Earnings Transcript for ENZ - Q3 Fiscal Year 2021

Operator: Greetings. Welcome to the Enzo Biochem Third Quarter 2021 Financial Results and Business Update. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Jeremy Feffer. You may begin.

Jeremy Feffer: Thank you and good afternoon. Joining us today from the company are Barry Weiner, Co-Founder and President and David Bench, Chief Financial Officer. A press release announcing the results and the corporate update was issued this afternoon and is available now on the Enzo website. I will now read the company’s Safe Harbor statement. Except for historical information, the matters discussed in this news release maybe 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, which are dependent on a number of factors outside of the control of the company, including the markets for the company’s products and services, cost of goods and services, other expenses, government regulations, litigation and general business conditions. Please see risk factors in the company’s Form 10-K for the fiscal year ended July 31, 2020. 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 income or net loss, income or 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 this afternoon. I would now like to turn the floor over to Barry Weiner, Co-Founder and President of Enzo Biochem. Barry, please go ahead.

Barry Weiner: Thank you, Jeremy. Good afternoon and thank you for joining us on our quarterly business and financial update call today. We issued our third quarter fiscal 2021 financial and operating results after the close of the market today, and I hope you’ve been able to review them briefly. The past quarter, and indeed the year, has been one of challenges and opportunities as COVID-19 dominated the healthcare industry and a good part of the world news it absorbed. This proved to be a double-edged sword for Enzo. The pandemic resulted in vast changes in healthcare for our practitioners and patients alike. Physician offices were shut down with all but emergency testing and treatments undertaken. Academic institutions were initially closed and remained partially so in the following months throughout the country and internationally, impacting demand for clinical and diagnostic supplies. At the same time, massive testing became an international mandate, with Enzo rising to the challenge by providing actionable, accurate and timely diagnosis for individuals, industry and educational institutions, among others. For Enzo, it was an environment in which we proved our mettle. We successfully transitioned into COVID-19 with record revenue growth and operating profitability. We demonstrated our scientific expertise, flexibility and nimble operating environment. Our capabilities were also reflected in the promptness and effectiveness with which we deployed our products and services to our community as the pandemic intensified. During this period, we demonstrated the validation of our strategy that was developed and implemented of being a vertically integrated diagnostic company, supporting a new industry paradigm. This contributed to our success of both sustaining and growing our testing capabilities during the most severe supply chain crisis in recent history. It also enabled us to drive enhanced margin improvement in our laboratory operations, counter to the rising cost structure of the environment. Our structure afforded us independence, volume growth and profitability. Our third fiscal quarter, which our CFO, Dave Bench, will discuss in detail shortly, represented another solid period both operationally and financially. Quickly, I would just like to highlight a couple of financial points to start. Our total revenue for the third quarter was $32.8 million, an increase of 94% year-over-year. We achieved gross margins of almost 50% and adjusted EBITDA of $2.7 million, resulting in a $9.7 million improvement from last year’s third quarter. These results solidify the trend we have posted over the last several quarters, and we are extremely proud of our team’s continued success. I’d like to review some highlights for the third quarter. Our core focus remains on the development and application of high-value opportunities, which we anticipate will provide meaningful initiatives as headwinds remain in the reimbursement environment. The higher margins achieved by our vertically integrated model of our COVID-19 testing are being extended to an increasing range of molecular tests as well as other types of testing beyond molecular, a cornerstone of our growth strategy. Our open system approach on GENFLEX, our molecular platform, allows for the highest levels of flexibility and adaptability in the post-COVID-19 environment. The platform’s open system architecture enables laboratories to use Enzo’s lower cost reagents or other third-party reagents with ease and flexibility. Within a month, our clinical lab will have installed approximately 20 GENFLEX diagnostic platforms, each capable of generating multimillion dollars of annual molecular testing. From a business development standpoint, we are actively engaged in detailed discussions regarding business relationships and partnerships that will enable us to pursue fresh opportunities for our proprietary products and services. These include possible tuck-in acquisitions that will complement existing activities as part of our growth blueprint. In addition, from an approval standpoint, we were pleased to receive FDA EUA clearance for our AMPICOLLECT Sample Collection kit, which is now available for COVID-19 testing protocols throughout the United States. Another key proprietary innovation that we anticipate will be a strong commercialization opportunity in fiscal year 2022 is our Loop RNA probe technology. And Loop RNA probe approach was featured in an independent publication of work derived from Enzo’s scientific collaborators in conjunction with Enzo scientists. It details improvements regarding in situ hybridization, reflecting higher sensitivity and lower background noise when compared to current leading commercially available technologies. Enzo’s probes uniquely identify a single genetic sequence within a cell but without destroying the cell structure. This allows for better medical interpretation, accelerated drug development and improved research capabilities. Our innovative technology may reduce the risk of false positives and false negatives for early-stage detection of HPV, or human papillomavirus, and potentially other RNA-based infections. It’s a technological advancement that may have broad implications in the future testing and in drug development. On a logistical front, we are integrating Enzo’s campus to include GMP manufacturing, our CLIA clinical laboratory, R&D as well as sales and marketing capabilities, all within 4 adjacent buildings at our Farmingdale campus. This integration includes the forthcoming closure of our Ann Arbor, Michigan manufacturing facility this summer. In February, we announced the issuance of a U.S. Patent for polyclonal antibodies against the osteoporosis drug target sclerostin. And more recently, in fact, just last week, Enzo received approval from UnitedHealthcare, the largest insurance provider in the United States, as a designated diagnostic provider. This means that UnitedHealthcare members will be guided to labs, such as ours, for non-emergent lab services, which should expand the amount of products and services we already deliver to UnitedHealthcare customers and members. Focusing on our post-COVID strategy, Enzo successfully navigated the most challenging times of COVID-19. As we indicated last quarter, we have already begun implementing our strategy for a post-COVID environment. With the successful rollout of the vaccine program in the United States, having just hit 42% of the total population fully vaccinated last week, the company has begun implementing operational protocols and a modified sales strategy to address the realities of a post-COVID-19 pandemic environment. We were well positioned prior to the COVID-19 pandemic, having successfully navigated our team through these difficult times, and we are confident we will navigate successfully out of the COVID-19 environment. Our ability to change in the COVID environment is indicative of our team’s ability to adapt with the times. Just as our teams did at the start of the pandemic, our teams now must remain nimble to the reopening and meeting our customers, vendors, and partners’ need as they evolve. While they still haven’t fully recovered, we see the gradual return to regular doctor visits. On the product side, academic institutions remain partially closed throughout the country. However, in speaking with these customers, we anticipate the majority of these academic institutions plan to reopen by the end of the summer and then reach full capacity by the end of the year. We expect COVID-19 testing to continue due to travel, return to the workplace and the reopening of entertainment venues, albeit tapered to lower levels. We are adjusting and implementing our post-COVID business strategy as follows. On the product side, we have shifted our sales focus from academia to industry. On the services side, we are expanding from primarily doctors to include lab-to-lab and commercial opportunities. Providing a little more color, I would like to take a minute to add on our strategy in the post-COVID environment and the opportunity that now exists. Enzo’s go-forward commercial strategy is clear

