Enzo Biochem Inc (ENZ) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Enzo Biochem Inc. First Quarter 2018 Operating Results Conference Call.

I will now read the company's safe harbor statement. Except for historical information, the matters discussed in this news release 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, 2017.

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 obligation 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 its 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.

Thank you. Good morning, and thank you for joining us today. On the call with me is Jim O’Brien, our Executive Vice President of Finance.

We distributed our first quarter results release yesterday after the market closed, and I hope you've had a chance to take a look at it. As the results show, we continue to implement our business strategy to enable our unique, fully integrated diagnostic structure to meet the evolving challenges of our industry.

This past quarter was marked by a number of significant operational accomplishments that validate Enzo's importance in the marketplace at a time when high cost of production and lower reimbursement is making it more and more difficult for clinical laboratories to operate profitably. We regard our operating and development accomplishments, as well as our outlook at Enzo, as very favorable, and we'll share our thoughts with you in that regard shortly.

Permit me to, once again, this quarter, underscore the growing success we have had in transitioning Enzo into a fully integrated hybrid diagnostic company. We have done so by blending our 2 operating business segments, Enzo Clinical Labs and Enzo Life Sciences, into what we believe is a unique, one-of-a-kind new company that develops products and platforms and also provides services and products that fills an important void in the growing field of molecular diagnostics.

What has made this possible is the unusual depth of our expertise and our forward-looking strategy to meet the needs of today's unusual market demands. Over the years of product and technology development, our strength stretches back over 4 decades and is embodied in our extensive intellectual property estate.

The depth, practical knowledge and experience of our scientists provides us with a unique competitive advantage with which to develop new technology that is both medically relevant and, importantly, cost-efficient.

This is an important part of what makes Enzo so strong. Our innate, deep understanding and ability to develop low-cost, highly effective technology platforms and products for a market in need of affordable solutions.

We have, within Enzo Life Sciences, broad capabilities for developing critical assays that have demonstrated high sensitivity. And in our 2 manufacturing facilities, one in New York and one in Michigan, we have the capability to manufacture them as they are approved.

At the same time, Enzo Clinical Labs and its state-of-the-art diagnostic capabilities provides a means for seamlessly working with life sciences to assure the quality and effectiveness of our products through their testing services. With our integrated resources, we are able to bring to market platforms and technologies that are fully vetted in a real-world diagnostic facility.

As many of you already know, Enzo Clinical Labs uses our own developed technology in performing many testing services that, given Enzo's higher-than-average industry gross margins, demonstrates the value of affordable technology that clinical laboratories can enjoy either by deploying Enzo solutions in their own laboratories or by referencing testing services to Enzo.

Thus, from idea to development, to validation, to manufacture, Enzo has enormous in-house strength. And what has made this special is that we recognized early on that the nation's independent clinical laboratories, which number in the thousands, are at an economic disadvantage in today's rapidly changing diagnostics world.

The advent and fast growth of molecular diagnostics as a means of early diagnosis and follow-through testing has required sophisticated new techniques and assays that are needed, but that are also burdensomely expensive.

You combine this with high capital cost to expand, upgrade or maintain laboratory facilities and ability for labs to expand their testing menu at affordable pricing, and perhaps, most importantly, steadily declining reimbursements makes it easy to understand the challenges these clinical labs face today.

Enzo has embraced the task of developing affordable solutions that are vitally needed. The effectiveness of this strategy is reflected in the increasing attention to our -- that our technology is getting from independent clinical labs, starting with our AMPIPROBE platform and others that have followed, and the cost-efficient, highly sensitive assays that we have developed all of which benefit clinical laboratories, their physicians and their patients.

Our transformation is starting to reflect in our financial performance. Revenues in recent years have been on a steady upward trajectory, as seen in the growth in our laboratory testing services, that is the result of new products, extending our geographic coverage in the Northeast and adding new clients. It is also attributable to our ability to offer not only high-quality and industry-best service, but also innovative new diagnostics of which our newly approved women's health panel is representative.

It is also notable that our revenues have grown despite a conscious effort to pare the low-margin commodity type research products in Enzo Life Sciences in order to build capacity for turning out new products being developed for clinical markets worldwide.

