jusun
investment paper
This is from NeoGenomics, Inc. (NASDAQ: NEO) has evolved into something more chaotic. After former CEO and company veteran Douglas Van Oort stepped down last year, things quickly turned toxic. The sudden resignation of his successor, Marc Maron, and the board’s hasty search for his replacement. After a tumultuous few months, the new CEO, Chris Smith, took over last August.
Third-quarter results released last month offered little insight into how the new leadership will affect the company’s future. That’s because most of the decisions during the quarter were made by the company’s chairman and an emergency council made up of former CFOs Bill Bonello and Doug Brown. News of Mr. Bonello’s resignation arrived yesterday, with Smith stepping down after being appointed to the position.
In my previous article, I said that unlike the previous CEO, Smith is likely to make a leadership change. What impact will this have on the business, and given the new CEO’s remarks on portfolio optimization, what can we infer from these changes? led the company’s strategy and established the informatics division, a loss-making division that has long been touted as one of the company’s key growth drivers.
Is amortization on the horizon?
In our previous article, following Smith’s comments on portfolio optimization and what we saw as critical remarks about the entrepreneurial spirit built by his predecessor, we explored the potential NEOs face in Q4. You mentioned the possibility of amortization as a risk. His comments implied a strategic focus away from strategic value creation and instead focused on maximizing short-term value.More than half of NEO’s assets are goodwill and intangible assets. This is very important for NEO given that it consists of and may be subject to write-downs depending on the outcome of the strategic review as we move forward from here. To get a clearer picture of what to do, let’s look at the financial details.
As of September 2022, NEO recorded $523 million and $417 million in goodwill and intangible assets on its balance sheet, respectively. Goodwill, unlike intangible assets, is not amortized because it relates to what the company considers to be indefinite intangible assets, including those related to acquisition synergies. However, on a quarterly basis, this balance is evaluated for impairment. Last quarter, the company wrote off $4.5 million due to accounting errors in the previous quarter. This amount is not significant and will not be discussed in this article.
The company allocates its goodwill to two business segments. Clinical services include FISH, karyotyping, fluorescence in situ hybridization (FISH), cytogenetics products such as microarrays, and other advanced sequencing such as next-generation sequencing, including liquid biopsy products inherited from the Inivata acquisition. Includes molecular diagnostic tests. The following is a table summarizing NEO’s goodwill by segment.
Table 1: Goodwill balance as of September 30, 2022.
|
clinical services |
pharmaceutical services | total | |
| balance | $458,782 | $63,984 | $522,766 |
The majority of other intangible assets recorded on the balance sheet are expected future developments from acquisitions such as Inivata and Trapelo in 2021, HLI in 2020, Genesis in 2019 and Clariant in 2016. related to management’s estimates of the cash flows of Balances also include assets related to consumer relationships, trademarks and brand names, as shown in the table below.
Table 2: Intangible asset balances as of September 2022.
| balance | |
| customer relationship | $89,929 |
| Developed technology | $282,439 |
| marketing assets | $345 |
| trademark | $28,774 |
| trade name | $1,914 |
| Trademark – Life indefinitely | $13,447 |
| total | $416,848 |
One of the consequences of the restructuring is to shift focus away from the unprofitable biopharmaceutical account. The company may also geographically focus on the United States. This will be accompanied by a reduction in operations in Europe following the acquisition of Inivata. From my understanding, bioinformatics is also currently unprofitable and an unestablished business model with unclear redemption pathways. These dynamics are based on SOPHiA GENETICS (Sof), the only listed company specializing in pure bioinformatics. Any of these changes would force management to reconsider its profitability assumptions and could result in a write-down of assets.
Finally, Fulgent (FLGTMore) has moved from a micro-cap to a billion-dollar+ business in the last 18 months, thanks to a COVID testing business that blossomed in 2021 and early 2022. Molecular diagnostic space. As FLGT continues to invest in growth initiatives, one can imagine a scenario where it could take market share away from NEO. This could encourage the company to adjust its profitability assumptions for intangible assets.
where could i be wrong?
The majority of NEO’s intangible assets and goodwill are related to Inivata, a high-growth company with a strong addressable market. The RADAR-branded liquid biopsy platform for Minimal Residual Disease (MRD) and the Invision-branded tumor profiling business are highly scalable and extendable across multiple indications. NEO purchased his Inivata purchase option in May 2020, locking in a favorable price ahead of the sector’s rise in 2021. Even with the stock market crashing today, you won’t find a liquid biopsy platform for the same price that NEO bought Inivata. As such, the majority of NEO’s intangibles are tied to quality assets with great market potential.
Second, NEO’s consumer-focused approach differentiates it from its competitors: the up-and-coming FLGT, which I believe has governance issues. There are significant differences between the two companies’ approaches to unlocking M&A synergies. NEO applies successful playbooks to acquired assets to unlock value. At the same time, FLGT is doing the opposite, using the board’s talent and operational blueprints to improve the operations of its core business.
Overview
After a turbulent year, NeoGenomics, Inc. finally has a CEO who can provide some guidance on the company’s strategic direction for the next few years. It’s too early to assess the impact of Neogenomics’ new management on the company’s performance, but I’m cautiously optimistic. NeoGenomics, Inc. is a valuable asset with a strong consumer-centric market position. However, management’s restructuring plans involve asset write-down risk on goodwill and other intangible balances. Yesterday, another company veteran, Bill Bonello, left the company, adding more questions about the company’s future direction.