ENZ - Enzo Biochem: Cleaned Up And Cash-Rich But Unloved

2023-10-26 01:18:21 ET

Summary

• Enzo Biochem is a microcap company with a $30 million revenue run-rate Life Sciences business and $78-$85 million in cash.
• The company is likely being prepared for sale, with interest from potential acquirers and activists controlling 30% of voting shares.
• Enzo's focus on generating positive cash flow and enhancing shareholder value could lead to significant improvement in Life Sciences results.
• At $1.33 it is nearly a penny stock, but trades below cash and simultaneously, you get the entire $28m+ Life Sciences business for free.
• Given Labcorp settled their ransomware lawsuit for $2-$4m, it is likely that ENZ’s case will be settled for a similar or smaller sum (a tiny amount relative to ~$80M cash).

Summary

Enzo Biochem (ENZ) is a largely forgotten microcap with a $30 million revenue run-rate Life Sciences business close to cash-flow break-even (ex-corporate overhead) and approximately $78-$85 million in cash post the sale of their Clinical Laboratory business to LabCorp in July of this year.

I think it is likely that the company is being primed for sale given its close-to-break-even status, the recent parting of ways with its CEO, and being too small and below the radar to matter to the public markets. The most recent Proxy filed stated there was interest in the Life Science business from acquirers and the investment banker (Jefferies) is still engaged. Activists now control at least 30% of the voting shares and are represented on the Board of Directors. Thus, investors are presented with an interesting relatively lower-risk situation for a microcap name.

Followers of the stock were relieved when the old management and Board were removed, and the new regime is clearly focused on generating positive cash flow and enhancing shareholder value. The current CEO is incentivized to execute a sale of the company. A singular focus, cost-cutting initiatives, and lack of high-cost overhead from the laboratory business should lead to significant improvement in Life Science results.

It seems apparent that bioprocessing is opening up new opportunities for the development of lifesaving treatments and how biomarker assays can better target disease-related epigenetic changes based on how an individual's genes work. Biomarker assays can now be more effectively utilized throughout the entire patient journey throughout life. Enzo technology and products help analyze, target, and develop for the entire spectrum of research, analysis, testing, and drug delivery markets and encompass all the relevant inputs. Essentially, Enzo is a diagnostic manufacturer and clinical service provider. Prior to this year, the Life Science business had continued to grow at mid-single digits YoY in Q1’FY23 and in double digits over the prior two years. Their end markets maintain growth rates typically between 8-15% and are currently accelerating in many cases.

Interesting and timely progressions made by ENZ

In the final week of October, I expect the Company to report results and file its 10K (July fiscal year), and more importantly, announce its plan for allocating the cash received from the recent sale of the Laboratory business. I believe this is likely to be a positive catalyst for this stock. This could take the form of a special dividend payout, stock buyback, and/or tender for shares. We would vote for the latter to remove weak hands from the stock and gain the likely accretive benefits of such a deal. With likely ~$78m+ cash on hand, ENZ could afford to purchase close to 30 million shares at the current stock price, thus retiring 60% of the outstanding stock and still having close to $30 million in cash remaining for operations, growth, and a dividend. That would also set the stage for a potential takeout by next summer (if not sooner) at significantly higher prices.

These are a few key announcements I am highlighting from the company press releases available on its website.

(3/16/23) : "Enzo Life Sciences reported revenue of $7.5 million, with January 2023 revenue of $3.6 million as the second highest monthly revenue in over 10 years." (Source: enzo.com website)

(6/14/23): "Q3 FY23 revenues for Enzo Life Sciences were $7.5 million. Q3 FY23 revenues were flat compared to Q2 FY23 and near flat compared to Q3 FY22. Enzo Life Sciences anticipated continuous growth this quarter, however, revenues for Enzo Life Sciences were negatively impacted by the downtime period after a ransomware attack (ENZ maintains insurance). Despite the downtime period revenue loss, the Q3 FY23 margin improved from 35.9% in the prior year Q3 to 40.2%, driven by distribution channel conversion and expansion efforts, along with other strategic initiatives." (Source: enzo.com Q3 2023 financial results)

