Oct 16, 2012
Operator
Good morning, and welcome to the Enzo Biochem Inc. Fourth Quarter 2012 Operating Results Conference Call.
I will now read the company's Safe Harbor statement.
Operator
Except for historical information, the matters discussed on this conference call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectations of the company and its management, including those related to cash flow, gross margins, revenues and expenses, are dependent on a number of factors outside of the control of the company, including inter alia, the markets for the company's products and services, costs of goods and services, other expenses, government regulation, litigations and general business conditions.
See Risk Factors in the company's Form 10-K for the fiscal year ended July 31, 2011.
Operator
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.
Operator
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.
[Operator Instructions] I would now like to turn the floor over to your host, Mr. Weiner, the floor is yours.
Barry Weiner
Good morning, thank you for joining us. Joining me today are a number of members of our senior management team, Mr.
David Goldberg; Mr. Andrew Crescenzo; and Mr.
Andrew Whiteley.
Barry Weiner
The fourth quarter, and indeed, all of fiscal 2012 has been very eventful and I would like to share with you the thoughts that went into our strategic decisions and what we see for Enzo going forward. We believe that the full implementation and realization of the realignment affected will result in a more focused, financially stronger company that is best poised to serve today's dynamic healthcare market.
Barry Weiner
Our company-wide action, which we announced yesterday, is actually the culmination of a number of months of planning and execution. What has emerged is a more concentrated, cost efficient and focused organization that can operate far more effectively servicing those biomedical markets with the highest potential.
Barry Weiner
Enzo's unique structure provides unparalleled opportunities for synergies between our divisions in developing and testing new highly promising diagnostic and biomedical products using our multichannel capability to bring them to market.
Barry Weiner
Before getting into a discussion of the many valuable opportunities that we are pursuing, I would like to detail the realignment we announced today. The plan that we have implemented addresses each of our operating divisions as well as our corporate infrastructure with the goal of significantly improving the company's financial results over the short and longer term.
I'd like to highlight several of these actions we announced yesterday, which have already been implemented.
The key outcomes of our actions are to
first, preserve and enhance our cash position while focusing on driving product revenue and bottom line return; second, to complete the consolidation of the acquired Enzo Life Sciences businesses; third, to focus the strategic product direction towards diagnostic and applied clinical utility; and fourth, to sustain the growth at Enzo Clinical Labs at levels that are above the industry norm.
The key outcomes of our actions are to
First, at Enzo Life Sciences. As we've modified our approach to selling higher margin products to core facilities and pharma, we have been able to lower and reduce the number of low-margin products that we have been carrying on our ranks.
We also have been able to reduce the number of employees significantly in our operation. Going forward, there will now be a far greater focus on diagnostic and applied clinical applications.
We believe by developing and selling higher value margin products, we can expect to better improve our cost base and structure. This should allow the division to begin to generate significant cash flow even while being presented with the challenging environment of a constrained research expenditure market.
The key outcomes of our actions are to
Of the $6 million in expense reductions announced yesterday, the vast majority within this division, they include reductions in costs through a consolidation of manufacturing facilities and improved logistics. Also, as a result of a more focused research and development activity, we significantly reduced our R&D expense.
The key outcomes of our actions are to
The company also generated a substantial savings in general and administrative expenses through staff reductions in areas where there was duplication. Since we completed the last Life Sciences acquisition in 2009, we have reduced headcount by nearly 50% as we stand today.
We have, in effect, completed a top to bottom consolidation across the entire division. In addition, we have reduced annualized corporate expenses by nearly $1 million, primarily through reduction in headcount and staffing support functions.
The key outcomes of our actions are to
While Enzo Clinical Labs has realized excellent growth that has far outpaced the industry and has a number of new esoteric and molecular tests on the horizon, we will also continue to focus on managing costs here as well. Today, because of the investments we have been making at Clinical Labs, we can generate cost savings by increasing the menu of tests being processed internally that previously have been sent to outside vendors.
The key outcomes of our actions are to
As we continue to invest in the lab infrastructure, both technical as well as via information technology, we believe that these enhanced capabilities at our labs will allow us to reduce marginal cost while keeping our service at the high level that our clients demand to receive.
The key outcomes of our actions are to
While the changes I just discussed have already been implement and will be evident in the current quarter, the full impact of them will be realized over the course of the year. Historically, legal expenses have been a material expense line item for us.
We have been working to contain and limit these expenditures. Our legal expenses have been driven by our necessary ongoing legal activities.
