Enzo Biochem Management Discusses Q2 2014 Results - Earnings Call Transcript

| About: Enzo Biochem, (ENZ)

Enzo Biochem (NYSE:ENZ)

Q2 2014 Earnings Call

March 12, 2014 8:30 am ET

Executives

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

Andrew R. Crescenzo - Senior Vice President of Finance

Analysts

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Jack Wallace - Sidoti & Company, LLC

Robert Smith

Operator

Good morning, and welcome to the Enzo Biochem, Inc. Second Quarter 2014 Operating Results Conference Call.

I will now read the company's Safe Harbor statement. Except for historical information, the matters discussed in this news release 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, cost of goods and services, other expenses, government regulations, litigations and general business conditions. See Risk Factors and the company's Form 10-K for the fiscal year ended July 31, 2013.

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 press release.

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 and thank you for joining us. With me today are several members of our senior management team. Our press release regarding the fiscal second quarter operating results was distributed last night and has been uploaded to our website, as well.

On earlier calls, I spoke about how we have been reshaping Enzo. We have taken a hard look at our Life Sciences business at a time when the market among the academic and government laboratories is being increasingly constrained by reduced funding. As a result, we have embarked on a comprehensive program to consolidate facilities, to streamline our distribution internationally, and shift our marketing and sales efforts towards higher-margin products and services. We've made progress here and we believe the results we reported are reflective of this.

Simultaneously, we have been investing to become an increasingly integrated biosciences company by engaging our Life Sciences research capabilities with the growing of our Clinical Laboratory that has the capability to reach much of the country. Our integrated research product platform capabilities, coupled with our excellent service reputation continues to gain recognition as we develop new technologies, which are built upon our extensive intellectual property estate.

We continue to successfully attract partners throughout the diagnostic world to utilize our unique bifurcated channel capability, which allows us to reach medical markets globally through our Life Sciences channels, as well as provide services to medical practitioners and laboratories regionally.

With that as a backdrop, I'd like to turn to a brief discussion of our operational results for the quarter.

As we reported last night, net revenues were $22.9 million versus the prior year of $22.2 million. This is up $700,000 or about 3%. Revenues at Clinical Labs were $13.8 million versus $13.3 million, which is up about $0.5 million or 4% from 2013. And this is basically due to increases in our esoteric and higher-value tests. It's important to note that the revenues in our Clinical Lab would have been at least $500,000 higher, if not for the impact of the severe winter weather that we experienced in the second quarter of this year. Life Science revenues were $8.1 million versus $7.9 million. This is a gain of about $200,000 or 2%, as we begin to see the impact of our focused marketing efforts in that particular division. Overall, gross margins increased by 13% with double-digit growth seen at both Life Sciences and Clinical Labs. Margin improvement at Clinical Labs was again due to the increases in our higher-value assays, while the more favorable product mix contributed to the gain at Life Sciences. Other operating expenses for the quarter were $13.3 million versus the prior year of $14.6 million. This is down about $1.3 million, or 9%. This is a result of the enterprise-wide reductions in SG&A and improvements in the allowance for uncollectibles at the Clinical Laboratory. The net loss improved by $2.1 million or 37%, while the EBITDA deficit also improved by $2.1 million or 46%.

Turning to year-to-date results. The net revenues for the company were $47 million versus the prior year of $47.8 million. This is down about $800,000 or 2%. Clinical Labs was $28.7 million versus $28.5 million. Clinical Labs were up $200,000 or 1%. Life Science revenues were $18.4 million versus $19.3 million. This is down $900,000 or 5%. Of that reduction, $400,000 or nearly half was due to reduced royalty income that we saw in the first fiscal quarter. Year-to-date net loss improved by $3.1 million or 32%, while the EBITDA deficit also improved by a similar amount, mostly due to improved Q2 results I just mentioned.

With respect to our liquidity and capital resources, our cash on hand as of January 2014 was $7.6 million and working capital was $8 million. This is essentially unchanged from the prior quarter.

Overall, we expect performance to continue to improve over the remaining fiscal year. And as a result, we believe our liquidity and capital resources are sufficient.

