Enzo Biochem, Inc.
Annual Report 2011
Enzo Biochem Today
Enzo Biochem, Inc. is a growth-oriented integrated life sciences and biotechnology
company focused on harnessing biological processes to develop research tools, diagnostics
and therapeutics and serves as a provider of test services, including esoteric tests, to the
medical community. Since our founding in 1976, our strategic focus has been on the
development of enabling technologies in research, manufacture, licensing and marketing of
innovative health care products, platforms and services based on molecular and cellular
technologies. Enzo’s pioneering work in genomic analysis coupled with its extensive patent
estate and enabling platforms have strategically positioned the Company to play an
important role in the rapidly growing life sciences and molecular medicine marketplaces.
Enzo has proprietary technologies and expertise in manipulating and modifying genetic
material and other biological molecules. Through three wholly-owned subsidiaries, the
Company targets its technology toward satisfying specific market needs.
Enzo Life Sciences manufactures, develops and markets functional biology and cellular biochemistry
products and tools to life sciences, pharmaceutical and clinical research customers world-wide and has
amassed a large patent and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in
labeling and detection technologies across research and diagnostic markets. Our strong portfolio of
proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science
researchers tools for target identification/validation, high content analysis, gene expression analysis,
nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are internationally
recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over
9,000 of our own products and in addition distribute over 30,000 products made by over 40 other original
manufacturers. Our strategic focus is directed to innovative high quality research reagents and kits in the
primary key research areas of protein homeostasis, epigenetics, live cell analysis, molecular biology and
immunoassays.
Enzo Clinical Labs is a regional clinical laboratory serving the New York, New Jersey and Eastern
Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us
to capitalize first hand on our extensive advanced molecular and cytogenetic capabilities and the broader
trends in predictive and personalized diagnostics. Enzo Clinical Labs offers a menu of routine and
esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or
support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed
condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of
approximately 30 patient service centers throughout New York and New Jersey, a stand alone “stat” or
rapid response laboratory in New York City and a full-service phlebotomy and logistics department.
Enzo Therapeutics is a biopharmaceutical venture that has developed multiple novel approaches in the
areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from
the pioneering work of Enzo Life Sciences. Enzo Therapeutics has focused its efforts on developing
treatment regimens for diseases and conditions for which current treatment options are ineffective, costly,
and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well
as more than 45 patents and patent applications.
To Our Shareholders:
Two years ago we embarked on a strategic transition for our Company. It was designed
to capitalize on our historical vision and core technology strengths. Ultimately, we
sought to position our Company in the evolving healthcare space, one that today
embraces personal medicine, molecular and companion diagnostics, and to benefit from
the many channels of distribution to which we have access. Importantly, we envisioned
and started to implement a fuller integration of our Life Sciences and Clinical Laboratory
capabilities.
While this program is ongoing, this past year – fiscal 2011, which ended July 31 – was
one of progress and accomplishment in pursuit of these goals.
The winds of change are sweeping across the healthcare industry. Notwithstanding the
challenges posed by the economic environment, healthcare – how it is delivered, how it is
practiced, how treatment protocols are being determined and implemented -- has shifted.
We believe this is creating opportunity for Enzo.
We have moved, and are succeeding at, making Enzo more responsive to these trends.
We have underway a decidedly focused developmental effort towards identifying key
specific products and technologies that will make a difference in medical knowledge,
decision-making and treatment, and also enable us to deliver higher margin, and more
differentiated products and research services in a timely manner.
Enzo Clinical Labs
Enzo Clinical Labs posted an especially strong performance during the year, increasing
revenues 19%, and notably achieving gross profits as a percentage of revenues of 40%,
up from 33% the prior year, a 21% gain.
Equally notable has been the strengthened positioning of the Labs both in its marketing
territory and as a provider of an increasing range of more sophisticated and higher margin
tests. It has implemented quality improvement measures as well, while achieving
substantial cost efficiencies. Physician connectivity capabilities have been improved and
updated, and in-house testing capabilities and menus continue to expand.
These efforts have resulted in improved client retention, and a higher level of
productivity. We also are achieving important progress in stepped up collaboration
between Clinical Labs and Enzo Life Sciences in the development of key platforms and
technologies, particularly in the area of molecular diagnostics, the fastest growing
segment of the diagnostic testing market.
Among a number of new molecular tests in the pipeline, we are awaiting final approval
from the New York State Department of Health of the ColonSentry test, a high value
molecular assay developed by Enzo’s partner GeneNews. This assay measures the
expression of specific panels of seven genes, designed to provide physicians with the
ability to identify patients having an increased risk for developing colorectal cancer.
Primary care physicians may use the results of this assay to encourage their patients who
may not have had regular colonoscopy procedures to indeed have such procedures
performed; it is estimated that more than 40 million Americans over age 50 do not
comply with the established standards for colon cancer screening.
Enzo Life Sciences
At Enzo Life Sciences a major streamlining has been underway – integrating facilities,
consolidating redundant functions for greater effectiveness and shifting research and
development efforts toward proprietary, higher margin items. These actions are
important to the long-term positioning and growth of the division coupled with industry
trends marginally impacted our 2011 operating results.
The changes, moreover, are continuing. We have augmented our global management
team with a number of new additions, including a new head of global technology and
business development, new leaders of our commercial merchandising and marketing, and
a new director of global manufacturing, plus, for the first time, an individual who will
lead distribution in the rapidly growing economies of Asia. In all, these new senior
people at Life Sciences have over 100 years of relevant experience with both large and
small life science and healthcare companies.
The shift at Life Sciences is being directed at better meeting the emerging and fast-
growing needs of pharma and biotech companies for tools that comprehensively evaluate
drug candidates through secondary screening and by assessing potential adverse
toxicological effects prior to making decisions on new products. In addition to greater
market penetration, these products will provide us with an opportunity to develop a more
integrated relationship with our customers.
The synergistic approach between Life Sciences and Clinical Labs is also showing signs
of yielding beneficial results with significant long-term potential, among them:
• Ampi-Probe™, an internally designed proprietary technology that facilitates real
time PCR type amplification and detection in a better, faster and more economical
way. It has been designed with interchangeable components, formatted for open
laboratory systems in order that it may be performed on equipment found in
almost all labs. In addition, it requires less sample volume, lowering the amount
of costly reagents, and also potentially benefits patients by not requiring repeat
visits to obtain additional specimens for follow-up tests. And, multiple assays can
be performed off the same specimen, positioning the platform to meet the
financial challenges of the proposed new molecular diagnostic reimbursement
schedule due for release in calendar 2012.
• Our Next-Generation Branched DNA technology is being applied to a number of
different-platforms including enhanced visualization of foreign DNA in a
patient’s chromosome. It would be especially useful in development of more
sensitive tests where it’s presence is being sought. It would offer applications in
assays to identify specific types of cancers, including breast and bladder
malignancies. Additionally, it would have use as a highly sensitive predictor of
the risk of progress to cervical cancer, thus enabling physicians to more
effectively target therapy and treatment.
These patented platform technologies are the culmination of decades of developmental
work at Enzo, and are benefiting from the integrated Clinical Lab-Life Science structure
that shows increasing and significant promise.
Research
While moving determinedly ahead, and with greater focus, our research and development
expenses across all divisions were reduced by approximately $1.9 million, or about 20%.
A solid example of our efficiency is Enzo Therapeutics’ Optiquel™, a promising
treatment for autoimmune uveitis. It is currently being studied under a cooperative
research and development agreement with the National Institute of Health’s National Eye
Institute, which is absorbing most of the expenses and with Enzo, if the therapy proves
successful, retaining the bulk of the revenues. Enrollment is well underway for this trial,
which in fact could be expanded to include other related therapeutic modalities, with
initial results anticipated for 2013.
Financial Results
Fiscal 2011 marked a milestone, with revenues exceeding $100 million for the first time,
and achieving 5% growth. Important progress was made in reducing selling, general and
administrative expenses as a percentage of revenues, and in sharply shrinking our net loss
for the year, which showed a better than $9 million improvement year over year. Our
cost saving programs exceeded our goal of $4 million by an additional $1 million. On a
consolidated basis, the gross margin improved over 7%, to $48.2 million and as a
percentage of revenues gross margin advanced 100 basis points to 47% for the year.
Not least, Enzo remains financially strong, with cash and cash equivalents, and short-
term investments, totaling over $24 million and working capital standing at $33.7
million. Stockholders’ equity was $109 million and has no long-term debt.
A Promising Future
Going forward, knowledgeable observers understand that healthcare will require
solutions that solve practical problems. These will include diagnostics that offer
prognostic insights, and economic assessment tools to aid clinical decision making.
Efficiency and effectiveness have become the important new bywords of healthcare, and
our Company is focused on benefiting from these trends. We are committed to build
Enzo to become an active participant in this transformation, and based on recent results
and achievements clearly we are headed in the right direction.
Our progress could not be made without the loyal dedication of our employees, the Board
of Directors and the support of our shareholders. We thank all of them, and express our
appreciation.
Barry W. Weiner
President
Elazar Rabbani, PhD.
Chief Executive Officer
Except for historical information, the matters discussed in this letter to shareholders 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. 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 letter to shareholders.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2011
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 001-09974
ENZO BIOCHEM, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction
of incorporation or organization)
527 Madison Ave.
New York, New York
(Address of principal executive offices)
13-2866202
(I.R.S. Employer
Identification No.)
10022
(Zip Code)
(212) 583-0100
(Registrant’s telephone number, including area code)
(Title of Each Class)
Common Stock, $.01 par value
(Name of Each Exchange on Which Registered)
The New York Stock Exchange
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files).
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act of 1934). Yes No
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was approximately $175,269,000 as of January 31, 2011
The number of shares of the Company’s common stock, $.01 par value, outstanding at October 1, 2011 was 38,596,448.
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on or about
January 12, 2012 are incorporated by reference into Part III of this annual report.
DOCUMENTS INCORPORATED BY REFERENCE
Part I
TABLE OF CONTENTS
Description
Page
2
23
32
33
33
37
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38
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55
55
55
55
55
55
F-1
F-2
F-3
F-4
F-5
F-6
F-7
S-1
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
(Removed and Reserved)
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
List of Consolidated Financial Statements and Financial Statements Schedule
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity & Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II - Valuation Accounts and Qualifying Accounts
1
PART I
Item 1. Business
Overview
Enzo Biochem, Inc. (the “Company” “we”, “our” or “Enzo”) is a growth-oriented integrated life sciences and
biotechnology company focused on harnessing biological processes to develop research tools, diagnostics and
therapeutics and serves as a provider of test services, including esoteric tests, to the medical community. Since our
founding in 1976, our strategic focus has been on the development of enabling technologies in research, development,
manufacture, licensing and marketing of innovative health care products, platforms and services based on molecular and
cellular technologies. Our pioneering work in genomic analysis coupled with its extensive patent estate and enabling
platforms have strategically positioned the Company to play an important role in the rapidly growing life sciences and
molecular medicine marketplaces.
In the course of our research and development activities, we have built a substantial portfolio of intellectual
property assets, comprising 107 key issued patents worldwide, and over 300 pending patent applications, along with
extensive enabling technologies and platforms.
Operating Segments
We are comprised of three operating segments, of which the Therapeutics and Life Sciences segments have
evolved out of our core competencies: the use of nucleic acids as informational molecules and the use of compounds for
immune modulation and augmented by the acquisition of a number of related companies. Information concerning sales by
geographic area and business segments for the years ended July 31, 2011, 2010 and 2009 is located in Note 17 in the
Notes to Consolidated Financial Statements.
Below are brief descriptions of each of our operating segments:
Enzo Life Sciences manufactures, develops and markets functional biology and cellular biochemistry
products and tools to life sciences, pharmaceutical and clinical research customers world-wide and has
amassed a large patent and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in
labeling and detection technologies across research and diagnostic markets. Our strong portfolio of
proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science
researchers tools for target identification/validation, high content analysis, gene expression analysis,
nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are internationally
recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over
9,000 of our own products and in addition distribute over 30,000 products made by over 40 other original
manufacturers. Our strategic focus is directed to innovative high quality research reagents and kits in the
primary key research areas of protein homeostasis, epigenetics, live cell analysis, molecular biology and
immunoassays.
The segment is an established source for a comprehensive panel of products to scientific experts in the
fields of Natural Products/Antibiotics, Autophagy, Cancer, Cell Cycle, Cell Death, Cell Signaling, Cellular
Analysis, Endocrinology/Hormones, DNA regulation, Compound Screening, Genomics/Molecular Biology,
GPCRs, Immunology, Inflammation, Metabolism, Neuroscience, Nitric Oxide pathway,
Obesity/Adipokines, Oxidative Stress, Proteases, Proteosomes, Protein Expression and modification,
Signal Transduction, Stress/Heat Shock proteins and Ubiquitin/Ubl signaling.
Enzo Clinical Labs is a regional clinical laboratory serving the New York, New Jersey and Eastern
Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us
to capitalize first hand on our extensive advanced molecular and cytogenetic capabilities and the broader
trends in predictive and personalized diagnostics. Enzo Clinical Labs offers a menu of routine and
esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or
support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed
condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of
approximately 30 patient service centers throughout New York and New Jersey, a stand alone “stat” or
rapid response laboratory in New York City and a full-service phlebotomy and logistics department.
Enzo Therapeutics is a biopharmaceutical venture that has developed multiple novel approaches in the
areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from
the pioneering work of Enzo Life Sciences. Enzo Therapeutics has focused its efforts on developing
treatment regimens for diseases and conditions for which current treatment options are ineffective, costly,
and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well
as more than 45 patents and patent applications.
2
The Company’s primary sources of revenue have historically been from product revenues and royalty and
licensing of Life Sciences’ products utilized in life science research and from the clinical laboratory services provided to
the healthcare community. The following table summarizes the sources of revenues for the fiscal years ended July 31,
2011, 2010 and 2009 (in $000’s and percentages):
Fiscal year ended July 31,
2011
2010
2009
Product revenues ..........................
Royalty and license fee income ....
Clinical laboratory services ...........
Total ..............................................
$ 41,830
7,437
52,762
$ 102,029
41% $
7
52
100% $
43,111
9,793
44,178
97,082
44% $
10
46
100% $
40,592
9,376
39,604
89,572
45%
11
44
100%
Markets
Background
Deoxyribonucleic Acid (“DNA”) is the source of biological information that governs the molecular mechanisms
underlying life. This information is stored in the linear sequences of nucleotides that comprise DNA. The sequence of the
human genome, comprising well over 30,000 genes, has been identified by genomic research in both the public and
private sectors, including the Human Genome Project. The ongoing challenge of the scientific research community is to
determine the function and relevance of each gene, as well as gene to gene and gene/environment interactions. In
addition, scientists are looking in detail at the proteins that are expressed by genes, their control and regulation in the
cellular environment. This information will facilitate the understanding of biological mechanisms and how variations and
mutations in such mechanisms may result in disease, enabling more rapid and accurate detection of specific diseases
and the development of new therapeutics to treat them.
Tools for biomedical and pharmaceutical research
There is an increasing demand by biomedical and pharmaceutical researchers for research and diagnostic tools
that both facilitate and accelerate the generation of biological information. This demand can be met by gene-based
diagnostics for which a variety of formats, or tools, have been developed that enable researchers to study biological
pathways and to identify mutations in gene sequences and variations in gene expression levels that can lead to disease.
These tools include DNA sequencing and genotyping instruments, microarrays, fluorescent microscopes, high content
screening systems, flow cytometers and plate readers. Common among these formats is the need for reagents that allow
the identification, quantification and characterization, and interactions of specific genes or nucleic acid sequences,
proteins, cells and other cellular structures and organelles.
We believe this market will continue to grow as a result of:
• research spending by academic, government and private organizations to determine the function and clinical
relevance of the gene sequences and proteins that have been identified by genome research;
• development of commercial applications based on information derived from this research; and
• ongoing advancements in tools that accelerate these research and development activities.
Clinical diagnostics
The clinical diagnostics market has been reported by industry sources to be greater than $22 billion annually. It is
comprised of a broad range of tests based on clinical chemistry, microbiology, immunoassays, genomics, proteomics,
gene expression profiling blood banking, and cancer screening assays through histology as well as newer body fluid
based approaches. Many of these tests employ traditional technologies, such as immunoassays and cell culture
technologies, for the detection of diseases.
Immunoassays are based on the use of antibodies directed against a specific target, or antigen, to detect that
antigen in a patient sample. Cell culturing techniques involve the growth, isolation and visual detection of the presence of
a microorganism and often it’s susceptibility to FDA approved drugs.
There are several drawbacks to these more traditional technologies. Immunoassays do not allow for early
detection of diseases because they require minimum levels of antigens to be produced by the microorganism in order to
be identified. These levels vary by microorganism, and the delay involved could be several days or several months, as
seen in HIV/AIDS. Cell cultures are slow, labor intensive and not amenable to all microorganisms. For example,
gonorrhea and chlamydia are difficult to culture.
3
Gene-based diagnostics have many advantages over the traditional technologies. Since gene-based diagnostics
focus on the identification of diseases at the cellular level, they can identify the presence of the disease at its earliest
stage of manifestation in the body. These tests provide results more rapidly, are applicable to a broad spectrum of
microorganisms and can easily be automated in a multiplex platform.
Several advances in technology are accelerating the adoption of gene-based diagnostics in clinical laboratories.
These advances include high throughput automated formats that minimize labor costs, non-radioactive probes and
reagents that are safe to handle, and amplification technologies that improve the sensitivity of such diagnostics.
According to industry sources, the market for molecular diagnostic tools, assays and other products is currently
more than $5 billion per year, and is acknowledged as one of the fastest growing segments in the in-vitro diagnostic
industry. Contributing to this growth is, among other factors:
•
•
•
•
the increasing number of diagnostic tests being developed from discoveries in genome research;
advances in formats and other technologies that automate and accelerate gene-based diagnostic testing;
growing emphasis by the health care industry on early diagnosis and treatment of disease and;
application of gene-based diagnostics as tools to match therapies to specific patient genetics commonly
referred to as pharmacogenomics.
Therapeutics
As science progresses, we are learning more about biochemical processes and how the cell’s machinery is
directed towards normal functioning of physiological, genetic and immune system pathways. Disease may result as the
consequence of an inappropriate reaction in any of these systems.
In the normal physiologic functioning of the body key modulators interact with membrane-bound proteins and
initiate a cascade of biochemical reactions that regulate the cell. How modulators interact with membrane-bound proteins
set the stage for a variety of possible activities that the cell then controls. The membrane-bound proteins are multiligand
receptors; hence the modulator(s) and their activity at a specific binding docking “station” determine the ultimate activity of
the cell. This constitutes a cell signaling pathway. One of the most notable cell signaling pathways is the Wnt pathway and
an associated membrane protein, LDL (low density lipoprotein) receptor-related protein LRP. Research by Enzo and
others have unlocked the key to the activation/inhibition of the Wnt and/or LRP system resulting in the discovery and
subsequent regulation of natural processes, such as development, cell division, and metabolic activity, among others.
Manipulation of this system through small molecules, peptides, oligonucleotides or antibodies may possibly correct
dysfunctional systems.
Other diseases may be the consequence of an inappropriate reaction of the body’s immune system, either to a
foreign antigen, such as a bacterium or virus, or, in the case of an autoimmune condition, to the body’s own components.
In recent years, several new strategies of medication for the treatment of immune-based diseases such as Crohn’s
disease, autoimmune uveitis and rheumatoid arthritis, have been developed. These treatments are all based on a
systemic suppression of certain aspects of the immune system and can lead to significant side effects. Thus, there
continues to be a need for a therapeutic strategy that is more specific and less global in its effect on the immune system.
Still other diseases result from either the expression of foreign genes, such as those residing in viruses and
pathogenic organisms, or from the abnormal or unregulated expression of the body’s own genes. In other cases, it is the
failure to express, or over expression of, a gene that causes the disease. In addition, a number of diseases result from the
body’s failure to adequately regulate its immune system.
Advances in gene analysis have provided the information and tools necessary to develop drugs that interfere with
the disease process at the genetic level. For a broad spectrum of diseases, this approach can be more precise and
effective than interfering with downstream events such as protein synthesis or enzyme activation. Therapies targeting
genetic processes are called gene medicines. There are two fundamental approaches to gene medicines, synthetic and
genetic.
Synthetic gene medicine involves the administration of synthetic nucleic acid sequences called “oligos” that are
designed to bind to, and thus deactivate, ribonucleic acid (“RNA”) produced by a specific gene.
To date, this approach has demonstrated limited success. Since a single cell may contain thousands of strands of
RNA, large amounts of oligos are necessary to shut down the production of unwanted proteins. Also, they are quickly
metabolized or eliminated by the body. Consequently, large quantities of oligos must be delivered in multiple treatments,
which can be both toxic to the body as well as costly.
4
Genetic medicine or gene therapy involves the insertion of a gene into a cell. The inserted gene biologically
manufactures the therapeutic product within the cell on an ongoing basis. This gene may be introduced to bring about a
beneficial effect or to disable a pathological mechanism within the cell. For example, the gene may be inserted to replace
a missing or malfunctioning gene responsible for synthesizing an essential protein or the inserted gene may code for a
molecule that would deactivate either an overactive gene or a gene producing an unwanted protein. As a permanent
addition to the cellular DNA, the inserted gene produces RNA and/or proteins where needed.
A major challenge in designing gene therapy medicines has been to enable the efficient and safe delivery of the
gene to the appropriate target cell. Gene delivery is often accomplished using a delivery vehicle known as a vector. A
critical quality of the vector is its ability to bind to the target cell and effectively deliver, or transduce, the gene into the cell.
It is also critical that the nucleic acid of the vector not produce proteins or antigens that can trigger an adverse immune
response.
Strategy
Our objective is to be a leading developer and provider of the tools, services, and diagnostic technologies used to
study and identify disease at the molecular level and to be a provider of therapeutic platforms to manage specific
diseases. There can be no assurance that our objective will be met. Key elements of our strategy involving three separate
platforms include our ability to:
Maximize our resources by collaborating with others in research and commercialization activities
We enter into research collaborations with leading academic and other research centers to augment our core
expertise on specific programs.
We enter into research collaborations with leading academic and other research centers to augment our core
expertise on specific programs. Our clinical trial of Optiquel® is a direct result of such a research collaboration. We
acquired the rights and intellectual property to this candidate drug and technology intended for use in the treatment of
autoimmune uveitis. Working with scientists and physicians in the United States and abroad, Enzo continued drug
development to the stage of a clinical trial now being conducted in collaboration with the National Eye Institute of the
National Institutes of Health in Washington DC.
We have research and clinical collaborations with other institutions including, Hadassah University Medical Center
in Jerusalem, Israel relating to our immune regulation technology. Through collaborations such as these and other
licensing agreements we continue to develop novel therapeutics for the stimulation and enhancement of bone formation
and glucose control, among others. Such products, if any, emanating from this technology could provide potential therapy
for bone disorders, including bone loss, bone fractures, periodontitis, diabetes and other indications. There can be no
assurance that any of these collaborative projects will be successful.
Similarly, we seek to fully exploit the commercial value of our technology by partnering with for-profit enterprises
in specific areas in order to act on opportunities that can be accretive to our efforts in accelerating our development
program.
Apply our biomedical research technology to the clinical diagnostics market
We have an extensive library of probes for the detection of various diseases. We have developed a standardized
testing format that can permit multiple diagnoses to be performed on the same specimen.
Expand marketing and distribution infrastructure
Enzo Life Sciences continues to develop its sales and marketing infrastructure to more directly service its end
users, while simultaneously positioning the Company for product line expansion. Our acquisitions of Axxora in May 2007,
Biomol International in May 2008 and Assay Designs in March 2009 have expanded our global sales, marketing,
manufacturing, product development and distribution infrastructure. Enzo Life Sciences now operates worldwide through
wholly owned subsidiaries (in USA, Switzerland, Benelux, Germany, and the UK), a branch office in France and a network
of third party distributors in most other significant markets worldwide.
Expand our collaborations with major life sciences companies
We intend to seek opportunities to secure strategic partnerships and assert our intellectual property estate with
multiple market participants. Further, we will look to advance proprietary business opportunities.
In fiscal 2007, Enzo Life Sciences and Abbott Molecular, Inc. entered into a five year agreement covering the
supply of certain Enzo Life Science’s products to Abbott Molecular for use in their fluorescence in situ hybridization (FISH)
product line. Both companies have also entered into a limited non-exclusive royalty bearing cross-licensing agreement of
patents for FISH systems, comparative genomic hybridization (CGH) analysis and labeling and detection technologies.
5
The cross-licensing agreement includes the Company’s patents directed towards its proprietary labeling and
detection systems as they relate to Abbott’s FISH platform. The license also provides the Company with limited access to
Abbott’s FISH technology patents, CGH patents and various patents which relate to particular chromosome targets.
These agreements relate to products in the field of molecular diagnostics, which is the fastest-growing segment of the
diagnostics market, according to industry sources. FISH involves the use of labeled DNA probes which are used to
identify specific genetic conditions. Currently, this technology is used to help diagnose and/or select therapy for certain
cancers, such as breast, bladder, and leukemia, as well as to help diagnose genetic disorders. CGH is a molecular
cytogenetic method for the analysis of chromosomal copy number changes (gains/losses) which are recognized as the
underlying basis for congenital disorders and complex diseases such as cancer. See Note 14 to the Notes to
Consolidated Financial Statements.
The Company has a license agreement with QIAGEN Gaithersburg Inc. (“Qiagen”) that began in 2005, whereby
the Company earns quarterly running royalties on the net sales of Qiagen products subject to the license until the
expiration of the patent on April 24, 2018. In the license agreement, Qiagen was granted a world-wide, non-exclusive
license to the Company U.S. Patent number 6,222,581, which is related to the use of a methodology called “hybrid-
capture” in which certain nucleic acid probes are hybridized to target nucleic acids and then captured indirectly on a solid
surface. The resulting nucleic acid hybrids are then detected by antibodies conjugated to signal-generating molecules
which produce an amplified signal allowing for more sensitive detection of the resultant hybrids. This platform is one of the
most desirable formats for the detection of nucleic acids in a reliable and economic manner, and has formed the basis for
one of the most commonly ordered genomic-based assays. See Note 13 to the Notes to Consolidated Financial
Statements.
Apply our innovative technology to a variety of diseases mediated by cell signaling pathways, by the
immune system, or, in advanced cases, gene therapy.
We believe our core technologies have broad diagnostic and therapeutic applications. We have focused our
efforts on discovering how best to correct pathologies associated with bone or metabolic control, and immune-mediated
diseases. Although the cause of disorders such as Crohn’s disease, autoimmune uveitis and non-alcoholic steatohepatitis
(NASH) remains unknown, various features suggest immune system involvement in their pathogenesis.
We continue to test technologies we believe can serve as enabling platforms for developing medicines that
genetically target and inhibit viral functions, as well as medicines that regulate the immune response. In addition to such
therapeutic products, we continue to capitalize on our nucleic acid labeling, amplification and detection technologies and
intellectual property to develop diagnostic and monitoring tests for various diseases.
Expand and protect our intellectual property estate
Since our inception, we have followed a strategy of creating a broad encompassing patent position in the life
sciences and therapeutics areas. We have made obtaining patent protection a central strategic policy, both with respect to
our proprietary platform technologies and products, as well as broadly in the areas of our research activities. During Fiscal
2011, we were issued 28 patents and expanded our patent estate in the area of nucleotides, amplification, labeling and
detection, among others.
Core Technologies
We have developed a portfolio of proprietary technologies with a variety of research, diagnostic and therapeutic
applications.
Diagnostic Technology Platform
Gene analysis technology
All gene-based testing is premised on the knowledge that DNA forms a double helix comprised of two
complementary strands that match and bind to each other. If a complementary piece of DNA (a probe) is introduced into a
sample containing its matching DNA, it will bind to, or hybridize, to form a double helix with that DNA. Gene-based testing
is carried out by:
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amplification of the target DNA sequence (a process that is essential for the detection of very small
amounts of nucleic acid);
labeling the probe with a marker that generates a detectable signal upon hybridization;
addition of the probe to the sample containing the DNA and;
binding or hybridization of the probe to the target DNA sequence, if present, to generate a detectable
signal.
6
We have developed a broad technology base for the labeling, detection, amplification and formatting of nucleic
acids for gene analysis which is supported by our significant proprietary position in these fields.
Amplification. In the early stages of infection, a pathogen may be present in very small amounts and
consequently may be difficult to detect. Using DNA amplification, samples can be treated to cause a pathogen’s DNA to
be replicated, or amplified, to detectable levels. We have developed a proprietary amplification process for multicopy
production of nucleic acid, as well as proprietary techniques for amplifying the signals of our probes to further improve
sensitivity. Our amplification technologies are particularly useful for the early detection of very small amounts of target
DNA and, unlike PCR (currently the most commonly used method of amplification), we have developed isothermal
amplification procedures that can be performed at constant temperatures and thus do not require expensive heating and
cooling systems or specialized heat-resistant enzymes.
Non-radioactive labeling and detection. Traditionally, nucleic acid probes were labeled with radioactive
isotopes. However, radioactively labeled probes have a number of shortcomings. They are unstable and consequently
have a limited shelf life. They are potentially hazardous, resulting in restrictive licensing requirements and safety
precautions for preparation, use and disposal. Finally, radioactive components are expensive. Our technologies permit
gene analysis without the problems associated with radioactively labeled probes and are adaptable to a wide variety of
formats.
Formats. There are various processes, or formats, for performing probe-based tests. In certain formats, the probe
is introduced to a target sample affixed to a solid matrix; in others the probe is combined with the sample in solution
(homogeneous assay). Solid matrix assays include: in situ assays in which the probe reaction takes place directly on a
microscope slide; dot blot assays in which the target DNA is fixed to a membrane; and microplate and microarray assays
in which the DNA is fixed on a solid surface, and the reaction can be quantified by instrumentation.
Therapeutic Platform Development
Cell Signaling Pathway
One area of Enzo’s therapeutic platform development is related to the development of pharmaceutical agents that
affect protein-protein interactions. Over the past several years, our scientists and collaborators have unlocked the secrets
of a major cell signaling pathway thus producing a means to modify biologic activity in a number of physiological systems.
Further investigation into the design and control of this system has allowed our scientists and their collaborators
to determine the structure of key regulatory proteins and to identify active sites that can then become targets for Enzo’s
proprietary technology generating system. Our technology is capable of generating active compounds that range from
orally delivered small molecules to peptides, oligonucleotides or antibodies. We have performed pioneering work on the
structure and function of LRP and its ligands, developed a screening technology to identify active compounds, and have
synthesized proprietary molecules capable of producing biological effects in cell-based systems and animal models of
disease. Specifically, this system allows the Company to successfully:
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generate biological, genetic, and structural information concerning LRP;
determine the structure of LRP docking sites of its ligands;
identify the functionally important residues via site-directed mutagenesis;
build the fine structure map and employ it as the basis for virtual screening;
show that compounds specifically bind to wild type LRP5, but not to mutated LRP5;
generate a cell-based assay capable of identifying active compounds and;
synthesize proprietary molecules that are active in animal models of disease.
Through this novel, proprietary, functional screening system, we have identified small molecules capable of
reversing sclerostin-mediated inhibition of Wnt signaling. Preclinical animal studies with several candidate lead
compounds produced the following results:
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significant increases in total and femoral bone density through new bone formation;
significant reduction in alveolar bone loss and;
significant reduction in bone resorption.
The anabolic induction of new bone formation and prevention of bone loss by our small molecule compounds may
promise new paths for the treatment of osteoporosis.
7
In addition, our proprietary technology has enabled the generation of novel chemical entities that have significant glucose
lowering activity. These effects are separate from its effects on bone metabolism indicating a specificity of action
conferred by the interaction of a particular compound with the cell signaling pathway. Therefore, this approach may be
broadly applicable to the generation of therapeutic drug candidates for multiple indications.
Immune Regulation
Oral Immune Regulation. We continue to explore a novel therapeutic approach based on immune regulation. Our
immune regulation technology seeks to control an individual’s immune response to a specific antigen in the body. An
antigen is a substance that the body perceives as foreign and, consequently, against which the body mounts an immune
response. This platform technology is being developed as a means to manage immune-mediated diseases, such as
autoimmune uveitis and Crohn’s disease.
Gene Regulation
We have developed an approach to gene regulation known as genetic antisense or antisense RNA. Our
technology involves the introduction into cellular DNA of a gene that codes for an RNA molecule that binds to, and thus
deactivates, RNA produced by a specific gene. To deliver our antisense gene to the target cell, in a process called
transduction, we have developed proprietary vector technology.
We believe, though there can be no assurance, that our vector technology has broad applicability in the field of
gene medicine. This can be attributed to the following properties of our construct:
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the viral promoters are inactivated;
insertional gene activation is prevented – a major safety factor;
chromosomal integration and;
nuclear localization.
We have developed an immunomodulator agent EGS21 as a potential therapeutic for treating immune mediated
disorders. EGS 21 is a glycolipid that has been shown by our scientists and collaborators to act as an anti-inflammatory
agent in animal model systems and is being evaluated as a drug candidate in the treatment of various immune mediated
diseases.
In summary, we have developed proprietary technologies in the areas of cell signaling, immune modulation and
gene regulation (genetic antisense RNA) that we are using as platforms for a portfolio of novel therapeutics.
There can be no assurance that we will be able to secure patents or that these programs will be successful. The
potential therapies we are developing could be used, if successful for the treatment of a variety of diseases, including
osteoporosis, osteonecrosis and other bone pathologies, diabetes, autoimmune uveitis and inflammatory bowel disease,
including Crohn’s disease and ulcerative colitis, among others.