The key outcomes of our actions are to
It should be noted that after many years, our patent infringement trial against Life Technologies in the Federal Court of New Haven, Connecticut has commenced. The trial is the result of an action we brought against the former Applera Corporation.
That said, we expect both Life Sciences and Clinical Labs to report improved results compared to the year-earlier period and for corporate expenses, excluding extraordinary legal expenses related to the trial to decline.
The key outcomes of our actions are to
I would like to make a few comments about our financial results before we detail some of the exciting opportunities that we see on the horizon. During the fourth quarter, Enzo took a $24.5 million pretax onetime noncash impairment charge.
This charge does not impact our operations in any way. A large portion of the charge was related to a write-down of goodwill based on a complex formula that was triggered by a decline in our market cap in the fiscal fourth quarter and lower historical revenues at our Life Sciences division, we adjusted the carrying value of the goodwill, intangibles and trademarks from our acquired companies.
Contributing to this decision was our rebranding strategy, under which many of the products that had been sold under other brand names will now be rebranded under the Enzo name over the next few years.
The key outcomes of our actions are to
For the year, our total revenues increased to a record $103 million. Clinical Lab sales for the quarter advanced 11%, and for the year, advanced 13% to nearly $60 million, while gross margin rose 10% to $23 million.
Enzo Life Science product revenue was $37.2 million, down from $41.8 million in 2011, while gross margin on products was down about 8% at Life Sciences. As a percentage of revenue, it actually increased by 100 basis points.
Our current ratio remains 2.1 to 1.
The key outcomes of our actions are to
Finally, the moves we announced today should get investors comfortable that our cash position is not only sustainable but will allow us to pursue our strategic goals. As an example of our focus on our balance sheet, our cash utilization was reduced to $200,000 from $3.4 million a year ago in the period.
We ended the year with over $15 million in cash and we expect that the initiatives we announced today will enable Enzo to generate cash during fiscal 2013.
The key outcomes of our actions are to
Several other financial highlights for the quarter include improved margins on products of about 300 basis points in Enzo Life Sciences, this despite lower product revenue and royalty income. EBITDA for the company, net of the adjustment, was about even with last year and revenues were close to last year's.
The key outcomes of our actions are to
We believe that our company has an opportunity, especially with some of the technologies that I will discuss shortly, to become a leader in developing and instituting comprehensive enabling platforms for next-generation molecular diagnostic assays, which are the fastest-growing segment of the laboratory market. The strategic synergies between our 2 operating divisions will become more pronounced operationally, especially in the marketing and in the development of high-value diagnostic and applied clinical products.
The key outcomes of our actions are to
Molecular diagnostics particularly is a high-growth market that continues to command an increasing share of health care dollars. Its growth rate is estimated at 3x that of core diagnostics.
And if the projections are correct, as an individual market, it is slated to top $8 billion in just 4 years. The corporate realignment that we have just completed, in addition to greatly improving our financial position, will allow us to move some key programs forward even more rapidly.
The underlying theme here is that Enzo's integrated structure, that is having both Life Sciences and a full-service and Molecular Clinical Laboratory in the same campus allows us opportunities not only in services but in products as well.
The key outcomes of our actions are to
It is this theme that is the cornerstone to our realigning the company and one that you will hear several times as I describe a few of our high-value initiatives. Let me start with our AmpiProbe platform.
AmpiProbe, as some of you may know, is our internally designed proprietary platform, which can enable one to perform a real-time PCR type amplification detection in a better, faster and more economical way. The initial product, a viral load detection assay, can be used with conventional existing open systems that can be found in many reference laboratories.
As we have announced earlier, we are in a dialogue with the New York State Department of Health for approval to use this product as a laboratory developed test at Enzo.
The key outcomes of our actions are to
Currently, it's estimated that the market for assays such as these that are now run by Real Time Amplification Detection methodologies exceed $2 billion, which is why we are so excited about the possibilities of developing both assays and products through Clinical Lab and Life Sciences based on AmpiProbe.
The key outcomes of our actions are to
Our published work has shown that assays based on this technology platform produce results within nearly 100% concordance with other systems. While at the same time, providing sensitivity twenty-fivefold or higher than existing technologies.
The question is why is this important?
The key outcomes of our actions are to
As healthcare costs become more burdensome, diagnostic laboratories are being put under greater pressure to increase the efficiencies of their operations. The higher sensitivity that test based on the AmpiProbe platform may generate can allow such labs to reduce the cost of goods by using smaller amounts of costly reagents.