Before I turn to provide a little more color on the operating results, I would like to provide you with an update on our legal matters. As you know, our patent estate has generated significant value for us over the years. This was most recently exemplified by a federal jury finding that Life Technologies infringed our patents, and awarded us over $61 million in direct infringement penalties and interest payments. As expected, after the judge formally upheld the jury verdict and set the interest rate, Life Technologies has filed an appeal to this decision. We are hopeful that this matter will finally be resolved during this calendar year.

Our New York cases are moving towards trial. And finally, our other cases in the Delaware court against multiple parties are now moving into the discovery phase with trial dates expected within the next year to 18 months.

I would like to summarize and update some of the new partnerships that Enzo has entered into over the past couple of months, which once again showed the benefits of the integrated structure of having both the Life Sciences and Clinical Labs as part of a cohesive corporate entity. Our capabilities as a company that has multiple access points or channels into the Life Sciences, Clinical Lab, Pharma and service sectors gives us a unique ability to introduce new products, technologies and diagnostics efficiently and comprehensively. Our channel to medical practitioners in our Northeast region is one that penetrates the largest and most valued clinical diagnostic services market in the United States.

As a result of this unique reach, last month we announced a partnership with Nuclea Biotechnologies, wherein we will be validating and marketing an assay for the measurement of HER-2/neu oncoprotein, an important test for the monitoring of patients with metastatic breast cancer. The test can identify those women that overexpress this protein in their tumors, that's allowing physicians to make more informed treatment decisions. We expect to roll this test out in the current quarter. And when added to the marketing agreement we signed late last year with Sequenom for their MaterniT21 noninvasive prenatal test, we believe we are positioned to continue our expansion into the women's health area.

When you take these 2 tests and add them to our comprehensive HPV menu, genotyping, our E-tect assay for the measurement of E6/E7, or expression that may be related to the integration of human papillomavirus into the host genome, as well as a number of comprehensive prenatal diagnostic panels, Enzo now provides one of the most comprehensive sets of women's health diagnostics offerings to physicians in our service area.

In the past quarter, we also announced a partnership with Flagship Biosciences of Boulder, Colorado, in which our 2 organizations will work together to offer a comprehensive immunohistochemistry-based solution to pharmaceutical companies that are utilizing tissue-based analysis for the development of potential companion diagnostics. This collaboration will capitalize on Enzo's long history of immunopathology products and services, and offer it to a much broader market in an integrated manner.

We have also, in concert with the European drug developer, just completed validations of key products in our line of protein aggregation products for the use in biological drug targeting optimization and scale up.

Turning to another topic. Last quarter, we announced the publication of what may be a very key study in the prestigious peer-reviewed journal, Modern Pathology, in which our scientists working with colleagues from Cornell and Ohio State were able to demonstrate a strong association between idiopathic pulmonary fibrosis, or IPF, a fatal lung disease, with the presence of a particular herpes virus known formerly to be native to squirrel monkeys. As we have indicated, pulmonary fibrosis is estimated to affect about 1 million Americans today, and about 20% or 200,000 of these cases are classified as IPF. Such a discovery of linking an infectious organism to this condition may allow our translational diagnostics team to develop a tissue-based, and downstream, perhaps a blood-based screening test that could lead to earlier detection of this very problematic disease, which in turn could lead to the ability to develop courses of treatment that could reduce the mortality. We have already laid the groundwork to begin the development of a possible assay to identify the presence of this virus in lung biopsies.

Our focus over the past several quarters on the research and development front has been to target providing low-cost molecular case testing capability to the broad clinical laboratory market. The economic pressure of reduced reimbursement, coupled with an increased demand for basic molecular information for their patients, has created a challenge within the lab industry. This tension has created a unique opportunity for Enzo to provide solutions to labs, whether in the form of services developed at our laboratory or in diagnostic products produced at Life Sciences. The broadening of our translational diagnostic group and the increased cooperation between Enzo Clinical Labs and Enzo Life Sciences on initiatives in and around multiple products has provided us an integrated structure to facilitate the development of these product opportunities in a very effective manner.

