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ENZ Enzo Biochem

Participants
Jeremy Feffer Investor Relations
Barry Weiner Co-Founder and President
David Bench Chief Financial Officer
Call transcript
Operator

Greetings. And welcome to the Enzo Biochem, Inc. Fourth Quarter and Fiscal 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Feffer, Investor Relations for Enzo Biochem, Inc. Thank you.

You may begin.

Jeremy Feffer

Thank you, Doug, 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 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 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, 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 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 may -- the company may refer to EBITDA, a non-GAAP measure. EBITDA is not and should not be considered an alternative to net income loss, income 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 update call today. We issued our fourth quarter and fiscal year 2020 financial and operating results after the close of the market and I hope you’ve had a chance to look at them. This period has presented unprecedented issues for our country, business community and Enzo specifically, as a first-line responder in providing approaches for testing that address the needs of our population. We completed the fourth quarter making significant achievements in the three core objectives, which we defined in the past, despite unprecedented conditions due to COVID-19 and the company’s mobilization to address the needs of the market. These objectives were; first, transforming from a bifurcated life sciences company to an integrated end-to-end diagnostics company; second, was building the infrastructure for growth; and third, implementing efficiency measures to bring -- better bring in line our cost structure with the market needs.

Before speaking to the key issues, we hope everyone has remained safe and healthy during these unpredictable times. The health and safety of our employees has always been of utmost importance to us.

We have implemented measures to safeguard our employees, while maintaining full operations, so we can continue to advance the important work we’ve been doing. It’s important for you to know what we at Enzo have been doing during this crisis, and how quickly and I would say, commendably our people adapted to the demands of the pandemic.

We’re very proud of them.

While most companies and businesses were closed due to unnecessary lockdowns and the people required to stay home, and so employees became essential workers and man the front-lines in dealing with the testing scope of the crisis and supporting the testing needs of the market. To begin, as the COVID-19 pandemic continues to grip our nation, recent industry trends have proved to be favorable for Enzo. Demand for reliable testing has grown rapidly and while there has been a number of rapid testing options reaching the market, data has shown that these rapid tests simply do not match the reliability of molecular testing as shown in our platform.

So with urgent need for test results that are accurate, particularly for asymptomatic patients and across a number of key customer groups, such as universities, nursing homes, physician’s offices and urgent care facilities, we have seen increasing demand for our molecular testing. The pandemic has created an extraordinary opportunity for us to leverage our platform and expand our capabilities. COVID-19 has engendered a greater appreciation for clinical laboratories in the diagnostics industry at large.

As we’ve discussed previously, the industry has been -- had been marginalized over the last few years, a result of reduced reimbursement rates. But with businesses, schools and governments facing a growing urgency to reopen and return to some semblance of normalcy, there is more widespread understanding of how critically important our collective products and services are, particularly with government mandates for continued and accelerating testing availability.

First, as part of our strategy to transforming from a bifurcated life sciences company to an integrated end-to-end diagnostics company, we have continued to invest broadly in our open platform. These investments have enabled us to address the nationwide testing challenge. Those supply issues are still present.

Our vertically integrated model sidesteps many of the supply issues that have impacted other testing platforms. Manufacturers exacerbated the supply issues with their closed systems, which can lack flexibility for labs to add third-party reagents or design their own protocols. By manufacturing our own reagents, swabs, and other supplies, we have successfully adapted our GenFlex platform to meet our demand for COVID-19 testing.

Additionally, we’re able to offer both services and product to other labs. In July, the FDA granted Enzo Emergency Use Authorization sometimes referred to as an EUA for three diverse Enzo platforms for the detection of SARS-CoV-2, the virus that causes COVID-19. This includes our proprietary GenFlex automated high-throughput platform, which combines our AMPIPROBE SARS-Cov-2 Test System, including sample collection, sample processing, detection and analysis. What is especially notable about this EUA for Enzo is that it encompasses an entire proprietary molecular diagnostic system, developed, built and produced by Enzo. Most EUA’s granted in connection with this crisis have generally been for components for testing services related to third-party platforms. In granting this EUA for Enzo, the FDA also authorized its marketing to and use by other diagnostic labs, singular recognition of the scope of our accomplishment, as well as running in our own facility today we are now in dialogue with laboratories considering its installation and use.

