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Genoptix (Nasdaq: GXDX) CEO Tina Nova keeps sending mixed – and potentially troubling – signals about the value of her company’s stock.
Take Nova’s latest insider sale, for example. On Feb. 3, Nova pocketed more than $500,000 by exercising cheap stock options years before they were formally set to expire. She sold that stock for $31.13 a share – near a four-month low – even though analysts were forecasting a $10 rise in the company’s share price.
For its part, Genoptix portrays such insider sales as “standard practice” for corporate executives looking to diversify their holdings under pre-approved trading plans. Genoptix critics view the sales as downright aggressive, however, since they’ve left senior executives with little direct ownership of the company’s stock.
Meanwhile, Nova has scored millions by selling stock and cashing big paychecks in recent years. Even so, she reportedly tried to soothe her own employees – who expressed concern about the company’s falling stock price – just a day before executing her last insider sale.
“I have received some notes from some of you asking about the decrease in the Genoptix stock that was observed last week,” Nova stated in an internal “Groundhog Day” email that was recently deleted from a company message board. “I want to assure you that it was beyond our control, and there was no announcement by us nor anything we did to cause the drop.
“It is important for us to stay focused on our company and the services we bring to the market and not on the things that we cannot control,” she continued. “The quality of our offerings is widely recognized and will eventually be rewarded” over time.
On the surface, at least, Genoptix looks like a highly successful company. A niche lab operator, Genoptix markets specialized tests aimed at diagnosing and treating cancers of the blood and bone marrow. The company boasts a remarkable growth rate – with sales exploding by more than 15,000% over the course of five short years – due to rising orders for its high-priced services.
But Genoptix critics, including industry insiders and other medical professionals, look at the company and see an unsustainable business model. Since Genoptix possesses no proprietary technology, they say, the company must rely on excessive testing – billed at pricy out-of-network rates – in order to outperform its peers. With its average revenue per case approaching $3,500, they say, the company is charging up to three times the amount billed for similar tests carried out by giant lab companies such as Quest (NYSE: DGX) or LabCorp (NYSE: LH).
Genoptix boasts a lofty price-to-sales ratio – a key metric in the laboratory industry -- despite its steep lab prices. The company currently trades at 3.2 times last year’s sales, while Quest and LabCorp trade at about 1.5 times their prior year’s sales instead. That high multiple, coupled with the company’s dependence on out-of-network rates for its underlying revenue, makes Genoptix look like a poor buyout candidate to some.
“There are a lot of rumors out there about Genoptix being taken over,” says a physician who has balked at the company’s high prices. “But if Quest bought the company tomorrow, all of those lab services would suddenly become in-network.
“Meanwhile, if anything goes wrong, that multiple is going to plummet,” the doctor adds. “This looks like a house of cards to me.”
The Ties That Bind
Genoptix bears have placed huge bets against the company, selling more than 40% of its available stock short in anticipation of a fall. But the company’s own leaders – who paint the future as bright – have been selling plenty of stock as well.
Nova and her operating chief, Samuel Riccitelli, became instant millionaires after executing their first insider sales roughly two years ago. Just months after Genoptix went public in October of 2007 – with its stock soaring almost 50% during its first day on the market – Nova and Riccitelli began cashing in their chips. Nova scored roughly $3 million, with Riccitelli pocketing almost half that amount, from those initial transactions.
By then, Investor’s Business Daily had stumbled across a telling risk factor embedded in the company’s business model. Specifically, the newspaper pointed out, the company relies on Cartesian Medical Group – a related entity formed in 2005 to employ specialized physicians – for most of its lab orders.
“Prior to that time, we employed these (doctors), which could result in the potential assertion by regulatory authorities that we were engaged in the corporate practice of medicine,” Genoptix states in its regulatory filings. “Under the laws of some states … business corporations generally are not permitted to employ physicians or to own corporations that employ physicians.”
In that same regulatory filing, however, Genoptix freely acknowledges that it possesses a “controlling financial interest” in Cartesian and even includes the organization’s numbers in its own consolidated results. (When questioned by TheStreetSweeper, Genoptix described this corporate structure as “typical” for healthcare companies operating in its home base of California.) Genoptix also reveals that it generates more than 95% of its revenue from Cartesian physicians, who may be rewarded for their service with grants of company stock.