Products and Services
We are applying our core technologies to develop novel therapeutics as well as research tools for the life
sciences and clinical diagnostics markets. In addition, we provide clinical laboratory services to physicians and other
health care providers in the New York, New Jersey and Eastern Pennsylvania medical communities.
Research Products
We are organized to lead in the development, production, marketing and sales of innovative life science research
reagents worldwide based on over 30 years of experience in building strong international market recognition,
implementing outstanding operational capabilities, through two main channels to market:
Enzo Life Sciences – “Enabling Discovery in Life Sciences”
Enzo Life Sciences is a positioned as a leading manufacturer and supplier of high quality
reagents, kits and products supplied to scientific researchers in academia, clinical research and
drug discovery. With direct sales operations in US, Switzerland, Germany, UK, France and
Benelux, Enzo Life Sciences also supports its 9,000 products through a global network of
dedicated distributors.
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Axxora.com – the “Innovative Research Reagents Marketplace”
Axxora.com is a proven distribution platform for original manufacturers of innovative research
reagents. An increasing number of researchers use our unique marketplace to instantly connect
with over 40 specialty manufacturers and gain access to over 30,000 products. Purchasing
groups from universities, research institutes, biotech and pharmaceutical companies utilize this
extensive catalog to source research reagents and conveniently consolidate orders.
The products supplied by Enzo Life Sciences include small molecules, proteins, antibodies, peptides, assay kits
and custom services. Our comprehensive portfolio of high quality reagents and kits in key research areas are sold to
scientific experts in the following fields:
Adipokines
Antibiotics
Apotosis/Cell Death
Biologically Active Peptides
Bone Metabolism
Cancer Research
Cell Death
Cell Cycle
Chemokines/Cytokines
Cytoskeletal Research
Dependence Receptors
DNA Fragmentation/Damage/Repair
DNA Regulation
Epigenetics
FISH
Growth Factors/Cytokines
Hypoxia
Immunology
Inflammation/Innate Immunity
Interferons
In Vitro Toxicology
Kinases/Inhibitors
Leukotrienes/Prostaglandins/Thromboxanes
Microarray Labeling
Multidrug Resistance
Natural Products/Antibiotics
Neuroscience
Nitric Oxide Pathway
Nuclear Receptors
Oxidative Stress
Protein Aggregation
Proteosome/Ubiquitin
Receptors
Signal Transduction
Stem Cell/Cell Differentiation
Stress Proteins/Heat Shock Proteins
TNF/TNF Receptor Superfamily
Transcription Factors
Viral Signaling
Enzo Life Sciences is organized to promote and market its products and brands under its own name, building on
a foundation of the brands it has acquired or developed previously.
Enzo The original Enzo brand products and technologies are primarily focused in the areas of microarray
analysis, gene regulation and gene modification. Patented Enzo technologies and products are recognized as key tools in
non-radioactive gene and protein labeling.
Alexis The Alexis brand provides recognition in producing and commercializing innovative high quality reagents
and as an established source for a comprehensive panel of products in many key research areas including the fields of
cell death, nitric oxide, and obesity/adipogenesis.
Biomol International The Biomol International brand provides global recognition in the cellular biochemistry
segment with an emphasis on areas related to protein post-translational modification, be it by ubiquitin or the ubiquitin-like
proteins, acetylation, methylation, phosphorylation, sulphation, or glycolsylation.
Assay Designs The Assay Designs brand emphasizes our immunoassay development capability in the fields of
inflammation, steroids and hormones, and cell signaling.
Stressgen The Stressgen brand is focused exclusively on the fields of the heat shock and cell stress.
Enzo Life Sciences through its new product development programs is now entering new markets in the fields of
Cellular Analysis and Protein Aggregation detection. As part of this introduction, we are establishing new product lines to
increase recognition of our products, such as the Cellestial® range of fluorescent dyes and kits, and ProteoStat® protein
aggregation detection line of products.
Therapeutic Development Programs
We have a number of therapeutic products in various stages of development that are based on our proprietary
platform technologies. Our therapeutic programs are described below.
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Autoimmune Uveitis. Autoimmune uveitis, which results from inflammation of a part of the eye known as the
uvea, is believed to result from an immune reaction to antigens in the eye, specifically the S-antigen and the
interphotoreceptor retinoid-binding protein (IRBP).
There is no known cure for uveitis, which in the United States, according to the American Uveitis Society, is newly
diagnosed in approximately 38,000 people every year.
Enzo acquired the rights and intellectual property to a candidate drug and technology intended for use in the
treatment of uveitis. The drug is the result of a discovery by scientists at the eye clinic of the Ludwig Maximilians
University in Munich, Germany, who found a small peptide that when fed to rats with experimental allergic uveitis
promoted their recovery. Based on favorable preclinical studies, the developers conducted an open, pilot Phase I clinical
trial in Germany with encouraging results.
Based on the results from the German study, we entered into a Cooperative Research and Development
Agreement (CRADA) with the National Eye Institute (NEI), part of the National Institutes of Health (“NIH”), for further
development of our candidate compound Optiquel® for the treatment of autoimmune uveitis. In October 2010, we
announced the initiation of a human clinical trial. Currently, patients are being enrolled and treated. Under the terms of the
CRADA, the NEI and Enzo will share the development costs of the studies and Enzo will supply its proprietary compound,
Optiquel™. The agreement additionally includes non clinical research focusing on the use of various compounds that may
serve to enhance the immune mediated oral tolerance response to specific antigens. Such research may be applicable
across the entire spectrum of the Company’s immune regulation platform. The clinical trial is currently ongoing at the NEI
to assess the safety and efficacy of Optiquel®. The study is designed as a randomized, double-masked, placebo-
controlled proof-of-concept study with a long-term follow-up.
We previously had filed with the regulatory authorities in Europe, and Optiquel™ has been granted orphan status
under European regulations. We may apply for the same in the U.S. since Orphan status designation can confer both
financial and marketing benefits.
Inflammatory bowel diseases. We believe Alequel™, Enzo’s proprietary candidate drug based on our immune
regulation technology may be used to treat inflammatory bowel disease (IBD), including ulcerative colitis and Crohn’s
Disease. According to the Crohn’s and Colitis Foundation, approximately one million persons in the United States suffer
from IBD. Although the cause of these disorders remains unknown, various features suggest immune system involvement
in their pathogenesis.
Patients are managed during short-term episodes through the use of anti-inflammatory medications, or
immunosuppressants, which provide symptomatic relief over short periods of time, but do not provide a cure. These drugs
are all based on a generalized suppression of the immune response and are non-specific. As such, they have
considerable side effects and may make the body more prone to infection, lymphoma, or other diseases.
Alequel™ is an individualized protein-product mixture produced from autologous tissue extracted during a routine
colonoscopy. The Enzo protein extract is administered to the patient orally. Clinical results indicated that the study met its
primary and secondary endpoints. Although not statistically significant, the results indicated that patients receiving
Alequel™ achieved improved rates of clinical remission compared with the placebo group (39% vs. 22%), clinical
response (50% vs. 30%) and improved quality of life in the drug study group compared to placebo. No treatment-related
adverse events were noted. Thus, we conclude that Alequel™ may be a safe and effective method for treatment of
patients with moderate to severe Crohn’s disease.
Osteoporosis (and certain bone disorders) and Diabetes
We have a number of new compounds in preclinical development that could provide therapy for treating bone
disorders including osteoporosis, bone loss, fractures, abnormalities, diseases, and other applications. These candidate
compounds were identified through an innovative approach, combining structural biology, computational screening,
mutational analyses and biological in vitro assays, followed by validation in animal model systems.
Enzo-D58 is one of several compounds found to induce new bone formation in mouse calvaria when injected
subcutaneously. When delivered orally the candidate compound was shown to prevent alveolar bone loss in a
periodontitis-induced rat model.
One of the most challenging problems in clinical dentistry chronicled throughout history is the loss of alveolar
bone. Alveolar bone loss is characterized by the reduction in height and volume of the maxillary and mandibular bones
that underlie and support the teeth. The primary causes of alveolar bone loss are periodontitis and tooth loss, although
osteoporosis may also contribute. The lack of an effective treatment for periodontal bone loss has encouraged the
continued search for a successful therapeutic approach.
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Our preliminary results which were presented at the annual meeting of the American Society for Bone and Mineral
Research 2007 suggest that Enzo-D58 may be effective in preventing alveolar bone loss. We have continued this effort
and have synthesized and developed novel compounds that appear to be active in standard animal models which assess
bone density. We continue to develop these drug candidates and progress them along the drug development continuum.
In addition, we and our collaborators have investigated the biochemical pathways involved in glucose
homeostasis. Using animal genetic models, and structural and computational biology we have been able to decipher
some of the complex cellular machinery that controls glucose, synthesize novel entities that interact at key targets and
test them in standard animal models of diabetes. We continue to explore this very exciting line of research and continue
activities geared toward the development of potential therapeutics for diabetes with novel mechanisms of action.
Clinical Laboratory Services
We operate a regional clinical laboratory that offers extensive diagnostic services to the New York, New Jersey
and Eastern Pennsylvania medical communities. Our clinical laboratory testing is utilized by physicians as an essential
element in the delivery of healthcare services. Physicians use laboratory tests to assist in the detection, diagnoses,
evaluation, monitoring and treatment of diseases and other medical conditions. Clinical laboratory testing is generally
categorized as clinical testing and anatomic pathology testing. Clinical testing is performed on body fluids, such as blood
and urine. Anatomic pathology testing is performed on tissues and other samples, such as human cells. Most clinical
laboratory tests are considered routine and can be performed by most commercial clinical laboratories. Tests that are not
routine and that require more sophisticated equipment and highly skilled personnel are considered esoteric tests and may
be performed less frequently than routine tests.
We offer a comprehensive menu of routine and esoteric clinical laboratory tests or procedures. These tests are
frequently used in general patient care by physicians to establish or support a diagnosis, to monitor treatment or
medication levels, or search for an otherwise undiagnosed condition.
Our full service clinical laboratory in Farmingdale, NY contains infrastructure that includes comprehensive
information technology applications, logistics, client service and billing departments. Also, we have a network of
approximately thirty strategically located patient service centers and a full service phlebotomy department. Patient service
centers collect the specimens as requested by physicians. We also operate a fully equipped STAT laboratory in New York
City. A “STAT” lab is a laboratory that has the ability to perform certain routine tests quickly and report results to the
physician immediately.
Patient specimens are delivered to our laboratory facilities primarily by our logistics department accompanied by a
test requisition form. These forms, which are completed by the ordering physician, indicate the tests to be performed and
demographic patient information in most instances utilizing EnzoDirect™, our proprietary computer-based ordering and
results delivery system. Once the information is entered into the laboratory computer system the tests are performed on
certain laboratory testing equipment and the results are delivered primarily through an interface from the laboratory testing
equipment or in some instances, manually into the laboratory computer system. Most routine testing is completed by early
the next morning, and test results are reported to the ordering physician.
These test results are either reported electronically via our EnzoDirect™ system or delivered by our logistics
department directly to the ordering physicians’ offices. Physicians who request that they be called with a particular result
are so notified by our customer service personnel.
For fiscal years ended July 31, 2011, 2010, and 2009, respectively, approximately 52%, 46% and 44% of the
Company’s revenues were derived from the clinical laboratory. At July 31, 2011 and 2010, respectively, approximately
51% and 45% of the Company’s net accounts receivable were derived from its clinical laboratory business. The Company
believes that the concentration of credit risk with respect to the Clinical Labs accounts receivable is mitigated by the
diversity of its numerous third party payers and individual patient accounts, and is limited to certain large payers that
insure individuals that utilize the Clinical Labs services. To reduce risk, the Company routinely assesses the financial
strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to
these payers, is limited. While the Company also has receivables due from the Federal Medicare program, the Company
does not believe that these receivables represent a credit risk since the Medicare program is funded by the federal
government and payment is primarily dependent on our submitting the appropriate documentation.
Revenues, net of contractual adjustment, from direct billings under the Federal Medicare program during the
years ended July 31, 2011, 2010 and 2009 were approximately 22%, 25% and 23%, respectively, of the clinical laboratory
segment’s total revenue. We estimate contractual adjustment based on significant assumptions and judgments, such as
the interpretation of payer reimbursement policies which bears the risk of change. The estimation process is based on the
experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross
amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on
gross billing rates, to amounts expected to be approved and reimbursed.
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Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, health
maintenance organizations (“HMO’s) and managed care providers. We adjust the contractual adjustment estimate
quarterly, based on our evaluation of current and historical settlement experience with payers, industry reimbursement
trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly
and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third
party arrangements. 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
The clinical laboratory industry is characterized by a significant amount of uncollectible accounts receivable related to the
inability to receive accurate and timely billing information in order to forward it on to the third party payers for
reimbursement, and the inaccurate information received from the covered individual patients for unreimbursed unpaid
amounts. Our provision for uncollectible accounts receivable is within historical expectations.
Other than the Medicare program, revenues from United Healthcare of New York, Inc. represented approximately
22%, 25% and 25% of the Clinical Labs segment’s net revenue for the fiscal year ended July 31, 2011, 2010 and 2009,
respectively. Billing for laboratory services is complicated. Depending on the billing arrangement and applicable law, we
must bill various payers, such as patients, insurance companies and the Federal Medicare Program, all of which have
different requirements. In both New York and New Jersey, the law prohibits the Company from billing the ordering
physician. Compliance with applicable laws and regulations as well as, internal compliance policies and procedures adds
further complexity to the billing process. We depend on the ordering physician to provide timely, accurate billing
demographic and diagnostic coding information to us. Additional factors complicating the billing process include:
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pricing differences between our standard gross fee schedules and the reimbursement rates of the payers;
disputes with payers as to which party is responsible for payment and;
disparity in coverage and information requirements among various payers.
We believe that most of our bad debt expense is primarily the result of inaccurate billing information on
requisitions received from the ordering physician. In addition, the bad debts includes the balances, after receipt of the
approved settlements from third party payers for the insufficient diagnosis information received from the ordering
physician, which result in denials of payment and the uncollectible portion of receivables from self payers, including
deductibles and copayments, which are subject to credit risk and patients’ ability to pay. We perform the requested tests
and report test results regardless of whether the billing or diagnostic coding information is inaccurate or missing. We
subsequently attempt to contact the ordering physician to obtain and rectify incorrect billing information.
Missing or inaccurate information on the requisitions adds complexity to and may slow the billing process, creates
backlogs of unbilled requisitions, and generally increases the collectability and the aging of accounts receivable. When all
issues relating to the missing or inaccurate information are not resolved in a timely manner, the related receivables are
fully reserved to the allowance for doubtful accounts or written off.
We incur significant additional costs as a result of our participation in Medicare, as billing and reimbursement for
clinical laboratory testing is subject to considerable and complex federal and state regulations.
These additional costs include those related to: (1) complexity added to our billing processes; (2) training and
education of our employees and customers; (3) compliance and legal costs; and (4) costs related to, among other factors,
medical necessity denials and advance beneficiary notices. The Centers for Medicare & Medicaid Services, or CMS
(formerly the Health Care Financing Administration), establishes procedures and continuously evaluates and implements
changes in the reimbursement process.
The permitted Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal
government in a number of instances over the past several years. In March 2010, U.S. federal legislation was enacted to
reform healthcare. The legislation provides for reductions in the Medicare clinical laboratory fee schedule of 1.9% for five
years beginning in 2010 and also includes a productivity adjustment which reduces the Consumer Price Index (“CPI”)
market basket update beginning in 2011. In 2011 and 2010, approximately 22% and 25% of our Clinical Lab’s segment
revenues were reimbursed by Medicare under the clinical laboratory fee schedule. The legislation imposes an excise tax
on the seller for the sale of certain medical devices in the United States, including those purchased and used by
laboratories, beginning in 2013. The legislation establishes the Independent Payment Advisory Board, which will be
responsible, beginning in 2014, annually to submit proposals aimed at reducing Medicare cost growth while preserving
quality. These proposals automatically will be implemented unless Congress enacts alternative proposals that achieve the
same savings targets. We could experience a significant decrease in revenue from Medicare as a result of this legislation,
which could have a material adverse effect on us.
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Research and Development
Our principal research and development efforts are directed toward expanding our research product lines, given
our increased manufacturing, distribution capability following the acquisitions of Axxora, Biomol International, and Assay
Designs, as well as developing innovative new clinical diagnostic and therapeutic platforms. We have developed our core
research expertise in the life science field as a result of over 30 years of dedicated focus in this area. We conduct our
research and other product development efforts through internal research and collaborative relationships.
In the fiscal years ended July 31, 2011, 2010 and 2009, the Company incurred costs of approximately
$7,806,000, $9,704,000 and $9,220,000, respectively, for research and development activities.
Internal Research Programs
Our professional staff, including 84 with post graduate degrees, performs our internal research and development
activities. Our product development programs incorporate various scientific areas of expertise, including recombinant
DNA, monoclonal antibody development, enzymology, microbiology, biochemistry, molecular biology, organic chemistry,
and fermentation. In addition, we continuously review in-licensing opportunities in connection with new technology.
External Research Collaborations
We have and continue to explore large numbers of collaborative relationships with prominent companies and
leading-edge research institutions in order to maximize the application of our technology in areas where we believe such
relationship will benefit the development of our technology. We also have a number of external collaborations around the
world to enhance our ongoing therapeutic development program.
Sales and Marketing
Our sales and marketing strategy for Enzo Life Sciences is to sell our life science products through: (i) direct sales
to end-users under the Enzo Life Sciences name, with direct recognition to our acquired brands (ii) direct sales to end
users under the Axxora electronic market place name (iii) supply agreements with manufacturers and (iv) through
distributors in major geographic markets. We operate with an understanding of local markets and a well-functioning
distribution network system across the globe. Scientists around the world who recognize the brands (Alexis, Assay
Designs, Biomol, Enzo and Stressgen) now receive products directly from Enzo Life Sciences where we are recognized
for innovative high quality products, supported directly by our qualified technical staff. We sell the same products through
our Axxora electronic market place which is also the source for life science research reagents from over 40 original
manufacturers. Our direct marketing and sales network includes fully-owned subsidiaries (USA, Switzerland, Germany,
Benelux, and UK), a branch office in France and a network of third party distributors in most other significant markets
worldwide.
For Enzo Clinical Labs, we focus our sales efforts on obtaining and retaining profitable accounts. We market the
clinical laboratory services to ordering physicians in the metro New York, New Jersey and Eastern Pennsylvania region
through our direct sales force who are supported by customer service and patient service representatives. We monitor
and where appropriate, we change the service levels and terminate ordering physician accounts that are not profitable.
We are focusing our efforts to attract and retain clients who participate with the providers with whom we have regional
contracts and adding clinical tests to our service menu to assist sales in new account penetration.
Distribution Arrangements
We also distribute our life science products internationally through a network of distributors. Through these
arrangements, we are able to leverage the established marketing and distribution infrastructure of these companies.
Competition
We compete with other life science and biotechnology companies, as well as pharmaceutical, chemical and other
companies. Competition in our industry is intense. Many of these companies are performing research targeting the same
technology, applications and markets. Some of these competitors are significantly larger than we are and have more
resources than we do. The primary competitive factors in our industry are the ability to create scientifically advanced
technology, offer innovative products at the forefront of technological development to targeted market segments,
successfully develop and commercialize products on a timely basis, establish and maintain intellectual property rights and
attract and retain a breadth and depth of human resources.
Our clinical laboratory services business competes with numerous national, regional, and local entities, some of
which are larger than we are and have greater financial resources than we do. Our laboratory competes primarily on the
basis of the quality and specialized nature of its testing, reporting and information services, its reputation in the medical
community, its reliability and speed in performing diagnostic tests, and its ability to employ qualified laboratory personnel.
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Intellectual Property
We consider our intellectual property program to be a key asset and a major strategic component to the execution
of our business strategy. A broad portfolio of issued patents and pending patent applications supports our core technology
platforms. Our policy is to seek patent protection for our core technology platforms, as well as for ancillary technologies
that support these platforms and provide a competitive advantage.
At the end of fiscal 2011 we owned or licensed over 100 patents relating to products, methods and procedures
resulting from our internal or sponsored research projects. There can be no assurance that patents will be issued on
pending applications or that any issued patents will not be challenged (see Item 3, Legal Proceedings), or that they will
have commercial benefit. We do not intend to rely on patent protection as the sole basis for protecting our proprietary
technology. We also rely on our trade secrets and continuing technological innovation. We require each of our employees
to sign a confidentiality agreement that prohibits the employee from disclosing any confidential information about us,
including our technology or trade secrets.
Our intellectual property portfolio can be divided into patents that provide claims in three primary categories, as
described below:
Nucleic Acid Chemistry
We currently have broad patent coverage in the area of nucleic acid chemistry. We have done extensive work on
the labeling of nucleic acids for the purpose of generating a signal that dates back over twenty years. Enzo has multiple
issued patents covering the modification of nucleic acids at their sugar and phosphate sites. The claims contained in
these patents cover products that incorporate a signaling moiety into a nucleic acid attached to a sugar or phosphate for
the purpose of nucleic acid detection or quantification, including sequencing and real time nucleic acid amplification. Enzo
also has patents directed to proprietary dyes that may be used to label the sugar, base or phosphate positions of nucleic
acids.
Signal Delivery
We also have a long history of innovation in the area of analyte detection using non-radioactive signaling entities.
At the signaling entity itself, there are several Enzo patents that cover the formation of this structure. A patent which was
allowed in 2006 covers the attachment of signaling molecules through the phosphate moiety of a nucleic acid, which is
how the signal-generating enzyme is bound.
Nucleic Acid Analysis Format
We also have patents with issued claims covering the use of arrays of single-stranded nucleic acids fixed or
immobilized in hybridizable form to a non-porous solid support. These patents cover any product that uses arrays of
nucleic acids for molecular analysis.
In some instances, we may enter into royalty agreements with collaborating research parties in consideration for
the commercial use by us of the developments of their joint research. In other instances the collaborating party might
obtain a patent, but we receive the license to use the patented subject matter.
In such cases, we will seek to secure exclusive licenses. In other instances, we might have an obligation to pay
royalties to, or reach a royalty arrangement with, a third party in consideration of our use of developments of such third
party.
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REGULATION AFFECTING OUR BUSINESSES
Clinical Laboratory Regulations
The clinical laboratory industry is subject to significant federal and state regulation, including inspections and
audits by governmental agencies. Governmental authorities may impose fines or criminal penalties or take other actions
to enforce laws and regulations, including revoking a clinical laboratory’s federal certification to operate a clinical
laboratory. Changes in regulation may increase the costs of performing clinical laboratory tests, increase the
administrative requirements of claims or decrease the amount of reimbursement. Our clinical laboratory and (where
applicable) patient service centers are licensed and accredited by the appropriate federal and state agencies. CLIA (The
Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988) regulates
virtually all clinical laboratories by requiring that they be certified by the federal government and comply with various
operational, personnel and quality requirements intended to ensure that their clinical laboratory testing services are
accurate, reliable and timely. CLIA does not preempt state laws that are more stringent than federal laws. Many clinical
laboratories must meet other governmental standards, undergo proficiency testing, and are subject to inspection. Clinical
laboratory certificates or licenses are also required by various state and local laws.
CLIA places all tests into one of three categories of complexity (waived, moderate complexity and high
complexity) and establishes varying requirements depending upon the complexity category of the test performed. A
laboratory that performs high complexity tests must meet more stringent requirements than a laboratory that performs only
moderate complexity tests, while those that perform only waived tests may apply for a certificate of waiver from most of
the requirements of CLIA. Our facility is certified to perform highly complex tests. In general, the Secretary of Health and
Human Services (“HHS”) regulations require laboratories that perform high or moderate complexity tests to implement
systems that ensure the accurate performance and reporting of test results, establish quality control and quality assurance
systems ensure hiring of personnel that meet specified standards, engage in proficiency testing by approved agencies
and undergo biennial inspections.
Clinical laboratories also are subject to state regulation. CLIA provides that a state may adopt different or more
stringent regulations than Federal law, and permits states to apply for exemption from CLIA if HHS determines that the
state’s laboratory laws are equivalent to, or more stringent than, CLIA. The State of New York’s clinical laboratory
regulations contain provisions that are more stringent than Federal law, and New York has received exemption from CLIA.
Therefore, as long as New York maintains its CLIA-exempt status, laboratories in New York, including our
laboratory, are regulated under New York law rather than CLIA. Our laboratory is licensed in New York and has continuing
programs to ensure that its operations meet all applicable regulatory requirements.
The sanction for failure to comply with these regulations may be suspension, revocation, or limitation of a
laboratory’s CLIA certificate necessary to conduct business, significant fines and criminal penalties. The loss of, or
adverse action against, a license, the imposition of a fine, or future changes in Federal, state and local laboratory laws
and regulations (or in the interpretation of current laws and regulations) could have a material adverse effect on our
business.
Billing and reimbursement for clinical laboratory testing is subject to significant and complex federal and state
regulation. Penalties for violations of laws relating to billing federal healthcare programs and for violations of federal fraud
and abuse laws include: (1) exclusion from participation in Medicare/Medicaid programs; (2) asset forfeitures; (3) civil and
criminal fines and penalties; and (4) the loss of various licenses, certificates and authorizations necessary to operate
some or all of a clinical laboratory’s business. The Company is not aware of any material violations.
The health care industry has been undergoing significant change because third-party payers, such as Medicare
(serving primarily patients 65 and older), Medicaid serving primarily indigent patients, health maintenance organizations
and commercial insurers, have increased their efforts to control the cost, utilization and delivery of health care services.
To address the problem of increasing health care costs, legislation has been proposed or enacted at both the Federal and
state levels to regulate health care delivery in general and clinical laboratories in particular. Additional health care reform
efforts are likely to be proposed in the future. In particular, we believe that reductions in reimbursement for Medicare
services will continue to be implemented from time to time. Reductions in the reimbursement rates of other third-party
payers, commercial insurer and health maintenance organizations are likely to occur as well. We cannot predict the effect
that health care reform, if enacted, would have on our business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on our business and operations.
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Containment of health care costs, including reimbursement for clinical laboratory services, has been a focus of
ongoing governmental activity. Clinical laboratories must bill Medicare directly for the services provided to Medicare
beneficiaries and may only collect the amounts permitted under the Medicare Fee Schedule. Reimbursement to clinical
laboratories under the Medicare Fee Schedule has been steadily declining since its inception.
Under health care legislation in March 2010, the Medicare Fee Schedule was reduced by 1.9% and future
reductions are expected to continue (See Item 1A Risk Factors). Furthermore, Medicare has mandated use of the
Physicians Current Procedural Terminology (“CPT”) for coding of laboratory services which has altered the way we bill
these programs for some of our services, thereby reducing the reimbursement that we receive.
In March 1996, HCFA (now, the Center for Medicare and Medicaid Services or CMS) implemented changes in the
policies used to administer Medicare payments to clinical laboratories for the most frequently performed automated blood
chemistry profiles. Among other things, the changes established a consistent standard nationwide for the content of the
automated chemistry profiles. Another change requires laboratories performing certain automated blood chemistry profiles
to obtain and provide documentation of the medical necessity of tests included in the profiles for each Medicare
beneficiary. Reimbursements have been reduced as a result of this change. Because a significant portion of our costs is
fixed, these Medicare reimbursement reductions and changes have a direct adverse effect on our net earnings and cash
flows.
Future changes in federal, state and local regulations (or in the interpretation of current regulations) affecting
governmental reimbursement for clinical laboratory testing could have a material adverse effect on our business. We
cannot predict, however, whether and what type of legislation will be enacted into law. In addition, reimbursement
disapprovals by the third party payers, commercial insurers and health maintenance organizations, reductions or delays in
the establishment of reimbursement rates, and carrier limitations on the insurance coverage of the Company’s services or
the use of the Company as a service provider could have a negative effect on the Company’s future revenues.
Anti Fraud and Abuse Laws
Existing Federal laws governing Medicare, as well as state laws, also regulate certain aspects of the relationship
between healthcare providers, including clinical laboratories and their referral sources such as physicians, hospitals and
other laboratories. One provision of these laws, known as the “Anti-Kickback Law,” contains extremely broad
proscriptions. Violation of this provision may result in criminal penalties, exclusion from Medicare, and significant civil
monetary penalties. Under another Federal law, known as the “Stark” law or “self-referral prohibition,” physicians who
have an investment or compensation relationship with an entity furnishing clinical laboratory services (including anatomic
pathology and clinical chemistry services) may not, subject to certain exceptions, refer clinical laboratory testing for
Medicare patients to that entity.
Similarly, laboratories may not bill Medicare or Medicaid or any other party for services furnished pursuant to a
prohibited referral. Violation of these provisions may result in disallowance of Medicare for the affected testing services,
as well as the imposition of civil monetary penalties. New York State also has laws similar to the Federal Stark and Anti-
Kickback laws.
The Federal Stark laws, and New York State regulations, have also placed restrictions on the supplies and other
items that laboratories may provide to their clients. These laws specify that laboratories may only provide clients with
items or devices that are used solely to collect, transport or store specimens for the laboratory or to communicate results
or tests. Items such as biopsy needles, snares and reusable needles are specifically prohibited from being supplied by
laboratories to their clients. These laws represent a significant deviation from practices that previously occurred
throughout the industry. The Company has put in place procedures to ensure compliance with these laws and restrictions
and believes that it is in compliance with these laws.
In February 1997, the OIG released a model compliance plan for laboratories. One key aspect of the model
compliance plan is an emphasis on the responsibilities of laboratories to notify physicians that Medicare covers only
medically necessary services. These requirements, and their likely effect on physician test ordering habits, focus on
chemistry tests, especially routine tests, rather than on anatomic pathology services or the non-automated tests, which
make up the majority of the Company’s business measured in terms of net revenues. Nevertheless, they potentially could
affect physicians’ test ordering habits more broadly. The Company is unable to predict whether, or to what extent, these
developments have had an impact or the utilization of the Company’s services.
The Company seeks to structure its arrangements with physicians and other customers to be in compliance with
the Anti-Kickback, Stark and state laws, and to keep up-to-date on developments concerning their application by various
means, including consultation with legal counsel. In addition, in order to address these various Federal and state laws, the
Company has developed its own Corporate Compliance Program based upon the OIG model program. The Company’s
Program focuses on establishing clear standards, training and monitoring of the Company’s billing and coding practices.
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Furthermore, as part of this Program, the Company’s Corporate Compliance team meets on a regular basis to
review various operations and relationships as well as to adopt policies addressing these issues.
However, the Company is unable to predict how the laws described above will be applied in the future, and no
assurances can be given that its arrangements or processes will not become subject to scrutiny under these laws. The
Company is unaware of any material violations.
Confidentiality of Health Information
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) was signed into law on August 21,
1996, and it included “administrative simplification” provisions designed to standardize common electronic transactions in
health care and to protect the security and privacy of health information. Congress’ purpose in promulgating HIPAA was to
increase the efficiency of health care transactions while, at the same time, protecting the confidentiality of patient
information. Regulations have been adopted for electronic transaction, privacy and security standards and include the
requirement to use a National Provider Identifier in electronic health care transactions. These provisions have very broad
applicability and they specifically apply to health care providers, which include physicians and clinical laboratories. The
National Provider Identifier is an identifier that replaced all other identifiers that are currently used for healthcare
transactions (e.g., UPIN, Medicaid provider numbers; identifiers assigned by commercial insurers).
The electronic transaction standards regulations created guidelines for certain common health care transactions.
With certain exceptions, these standards require that when we conduct certain transactions electronically with another
provider, clearinghouse or health plan we must comply with the standards set forth in the regulations. The regulations
established standard data content and format for submitting electronic claims and other administrative health transactions.
All health care providers are able to use the electronic format to bill for their services and all health plans and providers
are required to accept standard electronic claims, referrals, authorizations, and other transactions. The Company believes
it is in compliance with these standards.
Privacy regulations and specific requirements for the use and disclosure of protected health information
(“PHI”).
We are required to maintain numerous policies and procedures in order to comply with these requirements.
Furthermore, we need to continuously ensure that there are mechanisms to safeguard the PHI, which is used or
maintained in any format (e.g. oral, written, or electronic). Failure to comply with these requirements can result in criminal
and civil penalties.
The security regulations require us to ensure the confidentiality, integrity and availability of all electronic protected
health information (“EPHI”) that we create, receive, maintain, or transmit. We have some flexibility to fashion our own
security measures to accomplish these goals. The security regulations strongly emphasize that we must conduct an
accurate and thorough assessment of the potential risks and vulnerabilities of the confidentiality, integrity and availability
of our EPHI and then document our response to the various security regulations on the basis of that assessment.
Complying with the electronic transaction, privacy and security rules requires significant effort and expense for
virtually all entities that conduct health care transactions electronically and handle patient health information.
Medical Regulated Waste
We are subject to licensing and regulation under federal, state and local laws relating to the handling and disposal
of medical specimens, infectious and hazardous waste, as well as to the safety and health of laboratory employees. All
our laboratories are required to operate in accordance with applicable federal and state laws and regulations relating to
biohazard disposal of all facilities specimens. We use outside vendors to dispose of such specimens. Although we believe
that we comply in all respects with such federal, state and local laws, our failure to comply with those laws could subject
us to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions.