Second, we have been building infrastructure for growth. In September, we announced that we were expanding our reagent and supply manufacturing capability, and that we were working towards doubling our molecular lab testing at our Farmingdale facility in order to meet the growing demand for COVID-19 molecular and serological testing.

We are currently repurposing three buildings in our Farmingdale campus, more than doubling its footprint to enable us to expand our testing and production capacity. Once the work which is being done in stages is completed, we will have state-of-the-art expanded space for installing additional processing platforms, manufacturing, research and administration, all of which will position us to accommodate our growth. It will assure us not only of more space, but also greater efficiency as we expand the business. Today, we are offering a comprehensive range of products on our different platforms, encompassing women’s health testing, upper respiratory and viral load testing, just to mention a few. These products include, testing sample collection, molecular and antibody tests, as well as instrumentation and all being sold on a global basis.

Our internal manufacturing capability provides security of supply in key areas and stronger margin than test currently available from other commercial suppliers.

Our development program continues to address the evolving needs of COVID-19 testing.

Specifically, the development of a nasal swab PCR test for several pathogens including COVID-19 flu and other upper respiratory pathogens from a single swab. This has become a greater concern as we enter the flu season.

As well under development is a promising pooling capability that will allow multiple specimens within a single test, this increasing our capacity multi-fold and decreasing our cost per test. Also being explored our unique point-of-care testing formats for rapid testing in the expansion of our serological testing menu. Operationally, the fourth quarter was a tale of three seasons, winter, spring and summer, all in one quarter, and our results reflect this. We experienced sequential improvements in May, June and July, as testing demand grew to enable aspects of the economy to reopen as the summer unfolded.

In addition to certain partnerships, we have been providing testing services to independent pharmacies, academic institutions, drive-up clinics, urgent care centers and nursing homes.

While we are not providing preliminary numbers on the first quarter of 2021, I can say, that we have seen positive momentum continue in August and September, particularly with schools reopening and businesses attempting to have employees returned to work.

Third, we continue to make strides with regards to implementing efficiency measures a program that precedes COVID-19 by nearly a year. These include cutting non-essential costs from the overall business and changing processes and operations, sales and R&D to better align the company’s cost structure with the market opportunities.

We also continue to expand capacity and broaden our customer relationships. Since our last earnings call in June, we’ve entered into partnerships with colleges and other academic institutions to provide necessary COVID testing for the campus community.

We have also partnered with the New York Division of Community Pharmacy Enhanced Services Network to provide COVID-19 testing for pharmacies across the New York State. Enzo so continues to use its expertise to develop and deliver innovative solutions to address today’s global healthcare challenges. I’m extremely proud of what we’ve accomplished over the last few months and I really do want to thank our employees for their continued dedication and also thank our long-term shareholders for their support through this pandemic. At this time, let me turn the call over to David who will walk you through the financials for the quarter.

David Bench

Thanks, Barry.

Here’s a review of the financials for the fourth quarter. Total revenue of $19.5 million for the fourth quarter, declined 6.6% from the $20.9 million generated in the year ago period, reflecting a continued impact from pandemic-related volume declines offset by positive growth in collection services and increase COVID-19 testing. On a sequential basis, fourth quarter revenue increased 15% versus the third quarter of 2020, driven largely by COVID-19 testing. On a divisional basis, clinical services revenue for the fourth quarter was $13.7 million, compared to $13.1 million in the year ago period, representing an increase of 4.6% as testing volume excluding COVID-19 has approached pre-pandemic levels. Net revenue per accession grew 10% year-over-year during the quarter on improved testing mix. Product revenue for the fourth quarter was $5.8 million, compared to $7.9 million in the year ago period, a decrease of 26%, due mainly to customer working at a substantially reduced level since the February, March timeframe.

However, average product order value during the quarter increased 6.3% year-over-year reflective of higher value products such as genomics, ELISA kits and antibodies. The consolidated gross margin for the quarter was 40%, up significantly from the 30% in the year ago period. The quarter’s gross margin at the Enzo clinical lab expanded significantly at roughly 38% up from 14% in the year ago period. This was due mainly to favorable mix from increased COVID-19 testing, as well as from ongoing cost saving initiatives. Enzo life science gross margin was 46%, compared to 58% a year ago, unfavorable mix and pandemic-related factors caused the gross margin decline in the division.

