Enzo Biochem's (ENZ) Management on Q1 2015 Results - Earnings Call Transcript

| About: Enzo Biochem, (ENZ)
This article is now exclusive for PRO subscribers.

Enzo Biochem, Inc. (NYSE:ENZ) Q1 2015 Earnings Conference Call December 10, 2014 8:30 AM ET

Executives

Barry Weiner - President, Chief Financial Officer, Principal Accounting Officer, Treasurer, Director

Jim O'Brien - Senior Vice President, Finance

David Goldberg - Vice President, Corporate Development; Interim General Manager of Enzo Clinical Labs

Analysts

Norman Hale - Stifel

Operator

Good morning. Welcome to the Enzo Biochem Incorporated First Quarter 2015 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, 2014.

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. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation.

I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours.

Barry Weiner

Thank you very much. Good morning and thank you for joining us. With me today is Jim O'Brien, our Senior Vice President of Finance and David Goldberg, our Vice President of Corporate Development.

Our press release regarding the fiscal year 2015 first quarter numbers was distributed last night and has been uploaded to our website as well.

Just two months ago, we reported to you on the progress of our company. The progress that we have made in fiscal 2014, which ended in July and particularly in the fourth quarter as we closed out the year.

The results were reflection of our really dedicated and highly aggressive program to transform Enzo into a tightly integrated company focused on achieving our twin strategic goals of first, producing higher-margin products, especially those in high demand and in developing and utilizing our proprietary technology to position the company to address the rapidly changing market needs in the diagnostics marketplace.

Ultimately our objective, of course, is to achieve a significantly greater value for the Corporation. I am especially pleased this morning to report that these efforts encompassing heightened efficiency, reducing costs, improving margins, emphasizing more profitable products and providing greater availability of more molecular diagnostics is yielding results.

Our commitment has been to achieve a steady progressive course. Based our results for the first quarter of fiscal 2015, it is clear that we are in a positive track.

The first quarter's operating results have continued to reflect positive outcomes from the strategic plan we embarked upon to improve and enhance our operational capabilities while at the same time expanding our product line further into the molecular diagnostics marketplace.

Our financial results, which I will discuss shortly, continue favorably. We also continued to synchronize our two operating divisions and Enzo Clinical Labs and Enzo Life Sciences, with the goal of introducing products next year based on our proprietary AmpiProbe nucleic acid amplification detection platform.

We believe that the coordination of the functions of our two operating entities makes Enzo unique in the healthcare field. Few healthcare companies have the core competencies in both, the quality of manufacturing molecular products as well as in their complex and demanding use in clinical services.

A key asset has been our versatile ability to take a product idea from conception, move it from the earliest prototypes to the various stages of development and deal with the issues such as how to get adequately reimbursed for performing such test based on these technologies. This has been existing key in our ability to execute on our molecular diagnostic strategy.

Moreover, our strengthening financial condition is allowing us to make the necessary investments to develop and protect our extensive key platform technology assets. Our fiscal first-quarter results showed a strong double-digit improvement at life sciences and a breakeven quarter at the clinical laboratory.

Additionally, as I will detail shortly, we had record revenues at labs as we continued our focus on higher margin testing. At Life Sciences, our continued emphasis on high-value products and systems produced not only an increase in product sales over last year, but a 400-basis point margin improvement on those revenues as well.

Our results are demonstrative of an increasing demand for Enzo services and products in this reviving demand in the global markets. More specifically, we are focusing our efforts in the molecular diagnostics field, which is the fastest growing sector of the clinical diagnostics market, with a growth rate estimated to be in excess of 10% per year.

It is also a market that despite increasing demand improving utility remains under constant downward pricing pressure from payers. This dichotomy has produced challenges that have caused tension between diagnostic suppliers and their laboratory customers.

One where the suppliers are not willing or able to reduce their pricing despite the reduction in reimbursements that their customers are enduring, it is this setting that is generating the opportunity for Enzo, a case in point is our AmpiProbe technology, which granted a multi-year research and development program.

We recognize the need for a new proprietary molecular testing platform that would be cost-effective, produced at least equivalent performance if not better to what is currently in use and not require new equipment and extensive operator retraining.

We believe that with AmpiProbe, which is now undergoing validation for LDT approval and will be submitted for FDA approval, we have our product line that can address this market's rising needs.

Assays developed using this technology should be performed at substantial savings to patients and insurance companies as well as its lab users. Because these products can allow multiple tests to run from a single clinical specimen, they will increase convenience to the ordering physicians and their patients.

AmpiProbe should provide clinical labs with an optionality to improve their margins. Labs can obtain Enzo's cost-efficient, high-quality reagents produced under tight quality control and validate their own essays on any number of open platforms. Alternatively, they will be able to utilize the reference services of our clinical laboratory. They can refer such test to us and receive attractive rates, rates that should allow higher marginal return than if they were to run the tests themselves in many cases.

