Good morning, and welcome to the Enzo Biochem Inc. Fourth Quarter 2014 Operating Results Conference Call. 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 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 goods and services, cost of goods and services, other expenses, government regulations, litigation and general business conditions.

See Risk Factors in the company's Form 10-K for the fiscal year ended July 31, 2014. .

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 press release.

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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. .

Thank you. Good morning, and thank you for joining us today. With me is Jim O'Brien, our Senior Vice President of Finance; and David Goldberg, our Vice President of Corporate Development.

Our press release regarding the fourth quarter and the full year operating results was distributed last night and has been uploaded to our website as well, if you wish to refer to it. .

Let me begin by stating that our healthier operating results for the fourth quarter and the full year of 2014 reflect our commitment to improve our financial performance while we continue to invest in new, innovative technologies, which will further expand our presence in the growing health care marketplace.

Particularly, we are focused in the molecular diagnostics segment. Over a year ago, we laid out an aggressive operating plan to streamline and refocus the company to meet the challenging environment of lower health care, which is pervasive throughout the environment today.

We are seeing declines in reimbursement from the government and private insurers that are impacting the industry very dramatically. .

Our operational platform in our 2 operating segments, that is Enzo Life Sciences and Enzo Clinical Labs, needed to be synchronized to support our strategic plan of introducing our proprietary low-cost approach for molecular testing to the clinical markets, at the same time, placing continued emphasis on maintaining the high quality of products and services for which Enzo is known.

We have made and we are making material progress in focusing the company and continuing its transformation. By integrating our facilities, we are reducing product offerings to focus on higher-margin and more in-demand items and adding new technology to heighten efficiency, at the same time, reducing costs across the board..

These efforts can be seen in the improvement of our fiscal 2014 operating results and supports the positioning of Enzo as the leader in providing diagnostic services and clinical, biopharma and specialized research reagents to the global health care industry.

In 2014, that is fiscal 2014, our revenues grew year-over-year in both our services and products business units. This reflects an increasing demand for Enzo offerings. .

Importantly, our operating cash flows have improved significantly over the prior year, and our balance sheet now provides financial strength for growth. It's important to note that cash generated from operations in the fourth quarter was $1 million, an improvement of $2.5 million from a year ago.

This is the second sequential quarter of positive cash flow. This trend is an important bellwether in the improving performance of our operations. Looking forward in the first quarter, we do expect continued high legal expenses as our cases become more mature, which could impact some of the expense lines as are reflected. .

We are continuing to position the company for further growth based on advancements in our research and product development programs as well as new service and product introductions to meet reviving customer demand in the global marketplace. No place is this more evident than in the rapidly growing molecular diagnostics market.

This is the fastest-growing sector of the clinical diagnostics market. It's growing at about 10% per annum, and one that, despite this increasing demand and demonstrated effectiveness, remains under tremendous downward pricing pressure from the payers. .

We have focused this year on streamlining and centralizing our operating infrastructure. In addition, we have been integrating our development capabilities, manufacturing and service operations while improving our capabilities and skill sets across the various key functional areas. This ranges from discovery to marketing.

All these moves support the execution of a business plan that will enable Enzo products and services to meet the economic challenges of the clinical lab world resulting from reduced reimbursement programs in the industry. .

Moreover, we now have in place a uniquely integrated research product platform capability, encompassing Life Sciences development and Clinical Laboratory expertise. This is coupled with our highly regarded service capability to develop and gain industrial access for our new technologies. We believe that this can lead to substantial value creation.

We also believe that our product and service solution can address the tension that exists between diagnostic suppliers and their laboratory customers, one where the suppliers are not willing or able to reduce their pricing despite the reduction in reimbursements that their customers are enduring. .

To elaborate a bit, let's view our lead molecular platform, AmpiProbe. AmpiProbe, for those that may not be aware, is a nucleic acid or DNA amplification and detection platform that could allow the more efficient delivery of gene-based diagnostic testing.