More specifically, Enzo has over the years developed a number of key technologies underpinned by our patent estate that have far-reaching uses in molecular diagnostics. But not only molecular diagnostics, but also in areas such as veterinarian medicine, bioprocessing, food safety and biodefense. In order to focus our activities on key market segments, we are now developing strategic approaches that may result in new opportunities in these areas. These enterprises will be supported by the infrastructure that Enzo has built over the years. This infrastructure includes global sales and distribution, the ability to develop and market in-house developed assays, our manufacturing experiences, in which we manufacture a wide range of products. It gives us access to key opinion leaders and clinical specimens, and most importantly, regulatory expertise, just to name a few. Our infrastructure is a key asset in the support of our core technologies. One of the key core technologies which we have spoken of in the past is AmpiProbe.

We are focusing our efforts on targeted markets utilizing this technology. AmpiProbe is a DNA amplification and detection platform that could allow more efficient and cost-effective gene-based diagnostic testing. It has been designed to allow multiple testing from a single specimen, which in turn can materially alter the price structure for doing these types of tests, a concept which is perfectly in line with where health care reimbursement is moving today. Our goal in the development of products and services using this technology is to reduce the price of performing such tests to below the current cost of purchasing the reagents alone, potentially allowing a number of small-to-medium-sized labs, whether hospital-based or independent, to be able to participate in the rapidly expanding molecular diagnostics marketplace at an acceptable operating margin. We believe this product opportunity is timely and necessary for labs to survive in this difficult environment. And I'm pleased to report that the product panels are now in various stages of development as they move through the validation and regulatory process.

Before turning the call back to the operator for any questions, I would like to reiterate that it continues to be both an exciting and challenging time here at Enzo. We anticipate at Enzo where the course of 2014 could potentially help to create substantial value. We believe that these quarter's results, in light of the inclement weather that clearly impacted them, prove that we are moving in the right direction. We have spoken often about the issues impacting health care delivery and reimbursement. These are the challenges that we continue to face on a regular basis. And in the current environment, force us to adopt business approaches that need to generate more efficient delivery of medical information, while allowing us to achieve appropriate returns.

We are faced with a new economic environment regarding health care. Under the Affordable Care Act, more and more individuals are being brought into the health care system. This, in turn, will create greater demand while, of course, putting the industry under endless pressure to reduce costs. Enzo has a track record of developing and providing novel approaches to complex problems since our early days when we first introduced our technology for visualizing DNA without the use of radioisotopes, a technology that is the foundation for a number of key molecular tests today. We have been at the forefront of clinical discovery. Today, we are capitalizing on our development prowess, as we begin the process of introducing platforms and products that will meet these newly arising special needs within our industry. And while we continue to work towards these solutions, we are focused on achieving improved returns on our ongoing manufacturing and diagnostic activities.

We continue to look for the most effective ways to monetize many of the transformational technologies we've developed. As such, we continue to explore joint ventures, spinoffs, or forms of partnerships as a way to help advanced technologies and benefit our shareholders. What we hope is evident is that our strategy to enhance our businesses, and assure greater recognition for Enzo and its many assets. We are continuing to move forward on a number of fronts as we strive to achieve the goals that we've set forward.

On that note, I would like to conclude the formal comments I have to make and open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Bill Bonello of Craig-Hallum.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Just a couple of follow-up questions. Thanks for the color. Just want to probe a little bit more on the return to growth in the lab business. Is that something that you would imagine from this point forward that you're going to pretty consistently be able to show year-over-year growth? And sort of what's the core driver of that? Is it the menu expansion and more revenue across an existing customer base? Is it expanding the number of customers? If you just kind of elaborate a bit, and then I have a couple of follow-ups.

