Genetic Growth

Genetic Growth

CEO Q&A by Jean Gruss | Editor/Lee-Collier

Neogenomics is rapidly becoming a force in the world of cancer testing. Its president tells how he manages the company's growth and how the company will expand.

How do you manage a company that's growing revenues by more than 300%?

Just ask Robert Gasparini, the president and chief scientific officer of Neogenomics. The Fort Myers-based company is a clinical laboratory that specializes in genetic diagnostic testing of cancer.

For the first nine months of 2006, Gasparini and his team have grown revenues to $4.7 million versus $1.1 million in the same period in 2005, a 316% increase. The company's stock (symbol NGNM) traded at $1.60 recently, up from its 52-week low of 18 cents.

Gasparini, who joined Neogenomics in 2005, has a track record of building successful labs quickly. He was the director of the genetics division of lab giant US Pathology Labs, where he grew annual revenues for the new division to $30 million over a 30-month period.

In addition to recently expanding the headquarters in Fort Myers, Neogenomics opened a new laboratory in Southern California and acquired a facility in Nashville, Tenn., last year. Despite big investments in facilities and new employees, Neogenomics turned a profit of $299,584 in the first nine months of 2006 versus a loss of $636,468 in the same period in 2005.

Here is an edited transcript of a recent conversation with Gasparini:

Q: What is your biggest challenge in managing the growth of Neogenomics?

A: The single biggest challenge of growing a company like Neogenomics is the choreography needed between growing the sales team and building infrastructure. This dance is highly complex and if you get it right, you can be successful. If you get it wrong, there are a number of ways you will fail. One simple example would be that if you build your sales team too quickly and they bring in more business, if you haven't kept pace with the infrastructure, then just as many customers are going to be going out the back door as coming in the front door.

The number one differentiator in this business is turnaround time. It's a simple concept: you need to get the results back to the customer as quickly as possible. If you're overburdened, one of the first things affected is turnaround times.

Q: What is the trick to balancing sales and infrastructure?

A: You have to stay a half step ahead. Operations have to be able to absorb what sales brings in. It's expensive to have people not working or to have capacity. Having capacity translates to unused efficiency and wasted dollars. But "wasted" is somewhat subjective because my premise is: Let's open the pipeline, let's bring in the people, let's build the infrastructure and be ready for the wave. Hopefully, you're built and ready within weeks of the wave. You don't have the luxury of being right within a quarter. It needs to be closer than that.

Q: How do you find top talent and how do you recruit them to Fort Myers?

A: It's very difficult. It's one of the reasons we have other laboratories. We build labs in strategic areas where you can bring people where they already exist. In Fort Myers it's been difficult because there's not a lot of biotech and high-tech. We haven't hired that many people in the last six months for Florida because we've put all of our emphasis in California and Tennessee. Again, the reasons we chose those locations, among others, were that they were technologist resource-rich environment.

Q: What are some of the most valuable lessons you learned at US Labs that you're adopting at Neogenomics?

A: The first was that if you didn't pay attention to the balance between sales and infrastructure, you could quickly get overwhelmed.

Experience is a hard teacher, but hindsight is 20/20. That doesn't mean we're not making mistakes here. But we're hopefully making less critical mistakes. We've lost almost no customers.

Two years out [at US Labs] we had easily lost 200 customers. It was offset by the 250 new ones brought in, but it was a constant struggle. Our sales team after two years [at US Labs] was 35 people. Our sales team [at Neogenomics] has just gone up to seven people. It's a big difference here. What I learned was do not grow at all costs.

Q: Neogenomics started becoming profitable in February 2006. How did you do that?

A: Once we built infrastructure, we didn't invest millions into the sales team to bring in business we couldn't handle. So we saved on that huge expense. The laboratory we bought in Nashville came after profitability.

So we didn't expand until we were profitable. We didn't bite off too much more. We had controlled growth and we were trying to execute to plan. We were spending where we needed to spend, but not spending unless it was absolutely mission-critical. Also, we developed a finance department that could not only track all our finance metrics, but also be the collections department. We didn't spend 10% of our revenue to hire a company to go out and collect. We invested in some people to start our own billing and collections department and go after what was ours.

