Enzo Biochem Inc (ENZ) 2013 Q1 法說會逐字稿

Good morning and welcome to the Enzo Biochem, Inc., first-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 Acts 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. 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. Thank you for joining us. With me are several members of our senior management, Mr. David Goldberg, Mr. Andrew Crescenzo, and Mr. Andrew Whiteley.

Yesterday after the market closed, we distributed our results for the first quarter of the current fiscal year. I trust you've all had a chance to take a look at it.

I would like to begin my remarks by focusing on two major events that occurred during the past couple of months. First, the jury verdict in our patent infringement case against Life Technologies, and then the results and the consequences of Hurricane Sandy, which all of you know had a major impact all over the Northeastern United States but was particularly devastating here in New York and the metropolitan area.

First, as we reported last month a jury found that Applera, which is now Life Technologies, infringed our patents covering pioneering and pivotal technologies relating to compounds used in DNA sequencing systems that are utilized to read the genetic code. The applications for inventions based on our technology are diverse. They range from detecting pathogens and human diseases such as cancer to decoding and analyzing the human the genome.

As a result, the jury awarded us over $48 million in direct infringement penalties. In addition, a pre-judgment or interest award should be awarded to us by the court; this is because the jury found that such infringement went back for a number of years. Our legal team has estimated that the addition of the pre-judgment award could add additional recoveries potentially in the tens of millions of dollars.

Additionally, the jury in the case found that Life Technologies' sequencing instruments induced its customers to infringe on our patent. The sale of such instruments are estimated to be in excess of $770 million.

We are obviously very pleased with the outcome of this trial and we view it as a very strong validation of our intellectual property estate. As the process moves forward, we may plan to seek additional damages based on the decision that the sale of the sequencing instruments induced infringement of our intellectual property.

It is our expectation that this legal decision should have a positive impact on the resolution of pending actions that we have brought in the US Southern District in New York and have been working their way through the system for quite a long time. These involve additional defendants, additional patents, and specifically contract issues associated with each of the companies respectively. The defendants in these suits are Amersham, which is part of General Electric; Roche Diagnostics; Perkin Elmer; Molecular Probes, which is also today owned by Life Technologies; Orchid Cellmark, which is also owned by LabCorp of America; and Affymetrix.

The patents represented by these actions and that were brought against the number of companies I just referred to revolve around key developments in the biomedical field. As many of you who have followed us over the years know, this has been a long and somewhat formidable path; but we believe that the decision that took place in the Life Tech case may lead to positive resolutions of these other legal actions.

In addition to these cases we have brought actions against a number of other life sciences and diagnostic companies that we believe have infringed on other key Enzo intellectual property. These companies include Abbott, Hologic, Gen-Probe, Becton Dickinson, and Illumina, to name a few. These particular actions, as we have discussed before, are being handled on a contingency basis; thus our costs are greatly minimized.

I would like to turn to the impact of Hurricane Sandy on our financial results. During the last three calendar days of the first quarter our lab volume was significantly impacted. Hurricane Sandy put our extensive disaster recovery plan to the test, and I am pleased to share with you that our plan was executed with precision.

At no time even during the height of the storm was our operation shut down. We maintained a presence in both of our main facilities, and we were able to handle the great number of calls that were coming into our offices.

As many of you know, a number of individuals suffered severe, even catastrophic losses because of this. Some of our employees, and of course many of our clients and customers were without power and water for several weeks in the storm's aftermath.

Yet during this unprecedented event, the dedication of our employees and managers never waived. I want to take this opportunity to really thank each and every one of our employees for their dedication in keeping our businesses open without interruption.

The aftermath of the storm had a material impact on our operating results, especially at the clinical laboratory. The direct damage caused by Sandy, followed by the collateral damage of power losses, lack of public transportation, and gasoline shortages, shut down virtually all of our client physician practice for almost a week after the storm abated. We estimated a loss in revenue directly attributable to Sandy of over $700,000 for the quarter, with additional revenue losses that will be realized in the second quarter.

Here I would like to now share with you some of the highlights of the financial results for the first quarter. The clinical laboratory continued strongly despite Sandy, registering a 7% increase in revenues, still more than double that of the diagnostic industry as a whole. We estimate that our growth would have been approximately 12% year-over-year without the impact of the storm.

