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
Jack Wallace - Sidoti & Company, LLC
Enzo Biochem (ENZ) Q4 2013 Earnings Call October 16, 2013 8:30 AM ET
Good morning, and welcome to the Enzo Biochem Incorporated Fourth 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, including declarations regarding the intent; belief; current expectations of the company and its management, including those related to cash flow, gross margin, 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 cause material effect -- 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 to 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, and thank you for joining us. Now with me this morning are several members of our management team: Mr. Andrew Crescenzo, Mr. Andrew Whiteley and Mr. David Goldberg.
Our press release regarding fourth quarter and year end results was distributed last night. I trust you had a chance to take a look at it.
As you may have noticed, moving into the fourth quarter, our results, both on corporate and sector levels, have made significant progress on a sequential level.
Fiscal 2013 was, in many ways, a challenging year, with a number of cross cards. However, we did not permit these impediments to move our determination to build on the transformational program that we have embarked on and which we anticipate will result in greater recognition and truer value for our company.
Our program has involved, over the past year, aggressively reducing costs by greater centralization of our activities, which has resulted in greater gains and better focus; emphasizing at both Enzo Clinical Labs and Enzo Life Sciences higher-margin products and services that today are increasingly paying off. We've been working to achieve tighter integration between both units, as diagnostic capabilities become more instrumental to medical practitioners, pharmaceutical and clinical management companies.
We've also aggressively been pursuing new developments and alliances that broaden our offerings in what we believe will distinguish Enzo in a very important area of our history, and that is aiming new products for innovative healthcare, platforms and services that are based on our molecular and cellular diagnostic technologies.
We've also spent a fair amount of time protecting and prosecuting, where applicable, our valuable intellectual property estate that resulted in last November's favorable jury award in Connecticut, and, which long term, even before that decision, has been on under the basis of technology and patents that have garnished for us over $0.5 billion in revenues.
The countervailing influences, as we all recognize, have been macro forces that engage our entire industry. This includes reduced government budgets and others that have cut into the demand for Life Sciences activity in both public and private laboratories. We've been working diligently to offset this impact by building more profitable products into our distribution mix by looking at growth-oriented businesses.
Reductions in reimbursement by both Medicare and by private providers have reduced gross margins at Clinical Labs. We have been working toward offsetting this trend by implementing improved collection procedures, which were demonstrated this quarter with the lab demonstrating positive cash flow for the first time this year and other procedures and other efficiency measures without impairing the quality of services offered.
We also increased the menu proprietary, more esoteric tests, especially those that are gene-related, which is a core strength for us.
In conjunction with our success on the legal front, we incurred substantial attorney fees that we anticipate will probably continue into 2014 as we prepare for the upcoming trial against multiple defendants in New York Federal Court, and as we continue towards the conclusion of the Life Technologies action in Connecticut.
Turning to the financials for a moment. Our progress is best underscored by how results in the fourth quarter improved over the preceding fiscal third period, which ended in April 2013. Unless indicated otherwise, I would like to discuss our numbers on a sequential basis, that is fourth quarter against third quarter for fiscal 2013.
Overall revenues increased 3% to $23.3 million with Lab Services up 5% and Life Sciences dipping 4% due to both the economic factors noted earlier and our streamlining program to reduce lower-margin products from our catalog. With our cost of goods kept in check, and they were down about 2%, gross margin improved 4% to $9.4 million. Gross profit, as a percentage of revenues, increased 100 basis points to 41%.
On the sector side, Enzo Clinical Labs posted gross margin increases of 4% to $4.2 million, while at Life Sciences, gross margins on a product-only basis were $3.9 million, slightly down from the prior quarter, but their gross profit percentage was unchanged.
Revenue of Clinical Labs was up about $0.5 million. Especially noteworthy is that Clinical Labs in the fourth quarter achieved positive cash flow, as I stated earlier, for the first time this past year, while Life Sciences remained at positive cash flow as well.
Looking at Corporate, as noted, the efficiencies at the lab enabled a 35% improvement in the provision for uncollectible accounts receivable, moving it from about $900,000 to $600,000.
Legal expenses declined to just under $1 million from about $1.7 million in this quarter, and this is based on the timing of our specific actions. Although as a whole year, it was close to $6 million, and it could remain close to that level in the current year.
On balance, operating expenses, net of legal and the prior-year impairment charges, again reflecting the execution of our programs to hold down costs, effectively resulted in a decline of 12% in expenses or about $7 million.
As it is, the net loss for the quarter was $3.1 million against $5.8 million last quarter, including tax benefits of $400,000 in the fourth quarter fiscal '13.
