Enzo Biochem, Inc. (NYSE:ENZ) Q1 2023 Earnings Call Transcript December 13, 2022
Operator: Greetings and welcome to the Enzo Biochem, Incorporated First Quarter 2023 Earnings Call. At this all participants are in a listen-only mode. . Please note that this conference is being recorded. At this time I will turn the conference over to Brendan Payne of Investor Relations for Enzo Biochem. Brendan, you may now begin.
Unidentified Company Representative: Thank you, Rob and good afternoon everyone. Joining us today from the company are Hamid Erfanian, Chief Executive Officer and Patricia Eckert, Interim Chief Financial Officer. Enzo issued a press release detailing financial results for the first quarter of fiscal 2023 last night which is now available on the Investor Relations of the Enzo website. Before we begin, I would like to 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 year ended July 31st, 2022. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. The company disclaims any obligations to update any forward-looking statement as a result of developments occurring after the date of this conference call. During this conference call, the company may refer to EBITDA, a non-GAAP measure. EBITDA is not and should not be considered an alternative to net income or 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 call over to Hamid Erfanian, Chief Executive Officer of Enzo Biochem. Hamid, please go ahead.
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Hamid Erfanian: Thank you, Brendon. Good morning and thank you for joining us on our first quarter business and financial update. Last night we issued our first quarter fiscal year 2023 financial and operating results. First quarter revenue was 18.3 million, a decrease of 31% year-over-year compared to Q1 fiscal year 2022. We continue to cycle through some anticipated difficult comparisons driven by historical COVID revenues, which will anniversary in the fourth quarter of this fiscal year. COVID revenues declined from 9.2 million in Q1 fiscal year 2022 to 0.8 million in Q1 fiscal year 2023, which accounted for the full decline in the year-over-year revenues. First quarter revenues without COVID grew in the single-digits. Enzo Life Sciences reached 7.1 million in revenues with revenue growth of 9% year-over-year and 5% on an organic basis when adjusted for negative FX impact.
This is an acceleration compared to our organic growth of 2% in Q4 fiscal year 2022. Enzo Clinical Services bridge reached 11.2 million in revenues, a decrease of 43% year-over-year, impacted by the decline in COVID testing revenues. On a sequential basis, the first quarter without COVID testing grew 4%. We anticipate growth in our core testing revenues going forward offset by direct COVID testing declines. The Q1 fiscal year 2023 revenue performance on a COVID adjusted basis was encouraging and a validation of both the significant opportunity in our end markets and progress on our focused return strategy. Let me begin by highlighting some of our progress within each business and the status of their end markets and then wrap up with a summary of our overall strategies.
Let’s start with our life sciences business. The business operates in a large and healthy $10 billion market that is growing in the upper single digits, driven by significant growth in genomics, molecular biology, and tissue analysis segments. This is an area where our differentiated capabilities in labeling and detection reagents which are fundamental enabling solutions for assays and workflows across technologies for instance, genomics, tissue analysis, and applications such as cancer, immune-oncology, immunology, neuroscience, and stem cell research position Enzo to maximize commercial opportunities. The upper single digit growth we achieved in life sciences in Q1 fiscal year 2023 combined with a double-digit growth over the past two fiscal years demonstrate a consistent ability to grow this business.
Within fiscal year 2023, the growth was driven by 10% growth in drug discovery due to several new bulk orders for proteins and enzymes. We experienced 6% growth in immunoassay and antibodies due to larger orders from existing customers. We achieved a healthy growth in the bioprocess Eliza kits business in Asia and the addition of a new distributor in China. We also had 10% growth in libraries and small molecules due to rising demand and new bulk orders. This is evidence of our moving down the drug development pathway where we can experience recurring revenues as well as reliable forecasts from our customers. In addition to solid revenue growth within the quarter in Enzo Life Sciences, we also made strong progress in advancing our growth opportunities for the future.