Enzo Life Sciences moved strongly into the black with an operating profit of $1.4 million compared to a year ago's operating loss of $200,000, a favorable swing of approximately $1.6 million. The gains at Life Sciences were achieved despite a 13% decline in revenues, reflecting our program to consolidate facilities and functions and implement operational efficiencies, as well as our concentrating on our marketing efforts towards a more value-added mix of products.

Total revenues for the Corporation came in almost on a par with a year ago, approximately $26 million for each period. Gross margin, likewise, held firm at $11.7 million as compared to last year's $11.8 million, with gross profit as a percentage of revenues a steady 46% for both periods.

Life Sciences gross profit as a percent of its total revenues rose 400 basis points to 60%, while that percentage at Clinical Laboratories dipped to 36% from 38%. Even with legal costs increasing more than $800,000 over last year as a result of the Life Technologies trial, we kept expenses overall in check, with SG&A declining almost $1 million or 8%; and total operating expenses were 3% lower than a year ago.

We saw the operating loss decline by 9% and the net loss reduced by 18%. The EBITDA deficit also was lowered by 16%.

We also closed the quarter with a highly liquid cash and investments portfolio of close to $13.5 million. Cash utilization relating to operating activities and investments year-over-year also improved, falling by $800,000.

During the quarter, cash utilized approximated $1.7 million, of which 35% or $600,000 was for legal and capital expenditures. In addition, we estimate that our cash position was adversely affected by delayed cash collections of approximately $300,000 due to the storm. It should be noted that working capital equaled $18.3 million.

Looking more closely for a minute at our financial performance for the quarter, as I mentioned we had sharply reduced or diminished specimen counts in the last three days of the quarter due to the hurricane. This cost us, as I just mentioned, about $700,000 that we can define in revenue, although the lab maintained full capabilities both during and immediately after the storm.

Combined with the continued product rationalization program at Enzo Life Sciences, with its emphasis on higher-margin sales, total revenues for the quarter were nonetheless on a par with the year-ago results, again which were about $25.6 million.

Revenue is reflective, despite the storm, of a 7% growth in Clinical Labs, an 8% increase in royalties and licensing fee income, which were partially offset by a 13% decline in product revenue. Product revenues continued to be negatively impacted in the Life Sciences division by softness in the academic market and from certain of our global distributors. If not for the impact of Sandy, total revenues year-over-year should have improved by over 2%.

Turning to our consolidated costs for the quarter, overall gross margin was comparable at $11.7 million with gross profit at 46% in both periods. Our fiscal 2013 plan to reduce costs by over $6 million has shown impact this period and is progressing well.

Overall, operating costs -- being research and development; selling, general, and administrative; provision for uncollectible accounts; and legal -- decreased by 3%. Excluding legal expenses and non-cash provision for uncollectible accounts, our operating cost declined by $1.6 million or 11%.

Research and development costs as refocused to molecular tests and technology platform development were down over 30% from the year-ago period. SG&A expenses decreased 8% or $1 million despite higher sales volume-related costs at the lab. And as a percentage of revenues, SG&A decreased to 45% from 48% in the year-ago period.

Legal costs driven primarily by the patent case increased to $1.7 million, an increase of $800,000 over the prior year. Our provision for uncollectible accounts, primarily related to Enzo Clinical Labs, increased $300,000 which was due to higher revenue volume. As a percentage of lab revenues, the provision for uncollectible was 9.6% as compared to 9% in the prior period.

Overall for the Corporation, the net loss was $3.7 million, an $800,000 reduction from year ago, and the net loss translated to about $0.09 per share, versus 12% last year. EBITDA, a non-GAAP figure, improved by $0.5 million to a reduced loss of $2.6 million compared to a loss of $3.1 million last year.

Just briefly highlighting some of the segments -- some of this is a little bit repetitive to what I just went through, but I think it's important to put into context the specific operational activity of each segment as a result of the cost improvement issues we put into place last quarter and to chart the benefits that have been implemented.

Enzo Clinical Lab revenues, as I said, grew 7% to $15.2 million. Gross margin rose to $5.5 million from $5.4 million the year-ago period. SG&A as a percentage improved 33% as compared to 34% a year ago, and the operating loss increased, partially due to the storm, to $1.2 million from $800,000 a year ago.

The Life Sciences division posted operating income of $1.4 million. This was an increase of $1.6 million over year-ago when it lost $200,000. In line with the product rationalization program emphasizing fewer but higher-margin products, net revenues declined 13% to $8.4 million. Royalty and licensing income increased 8% to $2 million.