Despite somewhat reduced research product sales, our efforts to streamline our product mix in favor of higher-margin products and increasing efficiencies, along with tight cost controls, has enabled this segment to remain profitable and cash flow positive during this transformational period.

I will have more to say about our business shortly, including our product and technology platforms, but I would like to review with you our recent financial results for the first fiscal quarter of 2018, which ended on October 31.

Revenue for the quarter was $27.7 million, an increase of $1.4 million or 5% over the prior year period. Clinical laboratory services were once again a key driver, with revenue of $20.3 million, a 10% increase over the prior year. Gross profit increased to $12.2 million, 1% ahead of prior year. Gross margins were 44%, down slightly from the prior year, given somewhat lower product revenues.

Operating expenses were $12.9 million, a decrease of $500,000 or 4% from the prior year. Included in this amount was SG&A that was lower by about $600,000 or 5%. This was offset by higher allowances for bad debts of $100,000.

Our bad debt allowance remains constant as a percentage of laboratory services revenues at roughly 4%. The consolidated operating loss improved year-over-year by approximately $650,000, attesting further to our emphasis on improving profitability.

On a GAAP basis, the net loss was improved by $0.02 a share over the prior year. Net loss was $640,000 or $0.01 per share, compared with a net loss of $1.5 million or $0.03 per share in the prior year.

EBITDA, a non-GAAP measure, was breakeven during the quarter as compared to an EBITDA loss of $600,000 in the prior year, reflecting a significant improvement. In terms of segment performance, Enzo Clinical Laboratory services continue to increase revenue to $20.3 million, a significant 10% ahead of last year. The gains reflected an increase in testing volume, the result of wider geographic penetration in existing markets, but also expansion in parts of New England.

Increased business with most major health care providers has also been a growing factor, particularly business derived from our being named an in-network provider by the fourth largest national health care insurer last April. The Labs' gross profit increased 8% to $8.3 million and as a percentage of its revenues remained at 41%, for both the current year and year-ago quarter.

Enzo Life Sciences revenues were off slightly to $7.1 million from $7.4 million, a 5% decline. Gross profit was $4 million compared to $4.4 million a year ago. With continued focus on reducing costs and improving efficiency, SG&A declined by 11% and operating expenses fell by 12%.

Our financial condition remains solid, providing us with a capital to advance both our development and marketing programs, to expand our business throughout the United States and in international markets. Our balance sheet remains very strong, with cash and cash equivalents of about $67 million. This is $2.7 million higher than the balance as of July 31, 2017. Working capital remains at more than $71 million.

During the quarter, cash provided by operations was $2.6 million compared to cash used in operations of $0.3 million a year ago, an improvement of $2.9 million. Our financial position enabled us to invest nearly $500,000 in capital expenditures during the quarter.

Along with our solid financial performance, we continue to move rapidly ahead on the product development and regulatory approval front. Conditional approval during the quarter by the New York State Department of Health of the remaining 5 women's health tests has made possible our offering of one of the most complete women's health diagnostic panels on the market, with 13 different analyte targets.

This approval was significant in that it now allows a broader test menu to be marketed to clinical laboratories where the potential for savings, either by buying products or services from Enzo could be material. Our belief is that our diagnostic panel will offer a cost-efficient approach for women's health testing and have a broad and major impact.

Enzo labs is currently expanding its capabilities to incorporate the new tests for a complete panel solution. We expect to shortly offer the service through Enzo Clinical Labs' existing marketing territory in the greater metropolitan New York, New Jersey, New England area.

We are also preparing for a national marketing program, with a complete testing menu of affordable products and services that we can offer clinical labs around the country, with the option of purchasing the platform plus assays that are compatible with their existing systems, or sending the results to Enzo on a reference a basis for overnight processing and reporting on specimens. Our sales and marketing efforts are already receiving positive responses in the market, and we expect these efforts to grow over the next several months.

Recently, Enzo scientists delivered a poster presentation at the annual meeting of the Association for Molecular Pathology in Salt Lake City. It involved a report that detailed research of our women's health panel that uses our AMPIPROBE multiple real-time PCR assays for use with Candida, gonorrhea, chlamydia, Trichomonas and bacterial vaginosis.

