Enzo Biochem, Inc.
Q3 2013 Earnings Call Transcript

Published: 11 Jun 2013

[Operator:]

Good morning, and welcome to the Enzo Biochem, Inc. Third Quarter 2013 Operating Results Conference Call. I will now read the company's Safe Harbor statement. Except for historical information, the matters discussed on this conference call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectations of the company and its management, including those related to cash flow, gross margins, revenues and expenses, are dependent on a number of factors outside of the control of the company, including inter alia, the markets for the company's products and services, costs of goods and services, other expenses, government regulations, litigations and general business conditions. See Risk Factors in the company's Form 10-K for the fiscal year ended July 31, 2011. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. The company disclaims any obligations to update any forward-looking statement as a result of developments occurring after the date of this conference call. During this conference call, the company may refer to EBITDA, a non-GAAP measure. EBITDA is not and should not be considered an alternative to net loss, loss from operations or any other measure for determining operating performance. The company has provided a reconciliation of the difference to GAAP on its website, www.enzo.com and in the press release issued last night. Our speaker today is Barry Weiner, President. [Operator Instructions] I would now like to turn the floor over to host. Mr. Weiner, the floor is yours.

[Barry W. Weiner:]

Thank you, and good morning. With me today are several members of our management team, Mr. Andrew Crescenzo and Mr. David Goldberg. I would, first, like to discuss our results for the third quarter and the factors affecting them. And then, before opening the call to questions, I will get into the progress we have made on a number of fronts and the developments we are working on, which we believe hold significant opportunity. As indicated in the press release issued last night after the market closed, the third quarter, and indeed the year so far, has been subject to a number of cross currents. However, despite these factors, we posted improvement sequentially. Our expectation is that the fourth quarter, as we now look at things, will show further progress. Enzo's results are reflective of a business in transition as we have completed a number of initiatives in both operating divisions that we believe position us for improved financial results going forward. Moreover, we also believe that the progress we have made on a number of fronts, including the announcement we made this morning prior to the call, will provide you with further insight into our go-forward strategy in which we plan to put greater emphasis on building businesses, backed by our strong patent estate and technology and supported with our operational infrastructure. Let me get into some of the quarter's details by first discussing the operational results and the reasoning behind them. Our third quarter results showed modest improvement over second quarter. Revenue and operating results improved sequentially coming in at $22.6 million for the quarter, compared to $22.2 million in the previous quarter. Gross profit was higher on a sequential basis, following increased margins at both Enzo Life Sciences and Enzo Clinical Labs. Our quarterly results were impacted by a delay in the introduction of a number of higher-margin diagnostic assays. These was due to delays in their scheduled state-required inspections at the Clinical Laboratory. We have now rolled out a number of new esoteric tests that I will shortly discuss. However, their impact on revenue in the third quarter was not significant. We have begun to generate meaningful revenue from their sales in this current quarter. Clinical Labs was also negatively impacted from lower reimbursement rates, the effective sequestration on our Medicare revenue and reduced billing days in the 2013 period. Enzo's results were also impacted by higher legal expenses, which were associated with the preparation for the New York trials scheduled this fall. We are also moving forward with a number of other legal actions that were brought in Delaware, these are being handled on a contingency basis. Overall, operating costs were around the same for both Q2 and Q3 at $14.6 million. This included an approximately $300,000 additional expense over the prior period for legal expenses. Our SG&A and R&D costs were roughly the same, increasing about $0.5 million. The net loss for the quarter came to $5.8 million, slightly up from last quarter. The EBITDA loss, a non-GAAP measure, was $4.6 million, down $100,000 from the previous quarter. As of June 10, our cash and cash equivalents were about $10 million and so we are preparing our activities very aggressively to move our divisions towards a profitable stance after experiencing the cross currents I just mentioned earlier in my conversation. Revenue from the Clinical Labs segment amounted to $13.4 million, roughly the same as the January 2013 quarter. Our operating loss declined to $2.1 million from $2.4 million. We were able to show this sequential improvement despite the lower reimbursement rates I just alluded to, and the fact that a number of new services were delayed from being offered during this period due to the timing of the key inspections. Enzo Life Sciences generated revenue of $9.2 million, up from $8.9 million in the January 2013 quarter, as we continued our focus on higher value products and systems at Enzo Life Sciences. We believe that by selectively investing in our key product platforms and increasing our focus in our merchandising efforts, we are developing and implementing a campaign that will broaden our marketing efforts, attracting a much wider customer base. Finally, as we announced earlier, we have entered into a financing arrangement with Healthcare Finance Group wherein we have a secured revolving line of credit of $8 million, which can be extended to $12 million. It will help to build our working capital and assist in our execution of the strategic plans that I will discuss later in the call. We are working to drive both our operational businesses to profitability, as I mentioned. They are a strong foundation to support the proprietary growth of the platforms being developed that, we believe, could make a significant contribution in health care management. The health care environment is undergoing major changes, as you are all aware, from both a practices and reimbursement perspective. These changes, though disruptive, provide opportunities for value generation. Our significant technology base developed over the last number of years, is uniquely positioned to provide the solutions to better and more efficiently address these changing needs. As well as focusing on strengthening our operational businesses, we also have invested significant resources in protecting and monetizing our extensive intellectual property estate. Over the years, we have generated hundreds of millions of dollars of revenues as a result of our proprietary technology platforms and products. Our technology platforms have served as a key driver in opening up modern-day molecular processes that have benefited health care and scientific exploration. To this day, our gene labeling technologies and capabilities are still a fundamental basis used industry-wide. The potential returns from the use of Enzo technologies throughout the life sciences industry could exponentially drive values for our company. This is exemplified with the recently adjudicated kinetic case involving Life Technologies. As we have discussed previously, Life Technologies was found by a federal jury to have infringed our patents, covering pioneering and pivotal technology relating to compounds used in DNA sequencing systems to read the genetic code. The applications 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. We are awaiting the final certification of the decision, which we expect to include interest charges that our legal team believes can add a number of millions of dollars to the final award. Furthermore, we are seeking an additional award related to the jury's findings that Life Technologies' sequencing instruments indirectly induced its customers to infringe our patent via the sales of these instruments. The sales of such instruments during that time period, under which the patents were enforceable, has been estimated to be about $770 million. Concerning our actions in the New York cases, a trial date has been set for November 4 for the first of these cases. We have every reason to believe that the Life Technologies' decision would have a positive impact on these cases, since the jury found that a key patent, that is the cornerstone of these cases, was indeed valid. These cases deal not only with our patent estate, but also with matters of breach of contract as well. The defendants here include