Description from the ENZ website: "Enzo is a global leader in Life Sciences Contract Services, Bioprocess, Drug Development, AMPIVIEW™ RNA probes powered by Enzo’s LoopRNA ISH™ technology (In situ hybridization), Ultra-Sensitive PCR testing, and more. Business units include Labeling and Detection Technologies, RNA Probes, Genomics, IHC, ELISA, Flow Cytometry, and Live Cell Analysis. These molecular diagnostic products include proteins, antibodies, peptides, labeling probes, dyes, and kits, which are used for research and drug development. ENZ offers manufacturing expertise, Local Support, Global Presence, Trusted Delivery." NOTE: we have heard positive reviews of AMPIVIEW™ RNA probes powered by Enzo’s LoopRNA ISH™ technology. Clearly, RNA analysis and sequencing markets are growing. (Source: enzo lifesciences)

Trading Below Cash with a Real Business

Valuation is compelling with a $30 million run-rate Life Science business that could easily garner in excess of 2x sales in a takeout and with over $1.56 per share in cash and $0.20 per share in real estate and no net debt. At ~$1.33 per share, it seems reasonable that the stock could more than double to my $3.00/share price objective or arguably a bit higher.

ENZ is near its 52-week low and microcap at a $69.5M market cap with cash ~$78m exceeding market cap, ENZ can easily return in the short-term, to its price level from June 2023 when it was trading above $2 per share.

There is sparse coverage on this microcap and most investors have given up due to numerous disappointments in recent years. I have periodically enjoyed these opportunities over the years to build a position in completely unloved companies when nobody cares and the stock is completely off investor radar screens with potentially positive news in the imminent future. Microcap names, I believe, should rarely if ever be a big position in one's portfolio due to liquidity concerns, but for a relatively low-risk financial bet, it makes sense to me to take a position and the company’s cash position gives me comfort.

Other Equity and Financial Data :

For the 9-month period ending 4/30/23, pro forma revenue was $22.1 million with GM of 38%. ENZ had an operating loss was $15.9 million, which includes several one-time costs of legal and related expenses ($6 million), as well as inflated SG&A costs related to the ongoing strategic review and sale of the lab assets.

In May, the Company issued $7.6 million in convertible debentures with one million warrants. The debentures are convertible at $3.01 per share and warrants have an exercise price of $2.31. The debentures are not included in the pro forma balance sheet as of 4/30/23 (but are included in the financial snapshot I provide below). The Company has a July FY, so the audited 10k for the year should be filed by mid-October. There will be virtually no taxes on the sale of the lab, as the Company had over $100mm in NOLs prior to the sale.

(Pro Forma Financial Statements filed by Enzo July 24, 2023)

The business has a current annual revenue run rate of $30 million. Recent transactions in the molecular diagnostics space have seen multiples of 2x revenue on the low end, and into double-digit multiples of revenue at the high end.

Activists now control at least 30% of the voting shares and are represented on the Board of Directors.

Financial Snapshot (Prati Management)

Possible Tailwinds : The company experienced a Ransomware attack earlier in the year which has been addressed and is resolved. The company did (and does) maintain cyber insurance but has not released additional details regarding costs or potential liabilities. Regardless, we believe the share price reflects maximum fear which could be reduced in future periods.

Why did the Life Science business not get sold in the recent sale process? We believe the LabCorp transaction consumed everyone’s energy and focus and there was interest in the Life Science business according to the Proxy filing. There are numerous potential acquirers and selling a molecular life sciences business with good technology that is improving such as ENZ should not be a challenge. We believe the improving performance of the Life Science business, their proprietary technology in the growing RNA probe business, and growing end-markets all-around will attain better financial results, cash-flow-positive business, and subsequent buyers of the company in a relatively short period of time. A dividend, buyback, or Tender should be imminent given the large cash pile ($78m+) and small cash needs for the remaining LifeSci business ($30m revenue run-rate just below break-even). It is also possible, that some acquirers want the final numbers on the Ransomware attack from the insurance company and Enzo. However, the stock is trading below cash AND the Life Science business value on worst fears, so we don’t see any material impact to the company given their high cash position. I think it makes sense and would be reasonable for the ENZ board to approve a buyback, special dividend, or perhaps a tender offer in light of the depressed stock price.

