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Executives

Barry W. Weiner - Co Founder, President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director

David C. Goldberg - Vice President of Corporate Development and Interim General Manager of Enzo Clinical Labs

Analysts

Paul Nouri - Noble Equity Funds

Antony Pfaffle

Raj Maheshwari

Enzo Biochem (ENZ) Q2 2013 Earnings Call March 13, 2013 8:30 AM ET

Operator

Good morning, and welcome to the Enzo Biochem, Inc.'s Second Quarter 2013 Operating Results Conference Call.

I will now read the company's Safe Harbor statement. Except for historical information, the matters discussed on this conference call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such statements include declarations regarding the intent, belief or current expectations of the company and its management, including those related to cash flow, gross margins, revenues and expenses, are dependent on a number of factors outside of the control of the company, including inter alia, the markets for the company's products and services, costs of goods and services, other expenses, government regulations, litigations and general business conditions. See Risk Factors in the company's Form 10-K for the fiscal year ended July 31, 2011.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. The company disclaims any obligations to update any forward-looking statement as a result of developments occurring after the date of this conference call.

During this conference call, the company may refer to EBITDA, a non-GAAP measure. EBITDA is not and should not be considered an alternative to net loss, loss from operations or any other measure for determining operating performance. The company has provided a reconciliation of the difference to GAAP on its website, www.enzo.com, and in the press release issued last night.

Our speaker today is Barry Weiner, President. [Operator Instructions] I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours.

Barry W. Weiner

Good morning. Thank you for joining us. With me today are several members of our senior management, Mr. David Goldberg, Mr. Drew Crescenzo and Mr. Andrew Whiteley.

Last evening, after the market closed, we distributed our results for the second quarter and 6 months of the current fiscal year. I trust you've had a chance to take a look at it.

The second quarter was unusual. Our results reflected a number of unpredictable events that we believe do not necessarily paint an accurate picture of the operations of Enzo for the quarter. In a moment, I will provide some details as to what I'm referring to. But Hurricane Sandy and its fall out coupled with the timing of some new payor contracts, the initial impact of the Affordable Care Act and increased, but we believe, well justified expenditures on the legal front, all contributed to the results that we reported last night.

Let me get into some of the operational details by focusing on 2 major events that occurred in the first quarter and continued into the second quarter. First, the fall hurricane, which had a major impact all over the Northeastern United States, but was particularly devastating in the New York metropolitan area, where the vast majority of our Clinical Lab clients and patients reside. And secondly, the favorable jury verdict in our patent infringement case against Life Technologies.

I'd like to begin with the impact of the storm on our financial results. The hurricane had a material impact on our operating results, especially at the Clinical Laboratory. The total economic cost is estimated at approximately $2.2 million in top line revenue for the quarter. The direct damage caused by Sandy, followed by the collateral damage of power losses, lack of public transportation and gasoline shortages and concomitant lines at the pumps that plagued our area, especially Long Island, had sharply reduced the number of patients that our physician clients could see and treat during early November. Specifically, we estimated the loss just in reduced specimen volume of about $1.3 million, which was spread over the past 2 quarters. But this is only a portion of the impact of the storm on the laboratory.

Perhaps equally as important was the result in delay that we endured in rolling out our new platforms and products in the quarter that were planned for revenue growth. One example of this is related to our new Women's Health panel. Regulatory inspectors were scheduled to inspect our facility in the first week of November, ironically within the day of the storm, to provide final approvals for us to roll out this exciting addition to our product line. Unfortunately, the storm delayed the inspection, which was not completed until the middle to end of January. I'm pleased to announce that the inspection went extremely well, and we look forward to a formal launch of our unique panel later this month.

Additionally, another assay targeted at the Women's Health market was also delayed. It involves one that provides valuable information about the expression of 2 key oncogenes, which scientists have suggested are related to the potential progression of patients already identified at high risk with papillomavirus. We plan to formally announce the availability of this assay soon as well.

It is our firm belief that had we a full quarter's benefit of these 2 exciting offerings, we would have recorded approximately $1.5 million in additional revenues. We are confident that the beginning of the current quarter that is emerging, you will begin to see the positive impact of these products.

Fortunately, Enzo Biochem, or particularly, Enzo Clinical Labs had in place an extensive disaster recovery plan, which was successfully implemented. We were pleased that our employees suffered no injuries and our facilities, both primary and backup, suffered no physical damage. We maintained an operating presence in both of our main facilities in Long Island during this period. However, the limiting factor was the lack of patient visits to physicians.

