Enzo Biochem (ENZ) Q1 2018 Earnings Conference Call Transcript

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Enzo Biochem (NYSE: ENZ)
Q1 2018 Earnings Conference Call
Dec. 8, 2017 8:30 a.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

[Audio gap] Q4 2018 operating results Conference Call. I'll now read the company's safe harbor statement. Except for historical information, the matters discussed in this news release may be considered forward-looking looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. Such statements including declaration regarding the intent, belief or current expectations of the company and its management including those related to cash flow, gross margin, revenues, and expenses are dependent on a number of factors outside of the control of the company including inter alia, the market for the company's products and services, cost of goods and services, other expenses, government regulations, litigations, and general business conditions.

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Key risk factors in the company's Form 10K for the fiscal year ending July 31, 2017. Investors are cautioned that any such forward-looking statements are not guarantees for 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 record EBITDA or 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 then issued last night. Our speaker today is Barry Weiner, president. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions and comments following the presentation.

I'll now turn the floor over to your host. Mr. Weiner, the floor is yours.

Barry Weiner -- Chief Financial Officer, President and Treasurer

Thank you. Good morning and thank you for joining us today. On the call with me is Jim O'Brien, executive vice president of finance. We distributed our first quarter results released yesterday after the market closed and I hope you had a chance to take a look at it.

As the results show, we continued 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 marred by a number of significant operational accomplishments that validate Enzo's importance in the marketplace at a time when the 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 will share our thoughts with you in that regard shortly.

Permit me to once again this quarter underscore the growing success we've had in transitioning Enzo into a fully integrated, hybrid diagnostic company. We have done so by blending our two 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 which has made it possible to see 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 four decades and is embodied in our extensive intellectual property estate. The depth, practical knowledge, and experience of our scientists provide us with unique competitive advantage with which to develop new technology that is both medically relevant and importantly cost efficient.

This is an important part of 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 two 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 state of the art diagnostic capabilities provide a need 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 manufacturing, 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 have required sophisticated new techniques and assays that are needed but that is also burdensome and expensive.

If you combine this with the high capital cost to expand, operate or maintain laboratory facilities and the ability for labs to extend their and testing menu at affordable pricing and perhaps most importantly, steadily declining reimbursements make it easy to understand the challenges these clinical labs face today. Enzo had to brace into the task of developing affordable solutions that are vitally needed. The effectiveness of this strategy is reflected in the increasing attention 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 benefits clinical laboratories, their physicians, and the 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 the 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 of research products in Enzo Life Sciences in order to build capacity for turning on 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 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 ready 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 the key driver with revenue of $20.3 million, a 10% increase over the prior year. Gross profit increased to $5.2 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 of $640,000, or $0.03 per share, compared with a net loss of $1.5 million, or $0.03 per share, in the prior year. EBITDA and non-GAAP measure was break-even 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 $20.2 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 healthcare providers has also been a growing factor, particularly business derived from our being named an in-network provider by the fourth largest national healthcare insurer last April. The lab's 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 cost and improving efficiency, SG&A declined by 11% and operating expenses fell by 12%. Our financial condition remains solid, providing us with capital to advance both our development and marketing programs, to extend our business throughout the United States and 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 continued to move rapidly ahead on the product-development and regulatory-approval front. Conditional approval during the quarter by the New York State Department of the remaining five women's health tests has made possible our offering of one of the most complete women's health diagnostics 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 with a potential for savings, either by buying products or services from Enzo, could be material.

Our belief is that our diagnostics panel will offer a cost-efficient approach to 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 this service to Enzo Clinical Lab's existing marketing territory in the greater metropolitan New York, New Jersey, and New England area. We are also prepared for a national marketing program with a complete testing menu of affordable products and services that we offer clinical labs around the country with the option of purchasing the Fast One Plus assays that are compatible with their existing systems or sending the results to Enzo on a reference basis for overnight processing and recording 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 Sciences delivered a host of presentations at the annual meeting of the Association for Molecular Pathology in Salt Lake City. It involves a report that details 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 vaginitis associated with 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 prolactin in-situ hybridization is otherwise known as the FISH technique used in laboratories to visualize chromosomal abnormalities that outperform all 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 applications for detecting 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, an 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 for 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 we believe to be impending PAMA Medicare reimbursement levels, the first of which is implementation expected shortly after the first of the year. We hold the of further impacting the economic well-being 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 of even more timely and important.

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

Questions and Answers:

Operator

At this time I'd like to inform everyone, if you'd like to ask a question, please press star, then the number 1 on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Again, to ask a question or make a comment, please press * 1.

Your first question comes from the line of Kevin Ellich of Craig-Hallum.