Loss per share, basic and fully diluted, was $0.08 against the prior quarter of $0.15, a significant reduction. Cash used in operations, a very important number for us, was only about $1.5 million.
Our finances remain satisfactory, with approximately $9 million in cash and cash equivalents and working capital of about $8.7 million. To better monetize our receivables, we entered into a credit agreement that allows us access to additional capital if we need it. Stockholders' equity exceeded $34 million.
We are working to drive both our operational businesses towards profitability. They are the strong foundation to support the proprietary growth platforms being developed that we believe could make a significant contribution in healthcare management.
As you know, the healthcare environment is undergoing major change from both a practices and reimbursement perspective. These changes, however, provide opportunities for value generation.
Enzo's significant technology base, developed over the last number of years, is well positioned to provide solutions to better and more efficiently address these changing and evolving healthcare needs.
In addition to focusing on strengthening our operational businesses in the wake of these difficult headwinds, we also have invested significant resources, as I commented, in protecting and monetizing our extensive intellectual property estate.
Our platforms have served as a key driver in opening up modern-day molecular diagnostics that have benefited healthcare in scientific exploration. To this day, our nucleic acid labeling technologies are still fundamental and in use industry-wide. The potential returns from the use of Enzo technologies throughout the Life Sciences industry could exponentially drive values for our company, supporting the many initiatives that we continue to invest in. This was exemplified with the Connecticut case involving Life Technologies. As we discussed previously, Life Technologies was found by a federal jury to have infringed our patents covering pioneering and pivotal technologies relating to compounds used in DNA sequencing systems that are used to read the genetic code.
The application for inventions based on our technology are diverse, ranging 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 the current quarter, the judge in this case formally upheld the jury verdict and has now cleared the way for us to recover prejudgment interest in this case, which could add an additional number of millions to this judgment.
Concerning the actions in our New York case, a trial day is expected for mid-November for the first of these cases. We have every reason to believe that the Life Technologies decision should have a positive impact on these cases since the jury found that this key patent is indeed valid. These cases not only deal with our patent estate but also with matters of breach of contract. Defendants here include Hoffmann-La Roche, Affymetrix, General Electric, Life Technologies and PerkinElmer, among others. And we are vigorously preparing for the first of these cases. Our other cases in the Delaware Court against multiple parties are now moving into the discovery phase, with trial dates expected within the next 18 months.
Let me now summarize a few of the operational and technological enhancements we completed during fiscal 2013 that we believe should contribute to improved results in the upcoming year.
At Clinical Labs during the past year, we invested heavily in improving our core laboratory infrastructure. In addition to rolling out a new lab information system, we updated critical instrumentation from high throughput units that run our most common chemistry test to new immunology coagulation, immunohistochemistry in genetics platforms, to the addition of a brand new robotics platform. We now can reduce our manual processes that are involved in specimen handling.
We also introduced several new tests that we believe will contribute positively to future operations. These are high-margin esoteric assays that are being marketed to our current service clientele. Most of these assays are in and around women's health. This is a key market segment for Enzo. Some of these tests such as our E-tect assay, which is used for measuring the overexpression of 2 key oncogenes, these are E6 and E7, that may be an indicator of the integrated -- integration of the human papilloma virus into a patient's cells.
This assay is run off a standard liquid-based cytology specimen, and it can allow our physicians to more effectively manage their patient's follow-ups, since human papillomavirus integration may indicate a higher risk of progression towards cervical cancer than in patients where the virus has not integrated.
In addition, we are working on further enhancement to our HPV systems, and we are examining the utility of chromosomal-based tests to augment this particular gene expression assay.
We now are also offering high-risk HPV genotyping as a service that can run in concert with the HPV screen. Previously if a doctor wanted to identify the specific type of human papilloma virus that was potentially present in a specimen, it would have required an additional processing step and the specimen then sent to an outside laboratory. Enzo is now able to perform this assay at the same time and off the same specimen as delivered by our physician. We are increasing our level of service in reducing the need for potentially obtaining additional specimens from physicians, a cost savings and less troublesome for patients.
We are also advancing the marketing of a series of comprehensive prenatal genetics panels to our obstetrics clientele, which allows us to run these assays from a single tube rather than multiple tubes that have been required previously. These panels include tests such as Tay-Sachs, Walker-Warburg, Fanconi's Anemia, Gaucher's, Fragile X syndrome, spinal muscular dystrophy, just to name a few. And we expect to continuously add to this list.
For our general medicine clients, we introduced at the beginning of the fourth quarter a fourth-generation test for HIV screening. We are one of the first labs in New York Metropolitan area to offer this assay, which is now recommended by The New York State Department of Health in their latest HIV screening algorithm. As a result, we expect to experience more favorable reimbursement on this procedure and improve our service as confirmations can now be run in our own main laboratory.