The technology is the result of a multiyear research and development program at Enzo in which our research team was charged with inventing and designing a new low-cost molecular testing platform that would challenge the current existing standard system on performance, provide ease of use as well as cost savings and be outside of the expensive patent minefield that has limited entry to date.

I believe that, with AmpiProbe, we have done that. Our system performs well and has been designed to allow multiplex testing from a single specimen that can substantially alter the price structure for doing these extensive types of tests as well as provide a comprehensive panel for a physician. .

Our business approach is to provide clinical labs with optionality to improve their margins, which today, for many tests, are nonexistent or very low. To do this, they can obtain Enzo's high-quality reagents produced under tight quality control and validate their own assays on any number of open platforms while we move towards FDA approval.

Or they can utilize the services of our Clinical Laboratory. They can refer such tests to us at attractive rates below what many others are currently charging, turning their reference work to an enhanced profit center. .

Enzo's goal in the development of products and services using this technology is to reduce the price of performing such tests to a level where laboratories can offer these tests, whether developing them in-house or utilizing Enzo as a reference laboratory, at acceptable profit margins.

This would open molecular testing as a profit center for many small- to medium-sized academic and commercial laboratories that now run such tests at a loss or do not run them at all. The market for this segment is large, approaching well over $2 billion in size currently. .

Nor is this message lost on third-party commercial payers, who are seeing their costs increase as the proliferation of these type of tests expands.

In meetings we have had with representatives from such groups, they are aware of the importance of the molecular diagnostics marketplace and the key clinical and treatment decisions that derive from their output, and they have expressed interest in our solutions.

Our revolutionary approach to the market will allow us to capitalize far more quickly on the successful development of products based on this technology platform, and it is only possible because of the unique nature of the infrastructure that I have just described. .

Our translational diagnostics teams have developed an impressive pipeline of products and services based on AmpiProbe, including panels for both infectious and sexually transmitted diseases related to women's health, general infectious disease and those potentially related to cancer, both diagnostic and prognostic.

At this time, a number of these products are in development and undergoing validation and are moving through the regulatory approval process. We hope to see the first of these tests available for marketing sometime after the first of the calendar year. .

With that as an introduction, I will turn to a discussion of the fourth quarter and full year results. As we reported last night, net revenues for the July 31, 2014, quarter were $24.9 million versus the prior year of $23.3 million. That's up $1.6 million or 7%.

Service revenues at Clinical Labs were $15.4 million versus $14 million, up $1.4 million or 10% from 2013. This was due to increases in our molecular and higher-value test volume and up nearly $1 million from the third quarter. .

Product and royalty revenues at Life Sciences were $8.4 million versus $7.9 million last year, an increase of $500,000 or 6%, as we continue to see the impact of our focused marketing efforts in the areas of genomics and drug discovery, offset by lower royalty income.

Overall, gross margins expanded by 16% or $1.5 million to $10.9 million, with year-over-year increases at Clinical Labs of 25% and at Life Sciences of 10%. Margin improvements on services was again due to the increases in our higher-value assays while a more favorable product mix contributed to the gains at Life Sciences..

Operating expenses for the fourth quarter, which included $1 million increase in legal spend from a year earlier, rose by 5%. Despite this, the year-over-year quarterly operating loss was reduced by $300,000 to $3.1 million. For the fourth quarter, our pretax loss improved by $400,000 or 10% to $3.2 million.

On an adjusted EBITDA basis, our loss was $1.8 million, a 26% improvement over last year. .

For the full year, revenues were 96 point -- were actually just $96 million, a gain of $2.3 million from 2013, despite a $900,000 reduction in royalty income. Gross margin improved to $41.7 million or 7%, and gross profit was 43%, a 200-basis-point improvement over last year.

Revenues at Clinical Labs were $58.7 million for the year versus $55.9 million in 2013. This is an improvement of $2.8 million or 5%, while product sales at Life Sciences advanced by $300,000 or about 1%. .

