Enzo Biochem, Inc.

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 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.

Good morning. Thank you for joining us.

With me are several members of our senior management: Mr. David Goldberg, Mr.

Andrew Crescenzo and Mr. Andrew Whiteley.

first, the jury verdict in our patent infringement case against Life Technologies; and then the results and the consequences of Hurricane Sandy, which, all of you know, had a major impact all over the northeastern United States, but was particularly devastating here in New York and the metropolitan area.

First, as we reported last month, a jury found that Applera, which is now Life Technologies, infringed our patents covering pioneering and pivotal technologies relating to compounds used in DNA sequencing systems that are utilized to read the genetic code. The applications for inventions based on our technology are diverse.

They range from detecting pathogens and human diseases, such as cancer, to decoding and analyzing the human genome. As a result, the jury awarded us over $48 million in direct infringement penalties.

In addition, a prejudgment or interest award should be awarded to us by the court. This is because the jury found that such infringement went back for a number of years.

Our legal team has estimated that the addition of the prejudgment award could add additional recoveries, potentially in the tens of millions of dollars. Additionally, the jury in the case found that Life Technologies' sequencing instruments induced its customers to infringe on our patent.

The sale of such instruments are estimated to be in excess of $770 million. We are obviously very pleased with the outcome of this trial, and we view it as a very strong validation of our intellectual property estate.

As the process moves forward, we may plan to seek additional damages based on the decision that the sale of the sequencing instruments induced infringement of our intellectual property. It is our expectation that this legal decision should have a positive impact on the resolution of pending actions that we have brought in the U.S.

Southern District in New York and have been working their way through the system for quite a long time. These involve additional defendants, additional patents and specifically, contract issues associated with each of the companies, respectively.

The defendants in these suits are Amersham, which is part of General Electric; Roche Diagnostics; PerkinElmer; Molecular Probes, which is also today owned by Life Technologies; Orchid Cellmark, which is also owned by Lab Corp of America; and Affymetrix.

The patents represented by these actions and that were brought against the number of companies I just referred to revolve around key developments in the biomedical field. As many of you who have followed us over the years know, this has been a long and somewhat formidable path, but we believe that the decision that took place in the Life Tech case may lead to positive resolutions of these other legal actions.

In addition to these cases, we have brought actions against a number of other life sciences and diagnostic companies that we believe have infringed on other key Enzo intellectual property. These companies include Abbott, Hologic, Gen-Probe, Becton Dickinson and Illumina, to name a few.

These particular actions, as we have discussed before, are being handled on a contingency basis, thus our costs are greatly minimized.

I'd like to turn to the impact of Hurricane Sandy on our financial results. During the last 3 calendar days of the first quarter, our lab volume was significantly impacted.

Hurricane Sandy put our expensive disaster recovery plan to the test. And I'm pleased to share with you that our plan was executed with precision.

At no time, even during the height of the storm, was our operation shut down. We maintained a presence in both of our main facilities, and we were able to handle the great number of calls that were coming into our offices.

As many of you know, a number of individuals suffered severe and catastrophic losses because of this. Some of our employees, and of course, many of our clients and customers, were without power and water for several weeks in the storm's aftermath.

Yet, during this unprecedented event, the dedication of our employees and managers never waived. I want to take this opportunity to really thank each and every one of our employees for the dedication in keeping our businesses open without interruption.

The aftermath of the storm had a material impact on our operating results, especially at the clinical laboratory. The direct damage caused by Sandy, followed by the collateral damage of power losses, lack of public transportation and gasoline shortages, shut down virtually all of our client physician practice for almost a week after the storm abated.

We estimated a loss in revenue directly attributable to Sandy of over $700,000 for the quarter, with additional revenue losses that will be realized in the second quarter.

Here, I'd like to now share with you some of the highlights of the financial results for the first quarter. The Clinical Laboratory continued strongly despite Sandy, registering a 7% increase in revenues, still more than double that of the diagnostic industry as a whole.

We estimate that our growth would have been approximately 12% year-over-year without the impact of the storm.