Kevin Ellich -- Craig Hallum -- Analyst

Good morning. Thanks for taking questions. Barry, I just wanted to go back to the good cash flow that we're seeing and now you have about $67 million of cash on the balance sheet. What are your plans and how do you guys plan to deploy that or at least the discretionary portion? How would you prioritize that?

Barry Weiner -- Chief Financial Officer, President and Treasurer

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 concerted by 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 in more human capital 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 seen 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 evaluation 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 timeframe.

Kevin Ellich -- Craig Hallum -- Analyst

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

Barry Weiner -- Chief Financial Officer, President and Treasurer

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.

Kevin Ellich -- Craig Hallum -- Analyst

Got you. OK. And then as we think about value in the vertical integration of your business, especially, I think, in your prepared comments you made a comment about hybridized diagnostics company, how should we see the revenue segment shift over time and will we see a greater shift to the diagnostics side versus the clinical lab and how long do you think that will take to shape out?

Barry Weiner -- Chief Financial Officer, President and Treasurer

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 service and deliver reference services to us. We believe the economics favor the utility of reference testing as an economic need 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 an overhead cost structure that can be prohibited for them.

When you look at what is taking place within the market today where the approaches for economics are driving the elimination of middlemen in many of the areas of product delivery when look at Amazon and you look at recently just the announced program between Aetna and CVS, you see the utility in the consolidation that is taking place through the utilization of vertical integration and we believe that program 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 the product if parties wish product and we will provide the service. We believe the economics will favor the delivery of the service 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.

Kevin Ellich -- Craig Hallum -- Analyst

Very good. That's helpful. And then just a couple more questions. PAMA, 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.

Jim O'Brien -- Senior Vice President, Finance

Hi, 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 and we'll update you if things were to change but that's a good estimate right now.

Kevin Ellich -- Craig Hallum -- Analyst

And then, Jim, you made a comment about what changes if any private payers would make. Do you have any or many private-payer contracts, commercial contracts, tied to Medicare rates?

Jim O'Brien -- Senior Vice President, Finance

We do. It's not a significant portion of our business but there are contracts out there that 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.

Kevin Ellich -- Craig Hallum -- Analyst

OK, understood. And then, I guess, going back to gross margins on the lab side, it came in at about 100 basis points lower than the expected. Is that really due to the prior authorization for genetic testing? How should we think about that going forward?

Jim O'Brien -- Senior Vice President, Finance

Yeah, 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 pre-approvals, letters of medical necessity, we want to make sure that we're following the rules and we're compliant. 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 we think about it and over the next quarter we will continue to assess that but we're very comfortable where we are right now.

Kevin Ellich -- Craig Hallum -- Analyst

Gotcha. And then last two for me is, with the large national [Inaudible] contract, I think it's the fourth largest, I don't think you ever disclosed who it is, how's that contribution, since you've announced, or signed it, back in April, has it been ramping and is the pie getting bigger for you there and should we see other context as well?

Jim O'Brien -- Senior Vice President, Finance

It is growing. Certainly being able to expand up into the Northeast and eventually into the Mid-Atlantic, having that contact will help us to extend within our current marketplace today. I would say that our effort to gain more and more and in network contract is ongoing. It's time-consuming.

There are a lot of factors that go into it but we're seeing a lot of good projects, 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.

Kevin Ellich -- Craig Hallum -- Analyst

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

Jim O'Brien -- Senior Vice President, Finance

Yeah, I think we will be using it within our own lab in the next month, certainly within in the quarter and, as we noted in the script, having that expanded test menu and putting together a compendium of tests that we could offer as a reference service or as product sales, those efforts will really kick in the third and fourth fiscal quarter for Enzo. As you mentioned, our pre-marketing activities in 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 take the opportunities that are out there for us to expand the business, either the reference services or product sales.

Kevin Ellich -- Craig Hallum -- Analyst

Sounds good. Thanks, guys.

Operator

Once again, if you'd like to ask a question or make a comment, please press *, then the No. 1 on your telephone keypad.

Barry Weiner -- Chief Financial Officer, President and Treasurer

I think no questions. We thank you for your time. We look forward to reporting our second quarter in March. We believe this will be a very extraordinary activity for Enzo.

So, we're very excited about where we're going and we hope to speak with you in March. Thank you.

Operator

Thank you. That concludes the Enzo Biochem Inc.'s first-quarter 2018 operating results conference call. You may now disconnect.

Duration: 29 minutes

Call Participants:

Barry Weiner -- Chief Financial Officer, President and Treasurer

Kevin Ellich -- Craig Hallum -- Analyst

Jim O'Brien -- Senior Vice President, Finance

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