Barry Weiner - President & CFO Jim O'Brien - EVP, Finance.

Kevin Ellich - Craig-Hallum.

Good morning and welcome to the Enzo Biochem Inc. First Quarter 2018 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 market for the company’s products and services, cost of goods and services, other expenses, government regulations, litigations and general business conditions.

See risk factors in the company’s Form 10-K for the fiscal year ended July 31, 2017. 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 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 its press release issued last night. Our speaker today is Barry Weiner, President.

At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation. 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. On the call with me is Jim O'Brien our Executive Vice President of Finance. We distributed our first quarter results release yesterday after the market closed and I hope you had a chance to take a look at it.

As the results show we continue to implement our business strategy to enable our unique fully integrated diagnostic structure to meet the evolving challenges of our industry.

This past quarter was marked by a number of significant operational accomplishments that validate Enzo's importance in the marketplace at a time when high costs of production and lower reimbursement is making it more and more difficult for clinical laboratories to operate profitably.

We regard our operating and development accomplishments as what is our outlook at Enzo is very favorable. And we'll share our thoughts with you in that regard shortly. Permitting to once again this quarter underscore the growing success we have had in transitioning Enzo into a fully integrated hybrid diagnostic company.

We have done so by blending our two operating business segments, Enzo Clinical Labs and Enzo Life Sciences, in to what we believe is a unique one of a kind new company that develops products and platforms and also provides services and products that fills an important void in the growing field of molecular diagnostics.

What has made this possible is the unusual debt of our expertise in our forward-looking strategy to meet the needs of today’s unusual market demands. Over the years of product and technology development, our strength stretches back over four decades and is embodied in our extensive intellectual property estate.

The depth, practical knowledge and experience of our scientist provides us with a unique competitive advantage with which to develop new technology that is both medically relevant and importantly cost efficient.

This is an important part of what makes Enzo so strong, our innate deep understanding and ability to develop low cost highly effective [Audio Gap] technology platforms and products for a market in need of affordable solutions.

We have within Enzo Life Sciences broad capabilities for developing critical assays that have demonstrated high sensitivity and in our two manufacturing facilities one in New York and one in Michigan, we have the capability to manufacture them as they are approved.

At the same time, Enzo Clinical Labs and its state of the art diagnostic capabilities provides a means for seamlessly working with life sciences to assure the quality and effectiveness of our products to their testing services.

With our integrated resources, we are able to bring to market platforms and technologies that are fully vetted [ph] in a real world diagnostic facility.

As many of you already know Enzo Clinical Labs uses our own developed technology in performing many testing services that given Enzo's higher than average industry gross margins demonstrates the value of affordable technology that clinical laboratories can enjoy either by deploying Enzo Solutions in their own laboratories or by referencing testing services to Enzo.

Thus, from idea to development to validation to manufacture, Enzo has enormous in-house strength. And what has made this special is that we recognized early on that the nation's independent clinical laboratories which number in the thousands are at an economic disadvantage in today’s rapidly changing diagnostics world.

The advent and fast growth of molecular diagnostics as a means of early diagnosis and follow through testing has required sophisticated new techniques in assays that are needed, but that are also burdensomely expensive.

You combine this with high capital cost to expand, upgrade or maintain laboratory facilities, an ability for labs to expand their testing menu at affordable pricing and perhaps most importantly, steadily declining reimbursements makes it easy to understand the challenges these clinical labs face today.

Enzo has braced its [ph] task of developing affordable solutions that are widely needed.

The effectiveness of this strategy is reflected in the increasing attention to our tech -- that our technology is getting from independent clinical labs starting with our anti pro platform and others that have followed and the cost efficient highly sensitive assays that we have developed all of which benefit clinical laboratories, their physicians and their patients.

Our transformation is starting to reflect in our financial performance. Revenues in recent years have been on a steady upward trajectory as seen in the growth in our laboratory testing services, that is the result of new products, extending our geographic coverage in the northeast and adding new clients.

It is also attributable to our ability to offer not only high quality and industry best service but also innovative new diagnostics of which our newly approved women's health panel is representative.

