Enzo Biochem, Inc. (NYSE:ENZ) Q3 2019 Results Earnings Conference Call June 11, 2019 8:30 AM ET
Barry Weiner - President, Chief Financial Officer, Principal Accounting Officer and Director
Conference Call Participants
Per Ostlund - Craig Hallum
Good morning, and welcome to the Enzo Biochem Inc. Third Quarter 2019 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 in the company's Form 10-K for the fiscal year ended July 31, 2018.
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 obligation 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 its press release issued last night.
Our speaker today is Barry Weiner, President. At this time, all participants have been placed in a listen-only mode, and the floor will be open 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.
Thank you. Good morning and thank you for joining us today. On the call with me is Jim O'Brien, our Executive Vice President of Finance. We distributed our third quarter results release yesterday after the market close and I hope you've had a chance to look at them.
Before we get into a discussion of the financial and operational results for the fiscal quarter and the nine months, I thought I would take a few minutes to talk about our position in the marketplace, our three-pronged short-term value creation program and layout for you what's in front of us and why we feel so excited about the business and our prospects. As was stated in our announcement last night, Enzo is poised and ready to leverage and capitalize on our proprietary technology, our product development and intellectual property portfolio by implementing meaningful short-term strategic initiatives designed to materially unlock the value we know exists across our business. The Board and management team are focused and aligned in our conviction that Enzo can be a transformative agent of change in our industry, delivering tangible benefits for our customers, colleagues and shareholders. We share the frustration of many of our investors and know that there is tremendous value in our company not reflected in today's stock price.
I want to underscore our three-pronged short-term value creation strategy. First, the development and initiation of core strategic relationships. Second, our commitment to building a new low-cost high volume and centralized laboratory processing framework for the diagnostics industry. And third, to continue to intensely focus on reducing operating costs and increasing efficiencies. We are focused on growth both today and tomorrow.
We know that growth is how we will be measured and valued. And we are focused on the growth initiatives underway. First of which is our strategic relationship program. Enzo is in active discussions with several leading global life sciences and medical device companies, as well as manufacturers of automated systems to develop strategic relationships in three key platforms: molecular diagnostics, immunohistochemistry, and our Elisa platform.
The discussions involve developing long-term relationships and automation and manufacturing, distribution, marketing and product sales. We are pleased by the awareness and acceptance we are receiving. And our goal is to announce at least one of these relationships by the end of calendar 2019.
The second strategic initiative is building a new model for the diagnostic marketplace. As a lower cost and vertically integrated manufacturer of product and being a service provider of molecular testing solutions, we are rolling out a new business model for our lab to lab business, whereby Enzo will serve as the central capability for labs of all sizes. This growth strategy embraces the development of our high volume and lower cost tests used in connection with our proprietary and affordable open system platforms that will offer meaningful improvements of financial margins at clinical labs.
We believe we are uniquely positioned to drive change and feel good about the response we are receiving. We anticipate announcing the formal rollout of this program by the end of calendar 2019.
Our third plan to our value creation strategy is our intensive cost cutting and heightened efficiency program that is achieving greater integration of our financial and operating performance.
We anticipate sequential quarterly improvement and a return to operating profitability in our lab in calendar 2020. Enzo is in strong financial health. At the end of April, we had over $64 million in cash and cash equivalents and working capital of almost $71 million, allowing us comfortably to fund the goals we have laid out for this business and set the course for meaningful growth.
It's worth noting a few key highlights from the third quarter that underscore our developmental capabilities. Our program to expand our products and services in the oncology market now includes an expanded and comprehensive menu of oncology assays, and the addition of several biomarker tests. PAX-8 for aid in determining the prognosis of ovarian cancer, PIN-4 related to the diagnosis of prostate cancer, and MUC-4 for colon cancers. These cost effective high quality biomarkers function with our full open systems of workflow and add to our strategy of substituting lower cost internally developed testing solutions to improve margins. These validated tests also further complement Enzo’s POLYVIEW immunohistochemistry and in-situ hybridization detection platforms. This is an enhanced diagnostic detection system used by pathologists in reading tissue biopsies. Importantly, it has been cited by a leading peer reviewed publication for showing no false positive compared to our competitors.
Third to enhance the utility of our molecular platform, we are currently engaged in validation of our second generation AMPIPROBE platform. It accommodates all components in running a diagnostic test, including sample extraction reagents and providing and expanding the workflow capability and reach. Validation is ongoing on this high throughput open system that will culminate in an FDA submission and approval.
Our development programs continue to generate value. During the quarter, the company has filed four patents applications, and has been granted 15 patents. One very interesting one was the issuance of US Patent No. 10278960. It's entitled sphingosine pathway modulating compounds for the treatment of cancers. This product is directed to methods for treating hepatocellular carcinoma, or what we refer to as HCC. This is the most common form of liver cancer. It uses the compound Ozanimod, a product of Celgene Corporation now in late stages of development.
Enzo also has a product, we call it SK1 that targets a different part of the same cell signaling pathway. It is our proprietary sphingosine kinase inhibitor. It is currently in development for the treatment of HCC as well. Its target is a key cellular signaling pathway indicated in various cancers in functions of the immune system. We have already obtained a number of US and foreign patents covering the SK1-I compound, animal xenotransplantation studies examining the efficacy of each SK1 and Ozanimod against tumors derived from human liver cells is currently in progress.
I would also like to point out, as we discussed in the press release last night, that during the third quarter, Enzo entered into a patent infringement and contract and licensing agreement with a number of third parties that brought in nearly $30 million of additional cash to our company. In fact, over the last five years alone, the company has brought in more than $100 million of non-diluted cash. This involves settlements, business relationships, licensing payments and royalties that have enabled Enzo to fund its developmental program and to continue to build a best-in-class patent portfolio and grow our company. What should not be lost on our shareholders is that Enzo is first a developer of high value technology that is monetized into marketable products.
I'd like to now return to the results of the third quarter. While our total diagnostic testing volume increased year-over-year and sequentially over the second fiscal quarter, results were impacted by the reduced insurance reimbursement rates mandated by PAMA and private insurers, along with such other factors as increased competition and testing denials, and changes to medical and procedural requirements for genetic testing payers.
As noted, we entered into two legal settlements and licensing agreements, one related to a case in New York and another in Delaware, which resulted in net legal settlements of almost $30 million. Total revenues for the quarter were $19.7 million, compared to $25.2 million a year ago, a decline of 22%. Clinical service revenues total $11.8 million, compared with $17.7 million in the prior year, while product revenue increased to $7.9 million from $7.4 million year-over-year. Total diagnostic testing measured by accessions grew 1% reflecting an increase in esoteric testing, including further growth of our proprietary women's health panel. The women's health panel has increased in volume each quarter since its launch last fiscal year.
As we previously have noted, clinical service revenues have been restated for the last year due to new revenue recognition rules, under which collectible balances previously classified in operating expenses are now reported as a reduction in net revenues.
Consolidated gross margins were 27%, compared with 42% in the prior year, but up from 24% in the preceding second fiscal quarter, a 300 basis points improvement.
Clinical services gross margins were 7% compared with 38% a year ago and 8% in the second fiscal quarter. Product gross margin was 57%, up from 53% a year ago.
Operating expenses decreased 11% to $11.9 million from $13.5 million a year ago and improved by approximately $1.5 million quarter-over-quarter. Total legal expenses were $0.3 million compared to $1.7 million in the prior year. SG&A and R&D expenses, both were essentially flat year-over-year.
GAAP net income was $22.3 million or $0.47 per share. These include illegal settlements and licensing payments and compared to a GAAP net loss of $3 million a year ago or $0.06 per share.
The non-GAAP net loss was $6.7 million or $0.14 a share, and EBITDA was $22.8 million, compared with EBITDA loss of $2.4 million last year. Adjusted EBITDA was a loss of $6.1 million in the current period.
For the nine months, total revenues were $60.2 million, compared to $78.3 million a year ago, a 23% decline. Gross profit totaled $16.9 million compared to $32.7 million last year, with gross margins at 28.1% and 42% respectively.
SG&A at $33.4 million was comparable to a year ago, and legal expenses declined to $2.7 million from $3.8 million. GAAP net income and non-GAAP net loss totaled $7.9 million or $0.17 per share, and $21 million or $0.45 per share, respectively.
EBITDA was $9.5 million and adjusted EBITDA was a loss of $19.4 million for the nine month period.
The balance sheet remains strong with cash and cash equivalents and restricted cash, totaling approximately $65 million. Including proceeds from settlements, cash provided by operations amounted to $8 million for the nine months that ended April 30, 2019 and working capital at April 30, 2019 was $71 million.
I would like to now open the floor for questions.
Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from the line of Per Ostlund of Craig Hallum.
Thanks. Good morning Barry and Jim. First of all, I guess I want to start out with just an overall -- an appreciation of the layout of the three pillars of the near-term strategy. And I want to start out specifically asking on the third one, the return to operating profitability and growth in lab segment because obviously that has been under pressure here recently. So I'm curious, how you look at it today? How you bridge the gap from the operating losses currently to returning to operating profit in the lab in calendar 2020? How much of that is cost cut? And where do you see the big opportunities there and how much of it is a return to growth on the top line fueling that as well?
It is a combination of actions that have been put into place, which have embodied taking a very close look at all operational activities within the clinical laboratory. And looking at each operational segment and exploring it from a zero sum approach as to how one can create efficiencies, reduce costs, and increase operational direction through a more organized and targeted capability, we've looked at as an example, renegotiation of all of our supply contracts.0 We have reorganized our client services organization.
The technical floor production has been evaluated to see where efficiencies can be instituted. The production floor, which is a different area, is looking at a reworking of its staffing and methods to be able to produce work in a more efficient way. We're looking at new suppliers. We're looking at third-party billing capabilities to see if we can improve those efficiencies. And these are just a handful of the approaches. And in doing this exercise, we have identified areas of cost savings that are being acted upon. And as a result, we believe that we will be able to bring the cost structure very much in alignment with the reimbursement trends and conditions that are impacting us and all labs within the marketplace.
Coupled with that, we see an ability to enhance growth. And that is very important in the overall success of this activity. We believe by introducing and putting forward new products such as what was stated in my comments in the area of new novel biomarkers to enhance and expand our product offerings into the higher value segments of the market, specifically, molecular oncology, will increase our gross billing and also our receivables. We believe that by introducing tests that we internally develop and supplementing them for existing market tests that cost a significantly higher amount will give us improvement in our margins.
So we are also focused very intensively on growing our geographical reach. We are now moving up into the New England area extensively. We recently just got -- put into one of the largest reimbursement networks in New England, which will help us from our reimbursement model. So we are hitting all cylinders, it is a very strategic focus, and we believe we will be successful in accomplishing it.
I should make one other comment Per in relationship to the strategic initiatives to improve cost. It all flows in to our strategic growth initiative to centralize a laboratory framework. It's one of the pillars I just stated to, to build a centralized low cost network that we can provide services, and integrate other laboratories in a more centralized, low cost efficient method. So it all goes hands in hand with improving our own efficiencies and providing that in a new model to the industry to provide low cost services.
So I'm very glad you mentioned that, because that was one of my questions as well. So I think that the central capability, if you will, that second pillar that you talked about, we've talked about it for a little while, I mean, I think that your desire to be a low cost provider of diagnostic products and services is well known. So when, when you're looking at -- when you talk about a formal rollout, announcing a formal rollout of the program, sort of what are the factors, I guess that take you from the concept that you've described for some time now to that more formal rollout? What are the gating factors? What are the things that you sort of feel like you need to have put in place before making it that more formal announcement?
We have been working to institute many of our own lower cost approaches to performing the testing that would give improved margins to lab, to the laboratory in general. It also includes an increase in the test menu expansion, in other words, providing a number of tests as I mentioned earlier, examples of the biomarkers but a number of tests that will round out a more fuller menu for labs to partake in. I think we also are looking for capacity capability. I spoke in my comments about the second generation molecular platform as an example. That will provide capacity capability we don't currently have to provide the testing for large necessary providers out there that create volume.
So it's a combination of activities, which have been put into place. And we believe that we are at a point in time, where the critical mass is coming about. We are in dialogue with a number of labs. I think when we speak to the formal rollout, that will include running and integrating testing for labs that we are now in dialogue with, which we hope to initiate programs forward. So it's a coming together of a number of necessary components to drive the consolidation of a program that includes a larger testing menu, a higher volume capability, and a more extended reach into the marketplace and we believe that that will start this year.
So following on to that point, Barry, it sounds like going back a quarter or two, the reimbursement issues were rather rapid, rather severe. And I think we had discussed kind of at that time, how -- it would have been nice to have a little more time to be prepared and be out there with the comprehensive product offering. It sounds based on your remarks like you've made a tremendous amount of progress on the new product side, even from almost last quarter to this quarter, is that a fair statement? And how many more or how much more critical mass I guess might be the word or the term. How much more critical mass do you need on the product side to more formally launch this strategy, capability?