Jim Moriarty, a Houston-based attorney who successfully sued the giant Tenet (NYSE: THC) hospital chain for profiting from questionable physician-ordered surgeries, smells possible trouble ahead. He, for one, sees “no difference” between employing physicians and funding an operation that essentially does the same thing.
Up to now, Genoptix critics admit, the company’s formula has worked out well. Because Cartesian-employed physicians order so many tests and then bill for those services at expensive out-of-network rates, critics say, Genoptix has seen its revenue skyrocket in recent years. But that arrangement also presents serious conflicts, they add, which could derail the company down the road.
Genoptix itself offers a different version of its business practices, however. For starters, the company says that referring physicians “generally” place lab orders themselves unless they choose to put Cartesian doctors in charge of that testing. Moreover, the company claims that it performs a routine number of tests – involving “about three technologies per patient case” – that should be consistent with other lab operators that follow standard industry guidelines.
But some industry experts vehemently challenge those claims.
“Most labs do a standard panel of about 20 antibodies, but Genoptix states in its own market literature that it does almost two times that number,” says an insider who works for a larger laboratory firm. “They do an elaborate amount of testing – which is way outside the industry norm – and then charge prices that are way out of line.
“That’s how they make all of that money,” he adds. “It’s definitely unsustainable.”
‘Best Business Decision’
Originally, Nova revealed in a recent media interview, Genoptix pursued a far different business strategy – based on the development of a breakthrough technology – before deciding to switch gears.
“In the beginning, our idea was to develop an instrument that could be put in the clinical lab and could be used to make the (test) sample better,” Nova told The San Diego Union-Tribune last month. “But we found that, in order to get it approved and in a clinical lab, the time involved was longer than our investors were really willing to put into the company.”
In a previous discussion with another local paper, Nova highlighted her company’s refocused business strategy as the “best business decision” she ever made.
By then, past news reports show, Nova had already led another biotech company – saddled with a doomed technology – down a similar path. Shortly after joining San Diego-based Ligand, the local North County Times reported, Nova realized that the company had purchased the equivalent of “oceanfront property in Arizona” because the technology it acquired simply did not work. Refusing to give up, the newspaper stated, Nova decided to alter the company’s offerings instead.
“Was that failure?” Nova mused in an interview with the newspaper. “It was change. We took something that didn’t work, and we turned it into something that did.”
Nova has embraced a similar philosophy as the CEO of Genoptix. Under her leadership, the company shifted its focus away from technology and began concentrating on its relationships with hematopathologists – who specialize in cancer-related lab tests – instead. In early 2007, barely a year after establishing its Cartesian unit, Genoptix finally became profitable for the first time in company history. It went public, with its stock immediately soaring, later that same year.
Today, Genoptix boasts phenomenal revenue growth despite its lack of proprietary technology. The company spends very little of its money – just 1% of sales – on research and development, choosing to funnel far more of its resources into sales and marketing instead. It counts on big returns from that investment, too, with the average sales rep expected to generate $2.5 million in revenue per year. (In contrast, smaller Neogenomics – which hopes to duplicate the growth enjoyed by Genoptix – figures that even its most productive sales agents generate only one-quarter of that amount in total annualized sales.)
“Genoptix is hiring aggressive sales people, and it is paying them well,” says a physician who has examined the company in detail. “But the way this company makes money looks very scary to me.”
Set for Life
Meanwhile, Genoptix leaders have already pocketed enough cash to last most people a lifetime.
In April of 2008, just weeks after Nova and Riccitelli carried out their original seven-figure stock sales, Genoptix raised their salaries. The company increased their salaries again – while raising their bonus targets as well – at the end of that same year. Nevertheless, the executives soon started cashing in cheap stock options once again.
Thanks to $3 million worth of stock-related gains, The San Diego Union-Tribune reported last year, Nova became the best-paid female executive in the entire city. Even so, she has continued to sell stock – regularly scoring six-figure payouts – since that time.
Last month, for example, Nova sold $850,000 worth of Genoptix stock just a week before the company made a bullish presentation to outside investors. Riccitelli followed up with his own big stock sale on the same day as that upbeat presentation.
By then, the presentation itself had already raised red flags for some. In it, Genoptix confirmed several suspicions long held by its critics. For starters, the company revealed that it generates almost half of its revenue from health insurance companies billed at out-of-network rates. The company bills patients covered by those health insurance policies at in-network rates, however, even though some experts question the legality of that practice.