Our goal in the development of products and services using this technology is to reduce the price of performing such tests to the level where laboratories can offer these tests where they are developing them in-house or utilizing Enzo as a reference laboratory at acceptable profit margins. This would make molecular testing a profit center for many small to medium-sized academic and commercial laboratories. They now run such tests, many at a loss or do not run them at all.

Normally its availability would be lost on third-party commercial payers, who are seeing their costs increase as the proliferation of molecular diagnostic testing expands. These organizations are keenly aware of the importance of molecular diagnostics in the vital clinical and treatment decisions that derive from them.

Our approach to the market will allow us to capitalize on the successful development of a range of products based on this technology platform for analyzing and increasing number of diseases, a development that is only possible because of the nature of the coordinated infrastructure, which we have.

Our translational diagnostics teams are developing and extensive pipeline of products and services based on the AmpiProbe. These include panels for infectious and sexually-transmitted diseases that related to women's health, also general infectious diseases and those potentially related to cancer. These are both, diagnostic and prognostic.

I would like to turn the discussion to our first quarter financial results.

As we reported last night, net revenues for the October 31, 2014 quarter were $24.9 million. This is versus the prior year of $24.1 million. It is up $800,000 or 3%. Service revenues at Clinical Labs were a record $15.8 million versus $14.9 million, up $900,000 or 3% from 2013 and up $400,000 from the fourth quarter of fiscal 2014. The increases reflect both, greater testing throughput along with increased molecular and high-value test volume.

Product and royalty revenues at Life Sciences were $8 million for $7.7 million last year. This is an increase of $300,000 or 4%. Ex-royalty income, which declined 38%, because of our reduced licensing sales, life sciences locked almost a 15% revenue increase from product revenues.

Overall, gross margins remained unchanged both, from the prior year and sequentially from the fourth fiscal quarter. Clinical Labs gross margins increased to 36%, a 200-basis point improvement, sequentially from the fourth fiscal quarter, the result of operational improvements and higher value tests performed.

Gross margin for Life Science products without licensee fee income was 54%, a 400-basis point improvement over the prior year and essentially unchanged on a sequential basis from the fourth fiscal quarter.

Operating expenses for the first quarter, which included approximately $1 million increase in legal spending from year ago rose 4%. Despite this, the year-over-year quarterly operating loss was essentially unchanged.

For the first quarter, our pre-tax loss improved by $400,000 or 10% to $3.2 million. EBITDA for the first quarter was a loss of $2.6 million versus $1.6 million over the same period in the prior year, largely due to the lower royalties and licensing fees and higher legal expenditures.

You can refer to the tables that were attached to last night's press release, which include a reconciliation table of GAAP to non-GAAP net income or loss and EBITDA to adjusted EBITDA.

Our balance sheet is healthy, reflecting the benefits of stronger operating performance, legal settlements received last year and to a lesser extent, investing activities.

Cash flow used in operations during the quarter was $2.8 million. This is lower by $500,000 than the prior year period and reflects the higher legal related payments seen in the income statement.

Cash on hand as of October 31, 2014 was $16.6 million, while working capital as of October 31, 2014 was $15.2 million.

Our financial position is strong and allows Enzo to continue to invest in growing our business and product development activities towards further expanding our offerings.

Our revolving credit line balance was $3 million. This is lower by $250,000 from the prior year and this just provides additional low-cost financial flexibility to support our growth initiatives.

As for legal expenses, which increased materially in the quarter, this represents an important investment as we seek to protect and obtain fair value for our intellectual property.

As has been abundantly clear, our patents estate has generated significant value for us. Not only do we continue to record royalty income as a result of our IP estate, but this was further exemplified with the Life Technologies' jury verdict, awarding us over $61 million in direct infringement penalties and interest payments and this aware continues to grow as the court finally looks at the appeal which has been filed in the last few months.

As expected, the defendant in this case Life Technologies has looked at the appeal for which it argued orally before three panel judge heard last month. We are hopeful that this matter will be resolved in the coming months.

In addition to expenses related to that appeal, discovering deposition activity in the actions we have brought against a number of defendants in Delaware, a recent Markman hearing have all resulted in the occurrence of the higher legal expenses that you are seeing this quarter. We are hopeful that these cases will move towards trial dates in 2015.

Before I end my remarks, I would like to take the opportunity to add some further comments about our other platform technologies, which are being developed at Enzo.

We are also in the process of developing cell-based assays that are going through the same validation processes as AmpiProbe products. These products and associated services may be utilized by pathology labs to identified gene expression patterns in clinical specimens that may indicate the potential cancer progression in a patient.