For the full year, our pretax loss improved by $9 million or 48% to $9.9 million, while the adjusted EBITDA loss improved by $7.3 million, mostly due to the improved operating results I just mentioned. On a per-share basis, net loss was $0.23 versus $0.46 per share in fiscal 2013.

Please refer to the tables that were attached to last night's press release, which includes reconciliation tables of GAAP to non-GAAP net income and loss and EBITDA to adjusted EBITDA. .

With respect to our liquidity and capital resources, our balance sheet continues to strengthen, reflecting the benefits of stronger operating performance and legal settlements received in the third quarter. Cash flow used in operations for the year was only $1.7 million, an impressive $8.3 million improvement year-over-year..

Cash on hand at July 2014 was $17.5 million, while working capital totaled $15.8 million, nearly twice what it was a year ago. Our financial position is strong and allows Enzo now to continue to invest in growing the business and product development towards further expanding Enzo's offerings.

Our revolving credit line balance was $3 million, which was basically unchanged from the prior year and provides additional low-cost flexibility to support our growth initiatives..

Just briefly, I'd like to update our legal matters. During the past quarter, we entered into a $7 million settlement with PerkinElmer, covering both contract and certain patent matters, which the court has approved. These funds have yet to be recorded, pending the resolution of the associated legal fees with the award. .

As has been abundantly clear, our patent estate has generated significant value for us over the years. This was further exemplified with the Life Technologies verdict that awarded us over $61 million in direct infringement penalties and interest payments, and that award continues to grow, so long as it remains unremitted.

As expected, after the judge formally upheld the jury verdict and set the interest rate, an appeal was filed by Life Technologies. We are hopeful that this matter will be resolved during the early part of next calendar year.

Finally, our other cases against multiple parties are now moving into the discovery phase, with trial dates expected to be set in the next year as well. .

Before I end my formal remarks, I'd like to take the opportunity to add some further comments about AmpiProbe, our research and development capabilities and our robust intellectual property estate. In addition to the wide range of potential molecular diagnostic products that I discussed earlier, our platform could have broad-reaching opportunity.

As an example, we believe that there may be application for AmpiProbe-based products in areas such as veterinary medicine, bioprocessing, food safety and biodefense..

With respect to biodefense, the markedly increased sensitivity of products based on AmpiProbe technology may provide a tremendous benefit to initiatives in this field. In more conventional infectious disease testing, the presence of the virus or the bacteria being studied is often at a level where sensitivity is not an issue.

In these instances, the performance of AmpiProbe-based assays is as much related to economics as physician and patient satisfaction.

A major reason that less -- for this issue is that less starting material is needed to run this assay, which leads to assays that can be produced and run at lower costs and with less likelihood of needing additional clinical sampling.

However, in the biodefense marketplace, where the presence of even a single copy of a particular organism can be meaningful, the superior sensitivity that AmpiProbe is presenting may be seen as a crucial and critical improvement in overall testing standards. .

Additionally, we are also progressing with products based on other Enzo platform technologies. Enzo is developing cell-based assays that are going through the same validation processes as AmpiProbe products right now.

These products and services could be utilized by pathology labs to identify gene expression patterns that may indicate the potential of cancer progression in patients.

Our long experience in the development of homogeneous assays that are the foundation of key diagnostic products in use today may lead to the development of more sensitive gene expression tests that can result in a wide range of uses in the diagnostics space.

We will provide more details on these assays as they proceed to the development and regulatory pathway. .

We also, earlier this week, announced the award of a new patent. This is one of 20 new patents we have received this year. This one covers a discovery by our scientists of a novel vector that has application in gene therapy treatments.

It has the capability of being linked to a nucleic acid sequence that is specifically selected because of its ability to interfere with the disease process, thus, effectively shutting it off or to correct a genetic deficiency. Its applications range from cancers and virus infections to genetic diseases. .