Risk Factors :

• Competitive industry – molecular diagnostics and life sciences has many competitors.
• Industry change. The industry is subject to technological change, and a failure to adapt to such change in a timely manner could negatively affect results.
• Pricing pressure. The company's business could be affected by pricing pressure in the market.
• Impact of Ransomware attack in 2023. While the company did maintain cyber risk insurance, the full financial impact has not been publicly disclosed yet.
• Microcap - this is a tiny company and as such, has all of the associated risks

Deeper Dive and Background on Enzo Life Science Growth Initiatives & Technologies :

Enzo’s "AMPIVIEW™ RNA probes" strike me as being Enzo Biochem's latest incremental advance in their continuous efforts to generate ever-better RNA-ISH reagents that yield higher signal with lower background and is a strong advance for personalized medicine and early diagnosis which can be designed for any gene and in any genome.

We have all read about new possibilities opening up with recent advances in RNA sequencing and bioprocessing (loosely defined as being the production of a value-added material from a living source. The key component in the system is that the source organism is alive and responsive to its environment). Cancer therapies, vaccines, and painkillers are all examples of bioprocessing in the pharmaceuticals sector. The research, analysis and product development sectors globally are enormous and most of Enzo’s end markets are showing accelerating growth.

RNA-based approaches utilizing Enzo reagents, assays, probes and more are being applied to metabolism research and other lifesaving treatments (ex: Biomarker assays sold by Enzo identify one's personal body makeup, history, predispositions, lifestyle, and function as "precision medicine" and personalized lifestyle optimization when interpreted and applied intelligently. They can detect early disease in some cases, add to risk assessment capability, and predict future risk of disease development. The biological markers can be connected to disease risk and human systems/activity. Epigenetic testing may benefit patients in personalized disease prevention, precision medicine, and more.)

I found the following article regarding In situ hybridization to be most helpful and briefly synthesize some of the key points below (What is in situ hybridization and what are the recent advancements with this indispensable technique?)

1.) " In situ hybridization: Recent advancements in RNA ISH technology allow us to overcome its major limitation: the sensitivity, especially in the detection of single-copy targets. In this context, Enzo’s "AMPIVIEW™ RNA probes," powered by Enzo’s LoopRNA ISH™ technology, are amongst the most sensitive means of detection of nucleic acid targets in tissue and cells, without damaging the morphology of the sample. Early diagnosis and personalized treatments are two of the major challenges that modern medicine faces. For this reason, the quantitative and qualitative analysis of DNA, RNA, and protein biomarkers is becoming more and more prominent in clinical practice, providing crucial information in diagnosis, prognosis, and therapy guidance. Enzo’s AMPIVIEW™ RNA probes , based on the patented LoopRNA technology, are making contributions in the field."

" During the COVID-19 pandemic, Dr. Nuovo from Ohio University used an AMPIVIEW™ probe to detect SARS-CoV-2 RNA expression in different tissues from COVID-19 patients, comparing the presence of viral genome with the presence of the four characteristic viral protein (envelope, spike, membrane, and nucleocapsid). " You can re-watch its talk HERE

2.) " Enzo Life Sciences offers a comprehensive product portfolio for metabolism research , including Adipogenesis assay kit , a highly pure recombinant Adiponectin proteins , and highly sensitive Adiponectin , Leptin , and NGAL ELISA kits for lipid metabolism-related studies (a hot topic these days)." (Enzo Lifesciences regarding metabolism)

3.) "Life Sciences Contract Services : Customized solutions for workflow, Accelerate Drug Discovery, etc. Focus on GMP and extensive experience manufacturing over 20,000 life science products and platforms with tools needed to create full solutions from target identification and validation, high content analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. Enzo is an integrated life sciences company, diagnostic manufacturer, and clinical service provider. Enzo technology and products are used to analyze nucleic acids, peptides, proteins, antibodies, cells, tissues, or small molecules."

Custom Manufacturing Assay and Validation Testing GMP Services Other Services

( Link for Life Sciences Contract Services page )

And lastly

Yet another example of ENZ being in the right growth markets now:

The global biomarkers market is valued at approximately $59b (2021) and is expected to grow at a CAGR of approximately 15% (2022-2032). Safety biomarkers are expected to be the highest revenue-generating biomarker type, with a projected growth of 15.9% from 2022–2032. Biomarkers are measurable and tell how the body is doing. They are very important to the medicinal market. (source for growth estimates) . Further, “ Targeted Biomarker Market to Get a New Boost ” mentions only a few major companies including Enzo was just published last week. (Article - Targeted Biomarker Market to Get a New Boost - Enzo Biochem)

For further details see: