Enzo Biochem Inc (ENZ) 2012 Q1 法說會逐字稿

Good morning and welcome to the Enzo Biochem, Inc. first quarter 2012 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, the risk factors in 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 were 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 open for questions and comments following the presentation. I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours,

Good morning and welcome. Thank you for joining us on our earnings call. I'm joined today by members of our executive team which include David Goldberg, Andrew Crescenzo, and Andrew Whiteley. Last night, we distributed a press release detailing the operating results for our fiscal 2012 first quarter, and I trust you've had an opportunity to review them. Following my remarks, Drew will discuss our financial results in detail, and then we will open the floor for questions.

Let me begin with some of the quarter's highlights. First, total Company revenues increased year-over-year despite a challenging environment in the life sciences markets. We were pleased to see Enzo Clinical Labs revenues increase 15% due to greater market penetration as a result of our expanded sales and marketing programs. Also, Optiquel, our lead therapeutic candidate, which is the subject of clinical studies at the National Eye Institute of the NIH, continues to expand its enrollment. Enzo Life Sciences continued its organizational consolidation, streamlining operations, making inroads into the non-academic segments and expanding its senior sales and marketing team. And greater integration between Life Sciences and Clinical Labs yielding important synergies including development of 2 new important molecular diagnostic platforms, which I will detail in a few minutes.

Looking at the global life sciences market, we saw in the life sciences industry, softness in the academic market segment, arising from reduced government funding grants and general tightness in the global economy. Our Life Sciences revenues were negatively impacted in two specific areas. One, a reduction in sales volume in products that we distribute for other manufacturers, as well as those that we manufacture and are resold by other life sciences companies. The second point to impact our revenues was a drop in royalty revenue due to a substantial decline in reported sales from a key licensor, which is believed to be due to timing issues of certain orders and expect it should be smoothed out over the coming quarters. Importantly, our cash utilization for the quarter was only about $500,000 more than the prior years, even though we have expanded our marketing and sales efforts company-wide and have substantially bolstered the management team at Life Sciences.

Enzo has believed for a long time that the healthcare industry as a whole has been moving towards an integrated structure, whereby the clinical research and pharmaceutical industries are beginning to blend together under one umbrella. A couple of weeks ago, I participated in a panel with other healthcare and banking executives where this very notion was at the center of much of the program. The consensus was that more and more of the ever tightening healthcare budgets will find their way towards diagnostics. Especially those diagnostics that can affect expenses and possible life-altering treatment decisions. Moreover, instead of diagnostics being developed after pharmaceutical products are approved and in general use, they will become more and more integrally linked during the drug development process. Since the costs associated with drug failures are among the biggest component of healthcare costs, be they early-stage drugs that fail in preclinical stage or deaths associated with adverse effects on approved treatments, the industry as a whole is beginning to hone in on the diagnostics segment as a way to reduce such issues. Much of the estimated $1 billion plus price tag of taking a taking a drug from research stage to the market lies in the cost of the failures.

One way the healthcare industry is addressing the issue of failures is the increased emphasis on personalized medicine. In a nutshell, the idea of the same treatment regimen being used for all individuals that might be afflicted with a particular disease is going by the wayside. Instead, drug developers are looking towards using biomarkers to identify those individuals that might benefit from more specific treatment. The recent co-approval of Pfizer's Xalkori and Abbott's related companion diagnostic highlights this fact. More and more of the healthcare dollar is heading towards diagnostics, in particular molecular diagnostics, and we continue to improve Enzo's core capabilities in this area.

As we've stated before, Management's goal has been to continue to make Enzo more responsive to industry trends, and to drive a more focused developmental effort towards key specific products and technologies that will make a difference in medical knowledge decision-making and treatment. With that overview I'm going to turn the call over to Drew to comment on our operating results for the quarter and then I will return to make some specific comments to our operations. Drew?

Thank you, Barry, good morning. I would like to take this opportunity to discuss last night's earnings announcement for our fiscal first quarter and expand on Barry's comments. Our revenues rose $100,000 over the year ago period to a fiscal first-quarter record of $25.7 million. This gain is reflective of a 15% growth in lab service revenue, offset by a 5% decline in product revenue, and a 40% decline in royalty and licensing fee income. As Barry mentioned, product revenues were negatively affected by market softness in academia, and for our distributor products. Although sales from our core products remained constant, the decline in royalties primarily relate to lower reported sales from a key licensor.