Barry W. Weiner

We believe we will show continued growth in the lab. It is a combination of expanding our geographical reach, of introducing new higher-value, high-margin esoteric tests. We have a pipeline of tests, which are being processed, which we believe has shaped the financial performance of the laboratory this quarter. So it's a combination of multiple activities. And we believe that the focus on driving the shift to a esoteric technology platform will help this lab produce more improved results as we moved into the future quarters.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay. And just as a follow-up on that, you talked about expanding the geographic reach. Can you just talk a little bit more about sort of how so? And what your opportunity to be sort of more of a sort of super-regional or even national reference lab might be, if that's something you're interested in? And what you need to do to achieve that?

Barry W. Weiner

Currently, the Clinical Laboratory services on a routine basis, the Greater New York metropolitan up a bit to New York State, New Jersey, touching on the regions of Philadelphia and lower Connecticut. As we are all aware, the lab is a New York State CLIA certified lab, and as a result has reciprocity in the multiple states across the United States. Our focus has been to maintain our current routine testing penetration in our geographical area. But as we begin to introduce novel, unique testing capabilities, particularly we're focusing on the introduction of many of our AmpiProbe systems as a reference service, to spread that through the United States and the areas as a whole. So we have a vision for an expansion of the lab using our proprietary and specialized niche service capability, but maintaining a routine focus in our core geographical area.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay. That's helpful. And then just one last question and I'll get in the queue. But the margin expansion, you've shown really nice increase in margin year-over-year. Where do you kind of think gross margin can go from here? And can you continue to hold your other operating expenses pretty flat like you've been doing?

Unknown Executive

Yes. I'll take that one, it's Jim. I think we can continue to grow our margins gradually over, quarter-by-quarter. But we should see some growth in follow-on quarters. I think February was rather difficult with the -- by the weather that we saw in the Northeast. But I still hope to have some margin expansion in this quarter and beyond.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

And on the operating expenses?

Unknown Executive

Yes, I think we can continue to look at operating expenses. They should hold firm with the introduction of our new test and our ability to execute on the revenues that we anticipate for the balance of the year and into fiscal '15.

Operator

[Operator Instructions] Your next question comes from the line of Jack Wallace of Sidoti.

Jack Wallace - Sidoti & Company, LLC

A couple of things here. One, with the impact of the revenue in the quarter, we saw, I believe it was last year and the year following, some nasty weather including the hurricane, had some trickle on effects on the following quarters due to the algorithm that is used to calculate revenue. Should we see any impact such as that in the upcoming quarters in the lab?

Barry W. Weiner

Well, there is still a weather effect. February certainly has been an impacting weather month here in the Northeast. It's hard to really calculate that at this point in time. But we have been really addressing, I think considering the weather impact, we've been really pressing forward at the clinical lab to keep our numbers up, and I think we've done a fairly good job of that. So I'm optimistic. I can't really define the February effect yet. There will be an effect, there's no question about it. I don't know, we had 3 or 4 rather significant snow outages here. But going forward, I think we're looking for some strengthening in our position.

Jack Wallace - Sidoti & Company, LLC

Okay. That's helpful. And then, so receivables were down sequentially and last quarter, you mentioned that it's possible, the billing side haven't quite caught up with some of these tests that were launched. Is that what we saw here in the quarter? Or was some of that also due to just the lower lab revenue in general?

Andrew R. Crescenzo

This is Drew Crescenzo. So as you know, our second quarter typically has more holidays in it. So a combination of the holidays and greater amount of weather days definitely impacted the lab receivables in the second quarter.

Jack Wallace - Sidoti & Company, LLC

And then, last quarter you mentioned about $1 million in OpEx that could be stripped out of the business. It wasn't an explicit time period, but it seemed likely to be this calendar year. So how much progress did we make in that $1 million of OpEx reduction this quarter?

Andrew R. Crescenzo

Yes. Most of that OpEx adjustments started taking place in the first quarter and through some headcount realignments would have extended through the second quarter. So we would expect that in the third quarter, fourth quarter, we'll fully realize those benefits we had discussed earlier.

Jack Wallace - Sidoti & Company, LLC

Okay. And then, with the life -- I guess now the Thermo Fisher case has been appealed, looks like at the end of the year, we'd finally get a resolution. Is there an earliest time when we might hear about getting that $62 million-plus back?