The other thing that we did is we started to expand our menu. That drove sales and profits. In 2005, we layered on some new technologies. Then we layered on applications within the laboratories. We added a new panel of tests for leukemias and lymphomas. As we grow, it's not just about taking business away from other companies.

Q: How much of your business depends on Medicare reimbursement?

A: We consider our customers the doctors themselves, as opposed to who reimburses. The payer mix is uniform across the industry. Typically the government pays for about half. Don't forget that cancer is a disease of the elderly and Medicare is one of those elderly healthcare programs. The other half is through various arenas, including third-party insurers, managed-care groups, self-pay or contracts with other laboratories.

Q: What is the outlook for Medicare reimbursement?

A: Right now, we're optimistic. There are a number of other laboratory arenas that are under fire from Medicare and the federal government. Right now, genetic technology is not one of them.

Q: What about managed care?

A: We view managed care as wholesale business. Although managed care is coming to our niche area, it's not completely here. It will only be a matter of time and we'll have to start developing relationships. We have not budgeted this year for a vice president of managed care because we've been able to grow very nicely with our current customer mix. There is still reasonable discretion and autonomy among the physicians who order these tests. Certainly, that's something that's on our radar screen. Medicine is evolving in the direction of managed care.

Q: Besides finding qualified employees, why are you locating new laboratories outside Florida?

A: When we look at this business, it truly is bicoastal. There is not a lot of laboratory testing that goes on in the middle of the country. That's one of the reasons we're opening a laboratory in Southern California. If you have a series of regional laboratories, you have the power of being a regional laboratory. By that I mean having the benefit of having local couriers pick up customer specimens, as opposed to putting it on a plane.

What we tell our customers in Florida is that their specimen is not going to be put on a plane or be Fedexed. We pick it up, it comes into our building in the evening and we're working on it that night. You can effectively leverage into your business model the local angle. The vision is to develop a series of regional labs that collectively represent one of the largest cancer-genetics testing laboratories in America where we have regional power and national presence. That's really where we're headed.

The average turnaround time in this business for a cancer test is about 10 to 14 days. The best labs put out a result in seven to 10 days. The reason that turnaround time is so important is because once we get a sample it means that a person has already been told they may have cancer and they're on the cancer treadmill and waiting for a result. If you're an oncologist, are you going to be happy to wait 10 to 14 days if you can find a lab that does it in seven to 10 days? Neogenomics has made its mark in the industry by delivering cancer results in three to five days. In the 24 months that I've been here, we've averaged 4 days. Turnaround times are fueled by regional laboratories.

Q: Where else are you looking to establish regional laboratories?

A: What we have told Wall Street is that we're firmly entrenched in a merger and acquisitions strategy. So if you extrapolate, we're not done buying another laboratory.

If you look at a map of the United States, there are one or two spots that are empty. That's all I'll say at this point. We are in the process of connecting Tennessee with Florida and California. We have the capability now to do some of the technical work in one lab and the analysis in another lab.

Q: How do you feel about Fort Myers as home to Neogenomics' headquarters?

A: Right now, it hasn't slowed us down. We have a great airport. It's easy to get in and get out of Fort Myers. There are a lot of direct flights to a lot of cities. Sometimes my only quiet time these days is on a plane, when my laptop battery dies. But Florida is also the right place to be. Cancer is a disease of the elderly. California, Arizona and Florida have most of the country's elderly people. I read a statistic recently that one in seven Americans over the age of 65 lives in Florida. That's an unbelievable statistic. I suspect that means either in part-time or full-time capacity. I don't mean to sound crass about it, but cancer is a disease of the elderly and we are a cancer diagnostic company, so it makes sense to be in a state like Florida.

REVIEW SUMMARY

Company. Neogenomics

Industry. Clinical laboratories

Key. Speed is essential to beat the competition.