It is also notable that our revenues have grown despite a conscious effort to pare the low margin commodity type research products in Enzo Life Sciences in order to build capacity for turning out new products being developed for clinical markets worldwide, despite somewhat reduced research product sales.

Our efforts to streamline our product mix in favor of higher margin products and increasing efficiencies along with tight cost controls has enabled this segment to remain profitable and cash flow positive during this transformational period.

I will have more to say about our business shortly including our products and technology platforms but I would like to review with you our recent financial results for the first fiscal quarter of 2018 which ended on October 31st. Revenue for the quarter was 27.7 million, an increase of 1.4 million or 5% over the prior year period.

Clinical laboratory services were once again a key driver with revenue of 20.3 million a 10% increase over the prior year. Gross profit increased to 12.2 million, 1% ahead of prior year, gross margins were 44% down slightly from the prior year given somewhat lower product revenues.

Operating expenses were 12.9 million a decrease of 500,000 or 4% from the prior year. Included in this amount was SG&A that was lower by about 600,000 or 5%, this was offset by higher allowances for bad debts of a $100,000. Our bad debt allowance remains constant as a percentage of laboratory services revenues at roughly 4%.

The consolidated operating loss improved year over year by approximately $650,000 attesting further to our emphasis on improving profitability. On a GAAP basis the net loss was improved by $0.02 a share over the prior year. Net loss was $640,000 or $0.01 per share compared with a net loss of 1.5 million or $0.03 per share in the prior year.

EBITDA and non-GAAP measure was breakeven during the quarter compared to an EBITDA loss of 600,000 in the prior year reflecting a significant improvement. In terms of segment performance Enzo Clinical Laboratory Services continued to increase revenue to 20.3 million a significant 10% ahead of last year.

The gains reflected in the increase in testing volume, the result of wider geographic penetration in existing markets but also expansion in parts of New England. Increased business with most major healthcare providers has also been a growing factor.

Particularly business derived from our being named the network provider by the fourth largest national healthcare insurer last April. The lab's gross profit increased 8% to 8.3 million and as a percentage of its revenues remained at 41% for both the current year and year ago quarter.

Enzo Life Sciences Revenues were off slightly to 7.1 million from 7.4 million a 5% decline, gross profit was 4 million compared to 4.4 million a year ago. With continued focus on reducing costs and improving efficiency, SG&A declined by 11% and operating expenses fell by 12%.

Our financial condition remains solid, providing us with the capital to advance both our development in marketing programs to expand our business throughout the United States and in the International markets. Our balance sheet remains very strong with cash and cash equivalent of about 67 million.

This is 2.7 million higher than the balance as of July 31, 2017. Working capital remains at more than $71 million. During the quarter cash provided by operations was $2.6 million compared to cash used in operations of 0.3 million a year ago, an improvement of $2.9 million.

Our financial position enabled us to invest nearly 500,000 in capital expenditures during the quarter. Along with our solid financial performance, we continue to move rapidly ahead on the product development and regulatory approval front.

Conditional approval during the quarter by the New York State Department of Health of the remaining five women's health tests has made possible our offering of one of the most complete women's health diagnostic panels on the market, with 13 different analyte targets.

This approval was significant, in that it now allows a broader test menu to be marketed to clinical laboratories with a potential for savings either by buying products or services from Enzo could be material. Our belief is that our diagnostic panel will offer a cost-efficient approach for women's health testing and have a broad and major impact.

Enzo labs is currently expanding its capabilities to incorporate the new tests for a complete panel solution. We expect to shortly offer this service from Enzo clinical labs existing marketing territory in the greater metropolitan New York, New Jersey, New England area.

We are also preparing for a national marketing program with a complete testing menu of affordable products and services that we can offer clinical labs around the country with the option of purchasing the platform plus assays that are compatible with their existing systems, or sending the results to Enzo on a reference basis for overnight processing and reporting on specimens.

Our sales and marketing efforts are already receiving positive responses in the market, and we expect these efforts to grow over the next several months. Recently Enzo scientists delivered a poster presentation at the annual meeting of the association for molecular pathology in Salt Lake City.

It involves a report that detailed research of our women's health panel that uses our AmpiProbe multiple real-time PCR assays for use with candida, gonorrhea, chlamydia, trichomonas and bacterial vaginosis.