Our net loss for the quarter was $4.4 million or $0.12 per diluted share, as compared to a net loss of $1 million or $0.03 per diluted share in the prior year period. EBITDA, being earnings loss before interest, taxes, depreciation and amortization which is a non-GAAP disclosure, was a negative $3.1 million. Despite the increased loss, our cash utilized in operations increased by only $500,000 over the prior year period. We continue to not record any tax benefits for our pretax losses.

Turning to our consolidated costs for the quarter, overall gross margin was $11.9 million. Research and development costs were down 8% from the year ago period, due to lower payroll and patent-related costs at Enzo Life Sciences. And selling, general and administrative expenses increased 12% to $12.4 million, primarily due to greater sales volume-related costs at the lab and greater sales and marketing costs and higher costs from new senior management at Enzo Life Sciences. Legal costs increased by $200,000 to $900,000 for the quarter, reflective of higher costs for general and legal matters, including litigation. Our provision for uncollectible accounts primarily related to Enzo Clinical Labs increased $200,000 due to the additional provision required for a lower collection rate in the current period, which is partially affected by payer mix. As a percentage of lab revenues, the provision for uncollectible accounts was comparable to the prior year period.

Highlighting our first quarter segment results -- again, clinical lab revenues grew by 15% or $1.8 million to $14.2 million, and this was largely due to additional service volume attributed to greater market penetration. Gross profit at the labs for the quarter increased 12% to $5.4 million although higher costs, which are not expected to recur, impacted the gross profit percent by 100 basis points. Operating expenses, which are directly tied to revenue gains, increased $500,000, but as a percentage of revenues, declined to 44% from 46% from the prior year period.

At Enzo Life Sciences, as previously mentioned, product revenues declined $500,000 to $9.7 million for the quarter, due largely to the market softness in academia and certain distributed products. Royalty and licensing fee income declined $1.9 million from $3.1 million a year ago. Gross profit totaled $6.4 million compared to $8.7 million in the corresponding year-ago period with the majority of the decline attributed to lower royalty and licensing fee income. Total operating expenses at Enzo Life Sciences increased $1.1 million, primarily due to higher sales and marketing costs and the additional of new senior level personnel. The segment reported a slight operating loss for the period.

With respect for our liquidity and capital resources, our finances remain strong. With cash and cash equivalents and short-term investments in excess of $21 million and working capital of approximately $30 million. And our Company today continues to have no long term debt. Barry?

Thank you, Drew. I'd like to take this opportunity to expand on certain aspects of our operations beginning with Enzo Clinical Labs. As you have heard, Enzo Clinical Labs has had another strong performance this quarter. What we are seeing is the continuing realization of the strategic program that began more than two years ago. Over this period of time, we implemented both quality improvement measures as well as substantial cost efficiencies. Specifically we improved and updated our physician connectivity capabilities, bolstered our marketing efforts, expanded our in-house testing capability and menu and perhaps most importantly, stepped up collaboration efforts with Enzo Life Sciences to further develop the key platforms and technologies that we have within our own organizational structure. This has resulted in improved client retention, a much higher level of productivity and the development of an enhanced high value molecular test capability, which have all contributed to the topline growth, which is well above industry average.

We are awaiting final regulatory approval for ColonSentry, for risk stratification test for colon cancer developed by our partner, GeneNews. This assay measures the expression of a specific panel of genes, interpretation of the expression of this 17 panel may provide physicians with the ability to identify those patients that may have an increased risk for developing colorectal cancer. While not replacing colonoscopy, this blood test could be used by physicians to reinforce compliance of their patients in the need for colonoscopy screening. As we stated in October, we are awaiting the final approval from the state so that we can begin to market this exciting test in our service area.

Just to provide you with a sense of the potential market we are looking at here, it is estimated by the Centers for Disease Control that about 47 out of every 100,000 people develop or die from colorectal cancer in New York; the second highest occurrence rate in the United States. Moreover, there are about 40-plus million Americans over 50 who currently do not comply with the recommendations for colon cancer and rectal screening. This may be for a variety of reasons raising from fear of a colonoscopy just to general apathy. In any case this is a tremendous untapped market. We believe that by getting more individuals into the healthcare system with regular examinations, the benefits both medically and financially could be material.

Additionally, during this first quarter we moved 2 additional Lab-developed tests further towards what we hope is potential approval by New York State. The first is our version of OncoTect, an assay developed with our partner IncellDx, which can allow us to identify which patients are infected with high-risk human papilloma virus that might already have the virus integrated into their cells which potentially increases the likelihood that those individuals are at higher risk for progressing toward cervical cancer. In this way, physicians can closely monitor those patients and intervene with more clarity.

