Enzo Biochem Inc (ENZ) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Enzo Biochem Incorporated third 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, 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, 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. 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.

Thank you. Good morning and welcome. Thank you for joining us on our quarterly earnings call. I'm joined today by members of our senior executive team including David Goldberg, Drew Crescenzo, and Andrew Whiteley.

Last night we distributed a press release detailing the operating results for our fiscal 2012 third quarter. And, I hope you had an opportunity to review them. Following my remarks, Drew will discuss our financial results in detail for both the quarter and the nine months. And then, I will conclude with a brief overview on our strategy going forward. At the end of my remarks, we will open the floor to questions.

Let me begin with a brief overview of the quarter. During the third fiscal quarter, Enzo revenues rose to about $26 million led by a greater than 10% topline increase at Enzo Clinical Labs. Additionally, we had indicated before, royalty and licensing income has normalized, and was actually up by a little under 5% over last year. Gross profit was more or less unchanged at a little over $12 million. And, overall, owing to some higher ramp-up in sales related expenses at the laboratory, coupled with higher legal costs, our net loss for the quarter was about $3.4 million or $0.09 per share. As I mentioned, Drew will walk through the numbers more specifically in just a few minutes.

What I'd like to share with you are our plans to maintain topline growth, to improve cash flow, to achieve profitability and build value. This has been a challenging environment not only for Enzo but for virtually all others in the healthcare field. The sluggish economy has had its impact on individual expenditures for healthcare. And, reimbursement themselves by Medicare and other insurers have impacted how healthcare is being practiced. In addition, grants by federal agencies for medical research and expenditures by the National Institutes of Health specifically have all been trimmed back with notable reductions in academia. This is not only a US phenomenon, but also one that we see worldwide.

Our approach to this challenge has involved several things. In the Life Sciences area, we have been vigorously streamlining the business with more to come. We are in the process of consolidating facilities for economic benefit. Thus, importantly concentrating our research and manufacturing activities in fewer locations. We are reviewing our extensive product offerings with the intent to streamlining manufacturing and logistics to drive operational efficiencies. Additionally, this past quarter we announced that we have consummated a new agreement with Cosmo Bio, which we will hope not only increase our presence in the Japanese market but also provide us with unique product offerings to complement our core product groupings.

We believe that arrangements like this will help provide Enzo with broader opportunities to serve the pharmaceutical industry as their business shifts to more personalized medicine. The combination of our life sciences and clinical lab capabilities come into play here in an important way. And, with the new marketing team we've installed in Life Sciences, we hope to see beneficial results.

Beyond that, we are excited about the potential market opportunities for our AmpiProbe realtime target amplification technology platform. Along with new biomarker tests we are now offering including ColonSentry. I will discuss this aspect of our activities a little bit later.

Our goal is to continue to make Enzo more responsive to industry trends, which clearly are moving towards molecular diagnostics and away from basic academic-based research. Also, we aim to drive a more focused developmental effort towards key specific products and technologies that will make a difference in medical knowledge, decision-making, and ultimately, treatment. But, what is equally important is that while we remain aggressively focused on developing products that can meet today's demands in healthcare, we are also determined to bring our expenses down and improve our financial results. I'm going to turn this over to Drew, and then I will come back for comments at his conclusion. Drew?

Thank you, Barry, and good morning. I want to take this opportunity to discuss last night's earnings announcement for our fiscal third quarter, and expand on Barry's comments regarding our results. Our revenues rose $200,000, or about 1%, over the year ago period to $26 million. This gain is reflective of 10% organic growth in clinical lab revenues, a 5% increase in royalties and licensing fee income, and a 12% decline in product revenues at Life Sciences.

Product revenues continued to be negatively affected by softness in academia market and for certain of our distributed products. The net loss for the quarter grew by $1.3 million, or $0.04 per diluted share, to $3.4 million, or $0.09 loss per diluted share over the prior year. Our EBITDA loss, a non-GAAP measure, was $2.4 million, as compared to a $900,000 EBITDA loss in the year ago period.

With respect to our liquidity and capital resources, our cash and cash equivalents and short-term investments totaled $15.2 million at April 30, 2012. Cash declined approximately $8.9 million from July 31, 2011. Which included cash used for a one-time earn out payment related to a fiscal 2008 acquisition in the amount of $1.1 million and $1 million in payments for capital expenditures. Important to note, our cash used in operations was $6.4 million for the nine months ended April 30. Working capital amounted, at April 30, to $24.5 million, or a 2.5 to 1 current ratio. The Company continues to have no long-term debt.