Genoptix itself sees no problem with this arrangement. Although health insurers may charge different (higher) rates for out-of-network laboratory services, the company says, the lab itself is “generally not required to charge patients more” simply because they have received services from an out-of-network provider.
Genoptix critics wonder if the company is somehow gaming the system, however. By following this formula, they say, Genoptix can pocket generous payouts from private insurers while also satisfying cancer patients who might otherwise urge their doctors to order cheaper laboratory services. But the strategy could ultimately backfire, they add, under healthcare reforms that emphasize cost-containment.
For its part, Genoptix says that it bills insurers under the same fee schedule regardless of their network status. The company also says that it actually collects about the same amount from in-network providers as it does from out-of-network providers, so the difference between the two “is not huge.”
In its own regulatory filings, however, Genoptix has clearly admitted that any shift toward in-network billing could hurt the company’s future results.
“Should any third-party payors with whom we are not contracted insist that we enter into a contract for the specialized diagnostic services we provide, the resulting contract may contain pricing and other terms that are materially less favorable to us than the terms under which we currently operate,” Genoptix acknowledges in its latest quarterly report. “Although our case volume may increase as a result of the contract, our revenues per case under the contractual agreement and our gross margins may decrease.
“The overall net result of contracting with third-party payors,” the company adds, “may adversely affect our business, results of operations and financial condition.”
By now, Genoptix executives have already stuck it rich regardless of what happens. Meanwhile, they still hold piles of stock options – carrying strike prices as low as 38 cents a share – that can be exercised for massive gains even if the stock happens to dive. Since they own very little stock directly, they will largely escape any future pain felt by ordinary investors.
Right now, for example, Nova directly owns just 58,737 shares of her company’s stock. At current prices, that stock is worth about $1.85 million. While her stake is clearly valuable, she pocketed that much money – plus another $1 million – when carrying out her first insider sale two years ago.
* Editor’s Note: TheStreetSweeper hired an independent fact-checker to verify the accuracy of this story. Whenever possible, it has also included links to the actual documents used during the course of its research. To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
Genoptix (Nasdaq: GXDX) CEO Tina Nova keeps sending mixed – and potentially troubling – signals about the value of her company’s stock.
Take Nova’s latest insider sale, for example. On Feb. 3, Nova pocketed more than $500,000 by exercising cheap stock options years before they were formally set to expire. She sold that stock for $31.13 a share – near a four-month low – even though analysts were forecasting a $10 rise in the company’s share price.
For its part, Genoptix portrays such insider sales as “standard practice” for corporate executives looking to diversify their holdings under pre-approved trading plans. Genoptix critics view the sales as downright aggressive, however, since they’ve left senior executives with little direct ownership of the company’s stock.
Meanwhile, Nova has scored millions by selling stock and cashing big paychecks in recent years. Even so, she reportedly tried to soothe her own employees – who expressed concern about the company’s falling stock price – just a day before executing her last insider sale.
“I have received some notes from some of you asking about the decrease in the Genoptix stock that was observed last week,” Nova stated in an internal “Groundhog Day” email that was recently deleted from a company message board. “I want to assure you that it was beyond our control, and there was no announcement by us nor anything we did to cause the drop.
“It is important for us to stay focused on our company and the services we bring to the market and not on the things that we cannot control,” she continued. “The quality of our offerings is widely recognized and will eventually be rewarded” over time.
On the surface, at least, Genoptix looks like a highly successful company. A niche lab operator, Genoptix markets specialized tests aimed at diagnosing and treating cancers of the blood and bone marrow. The company boasts a remarkable growth rate – with sales exploding by more than 15,000% over the course of five short years – due to rising orders for its high-priced services.
But Genoptix critics, including industry insiders and other medical professionals, look at the company and see an unsustainable business model. Since Genoptix possesses no proprietary technology, they say, the company must rely on excessive testing – billed at pricy out-of-network rates – in order to outperform its peers. With its average revenue per case approaching $3,500, they say, the company is charging up to three times the amount billed for similar tests carried out by giant lab companies such as Quest (NYSE: DGX) or LabCorp (NYSE: LH).
