Enzo Biochem – Three Shots on Goal for This Biotech Growth Story

Enzo Biochem (ENZ) offers investors a three-pronged approach to growth – Clinical Lab services, Life Science products and tools, and Intellectual Property monetization, all interconnected. Where will Enzo be in three years, and which area will lead growth?

Clinical Lab Services is the meat-and-potatoes of Enzo’s operating menu
Enzo’s largest division is its clinical lab services, which accounted for $63.4 million, or 65% of total revenues in the last fiscal year. Enzo’s clinical lab operations focus on the tough-to-enter Northeast US market, including a full-service lab in Farmingdale, New York (on Long Island), a “STAT” lab (fast results) in New York City, and thirty patient service centers spread out across its core service area in New York and Northern New Jersey.
Clinical Lab’s results so far this fiscal year have been very solid, with double-digit revenue growth in each of the first three quarters of fiscal 2016, through April. Bottom-line results have been solid as well, with a net profit for this group to date in 2016, as compared to break-even for the same period last year, and operating cash flow in the $2-$3 million range. Growth this year for clinical labs has come from higher operating volumes, especially for newer, higher-margin esoteric tests, as well as the addition of newer, higher-value accounts. Going forward, Enzo’s plan for this segment is to continue to focus on its current Northeast geographic market while adding higher-margin diagnostic tests to the product mix, including proprietary tests.

Life Science Products add the sizzle
Diagnostic products and assays make up Enzo’s Life Sciences group, which showed $31.7 million in revenues for fiscal 2015, or 32% of total. Enzo’s key platform technologies include FlowScript, an enhanced flow cytometry for signal cell analysis method and AmpiProbe, the company’s low cost, real time DNA amplification and detection system. Revenues for this group so far this fiscal year have been flat or down slightly, although the most recent third quarter for Life Sciences showed a 22% revenue increase sequentially, fueled by new diagnostic assays for HPV and HCV as well as a slimmed-down, higher-margin overall product line. Life Sciences also showed positive operating contribution and cash flow for the first nine months of this fiscal year. Going forward, launch of a new Candida (a type of yeast infection) AmpiProbe-based assay later this year following rapidly-received conditional approval from New York state’s regulatory agency is expected to spur revenue growth for this group, and longer-term Enzo’s plan is to introduce additional proprietary tests into the marketplace, focusing on women’s health and infectious diseases. Up next in the news front for Enzo’s Life Sciences group is the upcoming College of Anatomic Pathologists ("CAP") meeting in Las Vegas in late September, where the company will be presenting data on the new Candida diagnostic test.

Intellectual Property licensing supplies the icing on the cake
Enzo has been on a roll lately in its long-standing effort to monetize its deep patent portfolio, consisting of 245 patents relating to diagnostic assay products, methods and procedures owned or licensed by the Company, including over 30 added just in the most recent full year. Most recently, Enzo announced a $21 patent litigation settlement with Illumina (ILMN) following an earlier $35 million settlement with the Life Technologies division of Thermo Fisher Scientific (TMO). Still pending for Enzo in monetizing its patent estate, which is especially strong in the areas of nucleotides, amplification, labelling and detection, are six cases (out of the original eleven filed) in the US District Court for the District of Delaware, one in the US District Court for New Haven, Connecticut, where Enzo is seeking an appeal of a previous large monetary award overturned by the US Federal Court of Appeals, and one case in the Southern District of New York.

What to do with new-found cash balances?
With the pending receipt of funds from the most recent litigation settlement expected to boost Enzo’s cash balances to the $65-$70 million range (over $1.50 per share), among the Company’s options include share buybacks, special dividends, acquisitions (most likely in the life science products area), or even a resurgence of activity for its well-hidden Therapeutics division. Enzo’s Therapeutics group includes Alequel, with a Phase II clinical trial completed in Crohn’s Disease patients, Optiquel, an oral formulation designed as a potential treatment for intraocular inflammatory condition autoimmune uveitis, which is in a proof-of-concept Phase I clinical trial in partnership with the NIH’s National Eye Institute, and other R&D pipeline programs in earlier stages for HIV, Diabetes, Osteoporosis, and Osteonecrosis of the Jaw.
Alternatively, Enzo might find itself attractive to potential acquirers, such as private equity firms, or other companies in the clinical lab or diagnostic products areas. While large lab service firms LabCorp (LH) and Quest Diagnostics (DGX) may have focused on non-lab acquisitions in the recent past, other small and medium-sized players including NeoGenomics (NEO) and Opko Health (OPK) (through its Bio-Reference Lab group) might take a hard look at ENZ, considering its very modest valuation of only 2.7X annual revenues, or 2.0X revenues once cash is factored out. Thus, investors may want to consider ENZ shares for further appreciation in the near- and long-term term, with a very reasonable valuation and three shots on goal for future growth, for a potential break-out over recent highs of $6.50 and beyond.

Disclosure: The author does not own shares of any of the companies mentioned in this report.
Published on Jul 11, 2016
By Robert Wasserman
Bob Wasserman has been following healthcare and biotech stocks for over 30 years, with a bias toward value investing.

Copyrighted 2016. Content published with author's permission.

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