On October 13, 2016 Enzo Biochem Inc. (NYSE:ENZ) reported strong results for the fourth quarter and fiscal year ended July 31, 2016, paced by revenue growth, margin expansion and litigation successes (Press release, Enzo Biochem, OCT 13, 2016, View Source [SID:SID1234515809]).

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Highlights
Fourth quarter fiscal 2016 revenue was $26.6 million and full year fiscal 2016 revenue was $102.8 million; increases of 4% and 5%, over the respective prior year periods. Enzo Clinical Labs revenue grew 5% in the fourth quarter of 2016 and generated double digit year over year revenue growth of 12%.

Clinical Labs and Life Sciences operating segments continue to be profitable and generate positive cash flow from operations.
Gross profit margins increased both quarterly and full year in both Life Sciences and Clinical Labs. In the fourth quarter of fiscal 2016, consolidated gross margin was 45% compared to 44% in the prior year period.

Net income for the fourth fiscal quarter was $36.1 million or $0.77 on a diluted share basis compared to $8.4 million or $0.18 on a diluted share basis in the prior year period. Full year net income was $45.3 million or $0.97 on a diluted basis compared to a loss of $2.3 million or $0.05 on a diluted share basis in the prior year.

New product approvals, along with a strong product development pipeline, underscore Enzo’s growth opportunities as a supplier of advanced lower cost molecular diagnostics for reimbursement constrained independent clinical labs.

Enzo Clinical Labs is growing market share in the women’s health market and expanding beyond the current regional New York area. During the year, three assays were approved by New York State.

At July 31, 2016, cash and cash equivalents were $67.8 million; working capital was $70.8 million. Cash flow provided by operations in the fourth quarter and year ended July 31, 2016 was $36.1 million and $53.1 million, respectively, driven by legal settlements and licenses and operating performance of business segments.

Comments by Barry Weiner, Enzo President:
"Fiscal 2016 was a highly successful year for Enzo Biochem. We solidified our growth opportunities on every front, setting a strong foundation for the future. Life Sciences’ product development emphasis on high profit margin products is paying off with several key approvals awarded in 2016. Enzo Labs came off a strong year with solid forward momentum from its expanding line of innovative molecular diagnostics, especially in the women’s health category, and a growing client roster. The unique combination of our Life Sciences development and marketing team with our Clinical Labs’ hands-on testing capabilities, and our deep patent estate, has resulted in a formidable development program, to prepare our broad pipeline of products for regulatory approval.

"This past year, New York State’s Health Department conditionally approved three new, highly efficient assays. We also have reported to the scientific community new analysis pointing to the effectiveness of our AmpiProbe platform technology. Included among the approved tests was our Candidiasis assay based on AmpiProbe and, last month, that of the stand-alone PLAQPRO Lp-PLA2 activity assay for identifying arterial inflammation, a possible potential indicator of coronary risk. Notably, both received approval for laboratory use just months after submission, and both are testaments to our growing expertise and recognition as a leading diagnostics supplier-producer in the women’s health field.

"On the operating side, we have also made significant progress. Costs are well under control, profit margins are enjoying an upward trend, and operating income at both Clinical Labs and Life Sciences remains positive. By bringing to resolution several court cases, legal expenses have trended lower, though this might change as possible trials could take place in calendar 2017. Meanwhile, with total patent infringement settlements and licenses in the past twenty-four months of over $100 million, our financial condition is robust and highly liquid. This is enabling us to pursue our growth strategies in the diagnostics market where, with Enzo’s highly efficient, economic and effective products, we are increasingly making our mark."

Fourth Quarter Results
Total revenues increased to $26.6 million, a $0.9 million or 4% improvement over a year ago. Gross profit was up 7%, to $12.1 million, equal to gross margin of 45%, compared to 44% a year ago. Research and development expenses held steady, as a percentage of revenues declined 100 basis points to 3%, while selling, general and administrative ("SG&A") costs likewise improved 100 basis points, to 42%, all of which underscores the Company’s effective management controls. The provision for uncollectible expenses remained flat at 3% of revenues, as a result of the Company’s effective credit procedures. Legal fees for the quarter declined by more than half, to $0.7 million, from $1.6 million a year ago.

Including $38.8 million legal settlements and licensing agreements, and a $0.4 million foreign currency loss, net income amounted to $36.1 million, or $0.77 per fully diluted share. In the year ago quarter, with net legal settlements at $11.3 million, net income totaled $8.4 million, or $0.18 per fully diluted share. Adjusted for the 2016 legal settlements and licensing agreements, the non-GAAP quarterly net loss amounted to $1.9 million or $0.04 on a fully diluted share basis, compared to a year ago non-GAAP net loss of $2.6 million, a 27% improvement. Non-GAAP adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was a negative $0.7 million, compared to a year ago negative $1.5 million, a 53% improvement.