Turning to the quarter's other key event. As we've reported earlier, Applera Corporation, which is now Life Technologies, was found by federal jury to have infringed our patents covering pioneering and pivotal technologies which relate to compounds used in DNA sequencing systems, which are utilized in reading the genetic code. The applications for inventions based on our technology are diverse. They range from detecting pathogens in human diseases, such as cancer, to decoding and analyzing the human genome. The jury awarded us over $48 million in direct infringement penalties.

In addition, we anticipate that an additional prejudgment or interest award will be awarded to us by the court. This is because the jury found that the infringement went back a number of years. Our legal team has estimated that the addition of the prejudgment award could add additional recoveries potentially in the tens of millions of dollars.

As to where we stand now, this action, as of February 15, both sides submitted post trial motions. Among the items we are now seeking are damages related to the jury's findings that Life Technologies sequencing instruments induced its customers to infringe our patent. The sales of such instruments during the time that the patents have been enforceable have been estimated to be about $770 million. We also believe that this decision could have a positive impact on the resolution of pending actions that we brought in the U.S. Southern District Court in New York City, which involve additional defendants, patents and contract issues. Among the defendants in those suits are Amersham, which is now part of GE Healthcare; Roche Diagnostics; PerkinElmer; Molecule Probes, which is also a division of Life Technologies; and Affymetrix.

In addition, we have brought additional actions against a number of other life sciences and diagnostic companies that we believe may have infringed on other key intellectual property. The companies include Abbott, Hologic, Becton Dickinson and Illumina, among others. These particular actions, as we've discussed before, are being prosecuted on a full contingency basis, and thus, the cost to Enzo will be nominal. As a result of the actions we have brought, dialogues have been opened with a number of these companies, which we hope to lead to positive and successful resolutions of these matters.

With these 2 events as a backdrop, I'd like to proceed with a brief overview of some of the quarter's key financial highlights. Looking more closely for a minute at the numbers in the quarter, as I mentioned, the Clinical Lab, due to the hurricane, experienced a sharply diminished specimen count in the initial week of the January quarter. These were not recovered. We anticipate this cost approximately $700,000 in revenue.

As I previously mentioned, the storm delayed the planned release of new tests that would've benefited the labs' year-over-year revenues, plus it had to deal with the change in third-party reimbursements and policies. Second quarter revenues were down 6% over the year ago period. We have seen a recovery in service volume toward the end of the quarter.

At Enzo Life Sciences, we continue to be impacted by reduced customer research budgets and a decline in government research projects that are affecting the entire industry. Total product revenues for the quarter were $7.9 million, or $1.7 million lower than the year ago period. Our revenue was partially impacted by our decision to emphasize higher-margin sales, which resulted in fewer products offered over last year. Royalties from a third-party licensor in the diagnostic industry were down 22% to $1 million. Later, I will address the actions being taken to mitigate some of the effects that are taking place in the macroeconomic market of life sciences.

Overall, total revenues affected by the aforementioned events total $22.2 million as compared to $25 million in the year-ago period.

Turning to our consolidated costs for the quarter. Overall gross margin was $8.6 million, with gross profit at 39%, which was down from 46%, reflecting the revenue decline, coverage of fixed cost and higher lab costs.

Our fiscal 2013 plan to reduce cost principally related to workforce realignment, final integration of our acquired business, refocus of R&D priorities and reduced outside consulting will result in, we believe, a savings of over $6 million, and these events are in effect as we speak. A portion of these savings have benefited this period and will continue, some being offset by the effect of higher costs, principally legal costs surrounding the patent litigation matters.

Overall, operating costs, which included research and development, selling, general and administrative, provision for uncollectible accounts and legal, decreased by 5%. Excluding legal expenses and the noncash provision for uncollectible accounts, our SG&A and R&D costs declined by $1.3 million or 10%.

Legal costs, driven primarily by the patent trial cases in both Connecticut and the New York federal courts, increased by $400,000 to $1.4 million for the quarter.

The net loss for the quarter totaled $5.7 million, a $1.4 million increase from 1 year ago, with the net loss per diluted share at $0.14 per share versus $0.11 last year. EBITDA loss, a non-GAAP measure, was $4.7 million compared to a loss of $3 million in the fiscal 2012.

As of January 31, 2013, our cash and cash equivalents were about $10 million; our working capital stood at approximately $14 million; cash utilization relating to operating activities and investments for the 6 months was higher by $1 million. Cash utilized year-to-date was approximately $4.4 million including legal. There were also expenditures of about $600,000 in capital expense. We estimate that our cash position was adversely affected by approximately $1.1 million due to the storm.