We launched our Powered by LoopRNA product which will allow us to better penetrate the high growth area of spatial biology for drug development. In addition, we have a number of GMP product launches with a focus on small molecule chemistry and antibodies as well as further portfolio expansion around bioprocess and toxicology for immune and biochemical assays. These efforts, combined with our ability to drive strong, consistent product order flow as evidenced by our ninth straight quarter of product orders in excess of an average of $1,000 per order, leave us well positioned to continue to drive strong revenue growth going forward. Now moving to our clinical lab services business. The business is situated in a very large $1.8 billion market in the tri-state area that is growing in the mid-single digits driven by macro drivers of growth in precision medicine from diagnostic testing to segment patients, data richness, patient driven testing, and regenerative medicines.
This is an area where our combination of the full range of testing capabilities with the convenience and personalized service of a local, community-based laboratory operation differentiate our service offerings. The Clinical Services business has been impacted by declining COVID revenues as well as the impact of the pandemic on our other types of business testing services. Revenues in this business sector in absence of a strong COVID contribution declined in low single digits on flat volume over the past two years, however, it has begun to rebound. We believe revenue growth in the Clinical Services business is poised to return to consistent and more predictable growth following the anniversary in Q4 fiscal year 2023 of the higher COVID comparable periods.
This is due to our focused return strategy with the addition of new specialty clinical menu for core services and molecular diagnostics, our efforts to direct-to-consumer options for molecular diagnostics, and expansion of the salesforce in key geographies that we anticipate growth. We are expanding capabilities in the lab to perform an IPT testing to become a leading reference lab in the region. These exciting new product introductions coupled with the opportunity to add new customers with expanding presence throughout New York State, New Jersey, Massachusetts, and Connecticut markets, as well as reference testing from other hospital networks leaves this business poised to grow at above market rates. Let me now wrap up my comments with a few remarks on our overall strategy.
As noted last year, we set out distinct strategies in the following areas; market expansion of the current product portfolio and growing and optimizing the clinical services segment. In addition to the factors noted above, we have made strong progress this quarter on a number of initiatives. Within the product, within the current product portfolio we successfully expanded distribution channels in Asia Pacific and continued to prepare to launch a new Life Sciences service offering, which is targeted for launch in mid fiscal year 2023. Finally, we also advanced our efforts in growing lab services through further advancing our CRO launch initiatives with leading life sciences companies, executing an agreement for staff work for a leading reference laboratory, and adding new novel tests in the rheumatology and oncology testing area.
These specific developments achieved this quarter is advancing our strategy combined with the growth drivers noted above position us well to take advantage of the large healthy market, that we compete in and leverage our unique attributes. We are one of the few companies in the world that’s able to leverage combined assets from biotechnology, life sciences, and clinical lab services. This allows us to understand our client’s challenges and provide tailored, lower cost solutions to their needs. We continue to leverage each of these segments to the benefit of the other and ensure they’re working together in a well-coordinated strategy. In addition to progressing our revenue growth opportunities, we’re also focused on improving the efficiency of our operations.
Our new website designed to improve the efficiency of our Enzo Life Sciences order taking process is expected to come online in early 2023 calendar year, which should help revenue growth and reduce the cost of transactions. Our consolidation into our new state-of-the-art facilities in Farmingdale with our exit from Ann Arbor, Michigan and our constant focus on improving the efficiencies of the lab are positioning us to continue to reduce our fixed cost infrastructure and thus reduce redundant costs. These efficiencies and cost improvements coupled with a fixed cost leverage from expected volume growth combined with higher margin new products provide us with the opportunity to expand margins while growing the business leading to better profitability.
On the business strategy front, as noted in Q3 fiscal year 2022, we have engaged in investment bank to help evaluate strategic alternatives for the company. That process is progressing well with strong support from our banking partner. We will provide details to our investors as process unfolds. In summary, I’m encouraged by the progress we’ve made in expanding our portfolio, driving commercialization, and leveraging our capabilities across our integrated business. It is important to iterate that our Enzo Life Sciences business continues to grow and our Clinical Services division is growing in non-COVID routine services. The team is very focused on driving our focused strategy forward and we believe that continued strong execution will position us well to take advantage of the large attractive markets that we compete in.
I look forward to continuing to provide our investors with updates as we progress through the year. With that, I would like to turn the call over to our Interim CFO, Ms. Patricia Eckert. Patty.
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Patricia Eckert: Thank you, Hamid. I will now provide a review of the financials for the first quarter of 2023. Starting with revenue, total revenues reached 18.3 million in the first quarter, which was a decrease of 31% compared to 26.5 million in the first quarter of last year and decreased 10% sequentially compared to the fourth quarter of 2022. As Hamid noted in his earlier comments our COVID testing revenues declined from 9.2 million in the first quarter of last year to 0.8 million in the first quarter of this year. Without the impact of COVID testing our consolidated revenues grew in the single digits. On a divisional basis Enzo Life Sciences revenues for the first quarter was 7.1 million, an increase of 9% or 5% taking into account FX compared to 6.8 million in the first quarter of 2022 and a decrease of 10% compared to the fourth quarter of 2022.
We had a strong quarter versus last year with growth in most segments including libraries and small molecules, drug discovery, and immunoassays and antibodies. Enzo Clinical Services revenues for the first quarter were 11.2 million, a decrease of 43% compared to the 19.7 million in the first quarter of last year, impacted by the decline in COVID testing revenues. On a sequential basis, our first quarter without COVID testing revenues grew 4% with those accessions increasing by 3%, difficult comparisons for direct COVID testing and in the fourth quarter of this fiscal year. The blended gross margin for the quarter was 20% compared to 42% last year and slightly down versus the 21% blended margin in the fourth quarter of last fiscal year. ELS gross margin declined from 40% to 35% in the first quarter of last year and was near flat versus the fourth quarter of 2022.
The October monthly gross margin returned to 50% as better product mix and lower investments increased the margins. Further revenue growth, cost improvements, and new products with higher margins should help drive margins back up overtime. ECL gross margin declined from 43% in the first quarter of last year to 10% in the first quarter of this year with a slight reduction versus the fourth quarter of 2022 due to lower COVID testing. Margin improvement is expected overtime as cost savings, higher margin tests, and higher fixed cost leverage or more testing volumes begin to occur. R&D grew from 0.7 million to 1 million as we continue to invest in the development of new products and services in both businesses. SG&A grew from 11.1 million to an 11.5 million with special charges of 0.9 million pertaining to strategic initiatives, professional services.
Legal and other expenses of 1.1 million decreased by 2.2 million year-over-year primarily due to the reduction of outside counsel costs after the addition of an in-house general counsel. Adjusted EBITDA was a loss of 7.4 million in the first quarter of 2023 versus income of 1 million in the first quarter of 2022, driven by the sales declines and lower margins, both of which we expect to improve due to the numerous factors previously outlined. Cash, cash equivalents, and restricted cash were 13.1 million at the end of the first quarter, a decline of 9.5 million versus the fourth quarter of 2022, due to the decline in profitability and slight impact of working capital and capital expenditures. The company’s current ratio remains strong with a ratio of close to two times and we currently have minimal debt outstanding on the business.
Evaluation of a short-term pre payable credit facility is in process to provide funding as we drive increased profitability and our growth initiatives. I will now turn the call back over to Hamid for his closing remarks.
End of Q&A : Thank you, Patricia. We continue to make strong progress in advancing our business and positioning the company to take advantage of its capabilities and its attractive end markets. Our focused return strategy continues to gain momentum and I look forward to providing you with further updates as we work our way through 2023. On behalf of the management team, I would like to thank the entire Enzo team for all their hard work and dedication as we continue to work to allow Enzo to fulfill its true potential. Due to our ongoing banking process, we will not have a Q&A period on this call. However, feel free to e-mail any questions you may have to ir@enzo.com. With that, I’m going to go ahead and turn it back to our operator, Rob.
Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.
