Catch Up with Growth

REVIEW SUMMARY
Company. Neogenomics
Industry. Health care
Key. Volume and efficiency become crucial when insurance reimbursements decline.

Douglas VanOort is the right man to bring some order to Neogenomics.

It's the classic growth-company story. The Fort Myers-based cancer-testing firm had grown so rapidly that it has stumbled along the way, losing money in 2009 despite posting double-digit percentage revenue growth.

As a top executive at Corning Life Sciences, VanOort grew and spun off Quest Diagnostic into the largest independent clinical diagnostic company in the U.S. with $1.5 billion in revenues in 1998.

VanOort, 54, took over as chairman and chief executive officer of Neogenomics one year ago after spending the last decade investing in promising companies and forming his own venture firm after leaving Quest. VanOort says Neogenomics will be profitable later this year.

In fact, Neogenomics has many things going for it. The Fort Myers-based laboratory company develops tests for detecting various kinds of cancers, a disease that primarily strikes the rapidly growing elderly population. Its hallmark is speed and accuracy, promising results faster than any of its competitors.

In a deal that drove its stock up 45% in two days, Neogenomics announced an agreement in July with pharmaceutical giant Abbott Laboratories, one of its key suppliers. Abbott agreed to acquire 9.6% of Neogenomics' stock for $4.8 million and collaborate on development cancer tests.

Neogenomics' revenues in 2009 totaled $29.4 million, up 47% from the prior year. But costs and expenses to keep up with that growth overtook sales and Neogenomics posted a $2.2 million loss last year.

Building efficiency
Like many fast-growing companies, the Fort Myers-based cancer-testing firm outgrew its thin management ranks. VanOort hired a vice president of laboratory operations and a new chief financial officer, a role that had long been filled by Naples investor Steven Jones who controls the largest block of Neogenomics stock.

While revenues surged, profits were hard to come by as the company ramped up sales, marketing and labs to handle the spike in cancer testing. Sales and marketing expenses increased by about $3.5 million, or 105% in 2009, the company says.

What's more, an undisclosed customer who accounted for 20% of the company's revenues decided to conduct high-margin bladder cancer tests itself. “That really reduced our sales,” says VanOort. “We had to focus on growing our other tests.” Now, no single customer makes up more than 4% of sales.

But VanOort says the expenses associated with hiring new sales representatives (the company has 26 across the country) and lab technicians will pay off as oncologists, pathologists and others sign up for Neogenomics' faster service. Now that its labs in Fort Myers, Nashville, and Irvine, Calif., can handle the growth, more of every dollar of additional revenue will fall to the bottom line.

To spur growth, Neogenomics started rewarding its employees for performance objectives they and company managers have established. Bulletin boards posted in each department update employees on how well they're doing using a picture of a red light. Green means they're on target; red means they're not.

If they meet their goals, employees earn a quarterly bonus that represents a percentage of their pay. “We call that goal sharing,” VanOort says.

VanOort established new reporting systems that let company executives track test samples from the minute they're picked up at a doctor's office to how long it takes to complete them and deliver the results. Another system tracks how quickly employees answer the phones. “We measure everything here,” VanOort says.

Tracking specimens and identifying problems also allows the company to alert its sales staff before they visit a customer. For example, a sales representative who visits an oncologist's office would know exactly how many tests he has sent and whether there are any problems.

As a result of these efforts, VanOort expects Neogenomics to come close to breaking even in the second quarter and be profitable in the second half of this year.

Increasingly, physicians are prescribing treatments that are tailored to a person's individual genetic makeup. Fact is, even the same types of cancers vary significantly in severity from one person to another.

This trend to “personalized medicine” is going to be important for labs such as Neogenomics because tests will need to be more sophisticated to identify subtypes of cancers. For example, Neogenomics scientists are working to develop new tests to better identify malignant melanoma and offer doctors more accurate prognostic information for their patient.

That's why the agreement with Abbott Laboratories is so important. Abbott has already been working on melanoma cancer tests and the head start gives Neogenomics years of advances on competitors. Identifying melanoma from less severe skin cancers is important because doctors diagnose more than one million cases of skin cancer every year.

Neogenomics has the resources to invest in new tests. Besides the cash from the sale of stock to Abbott, the company has access to a $3 million line of credit and $8 million from sale of stock to Illinois-base Fusion Capital, if needed.

The company may benefit from increased coverage of uninsured patients by the government, though VanOort says declines in insurance reimbursements may offset some of that. And it's likely that Neogenomics will sign more long-term contracts with private insurance companies to boost volumes and overcome lower reimbursements from them as well. “That means we have to be more efficient,” VanOort says.

at a glance

Company: Neogenomics
Headquarters: Fort Myers
Total employees: 180
Chief executive: Douglas VanOort
Market capitalization: $50 million
Stock symbol: NGNM
Recent stock price: $1.35
52-week high/low: $2.25/$0.92
Dividend: Nil
Source: Google Finance, company filings