The other test that we are awaiting regulatory feedback from is [Hunter Heart], a cardiac risk assessment profile that utilizes a proprietary algorithm that includes the results of 3 distinct panels of blood tests. These include basic metabolic studies, the National Cholesterol Education Project adult treatment panel and advanced risk markers such as lipoprotein(a), Factor V Leiden, and lipoprotein associated with phospholipase. The results can be utilized by cardiologists and family practitioners to more closely monitor those individuals fitting into a high-risk category of a cardiac event and can help in the recommendation of appropriate treatment regimens to bring the risk down to a more acceptable level.

Turning to Enzo Life Sciences, many life science tools companies have recently reported that they have seen substantial softness in the academic research product market segment and we have experienced this as well. The majority of the decline in our product revenue this quarter was the result of lower sales volumes to academic-based customers. To marginalize this trend, we continue to refocus the division's efforts towards more higher value products and assay systems and shift our product focus and marketing towards pharmaceutical and healthcare companies. The efforts of this shift should become apparent in the next few quarters.

As I indicated earlier, these customers have increasing needs for tools that can comprehensively evaluate drug candidates through secondary screening. By assessing potential adverse toxological effects prior to making decisions on new chemical entities that would enter the clinic, they could potentially improve the success rate of the very expensive drug development process. To address this market opportunity, we continue to increase our product menu in the area of life cell analysis and have begun to add a number of high value drug screening libraries to the Enzo Life Sciences catalog which have been well received by our pharmaceutical clientele. We have also entered the market for screening of therapeutic proteins, with new products that measure the byproducts of large-scale production of therapeutic proteins and antibodies -- in particular, protein aggregates. Screening for the ideal conditions for protein manufacture that minimizes formation of aggregates is a critical step in developing effective biological therapeutics.

The increased synergies that we are seeing among our divisions have manifested themselves in key developments, which we believe may have significant long-term revenue potential, and that leads me to a review of our two lead molecular diagnostic platforms. The first is Ampi-Probe, our internally designed proprietary technology, which can enable one to perform real-time PCR-type amplification and detection in a better, faster and more economical way. Enzo's proprietary platform has been designed with interchangeable components formatted for open laboratory systems. Initially generated results have shown 100% concordance with other systems with our platform demonstrating substantially better sensitivity. This is a critical advantage as we begin to formulate our commercial strategy. Improved sensitivity can convey with it several economic and service-level improvements that conventional PCR cannot match.

First, Enzo's platform requires less sample volume. This in turn lowers the amount of costly reagents needed to run the tests that are ordered. Thereby reducing costs for the clinical laboratory. Second, increased sensitivity of Enzo's platform reduces the amount of patient sample that is needed. This can benefit both the physician and patient by reducing the need for a second visit just to obtain additional specimens to run follow-up tests. In addition, the reduced volume requirement may allow the lab to run multiple different tests off the same specimen, thereby potentially reducing what is probably the most expensive component of the assays, sample processing. In some assays, sample processing costs alone can be more than 50% of the entire cost. And so a reduced sample volume may allow labs to spread this cost over multiple assays, thereby reducing the marginal costs for each test.

Our technology, which employs fewer steps and small reaction volumes can enable the development of highly desirable molecular diagnostic assays that can fill a growing market need. Currently, it is estimated that the market for assays, such as viral loads that are now run by real-time amplification detection methodology exceed about $2 billion. Thus you can certainly understand our desire to move to this commercialization in an expeditious manner. Our technical teams are currently running the last sets of internal correlative studies, which we hope will lead to the filing of our first LDT submission by quarter's and. Meanwhile, we have submitted our first abstract detailing our technology, and it's uses as --through a prestigious clinical organization, we will release details as soon as it is accepted.

In addition, we have also advanced the development of our next-generation branched DNA platform. Enzo scientists have been able to apply this technology to the visualization of as little as a single copy of virus that has been actually integrated into a cell. We have applied our bDNA platform to enhance the visualization of foreign DNA in patients' chromosomes and believe that it may be useful in the development of a battery of more sensitive tests that are looking for the presence of small amounts of genetic material. Examples of these include a number of assays used to identify specific types of cancer, such as breast and bladder. Additionally, this can be used as an even more sensitive predictor of the risk of progression to cervical cancer.