I'm mentioning this announcement to underscore that while we have been operationally transitioning our company, we continue to pursue new exciting and significant developments on both the life sciences and diagnostic fronts.

It's also to remind you that while Enzo is a robust global supplier of over 9,000 life science products for research labs, both academic and commercial, that we have an important niche in a major metropolitan market as well as a superior reference and diagnostics laboratory.

And at the same time, we remain a vital pursuer of cutting-edge science and medically related technology..

Finally, our intellectual property estate, which has been built up over decades of pioneering work, remains a core asset.

That we have initiated dozens, it's actually 12 to be exact, legal actions against various companies for infringement of our patents and the substantial verdict handed down by the jury in Connecticut, which, to be sure, still awaits the court's decisions on the appeal, attests to the value we ascribe to this part of our business. .

Before turning the call back for questions, I would like to reiterate a few key points about the past year. First, we are driving the company to become an integrated diagnostics and services provider that is using proprietary technology to address the reduced diagnostic reimbursement environment. .

Second, we are using a novel, disruptive, internally developed technology, AmpiProbe, in an alternative business model to meet the challenges of the changing laboratory economic environment.

And third, we are leveraging our products and services expertise to develop and provide high-throughput, high-value, lower-cost molecular testing and services and to provide them to the market in a bifurcated distribution model using our Life Sciences sales and our distribution teams associated with Life Sciences, in conjunction with the national reach of our Clinical Lab to provide laboratory services.

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We look for continued improving operational performance as we enter 2015. Our developmental efforts are accelerating into validations and, hopefully, key approvals that will allow us to make introductions into the marketplace.

The aggressive streamlining and refocusing of the company that took place over the last couple of years has shown positive economic results. Our strategic objectives, as always, are to enhance our business and ensure greater recognition for Enzo and its many assets, along with our determination to achieve the full value for the company.

As you can see, 2014 was an exciting year, a productive year and on a number of fronts, a very, very meaningful year, and we are looking forward to 2015. .

I would welcome questions at this point. .

[Operator Instructions] Our first question is coming from Bill Bonello with Craig-Hallum. .

Just a couple of follow-up questions on AmpiProbe to start with.

Can you just elaborate on what you're doing at this point to provide independent validation of the AmpiProbe technology? I mean, should we be looking for other labs to put out posters or papers or whatnot that show that they've used AmpiProbe and were able to sort of replicate the results that you've gotten?.

The technology has been successfully used by outside labs to address some of the key market opportunities that are presenting themselves. We are a participant in the process with these outside labs. I am aware that there are potential publications in process, which we are looking toward.

We have seeded the technology in a few different areas, which it is now germinating and working in conjunction with our own researchers. So I think one can expect, in the future, to see the external validation of this technology via other sources.

It should be noted that the technology was presented at the European conference for infectious diseases, and so it has a publicly recognized platform that has been exposed to the academic community. .

Okay. That's helpful.

And what are your thoughts at this point in terms of sort of partnering? I know you want to be very careful to hold on to the IP and sort of not lose control of that, but any thoughts in terms of partnering with a larger diagnostic product company, let's say, to accelerate the pace at which you could get products into the market? Or are you kind of determined to go at this on your own?.

Part of the value proposition of this technology, as I mentioned in my comments, was the potential for use in a multidisciplinary area of opportunity. And what I mean by that, there are potentially -- there is potential utility for this technology in veterinary medicine. I spoke about the area of biothreat.

I spoke to that specifically because we have already been working with parties in that area to define and validate our platform, in the -- in some areas of utility for that marketplace. We are of a size where we cannot develop all of the utility of this potential optionality -- of this potential product line.

We are in dialogue and we are actively exploring relationships to expand the use of the technology in areas outside of human diagnostic approaches. At the same time, we are in dialogue with parties to expand segments of the human health care market. I mentioned in the comments that we have a strong propensity in the area of women's health.

This, historically, has been a strength for Enzo. We are developing a very comprehensive women's health panel around the AmpiProbe technology. We are also developing and exploring the opportunities for testing in the upper respiratory area and in the area of cancers.