David Bench: Thanks, Barry. As Barry indicated, the third quarter was another impressive period of advancement and development across all segments of the business. Total revenue reached $32.8 million for the third quarter, an increase of 94% from the $16.9 million generated in the year ago period. This reflects a robust expansion of revenue and improvement from operations. On a sequential basis, third quarter revenue increased $1.3 million or 4% over the second quarter of 2021. Our consolidated gross margin for the quarter was 49%, up significantly from the 26% in the year ago period. On a divisional basis, clinical services revenue increased nearly 140% to $25 million from $10.5 million in the third quarter of 2020. The year-over-year performance was largely driven by volume growth in total accessions, which reached more than 340,000 in the most recent quarter, or an annualized rate of 1.36 million accessions versus pre-COVID annualized levels of approximately 800,000. It’s important to note that we saw clinical services gross margin increase to 49.1% from 12.9% in the third quarter of 2020, an improvement of more than 3,600 basis points. This is largely attributed to integration and use of our proprietary platforms as well as our ongoing cost savings initiatives. Enzo Life Sciences product gross margin was 48.4%, an increase in the year ago period from 47.9% and a larger increase sequentially based on 47.4% gross margins in the second quarter of 2021. It’s worth noting that the Life Sciences segment reached significantly higher gross margins at 53% prior to accounting for intercompany sales. Improving gross margin division remains a high priority for the coming quarters supported by improved product menu offerings, selling into a more stable ordering environment. Selling, general and administrative expenses of $12.1 million, rose significantly from $11.1 million in the year ago period. Leveraging our operating efficiencies, SG&A increased only 9% year-over-year during a period where revenue jumped nearly 100%, and accession volume increased approximately 140%. GAAP net income was $2.0 million or $0.04 a share versus a loss of $9.9 million or negative $0.21 per share in the year ago period. Adjusted EBITDA in the quarter was a positive $2.7 million compared to an adjusted EBITDA loss of $7 million in the third quarter of 2020. Year-to-date, Enzo has generated positive adjusted EBITDA in excess of $8.1 million. Enzo’s balance sheet remained strong financially, with cash, cash equivalents, restricted cash and marketable securities as of April 30, 2021, of $45.8 million. Going to capital expenditures, higher inventories and increased accounts receivable due to increased volume, this was slightly lower than the fiscal 2020 year-end cash account of approximately $48.6 million. However, working capital at quarter end was a sturdy $42.1 million, which compared favorably to $36.0 million 9 months earlier at the fiscal 2020 year-end. I want to highlight that the current ratio improvement to 2.4x from 2.1x during the first 9 months of fiscal year 2020 is indicative of a very clean and improving balance sheet. Additionally, we showed an improvement of $6.6 million in shareholder equity year-to-date. Finally, as we have indicated previously many times, the only significant debt on our books is the $4 million mortgage principle on one of our buildings in Farmingdale and a $7 million PPP loan, which we are actively working on with the SBA and expect a decision on the forgiveness by end of month – end of this month, actually. As of April 30, 2021, the company had 48.5 million shares outstanding. We believe Enzo’s financial profile will continue to improve and will benefit significantly in a post-pandemic world from our vertically integrated end-to-end solutions approach. I will turn the call back over to Barry for closing remarks.