We have made tremendous progress over the last three months. And actually the programs are moving along at a very nice pace. We continue to generate new content for our product offerings. Recently we just submitted testing now as an example for a new swab test for chlamydia, gonorrhea targeting anal and oral samples. We continue to provide extensive content and we are now in the stage of validating our high throughput machine. Hopefully, that will take on a big role in allowing us to deliver the capacity we hope to be able to provide to the industry.
And this is not only -- again, I should also comment, it's not only for the clinical lab rollout, it's also for the product side. These products and platforms will be offered as products to other labs and other consumers. So it really will extend our capabilities not only to allow our clinical lab model to morph and change to a centralized lab-to-lab structure, but it will also enhance our life science's component by providing these products and technologies to the industry as a whole.
And I should go back and also refer that all of these products are the subject of what we believe will be relationships with the industry in areas of support for marketing, for product manufacturing, for product sales. All the three initiatives that we've announced today, all interrelate. The developmental program will drive the centralized lab concept. It will drive the strategic relationships and we recognize the need for strategic partners to be able to enhance the rapidity of introduction of these products, and that is why we're so focused in that area right now.
So two more from me, and then I will let somebody else ask a question. So you talked about a number of operational initiatives on the lab operating profit side. How important is lab gross margin to getting there and what are your levers to get there on that? Because I'm assuming, I think if we stipulate that the current reimbursement environment is going to persist. I suspect you're going to need a combination of volume and probably utilizing internally developed tests and a few other things to kind of restore that as a function of restoring operating profit in the lab. Just curious your thoughts in general there?
Yes. I think you actually answered the question somewhat yourself. It's an issue of generating higher value and higher volume testing. It's about product mix. It's about extending into the areas where we have higher marginal return, as I mentioned before. Many of the areas deal with the oncology area which we're making a major move into right now. Volume is important and that is why strategically we are extending our reach geographically into New England. We have been enhancing our sales force.
And again volume is key, but value also underpins generating that marginal return that is necessary. And it's also a function of centralizing the laboratory operations. By doing such, we are gaining the efficiencies to improve that margin significantly. So we're hitting it on all cylinders. I think we clearly recognize the challenges. We clearly recognize what needs to be done. And we are hitting it from all different areas. It's not a single one process solution. I think to turn this lab into an efficient machine requires a lot of steps that are being taken right now that I believe will become visible over the next quarter or two quarters, you will see it starts to settle in. And I think all these approaches will provide a unique entity in the market that will be a new model for clinical labs to be able to look at, such that we can provide not only lower cost services but also more efficient and equally important utilization of capacities within our laboratory.
Very good. Last one from me. Coming back to therapeutics, you mentioned the patent, the 960 patent. Curious what the implications of that are and if you could give us sort of an updated timeline on the SK1 xenograft studies and what are the events we should be looking for there?
The therapeutic activities are very interesting one. As I commented that patent covers a compound called Ozanimod. It is a compound that is being used in different medical indications right now. We have received a patent on the utility of that in the treatment of hepatocellular carcinoma, which is one of the broadest of liver cancers.
We also have our own sphingosine kinase inhibitor SK1 compound that targets an additional pathway within that model. We do have patents on that as well. At this point in time, we have performed toxicity studies on both those -- on our SK1 compound, the Ozanimod has been cleared already. We are looking at xenograft testing right now on human liver cells that are implanted into mice.
When those results come back, and we hope to have those results in the fairly near term, hopefully within the next few months, we will then be able to make a determination to pursue this particular product in the areas that we've discussed. It's a broad market. It's actually very exciting in terms of an alternative approach for treating a very challenging disease that has no strong or adequate treatment right now.
And we're quite excited about it. We can't make any determination until the xenograft studies come forward and we hope to do that. Once we see it, we then will speak to the market and let them know what our actions will be going forward.
If there any other questions we would be pleased to take them.
A - Barry Weiner
I think that the indication I'm getting there are no further questions. I want to thank you for joining us on the call this morning. We look forward to speaking to you to report our year end results. We believe the next few months will be very exciting. We've detailed for you a very detailed program that is being executed on at this point in time and we believe at the next call, we will start to bring you up to date on the results. Thank you very much.
Thank you. A replay of this broadcast will be available until Tuesday, June 25 at 12:00 midnight. You may access this replay by dialing 1855-859-2056 the PIN number is 1870919. This replay is also available over the Internet at www.enzo.com. This concludes today's teleconference. You may now disconnect your lines at this time. And have a wonderful day.