Sunday, April 7, 2019

A Current AIM Small Cap Equity Holding: NeoGenomics, Inc. (NEO, $19.44): “Red Pill or Blue Pill?” By: Chez Daggs, AIM Student at Marquette University

NeoGenomics, Inc. (NEO, $19.44): “Red Pill or Blue Pill?”
By: Chez Daggs, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


NeoGenomics, Inc. (NASDAQ: NEO) is a provider of cancer diagnostics and pharma services to oncologists, pathologists, pharmaceutical companies, academic centers, and more.

• NeoGenomics completes acquisition of Genoptix, Inc.

• Launched new diagnostic test for breast cancer.

• Reported record revenues and strong organic revenue growth in the fourth quarter.

Key points:

In December of 2018, NeoGenomics completed their acquisition of Genoptix, Inc., a leading clinical oncology laboratory, specializing in hematology and solid tumor testing which was headquartered in California. Strategically, this acquisition makes a lot of sense. NeoGenomics can now expand their reach into more oncology practices, and significantly accelerate their progress towards major growth objectives. It also makes them unique in a sense that it allows them to create a new standard of highly advanced cancer testing service throughout the country. Management estimates expect Genoptix to contribute around $85 million of revenue in the first year, around $25 million of cost synergies, and incremental margin on Genoptix revenue to reach approximately 25% by the end of the third year.

In March of 2019, NeoGenomics announced availability of the Ventana PD-L1 (SP142) Assay for tumor tissue from patients with triple negative breast cancer (TNBC). This assay is a companion diagnostic test to identify TNBC patients who may be appropriate candidates for TECENTRIQ, an immunotherapy approved specifically for breast cancer. Ventana PD-L1 was recently approved by the FDA and is ready for clinical use. TNBC accounts for 10-20% of cases and is named because tumors lack three biomarkers that are commonly targeted with drug therapies when present. TNBC is very difficult to treat therefore makes many therapies ineffective, but the launch of PD-L1 (SP142) will provide TNBC patients access to a companion diagnostic test for a new, better treatment option.

In February 2019, NeoGenomics reported fourth quarter and fiscal year results. NeoGenomics reported record revenue and EBITDA for the quarter of $76.5 million and $13 million respectively. Historically NeoGenomics has delivered choppy operating margin year to year, but for 2018 operating margin jumped up to 4.46% compared to 1.31% for 2017. On top of that the company now looks profitable. The acquisition also puts the company on track to generate strong revenue growth of about 40% compared to the previous year.

What has the stock done lately?

Like most equities, the stock had a rough end to 2018 despite the strong close of their acquisition. Since the start of 2019, the stock has been steadily climbing to yet another 52 week high. The stock rose nearly 18% solely in the month of February following the announcement of its strong earnings report, and it’s expected to continue on its run.

Past Year Performance:

Today, the stock is trading more than double than it was a year ago. It has a 52 week H/L of $7.71 - 20.31. The stock has increased nearly 163% in value over the past year, and just recently hit that $20.31 mark in mid-March. The stock is currently dancing right around the price target it was pitched at of $20.64.  The stock has been one of the strongest players in the genetic testing stocks.

1 Year Stock Chart vs. Russell 2000
Source: FactSet

My Takeaway:

Since being added to the AIM small cap equity fund, the initial investment thesis with which the company was purchased has almost come to reality. NeoGenomics completed their acquisition of NeoGenomics, they experienced superior top-line growth, and received FDA approval of their genetic code PD-L1.  NEO is essentially at its price target, but has been a great run. It might time to decide on whether to sell or seek some additional profit.

1 Month Stock Chart
Source: FactSet