As Enzo continues to increase its human papilloma virus testing options, both with our partners as well as with internally generated products, our scientists have also used our next-generation bDNA technology to develop an assay that may allow a pathologist to actually visualize the presence of HPV DNA inside of a patient's cell's nucleus. Thereby potentially providing more concrete evidence of viral integration while allowing the pathologist to simultaneously view cellular morphology. By being able to identify in which patients the virus has integrated, physicians can target therapy and treatment to the correct subpopulation of infected individuals. In this way, Enzo may be able to help to more efficiently treat a disease that has become increasingly more serious, especially in the areas of cervical cancer -- in areas other than cervical cancer, such as head and neck and anal cancers.

There is yet another set of opportunities that may result from these platforms. While the ultimate goal of these technology platforms is to produce clinical assays, and these can take the form of FDA cleared assays in the United States, CE-IVD marked products for Europe and/or GMP-manufactured reagents that laboratories themselves can validate and offer as Lab-developed tests, we believe that products developed from these platforms may be introduced as research products by our Life Sciences team, which has a strong European presence and is currently calling on some of these same customers. These 2 exciting platforms are really the culmination of a number of years of development work.

As you may know, we have developed technologies in and around the labeling and detection of DNA and RNA for most of our history. About five years ago or so, we focused on these two technologies and began to work on ways to make them potentially more commercially viable. We are fortunate to have our research and development group co-located with our clinical lab operation which has accelerated this program, and we look forward to updating you on our progress.

Before concluding, I would like to reiterate that our clinical trial for Optiquel, our oral preparation for the treatment of chronic noninfectious uveitis that is being conducted at the NIH under a CRADA continues to enroll and treat patients. We hope to report results in early 2013. As we've stated before, the NIH bears a major portion of the costs here and so the financial risk to Enzo is minimal.

Before I turn the call over to Q&A, let me conclude with a final word on our strategic direction. Enzo's business model, which offers a hedged approach that mitigates risk but also develops innovative market offerings, is well-positioned to address the changing face of healthcare today. Going forward, healthcare will require solutions that solve practical problems. These will include diagnostics that offer prognostic insights, economically driven assessment tools that motivate clinical decision making, and therefore improve the efficiency and effectiveness of healthcare delivery. The demands placed on the healthcare system will continue to increase. Our integrated structure realignment is crucial and critical to our success in this area. We are excited and energized at our opportunities and are strongly motivated to move them towards commercialization. On that note, I would like to turn the call over for questions.

(Operator Instructions) Thank you. Sam Bergman, Bayberry Asset Management.

A couple questions. In regard to the new platform that you're talking about, the Ampi-Probe, going forward, what's the timeframe for that to get commercialization?

We are planning to submit our first product for New York state approval by the end of this quarter, which will be the end of January. Depending on the timeframe for approval, which can be anywhere from three to six or seven months, we hope to have a product that will be able to be marketed sometime after the end of the summer. And coinciding with that, we have in development a series of follow-on products, we are developing this into a format for paneling, meaning we will be offering multiple analytes for our end users to apply. So this will be a continuing process, but it is something that we are moving aggressively on. First product as I said should be going in by the end of January, publications have been submitted, and we believe that the viability for this within our market is quite high.

In terms of short-term catalysts, which one of what was mentioned would be considered short-term catalysts to grow revenues for the Company?

We have a multiple series of catalysts. Number 1, I mentioned a number of these new molecular diagnostic tests which are pending approval. Upon approval, any one of those will be immediately salable and in some cases, we have already begun the pre-marketing and establishment of the channels to get those products into the market. As I mentioned to you, the ColonSentry product is awaiting approval, and upon approval we will be able to get that into the market within probably 24 hours. Our system is already set up to address that.

The other products that we have will have comparable speed of entry into the market and they will generate volume for us. So that I think is a very immediate driver of revenue volume. Also within Life Sciences, we have a number of products that are being directed towards markets as I suggested in the pharmaceutical and biotechnology areas, which are in a format for being introduced. So those will also increase the revenue flow through the division. So that, I think on an immediate level, that's the first.

The second catalysts may come via partnerships with other companies in which our technologies and product will be utilized to drive value and to generate volume for us. So we believe that there is a second component here, which I can't get into too much detail, but we'll be able to drive value through different relationships that are in dialogue at the moment. Those would be the two key issues that I would focus on.

So in your opinion, the drop off in life sciences from the government funded side, could easily be made up by the products that are coming out? Is that your opinion?

I'm going to let Andrew Whiteley address that.

Okay.

