Enzo Biochem Inc (ENZ) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Enzo Biochem Inc. Third 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 the 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 expectation 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 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 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 press release detailing our third quarter results last night after the market closed. I hope you've had a chance to review it.

This morning, I would like to accomplish several things. That is, detail the work we've done and have been doing to bring our disruptive diagnostic technology to market and provide a context for our current progression towards commercialization of our strategic plan as well as reviewing our financials for the quarter. First, though, some background as to how our extensive expertise in diagnostic testing products and services fits into the present health care environment.

As we have previously stated, despite dramatic growth in molecular testing, independent labs are being left behind because they are under intense and growing cost pressure, the result of rigid high material prices and declining reimbursement. As to the latter, payment reform has evolved into sharp government reductions in reimbursements, which some analysts estimate may approximate $3 billion over the next 5 years. It is highly probable that dramatic reductions in laboratory margins are likely, and this comes at a time when they lack the capability to deal with molecular diagnostic technologies that are becoming the new standard.

Health care, overall, is in a transformative state, one we at Enzo, as among the pioneers in molecular diagnostics, have long recognized. Accordingly, with our inherent innovative thought process and extensive patent base, we embarked just a few years ago on the development of innovative diagnostic platforms and assays designed to bring independent labs meaningful cost savings, improved service to physicians to assure the comfort and the needs of patients and, overall, to help build long-term value. This involved developing superior critical assays that offer unusually high sensitivity, specificity, reproducibility and accuracy, while being capable of running multiple tests from a single specimen. Specifically, the platforms and assays we developed are designed to achieve multiple benefits, including savings that can range from 30% to 50%, superior product performance and technology that fits seamlessly into customers' current workflow.

Take our AmpiProbe molecular diagnostic platform. It allows paneling, which means the need for a single sample only. Up to 20 assays can be run simultaneously, providing multiple capability. The sensitivity of our tests exceed those provided by other systems produced by major diagnostic suppliers. It is also flexible for use with certain existing installed automated systems with which labs currently use, in addition to being in accordance with existing New York State guidelines. In its first quarter of test pilot operations, it performed perfectly in line with our cost and expectations and also, based on early market indications, is gaining increased acceptance.

Another platform addressing immunoassays, our pathfinding POLYVIEW product, an enhanced diagnostic detection system used by pathologists in reading tissue biopsy, was favorably cited by a leading peer review publication for showing no false positives. By contrast, it noted that other platforms widely used had false positives ranging from 29% to 50%. In diagnosis, immunopathology false positives can lead to unnecessary treatments or affect treatment decisions.

Our list of diagnostics, already substantial, is growing. Thus far, we have received approval from the New York State Department of Health for tests, including human papilloma virus infection E6/E7, hepatitis C viral load, a cardiac marker, in-situ hybridization test allowing for localizing specific nucleic asset targets within fixed tissues and cells. And notably, we have also received the New York State health agency's approval for a full women's health panel that is gaining serious attention. It contains 13 analytes that reduce the necessity for multiple tests, providing for greater patient comfort in addition to being highly reliable.

Our product pipeline currently is focused on a wide range of molecular diagnostic tests from a fertility assay to those for amplification and detection of hepatitis B virus and HIV viral loads, along with an enhanced cancer antibody panel detection label.

A new biopsy probe for cancer staging was added to our development pipeline for introduction later this year. In addition, a UMM marker, which is Ureaplasma, Mycoplasma and Mycoplasma genitalium, is currently under validation with -- and it will expand the company's 13-analyte women's health panel on the AmpiProbe platform.

Consequently, our patent state gives us important flexibility and freedom to operate. We have over 200 patents that have proved to be an invaluable asset to which we have added another 20 patents this past year.

If you look at our expenditures for research and development, you will see that they are very measured. This is because in keeping with our tradition at Enzo, we have learned to use our capital wisely, and I venture to say that our company is perhaps among the most efficient users of capital in the health care field.

I would like to emphasize that what provides a competitive edge for us is Enzo's unique structure that we have created in house as we move to improve diagnostic laboratory economics. That is, our life science products group, which functions as a supplier of globally, of wide -- of a wide variety of assays, also plays a crucial role in the development of our new products and their manufacturer. At the same time, Enzo Clinical Labs is a special asset serving a growing roster of physicians in the New York metropolitan area, now extending to -- from Pennsylvania to the south and states in the New England area and north. The lab traditionally picks up samples from clients, and its state-of-the-art electronic capabilities enable it to transmit results from testing to physicians overnight. However, it also plays a crucial role in evaluating on a real-time basis the diagnostics we are developing, which we believe is an important reason as to why our diagnostic platforms and assays are proving so highly effective and versatile.