Enzo Life Sciences moved strongly into the black, with an operating profit of $1.4 million compared to a year ago's operating loss of $200,000, a favorable swing of approximately $1.6 million. The gains at Life Sciences were achieved despite a 13% decline in revenues, reflecting our program to consolidate facilities and functions and implement operational efficiencies, as well as our concentrating on our marketing efforts towards a more value-added mix of products.

Total revenues for the corporation came in almost on a par with a year ago, approximately $26 million for each period. Gross margin, likewise, held firm at $11.7 million as compared to last year's $11.8 million, with gross profit as a percentage of revenues a steady 46% for both periods.

Life Sciences' gross profit as a percent of its total revenues rose 400 basis points to 60%, while that percentage of clinical laboratories dipped to 36% from 38%.

Even with legal costs increasing more than $800,000 over last year as a result of the Life Technologies trial, we kept expenses overall in check, with SG&A declining almost $1 million or 8%, and total operating expenses were 3% lower than a year ago. We saw the operating loss declined by 9% and the net loss reduced by 18%.

The EBITDA deficit also was lowered by 16%.

We also closed the quarter with a highly liquid cash and investments portfolio of close to $13.5 million. Cash utilization relating to operating activities and investments year-over-year also improved, falling by $800,000.

During the quarter, cash utilized approximated $1.7 million, of which 35% or $600,000 was for legal and capital expenditures. In addition, we estimate that our cash position was adversely affected by delayed cash collections of approximately $300,000 due to the storm.

It should be noted that working capital equaled $18.3 million.

Looking more closely for a minute at our financial performance for the quarter. As I mentioned, we had sharply reduced or diminished specimen counts in the last 3 days of the quarter due to the hurricane.

This cost is, as I just mentioned, about $700,000 that we can define in revenue, although the lab maintained full capabilities both during and immediately after the storm. Combined with the continued product rationalization program at Enzo Life Sciences, with its emphasis on higher-margin sales, total revenues for the quarter were nonetheless on a par with the year-ago results, again, which were about $25.6 million.

Revenue is reflective, despite the storm, of a 7% growth in Clinical Labs and 8% increase in royalties and licensing fee income, which were partially offset by a 13% decline in product revenue. Product revenues continue to be negatively impacted in the Life Sciences division by softness in the academic market and from certain of our global distributors.

If not for the impact of Sandy, total revenues year-over-year should have improved by over 2%.

Turning to our consolidated costs for the quarter. Overall gross margin was comparable at $11.7 million, with gross profit at 46% in both periods.

Our fiscal 2013 plan to reduce costs by over $6 million has shown impact this period and is progressing well. Overall, operating cost, being research and development; selling, general and administrative; provision for uncollectible accounts; and legal, decreased by 3%.

Excluding legal expenses and noncash provision for uncollectible accounts, our operating cost declined by $1.6 million or 11%.

Research and development costs, as we focus to molecular test and technology platform development, were down over 30% from the year-ago period. SG&A expenses decreased 8% or $1 million despite higher sales volume related costs at the lab.

And as a percentage of revenues, SG&A decreased to 45% from 48% in the year-ago period. Legal costs, driven primarily by the patent case, increased to $1.7 million, an increase of $800,000 over the prior year.

Our provision for uncollectible accounts, primarily related to Enzo Clinical Labs, increased $300,000, which was due to higher revenue volume. As a percentage of lab revenues, the provision for uncollectible was 9.6% as compared to 9% in the prior period.

Overall for the corporation, the net loss was $3.7 million, an $800,000 reduction from a year ago, which the net loss -- and the net loss translated to about $0.09 per share versus 12% (sic)[$0.12]last year. EBITDA, a non-GAAP figure, improved by $0.5 million to a reduced loss of $2.6 million compared to a loss of $3.1 million last year.

Just briefly highlighting some of the segments. Some of this is a little bit repetitive to what I just went through, but I think it's important to put into context the specific operational activity of each segment as a result of the cost improvement initiatives we've put into place last quarter and to chart the benefits that have been implemented.

Enzo Clinical Lab revenues, as I said, grew 7% to $15.2 million. Gross margin rose to $5.5 million from $5.4 million in the year-ago period.

SG&A as a percentage improved 33% as compared to 34% a year ago, and the operating loss increased, partially due to the storm, to $1.2 million from $800,000 a year ago.

