching 50% on an ex MRT basis?

Christopher Smith

Well, look, I think when you think of it task and you talk about it over a time line that you mentioned, we will be launching other products along the way. So for example, we're really excited about this liquid product that we're going to be launching. So there'll be new products that would come in. But without question, we believe we have a ton of runway on NGS I mean, I think, you know, all the data that we see is that NGS market is probably only penetrated 30% to 40% and growing in the 20% to 25% per year. And so we think that we will get our share of that growth. And I think as we bring out even our next large panel, we think that that will be a product that will make a significant impact in the market. So it's hard to say percentage wise, but I will tell you we're starting from a low base, especially compared to our competitors. We look at Foundation, you look at Tampa as you look at carriers. I mean, these are companies that are probably doing high high double digits of their business and in NGS and solid, and we just haven't been. So we think there continues to be a lot of runway there.
Got it. And a quick follow up on informatics. Actually Chris or Melody, perhaps I'm just curious as to your in all of your updated thoughts there on better monetizing your informatics offering. And on a somewhat related note, you've talked in the past as your product sort of moving towards more data intensive formats, whole-genome sequencing, whole exome, et cetera, as you trend in that direction, do you envision an additional level of investment that's needed to build the infrastructure to support those, you know, back-end analytics and so forth for those kinds of tests.
Yes, I'm going to let Melanie kind of get into the detail with you. But now remember, she has only had it officially, I think, for like two weeks. But look, I think zinc high level. We believe that there's opportunities especially in these markets that are growing double digits, we need to invest in. You know, I think our view is that we think that the business in entirety, we talk about it being portfolio has the ability to grow double digits. And so I think of informatics is no different than our other businesses where we think if we invest the right amount we can we can drive growth, but some of that has to do with product and strategy and that on that, let me kind of throw it to Melody to give you kind of some more color?
Yes.

Melody Harris

So two weeks I've been here take us on this project, so just looking at it and learning, but I do feel we have quite a bit of opportunity. We are only now with our LIM system, really transforming the underlying system such that we have the data structure for the back end analytics that you mentioned and as we get into new product offerings with whole genome sequencing with and liquid biopsy, a lot of the magic of those products is in the back end pipeline. And so we're already building that infrastructure for that, which then also lays the foundation for us for purposes of monetizing that in a meaningful way. And so if you think about data being the new oil. This means that we're going to have more oil production coming from whole genome sequencing and liquid biopsy. So the team is very excited about those new product offerings and what then that means for their product down the road from.

Jeffrey Sherman

I think from an investment perspective, we are continuing to capture gross margin savings and efficiencies throughout the Company and have will have several different work streams going from going towards that. So part of those savings, we can reinvest into things like informatics and R&D as well. So they'll be they'll be profit growth from that, but there'll also be some reinvestment from some of those operational efficiencies that we garner over the next couple of quarters and years.

Christopher Smith

And speaking to the lens in. Obviously, that's going to be a big cost savings to move multiple systems onto one platform. And we've talked a lot about the lens, but that really is the turbocharger for informatics front. It's been very hard from us from an informatics perspective on multiple LIM systems to aggregate all that data and be able to have data scientists create the things that we need it. So the limbs project think about it almost as an R & D campaign for informatics, it's going to create that.

Operator

Mike Matson, Needham & Company.

Michael Matson

Just one on the patent litigation. So with the hearing on March 29th, I guess what is the next step? And is it just a decision on your appeal? And what's the expected timing of that decision?

Christopher Smith

Yes, I'll let Alan take that care.

Alicia Olivo

So I guess the what was appealed was the preliminary injunction and typically our divisions take one to four months depending on various factors, including if there's a dissenting opinion and you know, sort of who the judges are, whether it's presidential in nature. And so we were about one month out. And so we don't really have greater visibility into the timing other than generally one to four months with the four months being if it's presidential or has a defense.

Christopher Smith

Okay, thanks.

Jeffrey Sherman

And then with the new liquid biopsy test that you mentioned, I mean, how does that fit with your prior radar as its radar kind of 2.0 is something that would you sell both versions of the test, assuming you get the preliminary injunction overturned.

Warren Stone

It is a the liquid that we are looking to launch in the latter part of this year. It doesn't relate to MRD. It's really it's a liquid tests and CCGP. pan-cancer liquid test that we are launching so that we're able to offer sort of concurrent testing opportunities with solid tumor and liquid biopsy.

Christopher Smith

Got it. Okay. Thank you.
Thanks.

Operator

Michael Ryskin, Bank of America.