What we have achieved is an infrastructure rare in our industry. It has enabled Enzo to develop platforms for use in multiple functional areas such as molecular diagnostics, anatomical pathology, immunoassays, genetics and genomics and flow cytometry, with the capability to manufacture and distribute reagents and kits, utilizing our global sales and marketing reach. The goal is to drive the market to Enzo's low-cost, centralized testing capability, providing laboratories with higher marginal return.

I'd like to share with you a number of developments on our commercial, sales and marketing program that are evolving in order for Enzo to capture this market opportunity.

Over the recent months, Enzo has recruited incremental sales professionals to drive revenue growth, with the addition of new professional team members, including new leadership in sales. We've added a major in-network laboratory provider of a large New England commercial payer covering more than 3 million individuals. We've also filed additional applications, which are pending for in-network status, with several payers that will expand Enzo's reach of testing services to millions more across the United States.

We have also accelerated our product and service marketing efforts, with new staff working around branding of technology platforms and formulating new print and digital articles and marketing materials. This is coupled with stepping up attendance at targeted shows and conferences. And we are engaged in a growing number of meetings and activities around potential partnerships as well as collaborations with hospital networks, diagnostic manufacturers and laboratories, with specific emphasis on the use of Enzo diagnostic reagents in existing automated systems commonly available.

We are also contemplating another facility expansion to support our anticipated growth, which, hopefully, we will have more to comment on in the coming weeks.

I'd like to now turn to our financial results for the third quarter. For the third quarter of fiscal 2018, which ended on April 30, I would like to point out that our quarterly results saw service revenues and gross margin being adversely impacted by a -- by one large relative customer in a shift to internalizing genetic testing ordering. We view this as a unique situation from our normal customer base. The second event was adverse weather in the northeast during the past February and March. And the third was an evolving payment practice at a commercial insurance payer. That said, Enzo showed resiliency in the quarter, replacing to a large extent this revenue by expanding our coverage area, increasing services to insurance networks and successfully launching tests, such as AmpiProbe, at a lower cost, therefore -- thereby, improving our gross margins.

Despite these items that I've -- that were just mentioned, core service testing volume increased nearly 2% or $2 million over the prior year period, with growth in basic esoteric and genetic testing. Included in this amount were strong revenue related to the recently launched AmpiProbe platform in the quarter. All told, service revenue totaled $18.1 million versus $19.6 million in the prior year.

Product revenue was slightly ahead of the prior year at $7.4 million as reported sales increased in Europe and stabilized in the United States.

Gross margins in the quarter were 43% compared with 45% in the prior year period.

Total operating expenses were $13.9 million compared to $12.4 million, an increase of $1.5 million.

Legal expenses were $1.7 million and accounted for $1.1 million of the increase in operating expenses, in addition to the heightened marketing and sales-related expenses of $0.3 million in advance of launching new sales initiatives. The increase in legal expenses were principally related to the New York litigation with Roche, where Enzo is the plaintiff.

The GAAP and non-GAAP net losses were $3 million or $0.06 per share, of which half was due to legal fees compared to the breakdown of results in the prior year period.

Looking at our segments. Service revenue were -- was $18.1 million compared to $19.6 million in the prior year period as a result of the aforementioned items that was offset by growth in testing volume.

Gross margins declined to 39.4% from 42.1% a year ago. Operating income amounted to $0.5 million compared to $1.5 million a year ago.

Noteworthy was the steady growth being experienced in the newly installed AmpiProbe platform with significantly above-average profit margins compared to historical laboratory testing.

Products revenue increased in the third fiscal quarter to $7.4 million from $7.3 million a year ago. The current quarter's revenue was impacted favorably by foreign exchange currency by approximately $0.2 million.

With costs well maintained and sales of higher-margin products resulting from the units product mix alignment, product margins advanced to 52% from 51% a year earlier.

Operating income was $0.4 million for the April 2018 quarter and $0.6 million in the year-ago period.

For the 9 months ended April 30, total revenues amounted to $80.3 million. This is up 1% from $79.6 million a year ago.

Gross margins were 43.2% versus 44.9% a year ago. And SG&A as a percentage of revenues was 41% versus 42%.