Occupational Safety
In addition to its comprehensive regulation of safety in the workplace, the U.S. Federal Occupational Safety and
Health Administration (“OSHA”) has established extensive requirements relating to workplace safety for health care
employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the
hepatitis B virus. These regulations, among other things, require work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and
transmission of, blood-borne pathogens. The Federal Drug Enforcement Administration regulates the use of controlled
substances in testing for drugs of abuse. We are also subject to OSHA’s requirement that employers using hazardous
chemicals communicate the properties and hazards presented by those chemicals to their employees.
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We believe that we are in compliance with these OSHA requirements. Our failure to comply with those regulations
and requirements could subject us to tort liability, civil fines, criminal penalties and/or other enforcement actions.
Other Regulation
Our business is and will continue to be subject to regulation under various state and federal environmental, safety
and health laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, and the
Atomic Energy Act or their state law analogs. These and other laws govern our use, handling and disposal of various
biological, chemical and radioactive substances used in our operations and wastes generated by our operations. We are
required to possess licenses under, or are otherwise subject to federal and state regulations pertaining to, the handling
and disposal of medical specimens, infectious and hazardous waste and radioactive materials.
We believe that we are in compliance with applicable environmental, safety and health laws in the United States
and internationally and that our continual compliance with these laws will not have a material adverse effect on our
business. All of our laboratories are operated in accordance with applicable federal and state laws and regulations relating
to hazardous substances and wastes, and we use qualified third-party vendors to dispose of biological specimens and
other hazardous wastes. Although we believe that we comply in all respects with such federal, state and local laws, our
failure to comply with those laws could subject us to denial of the right to conduct business, civil fines, criminal penalties
and/or other enforcement actions. Environmental contamination resulting from spills or disposal of hazardous substances
generated by our operations, even if caused by a third-party contractor or occurring at a remote location could result in
material liability.
Regulation of Diagnostics
The diagnostic products that are developed by our collaborators, or by us, are likely to be regulated by the FDA
as medical devices. Unless an exemption applies, medical devices must receive either “510(k) clearance” or pre-market
approval (“PMA”) from the FDA before marketing them in the United States. The FDA’s 510(k) clearance process usually
takes from four to twelve months, but it can last longer. The process of obtaining PMA approval is much more costly,
lengthy and uncertain. It generally takes from one to three years or even longer. We cannot be sure that 510(k) clearance
or PMA approval will ever be obtained for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance or PMA approval process based
upon statutory criteria. These criteria include the level of risk that the agency perceives is associated with the device and
a determination whether the product is a type of device that is similar to devices that are already legally marketed.
Devices deemed to pose relatively less risk are placed in either class I or II, which requires the manufacturer to submit a
premarket notification requesting 510(k) clearance, unless an exemption applies. The pre-market notification must
demonstrate that the proposed device is “substantially equivalent” in intended use and in safety and effectiveness to a
legally marketed “predicate device” that is either in class I, class II, or is a “pre-amendment” class III device (i.e., one that
was in commercial distribution before May 28, 1976) for which the FDA has not yet called for submission of a PMA
application.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness,
or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA
approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review
any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency
may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require the
manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable
devices, or deemed not substantially equivalent to a legally marketed class I or class II predicate device, or to a
preamendment class III device, for which PMAs have not been called, are placed in class III. Such devices are required to
undergo the PMA approval process in which the manufacturer must prove the safety and effectiveness of the device to
the FDA’s satisfaction. A PMA application must provide extensive preclinical and clinical trial data and also information
about the device and its components regarding, among other things, device design, manufacturing and labeling. After
approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, it’s labeling or
its manufacturing process.
Although clinical investigations of most devices are subject to the investigational device exemption (“IDE”)
requirements, clinical investigations of in vitro diagnostic (“IVDs”) tests are exempt from the IDE requirements, including
the need to obtain the FDA’s prior approval, provided the testing is noninvasive, does not require an invasive sampling
procedure that presents a significant risk, does not introduce energy into the subject, and is not used as a diagnostic
procedure without confirmation by another medically established test or procedure.
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In addition, the IVD must be labeled for Research Use Only (RUO) or Investigational Use Only (IUO), and
distribution controls must be established to assure that IVDs distributed for research or investigation are used only for
those purposes. The FDA expressed its intent to exercise heightened enforcement with respect to IUO and RUO devices
improperly commercialized prior to receipt of FDA clearance or approval.
We have developed products that we currently distribute in the United States on a RUO basis. There can be no
assurance that the FDA would agree that our distribution of these products meets the requirements for RUO distribution.
Furthermore, failure by us or recipients of our RUO products to comply with the regulatory limitations on the distribution
and use of such devices could result in enforcement action by the FDA, including the imposition of restrictions on our
distribution of these products.
Any devices that we manufacture or distribute will be subject to a host of regulatory requirements, including the
Quality System Regulation (which requires manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures), the Medical Device Reporting regulation (which requires that manufacturers report to
the FDA certain types of adverse events involving their products), labeling regulations, and the FDA’s general prohibition
against promoting products for unapproved or “off label” uses. Class II devices also can have special controls such as
performance standards, post market surveillance, patient registries, and FDA guidelines that do not apply to class I
devices. Unanticipated changes in existing regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.
We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory
requirements. If the FDA finds that we have failed to comply, the agency can institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions such as fines, injunction, civil penalties, recall or
seizure of our products, the issuance of public notices or warnings, operating restrictions, partial suspension or total
shutdown of production, refusal of our requests for 510(k) clearance or PMA approval of new products, withdrawal of
510(k) clearance or PMA approvals already granted, and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the cost of any medical device
manufactured or distributed by us. Our failure to comply with applicable requirements could lead to an enforcement action
that may have an adverse effect on our financial condition and results of operations.
Unanticipated changes in existing regulatory requirements, our failure to comply with such requirements or
adoption of new requirements could have a material adverse effect on us.
We have employees to expedite the preparation and filing of documentation necessary for FDA clearances and
approvals, patent issuances and licensing agreements.
We cannot assure you that future clinical diagnostic products developed by us or our collaborators will not be
required to be reviewed by FDA under the more expensive and time consuming pre-market approval process.
Regulation of Pharmaceutical Products
New drugs and biological drug products are subject to regulation under the Federal Food, Drug and Cosmetic Act,
and biological products are also regulated under the Public Health Service Act. We believe that products developed by us
or our collaborators will be regulated either as biological products or as new drugs. Both statutes and regulations
promulgated thereunder govern, among other things, the testing, licensing, manufacturing, marketing, distributing, safety,
and efficacy requirements, labeling, storage, exporting, record keeping, advertising and other promotional practices
involving biologics or new drugs, as the case may be. FDA review or approval or other clearances must be obtained
before clinical testing, and before manufacturing and marketing, of biologics and drugs. At the FDA, the Center for
Biological Evaluation and Research (“CBER”) is responsible for the regulation of biological drugs and the Center for Drug
Evaluation and Research (“CDER”) is responsible for the regulation of non-biological drugs. Biological drugs are licensed
and other drugs are approved before commercialization.
Any therapeutics products that we develop will require regulatory review before clinical trials, and additional
regulatory clearances before commercialization. New human gene medicine products as well as immune regulation
products, as therapeutics, are subject to regulation by the FDA and comparable agencies in other countries. The FDA on
a case-by-case basis currently reviews each protocol. In addition, the National Institutes of Health (“NIH”) is also involved
in the oversight of gene therapies and the FDA has required compliance with certain NIH requirements.
Federal requirements are detailed in Title 21 of the Code of Federal Regulations (21 CFR). In addition, the FDA
publishes guidance documents with respect to the development of therapeutics protocols.
Obtaining FDA approval has historically been a costly and time-consuming process. Generally, to gain FDA
approval, a developer first must conduct pre-clinical studies in the laboratory evaluating product chemistry, formulation
and stability and, if appropriate, in animal model systems, to gain preliminary information on safety and efficacy.
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Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations governing Good
Laboratory Practices (GLP). The results of those studies are submitted with information characterizing the product and its
manufacturing process and controls as a part of an investigational new drug (“IND”) application, which the FDA must
satisfactorily review before human clinical trials of an investigational drug can start. The IND application includes a
detailed description of the clinical investigations to be undertaken in addition to other pertinent information about the
product, including descriptions of any previous human experience and the company’s future plans for studying the drug.
In order to commercialize any products, we (as the sponsor) file an IND and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety and efficacy necessary to obtain FDA marketing approval of any
such products. For INDs that we sponsor, we will be required to select qualified clinical sites (usually physicians affiliated
with medical institutions) to supervise the administration of the investigational product. It is the sponsor’s responsibility to
ensure that the investigations are conducted and monitored in accordance with FDA regulations, Good Clinical Practices
(GCP) and the general investigational plan and protocols contained in the IND. This may be done using in-house trained
personnel or an outside contract research organization (CRO).
Each clinical study is reviewed and approved by an Institutional Review Board (IRB). The IRB will consider,
among other things, ethical factors and the safety of human subjects. Clinical trials are normally conducted in three
phases, although the phases might overlap. Phase I trials, concerned primarily with the safety and tolerance of the drug,
and its pharmacokinetics (or how it behaves in the body including its absorption and distribution) involve fewer than 100
subjects. Phase II trials normally involve a few hundred patients and are designed primarily to demonstrate preliminary
effectiveness and the most suitable dose or exposure level for treating or diagnosing the disease or condition for which
the drug is intended, although short-term side effects and risks in people whose health is impaired may also be examined.
Phase III trials are expanded, adequate and well-controlled clinical trials with larger numbers of patients and are intended
to gather the additional information for proper dosage and labeling of the drug. Clinical trials generally take two to five
years, but the period may vary. Certain regulations promulgated by the FDA may shorten the time periods and reduce the
number of patients required to be tested in the case of certain life-threatening diseases, which lack available alternative
treatments.
The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification,
suspension or termination of clinical trials if an unwarranted risk is presented to patients. Human gene medicine products
are a new category of therapeutics.
There can be no assurance regarding the length of the clinical trial period, the number of patients that the FDA
will require to be enrolled in the clinical trials in order to establish the safety, purity and potency of human gene medicine
products, or that the clinical and other data generated will be acceptable to the FDA to support marketing approval.
After completion of clinical trials of a new product, FDA marketing approval must be obtained before the product
can be sold in the United States. If the product is regulated as a new biologic, CBER requires the submission and
approval of a Biologics License Application (BLA) before commercial marketing of the biologic product. If the product is
classified as a new drug, we must file a New Drug Application (“NDA”) with CDER and receive approval before
commercial marketing of the drug. The NDA or BLA must include results of product development, pre-clinical studies and
clinical trials. The testing and approval processes require substantial time and effort and there can be no assurance that
any approval will be granted on a timely basis, if at all. The median time to obtain new product approvals after submission
to the FDA is approximately 12 months. If questions arise during the FDA review process, approval can take longer.
Before completing its review, the FDA may seek guidance from an Advisory Panel of outside experts at a public or closed
meeting. While the advice of these committees is not binding on the FDA, it is often followed. Notwithstanding the
submission of relevant data, the FDA might ultimately decide that the NDA or BLA does not satisfy its regulatory criteria
for approval and, thus, reject the application, refuse to approve it, or require additional clinical, preclinical or chemistry
studies. Even after FDA regulatory approval or licensure, a marketed drug product is subject to continual review by the
FDA.
In addition, if previously unknown problems are discovered or we fail to comply with the applicable regulatory
requirements, we might be restricted from marketing a product, we might be required to withdraw the product from the
market, and we might possibly become subject to seizures, injunctions, voluntary recalls, or civil, monetary or criminal
sanctions. In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to
further evaluate safety and effectiveness.
For commercialization of our biological or other drug products, the manufacturing processes described in our NDA
or BLA must receive FDA approval and the manufacturing facility must successfully pass an inspection prior to approval
or licensure of the product for sale within the United States. The pre-approval inspection assesses whether, for example,
the facility complies with the FDA’s current good manufacturing practices (cGMP) regulations. These regulations
elaborate testing, control, documentation, personnel, record keeping and other quality assurance procedure requirements
that must be met.
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Once the FDA approves our biological or other drug products for marketing, we must continue to comply with the
cGMP regulations. The FDA periodically inspects biological and other drug manufacturing facilities to ensure compliance
with applicable cGMP requirements. Failure to comply with the statutory and regulatory requirements subjects the
manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or voluntary
recall of a product.
If a developer obtains designation by the FDA of a biologic or other drug as an “orphan” for a particular use, the
developer may request grants from the federal government to defray the costs of qualified testing expenses in connection
with the development of such drug. Orphan drug designation is possible for drugs for rare diseases, including many
genetic diseases, which means the drug is for a disease that has a prevalence of less than 200,000 patients in the United
States. The first applicant who receives an orphan drug designation and who obtains approval of a marketing application
for such drug acquires the exclusive marketing rights to that drug for that use for a period of seven years unless the
subsequent drug can be shown to be clinically superior. Accordingly, no other company would be allowed to market an
identical orphan drug with the same active ingredient for the use approved by the FDA for seven years after the approval.
Manufacturing and Research Facilities
Our internal manufacturing, integrated laboratory and scientific efforts for our three segments take place primarily
at our two adjacent facilities in Farmingdale, New York. A major part of one facility is utilized by Life Science for research
and manufacturing with special handling capabilities and clean rooms suitable for our operations The Life Sciences
segment has logistics operations in Lausen, Switzerland and in San Diego, and a reagent and kit manufacturing facility in
Ann Arbor, Michigan. We also contract with qualified third-party contractors to manufacture our products in cases where
we deem it appropriate, for example, when it is not cost-effective to produce a product ourselves or where we seek to
leverage the expertise of another manufacturer in a certain area.
Employees
As of July 31, 2011, we employed 535 full-time and 71 part-time employees. Of the full-time employees, 170 were
engaged in research, development, manufacturing, and marketing of research products, 6 in therapeutics research, 307 in
performing testing, marketing and billing our clinical laboratories services and 52 in finance, legal, administrative and
executive functions. Our scientific staff, including 84 individuals with post graduate degrees, possesses a wide range of
experience and expertise in the areas of recombinant DNA, nucleic acid chemistry, molecular biology and immunology.
We believe that we have established good relationships with our employees.
Information Systems
Information systems are used extensively in virtually all aspects of our businesses. In our clinical laboratory
business, our information systems are critical with respect to laboratory testing, billing, accounts receivable, customer
service, logistics, and management of medical data. Our success depends, in part, on the continued and uninterrupted
performance of our information technology systems. Computer systems are vulnerable to damage from a variety of
sources, including telecommunications or network failures, malicious human acts and natural disasters.
Moreover, despite network security measures, some of our servers are potentially vulnerable to physical or
electronic break-ins, computer viruses and similar disruptive problems. We have invested heavily in the upgrade of our
information and telecommunications systems to improve the quality, efficiency and security of our businesses. In addition,
to complement our proprietary physician connectivity solution, EnzoDirect™ we have a web portal version which allows
physicians to receive laboratory results from any personal computer with a browser and an Internet connection.
Despite the precautionary measures that we have taken to prevent unanticipated problems that could affect our
information technology systems, sustained or repeated system failures that interrupt our ability to process test orders,
deliver test results or perform tests in a timely manner could adversely affect our reputation and result in a loss of
customers and net revenues.
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Quality Assurance
We consider the quality of our clinical laboratory tests to be of critical importance, and, therefore, we maintain a
comprehensive quality assurance program designed to help assure accurate and timely test results. In addition to the
compulsory external inspections and proficiency programs demanded by the Medicare program and other regulatory
agencies, our clinical laboratory has in place systems to emphasize and monitor quality assurance.
In addition to our own internal quality control programs, our laboratory participates in numerous externally
administered, blind quality surveillance programs, including on-site evaluation by the College of American Pathologies
(“CAP”) proficiency testing program and the New York State survey program. The blind programs supplement all other
quality assurance procedures and give our management the opportunity to review our technical and service performance
from the client’s perspective.
The CAP accreditation program involves both on-site inspections of our laboratory and participation in the CAP’s
proficiency testing program for all categories in which our laboratory is accredited by the CAP. The CAP is an independent
nongovernmental organization of board certified pathologists, which offers an accreditation program to which laboratories
can voluntarily subscribe. A laboratory’s receipt of accreditation by the CAP satisfies the Medicare requirement for
participation in proficiency testing programs administered by an external source. Our clinical laboratory facilities are
accredited by the CAP.
FORWARD - LOOKING AND CAUTIONARY STATEMENTS
This Annual Report contains “forward-looking statements” as defined in the Private Securities Litigation Reform
Act of 1995. All statements other than statements of historical fact, including, without limitation, the statements under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking
statements.” Forward-looking statements may include the words “believes,” “expects,” “plans,” “intends,” “anticipates,”
“continues” or other similar expressions. These statements are based on the Company’s current expectations of future
events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ
materially from those described in the forward-looking statements. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. The Company assumes no obligation to revise or update any forward-looking statements for any
reason, except as required by law.
The Company files annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission (the “SEC”). These filings are available to the public via the Internet at the SEC’s
website located at http://www.sec.gov. You may also read and copy any document the Company files with the SEC at the
SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. For more information, please call the
SEC at 1-800-SEC-0330.
The Company’s website is located at www.enzo.com. The Company makes available on its website a link to all
filings that it makes with the SEC. You may request a copy of the Company’s filings with the SEC (excluding exhibits) at
no cost by writing or telephoning us at the following address or telephone number:
Enzo Biochem, Inc.
527 Madison Ave.
New York, New York 10022
Tel: (212) 583-0100
Attn: Investor Relations
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Item 1A. Risk Factors
Risks relating to our Company and our industries
We have experienced significant losses in our last five fiscal years and quarter to quarter over such
periods and our losses have resulted in the use of cash in operations. If such losses and cash uses continue the
value of your investment could decline significantly.
We incurred a net loss of $12.9 million, $22.2 million and $23.6 million for the fiscal years ended July 31, 2011,
2010, and 2009 respectively. If our revenues do not increase, or if our operating expenses exceed expectations or cannot
be reduced, we will continue to suffer substantial losses and use cash in operations which could have an adverse effect
on our business and adversely affect your investment in our Company.
Our operating results may vary from period to period.
Our operating results may vary significantly from quarter to quarter and from year to year, depending on a variety
of factors including:
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competitive conditions, including changes in third-party reimbursements:
health care reform regulations affecting providers and plan sponsors;
exchange rate fluctuations;
changes in tax laws, the results of tax audits or the measurement of tax uncertainties;
the timing of our research and development, sales and marketing expenses;
the introduction of new products by us or our competitors;
the success of identifying, acquiring and integrating businesses that complement our product offerings,
add new technology or add presence in a market;
expenses associated with defending our intellectual property portfolio;
customer demand for our products due to changes in purchasing requirements and research needs;
general worldwide economic conditions affecting funding of research and;
seasonal fluctuations affected by weather and holiday periods.
Consequently, results for any interim period may not necessarily be indicative of results in subsequent periods.
Our future success will depend in part upon our ability to enhance existing products and to develop and
introduce new products.
The market for our products is characterized by rapidly changing technology, evolving industry standards and new
product introductions, which may make our existing products obsolete. Our future success will depend in part upon our
ability to enhance existing products and to develop and introduce new products.
The development of new or enhanced products is a complex and uncertain process requiring the accurate
anticipation of technological and market trends as well as precise technological execution. In addition, the successful
development of new products will depend on the development of new technologies. We will be required to undertake time-
consuming and costly development activities and to seek regulatory approval for these new products. We may experience
difficulties that could delay or prevent the successful development, introduction and marketing of these new products.
Regulatory clearance or approval of any new products may not be granted by the FDA or foreign regulatory authorities on
a timely basis, or at all, and the new products may not be successfully commercialized.
We may be unable to identify, acquire and integrate acquisition targets.
In the past five fiscal years we have made significant acquisitions in our Life Sciences segment. Our strategy
envisions that a part our future growth will come from acquiring and integrating similar operations and/or product lines.
There can be no assurance that we will be able to identify suitable acquisition candidates and, once identified, to
negotiate successfully their acquisition at a price or on terms and conditions favorable to us, or to integrate the operations
of such acquired businesses with the existing operations. In addition, we compete for acquisition candidates with other
entities, some of which have greater financial resources than ours. Our failure to implement successfully its acquisition
strategy would limit our potential growth.
23
Our inability to carry out certain of our marketing and sales plans may make it difficult for us to grow or
maintain our business.
The Life Sciences segment continues an aggressive marketing program designed to more directly service its end
users, while simultaneously promoting numerous brands. We will continue to expand the reach of companies by our direct
field sales force, the on-going enhancement of our interactive websites, continued attendance at top industry trade
meetings, and publications in leading scientific journals. In addition to our direct sales, we operate worldwide through
wholly-owned subsidiaries (in USA, Switzerland, Belgium, Germany, and the UK), a branch office in France and a network
of third-party distributors in most other significant markets. If we are unable to successfully continue these programs, we
may be unable to grow and our business could suffer.
We face intense competition, which could cause us to decrease the prices for our products or services or
render our products uneconomical or obsolete, any of which could reduce our revenues and limit our growth.
Our competitors in the biotechnology industry in the United States and abroad are numerous and include major
pharmaceutical, energy, food and chemical companies, as well as specialized genetic engineering firms. Many of our
large competitors have substantially greater resources than us and have the capability of developing products which
compete directly with our products. Many of these companies are performing research in the same areas as we are. The
markets for our products are also subject to competitive risks because markets are highly price competitive. Our
competitors have competed in the past by lowering prices on certain products.
The clinical laboratory business is highly fragmented and intensely competitive, and we compete with numerous
national and local companies. Some of these entities are larger than we are and have greater resources than we do. We
compete primarily on the basis of the quality of our testing, reporting and information services, our reputation in the
medical community, the pricing of our services and our ability to employ qualified professionals.
These competitive conditions could, among other things:
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Require us to reduce our prices to retain market share;
Require us to increase our marketing efforts which could reduce our profit margins;
Increase our cost of labor to attract qualified personnel;
Render our biotechnology products uneconomical or obsolete or;
Reduce our revenue.
We depend on distributors and contract manufacturers and suppliers for materials that could impair our
ability to manufacture or distribute our products.
Outside distributors, suppliers and contract manufacturers provide key finished goods, components and raw
materials used in the sale and manufacture of our products. Our Life Sciences segment distributes product for over 40
unrelated third party manufacturers. To the extent we are unable to maintain or replace a distributor in a reasonable time
period, or on commercially reasonable terms, if at all, our operations could be disrupted. Although we believe that
alternative sources for components and raw materials are available, any supply interruption in a limited or sole source
component or raw material would harm our ability to manufacture our products until a new source of supply is identified
and qualified. In addition, an uncorrected defect or supplier’s variation in a component or raw material, either unknown to
us or incompatible with our manufacturing process, could harm our ability to manufacture products. We might not be able
to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all. If we fail
to obtain a supplier for the components of our products, our operations could be disrupted.
We use hazardous materials in our business. Any claims relating to improper handling, storage or
disposal of these materials could be costly and time-consuming.
Our manufacturing, clinical laboratory and research and development processes involve the storage, use and
disposal of hazardous substances, including hazardous chemicals, biological hazardous materials and radioactive
compounds. We are subject to governmental regulations governing the use, manufacture, storage, handling and disposal
of materials and waste products. Although we believe that our safety and environmental management practices and
procedures for handling and disposing of these hazardous materials are in accordance with good industry practice and
comply with applicable laws, permits, licenses and regulations, the risk of accidental environmental or human
contamination or injury from the release or exposure of hazardous materials cannot be completely eliminated. In the event
of an accident, we could be held liable for any damages that result, including environmental clean-up or decontamination
costs, and any such liability could exceed the limits of, or fall outside the coverage of, our insurance.
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We may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur significant
costs to comply with current or future environmental and public and workplace safety and health laws and regulations.
We are required to expend significant resources for research and development for our products in
development and these products may not be developed successfully. Failure to successfully develop these
products may prevent us from earning a return on our research and development expenditures.
The products we are developing are at various stages of development and clinical evaluations and may require
further technical development and investment to determine whether commercial application is practicable. There can be
no assurance that our efforts will result in products with valuable commercial applications. Our cash requirements may
vary materially from current estimates because of results of our research and development programs, competitive and
technological advances and other factors. In any event, we will require substantial funds to conduct development activities
and pre-clinical and clinical trials, apply for regulatory approvals and commercialize products, if any, that are developed.
We do not have any commitments or arrangements to obtain any additional financing and there is no assurance that
required financing will be available to us on acceptable terms, if at all. Even if we spend substantial amounts on research
and development, our potential products may not be developed successfully. If our product candidates on which we have
expended significant amounts for research and development are not commercialized, we will not earn a return on our
research and development expenditures, which may harm our business.
Risks relating to our Intellectual Property and Regulatory Approval
Protecting our proprietary rights is difficult and costly. If we fail to adequately protect or enforce our
proprietary rights, we could lose potential revenue from licensing and royalties.
Our potential revenue and success depends in large part on our ability to obtain, maintain and enforce our
patents. Our ability to commercialize any product successfully will largely depend on our ability to obtain and maintain
patents of sufficient scope to prevent third parties from developing similar or competitive products.
In the absence of patent protection, competitors may impact our business by developing and marketing
substantially equivalent products and technology.
Patent disputes are frequent and can preclude the commercialization of products. We have in the past been, are
currently, and may in the future be, involved in material patent litigation, such as the matters discussed under “Part I - Item
3. Legal Proceedings” in this report. Patent protection litigation is time-consuming and we have incurred significant legal
costs. In addition, an adverse decision could force us to either obtain third-party licenses at a material cost or cease using
the technology or product in dispute.
We have filed applications for United States and foreign patents covering certain aspects of our technology, but
there is no assurance that pending patents will issue or as to the degree of protection which any issued patent might
afford.
Lawsuits, including patent infringements, in the biotechnology industry are not uncommon. If we become
involved in any significant litigation, we would suffer as a result of the diversion of our management’s attention,
the expense of litigation and any judgments against us.
In addition to intellectual property litigation for infringement, other substantial, complex or extended litigation could
result in large expenditures by us and distraction of our management. Patent litigation is time-consuming and costly in its
own right and could subject us to significant liabilities to third parties. In addition, an adverse decision could force us to
either obtain third-party licenses at a material cost or cease using the technology or product in dispute. In addition,
lawsuits by employees, stockholders, collaborators or distributors could be very costly and substantially disrupt our
business. Disputes from time to time with companies or individuals are not uncommon in the biotechnology industry, and
we cannot assure you that we will always be able to resolve them out of court.
We also utilize certain unpatented proprietary technology.
We may incur impairment charges on our goodwill and other intangible assets with indefinite lives that
would reduce our earnings.
We are subject to Statement of Financial Accounting Standards ASC 350, “Intangibles, Goodwill and Other (“ASC
350”) which requires that goodwill and other intangible assets that have an indefinite life be tested at least annually for
impairment. Goodwill and other intangible assets with indefinite lives must also be tested for impairment between the
annual tests if a triggering event occurs that would likely reduce the fair value of the asset below its carrying amount.
As of July 31, 2011, goodwill and other intangible assets with indefinite lives represented approximately 34% of
our total assets. If we determine that there has been impairment, our financial results for the relevant period would be
reduced by the amount of the impairment, net of tax effects, if any.
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We may be unable to obtain or maintain regulatory approvals for our products, which could reduce our
revenue or prevent us from earning a return on our research and development expenditures.
Our research, preclinical development, clinical trials, product manufacturing and marketing are subject to
regulation by the FDA and similar health authorities in foreign countries. FDA approval is required for our products, as well
as the manufacturing processes and facilities, if any, used to produce our products that may be sold in the United States.
The process of obtaining approvals from the FDA is costly, time consuming and often subject to unanticipated delays.
Even if regulatory approval is granted, such approval may include significant limitations on indicated uses for which any
products could be marketed. Further, even if such regulatory approvals are obtained, a marketed product and its
manufacturer are subject to continued review, and later discovery of previously unknown problems may result in
restrictions on such product or manufacturer, including withdrawal of the product from the market.
New government regulations in the United States or foreign countries also may be established that could delay or
prevent regulatory approval of our products under development. Further, because gene therapy is a relatively new
technology and has not been extensively tested in humans, the regulatory requirements governing gene therapy products
are uncertain and may be subject to substantial further review by various regulatory authorities in the United States and
abroad. This uncertainty may result in extensive delays in initiating clinical trials and in the regulatory approval process.
Our failure to obtain regulatory approval of their proposed products, processes or facilities could have a material adverse
effect on our business, financial condition and results of operations. The proposed products under development may also
be subject to certain other federal, state and local government regulations, including, but not limited to, the Federal Food,
Drug and Cosmetic Act, the Environmental Protection Act, and Occupational Safety and Health Act, and state, local and
foreign counterparts to certain of such acts.
We cannot be sure that we can obtain necessary regulatory approvals on a timely basis, if at all, for any of the
products we are developing or manufacturing or that we can maintain necessary regulatory approvals for our existing
products, and all of the following could have a material adverse effect on our business:
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significant delays in obtaining or failing to obtain required approvals;
loss of, or changes to, previously obtained approvals;
failure to comply with existing or future regulatory requirements and;
changes to manufacturing processes, manufacturing process standards or Good Manufacturing Practices
following approval or changing interpretations of these factors.
Adverse perception and increased regulatory scrutiny of gene medicine and genetic research might limit
our ability to conduct our business.
Ethical, social and legal concerns about gene medicine, genetic testing and genetic research could result in
additional regulations restricting or prohibiting the technologies we or our collaborators may use. Recently, gene medicine
studies have come under increasing scrutiny, which has delayed ongoing and could delay future clinical trials and
regulatory approvals. Federal and state agencies, congressional committees and foreign governments have expressed
interest in further regulating biotechnology. More restrictive regulations or claims that our products are unsafe or pose a
hazard could prevent us from commercializing any products.
Risks relating to our Clinical Labs services segment
Our clinical laboratory business is subject to extensive government regulation and our loss of any
required certifications or licenses could require us to cease operating this part of our business, which would
reduce our revenue and injure our reputation.
The clinical laboratory industry is subject to significant governmental regulation at the Federal, state and local
levels. Under the Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory Improvement Amendments of
1988 (collectively, as amended, “CLIA”) virtually all clinical laboratories, including ours, must be certified by the Federal
government. Many clinical laboratories also must meet governmental standards, undergo proficiency testing and are
subject to inspection. Certifications or licenses are also required by various state and local laws. The failure of our clinical
laboratory to obtain or maintain such certifications or licenses under these laws could interrupt our ability to operate our
clinical laboratory business and injure our reputation.
Reimbursements from third-party payers, upon which our clinical laboratory business is dependent, are
subject to inconsistent rates and coverage and legislative reform that are beyond our control. This inconsistency
and any reform that decreases coverage and rates could reduce our earnings and harm our business.
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Our clinical laboratory business is primarily dependent upon reimbursement from third-party payers, such as
Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement
rates among different third-party payers, as well as constant renegotiation of reimbursement rates. We also are subject to
audit by Medicare which can result in the return of payments made to us under these programs. These variances in
reimbursement rates and audit results could reduce our margins and thus our earnings.
The health care industry continues to undergo significant change as third-party payers’ increase their efforts to
control the cost, utilization and delivery of health care services. In an effort to address the problem of increasing health
care costs, legislation has been proposed or enacted at both the Federal and state levels to regulate health care delivery
in general and clinical laboratories in particular. Some of the proposals include managed competition, global budgeting
and price controls. Changes that decrease reimbursement rates or coverage, or increase administrative burdens on billing
third-party payers could reduce our revenues and increase our expenses.
U.S. healthcare reform legislation may result in significant change and our business could be adversely
impacted if we fail to adapt.
Government oversight of and attention to the healthcare industry in the United States is significant and increasing.
In March 2010, U.S. federal legislation was enacted to reform healthcare. The legislation provides for reductions in the
Medicare clinical laboratory fee schedule of 1.9% for five years beginning in 2010 and also includes a productivity
adjustment which reduces the CPI market basket update beginning in 2011. In 2011, approximately 22% of our Clinical
Lab’s segment revenues were reimbursed by Medicare under the clinical laboratory fee schedule. The legislation imposes
an excise tax on the seller for the sale of certain medical devices in the United States, including those purchased and
used by laboratories, beginning in 2013. The legislation establishes the Independent Payment Advisory Board, which will
be responsible, beginning in 2014, annually to submit proposals aimed at reducing Medicare cost growth while preserving
quality. These proposals automatically will be implemented unless Congress enacts alternative proposals that achieve the
same savings targets.
Further, the legislation calls for a Center for Medicare and Medicaid Innovation that will examine alternative
payment methodologies and conduct demonstration programs. The legislation provides for extensive health insurance
reforms, including the elimination of pre-existing condition exclusions and other limitations on coverage, fixed percentages
on medical loss ratios, expansion in Medicaid and other programs, employer mandates, individual mandates, creation of
state and regional health insurance exchanges, and tax subsidies for individuals to help cover the cost of individual
insurance coverage. The legislation also permits the establishment of accountable care organizations, a new healthcare
delivery model. While the ultimate impact of the legislation on the healthcare industry is unknown, it is likely to be
extensive and may result in significant change. Our failure to adapt to these changes could have a material adverse effect
on our business.
Changes in provider mix, including continued growth in capitated managed-cost health care and changes
in certain third party provider agreements could have a material adverse impact on the Company’s net revenues
and profitability.
Certain third party provider companies have adopted national and regional programs which include multiple
managed-care reimbursement models. If the Company is unable to participate in these programs or if the Company would
lose a material contract, it could have a material adverse impact on the Company’s net revenues and profitability.
