Cancer Trackers

Cancer Trackers

By Jean Gruss

Editor/Lee-Collier

Tucked away in a business park near the Fort Myers airport, lab technicians at Neogenomics analyze human tissue that just arrived by FedEx.

A technician points to a red cluster of dots that appear on the computer screen next to her microscope: Bladder cancer. Within a day or so, the doctor who prescribed that test will deliver the grim news to a patient after reading a report of the results online.

Because of the gravity of the test results, it's that kind of speed that Neogenomics executives say sets their company apart from much bigger rivals in the crowded lab business. Instead of the 10 to 14 days it usually takes most labs to relay the results of genetic tests for cancer, Neogenomics says it can deliver them in three to five days.

But transforming the small and so far unprofitable lab into one that will challenge the big industry players is no small feat, even if it's faster than its competitors. It takes good management, lots of money for expensive equipment and staff, and a laser focus on the customer.

"Take care of the customer and opportunities will present themselves," says Steven Jones, a Naples financier who controls a majority of the company's publicly traded shares and is the company's acting financial officer. The company trades under the shares NGNM.OB.

Jones admits he wasn't impressed when he first heard of Neogenomics. "It needed management and money," he says. Jones, a former Merrill Lynch telecom investment banker in the go-go 1990s, has seen his share of corporate disasters.

But the more Jones learned about the business, the more he liked its prospects. Genetic testing for cancer is one of the fastest-growing and most lucrative areas of the laboratory industry. In the last five years, new tests have been developed based on rapid advances in technology coupled with the mapping of the human genome. With Florida's high elderly population and people with cancer, Jones reasoned that Fort Myers was an ideal location for a lab.

So in April 2003 Jones lined up 25 investors and used some of his own money to build the business. He declines to say who the investors are except to say that most of them are high-net-worth individuals. Jones also minds the store by acting as the company's financial officer and signing off on the company's regulatory filings. "My role is to get my hands dirty," he says.

The company's original founder, Naples gynecologist Michael Dent, is the chairman. Since Jones gained control of the company, Neogenomics has used about $2 million in equity, mostly on equipment and staff.

Significantly, Jones struck up an agreement in June to sell up to $5 million shares of Neogenomics to Cornell Capital Partners on an as-needed basis. Cornell Capital is a private equity firm headquartered in Jersey City, N.J. "It gives us the ability to have dry powder in case we want to make an acquisition," Jones says. Plus, it provides a cushion should the company need funds urgently.

The key to the success of the lab business is speed, says Robert Gasparini, the company's president and chief science officer. In surveys of its customers, Neogenomics has found that turnaround time is their client's top concern. After all, who wants to wait two agonizing weeks for the results of a cancer test?

"Quality comes in third or fourth on customer surveys because it's expected," says Gasparini.

Locating the business near Southwest Florida International Airport in Fort Myers was critical because the human tissue for testing arrives overnight by FedEx. Another way to speed up the process is to provide results to doctors via the Internet. But the elaborate software to do that doesn't come cheap. Gasparini says he had to find a creative way to buy $1 million worth of software from eTelenext, a company that specializes in these kinds of applications. Neogenomics negotiated a deal under which it agreed to pay $67,500 up front. Then, it agreed to pay a $6,000-a-year "membership fee" plus transaction fees of $2.50 to $10 per completed test.

In addition to getting the money side of he company going, Jones quickly realized he had to hire an experienced lab director to have any chance of success. Enter Gasparini.

Before joining Neogenomics late last year, Gasparini had built the genetics division of U.S. Pathology Labs to $30 million in revenues in just over two years. In that short time, he built the division from scratch to the sixth-ranked genetics lab in the country by testing volume. Unfortunately, Gasparini didn't have an ownership stake in U.S. Pathology Labs, so when lab giant Laboratory Corp. of America bought the company in 2004 he didn't share in the windfall.

Now, Gasparini will have a big stake in Neogenomics. Under his new contract, Gasparini is eligible to receive 1 million incentive stock options in addition to a base salary of $185,000 a year. That's an amount equal to about 5% of the total shares outstanding as of September.

Gasparini is eligible for about a third of those options on a three-year vesting schedule. But his contract has performance-based vesting options too. For example, Gasparini will be vested in 50,000 shares if Neogenomics revenues reach $2.5 million in 2005 and 50,000 more shares if the company's stock maintains an average closing price of 75 cents per share for more than 30 days. The company's shares recently traded on the Nasdaq bulletin board at 23 cents per share. In all, the board set 14 performance goals for Gasparini.

"Bob's contract was the product of months of negotiations," Jones says. "The more he was willing to be tied to performance, the more stock options we would give him."

With the incentives to grow the business, Gasparini has been busy wooing new clients. For the three months ended September 30, the company's revenues surged 359% to $559,000, up from $122,000 in the same period in 2004, primarily as a result of attracting new clients.

Jones now hopes Neogenomics will turn its first quarterly profit in the first quarter of 2006. The company reported a net loss of $239,937 in the quarter ended Sept. 30 versus a net loss of $170,856 in the same period in 2004.

Neither Jones nor Gasparini will reveal who the new clients are, but its largest customers are now in California, New Jersey and New York. A year ago all of Neogenomics' customers were Florida-based, but today they account for less than 50% of revenues.

Customers include oncologists, pathologists and hospitals. About 40% of revenues come from Medicare; another 40% from groups such as hospitals that bill clients directly and 20% comes from private insurance. Medicare, Jones says, is the best payer. "I love Medicare," he says. "You can set your watch by them."

Besides new customers, Gasparini started offering new kinds of genetics tests that can generate as much as $2,500 in revenues per cancer case. In 2004, the company only offered one kind of test that generated just $600 per case. Neogenomics performed 1,152 tests in 2004, and Jones expects the company could triple the number of cases this year, with each case now representing a potential for four tests.

The company also started testing for cervical, breast and bladder cancers, in addition to the blood-related cancers it was already testing. Bladder, breast and cervical cancer tests now account for 16% of revenues.

Finding employees has been a challenge for Neogenomics, too. Gasparini estimates there's only one qualified candidate for every six jobs available. The company uses stock options to recruit new technicians, and it set up an in-house training program with the help of faculty at Florida Gulf Coast University. In the end, Gasparini says, "It's all about who you are and what your program is," Gasparini says.

With its credit line from Cornell Capital, Neogenomics also is on the lookout for acquisitions. The industry is still fragmented, with the top 20 laboratories in the country accounting for 50% of market revenues.

"This is an industry ripe for the pickings," says Jones. Gasparini has a stake in that too; his contract says he will vest in 50,000 stock options if he closes on the first acquisition by Dec. 31.

Neogenomics

By The Numbers

Statement of Operations

Revenues 2003 2004 Chg.

Net revenues 369,972 558,074 51%

Expenses

Cost of revenue 481,593 576,867 20%

Other operating expenses

General & admin. 382,711 710,771 86%

Interest expense 41,431 89,421 116%

Net Loss (535,763) (818,985) 53%

Balance Sheet

Assets

Cash 25,051 112,548 349%

Accounts receivable 63,861 56,491 -12%

Inventory 10,593 15,122 43%

Other 2,627 12,121 361%

Furniture & equipment 397,686 393,036 -1%

Other assets 7,221 2,681 -63%

Total assets 507,039 591,999 17%

Current Liabilities

Accounts payable 70,343 96,210 37%

Accrued & other liabilities 45,832 72,444 58%

Deferred revenue 110,000 110,000 0%

Due to affiliates 58,666 740,000 116%

Total current liabilities 284,841 1,018,654 258%

Long-term liabilities 590,000 0

Total Liabilities 874,841 1,018,654 16%

Stockholders' deficit (367,802) (426,655) 16%

Source: Company filings with the Securities and Exchange Commission.

How to Choose

Steven Jones, chairman of Naples-based investment firm Aspen Capital Group, seeks four attributes in a company before he invests in the firm. Some tips:

1. A great company. Look for companies with a product or service that is in demand in an industry that is growing and with employees who can execute the business plan.

2. Great management. Seek out managers who have direct experience growing similar companies in the past. Look for those who know where the traps are and can look ahead six to 18 months out to detect trends that will impact their business.

3. Great valuations. Look for companies that are growing faster than the market but whose valuations are in line with other companies in the same industry, based on revenues, earnings and cash flow.

4. A well-defined exit strategy. Investors must have a sense of comfort that they will be able to cash out within three to five years.

-Jean Gruss