Michael Ryskin

This is John Kim on for Mike. You mentioned that you'd actually be looking at the higher end of the adjusted EBITDA guidance, I wanted to ask on the price and the mix on. I think you previously talked about the NGS. contributing more than 60% of the increase in ARPU last quarter. And I'm wondering what that was this quarter and looking at the 2024 guide and looking at that adjusted EBITDA. It's fair if you had any change in your AUP expectations.
Yes.

Warren Stone

And I guess related to that note and how much improvement you're seeing in the revenue cycle?

Christopher Smith

And I know you talked about that it's a multiyear opportunity, but what sort of upside is less this year?

Jeffrey Sherman

And so internally, in terms of the pricing question, INGS. continues to drive over 60, 60 plus percent of AUP increase. And so that that trend has continued.
In terms of Ragan revenue cycle. I mean, we have kind of a lot of initiatives under that umbrella, we have what you would consider your historical kind of billing and collections, denials management piece. We're having success there. There is kind of conversion of tests from a single panel, the larger panel tests that kind of falls under what we would consider revenue cycle initiatives as well. And then we have payer policy movements as well. So as state biomarker legislation continues to get passed. That's long term favorable for us. That's going to take time to kind of matriculate through through our performance and getting payers to pay So and then finally, there's the rate aspect where we're seeing rate increases. And so I would say we continue to have success across all of those. They don't they don't really start or end in any one particular quarter. So I continue to see kind of a multi year opportunity of seeing improvements there. And that's really where the focus is on getting paid for the work that we're doing and making sure we're getting. We're capturing the value of the service we're delivering to our clients and their patients.

Christopher Smith

And I think that the progress has been good and we still see a lot of opportunity to improve more going forward that And sort of related to it, I know you've doubled the sales force and now as that team transitions to the under warranty talked about expanding it further, how should we think about this additional investment in the commercial team? Is that going to be what sort of impact. Is that going to have on the financial statements?
Yes, I would say, look, all of our strategies are kind of built into our guidance. So anything that we would do investing this year are already built into the guide.
No.
Thank you.
Thanks.

Operator

Mason Carrico, Stephens Inc.

Mason Carrico

Hey, guys, you gave some color on this in a previous question, but ask it more directly for the ADX business overall, is this still a business that you believe can consistently grow double digits? And if so, what needs to happen to get there? And how do you think about the time line to return to that level of growth?

Christopher Smith

Look, we a couple of things on that. I mean, I think we do believe that business can grow double digits. But that being said, I think we've got to make sure from a commercial optimization perspective, but that we have the right strategies in place. And I think also some of the newer tests that we're bringing to market, I think, are going to help us significantly.
So why Neo comprehensive 1.0 is broad panel. I think getting our next gen big panel out there that's going to be one of the largest, if not the largest on the market. It is going to have a big impact as well as liquid biopsy. So I think one of the things with the pharma is taking these new products and presenting them as new products and then I think the other piece is when we came in and we talked a lot about the clinical business bringing in Warren, we talked about sales force optimization and we and when you looked at the clinical group, we were below I'd best in class optimism. I optimize sales force. Our effective sales forces probably scoring about what 60 on the Gartner scale and we are well below 20. And I would say we've done a lot of things to lift that.
On the clinical side, you've seen those financial results. I would say that we did not go that through that process on the pharma side, and we're just beginning that now. So I think kind of the same thing with allowing more to get his arms around this business and understand it, but the market's there. So the question is that whether the market's there, the question is for us putting the right strategies and execute to do it. But to be fair, it's going to take quarters to get it going. I think we did make some good strategy moves on looking at optimizing the financials around that especially around the gross margin and closing some of those out out of the country or global sites and cutting loose some underperforming profitable customers. But now it's about the growth and getting it back to that growth mode.

Jeffrey Sherman

I think the other the other point is we have a relatively new sales force that has come on over the last couple of quarters. And so I think there's also the component of this of just the natural ramp there. And I think we have built a comprehensive sales structure support structure under one and the clinical side that will now may be really available from the pharma side as well.

Christopher Smith

Got it. I'll keep the one. Thanks, guys.
Thanks.

Operator

Matt Sykes, Goldman Sachs.

Matthew Sykes

Hey, guys say that taking the question, this is Personiv a lot's been covered already, but despite the increase sequentially in clinical revenues for this quarter, how much erosion of clinical testing volumes could have been attributed to winter seasonality? And then how are you thinking about investments into digital?

Christopher Smith

So it's two questions. So you want to talk a little bit yes, I think there is and I'll give Melody the second one.