Perhaps even more significant, increased sensitivity can lead to the use of smaller sample volumes, which can have multiple benefits that can all be grouped under the general heading of handling. Handles are multiple tests run off the same sample at nearly the same time.
The key outcomes of our actions are to
In a Clinical Laboratory, the most costly portion of DNA-based test is often the portion relating to sample extraction. If a lab can spread this cost across a set of tests versus over just 1, it could result in a substantial economic efficiency.
Second, the ability to panel may be able to reduce the need for patients to have to be called back by their physician to obtain additional samples and test results. Reducing this visit can eliminate anxiety for the patient and the inconvenience for the doctor, both key elements in the successful new diagnostic paradigm.
The key outcomes of our actions are to
Once a New York State approval for AmpiProbe platform is granted, as we hope it will be soon, our plans are to market viral load assays through Enzo Clinical Labs. Additionally, we are planning to apply for CE IVD designation for assays in order to make them available as a diagnostic product in the European Union.
In this manner, it is possible for both Enzo Clinical Labs and Enzo Life Sciences to benefit.
The key outcomes of our actions are to
Also, a major new panel that we expect to introduce, subject to approval, is a unique panel of products to identify at least 1 dozen women's health diseases, again, using a single specimen. Again, we believe that our ability to perform multiple tests on a single specimen, especially one that requires a visit to a doctor to obtain, can be an important benefit to our clients and their customers.
The key outcomes of our actions are to
Staying on the women's health scene for a minute, as a result of an agreement executed with IncellDx of Menlo Park, California, we will, starting next quarter, begin to offer our version of a test for identifying integrated HPV in cervical specimens. This can be an important test because the vast majority, I would say upwards of 70% or more patients that were affected even with high-risk HPV, experience spontaneous regression of the disease.
If the virus, however, has integrated into the patient's cells, the risk for progression to a more serious conditions is greatly increased. Therefore providing such information to clinicians may be very valuable as for those managing these patients.
The key outcomes of our actions are to
I'd like to turn for a minute to ColonSentry. ColonSentry, which we rolled out in the spring, is a blood-based test to assess a patient's risk for having colorectal cancer.
Our interdivisional translational diagnostics team has already performed some enhancements to this assay to improve turnaround time since we launched it. We believe that ColonSentry may promote greater compliance for colonoscopies, which allows physicians a chance to diagnose and treat early-stage cancers and pre-cancers condition at a time when the cure rate is quite high.
The key outcomes of our actions are to
Anecdotally, we know of several instances of patients that were noncompliant and upon receiving results that indicate the potential for higher risk went for colonoscopy, that detect pre-cancers lesions, which were easily removed. To date, we have analyzed more than 2,500 specimens and we are very pleased with the response as we continue to introduce this exciting assay to our physician network.
The key outcomes of our actions are to
We expect in the next couple of weeks to announce yet another market agreement with an esoteric test developer. The test uses a panel of tumor antigens that are selected for their involvement in the development of lung cancer.
It can be used as part of a risk assessment and early detection of lung cancer in high risk patients. For example, those who have smoked for a number of years or patients with a CT nodule under surveillance.
The key outcomes of our actions are to
We are also looking to expand our anatomic pathology footprint as well. Scientists at Enzo Life Sciences have been developing a number of nucleic acid probes based on our proprietary signal amplification technology that may be used to identify various cancers in cytology and pathology samples.
These probes could be validated at Enzo Clinical Labs and then marketed to our oncology and general medicine clientele, providing an additional revenue stream for the same product development project.
The key outcomes of our actions are to
In addition, we have a number of other projects under development, including those using our proprietary small molecule chemistry platform that may lead to a more effective management of various blood immuno chemistries. And we also are very excited that our ongoing clinical trial with the National Eye Institute of the National Institute of Health for the evaluation of our study drug for the treatment of autoimmune uveitis is progressing well, where much of the preclinical work was done in collaboration with our Life Sciences group.
We're expecting data in the latter part of this year.
The key outcomes of our actions are to
As you can see, we have a robust pipeline of opportunity, many of which involve both our operating divisions. By executing the realignment that we have announced, we believe that the opportunities for success and growth have never been greater.
The key outcomes of our actions are to
Before I turn the call back to the operator for questions, I'd like to conclude with a few observations on the industry as a whole, revolving around the changing and challenging nature of healthcare.
