Enzo Biochem, Inc.
Q4 2013 Earnings Call Transcript

Published: 16 Oct 2013

[Operator:]

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

[Barry W. Weiner:]

Good morning, and thank you for joining us. Now with me this morning are several members of our management team

[Operator:]

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

[Jack Wallace:]

A couple of questions for you here. First about the lab. It looks like you're starting to see a bit of a bounce back there after a rough couple of quarters. Gross margin, I guess, hadn't picked up as much as I was thinking it would be. I was wondering if there was maybe a less of an impact from the mix for some of the esoteric tests in the quarter, and if you see the gross margin in subsequent quarters -- seeing more of an impact from those newly announced -- excuse me, newly brought-to-market esoteric tests?

[Barry W. Weiner:]

That is correct. We were anticipating a greater tick-up from our gross margin. Much of it was a result of the delay of getting some of these new tests to market. They were anticipated very early on in the calendar year. They were delayed because of the storm and the delayed schedule of inspections and approval processes. As a result, many of them have started to come online in late spring. We are seeing them gaining traction, and we anticipate margin improvement into the future quarters now.

[Jack Wallace:]

And then, I guess, looking back to the last half of 2012, the lab was performing as well as it had been from a revenue and gross margin standpoint in recent memory. I guess, at what point do you see the lab getting back to those levels?

[Barry W. Weiner:]

We believe within the next 2 quarters you will start to see the lab return to its historical levels of performance.

[Jack Wallace:]

And then moving over to the Life Sciences division. A little bit lower sequential revenue. Was this more of a macro impact or was this also, I guess, more, I guess, continuation of remittance from the lower margin, I guess, products from the mix and focusing months with a higher margin -- products that were made in-house?

[Barry W. Weiner:]

It's a combination of the 2. As you may be aware, the macro environment in the Life Sciences industry has been very constrained over the past year due to many forces. There has been a reduction in the building of grants, which has moved from about 4 out of 8 -- 7, 8 to about 2 of 8 grants being funded recently. We've seen under this sequestration dramatic cuts in funding go to the national agencies, as well as to academia. So that, without question, has created a constriction in that particular environment. Coupled with that, we did institute a programmed reduction of products in the Life Sciences category. We were, for a company our size, marketing many products that were more low margin and not necessarily contributing to the bottom line of the company. We have instituted a programmed reduction in product SKUs. And as you can see, and I believe, as you will see in the upcoming quarters, an increase in the performance of the Life Sciences division. As I mentioned, the division is now nicely cash flow positive. We will try to move this into nice profitability over the next year, and I think all these measures will start to pay off for us.

[Jack Wallace:]

Two more questions. Sorry to bounce back to the lab here. I just wondered if you could help us quantify the potential impact of the CMS recap proposal. Physician fee schedule, at least from the aggregate, expected to be a 23% decline, at least on the initial proposal, and many of the new esoteric tests coming to the lab, I believe would fall under the physician fee schedules. Hopefully you can kind of give us some comments and some color on that.

[Barry W. Weiner:]

I'm going to have to ask David Goldberg to respond to that.

[David C. Goldberg:]

Most of what I've seen on the proposed cuts are really more heavily weighted towards the anatomic pathology side. So obviously, there'd be some impact to all labs, but it appears, and again, still everything is proposed. I don't know if you realized, but there have been some suits filed from some of the advocacy agencies, including the CAP and others. So we aren't 100% sure of what's going to happen as usual when you're dealing with Washington, of course. But I don't think it'll -- it shouldn't be major to our laboratory because we have a fairly broad offering of tests, but we are following it very, very closely.

[Jack Wallace:]

And then last question, Barry. Maybe -- is there an update on the timeline for the receipt of the cash, one, from the Life Tech lawsuit, maybe sometime in the next 6 months or so?

[Barry W. Weiner:]

We are -- this past quarter, as I mentioned in my comments, the judge reaffirmed the jury verdict. And I think very strongly advocated the course of the trial going forward -- as it was presented, which is very good for us in case of an appeal. We are currently awaiting the decision on the award of pretrial interest charges, which is an issue of law. When that is issued, then parties will have the ability to appeal. I have been told, if it goes that route, then it could be about a 6-month process or so. We are evaluating our options right now. We feel we're in a very good position in that case, and we're actually looking forward to the cases that are now coming to trial next month involving multiple parties, which we think will also be catalytical for us as a company.

[Operator:]

[Operator Instructions] At this time, there appear to be no further questions. I will now return the call back to Mr. Weiner for any closing remarks.

[Barry W. Weiner:]

Thank you for your interest and participation. We look forward to discussing our fiscal 2014 results with you in December. Have a good day. Thank you.

[Operator:]

A replay of this broadcast will be available until Wednesday, October 30, at 12