I'd like to turn now to an overview of the operating results for each of these segments. Clinical Lab revenue was $13.3 million, which is down from $14.1 million 1 year ago, which was due to the storm, as I mentioned. Gross profit was down $1.5 million to $3.9 million or a 29% decline. The operating expenses reflected a 5% reduction in the segment's SG&A. It declined by $200,000 to $6.3 million from $6.5 million. And the operating loss increased as a result of all of these events to $2.4 million, which is up about $1.1 million from the prior year.

At Enzo Life Sciences, product revenues amounted to $7.9 million as compared to $9.5 million 1 year ago, which is a result of programmed reduction of product lines, as well as reduced organic sales. Royalty and licensing fee income was $1 million, which was down from $1.3 million in the prior period. Operating expenses declined 13% as a result of planned reduction in expenses. Life Sciences operating loss was $57,000 for the period as compared to an operating income of $700,000 in the prior year 2012 period. With all of the events said, EBITDA was down only $200,000 from the prior year.

I'd like to shift the discussion towards some of the strategic goals and programs that have been put in place and implemented currently to strengthen the business and to recover from the financial impact of the prior quarter. Enzo is creating a value proposition that is both timely and well-directed in today's changing and challenging health care environment. Medicine today is focused on 2 key elements: one, bringing cost down; and two, delivering quality care that takes advantage of the new technological events that are emerging from the industry today, from early diagnosis to targeted medications and hopefully, eventually effective treatments. We are centering our efforts around a deep and highly experienced technology platform that has been built over 3 decades, which has incredibly strong relevance in terms of trends and product lines and indications that are taking place within our industry. Our technology platforms are supported by a broad and deep intellectual property and technology portfolio, as the life technology case has pointed out. We have multi-prong capabilities represented by diagnostics, Life Sciences and therapeutic development platforms.

Our research and development activities in the Life Sciences are now and have continued to mesh more and more with our Clinical Laboratory activities. This enabling us to be positioned to deliver high-value diagnostics services, as well as developing through hands-on research new platforms and tests that we believe will be more effective, less cumbersome to patient and physician alike and less expensive, which is critical in today's environment.

Our translational diagnostics team, which is made up of scientists from both our Clinical Labs and Life Sciences group, is working to generate a variety of novel tests for the industry. As a result of this group's increasingly successful efforts, we have seen a significant increase in the number of unique assays that we are developing, both as research products and as lab-developed tests.

As I mentioned earlier, we will be introducing important and potentially significant new assays to our clientele in the very near future. These tests focus on women's health markets specifically. This is historically one of our core constituencies. These will provide, we believe, important medical information that will allow physicians to be able to more effectively diagnose disease, specifically patients that may present with certain symptoms that may or may not spontaneously regress or change over the course of the disease timeframe. In this manner, we will be able to add value to the laboratory experience, and we hope ultimately to help improve overall patient care. Moreover, we will be rolling out assays that are suitable for use on a wide variety of specimen types, thereby eliminating the need for repeated sample collections, which should in turn contribute to materially enhanced patient convenience. We look forward to detailing these exciting developments in the days and weeks to come.

Our company's integrated structure and the translational group has also helped to advance our lead technology platforms in both the diagnostics area, as well as in the therapeutics area. AmpiProbe, one of our key diagnostic platform technologies, this is a low-cost high sensitive real-time platform target amplification approach, has applicability in use in a number of markets. One example is the use of this technology in the development of laboratory tests, which we will be using in our clinical lab. Our cross-functional teams have identified a number of targets that have clinical utility and can potentially be rolled out as products, as I mentioned, that will be used in our own Clinical Laboratory.

We are working diligently on a panel of as many as 15 different organisms that are involved in various infectious diseases seen in women. As I indicated earlier, this is a key market for our lab, and it fits extremely well with our sales team and marketing efforts that are utilized every day.

We feel that we will be able to produce an integrated system that will allow the simultaneous identification of a number of these organisms in a manner that is more expeditious and economical than standard PCR techniques which are utilized today.

Our team has currently produced several manufactured lots of probe material, and we will begin correlative studies this quarter. Once these have been completed, we plan to release this as a product for sale through our Life Sciences division. These customers will then be able to avail themselves to our technology and platform and utilize our platform in their own dedicated research, if they wish to incorporate it.

AmpiProbe-based products are providing an extensive alternative for existing methodologies for doing gene application approaches.

We will also work with our European-based team to obtain the appropriate in vitro diagnostic designations by employing such multifaceted commercialization strategies. We believe we can generate returns on our research and development investment in a relatively expeditious manner.