Legal expenses amounted to $3.8 million, up from $1.3 million a year ago, again, principally due to the litigation expense in New York involving Roche.

The GAAP and non-GAAP net loss was $4.6 million or $0.10 per share and $5.7 million or $0.12 per share, respectively, compared to GAAP and non-GAAP net loss of $2.6 million or $0.06 in the prior year period.

EBITDA and adjusted EBITDA was a loss of $3.9 million compared to a loss of $0.2 million in the prior year period.

As of April 30, 2018, cash and cash equivalents was $62.6 million compared to $64.2 million at July 31, 2017.

Working capital totaled $67.7 million, and the company has no debt.

Importantly, operating segments continue to be cash flow positive. Cash used in operations for the 9 months ended April 30, 2018, was only $0.5 million compared to cash used of $1.9 million for the 9-month ended period of April 30, 2017, an improvement of $1.4 million.

In conclusion, we at Enzo are addressing reimbursement and cost pressures in the laboratory market by developing low-cost, high-performing and easily adaptable diagnostics. The health care industry, including diagnostics, is in a period of turbulent change. Health care companies are fighting to withstand competition by configuring business models to manage and grow in nontraditional ways. This has been embodied in the last year with a number of unique transactions, pairing partners that historically have had diverse business models.

A few examples of these include the CVS Health acquisition of Aetna, also the Cigna acquisition of Express Scripts and the Amazon, Berkshire Hathaway, JPMorgan Chase Consortium to drive more streamlined health care for their employees. And these are only a few of the notable transactions in the year. The tenor within these organizations is to reorganize themselves to succeed in a more competitive, market-driven environment to reduce costs, eliminate channel players or middlemen, improve coordination and increase vertical integration and, ultimately, enhance value. Enzo has been driving its strategy, capitalizing on our unique integrated structure to eliminate costs, streamline services and improve patient care outside the traditional approach that has been the basis of the diagnostic industry for a number of years.

According to published reports, the laboratory market is approaching $75 billion in size, where reimbursements are shrinking, costs are increasing, while testing volume is expanding, particularly in the area that costs the most. Enzo's strategic plan, which has been unfolding over the last 1.5 years, has included reorganizing our business segments, extensive product development, validation and approvals, leading to commercial launch. Our focus is to create affordable solutions to overcome cost pressures in the industry by providing through a unique business model centralized and low-cost reference testing to laboratories nationwide, allowing them to not only improve their margins but also extend their testing menu into high-value molecular testing as well as other functional areas.

With a solid financial base and our lengthy experience, we are on the diagnostic development front moving rapidly and deliberately with an assured focus. The opportunities are certainly there, and we plan to fully capitalize on them.

I would like to turn the call over to questions at this point in time.

(Operator Instructions) And our first question comes from the line of Per Ostlund with Craig-Hallum Capital.

Want to start out with the customer that internalized the genetic testing. And, Barry, I appreciate that in your prepared remarks, you mentioned that you saw that as a unique situation. So I guess the first question would be, what gives you the comfort that it is a unique situation? And is there any risk that it extends to other customers -- any other customers in your customer base? And then I guess related to that, while I assume you're going to probably be trying to get this customer back, how should we be thinking about the impact on forecasts in the coming quarters given that it was kind of a $1.9 million headwind to this quarter?

In the laboratory business, customers are of varying sizes and types in terms of ordering processes. This was a unique customer for us in the way they proceeded with their ordering process. It stood out among our group in a very, very special way in that they utilized a third party as an ordering processor that worked with us. I think, overall, we view this particular account as quite unique, and we do not see it falling into the same pattern of our other customer bases. We're quite confident that it will not affect our ongoing activity in our other business. We believe, on an annualized basis, the totality of the impact could be between $5 million and $6 million. As you can see from our numbers this past quarter, we replaced -- we grew our business by close to $2 million. And that growth is taking place through extension of new accounts, geographical territories. This is the nature of the laboratory business, particularly when we're in a turbulent time, where billing practices are affecting so many of the processes that physicians are attempting to utilize. So we have to expect a little bit of churn in our business model in terms of our customer base. We are not concerned that this will have a long-term effect. We feel we will be replacing the business. We've done a pretty good job at this point in time going forward. But we're more focused on building the growth of our strategic model. And this -- and I think it's an important issue to put on the record. Our value proposition as we move forward is in the introduction of our strategic, low-cost testing capabilities that can be utilized on automated platforms that are already in place in so many labs around the United States and the world. And the growth will come from the entering of relationships and development of business relationships where Enzo will turn into a centralized, low-cost referencing operation, more than focused on individual accounts that may move in or out of the system. This is a very common thing within the clinical laboratory world. This is just one event. I think, over the period of time, it will not materially impact us.