Life Sciences gross margins improved to 60% of revenues compared to 50% in the same period last year. Other operating expenses including R&D and SG&A decreased $1.5 million to due to lower payroll, rent, and facility costs. Despite the continuing weakness in the academic markets, Life Sciences is benefiting from its realigned business focus and its operational efficiencies implemented over the last six months.

I would like to turn now to share with you some thoughts on our strategic goals. As you are aware, the healthcare environment is in a period of change. Enzo's value proposition is both timely and well suited to meet the emerging paradigm that is coming forward with all the events that are now being looked at and focused on in the healthcare environment.

Medicine, as you can tell from the political dialog, is focused on bringing costs down and delivering quality care that takes advantage of the vast technological advances that are now becoming apparent to others in the industry, which will allow early diagnosis, more targeted medications, and more effective treatments.

Our capabilities, based on our strong technology platform developed over the last 30 years, allow us a unique ability to address the evolving needs of this market. Our technology platforms are supported by a broad and relatively deep intellectual property portfolio. Our multipronged capabilities represented in the diagnostics, Life Sciences, and Therapeutics development area, provide us with an integrated view in the design of products that we believe will meet the stringent new demands of this market.

The realignment program that we undertook at the end of last fiscal year provided Enzo not only with efficiencies designed to reduce costs, but to put into place a highly effective and integrated structure that combined the immense and forward-looking attributes and strengths of our Clinical Lab unit and our Life Sciences unit. Our research and development activities in Life Sciences complement our Clinical Lab activities, enabling us to be positioned to deliver specialized, diagnostic services as well as developing through hands-on research new platforms and tests that are more effective, less cumbersome to the patient and physician alike, and less expensive.

We are moving towards providing a leading position in esoteric testing, and I would like to detail some of the very exciting developments. In Enzo Life Sciences, we have established a centralized research and development laboratory in Farmingdale, in facilities that are contiguous to each other and integrated. This is providing highly efficient synergies between the two operations.

Our Life Sciences products are being manufactured in Michigan, as we were able to consolidate this function from several other locations. In addition, we have reduced and continue to evaluate the number of SKUs that we carry, especially in terms of the less profitable products. These measures have impacted our revenues and have resulted in lower costs and higher operating efficiencies. In addition to our own 7,500 products, we also represent more than 40 other manufacturers and over 30,000 products globally.

Life Sciences today is leaner and more focused. We are shifting our focus from the academic-based customers, who themselves have seen grant money get tight over the years, by broadening our reach to industrial and clinical research customers.

The integrated structure of Enzo Life Sciences and Enzo Clinical Labs today facilitates the advancement of new platforms to address existing but substantial markets in the billion-dollar range with proprietary products that advance the art and are especially well suited to benefiting healthcare needs.

We have two lead platforms that we have spoken about in the past that capitalize on our long history in molecular identification, amplification, and detection. One is the AmpiProbe system. It is a low-cost, highly sensitive, real-time platform. We believe it will provide a superior testing methodology through operational efficiency and sharply reduced costs. Tests developed via this platform are currently undergoing review by the New York State Department of Health.

Another key platform involves our next-generation branched DNA technology. This is a signal amplification assay as opposed to a target amplification approach, which is AmpiProbe. This is used to detect a number of analytes through different approaches.

Among its targets are human papillomavirus testing, an immunoassay, and it has a special appeal where heightened sensitivity is desired and generally unobtainable from the existing platforms. The market that the branched DNA can approach is in the many billions of dollars, and it is in existing market where we believe we can bring enhanced value and better performance.

As for the AmpiProbe platform, we have already submitted for approval with New York State certain tests dealing with viral identification, and we are well along in the development of a women's health panel that would test for a number of specific diseases in a given specimen. This would be a convenience to the patient, since one specimen will suffice for multiple tests.

We plan to offer the panel as a product through our bifurcated distribution approach of both domestic products and CE-IVD, or European approved, products. It may also produce incremental cost savings at Enzo Clinical Labs.

I would like to update you on some of our important product launches over the last period. First, the introduction of the ColonSentry blood test for assessing a patient's risk for developing colon cancer is proving highly valuable. The lab thus far has processed in excess of 3,000 tests since its introduction, and we continue to see interest in the test for use with noncompliant individuals -- those who are reluctant or not disposed to have colonoscopies.