So there are many other areas that have potential value which we could see partnering off with other parties in our industry. The other interesting opportunity that may come with the concept of partnerships is partnerships with other clinical laboratories, partnerships with health care providers.

And again, standing back and looking at this potential opportunity, we are, again, attempting to deliver a low-cost solution to this market, and because of the nature of the benefit of providing a low-cost solution, it has the potential to bring in partnerships of economic benefit as well as technological benefit.

So I would, not to go on much farther, say that yes, the answer of partnerships is a high value proposition for us here and one that we are exploring fairly aggressively right now. .

Okay. And then just switching gears, one last question.

On the PerkinElmer settlement, what are your expectations in terms of the timing of actually getting that cash in the door and maybe how much of it might go to the lawyers?.

Well, it's -- timing is difficult. I'm hopeful and optimistic we will see that within the next quarter or so. In terms of the amount going to the lawyers, that is difficult to say at this point in time. There -- we did have a disagreement with the lawyers over the value of the time spent, and that is being discussed right now.

So it's very difficult for me to say, but we're cautiously optimistic that this will be resolved in the near future. .

[Operator Instructions] Our next question comes from the line of Norman Hale with Stifel, Nicolaus. .

In regards to AmpiProbe, which seems to be the real major product and the real opportunity for your company, is the -- as far as regulatory approval, are you getting FDA approval? Or are you getting the New York authority -- the regulatory authorities from the state of New York?.

The initial thrust will be to get New York State approval and then, ultimately, utilize the base that will be built off that approval to get FDA approval. One should recognize that we will move for CE mark as well in this process. That's the European approval process.

So the strategy is to get the system operational and in the hands of laboratories as rapidly as possible.

And with New York State approval, we can begin to market the reagents that can be utilized by these labs around the country to define and build and process their own systems based on our technology and start generating cost savings as well as improved margins in their diagnostic processes. So the LDT approach is ongoing as we speak right now.

Those are the first set of approvals we anticipate, and we will be moving towards FDA approval as well. .

Okay.

And you think you can start marketing the product in the first quarter of 2015?.

I believe that there will be selected products, as we build the portfolio, that we will be able to market. You will not see a full panel of cancer diagnostics, upper respiratory diagnostics and sexually transmitted disease diagnostics in that -- in the first quarter.

What you will see is the beginning of the panels in certain areas, predominantly women's health, being utilized. Again, this is -- it's an aggressive process in terms of the number of analytes we are processing right now.

It's a process which will take some time, but the key is to get the first ones out and get acceptability of this new testing capability. .

So basically, the strategy here is you will get certain products -- or certain diseases in certain markets you will hopefully initiate first quarter of 2015 and then expand into different diagnostic areas as time goes on?.

We will continue to add analytes to the system over time, yes. It's a very -- I mean, this is a 2-year process to fully build out a platform of tests that can address key core groups of diagnostic testing. .

Got it. And maybe you guys can't answer this question, but maybe just give me kind of a wild guess. Let's say 2 years down the road, most of or maybe all the markets will be in full gear, where you'll be selling to each of these various diagnostic markets, et cetera.

What do you think the revenue potential is for the product?.

The market that we are penetrating is a multibillion-dollar market. If you look at the existing, what I would call, wholesale level, that's the kit transfer prices to labs, you're talking about a $3 billion, $3.5 billion market. If you look at it from a service provision capability, you're in the multibillion-dollars.

So the level of penetration that we would need to achieve is very modest. The level of penetration will be dependent on the rapidity of the approval process, which I am always very reticent to handicap.

So I mean, depending on how quickly we are able to get these analytes approved, initially as LDTs and then, subsequently, through CE mark, because that will allow us to open up the European market, will drive the volume of revenues that will be generated into the future.

But again, I'm reticent because I -- we can make projections, but the reality is the parameters that are going to make those projections real are somewhat outside of our control. That being said, I would look forward to a significant opportunity, if not over the next 12 months, certainly within the next 24 months. .