The focus was on the panel sensitivity, specificity and reproducibility and accuracy in line with the requirements of the New York State's microbiology molecular checklist to validate the assay's diagnostic value. We were pleased to report that the study demonstrated that our technology provides a new proprietary approach to achieving accurate detection and identification of the vaginitis-associated microorganisms. The utility of this platform is now being extended to other targeted diseases.

At present, we have several noteworthy medically related molecular diagnostic testing assays that provide unusual sensitivity and cost savings, while being adaptable to open systems existing in many clinical laboratories. These include diagnostics for human papillomavirus infection, E6/E7; hepatitis C viral load, cardiac markers and in-situ hybridization allowing for localizing specific nucleic acid or DNA targets within fixed tissues and cells.

Our fluorescent in-situ hybridization, otherwise known as FISH, a technique used in laboratories to visualize chromosomal abnormalities that outperforms other commercially available products is also being offered. Another platform, POLYVIEW, for reading tissue biopsies and having a high confidence quotient as a result of demonstrating no false positives, is also being offered.

Amino assays having superior detection capability with higher sensitivity are in various stages of product development and utility. And FlowScript, our gene expression platform for assays providing broad application for detection of genotype and phenotype markers via flow cytometry, which applications include cancer progression and monitoring immune function and inflammation, are in various stages of development.

To build capacity as we add new products to the program, we have begun an expansion and upgrade of our Farmingdale, Long Island manufacturing location that will be ISO certified and GMP compliant. It will allow capacity to produce our proprietary molecular assays, including PCR-based and gene expression assays, plus immunohistochemistry and in-situ hybridization reagents.

I would like to close on a note that while we are active on multiple fronts, our focus is primarily on our basic business that we believe holds growth opportunities. We have previously commented on what is believed to be impending PAMA medical -- Medicare reimbursement levels. The first of which is the implementation expected shortly after the first of the year.

These hold the possibility of further impacting the economic wellbeing of the nation's independent laboratories, which makes our vision of transforming Enzo into a national provider of high-quality, affordable and easily adaptable diagnostic products and services even more timely and important.

With that, I would now like to open the call for questions.

(Operator Instructions) Your first question comes from the line of Kevin Ellich of Craig-Hallum.

Barry, I guess I just wanted to go back to the good cash flow that we're seeing, and I know you have about $67 million of cash on the balance sheet. What are the plans and how you guys plan to deploy that or at least the discretionary portion? What -- how would you prioritize that?

We are embarking on a program to expand our regional business into one that is a national reference service business. The utilization of that cash will be used in a conservative, but dedicated fashion to expand our sales presence throughout the national market. We are increasing our sales force, we are doing it in a measured and, I would suggest, focused way. But we will be investing in more human capital on -- in a number of different areas, one being sales, the other is being invested in the employment of personnel to drive our manufacturing capabilities, as we see a need in the future to build volume capacity within our production structure. At the same time, we are always evaluating new opportunities within the market. We are fairly stringent in our valuation process. But certainly, if opportunities do present themselves, they will be considered. So we are approaching this issue of capital utilization in a measured, conservative and, I hope, responsible fashion, one that we believe will drive revenue volume and product development within the laboratories and help the expansion of our business model in a more rapid time frame.

Great. And I guess with the expansion of the national sales force, just any rough estimate how many people you need to add in the field?

We believe that, ultimately, we will be adding approximately 10 new individuals in various functions in the marketing and sales organization. Obviously, this is an evolving target as we watch the business and the potential growth that should take place within the business. But at this point, we are targeting about 10 individuals.

Got you, okay. And then as we think about the value in the vertical integration of your business, especially I think in your prepared comments you made a comment about hybrid diagnostics company. How should we see the revenue segments shift over time? I mean, will we see a greater shift to the diagnostics side versus the clinical lab? And how long do you think that'll take to shake out?