The number of individuals covered under managed care contracts or other similar arrangements has grown over
the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare
programs may continue to shift to managed care. Entities providing managed care coverage have reduced payments for
medical services, including clinical laboratory services, in numerous ways such as entering into arrangements under
which payments to a service provider are capitated, limiting testing to specified procedures, denying payment for services
performed without prior authorization and refusing to increase fees for specified services. These trends reduce our
revenues and limit our ability to pass cost increases to our customers. Also, if these or other managed care organizations
do not select us as a participating provider, we may lose some or all of that business, which could have an adverse effect
on our business, financial condition and results of operations.
Because of competitive pressures, impacts of the economy on patient traffic at our customers and the
complexity and expense of the billing process in our clinical laboratory business, we must obtain new customers
while maintaining existing customers to grow our business.
Intense competition in the clinical laboratory business, increasing administrative burdens upon the reimbursement
process, reduced patient traffic, and reduced coverage and payments by insurers make it necessary for us to increase our
volume of laboratory services. To do so, we must obtain new customers while retaining existing customers.
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Our failure to attract new customers or the loss of existing customers or a reduction in business from those
customers could significantly reduce our revenues and impede our ability to grow.
Compliance with Medicare administrative policies, including those pertaining to certain automated blood
chemistry profiles, may reduce the reimbursements we receive.
Containment of health care costs, including reimbursement for clinical laboratory services, has been a focus of
ongoing governmental activity. Clinical laboratories must bill Medicare directly for the services provided to Medicare
beneficiaries and may only collect the amounts permitted under this fee schedule. Reimbursement to clinical laboratories
under the Medicare Fee Schedule has been steadily declining since its inception. Furthermore, Medicare has mandated
use of the Physicians Current Procedural Terminology, or CPT, for coding of laboratory services which has altered the
way we bill these programs for some of our services, thereby reducing the reimbursement that we receive.
In March 1996, HCFA (now, the Center for Medicare and Medicaid Services or CMS) implemented changes in the
policies used to administer Medicare payments to clinical laboratories for the most frequently performed automated blood
chemistry profiles. Among other things, the changes established a consistent standard nationwide for the content of the
automated chemistry profiles. Another change requires laboratories performing certain automated blood chemistry profiles
to obtain and provide documentation of the medical necessity of tests included in the profiles for each Medicare
beneficiary. Reimbursements have been reduced as a result of this change. Because a significant portion of our costs is
fixed, these Medicare reimbursement reductions and changes have a direct adverse effect on our net earnings and cash
flows.
Regulations requiring the use of “standard transactions” for healthcare services issued under the Health
Insurance Portability and Accountability Act of 1996, or HIPAA, may negatively impact our profitability and cash
flows.
Pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Secretary of the
Department of Health and Human Services, or HHS, has issued final regulations designed to improve the efficiency and
effectiveness of the healthcare system by facilitating the electronic exchange of information in certain financial and
administrative transactions while protecting the privacy and security of the information exchanged. Three principal
regulations have been issued in final form: standards for electronic transactions, security regulations and privacy
regulations.
The HIPAA transaction standards are complex, and subject to differences in interpretation by payers. For
instance, some payers may interpret the standards to require us to provide certain types of information, including
demographic information not usually provided to us by physicians. While most of our transactions are submitted and / or
received in ANSI standard format, inconsistent application of transaction standards by some remaining payers or our
inability to obtain certain billing information not usually provided to us by physicians could increase our costs and the
complexity of billing. In addition, new requirements for additional standard transactions, such as claims attachments, could
prove technically difficult, time-consuming or expensive to implement. We are working closely with our payers to establish
acceptable protocols for claims submissions and with our industry trade association and an industry coalition to present
issues and problems as they arise to the appropriate regulators and standards setting organizations.
Compliance with the HIPAA security regulations and privacy regulations may increase our costs.
The HIPAA privacy and security regulations established comprehensive federal standards with respect to the
uses and disclosures of protected health information by health plans, healthcare providers and healthcare clearinghouses,
in addition to setting standards to protect the confidentiality, integrity and availability of protected health information. The
regulations establish a complex regulatory framework on a variety of subjects, including:
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the circumstances under which uses and disclosures of protected health information are permitted or
required without a specific authorization by the patient, including but not limited to treatment purposes,
activities to obtain payments for our services, and our healthcare operations activities;
a patient’s rights to access, amend and receive an accounting of certain disclosures of protected health
information;
the content of notices of privacy practices for protected health information and;
administrative, technical and physical safeguards required of entities that use or receive protected health
information.
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We have implemented practices to meet the requirements of the HIPAA privacy and security regulations, as
required by law. The privacy regulations establish a “floor” and do not supersede state laws that are more stringent.
Therefore, we are required to comply with both federal privacy regulations and varying state privacy laws. In addition, for
healthcare data transfers from other countries relating to citizens of those countries, we must comply with the laws of
those other countries. The federal privacy regulations restrict our ability to use or disclose patient-identifiable laboratory
data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by
HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy
regulations. The privacy and security regulations provide for significant fines and other penalties for wrongful use or
disclosure of protected health information, including potential civil and criminal fines and penalties. Although the HIPAA
statute and regulations do not expressly provide for a private right of damages, we also could incur damages under state
laws to private parties for the wrongful use or disclosure of confidential health information or other private personal
information.
Compliance with all of the HIPAA regulations, including new standard transactions, requires ongoing resources
from all healthcare organizations, not just clinical laboratories. While we believe our total costs to comply with HIPAA will
not be material to our operations or cash flows, new standard transactions and additional customer requirements resulting
from different interpretations of the current regulations could impose additional costs on us.
FDA regulation of laboratory-developed tests, analyte specific reagents, or genetic testing could lead to
increased costs and delays in introducing new genetic tests.
The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform
diagnostic testing by clinical laboratories. In the past, the FDA has claimed regulatory authority over laboratory-developed
tests, but has exercised enforcement discretion in not regulating tests performed by high complexity CLIA-certified
laboratories. In December 2000, the HHS Secretary’s Advisory Committee on Genetic Testing recommended that the
FDA be the lead federal agency to regulate genetic testing. In late 2002, a new HHS Secretary’s Advisory Committee on
Genetics, Health and Society, or SACGHS, was appointed to replace the prior Advisory Committee. Ultimately, SACGHS
decided that it would continue to monitor the progress of the federal agencies in the oversight of genetic technologies, but
it did not believe that further action was warranted. In the meantime, the FDA is considering revising its regulations on
analyte specific reagents, which are used in laboratory-developed tests, including laboratory-developed genetic testing.
FDA interest in or actual regulation of laboratory-developed tests or increased regulation of the various medical devices
used in laboratory-developed testing could lead to periodic inquiry letters from the FDA and increased costs and delays in
introducing new tests, including genetic tests.
In the past, the clinical laboratory industry has received negative publicity. This publicity has led to increased
legislation, regulation, and review of industry practices. These factors may adversely affect our ability to market our
services, require us to change our services and increase the regulatory burdens under which we operate, further
increasing the costs of doing business and adversely affecting our operating results. If we experience a significant
disruption in our information technology systems, including our website, or if we fail to implement new systems and
software successfully, our business could be adversely affected.
If we fail to maintain or monitor our information systems our businesses could be adversely affected.
We depend on information systems throughout our Company to control our Life Science manufacturing, inventory,
distribution and website and the Clinical Lab processes for: processing orders, managing inventory, processing shipments
to and collecting cash from our customers, responding to customer inquiries, contributing to our overall internal control
processes, maintaining records of our property, plant and equipment, and recording and paying amounts due vendors and
other creditors. If we were to experience a prolonged disruption in our information systems that involve interactions with
customers and suppliers, it could result in the loss of sales and customers and/or increased costs, which could adversely
affect our business.
If we fail to attract and retain key personnel, including our senior management, our business could be
adversely affected.
Most of our products and services are highly technical in nature. In general, only highly qualified and trained
scientists and technician personnel have the necessary skills to develop proprietary technological products and market
our products, support our research and development programs and provide our Clinical Lab services.
In addition, some of our manufacturing, quality control, safety and compliance, information technology and e-
commerce related positions are highly technical as well. Further, our sales personnel highly trained and are important to
retaining and growing our businesses. Our success depends in large part upon our ability to identify, hire, retain and
motivate highly skilled professionals.
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We face intense competition for these professionals from our competitors, customers, marketing partners and
other companies throughout the industries in which we compete. Since our inception we have successfully recruited and
hired qualified key employees. Any failure on our part to hire, train, and retain a sufficient number of qualified
professionals would seriously damage our business.
We depend heavily on the services of our senior management. We believe that our future success depends on
the continued services of such management. Our business may be harmed by the loss of a significant number of our
senior management in a short period of time.
The insurance we purchase to cover our potential business risk may be inadequate.
Although we believe that our present insurance coverage is sufficient to cover our current estimated exposures,
we cannot assure that we will not incur liabilities in excess of our policy limits. In addition, although we believe that will be
able to continue to obtain adequate coverage, we cannot assure that we will be able to do so at acceptable costs.
Risks relating to our international operations
Foreign currency exchange rate fluctuations may adversely affect our business.
Since we operate as a multinational corporation that sells and sources products in many different countries,
changes in exchange rates could in the future, adversely affect our cash flows and results of operations.
Furthermore, reported sales and purchases made in non-U.S. currencies by our international businesses, when
translated into U.S. dollars for financial reporting purposes, fluctuate due to exchange rate movement. Due to the number
of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we
cannot predict the effect of exchange rate fluctuations on future sales and operating results.
We are subject to economic, political and other risks associated with our significant international
business, which could adversely affect our financial results.
We operate internationally primarily through wholly-owned subsidiaries located in North America and Europe.
Revenues outside the United States were approximately 26% of total revenues in fiscal 2011. Our sales and earnings
could be adversely affected by a variety of factors resulting from our international operations, including
•
•
•
•
•
•
•
•
future fluctuations in exchange rates;
complex regulatory requirements and changes in those requirements;
trade protection measures and import or export licensing requirements;
multiple jurisdictions and differing tax laws, as well as changes in those laws;
restrictions on our ability to repatriate investments and earnings from foreign operations;
changes in the political or economic conditions in a country or region, particularly in developing or
emerging markets;
changes in shipping costs and;
difficulties in collecting on accounts receivable.
If any of these risks materialize, we could face substantial increases in costs, the reduction of profit and the
inability to do business.
30
Risks Relating to our Common Stock
Our stock price has been volatile, which could result in substantial losses for investors.
Our common stock is quoted on the New York Stock Exchange, and there has been historical volatility in the
market price of our common stock. The trading price of our common stock has been, and is likely to continue to be,
subject to significant fluctuations due to a variety of factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
fluctuations in our quarterly operating and earnings per share results;
the gain or loss of significant contracts;
loss of key personnel;
announcements of technological innovations or new products by us or our competitors;
delays in the development and introduction of new products;
legislative or regulatory changes;
general trends in the industries we operate;
recommendations and/or changes in estimates by equity and market research analysts;
biological or medical discoveries;
disputes and/or developments concerning intellectual property, including patents and litigation matters;
public concern as to the safety of new technologies;
sales of common stock of existing holders;
securities class action or other litigation;
developments in our relationships with current or future customers and suppliers and;
general economic conditions, both in the United States and worldwide.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected
the market price of our common stock, as well as the stock of many companies in our industries. Often, price fluctuations
are unrelated to operating performance of the specific companies whose stock is affected.
In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation
has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur
substantial costs and a diversion of our management’s attention and resources, each of which could have a material
adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to
significant liabilities.
Because we do not intend to pay cash dividends on our common stock, an investor in our common stock
will benefit only if it appreciates in value.
We currently intend to retain our retained earnings and future earnings, if any, to finance the expansion of our
business and do not expect to pay any cash dividends on our common stock in the foreseeable future. As a result, the
success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee
that our common stock will appreciate in value or even maintain the price at which investors purchased their shares.
It may be difficult for a third party to acquire us, which could inhibit stockholders from realizing a
premium on their stock price.
We are subject to the New York anti-takeover laws regulating corporate takeovers. These anti-takeover laws
prohibit certain business combinations between a New York corporation and any “interested shareholder” (generally, the
beneficial owner of 20% or more of the corporation’s voting shares) for five years following the time that the shareholder
became an interested shareholder, unless the corporation’s board of directors approved the transaction prior to the
interested shareholder becoming interested.
31
Our certificate of incorporation, as amended, and by-laws contain provisions that could have the effect of
delaying, deferring or preventing a change in control of us that stockholders may consider favorable or beneficial. These
provisions could discourage proxy contests and make it more difficult for stockholders to elect directors and take other
corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares
of our common stock. These provisions include:
•
•
a staggered board of directors, so that it would take three successive annual meetings to replace all
directors; and
advance notice requirements for the submission by stockholders of nominations for election to the board
of directors and for proposing matters that can be acted upon by stockholders at a meeting.
Future sales of shares of our common stock or the issuance of securities senior to our common stock
could adversely affect the trading price of our common stock and our ability to raise funds in new equity
offerings.
We are not restricted from issuing additional common stock, preferred stock or securities convertible into or
exchangeable for common stock. Future sales of a substantial number of our shares of common stock or equity-related
securities in the public market or privately, or the perception that such sales could occur, could adversely affect prevailing
trading prices of our common stock, and could impair our ability to raise capital through future offerings of equity or equity-
related securities. No prediction can be made as to the effect, if any, that future sales of shares of common stock or the
availability of shares of common stock for future sale will have on the trading price of our common stock.
Item 1B. Unresolved Staff Comments
None
32
Item 2. Properties
The following are the principal facilities of the Company:
Location
Primary use
Segments
Leased/owned
Square footage
Farmingdale, NY
(Note 1)
Clinical laboratory and research
Clinical Labs,
Therapeutics
Leased
43,000
Farmingdale, NY
Manufacturing, research, sales
Life Sciences, Owned
22,000
and administrative office
Other
New York, NY
(Note 2)
San Diego, CA
(Note 3)
Corporate headquarters
Other
Leased
11,300
Sales, administration and distribution
Life Sciences
Leased
6,400
Lausen, Switzerland Operational headquarters in
(Note 4)
Europe, including sales and distribution
Life Sciences
Leased
18,829
Ann Arbor, Michigan Sales, manufacturing, research,
(Note 5)
administration and distribution
Life Sciences
Leased
26,820
Note 1 – In March 2005, the Company amended and extended the lease for its Farmingdale laboratory for a
period of 12 years (See Note 15 to the Consolidated Financial Statements).
Note 2 – In February 2010, the lease, which includes 4,100 square feet under a sublease rental agreement
through December 31, 2011, was extended through May 2020
Note 3 – The lease for this property was acquired in connection with the Axxora acquisition in May 2007 and was
amended and extended through February 2014.
Note 4 – The lease for this property was acquired in connection with the Axxora acquisition in May 2007 and was
amended and extended through April 2013.
Note 5 – The lease for this property was acquired in connection with the Assay Designs acquisition in March
2009 and was amended and extended through April 2016.
We believe the current facilities are suitable and adequate for the Company’s current operating needs for
its clinical laboratories, life science and therapeutics segments and that the production capacity in various
locations is sufficient to manage product requirements.
Item 3. Legal Proceedings
In October 2002, the Company filed suit in the United States District Court of the Southern District of New York
against Amersham plc, Amersham Biosciences, Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich
Corporation, Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences, Inc. In January 2003, the
Company amended its complaint to include defendants Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in
the suit are for breach of contract; patent infringement; unfair competition under state law; unfair competition under federal
law; tortious interference with business relations; and fraud in the inducement of contract. The complaint alleges that
these counts arise out of the defendants’ breach of distributorship agreements with the Company concerning labeled
nucleotide products and technology, and the defendants’ infringement of patents covering the same. In April, 2003, the
court directed that individual complaints be filed separately against each defendant. The defendants have answered the
individual complaints and asserted a variety of affirmative defenses and counterclaims. Fact discovery is ongoing. The
court issued a claim construction opinion on July 10, 2006. The Company and Sigma Aldrich (“Sigma”) entered into a
Settlement Agreement and Release effective September 15, 2006 (the “Agreement”). Pursuant to the Agreement, the
Company’s litigation with Sigma was dismissed and the Company recognized $2 million on settlement in the quarter
ending October 31, 2006. On January 3, 2007, the remaining defendants moved for summary judgment on all counts in
the individual complaints. During a two-day hearing held on July 17 through July 18, 2007, the defendants subsequently
withdrew the invalidity portion of their summary judgment motions. On March 13, 2009, the court denied defendants’
summary judgment motion and stayed the cases pending resolution of an appeal to the United States Court of Appeals for
the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc.
33
On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of
Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded
the Applera case for further proceedings consistent with the Federal Circuit’s opinion. On September 23, 2010, Applera
petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On
June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court
lifted the stay in the Amersham action. On August 26, 2011, the court allowed the defendants to renew their motions for
summary judgment related only to alleged non-infringement of some of the patents in suit. Defendants’ initial brief is to be
filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe the
defendants’ motion has merit, and will oppose it vigorously.
On October 28, 2003, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court of
the Eastern District of New York against Affymetrix, Inc (“Affymetrix”). The Complaint alleges that Affymetrix improperly
transferred or distributed substantial business assets of the Company to third parties, including portions of the Company’s
proprietary technology, reagent systems, detection reagents and other intellectual property. The Complaint also charges
that Affymetrix failed to account for certain shortfalls in sales of the Company’s products, and that Affymetrix improperly
induced collaborators and customers to use the Company’s products in unauthorized fields or otherwise in violation of the
agreement. The Complaint seeks full compensation from Affymetrix to the Company for its substantial damages, in
addition to injunctive and declaratory relief to prohibit, among other things, Affymetrix’s unauthorized use, development,
manufacture, sale, distribution and transfer of the Company’s products, technology, and/or intellectual property, as well as
to prohibit Affymetrix from inducing collaborators, joint venture partners, customers and other third parties to use the
Company’s products in violation of the terms of the agreement and the Company’s rights. Subsequent to the filing of the
Complaint against Affymetrix, Inc. referenced above, on or about November 10, 2003, Affymetrix, Inc. filed its own
Complaint against the Company and its subsidiary, Enzo Life Sciences, Inc., in the United States District Court for the
Southern District of New York, seeking among other things, declaratory relief that Affymetrix, Inc., has not breached the
parties’ agreement, that it has not infringed certain of Enzo’s Patents, and that certain of Enzo’s patents are invalid. The
Affymetrix Complaint also seeks damages for alleged breach of the parties’ agreement, unfair competition, and tortuous
interference, as well as certain injunction relief to prevent alleged unfair competition and tortuous interference. The
Company does not believe that the Affymetrix Complaint has any merit and intends to defend vigorously. Affymetrix also
moved to transfer venue of Enzo’s action to the Southern District of New York, where other actions commenced by Enzo
were pending as well as Affymetrix’s subsequently filed action. On January 30, 2004, Affymetrix’s motion to transfer was
granted. Accordingly, the Enzo and Affymetrix actions are now both pending in the Southern District of New York. Initial
pleadings have been completed and discovery has commenced. The Court issued a Markman (claim construction)
opinion on July 10, 2006. On January 3, 2007, Affymetrix moved for summary judgment on all counts of the Complaint. A
two-day hearing on Affymetrix’s summary judgment motion was held on July 17 through July 18, 2007. On March 13,
2009, the court denied Affymetrix’s motion and stayed the case pending resolution of an appeal in the United States Court
of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March
26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of
summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for
further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s remand of the Applera
case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained its stay of the Affymetrix
case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of
certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition
for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Affymetrix action. On August 26, 2011, the
court allowed Affymetrix to renew its motion for summary judgment related only to alleged non-infringement of one patent
in suit. Affymetrix’s initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16,
2011. The Company does not believe Affymetrix’s motion has merit, and will oppose it vigorously.
On June 2, 2004, Roche Diagnostic GmbH and Roche Molecular Systems, Inc. (collectively “Roche”) filed suit in
the U.S. District Court of the Southern District of New York against Enzo Biochem, Inc. and Enzo Life Sciences, Inc.
(collectively “Enzo”). The Complaint was filed after Enzo rejected Roche’s latest cash offer to settle Enzo’s claims for, inter
alia, alleged breach of contract and misappropriation of Enzo’s assets. The Complaint seeks declaratory judgment (i) of
patent invalidity with respect to Enzo’s 4,994,373 patent (the “‘373 patent”), (ii) of no breach by Roche of its 1994
Distribution and Supply Agreement with Enzo (the “1994 Agreement”), (iii) that non-payment by Roche to Enzo for certain
sales of Roche products does not constitute a breach of the 1994 Agreement, and (iv) that Enzo’s claims of ownership to
proprietary inventions, technology and products developed by Roche are without basis. In addition, the suit claims tortious
interference and unfair competition. The Company does not believe that the Complaint has merit and intends to vigorously
respond to such action with appropriate affirmative defenses and counterclaims. Enzo filed an Answer and Counterclaims
on November 3, 2004 alleging multiple breaches of the 1994 Agreement and related infringement of Enzo’s patents.
Discovery has commenced. The Court issued a Markman opinion on July 10, 2006. On January 3, 2007, Roche moved
for summary judgment on all counts of the Complaint. During a two-day hearing held on July 17 through July 18, 2007,
Roche subsequently withdrew its invalidity portion of its summary judgment motion.
34
On March 13, 2009, the court denied Roche’s motion and stayed the cases pending resolution of an appeal to the
United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and
Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of
Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded
the Applera case for further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s
remand of the Applera case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained
its stay of the Roche case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the
United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court
denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Roche action. On
August 26, 2011, the court allowed Roche to renew its motion for summary judgment related only to alleged non-
infringement of some of the patents in suit. Roche’s initial brief is to be filed by October 11, 2011, and all briefing is to be
completed by December 16, 2011. The Company does not believe Roche’s motion has merit, and will oppose it
vigorously.
On June 7, 2004, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court for the
District of Connecticut against Applera Corporation and its wholly-owned subsidiary Tropix, Inc. The complaint alleges
infringement of six patents (relating to DNA sequencing systems, labeled nucleotide products, and other technology). Yale
University is the owner of four of the patents and the Company is the exclusive licensee. These four patents are
commonly referred to as the “Ward” patents. Accordingly, Yale is also a plaintiff in the lawsuit. Yale and Enzo are aligned
in protecting the validity and enforceability of the patents. Enzo Life Sciences is the owner of the remaining two patents.
The complaint seeks permanent injunction and damages (including treble damages for willful infringement). Defendants
answered the complaint on July 29, 2004. The answer pleads affirmative defenses of invalidity, estoppels and laches and
asserts counterclaims of non-infringement and invalidity. A Markman hearing was held on May 25, 2006 and the district
court issued a ruling on October 12, 2006. On August 17, 2007, the Company voluntarily dismissed the infringement
claims for one of the patents in suit without prejudice. Defendants similarly dismissed their defenses and counterclaims as
to that patent. On the same date, the Company conceded a judgment of non-infringement for another of the patents in suit
based on the district court’s claim construction, reserving the right to appeal their construction. The defendants filed
motions for summary judgment for invalidity, laches and non-infringement of the Ward patents on March 5, 2007. The
Company and other plaintiff filed a motion for summary judgment on infringement of the Ward patents on March 5, 2007.
On August 20, 2007, the district court heard oral arguments on the motions for summary judgment. On September 6,
2007, the court granted defendants’ motion for summary judgment of invalidity of three of the remaining Ward patents and
entered judgment to that effect. The Company and other plaintiff filed a notice of appeal to the United States Court of
Appeals for the Federal Circuit on September 7, 2007. On January 30, 2008, the Court of Appeals for the Federal Circuit
granted the Company’s alternative motion to dismiss its appeal and remand to the Connecticut Court for further
proceedings incident to an entry of a final, appealable judgment. The Company requested the Connecticut Court to
dispose of all outstanding issues (including the Company’s claim under the fourth Ward patent and certain counterclaims
of Applera’s) and enter final judgment. The Connecticut Court granted this request. The Company subsequently filed an
Appeal on April 7, 2009. On March 26, 2010, the Federal Circuit issued an order concluding that the claims of U.S. Patent
Nos. 5,328,824 and 5,449,767 were not indefinite and that there were genuine issues of material fact as to anticipation.
The Court reversed the district court’s summary judgment of invalidity of those two patents and remanded the case back
to the Connecticut Court. Applera and Tropix then filed a combined petition for panel rehearing and rehearing en banc. On
May 26, 2010, the Federal Circuit issued an order denying both petitions. Applera filed a petition with the U.S. Supreme
Court for a writ of certiorari on September 23, 2010. On June 19, 2011, the Court denied that petition. The case is
currently scheduled for trial in February of 2012. There can be no assurance that the Company will be successful in this
litigation. Even if the Company is not successful, management does not believe that there will be a significant adverse
monetary impact on the Company.
On or about March 6, 2002, an action was commenced against the Company and certain officers and directors,
by an investor in the Company, Lawrence Glazer and on behalf of others, who had filed for bankruptcy protection. The
complaint alleged securities and common law fraud and breach of fiduciary duty and sought in excess of $150 million in
damages. On August 22, 2002, the complaint was voluntarily dismissed; however a new substantially similar complaint
was filed at the same time. On October 21, 2002, the Company and the other defendants filed a motion to dismiss the
complaint, and the plaintiffs responded by amending the complaint and dropping their claims against defendants Keating
and Yates. On November 18, 2002, the Company and the other defendants again moved to dismiss the Amended
Complaint. On July 16, 2003, the Court issued a Memorandum Opinion dismissing the Amended Complaint in its entirety
with prejudice. Plaintiffs thereafter moved for reconsideration but the Court denied the motion on September 8, 2003.
Plaintiffs thereafter appealed the decision to the United States Court of Appeals for the Fourth Circuit. On March 21, 2005,
the Fourth Circuit affirmed the lower Court’s prior dismissal of all claims asserted in the action with the sole exception of a
portion of the claim for common law fraud and remanded that remaining portion of the action to the U.S. District Court for
the Eastern District of Virginia. On May 20, 2005, defendants again moved the District Court to dismiss the sole remaining
claim before it.
35
On July 14, 2005, the District Court granted defendants’ renewed motion to dismiss. On July 29, 2005, Plaintiffs
moved to amend their Complaint and for reconsideration. On August 19, 2005, the Court denied Plaintiffs’ motion to
amend and entered final judgment dismissing the Complaint. Plaintiffs then appealed the order and judgment to the
Fourth Circuit. On September 21, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of
the Complaint. Thereafter, in March 2007, the United States Supreme Court denied the Glasers’ Petition for Certiorari.
Nevertheless, on January 14, 2011, many years after it was finally dismissed, Glaser filed a motion for reconsideration of
the dismissal of his case with the United States District Court for the Eastern District of Virginia, along with a motion for
sanctions, claiming in pertinent part that the Court was defrauded. The Company filed papers in opposition to the motion
and, on April 1, 2011, the Court denied Glaser’s motion. Glaser subsequently appealed that dismissal to the Fourth
Circuit. On October 4, 2011, his appeal was denied. The Company intends to defend vigorously any further effort by
Glaser to re-open this long ago dismissed action.
In January 2006, three actions were filed against the Company and certain of its officers and directors by Francis
Scott Hunt and others. These actions were filed by the same attorney who had previously filed a virtually identical claim
against the Company and certain of its officers and directors in the Eastern District of Virginia. These actions are in many
respects identical to the Glaser action. The first action (Hunt) was filed on or about January 10, 2006, on behalf of seven
alleged shareholders. The second action (Roberts) was filed on or about January 11, 2006, and was ultimately
consolidated at the Company’s request with the Hunt Action before Judge Scheindlin. One of the plaintiffs in the first
action, Paul Lewicki, subsequently withdrew his claim for procedural reasons and re-filed a separate virtually identical
complaint (the third action listed above) on or about August 21, 2006, and the Lewicki Action was also consolidated before
Judge Scheindlin. The pleadings in all three actions are virtually identical and seek to set forth only a claim for common
law fraud, based on the same essential allegations set forth in the Glaser Action, i.e., that there was a fraudulent scheme
approximately ten years ago to pump and dump Enzo securities. The Company and the other defendants moved to
dismiss all of the Complaints and that motion was granted by Judge Scheindlin. The Plaintiffs then amended their
Complaints and the Hunts moved for reconsideration. The Company and the other defendants opposed the motion for
reconsideration and moved again to dismiss the Amended Complaints that were filed. The Hunts’ motion for
reconsideration was denied and two of the other Plaintiffs (the McMahons) thereafter withdrew their complaint with
prejudice voluntarily. After further delays during which the remaining Plaintiffs hired new counsel, Plaintiffs proposed yet
another revised Complaint. The defendants’ motions to dismiss the latest version of the Complaints of the remaining
Plaintiffs was granted in part and denied in part. The remaining plaintiffs and defendants, including Enzo Biochem, Inc.,
then proceeded with discovery. Following the completion of discovery, the defendants moved for summary judgment. On
June 15, 2009, Judge Scheindlin granted the remaining defendants’ motion for summary judgment and dismissed the
complaints. The remaining Plaintiffs then filed a notice of appeal to the Second Circuit Court of Appeals. On August 30,
2011, the Second Circuit denied the appeal. The remaining Plaintiffs then moved for a rehearing, and that motion is
currently pending. The Company continues to believe that these actions have no merit whatsoever and expects the
Second Circuit to reaffirm the denial of their appeal. In any event, the Company will continue to defend these actions
vigorously.
On or about September 22, 2010, Mayflower Partners, L.P. f/k/a Biomol International, L.P. (“Mayflower”) filed an
action against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (together “Enzo”) in the United States District Court for the
Southern District of New York, alleging breach of the stock and asset purchase agreement dated as of May 8, 2008
between Enzo and Mayflower (the “Agreement”). Pursuant to the Agreement, the Company acquired the assets of
Mayflower, and agreed, among other things, to make certain contingent earn-out payments to Mayflower, accounted for
as additional purchase price consideration, if certain performance thresholds were met for each of the two annual periods
following the closing. Mayflower alleges that Enzo breached the Agreement by allegedly failing to operate the acquired
business in good faith during the second earn-out period and engaging in conduct the primary purpose of which was to
avoid making a second earn-out period payment under the Agreement. In addition, Mayflower claims that Enzo breached
the Agreement by allegedly failing to provide the documentation appropriate to support the calculation of defined financial
criteria for the second earn-out period as required under the Agreement. As part of the litigation, Mayflower moved by
Order to Show cause to enjoin the accounting procedure specified under the Agreement. Mayflower’s motion was heard
by a U.S. District Court Judge on September 27, 2010, who directed that the parties first go forward with the accounting
procedure, as provided under the Agreement, before moving further with the litigation. The parties were unable to resolve
the dispute through the accounting procedure. On January 27, 2011, Mayflower filed an amended complaint. On February
25, 2011, Enzo filed an answer to the amended complaint and on March 4, 2011 filed an amended counterclaim seeking
fees and expense of the suit as provided under the Agreement. As provided under the Agreement, Mayflower’s maximum
contingent earn-out was $2.5 million payable in either Enzo common stock or cash. The Company and Mayflower are
currently negotiating a resolution to the second and final earn-out dispute and based on such negotiation the Company
has accrued a $1.15 million settlement, expected to be in cash, which has been recorded in Goodwill as additional
purchase price consideration. The Company recorded the liability in Other Current Liabilities.
36
The Company is party to other claims, legal actions, complaints, and contractual disputes that arise in the
ordinary course of business. The Company believes that any liability that may ultimately result from the resolution of these
matters will not, individually or in the aggregate, have a material adverse effect on its financial position or results of
operations.
Item 4. (Removed and Reserved)
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The common stock of the Company is traded on the New York Stock Exchange (Symbol: ENZ). The following
table sets forth the high and low price of the Company’s common stock for the periods indicated as reported on the New
York Stock Exchange.
2011 Fiscal Year (August 1, 2010 to July 31, 2011):
1st Quarter................................................................................
2nd Quarter ..............................................................................
3rd Quarter ...............................................................................
4th Quarter ...............................................................................
2010 Fiscal Year (August 1, 2009 to July 31, 2010):
1st Quarter................................................................................
2nd Quarter ..............................................................................
3rd Quarter ...............................................................................
4th Quarter ...............................................................................
High
4.62
5.80
5.09
4.74
High
7.66
6.24
6.67
6.18
$
$
$
$
$
$
$
$
Low
3.37
4.16
3.46
3.52
Low
4.51
4.52
4.66
3.90
$
$
$
$
$
$
$
$
As of September 30, 2011, the Company had approximately 946 stockholders of record of its common stock.
The Company has not paid a cash dividend on its common stock and intends to continue a policy of retaining
earnings to finance and build its operations. Accordingly, the Company does not anticipate the payment of cash dividends
to holders of common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information regarding our existing equity compensation plans as of July 31, 2011.
Plan Category
Equity compensation plans approved by
security holders .............................................
Equity compensation plans not approved by
security holders .............................................
Total ...........................................................
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuances
under equity
compensation plans
(excluding securities
reflected in column
(a)
(c)
785,124
$
—
785,124
$
14.53
—
14.53
2,818,300
—
2,818,300
37
Item 6. Selected Financial Data
The following table, which is derived from the audited consolidated financial statements of the Company for the
fiscal years 2007 through 2011 should be read together with the discussion in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes to those
statements included elsewhere in this Annual Report on Form 10-K.
Operating Results
For the fiscal year ended July 31,
(In thousands, except per share amounts)
2011
2010
(1)
2009
(2)
2008
(3)
2007
Revenues .............................................................
$ 102,029
$ 97,082
$
89,572
$
77,795
$
52,908
Operating loss ......................................................