Okay. And I think you provided me a good segue to my next question related to the sales and marketing capabilities that you're adding both with people then expanded presence at trade shows and conferences. I think the press release noted that it was an acceleration of the activity. So I'm just curious to see how you would characterize the additions you have made. Have you made more additions than maybe you expected to at this point given the tenor of discussion with payers and labs across the country? Are you doing more to bolster the sales and marketing capabilities than you maybe had originally planned? Or just doing it quicker than maybe you originally planned?

I believe, last quarter, we mentioned that we have a goal to bring on at least 7 new sales individuals to bolster our sales group that will be targeting a nationwide campaign to introduce our testing capabilities to laboratories and institutions around the United States. We have been engaged actively in that process. And today, I think, we have managed to fulfill about half of that goal as we continue to press forward very aggressively to complete that. It is a process, and we are methodically searching and bringing in high-quality people to deal with the opportunity that this is presenting. So I think, overall, we are moving forward with our plan. It is on target. I would like -- obviously, as we press along, we will modify, we may extend it, we may enlarge it. We are -- we have been very, very cautious looking at the test pilot of the product lines to make sure that we are on solid footing, and we are. They have been fulfilling our goals and expectations, which is extremely encouraging. And we think the opportunity is significant. We see the environment changing quickly. We see hospitals emerging now and moving towards opening up to the opportunities of partnerships. And we see independent laboratories understanding that change is necessary, that we -- that one must look for different structures, different opportunities to be competitive in this marketplace. So the environment is well worth us -- is well with us in terms of our goals and agenda, and we are aggressively moving there.

Okay. Excellent. Wanted to ask you also about the new in-network agreement in New England. And not sure if you are at liberty to disclose who that commercial payer is, but obviously, we would be interested if you can. But wonder if nothing else, if you can characterize sort of the scope of that opportunity. Obviously, at this point, it's probably difficult to size, but how important of an opportunity can this be? When do you expect to start turning on services there? And maybe just give us a little bit of color as to how the in-network contract was won. Is this a function of your expanded capabilities? Or what else went into achieving that status?

The payer is a significant payer. I cannot disclose at this point in time, but it will become public. It opens up the northeast area for us. It will open up new geographical opportunities. The payer, I believe, has control of approximately 3 million lives, and so will open up opportunities throughout the New England area for us. It's one that we feel will be very important to our geographical and product expansion. In terms of obtaining these contracts, I believe Enzo today represents a very interesting laboratory for insurance providers to consider and look at. We are unique in that our product offerings are comprehensive, specifically in the women's health area. At the same time, I think we are being recognized as a provider and generator of novel economic options for laboratories out in the marketplace. And I believe providers recognize us for that. And I think our status and our integrated vertical structure differentiates us from many in the industry. And as a result, I think our business model is one that will lead to cost efficiencies, and everyone is looking for cost efficiencies in the marketplace. So I believe we are unique. And in terms of just one last point on your question, we have just begun to expand into the New England area up through Connecticut into Massachusetts. I believe the addition of this provider will help to accelerate that. You probably will not see it truly impact until the first quarter of next year when we begin the extension into that marketplace, but it is very significant for us.

Okay. Excellent. One more and then I will -- I promise to let somebody else ask a question. Just because you took the time to point out in the press release the additional patents, you made mention of a patent covering a potential cancer therapeutic or patents surrounding a potential cancer therapeutic. Is there anything you can talk about on that front? I know that the therapeutics business, I think, largely flies under the radar for you guys. So just curious if there was any signaling there with actually pointing out or calling out that potential product in the press release.

We have had a -- an area of activity in the therapeutic area for quite a while. It has been quietly pursued. We have some very interesting products in that area that are being looked at and explored to bring to commercialization. We have been focusing, as we have always said, on the diagnostic front. At the same time, we've not abandoned our therapeutic activities. If anything, we believe that there are potential products there that may have incredible significance in certain areas of treatment. And we are working to bring those to an area of opportunity that could be very, very interesting. The particular patent that you are referencing is a patent that covers the -- a product which is an inhibitor of a certain kinase that impacts cancer replication. It is being worked on, and we believe that at a point in time, we will begin human clinical trials on that. At that point in time, we will certainly announce the development of that program. It is one which is in early stages of activity but could have potentially high significance in terms of contribution and value. That is just one product. We also have products that are being explored and put into a format that might present a commercialization opportunity in the area of treatment of liver cancer, in the treatment of Crohn's disease, to name a few. I think there will be more to be said about the therapeutic activity in the near future. But at this time, it is active. It is viable. And I believe it may have extremely positive consequences for us as a company.