The Life Sciences division posted operating income of $1.4 million. This was an increase of $1.6 million over a year ago when it lost $200,000.

In line with the product rationalization program emphasizing fewer but higher-margin products, net revenues declined 13% to $8.4 million. Royalty and licensing income increased 8% to $2 million.

Life Sciences gross margins improved to 60% of revenues compared to 50% in the same period last year.

Other operating expenses, including R&D and SG&A, decreased $1.5 million due to lower payroll, rent and facility costs. Despite the continuing weakness in the academic market, Life Sciences is benefiting from its realigned business focus and its operational efficiencies implemented over the last 6 months

I'd like to turn now to share with you some thoughts on our strategic goals. As you are aware, the health care environment is in a period of change.

Enzo's value proposition is both timely and well suited to meet the emerging paradigm that is coming forward, with all the events that are now being looked at and focused on in the health care environment. Medicine, as you can tell from the political dialogue, is focused on bringing cost down and delivering quality care that takes advantage of the vast technological advances that are now becoming apparent to others and others in the industry, which will allow early diagnosis, more targeted medications and more effective treatments.

Our capabilities, based on our strong technology platform, developed over the last 30 years, allow us the unique ability to address the evolving needs of this market. Our technology platforms are supported by a broad and relatively deep intellectual property portfolio.

Our multipronged capabilities, represented in the diagnostics, life sciences and therapeutics development area, provide us with an integrated view in the design of products that we believe will meet the stringent new demands of this market.

The realignment program that we undertook at the end of last fiscal year provided Enzo not only with efficiencies designed to reduce cost, but to put into place a highly effective and integrated structure that combine the immense and forward-looking attributes and strengths of our Clinical Lab unit and our Life Sciences unit. Our research and development activities in Life Sciences complement our Clinical Lab activities, enabling us to be positioned to deliver specialized diagnostic services, as well as developing, through hands-on research, new platforms and tests that are more effective, less cumbersome to the patient and physician alike and less expensive.

We are moving towards providing a leading position in esoteric testing, and I'd like to detail some of these very exciting developments. In Enzo Life Sciences, we have established a centralized research and development laboratory in Farmingdale and facilities that are contiguous to each other and integrated.

This is providing highly efficient synergies between the 2 operations. Our life sciences products are being manufactured in Michigan, as we were able to consolidate this function from several other locations.

In addition, we have reduced and continue to evaluate the number of SKUs that we carry, especially in terms of the less-profitable products. These measures have impacted our revenues and have resulted in lower cost and higher operating efficiencies.

In addition to our own 7,500 products, we also represent more than 40 other manufacturers and over 30,000 products globally.

Life Sciences today is leaner and more focused. We are shifting our focus from the academic-based customers, who themselves have seen grant money get tight over the years, by broadening our reach to industrial and clinical research customers.

The integrated structure of Enzo Life Sciences and Enzo Clinical Labs today facilitates the advancement of new platforms to address existing but substantial markets in the billion-dollar range with propriety products that advance the art and are especially well suited to benefiting health care needs.

We have 2 lead platforms, that we have spoken about in the past, that capitalize on our long history in molecular identification, amplification and detection. One is the AmpiProbe system.

It is a low-cost, highly sensitive realtime platform. We believe it will provide a superior testing methodology through operational efficiency and sharply reduce costs.

Tests developed via this platform are currently undergoing review by the New York State Department of Health.

Another key platform involves our next-generation branched DNA technology. This is a signal amplification assay, as opposed to a target amplification approach, which is AmpiProbe, and this is used to detect a number of analytes through different approaches.

Among its targets are human papillomavirus testing and immunoassay and has a special appeal where heightened sensitivity is desired and generally unobtainable from the existing platforms. Thus, the market that the branched DNA can approach is in the many billions of dollars, and this is an existing market where we believe we can bring enhanced value and better performance.

As for the AmpiProbe platform, we have already submitted for approval with New York State certain tests dealing with viral identification, and we are well along in the development of a women's health panel that would test for a number of specific diseases in a given specimen. This would be a convenience to the patient, since one specimen will suffice for multiple tests.

We plan to offer the panel as a product through our bifurcated distribution approach of both domestic products and CE IVD- or European-approved products. It may also produce incremental cost savings at Enzo Clinical Labs.