I think over the next year, you will start to see the emergence of the reference activity within the clinical marketplace as it pertains to Enzo. We are agnostic in terms of whether our customers will buy product or perform reference services and deliver reference services to us. We believe the economics favor the utility of reference testing as an economic means for small- to medium-sized clinical laboratories. We see no reason for the need for hundreds of labs in our industry to be performing the same economic tests at a overhead cost structure that can be prohibitive for them. When you look at what is taking place within the market today, where the approach is for economics are driving the elimination of middlemen in many of the areas of product delivery -- when you look at an Amazon, when you look at recently just the announced program between Aetna and CVS, you see the utility and the consolidation that this taking place through the utilization of vertical integration. And we believe that program, that methodology, should benefit the clinical lab market as well. And we hope to be a provider of low-cost testing reference services, which I believe will drive the laboratory side of the business. At the same time, we do not view it as differentiated in terms of product versus service. We will be pleased to provide product if parties wish product, and we will provide the service. We believe the economics will favor the delivery of a service to labs and allow them to focus on sales and marketing, not on processing and production. So I believe you will see the growth on the service side.

Great. That's helpful. And then, just a couple more questions. PAMA, with the final rates coming out, have you guys had time to analyze the changes in 2018 and beyond? And curious if you have any material changes relative to what you guys said last quarter, I think you said it was going to be less than around $500,000.

Kevin, it's Jim O’Brien, I think that's right. As we look at the final rules and see how this is going to play out, I think that's a good estimate. We'll have to be conscious of what, if any, changes private payers make as a result of changes to PAMA, which could be anticipated, but we don't see that at this time. So we're keeping an eye out for it. We'll update you if things would have changed, but that's a good estimate right now.

And then, Jim, you made the comment about what changes, if any, private payers will make. Do you have any or many private payer contracts, commercial contracts tied to Medicare rate?

We do. It's not a significant portion of our business, but there are contracts out there that will review rates with us each year or maybe every other year, and they'll make changes based upon what's happening in the Medicare market.

Okay, understood. And then, I guess, going back to gross margins. On the Labs side, it came in about 100 basis points lower than we expected. Was that really due to the prior authorization for genetic testing? I guess, how should we think about that going forward?

Yes. I think what we've done in the quarter is to make sure that, as insurers take a more proactive view of genetic testing requiring preapprovals, letters of medical necessity, we want to make sure that we're following the rules in compliance. So in the quarter, we made sure that our revenue didn't get out too far in front of us, kept our balance sheet in check. We think we've got it right in terms of what to think about it. And over the next quarter, we'll continue to assess that. But we're very comfortable where we are right now.

Got you. And then last 2 from me is, with the large national payer contract that, I think, you said fourth largest -- I don't think we ever disclose who it is. How's that contribution -- since you guys announced or signed it back in April, has it been ramping? And how is it -- is the trend still getting -- is the pie getting bigger for you there? Should we see other contracts signed as well?

It is growing. Certainly, being able to expand up into the Northeast and eventually into the Mid-Atlantic, having that contract will help us. It's expanding within our current marketplace today. I would say that our efforts to gain more and more in-network contracts is ongoing. It's time consuming, there are a lot of factors that go into it. But we're seeing a lot of good products -- progress. We have good dialogues with payers in the marketplace. So we would expect those contracts to continue to grow. And with that, the opportunity for revenue expansion.

Sure. And then lastly, with the conditional approval of the -- in New York for the 13-analyte women's panel, I guess how should we think about that contribution as well? Obviously, you didn't have much, if any, any impact this quarter, should we see more next quarter? And any help in terms of how big that could get for you.

I think we'll be using it within our own lab in the next months, certainly within the quarter. And as we noted in the script, having that expanded test menu and putting together a compendium of tests that we can offer as a reference service or as product sales, those efforts will really kick in into the third and fourth fiscal quarter for Enzo. As we mentioned, our premarketing activities and the things that we've been doing in the marketplace so far have given us great confidence that the strategy is resonating with clinical labs. And we think the opportunities are out there for us to expand the business, either with reference services or product sales.

(Operator Instructions) There are no questions left...

I guess there is no -- thank you. Being no questions, we thank you for your time. We look forward to reporting our second quarter in March. We believe this will be a period of extraordinary activity for Enzo. So we're very excited about where we're going, and we hope to speak with you in early March. Thank you.

Thank you. That does conclude the Enzo Biochem Inc. First Quarter 2018 Operating Results Conference Call. You may now disconnect.