Our long experience in the development of homogeneous assays that are the foundation of key diagnostics products in use today may lead to the development of more sensitive gene expression tests that can result in a wide range of diagnostic application.

In addition, we are also utilizing proprietary Enzo technology to increase the menu of products and services available to pathologists as they study various tumor types to allow more definitive identification to be made, thus potentially allowing more targeted therapeutic regimens which hopefully will lead to overall better outcomes for patients.

Our intellectual property estate, which underscores these technologies, has been built up over a decade of pioneering work and it is at the heart of a number of products we have developed in our developing over in the past years.

I would like to especially reiterate several key points.First, we are continuing to drive Enzo to become an integrated diagnostic and services provider using our proprietary technology to address the challenging diagnostic reimbursement environment, which is being confronted by all clinical labs in this country today.

Second, we are using our novel potentially disrupted internally managed platforms, specifically AmpiProbe as a cornerstone of a key business strategy to meet the challenges of this changing laboratory economic environment.

Third, we are leveraging our products and services expertise to develop and provide high throughput, high-value, low-cost molecular testing and services. We are providing them to the market in a bifurcated distribution model, using our global life sciences and distribution teams and the national reach of our clinical lab to provide products and services to the marketplace.

Our development efforts continued to progress towards validation and towards the key regulatory approvals that will allow us to make product introductions into this area. The aggressive streamlining and refocusing of the company that took place over the last few years that enabling us to deliver improving results and value.

I would like to turn the call over to questions at this point in time. If you have questions please submit them and submit your name to the operator.

Question-and-Answer Session

Operator

Thank you. The floor is now opened for questions. [Operator Instructions] Your first question comes from the line of [indiscernible] of Craig-Hallum Capital.

Unidentified Analyst

Thanks. Good morning, everybody. Congratulations on the quarter. A few questions here from our end. You continue to see really excellent gross margin improvement as you discussed in your prepared remarks.

Thinking about the lab specifically, I am wondering if you might be able to kind of further bifurcate the contribution from the operational improvement efforts versus the ongoing shift toward the greater molecular testing.

I guess, kind of what I am getting at their relatedly would be sort of where do you feel you are at on the operational effort, has kind of the lion share of the effort been undertaken in the benefit being seen or is there still kind of more tailwind there ahead. Thanks.

Barry Weiner

I think, we are just at the beginning of the execution of the program to enhance the higher-margin products. We have a number of products that we are looking toward approval, which we believe when integrated into the clinical laboratory will further drive margin improvement.

These are tests which are targeting the molecular marketplace, which I think has been an area that has been of intensive focus at the clinical laboratory. I think you can see the results in this last quarter from that focus. It is starting to take effect.

I mean, we are very pleased with the performance of the lab this quarter as it moved to this breakeven point. It has been a goal which has been a target of management for the last year-and-a-half as we have realigned our internal structure and as we have refocused much of our testing methodology as we move towards a higher volume of molecular test, so I think we are just starting to see the benefits and we are optimistic that the future will continue to show that benefit as well as improve as we begin to introduce more tests that will fit this economic criteria.

Unidentified Analyst

Excellent. That kind of ducktails, I guess, into my next question. You talked about having some products on the AmpiProbe side, under review with, I presume, New York State at the moment. Can you kind of discuss sort of how many there are there, what the potential number ultimately could be?

Then I guess then the last bid on that front would be, what is sort of the key gating factor to getting products approved. Is the state may be a little bit slower than you expected? Because you are getting a flood of applications and how much have you had to kind of gate your own investment in development as you kind of balance investment in legal side?

Barry Weiner

Okay. As I mentioned in my comments, one of the key aspects of the AmpiProbe technology, is its ability to run more than one clinical specimen from a or actually more than one analyte from a single clinical specimens.

That it is an attribute, which is very important not only to the cost, but also to patient treatment. The real value proposition outside of just getting single test through the system will be getting these panels through the system, because they will have the unique appeal, we believe, to the marketplace.

We are in a validation process now for multiple analytes. To give you a sense, the women's health panel has upwards of 14 or 15 different analytes associated to one given type of specimen. That is a process and it is a process that we think will be done on a one-off basis over the next year or so.

Our goal is to get the women's health panel or components of it out within 2015. I can't say whether it will be all '14 or a component thereof, but we will begin to release them as they get approved.

The New York State has become a clearing ground for tests on a national level, because New York State approval is accepted in LDT - process by approximately 46 states in the United States.

What has happened is as the oversight rules towards all of diagnostics are being reconsidered and reevaluated by the FDA, is that there it has been an enormous push by product developers to get the New York State approval for their test. I think it is only second to the FDA in terms of the approval process, so I believe there has been an issue of overload perhaps in the authorization area of the state, but they are working diligently.