I'd like to update you on some of our important product launches over the last period. First, the introduction of the ColonSentry blood test for assessing a patient's risk for developing colon cancer is proving highly valuable.

The lab, thus far, has processed an excess 3,000 tests since its introduction, and we continue to see interest in the test for use with noncompliant individuals, those who are reluctant or are not disposed to have colonoscopies. It should be noted that colonoscopy still remains a gold standard for colorectal cancer, and it is the objective of this particular test to give information to the patient to allow that patient to make a more informed decision whether they should proceed with the colonoscopy.

New York, New Jersey, and eastern Pennsylvania. Additionally, we plan to introduce to our client base an innovative panel of genetic disease tests, which will allow for the simultaneous testing of a large number of inherited generic disorders from a single blood specimen.

Enzo Clinical Labs, because of its recognized expertise and standing as a New York State-certified lab, is broadening its recognition and has become, for an increasing number of research firms, a preferred partner with which to rapidly and effectively get their products to market, especially given our position in one of the nation's most strategically centered and highly populated markets. Enzo Clinical Labs, combined with our Life Sciences capabilities, is especially well situated to become an important growth vehicle on the cutting edge of diagnostics and medical product development.

Today, we are reviewing a number of new possible tests to add to our growing portfolio of molecular offerings, and we are being approached by many parties to provide and partner their newly developed tests because of our special channel of distribution in the New York regional market. Also, our licensing will allow us to accept many tests from outside of our regional area.

Enzo Clinical Labs is poised to become a very fundamental and critical asset for providing novel new tests to the New York region.

It is an exciting time for our company. We look forward to the meaningful progress of our capabilities and the improvement of our financial results over the subsequent quarters.

We believe that Enzo today is extremely well positioned, both from its geographical position in the Clinical Lab, as well as its technological position and intellectual properties position in Enzo Life Sciences, to become an integrated force in the development and the provision of new modern molecular test that we believe will be an asset and a developmental strength for the new changes that are coming forward in health care. It's an exciting time for the company, and we look forward to reporting to you in subsequent quarters with the introductions and changes that are affecting our industry today.

I'd like to now turn the floor over to questions.

Turning to the Life Technologies litigation, can you talk about what the timeline, broadly, is going to look like? Obviously, they're going to come back and appeal [ph].

But can you talk about what the timeline would look like for settling that?

We are awaiting the final official ruling document, at which time, parties then can have a period of time to make a decision to appeal or not to appeal. Assuming there is an appeal process that is set into place, I've been told that the resolution of that process can take anywhere from 6 to 12 months.

Okay. And as far as the other cases that you said you might benefit from the decision, what broad timeline are we looking at there?

We are awaiting trial dates for a number of the cases in the Southern District of New York. There is -- there are approximately 5 cases, as I mentioned earlier.

We have completed discovery for all intents and purposes, and we're awaiting trial dates, which, we anticipate, can take place sometime in the spring.

And the Delaware cases, is that something that you filed after the settlement [ph]?

Yes. That's a relatively new case.

Do you expect that the New York cases can be close to the amount of the judgment that this one was? Or will it be significantly less?

I can't comment on that at the moment. But we believe there are significant damages associated with these cases.

We have not quantified the specific damages associated with it publicly yet, but they are significant.

And what do you expect the Medicare rate cuts to be, about 2.5%?

I think we are -- we and other members in the industry are looking closer to about a 4.5% or so. We don't know that specifically, but our estimate is in the range of over 4%.

And that includes the sequestration cut, I assume, right?

Yes. Paul, it's David Goldberg here.

What we understand is there's a 2.9% cut coming in January and there's 2% additional sequestration. So that would be on the order of a little under 5%, that's as of now, obviously, subject to however this fiscal cliff negotiations end up.

Do you think that your other payers will go in that direction, too? Or are you not worried about that?

It's hard to say, hard to say. I think everybody is really kind of at a waiting game now, hopefully, not.

The bad debt ticked up a little bit. Does that have anything to do with introducing more esoteric tests?

Certainly, product mix and mix of our payers impacts our uncollectibles.

Thank you. We thank you for joining with us this morning.

We look forward to our next report on the second quarter. Have a good day.