$ (12,928) $ (22,058) $ (23,407) $ (14,786) $ (20,966)
Net loss ................................................................
$ (12,960) $ (22,233) $ (23,564) $ (10,653) $ (13,260)
Basic and diluted net loss per common share: ....
$
(0.34) $
(0.59) $
(0.63) $
(0.29) $
(0.38)
Financial Position
2011
2010
July 31,
(in thousands)
(4)
2009
(4)
2008
(4)
2007
Working capital.....................................................
$ 33,670
$ 42,181
$
60,518
$
92,392
$ 113,850
Total assets ..........................................................
$ 109,474
$ 115,245
$ 133,128
$ 154,522
$ 159,002
Long term obligations...........................................
$
96
—
—
—
—
Stockholders’ equity .............................................
$ 88,715
$ 97,016
$ 116,781
$ 138,289
$ 141,894
Notes to Selected Financial Data
(1) On March 12, 2009, Enzo Life Sciences Inc. acquired Assay Designs, Inc. (“ADI”). As such, the operating
results of ADI are included in the consolidated operating results beginning March 12, 2009.
(2) On May 8, 2008, Enzo Life Sciences Inc. acquired Biomol International, LP. (“Biomol”). As such, the operating
results of Biomol are included in the consolidated operating results beginning May 8, 2008.
(3) On May 29, 2007, Enzo Life Sciences Inc. acquired Axxora Life Sciences, Inc. (“Axxora”). As such, the
operating results of Axxora are included in the consolidated operating results beginning May 29, 2007.
(4) The above acquisitions were primarily paid using cash.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our
financial statements and related notes. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See
“Forward-Looking and Cautionary Statements”. Because of the foregoing factors, you should not rely on past financial
results as an indication of future performance. We believe that period-to-period comparisons of our financial results to
date are not necessarily meaningful and expect that our results of operations might fluctuate from period to period in the
future.
The Company is a life sciences and biotechnology company focused on harnessing biological processes to
develop research tools, diagnostics and therapeutics and on serving as a provider of diagnostic services to the medical
community. Since our founding in 1976, our strategic focus has been on the development of enabling technologies in
research, development, manufacture, licensing and marketing of innovative health care products, platforms and services
based on molecular and cellular technologies. Our pioneering work in genomic analysis coupled with its extensive patent
estate and enabling platforms have strategically positioned the Company to play an important role in the rapidly growing
life sciences and molecular medicine marketplaces.
38
We are comprised of three operating companies that have evolved out of our core competence: the use of nucleic
acids as informational molecules and the use of compounds for immune modulation. These wholly owned operating
companies conduct their operations through three reportable segments. Below are brief descriptions of each of the three
operating segments (see Note 17 in the Notes to Consolidated Financial Statements):
Enzo Life Sciences is a company that manufactures, develops and markets functional biology and cellular
biochemistry products and tools to research and pharmaceutical customers world-wide and has amassed a large patent
and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in labeling and detection technologies across
research and diagnostic markets. Our portfolio of proteins, antibodies, peptides, small molecules, labeling probes, dyes
and kits provides life science researchers tools for target identification/validation, high content analysis, gene expression
analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are internationally
recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 9,000 of our own
products and in addition distribute over 30,000 products made by over 40 other original manufacturers. Our strategic
focus is directed to innovative high quality research reagents and kits in the primary key research areas of protein
homeostasis, epigenetics, live cell analysis, molecular biology and immunoassays. The segment is an established source
for a comprehensive panel of products to scientific experts in the fields of Natural Products/Antibiotics, Autophagy,
Cancer, Cell Cycle, Cell Death, Cell Signaling, Cellular Analysis, Endocrinology/Hormones, DNA regulation, Compound
Screening, Genomics/Molecular Biology, GPCRs, Immunology, Inflammation, Metabolism, Neuroscience, Nitric Oxide
pathway, Obesity/Adipokines, Oxidative Stress, Proteases and Proteosomes, Protein Expression and modification, Signal
Transduction, Stress/Heat Shock proteins and Ubiquitin/Ubl signaling.
Enzo Clinical Labs is a regional clinical laboratory serving the greater New York, New Jersey and Eastern
Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us to capitalize
firsthand on our extensive advanced molecular and cytogenetic capabilities and the broader trends in predictive and
personalized diagnostics. We offer a menu of routine and esoteric clinical laboratory tests or procedures used in general
patient care by physicians to establish or support a diagnosis, monitor treatment or medication, or search for an otherwise
undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of 30 patient
service centers throughout greater New York, New Jersey and Eastern Pennsylvania, a stand alone “stat” or rapid
response laboratory in New York City, and a full-service phlebotomy and logistics department. Payments for clinical
laboratory testing services are made by the Medicare program, healthcare insurers and patients.
Enzo Therapeutics is a biopharmaceutical company that has developed multiple novel approaches in the areas
of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of
Enzo Life Sciences. The Company has focused its efforts on developing treatment regimens for diseases and conditions
in which current treatment options are ineffective, costly, and/or cause unwanted side effects. This focus has generated a
clinical and preclinical pipeline, as well as more than 40 patents and patent applications.
The following table summarizes the sources of revenues for the fiscal years ended July 31, 2011, 2010 and 2009,
(in $000’s and percentages):
Fiscal year ended July 31,
Product revenues..............................
Royalty and license fee income ........
Clinical laboratory services ...............
Total ..................................................
2011
2010
2009
$
41,830
7,437
52,762
$ 102,029
41% $
7
52
100% $
43,111
9,793
44,178
97,082
44 % $ 40,592
9,376
10
39,604
46
100 % $ 89,572
45%
11
44
100%
39
Results of Operations
Comparative Financial Data for the Fiscal Years Ended July 31,
(in 000’s)
2011
2010
Increase
(Decrease)
% Change
Revenues:
Product revenues ......................................................................
Royalty and license fee income ................................................
Clinical laboratory services .......................................................
Total revenues...........................................................................
$
41,830
7,437
52,762
102,029
$
43,111
9,793
44,178
97,082
$
(1,281)
(2,356)
8,584
4,947
Operating expenses:
Cost of product revenues ..........................................................
Cost of clinical laboratory services............................................
Research and development ......................................................
Selling, general, and administrative ..........................................
Provision for uncollectible accounts receivable ........................
Legal..........................................................................................
Litigation settlement and related legal costs .............................
Total operating expenses..........................................................
22,137
31,682
7,806
45,191
4,431
3,710
—
114,957
22,547
29,570
9,704
48,395
3,480
1,746
3,698
119,140
(410)
2,112
(1,898)
(3,204)
951
1,964
(3,698)
(4,183)
Operating loss ...........................................................................
(12,928)
(22,058)
9,130
Other income (expense):
Interest ......................................................................................
Other .........................................................................................
Foreign exchange gain (loss)....................................................
Loss before income taxes .........................................................
11
45
49
19
44
(266)
$ (12,823) $ (22,261) $
(8)
1
315
9,438
Consolidated Results:
(3)
(24)
19
5
(2)
7
(20)
(7)
27
112
(100)
(4)
41
(42)
2
118
42
The “2011 period” and the “2010 period” refer to the fiscal year ended July 31, 2011 and 2010, respectively.
Product revenues were $41.8 million in the 2011 period compared to $43.1 million in the 2010 period, a decrease
of $1.3 million or 3% due to a decline of $1.5 million or 3.5% in organic sales. The decline is attributed to the ongoing
strategy to increase direct sales and rationalize certain distribution business and negative impact from the Japanese
market. The decline is offset by a 0.5% positive impact from foreign currency transactions.
Royalty and license fee income was $7.4 million in the 2011 period compared to $9.8 million in the 2010 period, a
decrease of $2.4 million or 24%. Royalties are primarily earned from the reported sales of Qiagen products subject to a
license agreement. During both the 2011 and 2010 periods, the Company recognized royalties of approximately $6.8
million from Qiagen. The 2011 period decrease is due to Abbott’s notification that they had made a final payment under a
license agreement since they are not aware of any non-expired patents covered under the license agreement. Abbott and
the Company are in communication as to patents covered under the license agreement which remains in full force. During
the 2011 period, the Company recognized royalties and license fees from the Abbott agreement of approximately $0.4
compared to $3.0 million in the 2010 period. There are no direct expenses relating to royalty and licensing income.
Clinical laboratory revenues during the 2011 period were $52.8 million compared to $44.2 million in the 2010
period. The 2011 period’s increase over the 2010 period was $8.6 million or 19% due to organic growth of 11% and an
increase of 8% in revenue related to a new payer contract with Empire Blue Cross of New York.
40
The cost of product revenues during the 2011 period was $22.1 million compared to $22.5 million in the 2010
period, a decrease of $0.4 million or approximately 2%. Although product sales declined during the 2011 period, cost of
product revenues was negatively impacted by compensation costs, foreign exchange, other inventory adjustments and
changes in cost allocations to the cost of production of $1.7 million, offset by a charge in the prior year for excess and
obsolete inventory that arose primarily from the strategic realignment of marketing efforts for core products of $1.3 million.
The cost of clinical laboratory services during the 2011 period was $31.7 million as compared to $29.6 million in
the 2010 period, an increase of $2.1 million or 7%. The Company incurred increased costs due to higher reagent costs
and supplies of $1.7 million, primarily due to increased service volume and reagent costs for certain tests that were
previously sent to outside reference labs, higher laboratory personnel and related costs of $0.2 million primarily due to
incremental increases in service volume and increases in the other lab operating costs of $0.3 million offset by a decrease
of outside reference lab costs of $0.1 million. In the 2011 period the gross profit margin improved from 33% to 40% due to
increased revenues, process improvements and the positive impact of greater service volume on fixed costs coverage.
Research and development expenses were approximately $7.8 million during the 2011 period, compared to $9.7
million in the 2010 period, a decrease of $1.9 million or 20%. The decrease was principally attributed to lower costs of
$1.4 million at Enzo Life Sciences primarily due the realignment of the R&D workforce that occurred in July 2010. There
was a $0.2 million decline in clinical trial and related activities and $0.3 million in payroll costs at the Therapeutics
segment.
Selling, general and administrative expenses were approximately $45.2 million during the 2011 period as
compared to $48.4 million in the 2010 period, a decrease of $3.2 million or 7%. The Enzo Life Sciences segment
decreased by $1.9 million principally comprised of a decline of approximately $1.1 million of discretionary marketing costs
due to refocused spending and decreases of $1.0 million related to reallocation and realignment of personnel offset by
increases in payroll and related costs of $0.2 million. The Clinical Lab segment’s selling general and administrative
decreased by $0.1 million primarily due to a decline in payroll and related benefits of $0.8 million offset by an increase in
sales commission of $0.5 million as a result of increased service revenues and an increase in other expenses of $0.2
million. The Other segment’s selling general and administrative decreased by $1.2 million, primarily due to decreases in
outside consulting costs of $0.8 million, professional fees of $0.4 million and other operating expenses of $0.1 million,
directly related to planned cost reductions effective August 1, 2010 and other expense improvements, offset by increases
of $0.1 million in payroll and payroll related costs.
The provision for uncollectible accounts receivable, primarily relating to the Clinical Labs segment was $4.4
million for the 2011 period as compared to $3.5 million in the 2010 period, an increase of $0.9 million attributed to an
increase in patient service revenue. As a percentage of Clinical Lab revenues, bad debts approximated 8% in both the
2011 and 2010 periods.
Legal expense was $3.7 million during the 2011 period compared to $1.7 million in the 2010 period, an increase
of $2.0 million due to overall increases in legal services in the 2011 period for general, litigation and proxy related matters
of $1.0 million and the impact of $0.5 million in insurance reimbursements and $0.5 million in negotiation and settlement
adjustments in the 2010 period.
During the 2010 period, in connection with the litigation settlement with Mr. Shahram K. Rabbani to settle all of his
claims against the Company, and certain of its executive officers, the Company agreed to pay a lump sum payment of
$2.7 million. The Company recorded a settlement expense of approximately $3.7 million, consisting of the lump sum
payment of $2.7 million and approximately $1.0 million of legal expenses incurred in connection with the claims.
The 2011 period foreign exchange benefit was approximately $0.1 million compared to a loss of $0.2 million in the
2010 period. The foreign exchange benefit or loss is determined on two factors, an intercompany loan denominated in
British pounds sterling and transactions denominated in foreign currencies other than the functional currency.
41
Segment Results
The Life Sciences segment’s income before taxes was $2.8 million for the 2011 period as compared to $2.9
million for the 2010 period with the positive impact of the on-going integration of our businesses and related operational
improvements and cost reductions offset by a decline in revenues. Product revenues decreased by $1.3 million or 3% in
the 2011 period primarily due to a decline of organic sales of 3.5% partially attributed to the on-going strategy to increase
direct sales and rationalize certain distribution business and softness in the Japan market offset by a positive impact of
foreign exchange of 0.5%. Further, royalty and license fee income decreased by $2.4 million in the 2011 period principally
attributed to no royalty payments received under the Abbott license agreement after the first quarter of the 2011 period.
The segment’s gross profit of $27.1 million in the 2011 period was negatively impacted by the previously discussed
changes in revenues and cost of product revenues. The segment’s other operating expenses, including selling, general
and administrative, legal and research and development, decreased by approximately $2.8 million during the 2011 period
primarily due to the lower marketing and selling expenses attributed to refocused and lower planned spending, a decline
in payroll and payroll related costs, changes in expense allocations and reduced research and development expenses
principally due to the realignment of research and development workforce that occurred in July 2010 offset by increased
legal of $0.6 million.
The Clinical Labs segment’s loss before taxes was $2.1 million for the 2011 period as compared to $7.5 million in
the 2010 period an improvement of $5.4 million arising from revenue growth, process improvements and cost
containment. The revenue from laboratory services increased in the 2011 period by $8.6 million due to organic growth of
11% and the 8% increase in revenue due to the new payer contract with Empire Blue Cross of New York. The 2011
period gross profit of $21.1 million improved the gross profit margin from 33% to 40% over the 2010 period due to the
previously discussed changes in service revenues and favorable impacts on costs from process improvements and
benefits resulting from greater service volume on fixed costs coverage. Selling, general and administrative expense
decreased by approximately $0.1 million primarily due to decreases in benefits and other costs, partially offset by
increases in sales commissions directly the result of increased service revenues. The provision for uncollectible accounts
receivables increased by $1.0 million as compared to the 2010 period due to the increase in patient service volume.
The Therapeutics segment’s loss before income taxes was approximately $2.0 million for the 2011 period as
compared to a loss of $2.5 million for the 2010 period. The decrease in the segment loss of $0.5 million was primarily due
to decreases in clinical trial activities, impacted by timing of activities, of $0.2 million and a $0.3 million decrease in payroll
related expenses.
The Other segment’s loss before taxes for the 2011 period was approximately $11.5 million as compared to $15.1
million in the 2010 period, a decrease of $3.6 million. During the 2011 period, a decrease of $1.2 million in selling, general
and administrative primarily due to lower consulting costs and professional fees, partially attributed to the July 2010
planned cost reductions was offset by an increase of $1.2 million in legal fees for general, litigation and proxy related
costs and the impact of the recording $0.5 million in insurance reimbursements and $0.5 million in negotiation and
settlement adjustments in the 2010 period. Further, the 2010 period loss included a litigation settlement and related legal
costs of $3.7 million.
42
Results of Operations
Comparative Financial Data for the Fiscal Years Ended July 31,
(in 000’s)
2010
2009
Increase
(Decrease)
% Change
Revenues:
Product revenues .....................................................................
Royalty and license fee income ...............................................
Clinical laboratory services ......................................................
Total revenues .........................................................................
$
43,111
9,793
44,178
97,082
$
40,592
9,376
39,604
89,572
$
2,519
417
4,574
7,510
Operating expenses:
Cost of product revenues .........................................................
Cost of clinical laboratory services ...........................................
Research and development .....................................................
Selling, general, and administrative .........................................
Provision for uncollectible accounts receivable .......................
Legal .........................................................................................
Litigation settlement and related legal costs ............................
Total operating expenses .........................................................
22,547
29,570
9,704
48,395
3,480
1,746
3,698
119,140
26,766
26,295
9,220
41,314
5,189
4,195
—
112,979
(4,219)
3,275
484
7,081
(1,709)
(2,449)
3,698
6,161
Operating loss ..........................................................................
(22,058)
(23,407)
1,349
Other income (expense):
Interest .....................................................................................
Other ........................................................................................
Foreign exchange loss .............................................................
Loss before income taxes ........................................................
19
44
(266)
581
74
(725)
$ (22,261) $ (23,477) $
(562)
(30)
459
1,216
Consolidated Results:
6
4
12
8
(16)
12
5
17
(33)
(58)
—
5.5
(6)
(97)
(41)
(63)
(5)
The “2010 period” and the “2009 period” refer to the fiscal years ended July 31, 2010 and 2009, respectively. The
2010 period includes the twelve months results of ADI which was acquired on March 12, 2009. The 2009 period includes
the results of ADI from March 12, 2009 to July 31, 2009.
Product revenues increased overall by $2.5 million in the 2010 period to $43.1 million as compared to the 2009
period. Acquisition growth from the acquired ADI business was $6.5 million or 16% which was partially offset by a net
organic decline of $4.4 million or 11% due to a $5.2 million decline in low margin, third-party distribution business. Our
core product revenues demonstrated organic growth of $0.8 million or 2%. Foreign currency fluctuation positively affected
revenues by $0.4 million or 1%.
Royalty and license fee income during the 2010 period was $9.8 million compared to $9.4 million in the 2009
period, an increase of $0.4 million or 4%. Royalties are primarily earned from the reported net sales of Qiagen products
subject to a license agreement and from a license agreement with Abbott. During the 2010 and 2009 periods, the
Company recognized royalties of approximately $6.8 million and $6.7 million, respectively from Qiagen and royalties and
license fees under the Abbott License Agreement of approximately $3.0 million and $2.7 million respectively, an increase
of $0.3 million in the 2010 period. There are no direct expenses relating to royalty and license fee income.
Clinical laboratory revenues during the 2010 period were $44.2 million compared to $39.6 million in the 2009
period. The 2010 period’s increase over the 2009 period was $4.6 million or 12%. During the 2010 period, revenue
increased due to organic growth of 5.4% after giving consideration to the 2009 period contractual adjustment of $2.3
million.
The 2010 increase resulted from increased service volume, including higher priced testing volume, despite a
noted general slowdown in physician office visits due to the slowed economy and a 1.9% decrease in Medicare
reimbursement rates effective January 1, 2010. During the 2009 period, revenues were negatively affected by contractual
adjustments of $2.3 million. These immaterial contractual adjustments in 2009 related to computational errors that
affected the calculated expected reimbursement rate in fiscal 2008, and for periods prior to August 1, 2008 for the majority
of payers, and credits issued which were not accrued for timely.
43
The cost of product revenues during the 2010 period was $22.5 million compared to $26.7 million in the 2009
period, a decrease of $4.2 million or 16%. The decrease is primarily due to the impact of $4.7 million in lower costs from
low margin third-party distribution business, reduced fair value accounting adjustments of $1.8 million in accordance with
purchase accounting rules and reclassification of $1.6 million in costs relating to the realignment of manufacturing facilities
and personnel. Such decreases in 2010 were partially offset by product cost relating to ADI of $2.8 million, by the cost of
sales from organic growth, and $1.0 million of higher inventory reserves for excess and obsolete inventory due primarily to
a strategic realignment of marketing efforts for core products. We believe that cost of product revenues for future periods
will be affected by, among other things, competitive conditions and foreign currency rates.
The cost of clinical laboratory services during the 2010 period was $29.6 million as compared to $26.3 million in
the 2009 period, an increase of $3.3 million or 12%. The Company incurred increased costs due to increased reagent
costs and supplies of $1.3 million, laboratory personnel and related costs of $1.6 million and outside reference lab costs of
$0.4 million, partially due to increased service volumes. Laboratory personnel and related costs increased primarily due to
additional headcounts in phlebotomists to expand patient collection sites and other personnel to manage expanded
operations.
Research and development expenses were approximately $9.7 million during the 2010 period, compared to $9.2
million in the 2009 period, an increase of $0.5 million or 5%. The increase was principally attributed to higher costs of $1.4
million at Enzo Life Sciences primarily related to Assay Designs offset by $0.9 million in lower clinical trial and related
activities and payroll costs at the Therapeutics segment.
Selling, general and administrative expenses were approximately $48.4 million during the 2010 period as
compared to $41.3 million in the 2009 period, an increase of $7.1 million or 17%. The increase was primarily due to the
net increase at the Enzo Life Sciences segment of $5.4 million in the 2010 period which included approximately $2.3
million of selling, general and administrative expenses related to Assay Designs operations, the impact of realigning
manufacturing facilities and certain personnel of $1.6 million, $1.1 million in payroll and benefit costs, and increased
depreciation and amortization of $0.7 million, which were offset by a decrease in marketing costs of $0.3 million. The
Clinical Lab segment’s selling general and administrative increased $3.1 million primarily due to increased payroll and
related benefits of $2.2 million attributed to increases in headcounts in our sales force and management personnel
partially related to increased service volume and the marketing and development of esoteric and gene based testing
capabilities, information technology costs of $0.2 million, and other overhead expenses of $0.7 million. These increases
were offset by a decrease in the Other segment’s selling general and administrative of approximately $1.4 million,
primarily due to decreases in professional fees of $0.3 million, outside consulting costs of $0.7 million, payroll and payroll
related costs of $0.2 million, and other operating cost of $0.2 million.
The provision for uncollectible accounts receivable, primarily relating to the Clinical Labs segment was $3.5
million for the 2010 period as compared to $5.2 million in the 2009 period, a decrease of $1.7 million or 33%. The
decrease is attributed to a charge in 2009 attributed to increased provisions for the Clinical Labs legacy billing system,
which was replaced in August 2008, due to reduced collection efforts relating to the legacy billing system, the correction of
an immaterial error relating to fiscal 2008, and increased provisions required based on changes in payer mix, offset by a
reduced requirement under the new billing system.
Legal expense was $1.7 million during the 2010 period compared to $4.2 million in the 2009 period, a decrease of
$2.5 million, due to overall reduction in legal services provided relating to certain patent litigation matters and general
matters of $2.1 million, the reimbursement of $0.5 million in legal costs under our insurance policy, reductions in fees due
to negotiated fee settlements and other adjustments of $0.5 million offset by approximately $0.6 million in incremental
legal costs incurred for proxy related costs for the January 2010 annual meeting.
In connection with the litigation settlement with Mr. Shahram K. Rabbani to settle all of his claims against the
Company, and certain of its executive officers, the Company paid a lump sum payment of $2.7 million. The Company
recorded a settlement expense of approximately $3.7 million in the fiscal quarter ending January 31, 2010, consisting of
the lump sum payment of $2.7 million and approximately $1.0 million of legal expenses incurred in connection with the
claims (See Note 16 in Notes to Consolidated Financial Statements).
44
Interest income was $19,000 during the 2010 period as compared to $0.6 million during the 2009 period. The
interest income decrease during the 2010 period is attributed to the decline in interest rates. Furthermore, the Company
had higher average invested balances during the 2009 period. The Company earns interest by investing in short term U.S.
Treasury bills and money market accounts.
The loss on foreign currency was $0.3 million during the 2010 period, due to a $0.1 million non-cash loss on an
intercompany term loan denominated in British pounds sterling and the fluctuations of other foreign currencies relative to
the US dollar during the period and the impact that had on settled transactions during the period. During the 2009 period,
the loss on foreign currency transactions was $0.7 million primarily due to a non-cash loss on the intercompany term loan
denominated in British pounds sterling. The British currency depreciated more significantly against the US dollar during
the 2009 period than in the 2010 period.
The Company’s effective income tax rate benefit (provision) for the 2010 period was 0.1% compared to (0.4%)
during the 2009 period. The tax benefit (provision) for the 2010 and 2009 periods were based on state and local taxes,
domestic and foreign tax for tax deductible goodwill and indefinite lived intangibles, and book to tax differences for
acquired inventory and differed from the expected net operating loss carry forward benefit at the U.S. federal statutory
rate of 34% primarily due to the inability to recognize such benefit. The carry forward benefit cannot be recognized
because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency. In the 2010
period, the Company recognized a benefit of $0.1 million primarily as a result of the expiration of the statute of limitations
for an uncertain tax position.
Segment Results
The Life Sciences segment’s income before taxes was $2.9 million for the 2010 period as compared to $1.7
million for the 2009 period. Product revenues increased by $2.5 million in the 2010 period primarily due to the contribution
of product revenues from the March 2009 acquisition of Assay Designs and organic growth from our core products which
replaced low margin, high volume distribution product revenues principally to one customer. Royalty and license fee
income increased $0.4 million from the Qiagen agreement and the Abbott license agreement. The segment’s gross
margin of $30.4 million increased by $7.2 million in 2010. Gross profit margins increased to 57% from 47% due to
favorable impact from ADI’s higher margin, which replaced lower margin revenue in 2009, lower inventory fair value
adjustments and realignment of personnel from manufacturing to trading activity. The segment’s other operating
expenses, including selling, general and administrative, legal and research and development, increased by approximately
$6.4 million during the 2010 period primarily due to the inclusion of Assay Designs expenses of $3.3 million, the impact of
the aforementioned realignment of personnel of payroll and related costs of $1.6 million, increased payroll and other costs
of $1.2 million, and depreciation and amortization of $0.7 million, offset by lower legal costs of $0.3 million and lower
marketing costs of $0.3 million. The segment experienced a foreign currency loss of $0.3 million during the 2010 period
resulting from the impact that fluctuations in foreign currencies had on settled transactions and on an intercompany loan
denominated in pounds sterling. In aggregate, the inventory fair value adjustment and amortization of intangibles
negatively impacted the segment operating results in the 2010 period by $1.9 million.
The Clinical Laboratory segment’s loss before taxes was $7.5 million for the 2010 period as compared to a loss of
$7.3 million in the 2009 period. The revenue from laboratory services increased in the 2010 period by $4.6 million due to
increased service volume, despite a general slowdown in physician office visits since the fiscal third quarter, a decrease in
Medicare reimbursement rates effective January 1, 2010 and during the 2009 period revenues were negatively impacted
by contractual adjustments of $2.3 million. The 2010 period gross profit of $14.6 million increased $1.3 million over the
2009 period due to service volume increases, offset by increased headcount and other costs to perform increased testing,
and the impact the aforementioned $2.3 million contractual adjustment had on the 2009 period gross profit. In the 2010
period, the selling, general and administrative and legal costs increased by approximately $3.2 million primarily due to
increases in payroll and payroll related costs of $2.2 million attributed to increases in headcount in our sales force and
management personnel partially related to increased service volume and the marketing and development of esoteric and
gene-based testing capabilities, information technology costs of $0.2 million, and other operating costs of $0.7 million. The
provision for uncollectible accounts receivables decreased by $1.8 million as compared to the 2009 period. During the
2009 period, the Company recorded a charge attributed to increased provisions for the Clinical Labs legacy billing system,
which was replaced in August 2008, due to reduced collection efforts relating to the legacy billing system and the
correction of an immaterial error relating to fiscal 2008.
The Therapeutics segment’s loss before income taxes was approximately $2.5 million for the 2010 period as
compared to a loss of $3.4 million for the 2009 period. The decrease in the segment loss of $0.9 million was primarily due
to decreases in clinical trial activities of $0.6 million and decreases in salaries and related costs of $0.3 million.
45
The Other segment’s loss before taxes for the 2010 period was approximately $15.1 million as compared to $14.5
million in the 2009 period, an increase of $0.6 million. The Other segment’s 2010 period loss reflects the litigation
settlement of $3.7 million, offset by a decrease in professional fees, consulting costs and public relations expenses of $1.0
million, payroll and payroll related costs of $0.2 million, and $0.3 million in other costs. Legal expenses decreased $2.1
million due to the reimbursement of $0.5 million in legal fees; reduced services provided relating to certain patent litigation
activity and general matters of $1.7 million and reductions in fees recorded due to negotiated fee settlements and other
adjustments of $0.5 million offset by $0.6 million incremental legal costs incurred for proxy related matters in 2010.
Interest income declined $0.5 million due to the decline in interest rates. The Company earns interest by investing in short
term U.S. Treasury bills and money market accounts.
Liquidity and Capital Resources
At July 31, 2011, the Company had cash and cash equivalents of $14.2 million and short-term investments of
$10.0 million, or $24.2 million in aggregate as compared to $33.6 million at July 31, 2010. Short term investments are in
US Treasury bills. The Company had working capital of $33.7 million at July 31, 2011 compared to $42.2 million at July
31, 2010. The decrease in working capital of $8.5 million was primarily the result of the 2011 period net loss and funding
for capital expenditures of $1.2 million.
Net cash used in operating activities for the year ended July 31, 2011 was approximately $8.3 million as
compared to $13.4 million for the year ended July 31, 2010. The decrease in net cash used in operating activities in the
2011 period over the 2010 period of approximately $5.1 million was primarily due to a decrease in net loss of $9.3 million,
and an increase in non-cash expenses of $0.8 million, offset by changes in operating assets and liabilities of $5.0 million,
relating primarily to increases in accounts receivable, inventory and prepaid expenses and a decrease in accounts
payable - trade.
Net cash provided by investing activities was approximately $13.5 million as compared to cash provided of $15.3
million in the year ago period. The decrease in 2011 of $1.8 million is primarily due to the decrease in purchases of short-
term investments (US Treasury bills) and maturities of short-term investments over 2010 of $3.7 million offset by the
decrease in cash used for capital expenditures in 2011 of $2.0 million.
Net cash used in financing activities in 2011 was $0.1 million. There were no financing activities in 2010.
We believe that our current cash and cash equivalents and short-term investments are sufficient for our
foreseeable liquidity and capital resource needs over the next twelve months, although there can be no assurance that
future events will not alter such view.
Effect of New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs,” which amends the current fair value measurement and disclosure guidance of Accounting Standards Codification
(“ASC”) Topic 820 “Fair Value Measurement” to include increased transparency around valuation inputs and investment
categorization. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after
December 15, 2011 and is applied prospectively. The Company does not expect the adoption of these provisions to have
a material impact on its consolidated financial statements or on future operating results.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, updating ASC Topic 220,
Comprehensive Income. Under the amended ASC Topic 220, an entity has the option to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance
eliminates the current option to present other comprehensive income and its components in the Statement of
Stockholders’ Equity. This guidance does not change the components that are recognized in other comprehensive income
or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively.
The Company does not believe the adoption of this guidance in the first quarter of fiscal 2013 will have an impact on its
consolidated financial statements or on future operating results.
In July 2011, the FASB issued ASU No. 2011-07: Health Care Entities (Topic 954) — Presentation and Disclosure
of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care
Entities. This update was issued to provide greater transparency relating to accounting practices used for net patient
service revenue and related bad debt allowances by health care entities. Some health care entities recognize patient
service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount or
has assessed the patient’s ability to pay.
46
These prior accounting practices used by some health care entities resulted in a gross-up of patient service
revenue and the provision for bad debts, causing difficulty for outside users of financial statements to make accurate
comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires certain healthcare entities to
change the presentation of the statement of operations, reclassifying the provision for bad debts associated with patient
service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced
quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts.
This update is not designed and will not change the net income reported by healthcare entities. This update is effective for
fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect that this
update will have any material impact on its consolidated financial statements. The Company is currently evaluating if the
update will have any impact on the presentation of its statement of operations.
Contractual Obligations
The Company has entered into various real estate and equipment operating leases and has employment
agreements with certain executive officers. The real estate lease for the Company’s Farmingdale Clinical Lab and
Research facility is with a related party. See Item 2, Properties, and Note 15 to the Consolidated Financial Statements for
a further description of these various leases.
The following is a summary of future payments under the Company’s contractual obligations as of July 31, 2011:
Payments Due by Period
In 000’s
Real estate and equipment leases .................
Employment agreements ...............................
Total contractual cash obligations ..................
$
$
Total
20,592
1,223
21,815
Less than
1 year
4,520
1,223
5,743
$
$
1-3 years
6,685
—
6,685
$
$
4-5 years
5,217
—
5,217
$
$
Over 5 years
4,170
—
4,170
$
$
Management is not aware of any material claims, disputes or settled matters concerning third-party
reimbursements that would have a material effect on our financial statements.
Off-Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements” as such term is defined in Item 303(a) (4) of
Regulation S-K.
Critical Accounting Policies
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo
Biochem, Inc. consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates
and judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for
uncollectible accounts, inventory, intangible assets and income taxes. The Company bases its estimates on experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
Product revenues
Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is
fixed or determinable and collectibility is reasonably assured.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded
as deferred revenues.
47
Revenues - Clinical laboratory services
Revenues from the Clinical Labs segment are recognized upon completion of the testing process for a specific
patient and reported to the ordering physician. These revenues and the associated accounts receivable are based on
gross amounts billed or billable for services rendered, net of a contractual adjustment, which is the difference between
amounts billed to payers and the expected approved reimbursable settlements from such payers.
The following table represents the clinical laboratory segment’s net revenues and percentages by revenue
category:
Revenue category
Medicare ..................................
Third-party payers ...................
Patient self-pay .......................
HMO’s .....................................
Total ........................................