Genoptix boasts a lofty price-to-sales ratio – a key metric in the laboratory industry -- despite its steep lab prices. The company currently trades at 3.2 times last year’s sales, while Quest and LabCorp trade at about 1.5 times their prior year’s sales instead. That high multiple, coupled with the company’s dependence on out-of-network rates for its underlying revenue, makes Genoptix look like a poor buyout candidate to some.
“There are a lot of rumors out there about Genoptix being taken over,” says a physician who has balked at the company’s high prices. “But if Quest bought the company tomorrow, all of those lab services would suddenly become in-network.
“Meanwhile, if anything goes wrong, that multiple is going to plummet,” the doctor adds. “This looks like a house of cards to me.”
The Ties That Bind
Genoptix bears have placed huge bets against the company, selling more than 40% of its available stock short in anticipation of a fall. But the company’s own leaders – who paint the future as bright – have been selling plenty of stock as well.
Nova and her operating chief, Samuel Riccitelli, became instant millionaires after executing their first insider sales roughly two years ago. Just months after Genoptix went public in October of 2007 – with its stock soaring almost 50% during its first day on the market – Nova and Riccitelli began cashing in their chips. Nova scored roughly $3 million, with Riccitelli pocketing almost half that amount, from those initial transactions.
By then, Investor’s Business Daily had stumbled across a telling risk factor embedded in the company’s business model. Specifically, the newspaper pointed out, the company relies on Cartesian Medical Group – a related entity formed in 2005 to employ specialized physicians – for most of its lab orders.
“Prior to that time, we employed these (doctors), which could result in the potential assertion by regulatory authorities that we were engaged in the corporate practice of medicine,” Genoptix states in its regulatory filings. “Under the laws of some states … business corporations generally are not permitted to employ physicians or to own corporations that employ physicians.”
In that same regulatory filing, however, Genoptix freely acknowledges that it possesses a “controlling financial interest” in Cartesian and even includes the organization’s numbers in its own consolidated results. (When questioned by TheStreetSweeper, Genoptix described this corporate structure as “typical” for healthcare companies operating in its home base of California.) Genoptix also reveals that it generates more than 95% of its revenue from Cartesian physicians, who may be rewarded for their service with grants of company stock.
Jim Moriarty, a Houston-based attorney who successfully sued the giant Tenet (NYSE: THC) hospital chain for profiting from questionable physician-ordered surgeries, smells possible trouble ahead. He, for one, sees “no difference” between employing physicians and funding an operation that essentially does the same thing.
Up to now, Genoptix critics admit, the company’s formula has worked out well. Because Cartesian-employed physicians order so many tests and then bill for those services at expensive out-of-network rates, critics say, Genoptix has seen its revenue skyrocket in recent years. But that arrangement also presents serious conflicts, they add, which could derail the company down the road.
Genoptix itself offers a different version of its business practices, however. For starters, the company says that referring physicians “generally” place lab orders themselves unless they choose to put Cartesian doctors in charge of that testing. Moreover, the company claims that it performs a routine number of tests – involving “about three technologies per patient case” – that should be consistent with other lab operators that follow standard industry guidelines.
But some industry experts vehemently challenge those claims.
“Most labs do a standard panel of about 20 antibodies, but Genoptix states in its own market literature that it does almost two times that number,” says an insider who works for a larger laboratory firm. “They do an elaborate amount of testing – which is way outside the industry norm – and then charge prices that are way out of line.
“That’s how they make all of that money,” he adds. “It’s definitely unsustainable.”
‘Best Business Decision’
Originally, Nova revealed in a recent media interview, Genoptix pursued a far different business strategy – based on the development of a breakthrough technology – before deciding to switch gears.
“In the beginning, our idea was to develop an instrument that could be put in the clinical lab and could be used to make the (test) sample better,” Nova told The San Diego Union-Tribune last month. “But we found that, in order to get it approved and in a clinical lab, the time involved was longer than our investors were really willing to put into the company.”
In a previous discussion with another local paper, Nova highlighted her company’s refocused business strategy as the “best business decision” she ever made.
By then, past news reports show, Nova had already led another biotech company – saddled with a doomed technology – down a similar path. Shortly after joining San Diego-based Ligand, the local North County Times reported, Nova realized that the company had purchased the equivalent of “oceanfront property in Arizona” because the technology it acquired simply did not work. Refusing to give up, the newspaper stated, Nova decided to alter the company’s offerings instead.