[Operator:]

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

[Paul Nouri:]

In the 10-Q, concerning the Clinical Labs side, it's mentioned that payment policy from 1 payer of $0.4 million reduced revenues by $0.4 million, can you talk about exactly what that means?

[David C. Goldberg:]

It's David Goldberg here. Yes, there's actually a couple of different pieces with regards to the reductions in revenues. First and foremost, of course, is Medicare which, I think as you know, had a national 2.95% cut in January of this year. And in April 1, due to sequestration, there was an additional 2% cut, which is still going on. In addition, there was a reduction in the contract prices that were paid by Aetna. And again, this has been -- we've seen this nationally and they've actually reduced their prices as they narrowed their network. We are one of the laboratories that is still in the network. I think, if you follow the industry, you'll know that a number of laboratories were terminated last year and we are still in the network, but they have reduced their reimbursement.

[Paul Nouri:]

And it says revenue was reduced by $0.7 million due to reduced billing days? How many less billing days were there in this period?

[David C. Goldberg:]

Approximately 3, and there was also -- about 3 and 3.5, I believe.

[Paul Nouri:]

And I mean, so the gross margin was down pretty substantially year-over-year. Can we assume that the only real way that, that ticks back up is if sales kind of go back up to where they were last year?

[David C. Goldberg:]

There's a couple of pieces to this, Paul. Number one, you're correct, obviously, this is a high fixed costs business as you know and as such, we are looking to drive revenue. We have put-ins, as Barry indicated, several high-margin tests that have been introduced, actually introduced at the begin of the quarter or in the middle of last quarter. And we hope that those will have a positive impact on margins and we've also been able to get some cost savings with some of our vendors as well, as we've been able to renegotiate some of our vendor contracts. But you're correct, it is a top-line driven business and that is what we are focusing on.

[Barry W. Weiner:]

This is Barry, Paul. Just to reemphasize some of David's comments. From my statements just before, you could see that there is an extensive new portfolio of products that we have been introducing these products, for the most part, are much higher margins, specifically targeting esoteric types of tests. We recognize quite fully that the need to drive revenues in a fixed overhead business is critical. The quarter was unusual in that we had many cross currents, as I mentioned, whether it was the Medicare and sequestration cuts, the realignment of pricing from some of our suppliers and by providers. We believe very strongly and we have history now -- for the month already, into the new quarter, that traction is being obtained by these new tests. We are looking forward to the fourth quarter in seeing a growth in the revenue base of the laboratory, which would put us more in line with our historical revenue run rates. And we also see a return of higher margins as these tests start to kick in. It was unfortunate that because of the storm, we were delayed in almost 3 months in an inspection that would've allowed us to have instituted some of these tests at the beginning of this third quarter, which would have given us higher revenues and really had taken care of some of the bottom line issues that we have reported on. But that being said, we are moving forward aggressively now. The products are all online and been -- and are selling and are performing well. So we are very optimistic where we're moving in our fourth quarter.