Fiscal 2016 Results
With Clinical Labs revenues increasing by double digits, consolidated revenues rose to $102.8 million, up 5% from fiscal 2015’s $97.6 million. Gross profit for the year increased 6%, to $45.6 million, equaling gross margin of 44% in both years. R&D expenses were up modestly by 5% year over year, but flat at 3% as a percentage of revenues; SG&A increased 6%, but again held firm at 42% of revenues for both years; and legal expenses declined $2.4 million, or 27%, to $6.4 million.

Net income amounted to $45.3 million, or $0.97 per fully diluted share, including $57.3 million in net legal settlements and license agreement for the year. This compared to a year ago net loss of $2.3 million, or ($0.05) per share fully diluted, with net legal settlements and license agreements at $11.5 million in the prior year period. On a non-GAAP basis, adjusted for legal settlements and license agreements, extraordinary proxy and other expenses and related tax effects, the net loss was $9.2 million, or ($0.20) per share fully diluted, vs. a year earlier loss on a similar adjusted basis of $13.5 million, or ($0.30) per fully diluted share, a $4.3 million improvement. Non-GAAP adjusted EBITDA was a negative $5.0 million and $9.4 million, respectively, for the past two years, a $4.4 million improvement. Excluding direct legal litigation costs, adjusted EBITDA would be positive in the full year 2016 results.

As of July 31, 2016, cash and cash equivalents amounted to $67.8 million and total assets of were approximately $112.0 million.

Segment Results
Enzo Clinical Labs continued its strong growth, the result of the increased role of molecular diagnostics in its services mix, particularly those targeted to women’s health, as well as adding new clients and effective management of the Labs’ cost base. Fourth quarter revenues grew 5%, to $18.1 million. Gross profit improved 7%, to $12.1 million, and the gross margin percentage increased to 40%, from 39%. Operating income amounted to $0.8 million, compared to $0.5 million, up 60%.

Full year Lab revenues grew 12%, to $70.9 million. Gross profit consequently increased 18%, to $28.1 million, with the gross margin up 200 bps, to 40%, from 38%. The provision for uncollected receivables improved to 3.3%, from 3.8%, the result of improved collection procedures. Operating income more than doubled, to $1.2 million, from $0.5 million.

Enzo Life Sciences benefited from both higher margin product revenue and tight cost controls, although continuing to be challenged by a highly competitive environment and continued lower research funding, especially in academia. Product revenues were $8.1 million for the fourth quarters of both fiscal 2016 and 2015, with cost of revenues declining 6% in 2016, to $3.7 million. Gross profit on product revenues increased 5%, to $4.4 million, from $4.2 million, and gross margin advanced to 55%, from 52%. Excluding legal settlements, net, operating income improved to $1.0 million, compared to $0.6 million a year ago, up 66%.

Full year product revenues in 2016 amounted to $30.3 million, compared to $31.7 million in 2015. Products gross margin percentage increased by 200 basis points to 53% from 52%. Operating income amounted to $3.1 million, excluding $58.8 million from patent litigation settlements, compared to $4.4 million, excluding $11.5 million in settlements a year ago. Royalty and fee income declined to $1.5 million from $2.5 million a year earlier.

Product Development
In line with Enzo’s objective to develop, manufacture and sell high- throughput, high value reliable and affordable molecular diagnostic products and services that use our proprietary technologies to allow customers to meet their clinical needs, and to offer independent labs a counterweight to reduced reimbursement, Enzo has underway an aggressive product development program. This past year, the Company obtained conditional approval for several tests and assays from the New York State Department of Health, allowing the Company to provide these tests across the majority of the United States.

These approvals included our AmpiProbe technology platform that encompasses high sensitivity, real time nucleic acid amplification assays that is expected to provide low cost molecular diagnostics to benefit independent laboratories. At the same time, the AmpiProbe HCV Assay was approved for the quantitative detection of hepatitis C virus, which is expected to be the first in a line of expanded applications using the AmpiProbe platform. Last year, Enzo scientists presented data at the prestigious American Society for Clinical Pathology annual meeting showing new thresholds of sensitivity for the Company’s AmpiProbe – based HCV Assay. This demonstrated that the limit of detection was greater in sensitivity than leading commercially available HCV viral load assays.

Also approved was the Candidiasis Assay, the Company’s second test aimed at the rapidly expanding women’s health market, and Enzo Clinical Labs’ PLAQPRO Lp-PLA2 Assay, for evaluating lipoprotein-associated phospholipase A2 activity, a marker associated with the potential for coronary heart disease. Currently under development are tests for Hepatitis B virus, HIV viral diseases, and cancers, as well as a full spectrum of tests designed to identify a number of infectious diseases related to women’s health, one of the fastest growing segments of the molecular diagnostic market.