Turning to our consolidated costs for the quarter. Overall gross margin was $12.1 million, essentially unchanged from last year, and $500,000 higher sequentially, attributed to higher lab volume offset by higher testing costs and also lower cost of goods at Life Sciences. Research and development costs were down $500,000, or 23% from a year ago, due to lower payroll and patent related costs at Life Sciences, offset by increase in molecular and esoteric development at Clinical Labs.

Selling, General, & Administrative Expenses were up 9% to $11.9 million. Mainly due to higher selling costs incurred related to increased sales volume related costs at the lab, and greater sales and marketing costs, and higher costs from new senior personnel added at Life Sciences in the latter half of fiscal 2011. Legal costs increased by $250,000, or 36%, to $900,000, reflecting higher costs for litigation matters pertaining to pretrial costs. Our provision for uncollectible accounts, primarily related to Clinical Labs, increased by about $200,000, primarily due to the higher revenue volume. As a percentage of lab revenues, the provision for uncollectible accounts was relatively the same with the prior year at 7.6%.

Turning now to highlights of the third quarter by segment. Spurred by organic growth that outdistance the industry average, reflecting the results of a broader, highly seasoned staff, Clinical Labs posted a 10%, or $1.4 million revenue gain year-over-year, and 8% sequentially. The launch of ColonSentry in March, which Barry will discuss further in a few minutes, was too late in the quarter to materially impact fiscal third-quarter results, but is expected to make a more meaningful contribution throughout the year. The operating loss at the lab sequentially declined by approximately $400,000 to $600,000 from $1 million. In the year ago period, the operating loss was $100,000. During the current period the increased volume related -- the increased volume resulted in higher expenses including testing costs, commissions, and other sales and marketing. As previously mentioned, the provision for uncollectible accounts was relatively the same.

At Life Sciences, the program to emphasize fewer but higher-margin products is ongoing. We continue to see a decline in our distributed products for certain customer types and decline in resale product due to market softness in the academia segment. Our focus has shifted intensively on the Pharma industry where there are growth opportunities in specialized and personalized medicine.

Revenues in the 2012 third quarter, including royalties, lagged sequentially and year-over-year were $10.7 million versus $10.8 million and $12 million, respectively. Royalties and licensing fee income improved 5% to $1.1 million. Gross margin was 15% lower year-over-year due to the impact from lower revenues offset by operating improvements implemented. The impact on gross profit as a percentage of revenues was unchanged sequentially and lower by only 100 basis points from the year ago period. These comparable results are due to more efficient operations. We expect the benefit of these and other steps to be taken to result in margin improvements in the future.

Other operating costs at Life Sciences declined by $600,000, year-over-year, mostly due to the lower planned R&D along with better management of SG&A. Operating income was $600,000 at Life Sciences compared to $700,000 in the preceding quarter and $900,000 a year ago. Barry?

Thank you, Drew. I'd like to expand on my earlier comments with several items that underscored the continuing strategic shift that is taking place at Enzo. Over the past few years we have continued the implementation of both stepped-up marketing and sales efforts in addition to instituting continued quality improvement measures. Importantly, increasingly we have been affecting a greater collaboration between the clinical laboratory and Enzo Life Sciences to further the development of key platforms and technologies.

On the new product front, at the end of last quarter, after receiving final approval from the New York State Department of Health, we began marketing the ColonSentry risk stratification test for colorectal cancer. This assay measures the expression of specific panel of seven genes. And, interpretation of the expression of this panel may help to provide physicians with the ability to identify those patients that may have an increased risk for having colorectal cancer at that particular point in time. As we've previously noted, this assay is a simple blood test that requires no special preparation on behalf of the patient. It requires no special handling on behalf of the physician or their practice. And, this is designed to help identify best segment of the population that may be at highest risk. Once identified, it is hoped that the individual will be encouraged to have follow-up procedures that may include a colonoscopy.

Our early results have been quite encouraging. Because of the importance of the assay and the complexities surrounding its performance, we initially began marketing ColonSentry to our current physician base in the New York area on a limited basis. However, we are ramping the test up as we increase our throughput and we expect by the end of the current quarter it will be available to all physicians in the Enzo service area.