Year ended July 31
2011
Year ended July 31
2010
Year ended July 31
2009
(In 000’s)
(in %)
(In 000’s)
(in %)
(In 000’s)
(in %)
$
$
11,856
24,335
11,554
5,017
52,762
$
22
46
22
10
100% $
11,158
19,534
8,758
4,728
44,178
$
25
44
20
11
9,138
20,073
6,056
4,337
100% $ 39,604
23
51
15
11
100%
The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare
program. Laws and regulations governing Medicare are complex and subject to interpretation for which action for
noncompliance includes fines, penalties and exclusion from the Medicare programs. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving
allegations of potential wrongdoing.
Other than the Medicare program, one provider whose programs are included in the Third-party payer and Health
Maintenance Organizations (“HMO’s”) categories represent approximately 22%, 25% and 25%, of the Clinical Labs
segment’s services net revenues for the fiscal years ended July 31, 2011, 2010 and 2009 respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as
its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the
experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross
amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on
gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee
schedule we set for all third party payers, including Medicare, health maintenance organizations (“HMO’s”) and managed
care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical
settlement experience with payers, industry reimbursement trends, and other relevant factors.
The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1)
current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3)
the growth of in-network provider arrangements and managed care plans specific to our Company.
Our clinical laboratory business is primarily dependent upon reimbursement from third-party payers, such as
Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement
rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease
reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under
managed care contracts or other similar arrangements has grown over the past several years and may continue to grow
in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These
trends will continue to reduce our revenues.
During the years ended July 31, 2011, 2010 and 2009, the contractual adjustment percentages, determined using
current and historical reimbursement statistics, were approximately 84%, 83% and 81% respectively, of gross billings. The
Company believes a decline in reimbursement rates or a shift to managed care, or similar arrangements may be offset by
the positive impact of an increase in the number of tests we perform. However, there can be no assurance that we can
increase the number of tests we perform or that if we do increase the number of tests we perform, that we can maintain
that higher number of tests performed, or that an increase in the number of tests we perform would result in increased
revenue.
48
The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment
percentage could result in a change in clinical laboratory services revenues of approximately $3,298,000, $2,589,000, and
$2,040,000 for the years ended July 31, 2011, 2010, and 2009, respectively, and a change in the net accounts receivable
of approximately $507,000 and $339,000 as of July 31, 2011 and 2010, respectively.
Our clinical laboratory financial billing system records gross billings using a standard fee schedule for all payers
and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect
of contractual adjustment recorded during the current period that relate to revenue recorded in a previous period.
However, we can reasonably estimate our monthly contractual adjustment to revenue on a timely basis based on our
quarterly review process, which includes:
•
•
•
•
an analysis of industry reimbursement trends;
an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements
with third-party payers;
a rolling monthly analysis of current and historical claim settlement and reimbursement experience
statistics with payers;
an analysis of current gross billings and receivables by payer.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated
and recorded in the period of the related revenue.
The following is a table of the Company’s net accounts receivable by segment. The Clinical Labs segment’s net
receivables are detailed by billing category and as a percent to its total net receivables. As of July 31, 2011 and 2010,
approximately 51% and 45%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business,
which operates in the New York, New Jersey and Eastern Pennsylvania medical communities. The Life Sciences
segment’s accounts receivable, of which $2.5 million or 33% and $1.9 million or 27% represents foreign receivables as of
July 31, 2011 and 2010 respectively, includes royalty receivables of $2.0 million and $2.5 million, as of July 31, 2011 and
2010, of which approximately $2.0 million and $1.8 million, respectively is from Qiagen Corporation.
49
Net accounts receivable
Billing category
Clinical Labs ...........................................
Medicare .............................................
Third party payers ...............................
Patient self-pay ...................................
HMO’s .................................................
Total Clinical Labs ..................................
Total Life Sciences .................................
Total accounts receivable ......................
As of
July 31, 2011
As of
July 31, 2010
(In 000’s)
(in %)
(In 000’s)
(in %)
$
$
1.434
3,087
2,865
314
7,700
7,545
15,245
$
19
40
37
4
100%
$
849
2,664
2,024
296
5,833
7,173
13,006
14
46
35
5
100%
Changes in the Company’s allowance for doubtful accounts are as follows:
In 000’s
Beginning balance ................................................................................
Provision for doubtful accounts .............................................................
Write-offs, net ........................................................................................
Ending balance .....................................................................................
$
$
July 31, 2011
2,839
4,431
(3,782)
3,488
$
July 31, 2010
4,786
3,480
(5,427)
2,839
$
For the Clinical Labs segment, the allowance for doubtful accounts represents amounts that the Company does
not expect to collect after the Company has exhausted its collection procedures. The Company estimates its allowance for
doubtful accounts in the period the related services are billed and adjusts the estimate in future accounting periods as
necessary. It bases the estimate for the allowance on the evaluation of historical collection experience, the aging profile of
accounts receivable, the historical doubtful account write-off percentages, payer mix, and other relevant factors.
The allowance for doubtful accounts includes the balances, after receipt of the approved settlements from third
party payers for the insufficient diagnosis information received from the ordering physician, which result in denials of
payment and the uncollectible portion of receivables from self payers, including deductibles and copayments, which are
subject to credit risk and patients’ ability to pay. During the years ended July 31, 2011 and 2010, the Company
determined an allowance for doubtful accounts less than 210 days and wrote off 100% of accounts receivable over 210
days, as it assumed those accounts are uncollectible, except for certain fully reserved balances, principally related to
Medicare. These accounts have not been written off because the payer’s filing date deadline has not occurred or the
collection process has not been exhausted. The Company’s collection experience on Medicare receivables beyond 210
days has been insignificant. The Company adjusts the historical collection analysis for recoveries, if any, on an ongoing
basis.
The Company’s ability to collect outstanding receivables from third party payers is critical to its operating
performance and cash flows. The primary collection risk lies with uninsured patients or patients for whom primary
insurance has paid but a patient portion remains outstanding. The Company also assesses the current state of its billing
functions in order to identify any known collection or reimbursement issues in order to assess the impact, if any, on the
allowance estimates, which involves judgment. The Company believes that the collectibility of its receivables is directly
linked to the quality of its billing processes, most notably, those related to obtaining the accurate information in order to bill
effectively for the services provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions
or deterioration in aging of receivables), our estimates of net realizable value of receivables could be reduced by a
material amount.
Billing for laboratory services is complicated because of many factors, especially: the differences between our
standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of
coverage and information requirements among the various payers, and disputes with payers as to which party is
responsible for reimbursement.
50
The following table indicates the Clinical Labs aged gross receivables by payer group (in thousands), which is
prior to adjustment to gross receivables for: 1) contractual adjustment, 2) fully reserved balances not yet written off, and 3)
other revenue adjustments.
Total
Amount
As of July 31, 2011
1-30 days ................ $ 29,880
7,013
31-60 days ..............
4,029
61-90 days ..............
91-120 days ............
3,826
121-150 days ..........
2,084
Greater than 150
Medicare
%
Amount
60% 5,843
791
14%
566
8%
917
8%
375
4%
Third
Party
Payers
%
Amount
60% 13,851
3,441
2,522
1,819
1,385
8%
6%
9%
4%
%
56%
14%
10%
7%
6%
Self-pay
Amount
6,173
2,687
890
1,046
288
%
HMO’s
Amount
55% 4,013
93
24%
51
8%
44
9%
37
3%
%
95%
2%
1%
1%
1%
days* ...................
3,050
Totals ...................... $ 49,882
6% 1,234
100% 9,726
13%
1,717
100% 24,735
7%
94
100% 11,178
1%
5
100% 4,243
0%
100%
Total
Amount
As of July 31, 2010
1-30 days ................ $ 21,678
4,256
31-60 days ..............
61-90 days ..............
2,565
91-120 days ............
1,771
121-150 days ..........
936
Greater than 150
Medicare
%
Amount
66% $ 2,886
439
13%
281
8%
248
5%
236
3%
Third
Party
Payers
%
Amount
57% $ 10,846
2,458
1,337
850
696
9%
6%
5%
4%
%
Self-pay
Amount
64% $ 4,242
1,344
15%
935
8%
671
5%
2
4%
%
HMO’s
Amount
59% $ 3,704
15
18%
12
13%
2
9%
2
—%
%
99%
1%
—%
—%
—%
days** ..................
1,733
Totals ...................... $ 32,939
5%
967
100% $ 5,057
19%
711
100% $ 16,898
4%
52
100% $ 7,246
1%
3
100% $ 3,738
—%
100%
* Total includes $800 fully reserved over 210 days as of July 31, 2011.
** Total includes $805 fully reserved over 210 days as of July 31, 2010.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items
be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable
future.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Inventory
The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished
goods inventories consist of material, labor, and manufacturing overhead. Write downs of inventories to market value are
based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated
future demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and
require additional write downs of inventory which would impact our results of operations.
Goodwill and Indefinite-Lived Intangibles
Goodwill, representing the cost of acquired businesses in excess of the fair value of net assets acquired, and
indefinite-lived intangibles are not amortized, but are evaluated annually for impairment. The Company performs its
annual impairment test as of the first day of its fiscal fourth quarter or if indicators of potential impairment exist. Goodwill is
considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In assessing the
recoverability of goodwill, the Company reviews both quantitative as well as qualitative factors to support its assumptions
with regard to fair value. The fair value of a reporting unit is estimated using both a discounted cash flow model and
market approach model. In determining fair value, the Company makes certain judgments on the assumptions included in
the discounted cash flow such as forecasted revenue, gross profit margins, working capital cash flow, the identification of
reporting units and the selection of comparable companies for the market approach. Trademarks are considered impaired
if the carrying amount exceeds their estimated fair value. To date, there has been no impairment charges recorded.
51
The fair value of the trademarks is estimated based on a discounted cash flow model. If these estimates or their
related assumptions change in the future as a result of changes in strategy and/or market conditions, the Company may
be required to record an impairment charge. To date, there has been no impairment charges recorded.
Intangible Assets
Intangible assets (exclusive of patents), arose primarily from acquisitions and primarily consist of customer
relationships, trademarks, licenses, employment and non-compete agreements, and website and database content.
Finite-lived intangible assets are amortized according to their estimated useful lives, which range from 4 to 15 years. The
Company has capitalized certain legal costs directly incurred in pursuing patent applications as patent costs. When such
applications result in an issued patent, the related costs are amortized over a ten year period or the life of the patent,
whichever is shorter, using the straight-line method. The Company reviews its issued patents and pending patent
applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value,
the unamortized balance in deferred patent costs relating to that patent is immediately expensed.
Accrual for Self-funded Medical
Accruals for self-funded medical insurance are determined based on a number of assumptions and factors,
including historical payment trends, claims history and current estimates. These estimated liabilities are not discounted. If
actual trends differ from these estimates, the financial results could be impacted. As of July 31, 2011, the Company has
established a reserve of $0.4 million which is included in accrued liabilities, for claims that have been reported but not paid
and incurred but not reported.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates resulting from acquisitions with
foreign locations (See Item 1A. Risk Factors and Note 2 in the Notes to Consolidated Financial Statements) and, to a
much lesser extent, interest rates on investments in short-term instruments, that could impact our results of operations
and financial position. We do not currently engage in any hedging or market risk management tools.
Foreign Currency Exchange Rate Risk
The financial reporting of our non-U.S. subsidiaries is denominated in currencies other than the U.S. dollar. Since
the functional currency of our non-U.S. subsidiaries is the local currency, foreign currency translation adjustments are
accumulated as a component of accumulated other comprehensive income in stockholders’ equity. Assuming a
hypothetical aggregate change of 10% in the exchange rates of foreign currencies against the U.S. dollar at July 31, 2011,
our assets and liabilities would increase or decrease by $2.1 million and $0.9 million, respectively, and our net sales and
net earnings (loss) would increase or decrease by $2.2 million and $0.1 million, respectively, on an annual basis.
We also maintain intercompany balances and loans receivable with subsidiaries with different local currencies.
These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical aggregate
change of 10% in the exchange rates of foreign currencies against the U.S. dollar at July 31, 2011, our pre-tax earnings
(loss) would be favorably or unfavorably impacted by approximately $0.3 million on an annual basis.
Interest Rate Risk
Our excess cash is invested in highly liquid short term money market accounts and short term investments in U.S.
Treasury bills. Changes in interest rates may affect the investment income we earn on money market funds and short
term investments and therefore affect our cash flows and results of operations. As of July 31, 2011, we were exposed to
interest rate change market risk with respect to our money market accounts and short-term investments of $14.2 million.
The short-term investments bear interest rates ranging from 0% to 0.05%. As of July 31, 2011, based on the investments
held, it is determined we have no material interest rate risk.
As of July 31, 2011, we have fixed interest rate financing on transportation and equipment leases.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this report. See Item 15(a) (1) and (2)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
52
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we
conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of
July 31, 2011. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer
and Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving
their control objectives.
Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective at that reasonable assurance level as of July 31, 2011, and that information required
to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported in a
timely manner and is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter ended July 31, 2011
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of management and our directors; and
• provide reasonable assurance regarding prevention and timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
that are determined to be effective provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting based on criteria for
effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on its assessment, management concluded that we maintained effective internal control over financial
reporting as of July 31, 2011. Ernst & Young LLP, our independent registered public accounting firm, has issued an
attestation report on our internal control over financial reporting as of July 31, 2011. This report, in which Ernst & Young
LLP has expressed an unqualified opinion, appears in this Item 9A.
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Enzo Biochem, Inc.
We have audited Enzo Biochem, Inc.’s (“the Company”) internal control over financial reporting as of July 31, 2011, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Enzo Biochem, Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Enzo Biochem, Inc. maintained, in all material respects, effective internal control over financial reporting as
of July 31, 2011 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Enzo Biochem, Inc. as of July 31, 2011 and 2010 and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended July 31, 2011 of Enzo Biochem, Inc. and our report dated October 14, 2011 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Jericho, New York
October 14, 2011
54
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required under this item will be set forth in the Company’s proxy statement to be filed with the
Securities and Exchange Commission on or before November 28, 2011 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required under this item will be set forth in the Company’s proxy statement to be filed with the
Securities and Exchange Commission on or before November 28, 2011 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item will be set forth in the Company’s proxy statement to be filed with the
Securities and Exchange Commission on or before November 28, 2011 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this item will be set forth in the Company’s proxy statement to be filed with the
Securities and Exchange Commission on or before November 28, 2011 and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required under this item will be set forth in the Company’s proxy statement expected to be filed
with the Securities and Exchange Commission on or before November 28, 2011 and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
(1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2011 and 2010
Consolidated Statements of Operations- Years ended July 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) - Years
ended July 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows - Years ended July 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is included in the consolidated financial
statements or the notes thereto or because they are not required.
55
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on Form 10-K:
Exhibit No.
Description
3(a)
3(b)
3(c)
3(d)
3(e)
Certificate of Incorporation (1)
Certificate of Incorporation, as amended on March 17, 1980. (1)
Certificate of Amendment of the Certificate of Incorporation as amended on June 16, 1981. (2)
Certificate of Amendment to the Certificate of Incorporation as of July 22, 1988. (3)
Amended and restated Bylaws. (4)
10(a)
1994 Stock Option Plan. (5)
10 (b)
1999 Stock Option Plan. (6)
10 (c)
2005 Equity Compensation Incentive Plan (7)
10 (d)
2011 Incentive Plan (8)
10 (e)
Lease agreement with Pari Management (9)
10 (f)
Settlement and Release Agreement between the Company and Sigma Aldrich (10)
10 (g)
10 (h)
10 (i)
10 (j)
10(k)
Stock Purchase Agreement By and Among Enzo Life Sciences, Inc., Axxora Life Sciences Inc., and the
Stock holders, Option holders and Warrant holders (12)
Stock Asset Purchase Agreement By and Among Buyer Parties and Seller Parties with respect to the
Biomol International and affiliate acquisition (13)
Asset Purchase Agreement By and Among Enzo Life Sciences, Acquisition, Inc. and Assay Designs,
Inc.(14)
Amended and Restated Employment Agreement with Elazar Rabbani (15)
Amended and Restated Employment Agreement with Barry Weiner (15)
14 (a)
Code of Ethics (11)
21*
23*
List of subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
31 (a)*
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31 (b)*
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 (a)*
Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32 (b)*
Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
56
Notes to exhibits
Filed herewith
The exhibits were filed as exhibits to the Company’s Registration Statement on Form S-18 (File No. 2-67359) and
are incorporated herein by reference.
This exhibit was filed as an exhibit to the Company’s Form 10-K for the year ended July 31, 1981 and is
incorporated herein by reference.
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 1989 and is
incorporated herein by reference.
This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 and is incorporated herein by
reference.
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 1995 and is
incorporated herein by reference.
This exhibit was filed with the Company’s Registration Statement on Form S-8 (333-87153) and is incorporated
herein by reference.
This exhibit was filed as an exhibit to the Company’s Proxy Statement of Schedule 14A filed on January 19, 2005
and is incorporated herein by reference.
This exhibit was filed as appendix B to the Company’s Definitive Proxy Statement on Schedule 14A, which was
filed with the Securities and Exchange Commission on November 16, 2010 and is incorporated herein by
reference.
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 2006 and is
incorporated herein by reference.
This exhibit was filed with the Company’s Current Report on Form 8-K on September 21, 2006 and is incorporated
herein by reference.
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 2003 and is
incorporated here by reference.
This exhibit was filed with the Company’s Current Report on Form 8-K May 30, 2007 and is incorporated herein by
reference.
This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 and is incorporated herein by
reference.
This exhibit was filed with the Company’s Current Report on Form 8-K March 13, 2009 and is incorporated herein
by reference.
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 2010 and is
incorporated herein by reference.
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 14, 2011
ENZO BIOCHEM, INC.
By: /s/ Elazar Rabbani Ph.D.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Elazar Rabbani Ph.D.
Elazar Rabbani,
Chairman of Board of Directors and Secretary
(Principal Executive Officer)
By: /s/ Barry W. Weiner
Barry W. Weiner,
President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director
By: /s/ Stephen B. H. Kent Ph.D.
Stephen B. H. Kent, Director
By: /s/ Bernard L. Kasten MD
Bernard Kasten, Director
By: /s/ Gregory M. Bortz
Gregory M. Bortz, Director
October 14, 2011
October 14, 2011
October 14, 2011
October 14, 2011
October 14, 2011
58
FORM 10-K, ITEM 15(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and financial statement schedule of Enzo Biochem, Inc. are
included in Item 15(a):
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — July 31, 2011 and 2010
Consolidated Statements of Operations — Years ended July 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) — Years ended July 31,
2011, 2010 and 2009
Consolidated Statements of Cash Flows — Years ended July 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts — Years ended July 31, 2011, 2010 and 2009
F-2
F-3
F-4
F-5
F-6
F-7
S-1
All other schedules for which provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions or are inapplicable, and therefore have
been omitted.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem, Inc. as of July 31, 2011 and 2010,
and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash
flows for each of the three years in the period ended July 31, 2011. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Enzo Biochem, Inc. at July 31, 2011 and 2010, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended July 31, 2011, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Enzo Biochem Inc.’s internal control over financial reporting as of July 31, 2011, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated October 14, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Jericho, New York
October 14, 2011
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
July 31,
2011
July 31,
2010
ASSETS
Current assets:
Cash and cash equivalents...........................................................................................
Short term investments .................................................................................................
Accounts receivable, net of allowance for doubtful accounts of $3,488 in 2011 and
$2,839 in 2010 ...........................................................................................................
Inventories.....................................................................................................................
Prepaid expenses .........................................................................................................
$
14,161
10,000
$
15,245
9,260
2,733
8,759
24,807
13,006
8,882
2,284
Total current assets..........................................................................................................
51,399
57,738
Property, plant, and equipment, net.................................................................................
Goodwill............................................................................................................................
Intangible assets, net .......................................................................................................
Other ................................................................................................................................
10,335
27,373
19,985
382
11,858
24,943
20,368
338
Total assets ......................................................................................................................
$
109,474
$
115,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable – trade .............................................................................................
Accrued liabilities ..........................................................................................................
Other current liabilities ..................................................................................................
Deferred taxes...............................................................................................................
$
$
7,858
8,188
1,683
—
6,455
8,509
572
21
Total current liabilities ......................................................................................................
17,729
15,557
Deferred taxes..................................................................................................................
Other ................................................................................................................................
2,934
96
2,582
90
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or
outstanding ................................................................................................................
Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued:
39,045,837 at July 31, 2011 and 38,782,725 at July 31, 2010..................................
Additional paid-in capital ...............................................................................................
Less treasury stock at cost: 450,014 shares at July 31, 2011 and 623,848 shares at
July 31, 2010..............................................................................................................
Accumulated deficit .......................................................................................................
Accumulated other comprehensive income..................................................................
—
—
390
305,833
(6,387)
(214,914)
3,793
388
306,561
(8,854)
(201,954)
875
Total stockholders’ equity.................................................................................................
88,715
97,016
Total liabilities and stockholders’ equity...........................................................................
$
109,474
$
115,245
The accompanying notes are an integral part of these consolidated financial statements
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenues:
Product revenues ...............................................................................
Royalty and license fee income .........................................................
Clinical laboratory services ................................................................
$
Operating expenses:
Cost of product revenues...................................................................
Cost of clinical laboratory services.....................................................
Research and development ...............................................................
Selling, general, and administrative ...................................................
Provision for uncollectible accounts receivable .................................
Legal ..................................................................................................
Litigation settlement and related costs...............................................
Total operating expenses...................................................................
Years ended July 31,
2011
2010
41,830
7,437
52,762
102,029
22,137
31,682
7,806
45,191
4,431
3,710
—
114,957
$
$
43,111
9,793
44,178
97,082
22,547
29,570
9,704
48,395
3,480
1,746
3,698
119,140
2009
40,592
9,376
39,604
89,572
26,766
26,295
9,220
41,314
5,189
4,195
—
112,979
Operating loss .......................................................................................
(12,928)
(22,058)
(23,407)
Other income (expense):
Interest ...............................................................................................
Other ..................................................................................................
Foreign exchange gain (loss).............................................................
11
45
49
19
44
(266)
581
74
(725)
Loss before income taxes .....................................................................
(Provision) benefit for income taxes......................................................
(12,823)
(137)
(22,261)
28
(23,477)
(87)
Net loss .................................................................................................
($
12,960)
($
22,233)
($
23,564)
Net loss per common share:
Basic and diluted................................................................................
($
0.34)
($
0.59)
($
0.63)
Weighted average common shares outstanding:
Basic and diluted................................................................................
38,357
38,001
37,511
The accompanying notes are an integral part of these consolidated financial statements
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Years ended July 31, 2011, 2010, and 2009
(In thousands, except share data)
Common
Stock
Shares
Treasury
Stock
Shares
Common
Stock
Amount
Additional
Paid-in
Capital
Treasury
Stock
Amount
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Comprehensive
loss
Balance at July 31, 2008 ...............
38,007,581
777,719
$
380
$
303,811
$
(11,331)
$
(156,157)
$
1,586
$
138,289
(23,564)
—
—
—
—
—
—
(1,310)
(24,874)
(22,233)
—
—
—
599
(21,634)
(12,960)
—
—
—
2,918
$
(10,042)
Net (loss) for the year ended July
31, 2009 ...................................
Purchase of treasury stock............
Exercise of stock options...............
Vesting of restricted stock .............
Stock based compensation
charges ....................................
Issuance of stock for employee
401(k) plan match ....................
Issuance of stock for acquisition
—
—
251,162
128,941
—
—
earn out....................................
202,196
Foreign currency translation
adjustments..............................
—
Comprehensive loss......................
—
99,985
—
—
(142,150)
—
—
—
3
1
—
—
2
—
—
1,471
—
1,435
—
(1,126)
—
—
—
(1,435)
2,017
998
—
—
—
(23,564)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
(23,564)
(1,126)
1,474
1
1,435
582
1,000
(1,310)
(1,310)
Balance at July 31, 2009 ...............
38,589,880
735,554
386
306,280
(10,440)
(179,721)
276
116,781
Net (loss) for the year ended July
31, 2010 ...................................
Vesting of restricted stock .............
Stock based compensation
charges ....................................
Issuance of treasury stock for
employee 401(k) plan match ....
Foreign currency translation
adjustments..............................
Comprehensive loss......................
—
192,845
—
—
—
—
—
—
(111,706)
—
—
2
—
—
—
—
—
1,170
—
—
—
(889)
1,586
—
—
(22,233)
—
—
—
—
—
—
—
—
599
(22,233)
2
1,170
697
599
Balance at July 31, 2010 ...............
38,782,725
623,848
388
306,561
(8,854)
(201,954)
875
97,016
Net (loss) for the year ended July
31, 2011 ...................................
Vesting of restricted stock .............
Stock based compensation
charges ....................................
Issuance of treasury stock for
employee 401(k) plan match ....
Foreign currency translation
adjustments..............................
Comprehensive loss......................
—
263,112
—
—
—
—
—
—
(173,834)
—
—
2
—
—
—
—
—
1,049
—
—
—
(1,777)
2,467
—
—
(12,960)
—
—
—
—
—
—
—
—
2,918
(12,960)
2
1,049
690
2,918
Balance at July 31, 2011 ...............
39,045,837
450,014
$
390
$
305,833
$
(6,387)
$
(214,914)
$
3,793
$
88,715
The accompanying notes are an integral part of these consolidated financial statements
F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss .................................................................................................
($
12,960)
($
22,233)
($
23,564)
Years ended July 31,
2011
2010
2009
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of property, plant and equipment ......
Amortization of intangible assets .......................................................
Provision for uncollectible accounts receivable .................................
Deferred income tax provision (benefit) .............................................
Share based compensation charges .................................................
Share based 401(k) employer match expense ..................................
Deferred revenue recognized ............................................................
Foreign exchange (gain) loss on intercompany loan .........................
Changes in operating assets and liabilities:
Accounts receivable ...........................................................................
Inventories..........................................................................................
Prepaid expenses ..............................................................................
Accounts payable – trade ..................................................................
Accrued liabilities ...............................................................................
Other current liabilities .......................................................................
Other liabilities....................................................................................
Total adjustments...............................................................................
2,962
1,507
4,431
17
1,049
690
(38)
(131)
(6,537)
(178)
(432)
1,462
(208)
34
6
4,634
2,727
1,542
3,480
(45)
1,170
1,115
(450)
45
(3,844)
681
220
2,348
(232)
(78)
90
8,769
2,185
1,277
5,189
—
1,435
582
(475)
697
(1,409)
2,647
208
(571)
528
(206)
—
12,087
Net cash used in operating activities ..............................................
(8,326)
(13,464)
(11,477)
Cash flows from investing activities:
Capital expenditures ..........................................................................
Maturities of short term investments ..................................................
Purchases of short term investments.................................................
(Increase) decrease in security deposits and other ...........................
Acquisitions, net of cash acquired .....................................................
Net cash provided by (used in) investing activities.........................
(1,223)
182,453
(167,646)
(45)
—
13,539
(3,251)
232,140
(213,643)
81
—
15,327
(2,709)
318,650
(361,956)
384
(14,541)
(60,172)
Cash flows from financing activities:
Installment loan payments .................................................................
Proceeds from the exercise of stock options .....................................
Net cash (used) provided by financing activities ............................
Effect of exchange rate changes on cash and cash equivalents.......
(68)
—
(68)
257
—
—
—
(33)
—
348
348
(92)
Increase (decrease) in cash and cash equivalents............................
Cash and cash equivalents - beginning of year.................................
Cash and cash equivalents - end of year ..........................................
5,402
8,759
14,161
$
$
1,830
6,929
8,759
(71,393)
78,322
6,929
$
The accompanying notes are an integral part of these consolidated financial statements
F-6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 1 - Summary of significant accounting policies
Nature of business
Enzo Biochem, Inc. (the “Company”) is an integrated life science and biotechnology company engaged in research,
development, manufacturing and marketing of diagnostic and research products based on genetic engineering,
biotechnology and molecular biology. These products are designed for the diagnosis of and/or screening for infectious
diseases, cancers, genetic defects and other medically pertinent diagnostic information and are distributed in the United
States and internationally. The Company is conducting research and development activities in the development of
therapeutic products based on the Company’s technology platform of genetic modulation and immune modulation. The
Company also operates a clinical laboratory that offers and provides diagnostic medical testing services in the New York,
New Jersey and Eastern Pennsylvania medical communities. The Company operates in three segments (see Note 17).
Principles of consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned
subsidiaries, Enzo Clinical Labs, Inc., Enzo Life Sciences, Inc., Enzo Therapeutics, Inc. and Enzo Realty LLC (“Realty”).
All intercompany transactions and balances have been eliminated. The results of operations for companies acquired are
included in the consolidated financial statements from the effective date of the acquisition.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results
could differ from those estimates.
Foreign Currency Translation/Transactions
The Company has determined that the functional currency for its foreign subsidiaries is the local currency. For financial
reporting purposes, assets and liabilities denominated in foreign currencies are translated at current exchange rates and
profit and loss accounts are translated at weighted average exchange rates. Resulting translation gains and losses are
included as a separate component of stockholders’ equity as accumulated other comprehensive income or loss. Gains or
losses resulting from transactions entered into in other than the functional currency are recorded as foreign exchange
gains and losses in the consolidated statements of operations.
Cash and cash equivalents
Cash and cash equivalents consist of demand deposits with banks and highly liquid money market funds.
Short term investments
Short term investments are highly liquid U.S. Government instruments with maturities of less than ninety days.
Fair Values of Financial Instruments
The recorded amounts of the Company’s cash and equivalents, short-term investments, receivables, accounts payable
and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair
value of short term investments is based on quoted market prices where available.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and
cash equivalents, short term investments, and accounts receivable. The Company’s short term investments are invested
in highly liquid US Government instruments.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The Company believes the fair value of the aforementioned financial instruments approximates the cost due to the
immediate or short-term nature of these items.
Concentration of credit risk with respect to the Company’s Life Sciences segment is mitigated by the diversity of the
Company’s clients and their dispersion across many different geographic regions. To reduce risk, the Company routinely
assesses the financial strength of these customers and, consequently, believes that its accounts receivable credit
exposure with respect to these customers is limited.
The Company believes that the concentration of credit risk with respect to the Clinical Labs accounts receivable is
mitigated by the diversity of its numerous third party payers and individual patient accounts and is limited to certain large
payers that insure individuals that utilize the Clinical Labs services. To reduce risk, the Company routinely assesses the
financial strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with
respect to these payers, is limited. While the Company also has receivables due from the Federal Medicare program, the
Company does not believe that these receivables represent a credit risk since the Medicare program is funded by the
federal government and payment is primarily dependent on our submitting the appropriate documentation.
Accrual for Self-Funded Medical
Accruals for self-funded medical insurance are determined based on a number of assumptions and factors, including
historical payment trends, claims history and current estimates. These estimated liabilities are not discounted. If actual
trends differ from these estimates, the financial results could be impacted.
Revenue Recognition
Product revenues
Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or
determinable and collectibility is reasonably assured.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as
deferred revenues in the accompanying balance sheet.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Clinical laboratory services
Revenues from the Clinical Labs segment are recognized upon completion of the testing process for a specific patient and
reported to the ordering physician. These revenues and the associated accounts receivable are based on gross amounts
billed or billable for services rendered, net of a contractual adjustment, which is the difference between amounts billed to
payers and the expected approved reimbursable settlements from such payers.
The following tables of the Clinical Lab segment’s net revenues and revenue percentages by revenue category:
Revenue category
Medicare.................................
Third-party payers ..................
Patient self-pay ......................
HMO’s ....................................
Total .......................................
2011
Years ended July 31
2010
2009
(In 000’s)
(in %)
(In 000’s)
(in %)
(In 000’s)
(in %)
$
$
11,856
24,335
11,554
5,017
52,762
$
22
46
22
10
100% $
11,158
19,534
8,758
4,728
44,178
$
25
44
20
11
100% $
9,138
20,073
6,056
4,337
39,604
23
51
15
11
100%
The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare
program. Laws and regulations governing Medicare are complex and subject to interpretation for which action for
noncompliance includes fines, penalties and exclusion from the Medicare programs. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving
allegations of potential wrongdoing.
Other than the Medicare program, United Healthcare of New York whose programs are included in the “Third-party
payers” and “Health Maintenance Organizations” (“HMO’s”) categories represent approximately 22%, 25% and 25% of the
Clinical Labs segment net revenue for the years ended July 31, 2011, 2010 and 2009 respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its
interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the
experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross
amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on
gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee
schedule the Company sets for all third-party payers, including Medicare, HMO’s and managed care providers. The
Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical
settlement experience with payers, industry reimbursement trends, and other relevant factors which include the monthly
and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third
party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our
Company.
During the years ended July 31, 2011, 2010 and 2009, the contractual adjustment percentages, determined using current
and historical reimbursement statistics, were approximately 84%, 83% and 81%, respectively, of gross billings.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and
recorded in the period of the related revenue.
For the Clinical Labs segment, the allowance for doubtful accounts represents amounts that the Company does not
expect to collect after the Company has exhausted its collection procedures. The Company estimates its allowance for
doubtful accounts in the period the related services are billed and adjusts the estimate in future accounting periods as
necessary. It bases the estimate for the allowance on the evaluation of historical collection experience, the aging profile of
accounts receivable, payer mix and other relevant factors.
During the years ended July 31, 2011 and 2010, the Company determined an allowance for doubtful accounts for
customers whose accounts receivable have been outstanding less than 210 days and wrote off 100% of accounts
receivable over 210 days, as it determined based on historical trends that those accounts were uncollectible, except for
certain fully reserved balances, principally related to Medicare. These accounts have not been written off because the
payer’s filing date deadline has not occurred or the collection process has not been exhausted. The Company adjusts the
historical collection analysis for recoveries, if any, on an ongoing basis.