The focus was on the panel sensitivity, specificity and reproducibly and accuracy in line with the requirements of the New York State's microbiology molecular checklist, to validate the assay's diagnostic value.

We were pleased to report that the study demonstrated that our technology provides a new proprietary approach to achieving accurate detection and identification of vaginitis associated microorganisms. The utility of this platform is now being extended to other targeted diseases.

At present we have several noteworthy medically related molecular diagnostic testing assays that provide unusual sensitivity and cost savings while being adaptable to open systems existing in many clinical laboratories.

These include diagnostics for human papilloma virus infection new 67, hepatitis C viral load, cardiac markers and in situ hybridization allowing for localizing specific nucleic acid or DNA targets within fixed tissues and cells.

Our fluorescent in situ hybridization otherwise known as FISH technique used in laboratories to visualize chromosomal abnormalities that outperforms other commercially available products is also being offered.

Another platform POLYVIEW for reading tissue biopsies and having a high confidence quotient as a result of demonstrating [indiscernible] positive is also being offered. Immunoassays having superior detection capability with higher sensitivity are in various stages of product development and utility.

And FlowScript our gene expression platform for assays providing broad application for detection of genotype and phenotype markers via flow cytometry which applications include cancer progression and monitoring a new function and inflammation are in various stages of development.

To build capacity as we add new products to the program, we have begun an expansion and upgrade of our Farmingdale Long Island manufacturing location that will be ISO Certified and GNP compliance.

It will allow capacity to produce our proprietary molecular assays including PCR base and gene expression assays plus immunohistochemistry and in situ hybridization reagents. I would like to close on a note that while we are active on multiple fronts, our focus is primarily on our basic business that we believe holds growth opportunities.

We have previously commented on what is believed to be impending PAMA Medical Medicare reimbursement levels. The first of which is implementation expected shortly after the first of the year.

These hold the possibility of further impacting the economic wellbeing of the nation's independent laboratories, which makes our vision of transforming Enzo into a national provider of high quality, affordable and easily adaptable diagnostic products and services even more timely and important.

With that I will now like to open the call for questions. .

[Operator Instructions] Your first question comes from the line of Kevin Ellich of Craig-Hallum..

Good morning. Thanks for taking the questions. Barry, I just wanted to go back to the good cash flow that we’re seeing and now you have about $67 million of cash on the balance sheet.

What are your plans and how you guys plan to deploy that or at least the discretionary portion? How would you prioritize that?.

We are embarking on a program to expand our regional business into one that is a national reference service business. The utilization of that cash will be used in a conservative but dedicated fashion to expand our sales presence throughout the national market.

We are increasing our sales force, we are doing it in a measured and I would suggest a focused way, but we will be investing in more human capital [ph] in a number of different areas, one being sales, the other is being invested in the employment of personnel to drive our manufacturing capabilities as we see a need in the future to build volume capacity within our production structure.

At the same time, we are always evaluating new opportunities within the market, we are fairly stringent in our evaluation process but certainly if opportunities do present themselves, they will be considered.

So, we are approaching this issue of capital utilization in a measured, conservative and I hope responsible fashion one that we believe will drive revenue volume and product development within the laboratories and help the expansion of our business model in a more rapid timeframe..

Great and I guess you know with the expansion of the national sales force any rough estimate how many people you need to add in the field. .

We believe that ultimately, we will be adding approximately 10 new individuals in various functions in the marketing and sales organization. Obviously, this is an evolving target as we watch the business and the potential growth that should take place within the business but at this point we are targeting about 10 individuals..

Got you, okay and then as we think about the value in the vertical integration of your business especially I think in your prepared comments you made a comment about hybrid diagnostics company.

How should we see the revenue segment shift over time? I mean will we see a greater shift to the diagnostics side versus the clinical lab and how long do you think that'll take to shake out..

I think over the next year you will start to see the emergence of the reference activity within the clinical marketplace as it pertains to Enzo. We are agnostic in terms of whether our customers will buy product or perform reference services and deliver reference services to us.