We also have moved two additional lab developed tests for the further towards what we hope is eventual approval by New York State. The first is our version of OncoTect, an assay that can allow the identification of a patient infected with high-risk human papillomavirus and who might already have the virus integrated into their cells. This would make possible the determination of whether the patient potentially may have an increased likelihood of higher -- of a higher risk for progressing toward cervical cancer. It would enable physicians to closely monitor and follow these individuals.

Also in the new test pipeline, for which we are awaiting final regulatory feedback, is Hunter Heart. This is a cardiac risk assessment profile utilizing a proprietary algorithm that includes the results of three distinct panels of blood tests. These include basic metabolic studies, the National Cholesterol Education project for adult treatment panel, and advanced risk markers such as lipoprotein in Factor V, 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 to prescribe appropriate treatment regimens to reduce that risk.

We've also made substitutive progress on the first assay based on AmpiProbe. Our internally designed proprietary technology which can achieve the performance of the widely used realtime PCR type amplification and detection in a faster and more economical manner. The market for PCR related assays such as viral loads now run by realtime amplification detection methodology is believed to exceed $2 billion. Our initial product, the hepatitis C virus viral load detection assay, can be used with conventional existing open systems used currently in many reference laboratories. We submitted our application to the New York State Department of Health last quarter, and are awaiting regulatory feedback.

Simultaneously, we are working to obtain CE IVD approval for our test in Europe. Once such a designation is received, we will be able to market and sell AmpiProbe HPV as a diagnostic product to our centralized sales and marketing group based in Europe. We are enthusiastic regarding our AmpiProbe-based assays. Our cross divisional scientific team presented data at a recent microbiology and infectious disease conference indicating that AmpiProbe-based assays can produce results with nearly 100% concordance with other systems. While at the same time providing sensitivity 25 fold or higher than existing technologies.

This increased sensitivity is a very important feature. Since, as healthcare costs continue to grow, diagnostic laboratories will be under increasing pressure to increase efficiency. The higher sensitivity of our AmpiProbe platform could provide labs with the ability to materially reduce their costs by improving the use of reagents, a key cost item in the labs. Also, increased sensitivity can lead to the use of smaller sample volumes. This can offer multiple benefits that can all be grouped under the general heading of paneling. Panels and laboratory prevalence are multiple tests run off the same sample at nearly the same time.

In the clinical laboratory another costly part of DNA-based tests is often that relating to sample extraction, or drawing blood. Our test enables the use of a single specimen further cutting expenses. Similarly, it obviates the need for calling back patients to obtain additional specimens, reducing patient anxiety and avoiding another visit to the physician's office, which might involve another utilization of staff time and a good likelihood that the doctor won't be compensated for the time invested on another blood draw.

We are also applying AmpiProbe technology to the development of a comprehensive women's health panel that will be offered to Enzo Clinical Labs. Such a panel can enable a lab using a single swab obtained during a routine examination to identify as many as 10 different pathogens. Current conventional non-molecular methods can be difficult to administer and not nearly as sensitive or specific as our technology. An article published several years ago in the Journal of the American Medical Association concluded that approximately 30% of symptomatic women failed to be diagnosed using conventional procedures. Adding this assay to our menu may provide us with one of the most comprehensive women's health portfolios in the industry.

Also during this past quarter, we saw an increase in the legal activity of the Company as well as an enhancement of our therapeutic activity on a number of different fronts. First, steps were taken to more aggressively defend our intellectual property estate against a number of parties, many of whom are significant players in the diagnostics and Life Sciences industries. Secondly, our clinical trial for the study of Optiquel is progressing. And, we are currently exploring the possibility of expanding our relationship with the NIH to extend this trial both in size and scope.

Before I turn the call over for questions, I would like to conclude with a final word on our strategic direction. Enzo's integrated 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 that we are witnessing today. Going forward, healthcare will require solutions that solve practical problems.

These include diagnostics that offer prognostic insights and economically driven assessment tools that motivate clinical decision-making thereby improving efficiency and effectiveness of healthcare delivery. However, we also recognize that continued execution on the strategy must also deliver financial returns. We are just as focused on driving functional efficiency and improving to build our existing financial strength. We will continue to scrutinize our operations very carefully and make appropriate adjustments to our infrastructure in order to drive our Company towards a positive cash flow and to ultimately, profitability. On that note, I would like to turn the call over for questions. Thank you.