The Company’s ability to collect outstanding receivables from third-party payers is critical to its operating performance and
cash flows. The primary collection risk lies with uninsured patients or patients for whom primary insurance has paid but a
patient portion remains outstanding. The Company also assesses the current state of its billing functions in order to
identify any known collection issues and to assess the impact, if any, on the allowance estimates which involves
judgment. The Company believes that the collectibility of its receivables is directly linked to the quality of its billing
processes, most notably, those related to obtaining the correct information in order to bill effectively for the services
provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions or deterioration in aging of
receivables), our estimates of net realizable value of receivables could be reduced by a material amount.
The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net receivables.
At July 31, 2011 and 2010, approximately 51% and 45%, respectively, of the Company’s net accounts receivable relates
to its Clinical Labs business, which operates in the New York, New Jersey, and Eastern Pennsylvania medical
communities.
The Life Sciences segment’s accounts receivable includes royalties receivable of $2.0 million and $2.5 million, as of July
31, 2011 and 2010, respectively, of which approximately $2.0 million and $1.8 million, respectively is from QIAGEN
Gaithersburg Inc. (“Qiagen”) (see Note 13).
The following is a table of the Company’s net accounts receivable by segment.
Net accounts receivable by segment
Clinical Labs (by billing category)
As of
July 31, 2011
As of
July 31, 2010
(In 000’s)
(in %)
(In 000’s)
(in %)
Medicare ..............................................................
Third party payers ................................................
Patient self-pay ....................................................
HMO’s ..................................................................
Total Clinical Labs...................................................
$
1,434
3,087
2,865
314
7,700
$
19
40
37
4
100%
849
2,664
2,024
296
5,833
14
46
35
5
100%
Total Life Sciences..................................................
Total accounts receivable .......................................
$
7,545
15,245
7,173
13,006
$
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Changes in the Company’s allowance for doubtful accounts are as follows:
Beginning balance................................................................................
Provision for doubtful accounts ............................................................
Write-offs ..............................................................................................
Ending balance ....................................................................................
Inventories
July 31, 2011
$
2,839
4,431
(3,782)
3,488
$
July 31, 2010
4,786
$
3,480
(5,427)
2,839
$
The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods
inventories consist of material, labor, and manufacturing overhead. Write downs of inventories to market value are based
on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future
demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and require
additional write downs of inventory which would impact our results of operations.
Property, plant and equipment
Property, plant and equipment is stated at cost, and depreciated on the straight-line basis over the estimated useful lives
of the various asset classes as follows: building and building improvements 15-30 years and laboratory machinery and
equipment and office furniture and computer equipment - ranges from 3-10 years. Leasehold improvements are amortized
over the term of the related leases or estimated useful lives of the assets, whichever is shorter.
Impairment of Long-Lived Assets
The Company reviews the recoverability of the carrying value of long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Should indicators of
impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of an asset is adjusted to fair value if its expected
future undiscounted cash flow is less than its book value. No indicators of impairment were identified during the years
ended July 31, 2011, 2010 or 2009.
Goodwill and Indefinite-Lived Intangibles
Goodwill, representing the cost of acquired businesses in excess of the fair value of net assets acquired and indefinite-
lived intangibles are not amortized, but are evaluated annually for impairment. The Company performs its annual
impairment test as of the first day of its fiscal fourth quarter or if indicators of potential impairment exist. Goodwill is
considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In assessing the
recoverability of goodwill, the Company reviews both quantitative as well as qualitative factors to support its assumptions
with regard to fair value. The fair value of a reporting unit is estimated using both a discounted cash flow model and
market approach model. In determining fair value, the Company makes certain judgments on the assumptions included in
the discounted cash flow such as forecasted revenue, gross profit margins, working capital cash flow, the identification of
reporting units and the selection of comparable companies for the market approach. Trademarks are considered impaired
if the carrying amount exceeds their estimated fair value. The fair value of the trademarks is estimated based on a
discounted cash flow model. If these estimates or their related assumptions change in the future as a result of changes in
strategy and/or market conditions, the Company may be required to record an impairment charge. To date, there has
been no impairment charges recorded.
Intangible Assets
Intangible assets (exclusive of patents), arose primarily from acquisitions (See Note 2), and primarily consist of customer
relationships, trademarks, licenses, employment and non-compete agreements, and website and database content.
Finite-lived intangible assets are amortized according to their estimated useful lives, which range from 4 to 15 years.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The Company has capitalized certain legal costs directly incurred in pursuing patent applications as patent costs. When
such applications result in an issued patent, the related costs are amortized over a ten year period or the life of the patent,
whichever is shorter, using the straight-line method. The Company reviews its issued patents and pending patent
applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value,
the unamortized balance in deferred patent costs relating to that patent is immediately expensed.
Comprehensive loss
Comprehensive loss consists of net loss and foreign currency translation adjustments. Foreign currency translation
adjustments included in comprehensive loss were not tax effected as investments in international affiliates are deemed to
be permanent. Accumulated other comprehensive income is a separate component of stockholders’ equity and consists of
foreign currency translation adjustments.
Shipping and Handling Costs
Shipping and handling costs associated with the distribution of finished goods to customers are recorded in cost of goods
sold.
Research and Development
Research and development costs are charged to expense as incurred.
Advertising
All costs associated with advertising are expensed as incurred. Advertising expense, included in Selling, general and
administrative expense, approximated $235, $375 and $634 for the years ended July 31, 2011, 2010 and 2009,
respectively.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The
liability method requires that any tax benefits recognized for net operating loss carryforwards and other items be reduced
by a valuation allowance when it is more likely than not that the benefits may not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon
management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax
authorities. At July 31, 2011, the Company believes it has appropriately accounted for any unrecognized tax benefits. To
the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required
to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be
affected.
Segment Reporting
The Company follows accounting pronouncements which establish standards for reporting information on operating
segments in interim and annual financial statements. An enterprise is required to separately report information about each
operating segment that engages in business activities from which the segment may earn revenues and incur expenses,
whose separate operating results are regularly reviewed by the chief operating decision maker regarding allocation of
resources and performance assessment and which exceed specific quantitative thresholds related to revenue and profit or
loss. The Company’s operating activities are reported in three segments (see Note 17).
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Net income (loss) per share
Basic net income (loss) per share represents net income (loss) divided by the weighted average number of common
shares outstanding during the period. The dilutive effect of potential common shares, consisting of outstanding stock
options and unvested restricted stock, is determined using the treasury stock method. Diluted weighted average shares
outstanding for fiscal 2011, 2010 and 2009 do not include the potential common shares from stock options and unvested
restricted stock because to do so would have been antidilutive and as such is the same as basic weighted average shares
outstanding. The number of potential common shares (“in the money options”) and unvested restricted stock excluded
from the calculation of diluted earnings per share during the years ended July 31, 2011, 2010, and 2009 was 27,000,
51,000, and 105,000, respectively.
For the years ended July 31, 2011, 2010 and 2009, the effect of approximately 785,000, 1,132,000 and 1,191,000
respectively, of outstanding “out of the money” options to purchase common shares were excluded from the calculation of
diluted net loss per share because their effect would be anti-dilutive. The following table sets forth the computation of
basic and diluted net loss per share for the years ended July 31:
Numerator:
Net loss ................................................................................................
$
(12,960) $
(22,233) $
(23,564)
2011
2010
2009
Denominator:
Weighted-average common shares outstanding- Basic ......................
Add: effect of dilutive stock options and restricted stock .....................
Weighted-average common shares outstanding - Diluted ...................
38,357
—
38,357
38,001
—
38,001
37,511
—
37,511
Net loss per share
Basic and diluted ...............................................................................
$
(0.34) $
(0.59) $
(0.63)
Share-Based Compensation
The Company records compensation expense associated with stock options and restricted stock based upon the fair
value of stock based awards as measured at the grant date. The expense is recorded by amortizing the fair values on a
straight line basis over the vesting period, adjusted for estimated forfeitures.
For the years ended July 31, 2011, 2010 and 2009, share-based compensation expense relating to the fair value of
restricted shares and restricted stock units was approximately $1,049, $1,170, and $1,435, respectively (see Note 11). No
excess tax benefits were recognized for the year ended July 31, 2011, 2010 and 2009.
The following table sets forth the amount of expense related to share-based payment arrangements included in specific
line items in the accompanying statement of operations for the years ended July 31:
Cost of clinical laboratory services............................
Research and development ......................................
Selling, general and administrative ...........................
$
$
2011
10
14
1,025
1,049
$
$
2010
12
14
1,144
1,170
$
$
2009
8
13
1,414
1,435
As of July 31, 2011, there was $1.1 million of total unrecognized compensation cost related to nonvested share-based
payment arrangements granted under the Company’s incentive stock plans, which will be recognized over a weighted
average remaining life of approximately eight months.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Subsequent events
In accordance with authoritative guidance, the Company evaluates subsequent events through the date of filing.
Effect of new accounting pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04,
“Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,”
which amends the current fair value measurement and disclosure guidance of Accounting Standards Codification (“ASC”)
Topic 820 “Fair Value Measurement” to include increased transparency around valuation inputs and investment
categorization. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after
December 15, 2011 and is applied prospectively. The Company does not expect the adoption of these provisions to have
a material impact on its consolidated financial statements or on future operating results.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, updating ASC Topic 220,
Comprehensive Income. Under the amended ASC Topic 220, an entity has the option to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance
eliminates the current option to present other comprehensive income and its components in the Statement of
Stockholders’ Equity. This guidance does not change the components that are recognized in other comprehensive income
or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively.
The Company does not believe the adoption of this guidance in the first quarter of fiscal 2013 will have an impact on its
consolidated financial statements or on future operating results.
In July 2011, the FASB issued ASU No. 2011-07: Health Care Entities (Topic 954) — Presentation and Disclosure of
Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care
Entities. This update was issued to provide greater transparency relating to accounting practices used for net patient
service revenue and related bad debt allowances by health care entities. Some health care entities recognize patient
service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount or
has assessed the patient’s ability to pay. These prior accounting practices used by some health care entities resulted in a
gross-up of patient service revenue and the provision for bad debts, causing difficulty for outside users of financial
statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07
requires certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision
for bad debts associated with patient service revenue from an operating expense to a deduction from patient service
revenue and also requires enhanced quantitative and qualitative disclosures relevant to the entity’s policies for
recognizing revenue and assessing bad debts. This update is not designed and will not change the net income reported
by healthcare entities. This update is effective for fiscal years beginning after December 15, 2011, with early adoption
permitted. The Company does not expect that this update will have any material impact on its consolidated financial
statements. The Company is currently evaluating if the update will have any impact on the presentation of its statement of
operations.
Reclassifications
Certain amounts in prior years have been reclassified to conform to current year presentation.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 2 - Acquisitions
Assay Designs, Inc.
On March 12, 2009, Enzo Life Sciences, Inc. and Enzo Life Sciences Acquisition, Inc., a newly formed wholly owned
subsidiary of Enzo Life Sciences, Inc. (“Acquisition Sub”), entered into an asset purchase agreement (“Purchase
Agreement”) with Assay Designs, Inc. (“Assay Designs”). Assay Designs, a privately owned company with annual sales of
approximately $11 million, was engaged in researching, developing, manufacturing, distributing, marketing and selling
specialty immunological and biochemical protein detection kits, assays, reagents, antibodies, recombinant proteins and
related products and providing related services for use in the biotechnology, pharmaceutical and life sciences research
industries (“Business”). Under the terms of the Purchase Agreement, Acquisition Sub purchased from Assay Designs
substantially all of its assets, including trade accounts receivable, inventory, fixed assets, and intellectual property, used in
or related to the Business and assumed certain of Assay Designs’ liabilities, including trade accounts payable, capital
lease obligations and certain other current liabilities.
The execution of the Purchase Agreement and the closing of the transaction occurred simultaneously on March 12, 2009.
The purchase price was $13,061 including acquisition costs of approximately $540. The acquisition was funded with the
Company’s cash. Effective March 12, 2009, Assay Designs became a wholly-owned subsidiary of Enzo Life Sciences.
The consolidated financial statements include the results of operations for Assay Designs from the date of acquisition.
The following table presents the fair values of the assets acquired and liabilities assumed for the Assay Designs
acquisition:
Current assets ..........................................................................................................
Property and equipment...........................................................................................
Other assets .............................................................................................................
Intangible assets ......................................................................................................
Goodwill....................................................................................................................
Total assets acquired ............................................................................................
$
4,235
1,747
11
6,360
1,823
14,176
Less:
Current liabilities.......................................................................................................
Total liabilities assumed........................................................................................
Net assets acquired .................................................................................................
1,115
1,115
$ 13,061
The purchase price allocation is based on a valuation of acquired tangible and intangible assets based on the final
valuation completed in fiscal 2010. The Company determined the fair value of the identifiable intangible assets based on
various factors including the cost and discounted cash flow models in determining the purchase price allocation. The
excess of the total purchase price over the fair value of the net assets acquired, including the estimated fair value of the
identifiable intangible assets, has been allocated to goodwill.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
For financial reporting purposes, useful lives for the acquisitions have been assigned as follows:
Customer relationships ...........................................................................................
Trademarks .............................................................................................................
Other intangibles .....................................................................................................
8 -15 years
Indefinite
4-5 years
The following unaudited pro forma financial information presents the combined results of operations of the Company and
the acquisition completed in 2009 as if the acquisition had occurred as of August 1, 2008. The pro forma financial
information reflects appropriate adjustments for amortization of intangible assets and interest expense. The pro forma
financial information presented is not necessarily indicative of either the actual consolidated operating results had the
acquisition been completed at the beginning of each period or future operating results of the consolidated entities.
Year ended July 31, 2009
Net revenues .............................................................................................................
Net loss .....................................................................................................................
Net loss per common share:
2009
$
96,227
$ (24,098 )
Basic and diluted....................................................................................................
$
(0.64 )
Note 3- Supplemental disclosure for statement of cash flows
In the years ended July 31, 2011, 2010, and 2009, income taxes paid by the Company approximated $107, $186, and
$220 respectively.
In fiscal 2009, certain officers of the Company exercised 206,576 stock options in a non-cash transaction. The officers
surrendered 99,985 shares of previously acquired common stock to exercise the stock options. The Company recorded
approximately $1.1 million, the market value of the surrendered shares, as treasury stock.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 4 – Short term investments
At July 31, 2011 and 2010 the Company’s short-term investments, whose fair value approximates cost, are in U.S.
Treasury bills, which are purchased at discounts with remaining maturities of under ninety days.
The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level
3 measurements). The three levels of the fair value hierarchy under the guidance are described below:
Level 1: Valuations based on quoted market prices in active markets for identical assets or liabilities.
Level 2: Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are
not active, or other inputs that are observable or can be corroborated by observable data for
substantially the full term of the assets or liabilities
Level 3: Valuations based on inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities
At July 31, 2011 and 2010, the Company’s short-term investments are classified as Level 1 assets.
Note 5 – Accumulated Other Comprehensive Income (Loss)
The following is a summary of accumulated other comprehensive income (loss), relating to the effect of foreign currency
translation:
Balance - July 31, 2008........................................................
Fiscal 2009 – unrealized loss on foreign currency
translation..........................................................................
Balance – July 31, 2009.......................................................
Fiscal 2010 – unrealized gain on foreign currency
translation..........................................................................
Balance – July 31, 2010.......................................................
Fiscal 2011 – unrealized gain on foreign currency
translation..........................................................................
Balance – July 31, 2011.......................................................
$
Note 6 - Inventories
Inventories consisted of the following at July 31:
Accumulated income
(loss) before tax
1,586
$
Tax (expense)
or benefit
—
Accumulated income
(loss) net of tax
1,586
$
(1,310)
276
599
875
2,918
3,793
—
—
—
—
—
—
$
(1,310)
276
599
875
2,918
3,793
Raw materials................................................................................
Work in process.............................................................................
Finished products..........................................................................
$
$
2011
1,063
2,517
5,680
9,260
$
$
2010
921
2,136
5,825
8,882
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 7 – Property, plant, and equipment
At July 31, 2011 and 2010 property, plant, and equipment consist of:
Building and building improvements .................................................
Machinery and equipment.................................................................
Office furniture and computer equipment..........................................
Leasehold improvements ..................................................................
Accumulated depreciation and amortization .....................................
Land and land improvements............................................................
2011
4,320
6,916
14,551
4,694
30,481
(20,858)
9,623
712
10,335
$
$
2010
4,309
6,814
13,057
4,572
28,752
(17,606)
11,146
712
11,858
$
$
Note 8 – Goodwill and intangible assets
The Company’s change in the net carrying amount of goodwill by business segment is as follows:
August 1, 2009 ...................................................................................................
Foreign currency translation...............................................................................
July 31, 2010 ......................................................................................................
Additional purchase price consideration – see Note 16.....................................
Foreign currency translation...............................................................................
July 31, 2011 ......................................................................................................
Enzo Life
Sciences
17,444
47
17,491
1,150
1,280
19,921
$
$
Enzo
Clinical
Labs
7,452
—
7,452
—
—
7,452
$
$
Total
24,896
47
24,943
1,150
1,280
27,373
$
$
Intangible assets, all of which are included in the Life Sciences segment, consist of the following:
Finite-lived intangible assets:
Patents .........................................
Customer relationships ................
Non-compete and employment
agreements ...............................
Website and acquired content .....
Licensed technology and other ....
Indefinitely-lived intangible assets:
Trademarks ..................................
Total ................................................
July 31, 2011
Accumulated
Amortization
Gross
Net
Gross
July 31, 2010
Accumulated
Amortization
Net
$ 11,027
12,789
$
(10,278) $
(3,472)
749
9,317
$ 11,027
12,099
$
(10,154) $
(2,248)
873
9,851
547
1,063
649
(547)
(748)
(355)
—
315
294
478
1,009
628
(396)
(489)
(285)
82
520
343
9,310
$ 35,385
$
—
9,310
(15,400) $ 19,985
8,699
$ 33,940
$
—
8,699
(13,572) $ 20,368
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Estimated amortization expense related to these finite-lived intangible assets for the five succeeding fiscal years ending
July 31 is as follows:
2012 ........................................................................................................................
2013 ........................................................................................................................
2014 ........................................................................................................................
2015 ........................................................................................................................
2016 ........................................................................................................................
$
1,367
1,311
1,196
1,154
1,143
At July 31, 2011, the weighted average useful lives of amortizable intangible assets were approximately eight years.
Amortization expense for the years ended July 31, 2011, 2010, and 2009 was $1,507, $1,542, and $1,277, respectively.
Note 9 - Income taxes
The benefit (provision) for income taxes for fiscal years ended July 31 is as follows:
Current (provision) benefit:
2011
2010
2009
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
At July 31, 2011, the Company had net deferred tax liabilities of approximately $2.9 million which consists primarily of
identifiable intangible assets and cumulative tax deductions in excess of book expenses recognized by foreign
subsidiaries.
Net deferred tax liabilities are included in the consolidated balance sheets as follows:
Deferred taxes:
Current .................................................................................................................................
Non-current ..........................................................................................................................
July 31, 2011
July 31, 2010
$
$
—
2,934
2,934
$
$
21
2,582
2,603
The Company recorded a valuation allowance during the year ended July 31, 2011 and 2010 equal to domestic and
certain foreign net deferred tax assets. The Company believes that the valuation allowance is necessary as it is not more
likely than not that the deferred tax assets will be realized in the foreseeable future based on positive and negative
evidence available at this time. This conclusion was reached because of uncertainties relating to future taxable income, in
terms of both its timing and its sufficiency, which would enable the Company to realize the deferred tax assets.
As of July 31, 2011, the Company had U.S. federal net operating loss carryforwards of approximately $75.0 million. The
U.S. federal tax loss carryforwards, if not fully utilized, expire between 2012 and 2031. Utilization is dependent on
generating sufficient taxable income prior to expiration of the tax loss carryforwards. As of July 31, 2011, the Company
had foreign loss carryforwards of approximately $1.5 million.
As a result of certain acquisitions approximately $1.5 million of the Company’s U.S. federal net operating loss
carryforwards are subject to an annual limitation under Internal Revenue Code Section 382 due to the ownership change.
However, management does not believe that such a change would have a significant impact on the Company’s ability to
utilize its tax loss carryforwards.
The components of loss before income taxes consisted of the following for the years ended July 31:
United States operations.................................................................................
International operations...................................................................................
Loss before taxes............................................................................................
2011
2010
2009
$ (12,284) $ (19,642) $ (21,221)
(2,256)
$ (12,823) $ (22,261) $ (23,477)
(2,619)
(539)
The (provision) benefit for income taxes were at rates different from U.S. federal statutory rates for the following reasons
for the years ended July 31:
Federal statutory rate ......................................................................................
Expenses not deductible for income tax return purposes...............................
State income taxes, net of (benefit) of federal tax deduction..........................
Change in valuation allowance .......................................................................
Reversal of tax reserve ...................................................................................
Other ...............................................................................................................
2011
34%
(2.3)%
1.0%
(34.6)%
0.1%
0.7%
(1.1)%
2010
34%
(1.5)%
0.1%
(32.3)%
0.5
(0.7)%
0.1%
2009
34%
(0.4)%
2.5%
(37.8)%
—
1.3
(0.4)%
U.S. federal income taxes have not been provided on the undistributed earnings of approximately $230 at July 31, 2011 of
the Company’s foreign subsidiaries, because the determination of the amount of unrecognized US federal income tax
liability with respect to such earnings is not material.
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The Company files income tax returns in the U.S. Federal jurisdiction, various U.S. state jurisdictions and several foreign
jurisdictions. With few exceptions, the years that remain subject to examination are years July 31, 2008 through 2010.
Note 10 – Accrued Liabilities, Other Current Liabilities and Other Liabilities
At July 31 accrued liabilities consist of:
Legal.............................................................................................................................................
Payroll, benefits, severance and commissions ............................................................................
Research and development .........................................................................................................
Professional fees..........................................................................................................................
Outside reference lab testing .......................................................................................................
Other ............................................................................................................................................
At July 31 other current liabilities consist of:
Liability for purchase price consideration (see Note 16)..............................................................
Deferred revenue .........................................................................................................................
Other ............................................................................................................................................
2011
610
4,286
709
782
—
1,801
8,188
2011
1,150
396
137
1,683
$
$
$
$
2010
877
4,012
716
963
194
1,747
8,509
2010
—
496
76
572
$
$
$
$
Self-Insured Medical Plan
Beginning in February 2010 in an attempt to offset the cost of rising health care expenses, the Company began self-
funding medical insurance coverage for certain of its U.S. based employees. The risk to the Company is being limited
through the use of individual and aggregate stop loss insurance. As of July 31, 2011 and July 31 2010, the Company has
established a reserve of $0.4 million and $0.6 million which is included in accrued liabilities, for claims that have been
reported but not paid and incurred but not reported. The reserve is based upon the Company’s historical payment trends,
claim history and current estimates.
Installment Loans
The Company has installment loans outstanding for transportation and lab equipment aggregating $0.2 million at July 31,
2011, which bear interest at interest rates ranging from 0% to 5.75% per annum, and are secured by the underlying
assets. The principal payments under the installment loans are as follows: 2012 - $0.1 million, included in Other Current
Liabilities, 2013 – $0.06 million and 2014 - $0.04 million totaling $0.1 million included in Other Liabilities.
Note 11 – Stockholders’ equity
Common stock
In June 2009, the Company issued 202,196 shares of common stock at a fair value of $1.0 million in connection with the
Biomol International acquisition earn-out of $2.5 million.
Treasury stock
In fiscal 2011, the Company issued 173,834 shares from treasury stock for its employees’ 401(k) matched contributions
obligation. The Company recorded an expense of $690 for the match, reducing treasury stock by $2,467 for the average
acquisition cost of such shares and adjusting additional paid in capital by $1,777.
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
In fiscal 2010, the Company issued 111,706 shares from treasury stock for its employees’ 401(k) matched contributions
obligation. The Company recorded an expense of $697 for the match, reducing treasury stock by $1,586 for the average
acquisition cost of such shares and adjusting additional paid in capital by $889.
In fiscal 2009, the Company issued 142,150 shares from treasury stock for its employees’ 401(k) matched contributions
obligation. The Company recorded an expense of $582 for the match, reducing treasury stock by $2,017 for the average
acquisition cost of such shares and adjusting additional paid in capital by $1,435.
In fiscal 2009, certain officers of the Company exercised 206,576 stock options in a non-cash transaction. The officers
surrendered 99,985 shares of previously acquired common stock to exercise the stock options. The Company recorded
approximately $1.1 million, the market value of the surrendered shares, as treasury stock.
Incentive stock plans
The Company has an incentive stock option plan (the “1999 Plan”) and an incentive stock option and restricted stock
award plan (the “2005 Plan”),under which the Company may grant options for up to 2,312,356 common shares under the
1999 Plan and options and restricted stock awards for up to 1,000,000 common shares under the 2005 Plan. On January
14, 2011, the Company’s stockholders approved the adoption of the 2011 Incentive Plan (the “2011 Plan”) which provides
for the issuance of equity awards, including among others, options, restricted stock and restricted stock units for up to
3,000,000 Common Shares. No additional awards may be granted under the 1999 or 2005 Plans. The exercise price of
options granted under the 2011 Plan, and consistent with other Plans, is equal to or greater than fair market value of the
Common Stock on the date of grant. Unless terminated earlier by the Board of Directors the 2011 Plan will terminate at
the earliest of; (a) such time as no shares of Common Stock remain available for issuance under the 2011 Plan or (b)
tenth anniversary of the effective date of the 2011 Plan. Awards outstanding upon expiration of the 2011 Plan shall remain
in effect until they have been exercised, terminated, or have expired. As of July 31, 2011, there were approximately
2,818,300 shares available for grant under the 2011 Plan.
Options granted pursuant to the plans may be either incentive stock options or non statutory options. Stock options
generally become exercisable at 25% per year after one year and expire ten years after the date of grant. The 2011 Plan
provides for the issuance of restricted stock and restricted stock unit awards which generally vest over a two to four year
period.
A summary of the information pursuant to the Company’s stock option plans for the years ended July 31, 2011, 2010, and
2009 is as follows:
2011
2010
2009
Weighted -
Average
Exercise
Price
Weighted -
Average
Exercise
Price
Options
Weighted -
Average
Exercise
Price
Options
Options
Outstanding at beginning of
year .........................................
Exercised....................................
Cancelled ...................................
Outstanding at end of year.........
Exercisable at end of year..........
Weighted average fair value of
options granted during year ....
1,132,450
—
$
$
(347,326) $
$
785,124
$
785,124
14.30
—
13.78
14.53
14.53
$
1,191,519
$
—
(59,069) $
$
$
1,132,450
1,132,450
$
—
14.41
—
16.14
14.30
14.30
—
2,275,415
$
(251,162) $
(832,734) $
$
$
1,191,519
1,191,519
13.13
5.87
13.87
14.41
14.41
$
—
The aggregate intrinsic value of stock options exercised during the years ended July 31, 2011, 2010 and 2009, including
the non-cash transactions (see Note 3) was $0, $0 and $1.4 million, respectively. There is no aggregate intrinsic value of
options both outstanding and exercisable at July 31, 2011.
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The following table summarizes information for stock options outstanding at July 31, 2011:
Options outstanding and exercisable
Range of Exercise prices
$8.33-12.25 ........................................................
$12.93-19.02 ......................................................
$20.20 ................................................................
Shares
362,489
413,952
8,683
785,124
Restricted Stock Awards
Weighted- Average
Remaining
Contractual Life in
years
1.45
3.0
0.5
Weighted-
Average Exercise
Price
11.80
16.80
20.20
$
$
$
During fiscal 2011, 2010 and 2009, the compensation committee of the Company’s board of directors approved grants of
restricted stock and restricted stock unit awards (the “Awards”), respectively, to the Company’s directors, certain officers
and certain employees under the 2011 and 2005 Plans. The Awards vest upon the recipient’s continued employment or
director service ratably over either two, three or four years. Share-based compensation expense is based on the fair value
of the award as measured on the grant date and is recorded over the vesting period on a straight-line basis. The Awards
will be forfeited if the recipient ceases to be employed by or serve as a director of the Company, as defined in the Plans’
terms. The Awards settle in shares of the Company’s common stock on a one-for-one basis. As of July 31, 2011, 311,952
shares were unvested.
A summary of the information pursuant to the Company’s Restricted Stock Awards for the years ended July 31, 2011,
2010 and 2009 is as follows:
2011
Weighted -
Average
Award Price
Awards
5.50
$
Outstanding at beginning of year .... 417,578
3.78
Awarded .......................................... 181,643
$
5.11
Vested ............................................. (263,112) $
5.27
(24,157) $
Forfeited ..........................................
4.84
$
Outstanding at end of year.............. 311,952
Weighted average market value of
awards granted during year .........
$
3.78
2010
Weighted -
Average
Award Price
Awards
6.05
$
377,400
5.54
241,610
$
6.46
(192,845) $
9.29
(8,587) $
5.50
$
417,578
2009
Weighted -
Average
Award Price
Awards
12.34
$
220,240
291,801
4.05
$
12.11
(128,941) $
10.18
(5,700) $
6.05
$
377,400
$
5.54
$
4.05
Note 12 - Employee benefit plan
The Company has a qualified Salary Reduction Profit Sharing Plan (the “Plan”) for eligible U.S. employees under Section
401(k) of the Internal Revenue Code. The Plan provides for voluntary employee contributions through salary reduction
and voluntary employer contributions at the discretion of the Company. For the years ended July 31, 2011, 2010, and
2009, the Company authorized employer matched contributions of 50% of the employees’ contribution up to 10% of the
employees’ compensation, payable in Enzo Biochem, Inc. common stock. The share-based 401(k) employer matched
contributions and accrued expense was approximately $690, $1,115, and $582 in fiscal years 2011, 2010, and 2009,
respectively.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The Company’s Swiss operations provide a pension plan under the Swiss government’s social security system for Swiss
employees. Employees are required to contribute based on a formula and the Company’s Swiss operations make
contributions of at least 50% of the employee contribution. During the years ended July 31, 2011, 2010 and 2009, the
employer contributions related to the Swiss benefit pension plan was approximately $480, $408 and $399, respectively.
Pension expense at the other international operations was approximately $38, $36 and $36 for the years ended July 31,
2011, 2010 and 2009, respectively.
Note 13 – Royalty and other income
The Company has a license agreement with Qiagen that began in 2005, whereby the Company earns quarterly running
royalties on the net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018.
During the years ended July 31, 2011, 2010 and 2009, the Company recorded royalty income under the Agreement of
approximately $6.8 million, $6.8 million and $6.7 million, respectively, which is included in the Life Sciences segment.
Note 14 - Licensing and Supply Agreement
On April 27, 2007 (the “Effective Date”) Enzo Life Sciences, Inc. (“Life Sciences”) and Abbott Molecular Inc. (“Abbott”)
entered into a 5 year agreement, which is still in effect, covering the supply of certain of Enzo Life Sciences products to
Abbott for use in their product line. The parties also entered into a limited non-exclusive royalty bearing cross-licensing
agreement (“Licensing Agreement”) for various patents. The Licensing Agreement requires each party to pay royalties, as
defined through the lives of the related non-expired patents. In connection with a component of the License Agreement,
Abbott paid a one-time fee of $1.5 million relating to a fully paid-up license and sublicense, as defined. This one-time fee
was recognized as revenue through August 31, 2010 representing the longest expected patent life of the related patents.
Abbott has notified the Company that they have made a final royalty payment because they are unaware of any non-
expired patents. The Company is presently reviewing its patent portfolio and Abbott’s position. The Licensing Agreement
between the parties remains in full force and effect and the Company continues its commercialization efforts under the
contract terms. At July 31, 2010, the Company’s balance sheet includes current deferred revenue of approximately $0.1
million relating to the one-time fee. During the years ended July 31, 2011, 2010, and 2009, the Company recorded
approximately $0.4 million, $3.0 million and $2.7 million, respectively, in royalties and license fee income under the
Licensing Agreement.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 15 – Commitments
Leases
The Company leases equipment, office and laboratory space under several non-cancelable operating leases that expire
between August 2011 and May 2020. Certain leases include renewal options and rent escalation clauses. An entity
owned by certain executive officers/directors of the Company owns the building that the Company leases as its main
facility for laboratory operations and certain research operations. In March 2005, the Company amended and extended
the lease for another 12 years. In addition to the minimum annual rentals of space, the lease is subject to annual
increases, based on the consumer price index. Annual increases are limited to 3% per year. Rent expense, inclusive of
real estate taxes, approximated $1,509, $1,470, and $1,424 during fiscal years 2011, 2010 and 2009, respectively.
Total rent expense incurred by the Company during fiscal 2011, 2010 and 2009 was approximately $4,023, $4,076, and
$3,818, respectively. Minimum future annual rentals under non-cancelable operating leases, net of sublease rental
income of $117 as of July 31, 2011, are as follows:
Years ended July 31,
2012 .................
2013 .................
2014 .................
2015 .................
2016 .................
Thereafter .................
$
4,520
3,750
2,935
2,705
2,512
4,170
$ 20,592
Employment Agreements
The Company has employment agreements with certain officers that are cancelable at any time but provide for severance
pay in the event an officer is terminated by the Company without cause, as defined in the agreements. Unless cancelled
earlier, the contracts expire through May 2012. Aggregate minimum compensation commitments, exclusive of any
severance provisions, for the year ending July 31, 2012 is $1,223.