Barry W. Weiner

We -- it's very difficult to put a specific timeframe. The rough timeframe typically would be within 9 months from filing the appeal to resolution.

Jack Wallace - Sidoti & Company, LLC

Okay. And then lastly, any other updates on say some of the Delaware cases or some of the other, for example, PerkinElmer? Actually this is more New York. There was a March 18 court date. Now it looks like that's been pushed back without a court date. Affymetrix pushed back a couple of weeks, it looks like. And Roche, we still don't have a court date. Any other updates we can have on those fronts?

Barry W. Weiner

Really not much more to say. As you're stating, the PerkinElmer date is still in flux a bit now. Affymetrix has been set for early May, and we are awaiting the Roche date in New York. In Delaware, the cases are moving along at a fairly rapid pace. We anticipate, if the scheduling orders hold, to start to look at trial dates sometime around the first of the year.

Operator

Your next question comes from the line of Robert Smith of Center for Performance Investing.

Robert Smith

My question is, do you feel there's any current value to the past work that you've done in drugs and drug development, specifically Crohn's, NASH or working with the gene?

Barry W. Weiner

Yes, we believe that there is important value in those product lines. As you are aware, there is a trial in motion at the NIH. It's actually in a follow-up phase right now for the autoimmune uveitis product, Optiquel. Based on some of the data that may come out of that particular trial, it will give us guidance in terms of the direction of the Crohn's product. It's a similar based technology in terms of autoimmune regulation. There may be adjuvants that come out of that trial, which will drive the Crohn's product to a different product formulation. So that is still a very high interest. We have a very, very interesting program development in our Wnt Pathway process drugs. These are drugs which target conditions such as osteoporosis, possibly diabetes. Again, we've not made the significant commitment to fund extensive research programs under these product lines. But we do have active dialogue in terms of seeking to partner these products with various parties. And that is an ongoing dialogue.

Robert Smith

Barry, how about the work that was done quite a few years ago and with the gene? And you seem to have very valuable IP associated with that?

Barry W. Weiner

Which gene are you referring, what is it -- I'm not sure exactly what you're referring to?

Robert Smith

Well, not a specific gene, but in genetics turning on and off genes, and has that been superseded later on by developments away from you?

Barry W. Weiner

No, it hasn't been superseded. I think much of that gene work was very early stage work in gene discovery. The key is not -- the scientific work has very, very strong importance. The key is to pick and channel the appropriate targets that we feel are worth investing behind, that can give the shareholders of our company a return in a somewhat more expedient fashion. Much of that early gene work was core technology, basic science, which laid the groundwork for some of the products that we are now -- that we put through clinical trials. So it was more fundamental work that delivered, I think, some very important outcomes for us in terms of deriving the products that we are building today. So I think it's very important. I do believe that there is a place for this.

Robert Smith

If you succeed with the litigation efforts, do you think you would refocus or could refocus back into these areas?

Barry W. Weiner

It's a possibility. I think there are some areas which are more further developed, and that could potentially deliver more near-term results. At the end of the day, the focus of Enzo has really been tuned more to the diagnostic forefront. We believe that the core technologies that we are exploring, that AmpiProbe technology has a very timely and very material potential in contributing to the current reimbursement trends that are presenting themselves today. I think as a company, we are not of the scale to have a full therapeutic development program. But that would not prevent us from potentially capitalizing on these products and developments in a number of different ways, and ways have been looked at whether they are via partnering or spinning off these products to create economic gain for us. So it is not an effort that is terminated in any way. But it is a priority issue, and a capital requirement issue that we have to be realistic about.

Operator

There appear to be no further questions at this time. I will now return the call to Barry Weiner for any additional or closing remarks.

Barry W. Weiner

Thank you for participating in the call. We believe the next quarter will be a very interesting one for us, as we move forward in the development of the programs I spoke to you about, and we look forward to the June quarter to report our progress. Thank you.

Operator

A replay of this podcast will be available until Wednesday, March 26 at 12 midnight. You may access this replay by dialing 1 (800) 585-8367. The pin number is 10213172. 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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