NGNM: RE-INITIATED COVERAGE

Neogenomics Passes the Test;
Strong Growth, Sustainable Profitability

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We are re-initiating coverage on NeoGenomics with a Strong Buy rating and a 2009 target price of $2.20. In the past two years the company has invested in infrastructure and management and we anticipate a rapid acceleration of earnings as NeoGenomics leverages its newly created capacity. The company recently completed the transition from a wholesale to a retail business model and is poised to deliver significant long-term growth as a provider of high-end genetic testing services for cancer. The scarcity of qualified genetics cancer labs enables NeoGenomics to effectively compete with much larger institutions, which merits a premium multiple for the shares. We anticipate 2008 EPS of $0.02 per diluted share and 2009 EPS of $0.11 per diluted share. Our price target is based on a multiple of 20x expected 2009 diluted EPS.

Key Points

Sustainable profitability has been reached. The positive results of the company’s previous investments in infrastructure and personnel will become evident in earnings improvements over the next two years as operations begin to scale. The company has gained significant traction as a specialist in cancer testing, increasing its presence to 31 states from solely Florida in 2005. The company returned to quarterly profitability in Q2 ‘08 and was free cash flow positive in Q1 ‘08. Additionally, with its retail business model we expect the company to scale revenues faster without the drag in sales of a shrinking wholesale revenue stream.

Competitive advantages. NeoGenomics’ cost structure and exclusive focus on cancer genetics enables it to win business that larger labs cannot. The company differentiates itself based on turnaround times and customer service. The genetics testing market is expected to grow at 20-25% per annum, implying immense room for growth. We expect the company to leverage its competitive advantages to achieve high profitability.

Strong management. Key to the investment thesis for NeoGenomics is its seasoned and highly effective management team. The company reported top-line growth of 78% in 2007 on the heels of 243% YOY increase in 2006 revenue. Average revenue per requisition increased 3.7% in 2007 and was up 7.2% in 2006. President and Chief Scientific Officer Bob Gasparini, who previously took the genetics division of US Labs from zero dollars in revenue to approximately $32 million in about 30 months, believes that for the first time NeoGenomics is fully prepared to grow unabated.