[Paul Nouri:]

Do these tests give you a reason to go to doctors where you hadn't been going for or initially, are you going to attempt to penetrate the doctors that are currently your customers with these tests?

[David C. Goldberg:]

Paul, both of the above. Obviously, the value proposition that we make as a Clinical Laboratory is superior service. It is the way that we grow and maintain our business. So we, obviously, will market these tests to our current client base but in addition to that, they are differentiators and they do allow us to market to new clients and so the answer to your question is that we are using that both ways.

[Operator:]

[Operator Instructions] Sir, there appears to be no further questions at this time. I'm sorry, you now have a question from Michael King of Princeton Research.

[Michael King:]

It seems the administrative costs are very high for your company relative to competitors in the same space. If you look at DGX, which is Quest or BRLI, they run like 20% to 25%. Yours run 40% to 45%. Can you explain that?

[Barry W. Weiner:]

What is it you're -- can you be a little more specific on what administrative costs you're referring to?

[Michael King:]

The selling, general and administrative, which is a category under P&L.

[Barry W. Weiner:]

Quest and Labcore are national laboratories with a much larger sales base than Enzo is. I'm really unable to focus specifically on which cost. I mean, we do run a fixed overhead business. There certainly are economies of scale associated with this business. I don't think you can really compare us to one of the national laboratories. I mean, they're a $5 billion, $7 billion operations and we are a $60 million operation. And as a result, there's a whole different financial structure associated with us. I don't know if I'm really able to answer your question adequately, but I'm not at a -- I really don't know how far to take it to get any -- a better response.

[Michael King:]

How about Bio-Reference Laboratories, which is BRLI?

[Andrew R. Crescenzo:]

This is Drew Crescenzo. Again, I'd like to point out that when we're referring to BRLI or Quest, that is just the Clinical Labs segment of the business. Our business includes our Therapeutics group, it includes our Life Sciences group, all of those items, areas have SG&A costs. As we announced early in the fiscal year, we had completed a review of our G&A costs and we were able to identify and implement a $6 million plan to reduce our cost. Through the third quarter, we have approximately accomplished 75% of that cost reduction, mostly in the area of SG&A and R&D. And as Barry Weiner added, we expect the final 25% of that planned cost reduction to occur in the fourth quarter. So we do monitor our SG&A costs and again, these costs are expanded over the entire -- our 3 segments.

[Operator:]

Your next question, coming from the line of Paul Nouri of Noble Equity Funds.

[Paul Nouri:]

You talked a bit about getting into JVs or spinning off JVs and it actually sounds like a pretty good idea to me. Can you expand a little bit more into it as much as possible?

[Barry W. Weiner:]

Yes. Because of the wealth of technological development at Enzo, for a company our size, we have an extraordinarily prolific R&D output. This has been exemplified over the years. I talked about gene labeling, I talked about hybrid capture. I can give you a number of other key technology platforms that have been developed historically and some are subject of many of the litigations that we have. These go to branch DNA, which is used by the Siemens VERSANT line. It runs to certain types of technologies, which are applicable to fluorescence in situ hybridization technologies, which are used by many companies. So we have a historical history of developing very meaningful, contributing platform technologies. Some of which have yet to be developed or have been developed by others. We made a strategic decision, about 18 months to 2 years ago, to internally focus our effort to develop these platforms, which have been very lucrative to many others in the industry. These platforms are applicable in many spaces. As an example, I spoke about AmpiProbe. AmpiProbe is a form of gene amplification technology, which is applicable in many market segments, human health care is one. It is applicable in veterinary and bioprocessing. It has multiple spaces of utility. We have made the decision to build the AmpiProbe system in the human health area because it is an area that we are comfortable within. We have all of the resources. We have the infrastructure that is the combination of our Life Sciences and our Clinical Lab. We have an integrated structure, which gives us an enormous lead in commercialization of these products than start-up companies. So we made the strategic decision to build these units or operations around our technology platforms, having them base off of the infrastructure of Enzo. To accomplish this, though, we need to be able to fund these operations specifically and adequately. Human health is something within our own capacity at the moment and we are investing behind it. We have a full product line in Women's Health coming out in AmpiProbe. We are working on it, we've made submissions to New York State under this platform. So it is far along in the process. What we are looking to do is expand the utility of this platform in other areas that may not be in our core competencies, that meaning

[Paul Nouri:]

And have you hired an investment bank to help you reach out to companies or are you kind of doing it on your own?

[Barry W. Weiner:]

We have been in dialogue with a number of parties to do this. There is an investment bank that is in a dialogue with us. It's too premature to speak to that, but it is one of the potential avenues for which we will explore these products.