“Was that failure?” Nova mused in an interview with the newspaper. “It was change. We took something that didn’t work, and we turned it into something that did.”
Nova has embraced a similar philosophy as the CEO of Genoptix. Under her leadership, the company shifted its focus away from technology and began concentrating on its relationships with hematopathologists – who specialize in cancer-related lab tests – instead. In early 2007, barely a year after establishing its Cartesian unit, Genoptix finally became profitable for the first time in company history. It went public, with its stock immediately soaring, later that same year.
Today, Genoptix boasts phenomenal revenue growth despite its lack of proprietary technology. The company spends very little of its money – just 1% of sales – on research and development, choosing to funnel far more of its resources into sales and marketing instead. It counts on big returns from that investment, too, with the average sales rep expected to generate $2.5 million in revenue per year. (In contrast, smaller Neogenomics – which hopes to duplicate the growth enjoyed by Genoptix – figures that even its most productive sales agents generate only one-quarter of that amount in total annualized sales.)
“Genoptix is hiring aggressive sales people, and it is paying them well,” says a physician who has examined the company in detail. “But the way this company makes money looks very scary to me.”
Set for Life
Meanwhile, Genoptix leaders have already pocketed enough cash to last most people a lifetime.
In April of 2008, just weeks after Nova and Riccitelli carried out their original seven-figure stock sales, Genoptix raised their salaries. The company increased their salaries again – while raising their bonus targets as well – at the end of that same year. Nevertheless, the executives soon started cashing in cheap stock options once again.
Thanks to $3 million worth of stock-related gains, The San Diego Union-Tribune reported last year, Nova became the best-paid female executive in the entire city. Even so, she has continued to sell stock – regularly scoring six-figure payouts – since that time.
Last month, for example, Nova sold $850,000 worth of Genoptix stock just a week before the company made a bullish presentation to outside investors. Riccitelli followed up with his own big stock sale on the same day as that upbeat presentation.
By then, the presentation itself had already raised red flags for some. In it, Genoptix confirmed several suspicions long held by its critics. For starters, the company revealed that it generates almost half of its revenue from health insurance companies billed at out-of-network rates. The company bills patients covered by those health insurance policies at in-network rates, however, even though some experts question the legality of that practice.
Genoptix itself sees no problem with this arrangement. Although health insurers may charge different (higher) rates for out-of-network laboratory services, the company says, the lab itself is “generally not required to charge patients more” simply because they have received services from an out-of-network provider.
Genoptix critics wonder if the company is somehow gaming the system, however. By following this formula, they say, Genoptix can pocket generous payouts from private insurers while also satisfying cancer patients who might otherwise urge their doctors to order cheaper laboratory services. But the strategy could ultimately backfire, they add, under healthcare reforms that emphasize cost-containment.
For its part, Genoptix says that it bills insurers under the same fee schedule regardless of their network status. The company also says that it actually collects about the same amount from in-network providers as it does from out-of-network providers, so the difference between the two “is not huge.”
In its own regulatory filings, however, Genoptix has clearly admitted that any shift toward in-network billing could hurt the company’s future results.
“Should any third-party payors with whom we are not contracted insist that we enter into a contract for the specialized diagnostic services we provide, the resulting contract may contain pricing and other terms that are materially less favorable to us than the terms under which we currently operate,” Genoptix acknowledges in its latest quarterly report. “Although our case volume may increase as a result of the contract, our revenues per case under the contractual agreement and our gross margins may decrease.
“The overall net result of contracting with third-party payors,” the company adds, “may adversely affect our business, results of operations and financial condition.”
By now, Genoptix executives have already stuck it rich regardless of what happens. Meanwhile, they still hold piles of stock options – carrying strike prices as low as 38 cents a share – that can be exercised for massive gains even if the stock happens to dive. Since they own very little stock directly, they will largely escape any future pain felt by ordinary investors.
Right now, for example, Nova directly owns just 58,737 shares of her company’s stock. At current prices, that stock is worth about $1.85 million. While her stake is clearly valuable, she pocketed that much money – plus another $1 million – when carrying out her first insider sale two years ago.
* Editor’s Note: TheStreetSweeper hired an independent fact-checker to verify the accuracy of this story. Whenever possible, it has also included links to the actual documents used during the course of its research. To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