Barry Weiner: Thank you, David. While today’s call is intended to discuss the company’s operations and financial results, I’d like to note a few corporate developments as well. As David made clear, we believe we are well in line with wrapping up a solid year. Heading into fiscal 2022, we anticipate benefiting from, among others, new molecular diagnostic developments; our now demonstrated well integrated and expanded capabilities; our opportunities to expand our portfolio via partnerships and perhaps acquisitions; and enhancements to our operations and tighter control on our costs. As announced in the previous quarter, the company’s strategic initiatives and succession planning are proceeding. The company management and Board are working in unison to translate Enzo’s capabilities to benefit all shareholders and enhance shareholder value. Our internal focus remains on achieving further efficiencies and enhanced integration while leveraging commercial opportunities. We are determined to drive top line growth while targeting profitability from operations in the future. We are very excited about the future of Enzo and its opportunities. We would now like to open the call for questions.

Operator: [Operator Instructions] Our first question is from Andrew D’Silva with B. Riley Securities & Company. Please proceed with your question.

Andrew D’Silva: Hi, good afternoon. Thanks for taking my questions. Just a couple of quick ones for me. So you’ve been working with various academic institutions, I believe, and have been providing COVID-19 testing. I was curious if you see those channels evolving in a post-pandemic world where you can actually start selling diagnostics outside of COVID. I heard you referenced women’s health and sexually transmitted diseases. And if that is possible, I mean, curious on what the process for that would look like.

Barry Weiner: Yes. Thank you, Andrew. Absolutely, we are very much focused on those long-term relationships that we have created during COVID, which include the academic institution and to help them in their health center in terms of testing going forward with STDs and other areas. So yes, we are working on those, and we do feel like we have a strong hold in those areas.

Andrew D’Silva: Great. And would you expect that you’d be going through the CLIA path or an FDA-approved pathway or some hybrid of the two?

Barry Weiner: Our process is to proceed through the FDA pathway on our key platform technologies. We have LDT, or lab-developed test, approval on many of them. The GENFLEX platform as well as our other platforms in development are all proceeding on a pathway to which we will attempt to attain FDA approval.

Andrew D’Silva: Okay. Okay. That makes sense. And last question for me. I know earlier, during the pandemic, it was difficult for diagnostic companies to source adequate amount of employees for various specialties. Has that market started to improve at all? And if not or if so, could you just give a little bit of color around that?