Yes, absolutely. As noted in our discussion, we definitely saw some softness in the academic marketplaces after the events in August. We are focusing in on these added value products, the products that we develop and have grown ourselves into the high-volume marketplace both in the pharmaceutical and the clinical research sectors. So this is definitely a way that we will recover and build a business from here.

I would like to comment that the drop off seen in the academic markets is not unique to us. If anything, if you have been following the trends in the life sciences sector, many companies have reported even more significant drop-off in volume this past quarter as a result of this undetermined environment of grant funding, via the NIH and other funding. There has also been a contraction I believe, or a slowing down of willingness to invest in technology, capital equipment, and reagent usage in this last quarter of the year not knowing what new budgets will provide as we come forward into the first of the year. It is our hope that we will see some rebound in that. I noticed from some of our licensors and distributors where we have seen this fall off far more severe than what we experienced, there is some commentary of a rebound taking place in some of these areas. So this is a macroeconomic trend which is impacting the industry as a whole. It's important to note that even though we saw softness in our distributor market, our OEM markets, our core products were stable in their volume. And I think that is an important note to make as we look towards building more of those core products to fill in for many of the distributed products that represented the falloff in volume.

I still prefer you be the exception to the rule even though the industry is like that. But I know it can't be avoided. My last question is regarding the increase in SG&A. I know you've been pretty vigilant on watching the spend or the creep on the spend, but there was a significant amount of increase this quarter, I think it was $1.3 million. Why such a large increase after restructuring and being concerned about the overhead costs?

That consisted of a number of components. Number 1, what you're seeing is some of the costs of the consolidation that took place in Enzo Life Sciences. This involved the closing of certain facilities, both domestically and internationally, of which there was an expense attributed to that we have yet to see the gain, which will come forward in future quarters. The second was the increase in headcount, not an increase in headcount but a replacement in headcount at our Life Sciences division where we brought in a number of senior executives in this realignment of talent to direct the new directions of this entity, of this organization. And so we have -- we had to make an investment in human capital and we have done that because we believe that the future direction is strong and required a different way of addressing and thinking about this marketplace. The third area, was an increase in the legal activities of the Company, and that is a timing issue and one which we felt was necessary.

Sam, it's David Goldberg here. There's actually one other reason why SG&A went up this quarter and that's because of the increase in sales at Enzo Clinical Labs. We've increased our sales activity there, we've invested more in the sales and marketing programs, and you can see the results in terms of the topline growth.

Okay. Thank you very much.

Just as a footnote, Sam. You can be assured that our vigilance in looking at the, as you called it, the creep of expenses is extremely high. We are very tuned in, and you can be certain as we look at the potential revenue implications in Life Sciences, we are certainly looking at the cost structures throughout the entire corporation to maintain a sound financial bearing here.

Thank you very much.

Paul Nouri, Noble Equity Fund.

Good morning, Paul?

Margin in a while, and came down a few hundred basis points this quarter. Can you talk about the reasoning for that and if you can get back to that 42% level?

I'm sorry, could you please repeat the question? We lost the first half of it.

Okay. In the fourth quarter of last year, you had a 42% gross margin for the Clinical Lab, which was the best gross margin for the Clinical Lab in a long time. I was just wondering if you think you can get back to 42% this year?

Hi, Paul, David Goldberg again. I believe we can. In the first quarter this year we had, as Drew mentioned, there were a couple of costs associated with one time -- there were one time issues, which we believe have already been resolved. They were some movement of some laboratory tests that had been previously sent to outside laboratories. We've now, with some increased capacity and some of the investment that Barry indicated, have now moved them in-house. So we do believe that the gross margins will improve as we go forward.

I would just like to add regarding our margins, as Barry indicated, we're also very carefully looking at our cost of products and delivery of our Clinical Lab service revenues, just as we are looking at our SG&A costs to make sure there's no creep up on a forward basis.

And the 10-Q indicated that the Mayflower lawsuit is settled or close to settled? Is that correct?

Yes, it's been settled.

So should the legal costs come down a little bit in the next few quarters? I guess there's still other lawsuits going on, right?

I mean, it's hard to say, but that certainly will not be a cost in the next ensuing quarters.

Okay. Thanks for taking the questions.

Thank you. If there are no other questions, I'd like to thank you again for joining us, and we look forward to reporting you on our second quarter in March. Thank you.

Thank you. A replay of this broadcast will be available until Tuesday, December 27 at 12 midnight. You may access this replay by dialing 1-800-585-8367. The pin number is 34311540. 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.