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Test of speed


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  • | 7:36 a.m. May 3, 2013
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Over four days this spring, a group of laboratory technicians at NeoGenomics closeted themselves in a room to map out in painstaking detail how many steps it took to analyze a cancerous tissue sample.

The cancer-testing lab was already functioning efficiently, or so its top executives thought. But what they discovered was that the test took a circuitous route around the lab, wasting valuable time. The surprising conclusion: What was once a 596-foot journey could be turned into a 60-foot one.
“That's an example of what we need to do,” says Douglas VanOort, the chairman and CEO of the Fort Myers-based cancer-testing firm.

VanOort is on a mission to streamline operations as falling government and insurance reimbursements threaten to erode the company's profits. Greater efficiency will help the company maintain profit margins even as revenues-per-test decline.

Meanwhile, the company is racing to develop new cancer tests that will help oncologists tailor therapy for their patients and boost test volumes. Such tests will help doctors treat patients with “personalized medicine” for particular strains of cancer. “We launched 50 new tests last year,” says VanOort.

As a result, NeoGenomics is gaining market share on its competitors. The company's test volumes grew 50% in 2012. And even though average revenues per test fell 20% over the last two years, the company turned a slight profit in 2012. The company earned $65,000 on revenues of $59.9 million in 2012 compared with a $1.18 million loss on revenues of $43.5 million in 2011.

Investors have rewarded the company, which recently began trading on the Nasdaq (symbol: NEO; recent price: $4). Previously, the company's stock had been trading over the counter.

According to industry trade publication Laboratory Economics, NeoGenomics' stock was the best performing of 11 publicly traded lab companies in the U.S. with a 52% increase in share price from Dec. 31 through March 15. NeoGenomics has the seventh-largest market capitalization at $181 million.

NeoGenomics successfully raised about $9.2 million, net after fees, in a secondary stock offering in February. The company used the proceeds to pay down $5 million of debt and shore up its balance sheet with $4 million in cash.

Future acquisitions
With a strengthened balance sheet and improving financials, NeoGenomics is considering acquiring competitors. “What's different now is that we're widely viewed as a company that will survive and thrive,” says Steven Jones, one of the early investors in NeoGenomics and the company's executive vice president of finance.

What's more, falling Medicare and insurance reimbursements are forcing less-efficient labs to consider selling out to better-managed competitors like NeoGenomics. “The level of fear is prompting a lot of smaller labs to look for partners,” says Jones. “Everybody talks to everybody in our industry.”

NeoGenomics now has a stronger currency with which to make acquisitions: its own stock. The company can negotiate from a stronger position because of the success of the secondary public offering and the sharp increase in the value of its stock.

“If we were to issue shares, we'd be very focused on making sure that these deals would be accretive,” VanOort told investors in a recent earnings call with analysts.

A stronger balance sheet also means the company can be choosy about acquisitions, too. “Right now we're cash-flow positive and we can fund our own growth,” says VanOort. “There's no need for additional cash.”

Test volumes grow
To spur growth, NeoGenomics has boosted its spending on research and development. In 2012, the company spent nearly $2.3 million on research and development, up from $543,000 in 2011.

NeoGenomics launched 50 tests last year and hired a leading researcher, Maher Albitar, to develop new ones. Albitar, now chief medical officer at NeoGenomics, previously oversaw the leukemia section of the M.D. Anderson Cancer Center at the University of Texas.

“He's launched 19 new tests in the first quarter,” says VanOort. “Innovation is really important.”

The more tests NeoGenomics can offer, the more business it can win. The company says one of the competitive advantages it has is that it can provide results faster than its competitors. Such speedy turnaround times helps doctors provide quicker treatment options to patients.

One of the most promising tests NeoGenomics is working on now is one for prostate cancer. This test would be based on blood or urine, a big improvement for patients who now have to get a biopsy. Furthermore, the test would help doctors determine whether the prostate cancer is aggressive or not, helping them decide on the proper treatment.

The prostate-cancer test is one of several that have come out of a partnership NeoGenomics formed in early 2012 with Health Discovery Corp., a Georgia company that has 84 patents on cancer tests. Albitar was on the board of Health Discovery. “He was an important element in us doing that deal,” says VanOort.

Increasingly, doctors are seeking tests that will help them tailor therapy for a particular strain of cancer. Experts consider such “personalized medicine” as the future of health care.

For example, NeoGenomics is working on developing a test for a strain of lung cancer that only affects 3% of lung-cancer patients. It's working with an undisclosed pharmaceutical company whose therapy would cost patients $100,000 a year, so a test would be required before insurance covered it. “That's a good example of a companion test, and we can grow that business,” says VanOort. “I would love it to be 10% of our business.”

Forced efficiency
In the most recent quarter, NeoGenomics trimmed 5.5% from the average cost per test by identifying unnecessary steps. That's on track for the company to eliminate 20% of the average cost per test within a year.

To do that, NeoGenomics is identifying the processes to speed up the testing and investing in new, speedier equipment and software rather than cutting staff. “We hired 80 people last year,” VanOort says.

“Lowering our cost structure is a strategic imperative,” says VanOort. That's because the federal government has been slashing the reimbursements for cancer tests, in some cases by 20%. Private insurance companies usually follow Medicare's lead.

For example, Medicare, the government's insurance program for older people, stopped paying laboratory-test firms such as NeoGenomics for tests performed at hospitals. Instead lab firms must bill hospitals, which reimburse them at lower rates than Medicare. That's one of the reasons that the average revenue per test at NeoGenomics fell 8.4% in 2012 to $522 compared with $570 in 2011.

No one knows for sure what the impact of Obamacare will be on cancer-test reimbursements. But VanOort is certain about one thing: “We need to expect lower reimbursements for a long time,” he says. “It means we need to be more efficient. We are trying very hard to be a low-cost provider.”

 

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