Thank you. (Operator Instructions) Paul Nouri, Noble Equity Funds.

Morning.

Good Morning.

Given that you're still burning through cash, you have about $15 million in cash left, the Clinical Lab, obviously, continues to grow, but you continue to put money in therapeutics and legal. I guess, can you talk about over the next year if you think you'll dedicate the same resources to those two areas? And, if you are looking to obtain a credit facility?

We have been extremely focused on our cash utilization over the last few years. We've made significant investments to position the Clinical Laboratory via its infrastructure and human resource capital in a very targeted and directional way. The Life Sciences has also required significant capital to affect the consolidation and the improvement in the infrastructure at Life Sciences. We do not see a continuation of the investment in capital that has been put into place over the last few years going forward.

At the same time, we have been taking efficiency steps to consolidate our operations. These are ongoing, I believe the effects of these consolidations will appear over the next two quarters and will dramatically reshape the financial performance of our Company. The result being that we will be the we will be able to operate within our current cash flow stream going forward.

We are also looking towards significant improvements in our revenue at the divisions. Particularly in the Clinical Laboratory as we will see the coming on stream of these new molecular tests that I have referenced in my comments. ColonSentry will start to hit in this current quarter, and we believe that the ramp-up will have an effect on our revenue line that will materially drive this lab to stronger growth.

We are optimistic on the approval of the other tests in the next quarter or two, which will also add to our portfolio of products driving revenue growth at the Clinical Laboratory. At this point in time, we believe that we will be able to be self-sufficient on our capital structure and drive growth and turn this company to a cash flow positive entity over the next year.

Can you talk about -- maybe get into specifics about the opportunity for ColonSentry and if you have primary physicians ordering it in addition to GI's?

Yes. The initial targets of the first part of our launch -- and this has been a limited launch to date. We are preparing our capacity capabilities to expand this to our entire sales network very soon. But, the target has been to primary care, internal medicine, and OB/GYN' s.

Again, this test is being marketed as a screening facility to allow individuals, or motivate individuals, to better understand their conditions and obtain the appropriate medical practices to address them. Approximately 50% of those that should get colonoscopies do not. It is hoped that this test will provide that internal medicine or general practitioner a tool to motivate that individual to do what they should be doing.

We, today, have had very good success with the group of physicians that have initially been exposed to this test. We are receiving samples in daily. We are getting reimbursed for it. Our agenda at this point in time is to increase the capacity of this test to a level where we can get it to our full network of physicians and ultimately look beyond our regional area.

And, for a while, you were doing well at bringing the bad debts down. And, even though from the quarterly report it looks like the self-pay portion of the reimbursement went down, the bad debts have creeped back up. Can you talk about what that relates to?

The mix in business on a quarterly basis can vary. We have taken steps to actually bring in some seasoned people in our billing group that are attacking the bad debt area. And, we're confident that in the future, that number should either stabilize -- definitely stabilize and probably come down.

Okay. Thanks.

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

Good morning, gentlemen.

Good morning.

Hi, Barry. Couple questions. The AmpiProbe product, when is your expectations for the New York State to approve that?

We are awaiting that approval. It can happen within the next few months, we believe. It could be a little bit longer. We cannot predict when it will come out. But, we are -- we have gotten active feedback from the state, so we are awaiting its approval at any point in time.

Now, is it my assumption that you're going to -- once it's approved, you're also going to start selling it or try to have it approved in Europe?

We already have begun that process to apply for CE Mark IVD status, so that we can be marketed in the European arena as well.

And, what would be your marketing program over there and who would you line yourself up with to market the product?

Well, we'll be marketing through our Enzo Life Sciences organization in Europe. One of the benefits of having our Life Sciences group in support of our clinical lab activity is that it gives us a very strong channel of distribution both in the United States as well as in Europe. So, this will be put through the European Life Sciences entity which has a very strong electronic marketing platform as well as on the ground sales efforts throughout the European arena.

And, the other question I have is, I understand there was a trial supposed to have happened in May, and it was put off or set aside, I'm not sure exactly what happened, until September. Can you inform us and give us some clarity to that?