(Operator Instructions) And our next question comes from the line of Pat Gallagher with Laidlaw.

I wanted to maybe just ask, and I know it's early days, have you started to -- now that you've optimized the technology in your own labs, started to talk to outside people? And does that entail phone calls or meetings? Or are they coming through the labs to see how the technology works? And how should we view the low-hanging fruit here? Is it the independent labs? Is it the hospital networks? I mean, they probably have different sales cycles, and again, I know it's early days, but do you have priorities in terms of reaching out to folks? Or is it pan anybody who tests?

You're seeing aggressive effort at this point to engage and educate our constituency, which are -- which is independent labs. It is also hospital labs. We are in an environment, as I commented earlier, where cost efficiency is a paramount goal and a necessity for clinical laboratories across the country. Our product line and our strategy offers efficiencies of economics and improved margin capability for partners. As a result, we are in dialogue with independent laboratories. We are in dialogue with hospitals. And it is important because it is a process, it's an educational process, but at the same time, the direction of our effort is clearly pointed to the highlight of the issues that are impacting labs across the United States. So it is a cycle. We are engaged in it. It's aggressively being pursued. And the results of it will be apparent, I hope, over the next few quarters.

Our next question comes from the line of Jeff Silver with Berson+Corrado.

You partially answered this with your very last comment there, but I wonder about the pace and the timing of the change in the marketplace. Would you say that the pace is more a function of what you are able to do internally or this process that you are going through with the players in the industry? And in regards to that, you mentioned that you're considering another expansion lab in Long Island. Can you say a little bit more about that, along what lines that expansion would be? And, obviously, you would be highly confident in getting the business, but maybe you could tell us a little bit about what you're referring to when you talk about the expansion.

The expansion I'm referring to is an expansion of our manufacturing capabilities. As we move more products into a GMP manufactured process, we need to expand our capabilities to meet those types of demands. We do manufacture a significant number of products. We are particularly strong right now as we move towards products that will be utilized in the clinical marketplace, which is our -- which are our diagnostic systems. These need a very specific type of manufacturing facility and capability, of which some is present. But as we grow and move, we will need enhanced capabilities to deal with that. And those facilities, certainly, are prerequisite for us to manage what we believe will be the growth in our business. Also, we do see expansion in our services side. As we bring in more very sophisticated types of tests, we will need more laboratory capability, and that will be a component thereof as well. In terms of the pace, the acceleration here, we have spent the last few quarters aggressively building our infrastructure. We are in the process of enhancing our sales team to build and to enhance that pace. That is the goal of adding more sales and marketing professionals to the team. The client -- the clients that we are approaching are, in some respects, different than our historical client base, particularly with the nature of our product lines and messages. We are now looking to educate laboratories, whether they're hospital-based labs or independent labs, to the strategy of using a lower-cost, centralized referencing capability that can improve their margin, that can extend their menus. The issue of capacity in the diagnostic industry is a very interesting one in that there is excess capacity in diagnostic laboratories that can be utilized more fully if applied in different areas. The concept of centralizing high-value testing is one that is paramount to improving margin for clinical labs around the United States today. And I believe that message is being well received. If you look throughout the industry, it is the direction that many different types of businesses are moving towards to obtain efficiencies. We believe we have the infrastructure, the capability, and most importantly, the products to be able to do that type of structure and provide the results to these labs or hospital-based laboratories. And so we're moving forward. It is an educational process. Fortunately, dialogue is plentiful. We are engaged in discussion with many partners, many, I would say, potential partners. And it's an issue of timing and education. And we do believe that the options are limited for so many of the parties out there that we will generate success at the end of the day.

There are no more questions. I want to thank you. We look forward to speaking to you in our next call, which will be in the fall. We believe the next period will be one of extreme excitement for Enzo. We look forward to reporting to you at that point in time. Thank you, and goodbye.

A replay of this broadcast will be available until Tuesday, June 26, at 12 midnight. You may access this replay by dialing 1 (800) 585-8367. The PIN number is 8178498. This replay is also available over the Internet at www.enzo.com. This concludes today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.