It should be noted that the colonoscopy still remains the gold standard for colorectal cancer, and it is the objective of this particular test to give information to the patient to allow that patient to make a more informed decision whether they should proceed with a colonoscopy.

Several weeks ago, we announced a new partnership agreement with OncoMune, Inc., of Kansas City that enabled Enzo Clinical Labs to make available an important new lab test that assists in risk assessment and early detection of lung cancer in those patients already in a high-risk pool, such as those individuals who were heavy smokers. It is being made available to physicians in our service area, New York, New Jersey, and Eastern Pennsylvania.

Additionally, we plan to introduce to our client base an innovative panel of genetic disease tests which will allow for the simultaneous testing of a large number of inherited genetic disorders from a single blood specimen. Enzo Clinical Labs, because of its recognized expertise and standing as a New York State certified lab, is broadening its recognition and has become for an increasing number of research firms a preferred partner with which to rapidly and effectively get their products to market, especially given our position in one of the nation's most strategically centered and highly populated markets. Enzo Clinical Labs, combined with our Life Sciences capabilities, is especially well situated to become an important growth vehicle on the cutting edge of diagnostics and medical product development.

Today we are reviewing a number of new possible tests to add to our growing portfolio of molecular offerings, and we are being approached by many parties to provide and partner their newly developed tests because of our special channel of distribution in the New York regional market. Also, our licensing will allow us to accept many tests from outside of our regional area. Enzo Clinical Labs is poised to become a very fundamental and critical asset for providing novel new tests to the New York region.

It is an exciting time for our Company. We look forward to the meaningful progress of our capabilities and the improvement of our financial results over the subsequent quarters.

We believe that Enzo today is extremely well positioned both from its geographical position in the Clinical Lab as well as its technological position and intellectual property position in Enzo Life Sciences to become an integrated force in the development and the provision of new, modern molecular tests that we believe will be an asset and a developmental strength for the new changes that are coming forward in healthcare. It's an exciting time for the Company, and we look forward to reporting you in subsequent quarters with the introductions and changes that are affecting our industry today.

I would like to now turn the floor over to questions.

(Operator Instructions) Paul Nouri, Noble Equity Funds.

Turning to the Life Technologies litigation, can you talk about what the timeline broadly is going to look like? Obviously they are going to come back and (technical difficulty). But can you talk about what the timeline will look like for settling that?

We are awaiting the final official ruling document, at which time parties then can have a period of time to make a decision to appeal or not to appeal. Assuming there is an appeal process that is set into place, I have been told that the resolution of that process can take anywhere from six to 12 months.

Okay. As far as the other cases that you said might benefit from the decision, what broad timeline are we looking at there?

We are awaiting trial dates for a number of the cases in the Southern District of New York. There are approximately five cases, as I mentioned earlier. We have completed discovery for all intents and purposes, and we are awaiting trial dates, which we anticipate can take place sometime in the spring.

And the Delaware cases, is that something that you filed after this decision?

Yes. That's a relatively new case.

Do you expect the New York cases can be close to the amount of the judgment that this one was, or will it be significantly less?

I can't comment on that at the moment, but we believe there are significant damages associated with these cases. We have not quantified the specific damages associated with it publicly yet; but they are significant.

What do you expect the Medicare rate cut to be? About 2.5%?

I think we and other members in the industry are looking closer to about a 4.5% or so. We don't know that specifically, but our estimate is in the range of over 4%.

That includes the sequestration cut, I assume, right?

Yes, Paul. It's David Goldberg here. What we understand is there is a 2.9% cut coming in January, and there is 2% additional sequestration. So that would be on the order of a little under 5%.

That is as of now. Obviously, subject to however these fiscal cliff negotiations end up.

Do you think that your other payers will go in that direction too? Or are you not worried about this?

It's hard to say, hard to say. I think everybody is really at a waiting game now. Hopefully not.

The bad debts ticked up a little bit. Does that have anything to do with introducing more esoterica?

Certainly product mix and mix of our payers impacts our uncollectibles.

Okay, thanks.

(Operator Instructions) Sir, there appear to be no further questions at this time.

Thank you. We thank you for joining with us this morning. We look forward to our next report on the second quarter. Have a good day.

A replay of this broadcast will be available until Tuesday, December 25, at 12 midnight. You may access this replay by dialing 1-800-585-8367. The pin number is 78041681. 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.