The key outcomes of our actions are to
These changes come at a time when medicine is on the very real cusp of successfully tackling a variety of serious illnesses and diseases. At such a pivotal point in what is being accomplished from a scientific point of view, and it is pivotal, the cost of delivering healthcare has become one of the critical topics of the day.
We at Enzo recognize the necessity for change to meet the demands for more cost effective healthcare delivery, as well as the changing reimbursement and support environment for clinical products and research.
The key outcomes of our actions are to
At the same time, however, we have all heard about how expensive it is to develop and test new drugs and new procedures. The pharmaceutical industry has and is continuing to undergo consolidation, even while R&D to bring new drugs and treatments to market consume a bigger and bigger share of their budget.
In our industries of Life Sciences and clinical laboratories, we have seen a paradigm shift as well, a reflection of these changing times. At Enzo, we have a long history of developing enabling technologies based on molecular and cellular technologies.
We have done pioneering work in genomics and control an extensive patent estate and proprietary enabling platform universe.
The key outcomes of our actions are to
This has been an eventful quarter, one of great change, of great structure, of great focus. We believe it will herald new opportunities and greater recognition for Enzo and many of our strengths.
And importantly, it will show clarity on the company's potential.
The key outcomes of our actions are to
Today, we are a leaner organization, but we are confident and more effectively structured to reach our goals and we look forward to the next year as one to accomplish and put into place many of the products that have been worked on over many years. On that note, I'd like to turn the call over to the operator for questions, please.
Operator
[Operator Instructions] Your first question comes from the line of Paul Nouri with Noble Equity Funds.
Paul Nouri
I guess this is the second year in a row that the Qiagen royalty has come down, can you talk about if it's going to be a trend until that revenue stream runs out or the dynamics behind that?
Barry Weiner
I can't comment on the Qiagen strategy, which is their HPV test. This past year, we have seen that royalty come down a bit.
Certainly, there has been an introduction into the market, of a number of competitive products which we believe are taking market share from that product. We do believe that the Qiagen product is a strong product still.
It has potential for expansion both in Europe and Asia that we are well aware of. Obviously, we believe that there should be up a plateau in that product depletion stream, but that is not an area that I can comment on.
Paul Nouri
Okay. And I guess there was some news on the lawsuits in New York with the various Life Sciences companies, can you comment on the status of those?
Barry Weiner
Yes. The summary judgments concerning both sides were ruled on in -- a few weeks ago which will allow this case to now move forward.
There were a number of classical summary judgments that were put forth to clarify issues going forward, the judge ruled on them. That case will now move forward in the court system.
Paul Nouri
Okay. Part of the restructuring I guess was moving some your resources from Michigan to I guess Farmingdale.
Are you completely closing down Michigan or are you keeping part of it open?
Barry Weiner
I'm going to give that to Andrew Whiteley, who's with us.
Andrew Whiteley
Sorry for any misunderstanding about this. The site is actually being retained by us as our primary manufacturing and logistics center and it also has a part of our R&D infrastructure.
So no, that's completely wrong, we're maintaining and very much growing and leaning on that part of the organization to continue the excellent service in the supply of the product.
Barry Weiner
The Ann Arbor site is becoming our prime manufacturing site, quite to the contrary of that. We closed some satellite operations in the U.K.
and San Diego, as well as our Philadelphia operation and concentrated much of that in the Ann Arbor location.
Paul Nouri
Okay. And final question, with the restructuring is some of that going to show up in improved gross margins on the product or Clinical Lab side or is a lot of it going to come out of the R&D and SG&A expense?
Andrew Whiteley
The stated $6 million in savings will be throughout the organization. Certainly, R&D is -- the refocus on the R&D has a good impact, but we do expect margin improvement in the Lab and Life Sciences as a result of not only headcount realignment, but better opportunities with our vendors that provide us supplies.
Operator
[Operator Instructions]
Barry Weiner
If there are any further questions, please come forward.
Operator
I now like to turn the floor back over to Mr. Weiner for any closing remarks.
Barry Weiner
Thank you, if there are no further questions, I'd like to thank you for your listening and joining us this morning. We are looking forward to this current fiscal year as a one that will generate a more enhanced financial capability for the company, as well as bring to market some very exciting new products.
We are looking forward to reporting to you over the next quarters. Thank you.
Operator
A replay of this broadcast will be available until Tuesday, October 30 at 12 midnight. You may access this replay by dialing 1 (800) 585-8367.
The PIN number is 39091633. 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.