We will be enhancing this offering shortly, as we also bring online an assay for confirmation of both positive and equivocal results.
In this changing and challenging healthcare environment, we are constantly focusing on improving cost efficiencies, which should impact further results. Among these are focusing on reducing key reagent costs that we commonly use in the laboratory, as well as more favorable pricing structures for the assays that we currently refer to other laboratories.
As we look toward the future of the Clinical Laboratory, we have adopted a bifurcated strategic approach, one that will allow the capabilities of the lab to support and grow the broader corporate initiatives of developing disruptive products and platforms to address the needs of our changing healthcare environment.
The broadening of our translational diagnostics group and the increased cooperation with Enzo Life Sciences on initiatives in and around multiple products gives us an integrated structure to facilitate the development of new products, technologies and business opportunities.
At Life Sciences, we continue to see the benefits of the ongoing cost and expense reductions we have been implementing over the past year. For the year that just ended, we were able to reduce costs in areas such as finance, IT and operations by $2.5 million, while maintaining our sales and marketing expenses proportionately.
We also recently completed a consolidation of our European operations, and we expect this to have a positive impact in the subsequent quarters.
This realignment of resources will now allow us to further develop targeted marketing campaigns designed around our high-value products and kits that serve a more clinically oriented marketplace.
An example of these initiatives launched during the quarter are targeted programs based on the growing immunohistochemistry market. Our new suite of products now allows Enzos to provide customers with one of the most comprehensive menus of both primary antibodies and colorimetric detection options for a wide variety of applications.
In addition, we have also rolled out programs targeting cancer research, congenital screening and epigenetics.
I'd like to make a few comments on our corporate development strategy. The new environment demands not only greater efficiency and reduced costs, but also a new array of diagnostic tools as healthcare increasingly shifts its attention to prevention and personalized medicine.
Advances in genetic analysis and therapies with greater, more personal specificity are becoming the norm, and their increasing success is evident in the rising age and well-being of our population.
Enzo has developed a number of key technologies underpinned by broad and deep patent estate that has far-reaching uses, not only in molecular diagnostics, but in such areas as veterinary, medicine, bioprocessing, food safety and biodefense, just to name a few.
In order to focus our activities on key market segments, we are developing strategic approaches that may result in some very interesting new opportunities. These enterprises will be supported by the infrastructure that Enzo has built over the years, including such key elements as global sales and distributions capability, the ability to develop and market in-house developed assays, manufacturing experience across a wide range of product types, access to key opinion leaders and clinical specimens, and regulatory expertise, just to name a few.
It is our desire to utilize this infrastructure as an asset in support of some of our key technology platforms such as AmpiProbe, and focus our efforts on specific markets. We are extremely excited about the prospect for AmpiProbe.
Over the years, we have developed technological platforms and products that have opened new scientific and diagnostics markets. This was exemplified with our breakthrough gene labeling system and platforms, such as hybrid capture, which is the basis for the largest selling human papillomavirus test in the market today.
Our AmpiProbe technology is a new opportunity that could allow more efficient delivery of gene-based diagnostic testing. It has been designed to allow multiple testing from a single specimen that can alter the price structure for doing these types of tests, a concept perfectly in line with where healthcare reimbursement is moving today.
We believe the approach is more cost efficient and easier to use than current methods.
Before turning the call back to the operator for questions, I would like to reiterate that it has been both challenging and exciting for Enzo in this past year. While we are dealing with the same economic factors our colleagues and competitors in the healthcare industry face, we have important potential for capitalizing on these challenges with a head-ons approach.
Moreover we anticipate events over the course of 2014 that could potentially help to create substantial value. These include possible resolutions surrounding the extensive net of IP-related legal actions that, in the aggregate, touch on existing markets in the multibillion-dollar range.
Additionally we believe the upcoming litigations will further focus attention on the value of our intellectual property, enabling us to generate opportunities to monetize our patent estate, even in the form of licensing transactions or outright dollar awards.
Finally we continue to look for the most effective, least dilutive way to monetize many of the transformational technologies we have developed. We continue to explore joint ventures, spinoffs or other forms of partnerships as a way to help advance technology and benefit our shareholders. We firmly believe that success in these opportunities will become a value-creating event.
What we hope is evident in our strategy to both continue and enhance our businesses and ensure greater recognition for Enzo is its many assets in our determination to achieve full value for our company. We are moving forward on many fronts and evaluating a number of plans and opportunities to help us to reach these goals.
It has been a very direct, informative year for us. We are very excited about the potentials of what we have going forward. And on that note, I will turn the call over for questions.
[Operator Instructions] Your first question comes from the line of Jack Wallace of Sidoti.