I mean, this is a new platform and technology. There are a lot of issues that need to be reviewed and looked at. We are very confident in what we are doing now. We have been working with the system. It has been externally validated. There is a dialogue that is ongoing with the New York State authorities, so we are optimistic we will start to see these start to emerge in 2015.

I can't give you an exact schedule, because it is not in our control, but we think know there will be initially products that will be targeting detection of specific infectious disease such as hepatitis as well as women's health issues emerging during this time period.

Unidentified Analyst

Excellent. Okay. One last really easy question, I think. Do you have any additional kind of line of sight on to win the resolution of that PerkinElmer settlement might take place?

Barry Weiner

I really do not. That is sitting with the judge right now. As you know, we settled with PerkinElmer. The issue with the judge is just over the disposition of certain legal fees in the case. Once that is rectified, it will clear out. I really don't know when the judge will address it.

Unidentified Analyst

Okay, but it's not reflected in your $16.6 million?

Barry Weiner

No. It isn't.

Unidentified Analyst

Okay. Perfect. Thank you very much guys.

Barry Weiner

Thank you.

Operator

[Operator Instructions] Your next question comes from Norman Hale of Stifel.

Norman Hale

Good morning.

\

Barry Weiner

Good morning.

Norman Hale

The Markman hearings, when were they completed?

Barry Weiner

The Markman hearing was completed I think about a or a month-and-a-half ago.

Norman Hale

Okay. All right. Has the judge has he come with anything further relative to the hearings or everything is still pending?

Barry Weiner

Everything is pending. At the hearing, the judge gave a verbal target of early December, for an attempt to issue resolution of the Markman. We are awaiting that. Obviously it is not in anyone's control, but the judges, so we are anxiously awaiting that ruling.

Norman Hale

Okay. All right. I understand there's really nothing you guys can do relative to that. I know you briefly spoke about and referred to the life sciences litigation pending word from there company. Do you have any kind of timetable you can present to us relative to their particular subject?

Barry Weiner

My understanding and whether it will hold or not is certainly just my opinion.. The guidance we are giving is that it can take 34 months post oral hearing to get a judgment in that case, so that could put it somewhere around February.

Norman Hale

Okay. February of 2015. Okay. It sounds like winter. Back to AmpiProbe, obviously, this is a key product for the company and have you discussed in some detail there, but I guess my question and I understand you guys do not have any control over these regulatory authorities that give you the approval, but do you get a feeling from your discussion. I mean, there is ongoing discussion with the regulatory authorities. Do you get a feeling that they are running out of any kind of objections in terms of the quality of the product or any of the factors that would be relevant to giving the authorization decision?

Barry Weiner

All of these approvals are a process. In many ways it is an iterative process of back and forth question response. I am not aware of any response that would be a response that would be negative to the ultimate authorization to prove any of these products.

I think it is a process. I know this platform has been well tested. It has been utilized by others outside of our company, so we have a high level of confidence in its quality and its faith in performing what it needs to do. I am not aware of anything that would be blocking it at this point in time.

Norman Hale

Okay. Yes, because that is an exciting product hopefully. Hopefully sometime in 2015, you guys would get the green light and start selling the product. Once you do get the green light whether it would be a ramp up in terms of the manufacturing, I mean, what is the which the with the game plan as far as once you have received authorization the approval, what are the following steps you guys are taking.

Barry Weiner

Manufacturing is not an issue. We are a manufacturer of reagents globally, so that is an area of high confidence within our company. The first steps will be to integrate the product into our clinical laboratory for our own internal use. It will be a cost savings variable. For us, in terms of our own testing program, it will be a margin improvement for own molecular testing in the areas that receive approvals for.

It will also serve as a validation ground to generate data, which we will ultimately utilized in an FDA submission. At the same time, we will be providing the reagents and the understanding of this platform to others globally and we will be doing that to our life sciences entity, which has a global selling platform both, electronic and on the ground.

I think that is one of the keys of our unique distribution model to be able to provide the components the kits, the reagents, directly to the end-users if they wish to incorporate and use them or to provide the service via the clinical lab at a cost structure that could be highly valuable to labs today which are not doing these types of tests, so we are offering a solution that one could view as having two aspects, direct supply of products or providing of the services. In either case, the agenda is to provide marginal return to the service entity or the clinical laboratory.

Norman Hale

Very good. Okay. That is all I have got. Thank you very much.

Barry Weiner

Thank you.

Operator

At this time there are no further questions. I will now turn the call to Barry Weiner for any additional or closing remarks.

Barry Weiner

Thank you for joining us. It has been an exciting quarter. The year looks like it is shaping up to be a very eventful year. We look forward to reporting to you again in March, on the second quarter performance. Thank you for joining us.

Operator

A replay of this broadcast will be available until Friday, December 24th at 12 midnight. You may access this replay by dialing 1(800) 585-8367. The pin number is 38814081. 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!