[Paul Nouri:]

Okay. And when I look at Enzo Biochem and look at the product side and the clinical side, sometimes I struggle to understand where the synergies are coming from. It seems like, independently, these businesses will be worth more than the market is valuing them at today. Can you talk about, maybe, if the research that produces the esoteric tests for the clinical side is coming from the product site or not? And then, what the value is of having these 2 businesses together?

[Barry W. Weiner:]

Certainly. The structure that Enzo has built over the last 3 to 4 years is an integrated structure. And it is a structure that, we believe, makes perfect sense and aligns with the directions of developing and building and bringing products to market in this diagnostic space. I think it's -- you made a comment that the components have individual values. They do have individual values, there is no question about that. The value of the Clinical Laboratory is a growing value in this market place, as we see the consolidation take place and as we see the need for channels of distribution for the new types of tests that are emerging in the area of predictive companion diagnostics and so forth. What we believe -- and it's not what we believe alone, it's where we see the industry moving, is that the structure that we, today, have in place of this integrated entity that can go from biomarker basic research to platforming, to labeling technologies, to kit manufacturing, to be transferred to a unit that will be translational and taking research-related products that can be channeled through Life Sciences and putting them through as LDTs or lab developed tests into the clinical market and ultimately, FDA-approved products through the Life Sciences division. It's a very unique structure. It is a structure that many companies in our industry are looking to emulate. And I point you just to the transactions that have been executed over the last few years, where you see life sciences companies adding in clinical service entities to help build their channel of distribution. You see a broad variety of acquirers out there which are not just the traditional consolidators, such as Labcore and Quest. I mean, you see a General Electric acquire a Clarient. You see Novartis acquire Genoptix. You see a Nestle acquire a Prometheus. So the issue here is the integrated value of the structure and how it could potentially help to drive and build an expedited process for delivering product to the market and particularly product that is of a new nature. These new molecular systems require different types of approaches. It's one which is paramount. So we believe the integrated value of the operations hold a huge potential and it's a structure that so many in our industry are trying to build today. And we see that on an everyday basis. As we are building our AmpiProbe technology, we see the value of having this Clinical Labs structure that offers us reach to key opinion leaders, reach to thousands of physicians on a daily basis and whom we have personal intimate contact with. The ability to access information, to provide informatics that are driving the values and the directions of our development cycle within Life Sciences. So all of this fits together. I mean, we have, over the last 2 years, built a very streamlined, very focused machine in both Life Sciences and Clinical Labs services, which we think is synergistic and will drive, ultimately, to a much higher value for our company as the products become developed. And we are well underway to achieving that.

[Paul Nouri:]

Okay. And then, a couple of just technical questions concerning the lab. The provision for uncollectible accounts went down, which was nice. Is that sustainable?

[Andrew R. Crescenzo:]

The results we reported in that area is a result of stronger collection efforts. We had some internal changes, which we've put new policies and procedures through and we will look for that to be sustaining.

[Paul Nouri:]

Okay. Great. And then, can you talk about your effort to go into the Pennsylvania market, whether that is successful and if it took -- if you had to take on additional fixed overhead to take that business on or if you just kind of added -- putting a couple of cars out there everyday?

[David C. Goldberg:]

Paul, the efforts in Pennsylvania, they've been a small amount of fixed overhead that we had to add. But for the most part, it was a logical geographic expansion since we now cover, I guess, the entire state of New Jersey. So going over to the Philadelphia area was not a huge effort for us. And it has been paying some dividends for us.

[Paul Nouri:]

And I guess, last question. Are there any commercial payors that still had to come or are still going to come and knock down price? Or has a lot of that been baked in?

[David C. Goldberg:]

Paul, it's hard to say. At this point, none that are on the horizon. But again, as you know, this is a very dynamic business and so it's hard to predict the future there. But we don't see anything in the immediate future here.

[Paul Nouri:]

I guess -- okay, this will be my last. Do you expect any kind of net benefit from the Affordable Care Act, from the additional patients coming? I mean, a lot of them, I guess, will be on Medicaid initially, but maybe you can speak into that..?

[David C. Goldberg:]

It's hard to say. I mean, certainly, there will be more people in the system. They, hopefully, will be covered by insurance. I mean, it will be Medicaid. Without knowing specifically what the actual reimbursements will be based upon how these health care changes are formed, it's hard to say. But we certainly do think -- as an industry, we do believe that there will be some additional volume. But with any of these programs, the proof will obviously be in the pudding.

[Operator:]

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

[Barry W. Weiner:]

Thank you. We appreciate your interest and participation. We do believe the measures we have taken, both operationally and financially, will allow us to proceed on an aggressive pathway. We are enthusiastic about the future. And we look forward to discussing our fourth quarter results and full-year in the fall. Have a good day, and thank you.

[Operator:]

A replay of this broadcast will be available until Tuesday, June 25, at 12 midnight. You may access the replay by dialing 1 [phone]. The pin number is 91660138. 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.