We are working to improve gross margins in the division in the coming quarters due to our anticipated mix of products being sold in the marketplace.

On the operating expense side, research and development expenses increased 40% to $1.2 million or 6% of total revenue from $0.8 million or 4% of total revenue in the year ago period. The increase is mostly attributable to investments we continue to make in our proprietary GenFlex platform.

We expect this investment to continue in the coming quarters. Selling, general and administrative expenses of $10.1 million declined from $10.9 million in the year ago period, although it was flat as a percentage of revenue. GAAP net loss was $3.3 million or negative $0.07 per share versus a loss of $5.4 million or negative $0.11 per share in a year ago period. Adjusted EBITDA loss in the quarter and year ago periods were $2.7 million and $5.0 million, respectively. The year-over-year improvement was driven mainly by expansion of gross margins and lower SG&A expenses from headcount efficiencies, lower intangible amortization and reduced travel. Cash and cash equivalents totaled $48 million at the end of the fiscal year ending July 31st. The company added $11.4 million of capital during the fiscal year to strengthen its balance sheet through various grants, loans and advance payments.

As of July 31, 2020, the company had 47.9 million shares outstanding.

Regarding efficiency measures, as we discussed last quarter, we continue to see tangible results from our ongoing efficiency measures and we have thus far recognized approximately $10 million or 100% of our savings target.

We continue to explore cost saving measures within the company’s operations. That being said, we remain committed to investing in key growth areas, most notably, our proprietary lab developed tests and our four proprietary platforms, molecular, serology, cytology and immunohistochemistry.

We expect this investment to yield significant gross margin improvement in a normalized post-COVID environment. With further discipline management of operating expenses and with more consistent revenue growth driven by increasing demand for our PCR based COVID-19 molecular and serological testing we believe Enzo is on track towards profitability. With regards to the fiscal year results, full year revenues totaled $76 million, compared to $81.2 million impacted in the second half, when testing volume virtually disappeared and COVID-19 affected the life sciences business. Based on the first two months of fiscal year 2021, we are at a run rate to exceed $100 million in revenue this fiscal year and to potentially achieve quarterly profitability by the end of the time period. Research and development expenses were $4.4 million for the year ending July 31, 2020, or 5.9% of total revenue, compared to $3.2 million or 3.9% of total revenue for 2019. This increase is mostly attributable to investments in our proprietary GenFlex platform. Selling, general and administrative expenses for the year ending July 31, 2020, were $43 million or 57% of total revenue, compared to $44.3 million or 55% of total revenue for the same period in 2019. This decrease is primarily due to cost efficiency measures counterbalanced by costs related to COVID-19 testing. Fiscal net loss of $28.5 million or $0.60 per share, compared to a year ago net income of $2.5 million or $0.05 per share, which included net legal settlements of approximately $29 million. I’d like to turn the call back over to Barry for closing remarks.

Barry Weiner

Thank you, David. Both revenue and profit margins have increased dramatically in the recent months. But more impressive is the company’s transformative positioning in the marketplace.

As one of few companies to incorporate a biotech entity, a diagnostics division and a CLIA certified clinical laboratory, we believe Enzo is well-positioned as a vertically integrated company to address the COVID-19 pandemic from multiple angles.

We have addressed many challenges of the supply chain by manufacturing critical reagents in-house and we have doubled capacity in our Farmingdale facility under great obstacles to meet the growing demand for our COVID-19 molecular and serological tests from universities, nursing homes, physician’s offices and urgent care facilities.

Our diagnostic equipment and kits are validated in our own lab and are currently available to other labs and end users. We boast a comprehensive end-to-end solution for modern clinical diagnostics, making us uniquely positioned within the broader molecular diagnostics market, both in the covered -- current COVID-19 setting as well in a post-COVID environment. At this point, I would like to open the floor for questions.

Operator

Thank you. [Operator Instructions]

Operator

Okay. I’d like to turn the floor back over to Barry for closing remarks.

Barry Weiner

Thank you very much for joining with us today. We look forward to our first quarter report in the middle of December. This is a very interesting time in the development of our company, as well as in the challenge of the COVID epidemic that is putting severe constraints on all of our lives at this point in time. I believe Enzo will be making an important contribution as we move forward in this process and we look forward to meeting with you in December. Thank you.

Operator

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.