This is but one example of the potential uses of our proprietary target amplification platform. Our newly expanded corporate business development group has initiated discussions with a number of parties to apply our AmpiProbe technology towards other markets as well. These range from biosafety, to food and veterinary diagnostics, to bioprocessing, just to list a few.

Our other lead diagnostic platform involves next-generation branched DNA technology, which is a signal amplification technology. This is opposed to target amplification, which is what the AmpiProbe technology targets. This will be used to detect other nucleic acids and protein molecules as well. Among its targets are human papillomavirus testing in immunoassays. This technology has special appeal where heightened sensitivity is desired, and that is generally unobtainable from existing platforms.

As the diagnostic industry continues to undergo enormous paradigm shifts brought on by changing and challenging regulatory issues, as well as reimbursement challenges, we believe that a platform such as this one, the branched DNA may provide important opportunities for new generations of tests that rely on interpretive skills of pathologist, which we believe to be a broad and promising market.

Not only are we progressing forward on our technology platforms, we are also in the midst of reshaping our marketing and product management approach to our Life Sciences customers. We are developing targeted marketing campaigns at both basic, such as genomics, immunoassays and epigenetics markets, as well as applied markets, such as cancer, neurosciences and predictive toxicology. As a result, by extending our applications, we have been able to target high-value products, such as our comprehensive range of kits, towards a wider market of prospects.

By selectively investing in our key product platforms, augmented by an increased focus in our merchandising function, we are developing and implementing a comprehensive campaign that we believe will eventually bring our name and capabilities to a much wider customer base.

I'd also like to mention that we are also continuing to progress in our clinical trial of Optiquel. This is our study drug for the treatment of noninfectious uveitis. This is based on a platform technology in and around immunomodulation. This is a study being conducted under a cooperative research and development agreement, or CRADA, with the National Institute of Health at the National Eye Institute. It is under the leadership of Dr. Robert Nussenblatt who is the trials principal investigator.

Uveitis is a serious inflammatory condition when which the body's immune system attacks part of the eye, which often causes blindness. Uveitis treatments historically have involved various drugs that suppress the immune system, but these medicines sometimes do not work or may cause serious side effects, so there is an absolute need for new treatments for this disease globally.

Optiquel is a natural product. It is an experimental medication being tested for its effectiveness against this particular disease. It contains a small protein fragment, it's called the B27PD, which is similar to proteins in the parts of the eye that are being attacked by the immune system. Taking this B27PD by mouth may induce an effect in which the immune system is taught to recognize and not attack normal parts of the body.

Our study is currently enrolling and treating patients. Depending on the speed, we hope to have results by the end of the year or early 2014. Should the trial reach or exceed its primary or secondary endpoints, we believe that we will have a very valuable asset that will create, I think, a very strong option for alternatives in treating this disease.

Before we conclude the formal portion of the call and turning it over for questions, I just want to conclude that the quarter certainly has been challenging, but it is also exciting. We are seeing the development of many product lines that have been in process for quite a long time, and we hope to start to see their commercialization in the few weeks in front of us as we move forward over the next quarter. It is an important time in our history as we transform and move the business into a translational diagnostics company. And all of us at Enzo are looking for meaningful progress in our capabilities and without question, a strong improvement in our financial results in the ensuing quarters.

I would like now to turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Paul Nouri of Noble Equity Funds.

Paul Nouri - Noble Equity Funds

Looking at the Life Technologies court decision, I guess the timing of it becoming finalized is the next 6 to 9 months at this point?

Barry W. Weiner

This is what our legal team is telling us, yes.

Paul Nouri - Noble Equity Funds

And I don't know whether you can disclose it or not, but are -- would you be in negotiations at all with the company to come to an agreement that you definitely get some kind of settlement, or are you just going for the entire judgment?

Barry W. Weiner

I can't really comment on the specific activity that is in place at the moment. But I can, as I mentioned in my comments, suggest to you that this trial and the resolution of the court case, in particular with the jury verdict, we believe has instituted a progression to dialogue with a number of companies in the industry with whom we are in litigation at the moment. I cannot say what the ultimate outcome will come from those dialogues, but there is dialogue in progress. Specifically with Life Tech, I can't say anything directly as to the progress. We are currently awaiting the final judgment from the judge post the post-motion submissions. After that, we will then be able to have a more conclusive determination as to the progress to ultimate resolution.

Paul Nouri - Noble Equity Funds

Have you gotten court dates with any of the other cases yet?

Barry W. Weiner

Yes, we have. We are looking to court dates in early November for the New York cases.