Yes, the trial against Life Technologies in the New Haven federal court has been set to begin in early November. That is part of the process of the motion practice that took place in early May, but we are anticipating a trial. As a matter of fact, if you look at some of the enhanced legal expenses in this past quarter, that was associative with the pretrial preparation in light of that particular event.

Do you feel your two thirds into the expenses, or less than that? For that trial?

Again, it's hard for me to handicap. I think we've invested a good percentage of the pretrial of development work to date for going forward.

And last, just one last question, knowing where your expense line is, and restructuring of some form of restructuring that you've been doing right along, where does revenue have to be for you to be cash flow positive?

We believe over the next year we should be able to drive our revenue to obtain that position. And, it's not only just revenue growth. It's also -- will be dependent on cost savings initiatives via the consolidation that is taking place in Life Sciences as well as improving and streamlining the efficiencies of the Clinical Laboratory. So, we are working towards a double measured approach of increasing revenues. We believe we will see that increase revenues based on the introduction of these new products over the next year. And, in combination with a program to drive efficiencies and costs through consolidation and improvement of operations to achieve a cash flow positive position.

Barry, without talking about the efficiencies, is there any way you can give us a little color on the cost savings over a 12 month period that you expect to get from the organization?

Yes. We have taken a number of steps over the last two years that have been investing steps. Specifically, the introduction of new computer systems to consolidate our Life Sciences entity as well as new efficient computer capabilities at our Clinical Lab that will improve our operations.

The implementation of these systems will drive savings in headcount because of the automated aspect of these systems. That is one measure. A second measure is the shift to internalize the numbers of tests that we currently send out. And, basically our send out costs are at a level which we feel we can bring down significantly to improve our bottom line in the Clinical Laboratory.

The third area is the consolidation of manufacturing operations. As you recall, we've acquired four different companies that have separate manufacturing, separate computer systems, separate financial systems. We are at the tail end of consolidating them. This has been an ongoing practice for the last 18 to 24 months.

Today, we have closed our Philadelphia and UK manufacturing operations. We've consolidated all of our manufacturing in Ann Arbor Michigan, except for certain nucleic acid-based products in New York. So, we have been taking the steps that have resulted in both efficiencies, headcount reduction, and overhead lowering. We think that these combinations will drive our goal of achieving a cash flow positive position over the next year.

Okay. Thank you, very much.

Paul Nouri, Noble Equity Funds.

In your Life Sciences division, how much of that revenue comes from Europe? And, has any of the recent weakness been associated with the weakness in Europe?

Yes, it's Andrew here. We do about 50% of our revenues outside of the United States. A significant portion of that comes from Europe. As Barry indicated in his remarks, we have seen some of the pent-up weakness in academic sector as we had in the US in the early part of the year. But yes, it's about 50% of our revenues outside of the US right now.

And, turning back to the Clinical Lab, how's the sales force been performing? And, have you had a lot of turnover? Or has it been stable?

It's David Goldberg here, Paul. Sales force has been performed well as you can see by the topline growth, which is still in double digits. And, they've done very, very well.

There is -- we have a very stable sales force. We are -- we hold a very special and somewhat unique position in the New York regional market. And, as a result, I believe we have been very successful in being able to attract very senior qualified sales individuals. And, I think that has been demonstrated in the performance and the growth of the laboratory during a period when lab growth ranges from minus 2% to plus 3%, 4% quarter-over-quarter. We have been beating those numbers continuously quarter-over-quarter, showing between 8% and 15% growth.

Have your doctors conveyed to you how comfortable they are with their volumes or where they see their volumes currently?

Their volumes, obviously, were impacted by the recession of 2008 and 2009. They haven't really conveyed anything specific about their volumes. So, it's hard to say. Probably, they're starting to see, probably, some return to normalcy, but I don't know if they've gotten back to the pre-2008 volumes.

Okay. Thanks.

At this time, we have no further questions. I'd like to turn the floor back over to Mr. Weiner for any closing comments.

Thank you, very much. We look forward to reporting our year-end results in October. And, we will be moving forward to drive the programs that we have talked about in a very aggressive fashion over the next quarter. Thank you for joining us.

A replay of this broadcast will be available until Tuesday, June 26, at 12.00 midnight. You may access this replay by dialing 1-800-585-8367. The pin number is 87825581. 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.