Inside the Lab Industry: NeoGenomics’ Financial Success Achieved With Microscopic Attention to Detail

Baseball is a game of inches. And as NeoGenomics Laboratories Chief Executive Officer Douglas VanOort discussed during G2 Intelligence’s Lab Institute in Arlington, Va., last month, his operational challenges are often a matter of feet. In one example, it was 540 feet. That is how much distance was cut from what the company’s flow cytometry lab technicians had to traverse on average to process a test. “Would you rather walk 600 feet or 60 feet to do the exact same job?” VanOort asked during an interview following conference. Such a redesign—NeoGenomics operates flow cytometry sites at both its Fort Myers, Fla., headquarters and in Irvine, Calif.—occurred over the course of a single weekend. And it was performed by a lab chief whom VanOort recalled was puffing his chest out with pride about already running the best such facility in the country. That chief had been invited to one of the half-dozen kaizen sessions the company conducts every year. Adopted from the Japanese process used to improve operations, they are two- to three-day closed-door sessions with managers, technicians, and other personnel to determine how to hone NeoGenomics’ processes to a point where all the excess costs have been wrung out and every possible efficiency has been introduced. The travel reduction also contributed to another impressive statistic: NeoGenomics was able to process 20 percent more tests in the third quarter of 2013 versus the same quarter a year ago, with only a commensurate 5 percent increase in costs and staffing. VanOort cited another example: NeoGenomics’ employees in Florida were spending about 40 minutes every day packing specimens to ship to its California lab. Not only were the California employees unhappy with the way the boxes were being packed, it was costing them time. A kaizen session led to a box-packing protocol that not only made both sets of employees happy, it made the entire process faster and more efficient. “It sounds simple, but when our people work to improve processes collaboratively, good things happen,” VanOort said. Tremendous Growth The numbers tend to bear out that VanOort’s tenure as NeoGenomics’ chief executive officer has been productive not only in terms of feet traveled but also in the emergence of good things. When he took over the molecular testing company in 2009, revenue was less than $30 million a year and it was losing money. It is now on track to end 2013 with revenues approaching  $65 million, with net income recently entering the seven figures. In addition to the revenue growth, NeoGenomics’ product offerings continue to expand at a rapid pace, with about 80 new tests introduced in the past 18 months. The company is also seeking to release in 2014 a prostate cancer test that relies on a urine sample rather than a tissue biopsy, something that discourages many patients from seeking crucial follow-up tests.

NeoGenomics Laboratories Earnings
3Q 2013 Revenue	3Q 2012 Revenue	3Q 2013 Net Income	3Q 2012 Net Income
$16.9 million	$14.2 million	$900,000	$975,000
Year-to-Date 2013 Revenue	YTD 2012 Revenue	YTD 2013 Net Income	YTD 2012 Net Income
$48.1 million	$45 million	$1.18 million	$178,000
Sources: Financial Reports

  But every single penny of NeoGenomics’ growth appears to have been ground out with all the accompanying tension of a baseball championship game. Although its repertoire focuses on high-cost molecular tests used to aid cancer and other esoteric diagnoses, the average revenue NeoGenomics reaps per assay has dropped 21 percent over the past three years. Its tests retail for a median of about $500, on the lower end for a segment where some tests can command thousands of dollars. Yet despite the financial pressures, the average cost for each test NeoGenomics performs has been driven down 34 percent in the past three years. And its gross profit margin has increased to 48 percent in the third quarter of the year, compared to 41 percent during the third quarter of 2012. Using Large-Business Experience To succeed in such a difficult environment, the 57-year-old VanOort relies on the experience he has gained at both larger and smaller businesses. Beginning in the early 1980s, he served in a variety of positions at Corning Life Sciences, eventually becoming its chief financial officer. The company was spun off to become Quest Diagnostics, where he served as senior vice president of operations before leaving in the late 1990s to found a venture capital firm. Along with running NeoGenomics, VanOort has longtime experience in the retail space: He has co-owned 11 Ace Hardware stores in the Central Florida area for the past decade and a half. “Although that is a very different business, there is a common thought process and approach,” he said.  “Each company uses a management process built around a unique mission, vision, values, key success factors, and objectives. Each company is obsessively focused on customer service.  Each company works hard to constantly improve its key processes.  And each company believes that its employees are its most important asset.” And VanOort also believes smaller businesses provide more of an opportunity to make an impact. “Large companies have important strengths and can be great training grounds for people. But in a big company, it’s sometimes hard to make a difference,” he said. “You can really make a difference in a small company. And well-run small companies can leverage many of [the] same strengths as larger companies.” Employee Morale But imposing large-scale efficiencies on a smaller firm such as NeoGenomics is a risky proposition: Morale can take a beating if employees believe they are merely a cog in an operational process. VanOort noted that focus is placed not only on the core competencies of the workforce but also in encouraging four specific values: quality, accountability, integrity, and teamwork. Those employees who embrace those values are regularly recognized, and they are encouraged to praise one another on electronic bulletin boards visible to all of the workforce. These kudos are part of a point system that can be redeemed for gifts. Employees are also encouraged to nominate one another for quarterly core value awards. Presentations are made during companywide meetings. The sales staff, which has grown from 18 to 23 in the past year, is also very carefully selected and trained. Biweekly seminars are held in order to educate them about the utility and significance of current and recently developed assays. Pathologists, medical practices, and other clients are also continuously informed of new and ongoing product lines through e-mail blasts, webinars, and other forms of communication. “We believe that a sales team’s ability to close business is directly related to how they demonstrate the NeoGenomics culture,” VanOort said. By combining that with relentless attention to customer service, he noted that very few clients turn over once their business has been retained. “We have to do 100 things right all the time in order to maintain good service,” VanOort said. But that and the extreme focus on productivity and cost control have made the difference in being able to grow NeoGenomics while encountering some very tough headwinds. Takeaway: Even in a difficult operating environment, labs can grow if they focus on service, efficiency, and cost control while promoting a positive corporate culture.