Note 16– Contingencies
In October 2002, the Company filed suit in the United States District Court of the Southern District of New York against
Amersham plc, Amersham Biosciences, Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation,
Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences, Inc. In January 2003, the Company
amended its complaint to include defendants Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in the suit
are for breach of contract; patent infringement; unfair competition under state law; unfair competition under federal law;
tortious interference with business relations; and fraud in the inducement of contract. The complaint alleges that these
counts arise out of the defendants’ breach of distributorship agreements with the Company concerning labeled nucleotide
products and technology, and the defendants’ infringement of patents covering the same. In April, 2003, the court directed
that individual complaints be filed separately against each defendant. The defendants have answered the individual
complaints and asserted a variety of affirmative defenses and counterclaims. Fact discovery is ongoing. The court issued
a claim construction opinion on July 10, 2006. The Company and Sigma Aldrich (“Sigma”) entered into a Settlement
Agreement and Release effective September 15, 2006 (the “Agreement”). Pursuant to the Agreement, the Company’s
litigation with Sigma was dismissed and the Company recognized $2 million on settlement in the quarter ending October
31, 2006. On January 3, 2007, the remaining defendants moved for summary judgment on all counts in the individual
complaints. During a two-day hearing held on July 17 through July 18, 2007, the defendants subsequently withdrew the
invalidity portion of their summary judgment motions. On March 13, 2009, the court denied defendants’ summary
judgment motion and stayed the cases pending resolution of an appeal to the United States Court of Appeals for the
Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March 26, 2010, the
United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of
invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings
consistent with the Federal Circuit’s opinion. On September 23, 2010, Applera petitioned the Supreme Court of the United
States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied
Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Amersham action.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
On August 26, 2011, the court allowed the defendants to renew their motions for summary judgment related only to
alleged non-infringement of some of the patents in suit. Defendants’ initial brief is to be filed by October 11, 2011, and all
briefing is to be completed by December 16, 2011. The Company does not believe the defendants’ motion has merit, and
will oppose it vigorously.
On October 28, 2003, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court of the
Eastern District of New York against Affymetrix, Inc (“Affymetrix”). The Complaint alleges that Affymetrix improperly
transferred or distributed substantial business assets of the Company to third parties, including portions of the Company’s
proprietary technology, reagent systems, detection reagents and other intellectual property. The Complaint also charges
that Affymetrix failed to account for certain shortfalls in sales of the Company’s products, and that Affymetrix improperly
induced collaborators and customers to use the Company’s products in unauthorized fields or otherwise in violation of the
agreement. The Complaint seeks full compensation from Affymetrix to the Company for its substantial damages, in
addition to injunctive and declaratory relief to prohibit, among other things, Affymetrix’s unauthorized use, development,
manufacture, sale, distribution and transfer of the Company’s products, technology, and/or intellectual property, as well as
to prohibit Affymetrix from inducing collaborators, joint venture partners, customers and other third parties to use the
Company’s products in violation of the terms of the agreement and the Company’s rights. Subsequent to the filing of the
Complaint against Affymetrix, Inc. referenced above, on or about November 10, 2003, Affymetrix, Inc. filed its own
Complaint against the Company and its subsidiary, Enzo Life Sciences, Inc., in the United States District Court for the
Southern District of New York, seeking among other things, declaratory relief that Affymetrix, Inc., has not breached the
parties’ agreement, that it has not infringed certain of Enzo’s Patents, and that certain of Enzo’s patents are invalid. The
Affymetrix Complaint also seeks damages for alleged breach of the parties’ agreement, unfair competition, and tortuous
interference, as well as certain injunction relief to prevent alleged unfair competition and tortuous interference. The
Company does not believe that the Affymetrix Complaint has any merit and intends to defend vigorously. Affymetrix also
moved to transfer venue of Enzo’s action to the Southern District of New York, where other actions commenced by Enzo
were pending as well as Affymetrix’s subsequently filed action. On January 30, 2004, Affymetrix’s motion to transfer was
granted. Accordingly, the Enzo and Affymetrix actions are now both pending in the Southern District of New York. Initial
pleadings have been completed and discovery has commenced. The Court issued a Markman (claim construction)
opinion on July 10, 2006. On January 3, 2007, Affymetrix moved for summary judgment on all counts of the Complaint. A
two-day hearing on Affymetrix’s summary judgment motion was held on July 17 through July 18, 2007. On March 13,
2009, the court denied Affymetrix’s motion and stayed the case pending resolution of an appeal in the United States Court
of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March
26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of
summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for
further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s remand of the Applera
case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained its stay of the Affymetrix
case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of
certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition
for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Affymetrix action. On August 26, 2011, the
court allowed Affymetrix to renew its motion for summary judgment related only to alleged non-infringement of one patent
in suit. Affymetrix’s initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16,
2011. The Company does not believe Affymetrix’s motion has merit, and will oppose it vigorously.
On June 2, 2004, Roche Diagnostic GmbH and Roche Molecular Systems, Inc. (collectively “Roche”) filed suit in the U.S.
District Court of the Southern District of New York against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively
“Enzo”). The Complaint was filed after Enzo rejected Roche’s latest cash offer to settle Enzo’s claims for, inter alia,
alleged breach of contract and misappropriation of Enzo’s assets. The Complaint seeks declaratory judgment (i) of patent
invalidity with respect to Enzo’s 4,994,373 patent (the “‘373 patent”), (ii) of no breach by Roche of its 1994 Distribution and
Supply Agreement with Enzo (the “1994 Agreement”), (iii) that non-payment by Roche to Enzo for certain sales of Roche
products does not constitute a breach of the 1994 Agreement, and (iv) that Enzo’s claims of ownership to proprietary
inventions, technology and products developed by Roche are without basis. In addition, the suit claims tortious
interference and unfair competition. The Company does not believe that the Complaint has merit and intends to vigorously
respond to such action with appropriate affirmative defenses and counterclaims. Enzo filed an Answer and Counterclaims
on November 3, 2004 alleging multiple breaches of the 1994 Agreement and related infringement of Enzo’s patents.
Discovery has commenced. The Court issued a Markman opinion on July 10, 2006. On January 3, 2007, Roche moved
for summary judgment on all counts of the Complaint.
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
During a two-day hearing held on July 17 through July 18, 2007, Roche subsequently withdrew its invalidity portion of its
summary judgment motion. On March 13, 2009, the court denied Roche’s motion and stayed the cases pending resolution
of an appeal to the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera
Corporation and Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the
District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and
remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal
Circuit’s remand of the Applera case to the District of Connecticut and the impending trial, on May 27, 2010, the court
maintained its stay of the Roche case until further notice. On September 23, 2010, Applera petitioned the Supreme Court
of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme
Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Roche
action. On August 26, 2011, the court allowed Roche to renew its motion for summary judgment related only to alleged
non-infringement of some of the patents in suit. Roche’s initial brief is to be filed by October 11, 2011, and all briefing is to
be completed by December 16, 2011. The Company does not believe Roche’s motion has merit, and will oppose it
vigorously.
On June 7, 2004, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court for the District of
Connecticut against Applera Corporation and its wholly-owned subsidiary Tropix, Inc. The complaint alleges infringement
of six patents (relating to DNA sequencing systems, labeled nucleotide products, and other technology). Yale University is
the owner of four of the patents and the Company is the exclusive licensee. These four patents are commonly referred to
as the “Ward” patents. Accordingly, Yale is also a plaintiff in the lawsuit. Yale and Enzo are aligned in protecting the
validity and enforceability of the patents. Enzo Life Sciences is the owner of the remaining two patents. The complaint
seeks permanent injunction and damages (including treble damages for willful infringement). Defendants answered the
complaint on July 29, 2004. The answer pleads affirmative defenses of invalidity, estoppels and laches and asserts
counterclaims of non-infringement and invalidity. A Markman hearing was held on May 25, 2006 and the district court
issued a ruling on October 12, 2006. On August 17, 2007, the Company voluntarily dismissed the infringement claims for
one of the patents in suit without prejudice. Defendants similarly dismissed their defenses and counterclaims as to that
patent. On the same date, the Company conceded a judgment of non-infringement for another of the patents in suit based
on the district court’s claim construction, reserving the right to appeal their construction. The defendants filed motions for
summary judgment for invalidity, laches and non-infringement of the Ward patents on March 5, 2007. The Company and
other plaintiff filed a motion for summary judgment on infringement of the Ward patents on March 5, 2007. On August 20,
2007, the district court heard oral arguments on the motions for summary judgment. On September 6, 2007, the court
granted defendants’ motion for summary judgment of invalidity of three of the remaining Ward patents and entered
judgment to that effect. The Company and other plaintiff filed a notice of appeal to the United States Court of Appeals for
the Federal Circuit on September 7, 2007. On January 30, 2008, the Court of Appeals for the Federal Circuit granted the
Company’s alternative motion to dismiss its appeal and remand to the Connecticut Court for further proceedings incident
to an entry of a final, appealable judgment. The Company requested the Connecticut Court to dispose of all outstanding
issues (including the Company’s claim under the fourth Ward patent and certain counterclaims of Applera’s) and enter
final judgment. The Connecticut Court granted this request. The Company subsequently filed an Appeal on April 7, 2009.
On March 26, 2010, the Federal Circuit issued an order concluding that the claims of U.S. Patent Nos. 5,328,824 and
5,449,767 were not indefinite and that there were genuine issues of material fact as to anticipation. The Court reversed
the district court’s summary judgment of invalidity of those two patents and remanded the case back to the Connecticut
Court. Applera and Tropix then filed a combined petition for panel rehearing and rehearing en banc. On May 26, 2010, the
Federal Circuit issued an order denying both petitions. Applera filed a petition with the U.S. Supreme Court for a writ
of certiorari on September 23, 2010. On June 19, 2011, the Court denied that petition. The case is currently scheduled for
trial in February of 2012. There can be no assurance that the Company will be successful in this litigation. Even if the
Company is not successful, management does not believe that there will be a significant adverse monetary impact on the
Company.
On or about March 6, 2002, an action was commenced against the Company and certain officers and directors, by an
investor in the Company, Lawrence Glazer and on behalf of others, who had filed for bankruptcy protection. The complaint
alleged securities and common law fraud and breach of fiduciary duty and sought in excess of $150 million in damages.
On August 22, 2002, the complaint was voluntarily dismissed; however a new substantially similar complaint was filed at
the same time. On October 21, 2002, the Company and the other defendants filed a motion to dismiss the complaint, and
the plaintiffs responded by amending the complaint and dropping their claims against defendants Keating and Yates. On
November 18, 2002, the Company and the other defendants again moved to dismiss the Amended Complaint.
F-27
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
On July 16, 2003, the Court issued a Memorandum Opinion dismissing the Amended Complaint in its entirety with
prejudice. Plaintiffs thereafter moved for reconsideration but the Court denied the motion on September 8, 2003. Plaintiffs
thereafter appealed the decision to the United States Court of Appeals for the Fourth Circuit. On March 21, 2005, the
Fourth Circuit affirmed the lower Court’s prior dismissal of all claims asserted in the action with the sole exception of a
portion of the claim for common law fraud and remanded that remaining portion of the action to the U.S. District Court for
the Eastern District of Virginia. On May 20, 2005, defendants again moved the District Court to dismiss the sole remaining
claim before it. On July 14, 2005, the District Court granted defendants’ renewed motion to dismiss. On July 29, 2005,
Plaintiffs moved to amend their Complaint and for reconsideration. On August 19, 2005, the Court denied Plaintiffs’ motion
to amend and entered final judgment dismissing the Complaint. Plaintiffs then appealed the order and judgment to the
Fourth Circuit. On September 21, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of
the Complaint. Thereafter, in March 2007, the United States Supreme Court denied the Glasers’ Petition for Certiorari.
Nevertheless, on January 14, 2011, many years after it was finally dismissed, Glaser filed a motion for reconsideration of
the dismissal of his case with the United States District Court for the Eastern District of Virginia, along with a motion for
sanctions, claiming in pertinent part that the Court was defrauded. The Company filed papers in opposition to the motion
and, on April 1, 2011, the Court denied Glaser’s motion. Glaser subsequently appealed that dismissal to the Fourth
Circuit. On October 4, 2011, his appeal was denied. The Company intends to defend vigorously any further effort by
Glaser to re-open this long ago dismissed action.
In January 2006, three actions were filed against the Company and certain of its officers and directors by Francis Scott
Hunt and others. These actions were filed by the same attorney who had previously filed a virtually identical claim against
the Company and certain of its officers and directors in the Eastern District of Virginia. These actions are in many respects
identical to the Glaser action. The first action (Hunt) was filed on or about January 10, 2006, on behalf of seven alleged
shareholders. The second action (Roberts) was filed on or about January 11, 2006, and was ultimately consolidated at the
Company’s request with the Hunt Action before Judge Scheindlin. One of the plaintiffs in the first action, Paul Lewicki,
subsequently withdrew his claim for procedural reasons and re-filed a separate virtually identical complaint (the third
action listed above) on or about August 21, 2006, and the Lewicki Action was also consolidated before Judge Scheindlin.
The pleadings in all three actions are virtually identical and seek to set forth only a claim for common law fraud, based on
the same essential allegations set forth in the Glaser Action, i.e., that there was a fraudulent scheme approximately ten
years ago to pump and dump Enzo securities. The Company and the other defendants moved to dismiss all of the
Complaints and that motion was granted by Judge Scheindlin. The Plaintiffs then amended their Complaints and the
Hunts moved for reconsideration. The Company and the other defendants opposed the motion for reconsideration and
moved again to dismiss the Amended Complaints that were filed. The Hunts’ motion for reconsideration was denied and
two of the other Plaintiffs (the McMahons) thereafter withdrew their complaint with prejudice voluntarily. After further
delays during which the remaining Plaintiffs hired new counsel, Plaintiffs proposed yet another revised Complaint. The
defendants’ motions to dismiss the latest version of the Complaints of the remaining Plaintiffs was granted in part and
denied in part. The remaining plaintiffs and defendants, including Enzo Biochem, Inc., then proceeded with discovery.
Following the completion of discovery, the defendants moved for summary judgment. On June 15, 2009, Judge Scheindlin
granted the remaining defendants’ motion for summary judgment and dismissed the complaints. The remaining Plaintiffs
then filed a notice of appeal to the Second Circuit Court of Appeals. On August 30, 2011, the Second Circuit denied the
appeal. The remaining Plaintiffs then moved for a rehearing, and that motion is currently pending. The Company
continues to believe that these actions have no merit whatsoever and expects the Second Circuit to reaffirm the denial of
their appeal. In any event, the Company will continue to defend these actions vigorously.
On or about September 22, 2010, Mayflower Partners, L.P. f/k/a Biomol International, L.P. (“Mayflower”) filed an action
against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (together “Enzo”) in the United States District Court for the
Southern District of New York, alleging breach of the stock and asset purchase agreement dated as of May 8, 2008
between Enzo and Mayflower (the “Agreement”). Pursuant to the Agreement, the Company acquired the assets of
Mayflower, and agreed, among other things, to make certain contingent earn-out payments to Mayflower, accounted for
as additional purchase price consideration, if certain performance thresholds were met for each of the two annual periods
following the closing. Mayflower alleges that Enzo breached the Agreement by allegedly failing to operate the acquired
business in good faith during the second earn-out period and engaging in conduct the primary purpose of which was to
avoid making a second earn-out period payment under the Agreement. In addition, Mayflower claims that Enzo breached
the Agreement by allegedly failing to provide the documentation appropriate to support the calculation of defined financial
criteria for the second earn-out period as required under the Agreement.
F-28
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
As part of the litigation, Mayflower moved by Order to Show cause to enjoin the accounting procedure specified under the
Agreement. Mayflower’s motion was heard by a U.S. District Court Judge on September 27, 2010, who directed that the
parties first go forward with the accounting procedure, as provided under the Agreement, before moving further with the
litigation. The parties were unable to resolve the dispute through the accounting procedure. On January 27, 2011,
Mayflower filed an amended complaint. On February 25, 2011, Enzo filed an answer to the amended complaint and on
March 4, 2011 filed an amended counterclaim seeking fees and expense of the suit as provided under the Agreement. As
provided under the Agreement, Mayflower’s maximum contingent earn-out was $2.5 million payable in either Enzo
common stock or cash. The Company and Mayflower are currently negotiating a resolution to the second and final earn-
out dispute and based on such negotiation the Company has accrued a $1.15 million settlement, expected to be in cash,
which has been recorded in Goodwill as additional purchase price consideration. The Company recorded the liability in
Other Current Liabilities.
The Company is party to other claims, legal actions, complaints, and contractual disputes that arise in the ordinary course
of business. The Company believes that any liability that may ultimately result from the resolution of these matters will not,
individually or in the aggregate, have a material adverse effect on its financial position or results of operations.
F-29
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 17 – Segment reporting
The Company has three reportable segments: Life Sciences, Clinical Labs and Therapeutics. The Company’s Life
Sciences segment develops, manufactures, and markets products to research and pharmaceutical customers. The
Clinical Labs segment provides diagnostic services to the health care community. The Company’s Therapeutics segment
conducts research and development activities for therapeutic drug candidates. The Company evaluates segment
performance based on segment income (loss) before taxes. Costs excluded from segment income (loss) before taxes and
reported as “Other” consist of corporate general and administrative costs which are not allocable to the three reportable
segments.
Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment
have not been included in the reportable segments below. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
The following financial information represents the operating results of the reportable segments of the Company:
Year ended July 31, 2011
Revenues:
Product revenues .......................................................
Royalty and license fee income .................................
Clinical laboratory services ........................................
Life
Sciences
Clinical
Labs
$ 41,830
7,437
—
49,267
—
—
$ 52,762
52,762
Therapeutics
Other
Consolidated
—
—
—
—
$
—
—
—
—
41,830
7,437
52,762
102,029
Operating expenses:
Cost of product revenues ...........................................
Cost of clinical laboratory services.............................
Research and development .......................................
Selling, general and administrative ............................
Provision for uncollectible accounts receivable .........
Legal...........................................................................
Total operating expenses...........................................
22,137
—
5,784
17,855
16
726
46,518
$
—
31,682
—
18,426
4,415
387
54,910
—
—
2,022
—
—
—
2,022
—
—
—
$ 8,910
—
2,597
11,507
22,137
31,682
7,806
45,191
4,431
3,710
114,957
Operating income (loss) .............................................
2,749
(2,148)
(2,022)
(11,507)
(12,928)
Other income (expense)
Interest .......................................................................
Other ..........................................................................
Foreign exchange gain...............................................
Income (loss) before income taxes ............................
2
(3)
49
$ 2,797
(5)
30
—
—
—
—
14
18
—
$ (2,123) $
(2,022) $ (11,475) $
11
45
49
(12,823)
Depreciation and amortization included above ..........
$ 3,282
$ 1,012
$
47
$
128
$
4,469
Share-based compensation included in above:
Cost of clinical laboratory services..........................
Research and development ....................................
Selling, general and administrative .........................
Total ........................................................................
$
$
—
14
84
98
$
$
10
—
61
71
—
—
—
—
$
$
—
—
880
880
$
$
10
14
1,025
1,049
Capital expenditures
$
389 $
834
— $
— $
1,223
F-30
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Year ended July 31, 2010
Revenues:
Product revenues ......................................
Royalty and license fee income ................
Clinical laboratory services .......................
$
Operating expenses:
Cost of product revenues ..........................
Cost of clinical laboratory services............
Research and development ......................
Selling, general and administrative ...........
Provision for uncollectible accounts
receivable...............................................
Legal..........................................................
Litigation settlement ..................................
Total operating expenses..........................
Life
Sciences
Clinical
Labs
Therapeutics
Other
Consolidated
$
43,111
9,793
—
52,904
22,547
—
7,202
19,800
48
145
—
49,742
—
—
44,178
44,178
—
29,570
— $
18,503
3,432
222
—
51,727
—
—
—
—
—
—
2,502
—
—
—
—
2,502
$
—
—
—
—
$
—
—
—
10,092
—
1,379
3,698
15,169
43,111
9,793
44,178
97,082
22,547
29,570
9,704
48,395
3,480
1,746
3,698
119,140
Operating income (loss) ............................
3,162
(7,549)
(2,502)
(15,169)
(22,058)
Other income (expense)
Interest ......................................................
Other .........................................................
Foreign exchange loss ..............................
Income (loss) before income taxes ...........
$
Depreciation and amortization included
(5)
(8)
(266)
2,883
$
—
46
—
(7,503) $
—
—
—
(2,502) $
24
6
—
(15,139) $
19
44
(266)
(22,261)
above .....................................................
$
3,110
$
982 $
52
$
125
$
4,269
Share-based compensation included in
above:
Cost of clinical laboratory services.........
Research and development ...................
Selling, general and administrative and
legal.....................................................
Total .......................................................
Capital expenditures .................................
$
$
$
—
14
114
128
12 $
—
78
90 $
1,450
$
1,728 $
—
—
—
—
11
$
$
$
—
—
952
952
62
$
$
$
12
14
1,144
1,170
3,251
F-31
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Year ended July 31, 2009
Revenues:
Product revenues ..................................
Royalty and license fee income ............
Clinical laboratory services ...................
$
Operating expenses:
Cost of product revenues ......................
Cost of clinical laboratory services........
Research and development ..................
Selling, general and administrative .......
Provision for uncollectible accounts
receivable...........................................
Legal......................................................
Total operating expenses......................
Life
Sciences
Clinical
Labs
Therapeutics
Other
Consolidated
$
40,592
9,376
—
49,968
26,766
—
5,855
14,546
—
392
47,559
—
—
39,604
39,604
—
26,295
15,425
5,189
73
46,982
$
—
—
—
—
—
—
3,365
—
—
—
3,365
$
—
—
—
—
$
—
—
—
11,343
—
3,730
15,073
40,592
9,376
39,604
89,572
26,766
26,295
9,220
41,314
5,189
4,195
112,979
Operating income (loss) ........................
2,409
(7,378)
(3,365)
(15,073)
(23,407)
Other income (expense)
Interest ..................................................
Other .....................................................
Foreign exchange loss ..........................
Income (loss) before income taxes .......
Depreciation and amortization included
above .................................................
Share-based compensation included in
above:
Cost of clinical laboratory services.....
Research and development ...............
Selling, general and administrative
and legal..........................................
Total ...................................................
Capital expenditures .............................
$
$
$
$
$
—
25
(725)
1,709
$
57
49
—
(7,272) $
—
—
—
(3,365) $
524
—
—
(14,549) $
581
74
(725)
(23,477)
2,350
$
946
$
50
$
116
$
3,462
—
13
128
141
1,334
$
$
$
8
—
135
143
1,253
$
$
$
$
—
—
119
119
78
$
$
$
—
—
1,032
1,032
44
$
$
$
8
13
1,414
1,435
2,709
F-32
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Geographic financial information is as follows:
Net sales to unaffiliated customers:
United States.........................................................................................................
Switzerland............................................................................................................
United Kingdom.....................................................................................................
Other international countries.................................................................................
Total ......................................................................................................................
Long-lived assets at July 31,
United States.........................................................................................................
Switzerland............................................................................................................
United Kingdom.....................................................................................................
Other international countries.................................................................................
Total ......................................................................................................................
2011
$ 85,691
8,508
2,825
5,005
$ 102,029
2011
$ 44,028
8,958
2,857
1,850
$ 57,693
2010
$ 82,873
7,037
2,507
4,665
$ 97,082
2010
$ 45,439
7,063
2,944
1,723
$ 57,169
2009
$ 75,936
6,487
2,517
4,632
$ 89,572
2009
$ 45,896
7,075
3,334
1,923
$ 58,228
F-33
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The Company’s reportable segments are determined based on the services they perform, the products they sell, and the
royalties and license fee income they earn, not on the geographic area in which they operate. The Company’s Clinical
Labs segment operates 100% in the United States with all revenue derived there. The Life Sciences segment earns
product revenue both in the United States and foreign countries and royalty and license fee income in the United States.
The following is a summary of the Life Sciences segment revenues attributable to customers located in the United States
and foreign countries:
United States..........................................................................................................
Foreign countries ...................................................................................................
2011
$ 32,928
16,339
$ 49,267
2010
$ 38,695
14,209
$ 52,904
2009
$ 36,332
13,636
$ 49,968
Note 18 – Summary of Selected Quarterly Financial Data (unaudited)
The following table contains statement of operations information for each quarter of the years ended July 31, 2011 and
2010. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
Unaudited quarterly financial data for fiscal 2011 and 2010 is summarized as follows:
Quarter Ended
October 31,
2010
25,652
13,473
(1,060)
(1,122)
$
January 31,
2011
23,734
10,331
(5,562)
(5,708)
$
(0.03) $
(0.15) $
April 30,
2011
25,827
12,364
(2,002)
(2,110)
(0.05) $
July 31,
2011
$ 26,816
12,042
(4,199)
(4,020)
(0.11)
Quarter Ended
October 31,
2009
25,165
13,329
(1,893)
(1,814)
$
January 31,
2010
23,186
10,885
(10,210)
(10,328)
$
(0.05) $
(0.27) $
April 30,
2010
23,786
10,529
(4,401)
(4,578)
(0.12) $
July 31,
2010
$ 24,945
10,222
(5,757)
(5,513)
(0.15)
Fiscal 2011
Total revenues.........................................................................
Gross profit..............................................................................
Loss before income taxes .......................................................
Net loss ...................................................................................
Basic and diluted loss per common share ..............................
Fiscal 2010
Total revenues.........................................................................
Gross profit..............................................................................
Loss before income taxes .......................................................
Net loss ...................................................................................
Basic and diluted loss per common share ..............................
$
$
$
$
F-34
ENZO BIOCHEM, INC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 2011, 2010 and 2009
(in thousands)
Year ended
July 31,
Description
Balance at
Beginning
of period
Charged
to
costs
and expenses
Charged
to other
accounts Deductions
Balance at
end of period
2011
Allowance for doubtful accounts receivable
2,839
4,431
3,782(1)
3,488
2010
Allowance for doubtful accounts receivable
4,786
3,480
—
5,427(1)
2,839
2009
Allowance for doubtful accounts receivable
886
5,189
—
1,289(1)
4,786
2011
Deferred tax valuation allowance
28,901
4,019
2010
Deferred tax valuation allowance
21,716
7,185
2009
Deferred tax valuation allowance
12,965
8,751
—
—
—
—
32,920
28,901
21,716
(1) Write-off of uncollectible accounts receivable.
S-1
List of subsidiaries of the Company
EXHIBIT 21
Enzo Clinical Labs, Inc., a New York Corporation
Enzo Life Sciences, Inc., a New York Corporation
Enzo Therapeutics, Inc., a New York Corporation
Enzo Realty, LLC, a New York Corporation
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1)
Registration Statement (Form S-8 No. 333-87153, 333-89308, 333-123712 and 333-172127) pertaining to
the1999 Stock Option Plan, the 2005 Equity Compensation Incentive Plan and the 2011 Incentive Plan;
(2)
Registration Statement (Form S-3 No. 333-168311)
of our report dated October 14, 2011, with respect to the consolidated financial statements and schedule of Enzo
Biochem, Inc., and our report dated October 14, 2011, with respect to the effectiveness of internal control over financial
reporting of Enzo Biochem, Inc., included in this Annual Report (Form 10-K) of Enzo Biochem, Inc.
/s/ Ernst & Young LLP
Jericho, New York
October 14, 2011
CERTIFICATIONS
EXHIBIT 31 (a)
In connection with the Annual Report on Form 10-K of Enzo Biochem, Inc. (“the Company”) for the fiscal year ended July 31, 2011
as filed with the Securities and Exchange Commission on the date hereof, I, Elazar Rabbani, Ph.D., Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Enzo Biochem, Inc.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during
the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s internal control over financial reporting.
Date: October 14, 2011
By: /s/ Elazar Rabbani, Ph.D.
Elazar Rabbani, Ph.D.
Chief Executive Officer
CERTIFICATIONS
EXHIBIT 31 (b)
In connection with the Annual Report on Form 10-K of Enzo Biochem, Inc. (“the Company”) for the fiscal year ended July 31, 2011
as filed with the Securities and Exchange Commission on the date hereof, I, Barry Weiner, Chief Financial Officer and Principal
Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of
2002, that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Enzo Biochem, Inc.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during
the Company’s most recent fiscal quarter (the Company’s fourth quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s internal control over financial reporting.
Date: October 14, 2011
By: /s/ Barry Weiner
Barry Weiner
Chief Financial Officer and Principal
Accounting Officer
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32 (a)
In connection with the Annual Report of Enzo Biochem, Inc., and Subsidiaries (“the Company”) on Form 10-K for the fiscal
year ended July 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elazar Rabbani,
Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: October 14, 2011
By: /s/ Elazar Rabbani, Ph.D.
Elazar Rabbani, Ph.D.
Chief Executive Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or
otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section
906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Act
Commission or its staff upon request.
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32 (b)
In connection with the Annual Report of Enzo Biochem, Inc., and Subsidiaries (“the Company”) on Form 10-K for the fiscal
year ended July 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry Weiner,
Chief Financial Officer and Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: October 14, 2011
By: /s/ Barry Weiner
Barry Weiner
Chief Financial Officer and Principal
Accounting Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or
otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section
906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Act
Commission or its staff upon request.
Performance Graph
The graph below compares the five-year cumulative shareholder total return based upon an initial $100 investment (assuming
the reinvestment of dividends) for Enzo Biochem, Inc. shares of Common Stock with the comparable return for the New York Stock
Exchange Market Value Index and two peer issuer indices selected on an industry basis. The two peer group indices include: (i) 62
biotechnology companies engaged in the research and development of diagnostic substances and (ii) 38 companies engaged in the
medical laboratories business. All of the indices include only companies whose common stock has been registered under Section 12 of
the Securities Exchange Act of 1934 for at least the time frame set forth in the graph.
The total shareholder returns depicted in the graph are not necessarily indicative of future performance. The Performance
Graph and related disclosure shall not be deemed to be incorporated by reference in any filing by the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the graph and
such disclosure by reference.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
Company/Market/Peer Group 7/31/2006 7/31/2007 7/31/2008 7/31/2009 7/31/2010 7/31/2011
$99.15
Enzo Biochem, Inc.
$29.79
$110.57
$118.42
NYSE Composite Index
$166.49
$114.00
Diagnostic Substances
$106.55
$108.43
Medical Laboratories
$35.69
$93.69
$111.94
$95.42
$100.00
$100.00
$100.00
$100.00
$110.24
$107.08
$121.23
$110.49
$39.57
$84.05
$92.99
$97.90
Corporate Information
Board of Directors
Officers and Management
Corporate Office
Gregory M. Bortz
Founder and Manager Partner
Creo Capital Partners, LLC
Bernard L. Kasten, MD.
Chairman, Cleveland Biolabs, Inc.
Former Chief Laboratory Officer,
Quest Diagnostics, Inc.
Former CEO, Siga Technologies, Inc.
Stephen B. H. Kent, Ph.D.
Professor of Biochemistry and
Molecular Biology, University of Chicago
Former CEO and President, Gryphon
Sciences
Elazar Rabbani, Ph.D.
Chairman of the Board,
Chief Executive Officer and Secretary
Barry W. Weiner
President, Chief Financial Officer,
Principal Accounting Officer and Treasurer
Elazar Rabbani, Ph.D.
Chairman of the Board
Chief Executive Officer
Barry W. Weiner
President and Chief Financial Officer
Andrew P. Whiteley
Chief Operating Officer,
Enzo Life Sciences, Inc.
Andrew R. Crescenzo, CPA
Senior Vice President, Finance
David C. Goldberg
Vice President,
Corporate Development and Interim
General Manager of Enzo Clinical Labs, Inc.
Herbert B. Bass
Vice President, Finance
Paul C. O’Brien
Vice President, Global
Human Resources
Natalie Bogdanos
General Counsel
Enzo Biochem, Inc.
527 Madison Ave.
New York, NY 10022
(212) 583-0100
Corporate Subsidiaries
Enzo Clinical Labs, Inc.
60 Executive Blvd,
Farmingdale, NY 11735
(631) 755-5500
Enzo Life Sciences, Inc.
10 Executive Blvd.
Farmingdale, NY 11735
(631) 694-7070
Enzo Therapeutics, Inc.
10 Executive Blvd.
Farmingdale, NY 11735
(631) 755-5500
Corporate Information
General Counsel
Greenberg Traurig, LLP
200 Park Avenue
New York, NY 10166
Independent Auditors
Ernst & Young LLP
One Jericho Plaza
Jericho, NY 11753
Transfer Agent and Registrar
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
Common Stock
Listed on NYSE
(Symbol: ENZ)
Market for Registrant’s Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the New York Stock Exchange: (Symbol: ENZ). The following table sets forth the high and
low sale price of the Company’s Common Stock for the periods indicated as reported on the New York Stock Exchange.
2011 Fiscal Year
(August 1, 2010 to July 31, 2011):
High
Low
2010 Fiscal Year
(August 1, 2009 to July 31, 2010):
High
Low
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$4.62
$3.37
$5.80 $4.16
$3.46
$5.09
$3.52
$4.74
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$7.66
$4.51
$6.24 $4.52
$4.66
$6.67
$3.90
$6.18
As of September 30, 2011, the Company had approximately 946 stockholders of record of its Common Stock.
The Company has not paid a cash dividend on its Common Stock and intends to continue a policy of retaining earnings to finance and build
its operations. Accordingly, the Company does not anticipate the payment of cash dividends to holders of Common Stock in the foreseeable
future.
Enzo Biochem, Inc.
527 Madison Ave.
New York, NY 10022
(212) 583-0100
www.enzo.com