We believe the economics favor the utility of reference testing as an economic means for small to medium sized clinical laboratories. We see no reason for the need for hundreds of labs in our industry to be performing the same economic tests at an overhead cost structure that can be prohibitive for them.

When you look at what is taking place within the market today where the approaches for economics are driving the elimination of middle men in many of the areas of product delivery when you look at an Amazon when you look at recently just the announced program between Etna and CVS you see the utility in the consolidation that is taking place through the utilization of vertical integration and we believe that program and that methodology should benefit the clinical lab market as well and we hope to be a provider of low cost testing reference services which I believe will drive the laboratory side of the business.

At the same time, we do not view it as differentiated in terms of products versus service. We will be pleased to provide product if parties wish product and we will provide the service, we believe the economics will favor the delivery of the service to labs and allow them to focus on sales and marketing not on processing and production.

So, I believe you will see the growth on the service side..

Great, that's helpful, and then just couple more questions, PAMA with the final rates coming out have you guy had time to analyze the changes in 2018 and beyond and curious if you have any material changes relative to what you guys said last quarter. I think you said it was going to be less than around $500,000..

Hi Kevin its Jim O'Brien I think you are right, as we look at the final rules and see how this is going to play out I think that’s a good estimate. We will have to be conscious of what, if any changes private payers make as a result of changes to PAMA which could be anticipated but we don't see that at this time.

So, we are keeping an eye out for, we will update if things would have changed but that’s a good estimate right now..

And then Jim you made a comment about what changes of any private payers will make, do you have any or many private payer contract, commercial contract tied to Medicare rate?.

We do. It's not a significant portion of our business but there are contracts out there that we will review rates with us each year or maybe every other year. And they will make changes based upon what's happening in the Medicare market..

And then I guess going back to gross margins on the lab side it came in about 100 basis points lower than we expected.

Is that really due to the prior authorization for genetic testing? I guess how should we think about that going forward?.

I think what we have done in the quarter is to make sure that as insurers take a more proactive view of genetic testing requiring preapprovals [when there is] a medical necessity we want to make sure that we are following the rules and compliance.

So, in a quarter we make sure that our revenue didn’t get out too far in front of us kept our balance sheet in check. We think we have got it right in terms of what to think about it. And over the next quarter we will continue to assess that. But we are very comfortable where we are right now..

And then last two for me as, with the large national payer contract, I think it’s the fourth largest -- I don’t think you ever disclosed who it is, how is that contribution [indiscernible] has announced or signed [indiscernible] has been ramping and how is the trend still -- getting is the pie getting bigger for you there, and should we see other contracts signed as well?.

Its growing, so we have been able to extend up into the Northeast and eventually into the mid-Atlantic having that contract will help us. Its expanding within our current market price today. I would say that our efforts to again more and more in network contracts is ongoing, its time-consuming.

There are a lot of factors that go into it but we are seeing a lot of good progress, we have dialogues with payers in the marketplace. So, we would expect those contracts to continue to grow, and with that the opportunity for revenue expansion..

And then lastly with the conditional approval of the -- in New York, for the 13-analyte women's panel. I guess how should we think about that contribution as well? Obviously didn’t have much, if any impact, this quarter. Should we see more next quarter and any help in terms of how big that could get for you..

No, I think we will be using it within our own lab, in the next [technical difficulty] month, or certainly within the quarter. And as we noted in the script, having that expanded test menu and putting them together a compendium of test that we can offer as a reference services or as product sales.

Those efforts will really kick in into the third quarter and fourth quarter fiscal quarter for Enzo.

As we mentioned our team opening [ph] activities and the things that we’ve been doing in the marketplace so far has given us great confidence that the strategy is resonating with clinical labs and we think the opportunities are out there for us to expand the business either the reference services or product sales. .

[Operator Instructions] There are no more questions..

I guess there is no more. Thank you, seeing no questions, we thank you for your time. We look forward to reporting our second quarter in March, we believe that this will be a period of extraordinary activity for Enzo. So, we’re very excited about where we’re going and we hope to speak with you in early March. Thank you. .

Thank you. That does conclude the Enzo Biochem, Inc first quarter 2018 operating results conference call. You may now disconnect..