Jack Wallace - Sidoti & Company, LLC
A couple of questions for you here. First about the lab. It looks like you're starting to see a bit of a bounce back there after a rough couple of quarters. Gross margin, I guess, hadn't picked up as much as I was thinking it would be. I was wondering if there was maybe a less of an impact from the mix for some of the esoteric tests in the quarter, and if you see the gross margin in subsequent quarters -- seeing more of an impact from those newly announced -- excuse me, newly brought-to-market esoteric tests?
Barry W. Weiner
That is correct. We were anticipating a greater tick-up from our gross margin. Much of it was a result of the delay of getting some of these new tests to market. They were anticipated very early on in the calendar year. They were delayed because of the storm and the delayed schedule of inspections and approval processes. As a result, many of them have started to come online in late spring. We are seeing them gaining traction, and we anticipate margin improvement into the future quarters now.
Jack Wallace - Sidoti & Company, LLC
And then, I guess, looking back to the last half of 2012, the lab was performing as well as it had been from a revenue and gross margin standpoint in recent memory. I guess, at what point do you see the lab getting back to those levels?
Barry W. Weiner
We believe within the next 2 quarters you will start to see the lab return to its historical levels of performance.
Jack Wallace - Sidoti & Company, LLC
And then moving over to the Life Sciences division. A little bit lower sequential revenue. Was this more of a macro impact or was this also, I guess, more, I guess, continuation of remittance from the lower margin, I guess, products from the mix and focusing months with a higher margin -- products that were made in-house?
Barry W. Weiner
It's a combination of the 2. As you may be aware, the macro environment in the Life Sciences industry has been very constrained over the past year due to many forces. There has been a reduction in the building of grants, which has moved from about 4 out of 8 -- 7, 8 to about 2 of 8 grants being funded recently. We've seen under this sequestration dramatic cuts in funding go to the national agencies, as well as to academia. So that, without question, has created a constriction in that particular environment. Coupled with that, we did institute a programmed reduction of products in the Life Sciences category. We were, for a company our size, marketing many products that were more low margin and not necessarily contributing to the bottom line of the company. We have instituted a programmed reduction in product SKUs. And as you can see, and I believe, as you will see in the upcoming quarters, an increase in the performance of the Life Sciences division. As I mentioned, the division is now nicely cash flow positive. We will try to move this into nice profitability over the next year, and I think all these measures will start to pay off for us.
Jack Wallace - Sidoti & Company, LLC
Two more questions. Sorry to bounce back to the lab here. I just wondered if you could help us quantify the potential impact of the CMS recap proposal. Physician fee schedule, at least from the aggregate, expected to be a 23% decline, at least on the initial proposal, and many of the new esoteric tests coming to the lab, I believe would fall under the physician fee schedules. Hopefully you can kind of give us some comments and some color on that.
Barry W. Weiner
I'm going to have to ask David Goldberg to respond to that.
David C. Goldberg
Most of what I've seen on the proposed cuts are really more heavily weighted towards the anatomic pathology side. So obviously, there'd be some impact to all labs, but it appears, and again, still everything is proposed. I don't know if you realized, but there have been some suits filed from some of the advocacy agencies, including the CAP and others. So we aren't 100% sure of what's going to happen as usual when you're dealing with Washington, of course. But I don't think it'll -- it shouldn't be major to our laboratory because we have a fairly broad offering of tests, but we are following it very, very closely.
Jack Wallace - Sidoti & Company, LLC
And then last question, Barry. Maybe -- is there an update on the timeline for the receipt of the cash, one, from the Life Tech lawsuit, maybe sometime in the next 6 months or so?
Barry W. Weiner
We are -- this past quarter, as I mentioned in my comments, the judge reaffirmed the jury verdict. And I think very strongly advocated the course of the trial going forward -- as it was presented, which is very good for us in case of an appeal. We are currently awaiting the decision on the award of pretrial interest charges, which is an issue of law. When that is issued, then parties will have the ability to appeal. I have been told, if it goes that route, then it could be about a 6-month process or so. We are evaluating our options right now. We feel we're in a very good position in that case, and we're actually looking forward to the cases that are now coming to trial next month involving multiple parties, which we think will also be catalytical for us as a company.
[Operator Instructions] At this time, there appear to be no further questions. I will now return the call back to Mr. Weiner for any closing remarks.
Barry W. Weiner
Thank you for your interest and participation. We look forward to discussing our fiscal 2014 results with you in December. Have a good day. Thank you.
A replay of this broadcast will be available until Wednesday, October 30, at 12:00 midnight. You may access this replay by dialing 1 (800) 585-8367. The pin number is 77517330. 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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