Okay.

And Barry, assuming that you guys finally get paid on the Connecticut court case, $60-some million dollars, will that permit you to accelerate a number of initiatives that you guys were working on, specifically AmpiProbe, and add additional capital?.

Yes, that is correct. Our spending volume against the development of this system has been relatively modest by industry standards. If you look at the investment companies make to introduce new systems to the market or new tests to the market, they far supersede the amount of investment we have made to date.

That being said, we are fortunate that the dynamics of this system, because we do not need to produce a dedicated piece of equipment, makes the entry a bit simpler because it's basically reagent-based testing modalities. But we certainly will need to spend more money to get these tests out in a more rapid fashion.

And hopefully, with the influx of capital from these legal issues, hopefully, that will be a reality. .

Okay.

And as far as the use of the proceeds, would you be looking to hire some additional people, sales, marketing, to ramp up the pace at which you can try to launch these products in various markets?.

Yes. We, today, are selectively hiring. I think when you look at what has transpired over the last year, you will see a streamlining and efficiency put against, particularly, the Life Sciences business. The headcount in that business has been significantly reduced over the last 24 months.

Those -- the savings associated with that headcount reduction is apparent in the numbers we spoke to today. At the same time, we are bringing in very targeted high-level individuals to help drive this product launch and to help drive this development program. This is a process that will go on over the next 12 months. .

Okay. And I believe you said that you anticipate concluding the litigation, hoping to get paid here, first quarter of 2015.

Is that the anticipated time table?.

That is the anticipated time table, yes, though I will make a caveat that, within the legal system, the timing is not within the control of any of the participants. So we are optimistic, according to the schedules the attorneys have laid out, we should see resolution in the first quarter. .

Okay. Okay, good. Getting back to the various markets that AmpiProbe has potential, you've mentioned the veterinary market, which -- that is a market with a tremendous growth.

What do you think the potential revenue -- how big could that get as far as AmpiProbe being in the veterinary sector?.

The veterinary sector is an interesting sector because it tends to be a cash-based reimbursement model, unlike the human health care sector, which means that cost is certainly a very important paradigm within veterinary medicine delivery. Our system has the potential to reduce the cost of these types of tests for animals.

And again, this is just beginning in the animal health care marketplace. I think vets are starting to see the utility of these types of molecular tests. There is an adoption period and an introduction period that I think will take some time yet.

In terms of the penetration, it's very difficult to say, because it will depend upon who we ultimately partner with in this sector and what the breadth of their marketing capability is and the breadth of their development capability. I mean, we -- many of the analytes that are being developed may have crossover utility in animal health.

But at the same time, it is a different process and a different dynamic. So much of that will depend on the partner with whom we go with, if we do go with a partner in this field. So it's very difficult for me to make any type of viable projection that I'd be willing to back up here. .

Okay. Well, one thing I know, our company helped launch a pet insurance company this year, and there is a huge opportunity in pet insurance. It's becoming more widely adopted by quite a few pet owners, and so I think there's a tremendous growth opportunity in this area.

If you get insurance with -- in some kind of a broad amount, then people are going to be much more amenable to taking their animals in and having some maybe semi-expensive tests done on them, so interesting. But it sounds great.

And if I understand your -- what you've been telling us today, it sounds like AmpiProbe has an enormous opportunity in many... .

Let me -- so we -- it has opportunity for many, many reasons, and we are -- we believe it will be a formidable driver of value for the company into the future. Any -- because of the time, any other -- I would like to move on if we could. Are there any other questions? If there are not, I would... .

We have no further... .

Okay, thank you. Again, I would like to thank you for joining with me today. Our first quarter will be reported in early December. We look forward to speaking with you at that time. .

A replay of this broadcast will be available until Friday, October 24, at midnight. You may access this replay by dialing 1 (800) 585-8367. The PIN number is 7864886. 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..