Paul Nouri - Noble Equity Funds

Okay. Concerning the test that you're going to be coming out with, the LDTs, is there any reimbursement in place, or do you have an idea of what code you're going to put them under?

Barry W. Weiner

I'm going to ask Dr. David Goldberg to comment on that.

David C. Goldberg

Paul, yes, their reimbursement has been vetted, and we do expect it to be favorable.

Operator

Your next question comes of the line of Antony Pfaffle of Bearing Circle Capital Market.

Antony Pfaffle

Two questions. One is, there's has been a lot of changes in the reimbursement codings through the stack coding and inability to get reimbursed through that. How would the Women's Health tests in that you are looking to market be affected by that, if at all? And what is the status for the ColonSentry in terms of being able to market that, and also the lung cancer test?

David C. Goldberg

Tony, with regards to the Women's Health panel, these are using codes that are being used in 2013. They're not -- they aren't stack codes. They're actually codes for the specific test. And again, we'll be -- we expect to be announcing these very shortly. And again, they're codes that we've already vetted and we believe will be able to be used in 2013. And the same thing goes forward for the lung cancer test. Again, those are individual test codes that are unique for each of the markers that are being tested for with the EarlyCDT-Lung, and we are getting paid for them in 2013.

Antony Pfaffle

Okay. And a follow-up, in terms of -- do you intend to use your organic sales force to market these Women's Health tests and other esoteric tests, or are you planning some type of larger marketing effort to essentially increase sales in these particular tests as it relates to it? And a follow-up to that is, what percentage of the laboratory revenue do these esoteric tests have a potential of reaching, and is it a real growth driver for the lab?

Barry W. Weiner

As I commented in my earlier comments, we are taking a bifurcated approach to marketing these panels of tests. We are implementing them in our own Clinical Laboratory, which will give us an advantage of developing a historical databank of information from which we can then build for potential regulatory submissions. It gives us an avenue to differentiate our laboratory with our clinical customers by offering a new product and new technology approach that we think will help them in their practice of medicine, as well as in-patient care. We believe it will provide us with a revenue stream at the clinical lab as well. Simultaneously, we will be offering these tests to others via our Life Sciences division. And that is really one of the strengths of Enzo, that we have a bifurcated channel of distribution to the market, one via our Life Sciences sales force to the broad market, which is both the United States and the world, specifically Europe at large, and at the same time, to service providers in our region, our own clinical physician practice group via the laboratory at a point in time. Because we are New York State Cap certified, the New York State licensure is accepted by many states in the United States, so we can even provide these tests, assuming they gain the traction that we hope they will gain, on a nationwide basis, specifically either directly through our own lab as a provider of services or through collaborative laboratories across the United States. So we are approaching this from a bifurcated and multi-channeled aspect to develop these products. We believe...

Antony Pfaffle

One last question. Is there an ability to give an interim look at Optiquel, or is it purely event-driven, or is there some type of committee which will take a look at it to see how it's progressing the uveitis trial?

Barry W. Weiner

The NIH has its own standards and protocols for -- they have an independent team that monitors these particular trials. My understanding is that they can, on a confidential level, take a look at the progress of that study. It is a double-blind study, obviously. And it's -- so that is I think standard protocol in any of these trials.

Operator

Your next question comes from Raj Maheshwari of Charlestown Capital Market.

Raj Maheshwari

I had a question, and perhaps you might have already covered this. Could you give us a little more granularity on your efforts to market ColonSentry now that you've had maybe 6 to 9 months of marketing the test?

Barry W. Weiner

ColonSentry, from the initial -- we actually were able to get very strong penetration with ColonSentry in the first 6 months of the trial. As was alluded to, with the change of reimbursement codes, our partner, GeneNews, is now looking at developing a profile for obtaining a designated code for this particular test. So we are now waiting for that to happen to be able to progress and to make a deeper penetration with the test.

Raj Maheshwari

Do you have any kind of numbers that you can share with us at this point in terms of the test acceptance or some marketing data?

Barry W. Weiner

We have not publicly done that, and that would have to be done in collaboration with our partner here. So we've not really made any specific disclosures as to that particular test.

Operator

Sir, there appear to be no further questions at this time.

Barry W. Weiner

Thank you very much for joining us. As I commented to you in my earlier speech, I look forward to the subsequent and future quarters to show some extremely interesting progress in the development of our pipeline products, and we look forward to reporting to you after the end of the next quarter. Thank you.

Operator

A replay of this broadcast will be available until Wednesday, March 27, at 12 midnight. You may access this replay by dialing 1 (800) 585-8367. The PIN number is 19695460. This replay is also available over the Internet at www.enzo.com.

This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

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