Barry Weiner: Yes, the market is absolutely improving. One of the key challenges that confronted laboratories, such as ours, was the maintenance of staffing during a period of time when the country was basically telling people to stay home or paying people to stay home. We are an operation that can only operate with people on the ground. And one of the key challenges of management and one of the key issues that had to be dealt with was a maintenance of staffing and the implementation of programs where we’re able to move people off-site, where possible, but yet maintain people in the operational roles, in the operations of the laboratory during the most stringent and difficult times of the COVID environment. And I must say, I am internally grateful to the staff of this company who rose to the occasion and, in the most dire times, put themselves in the face of danger, in the frontline of the diagnostic sector here and provided the testing, the sample collection, the solutions and showed up for work when most of the country was basically maintaining a home presence. Today, we have still openings that we are filling. It is an ongoing process. But certainly, it has been a credit to our staff, a credit to the management of this company that was able to motivate and to drive people not only to improve developmental processes in the most rapid time, in a period of incredibly critical short supply chain capabilities to build, develop the platforms we developed, to produce the reagents that allowed us to operate within a supply chain that was freezing everyone across the country and deliver a service to our community by providing testing and security to those that needed it. And I cannot say more about that. But it was a very, very challenging period. And fortunately, I believe the organization has emerged stronger, more effective, operating on a leaner basis and incredibly focused in its goals and objectives.

Andrew D’Silva: Great. Thank you for the color. And really, congrats on the progress you’ve made over the last 12 months. I will hop back in queue.

Barry Weiner: Thank you.

Operator: Thank you. [Operator Instructions] Our next question we have is Brett Reiss with Janney Montgomery Scott. Please proceed with your question.

Brett Reiss: Thank you, gentlemen for giving me the opportunity to ask a couple of questions. Could you update us on the finding of the new CEO, as you previously announced?

Barry Weiner: As was stated in our prepared comments and in the press release that was put forward today, we are in the process of exploring opportunities, both on the strategic front as well as in succession planning. These are binary events. There is not much more to say. But when there is news to report, it will be reported. That would be about the most I can comment on that at this point.

Brett Reiss: Okay. There is a company, Cepheid, which is now a division of Danaher Group, that has a whole array of PCR tests. Does your testing platforms compete with Cepheid? How do your mousetraps compare to Cepheid, which I believe is now owned by Danaher?

Barry Weiner: There are similarities in the end goals of these two types of this particular platform. The company you’re referring to is Cepheid. We do have technologies that are competitive. Our goal has always been to develop technologies and platforms that would be extremely cost efficient and drive margin improvement for clinical labs. As you may be aware, pre-COVID, the reimbursement market for clinical testing was under pressure, extreme pressure. Clinical labs were losing margin. Many of the platforms that are out there, some similar to Cepheid’s, require costly components, costly supplies. And we – and quickly, we were seeing margin erosion for labs in many different areas. Our systems have been designed to improve margins by reducing the cost structure due to the technological developments that we have been implementing over the last few years. So there are some similarities, but there are many that are not similar. Our goal here is to produce more cost-effective testing systems that will allow companies to have higher margin and longer sustainability in the marketplace.

Brett Reiss: Alright. Thank you for that color. Just one or two more if I may. When do you expect to make an announcement on Dr. Rabbani’s replacement?

Barry Weiner: As I mentioned earlier, the company has embarked on a program for a strategic review and strategic optionality. Encompassed with that is succession planning. And as I commented just before, that will be addressed at a point in time when it is effective.

Brett Reiss: Okay. And forgive me if this has been mentioned in prior public documents. But with respect to the strategic review that’s ongoing, is it being done only by internal people at the company or is there an outside consultant or investment bank that’s aiding the company in your strategic review process?

Barry Weiner: It was publicly announced last quarter that Cain Brothers was retained to assist in their strategic review of corporate options.

Brett Reiss: Okay. And they are still involved with that with you.

Barry Weiner: That is correct.

Brett Reiss: Great. Thank you for taking all my questions.

Operator: [Operator Instructions] And it looks like there are no more questions. We end our question-and-answer session. And now I’ll turn the call back over to Barry Weiner for closing remarks.

Barry Weiner: Thank you very much for joining us today. While we are very proud of our revenue growth and our profitability achieved this quarter and year-to-date, we remain committed to our transformation into an integrated end-to-end diagnostic products and solutions company. We look forward to discussing further progress with you on our Q4 report, which will take place in mid-October. Thank you for joining us.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.