Warren Stone

Yes, I think as Jeff mentioned in his commentary, we didn't know if we see a meaningful change in ad demand patents in Q1. And actually this from a weather perspective, maybe there is margin anymore weather phenomenon in this year versus last year, bad debt wasn't materially different. And as a result, we didn't necessarily see as large a dip as what we have seasonally seen in Q1. So we saw what I would define as fairly robust volume demand across all of our modalities in the first quarter?

Kendra Sweeney

Yes, on digital pathology, we do have a couple of internal initiatives. We do, to some extent, employed a level of digital agency and other circling methodologies today, but to really do it at our full production scale, we're not seeing a digital path and I vendors in the marketplace that have the breadth of our menu. So we're trying to figure out ways that we would piece that together in a full scale production method. So today, we've done it opportunistically and taking some of the higher pain points and digitize that. But as far as across the board, digital pathology solutions, we don't see that they're quite out there yet today.

Operator

Andrew Cooper, Raymond James.

Andrew Cooper

Andrew pay, everybody, the mine.

Jeffrey Sherman

Thanks for the questions here.

Christopher Smith

Lot's already been asked, but maybe one more on on MRD. and the mention of sort of the various different pathways you could go down. Just would love kind of the high-level thoughts of how you think about the value of time from that perspective and with a trial potentially starting in 2025 with the IPRs underway, the time line of seeing those through to the end versus potentially going another route where you could do something faster, even if it maybe cost a little bit more. Just help us think about how you balance those things as you think about what the next steps should be to add MRD. to the portfolio from a commercial point of view?
I think it's a good question. Look, we do have a lot of confidence in the legal strategy because I think especially the IPRs. And I think that's gone kind of under the radar through all this because we're going through the natural steps. But those are now final and to see if we get those patents overturn. And so look, I think from a radar perspective, we like that technology a lot and the team had already started working on the next gen radar product. So I think we're not abandoning that path. But I think that being said, look, we're a company that sells over 600 cancer tests. And we know that MRD. will be a product that needs to be there, but our ability to have multiple NGS tests. So I think our ability to evaluate other options and I think it's just prudent on our part as one of the big projects that Ali and her team are looking at. There's a lot of interesting, innovative, early-stage companies out there from a technology perspective. So look I think we would do that.
As far as on timing, look, I think at the end of the day, you've got to remember a lot of that product is still not getting reimbursed. I think there I think the team has done a good job with multi-access and getting coverage. But if you still look at the whole industry, it's pretty deep in colorectal, but not a lot of other cases. And there are some very good companies that are bringing those products to market in the next year or two, which we think will only grow the market at a faster rate and help adoption, especially from a payer perspective. But this is still so it's such early days from MRD. I think it's almost like if you would go back with NGS 10 years ago and today NGS is only about 30 35% penetrated. So we think that this is going to be a long game with MRD. And we believe that being the leading cancer company that's going to be important to us. But it's also about being prudent and making sure that we have multiple opportunities.
Awesome.

Jeffrey Sherman

That's super helpful. Maybe just one more in terms of some of the sales force commentary.

Christopher Smith

Can you just remind us from a numbers perspective, sort of where you sit in that precision oncology versus the traditional sort of our call point and then as well in ATX and maybe versus those numbers where you'd like to be end of year or long term to the degree, there's a material change there yet.

Warren Stone

So and as Chris stated, we've sort of doubled our sales force in the last 18 months, which ultimately means we now have an authorization that's that's north of 100 on the clinical side. And if you think of of allocation of time, et cetera, that we apply roughly 40% of the sales force time is now focused on the community oncology setting with the remaining roughly 60% focused on U.S., more traditional core point with the pathology and the hospital. So that that's really the breakdown with regards to the <unk>, the clinical side of things on on the pharma side of things, just getting my arms around it today, we have in less than 10 people with our commercial organization targeting our pharma customers. And I think there is a real opportunity for us to make investments here, but not necessarily what I would call traditional investments. I think there is opportunities to drive a much more sophisticated sales, commercial strategy and sales deployment to support that. So I wouldn't just think about this is scaling a number of BD's, I would think about this and much more transformational manner and different solutions that will drive better efficiency and reduce cost to serve. So I think investments there but we're too excited about probably a little early for me to comment.

Operator

We have reached the end of the question and answer session, and I will now turn the call over to management for closing remarks.

Christopher Smith

Okay. Thanks so much, Ali and everybody. Thanks for taking the time to catch up with us today as we believe our growth was a strong quarter, and we're pleased with the progress that we continue to make, and we'll look forward to catching up with you next quarter. Thanks and take care.

Operator

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