Item 1. Business
Overview
Enzo Biochem, Inc. (the “Company” “we”,
“our” or “Enzo”) is an integrated diagnostics, clinical lab, and life sciences company focused on delivering
and applying advanced technology capabilities to produce affordable reliable products and services that enable our customers to
meet their clinical needs. Through a connection with the market, we provide advanced biotechnology solutions to the global community
as affordable and flexible quality products and services. We develop, manufacture and sell our proprietary technology solutions
and platforms to clinical laboratories, specialty clinics, researchers and physicians globally. Enzo’s structure and business
strategy represent the culmination of years of extensive planning and work. The Company has the unique ability to offer
low cost, high performance products and services for diagnostic testing, which ideally positions us to capitalize on
the reimbursement pressures facing diagnostic labs. Our pioneering work in genomic analysis coupled with our extensive patent estate
and enabling platforms have positioned the Company to continue to play an important role in the rapidly growing molecular medicine
marketplaces.
Enzo develops low cost diagnostic platform products and related
services. Our platform development includes automation-compatible reagent systems and associated products for sample collection
and processing through analysis. We develop affordable products and services to improve healthcare, one of the greatest challenges
today. Enzo combines over 40 years of expertise in technology development with assay development capabilities and diagnostic testing
services to create high performance, cost-effective, and open assay solutions. The ability to combine these assets in one company
is unique. With our strong intellectual property portfolio integrated with assay development know-how, production, distribution,
validation and services capabilities, we have enabled sustainable products and services for a market that is facing increasing
pressure in costs and reimbursement.
Enzo technology solutions and platforms and unique operational
structure are designed to reduce overall healthcare costs for both government and private insurers. Our proprietary technology
platforms reduces our customers’ need for multiple, specialized instruments, and offer a variety of high throughput capabilities
together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing
markets primarily in the areas of personalized medicine, women’s health, infectious diseases and genetic disorders.
For example, our GENFLEX ™ platform is a high-throughput,
automated, and scalable instrument for processing molecular diagnostics tests within a clinical production setting. While initially
focused on COVID-19 and Women’s Health assays, it can lead to the development of an entire line of molecular products that
can allow laboratories to offer a complete menu of services for this $7 billion plus growing market at a cost that allows them
to enjoy an acceptable margin. These products include testing sample collection, molecular, and antibody tests, as well as instrumentation,
all on a global basis. Our solutions provide tools to physicians, clinicians and other healthcare providers to improve detection,
treatment and monitoring of a broad spectrum of diseases and conditions. In addition, reduced patient to physician office visits
translates into lower healthcare processing costs and greater patient services.
In the course of our research and development activities, we
have built a substantial portfolio of intellectual property assets, comprised of 475 issued patents worldwide and over 63 pending
patent applications, along with extensive enabling technologies and platforms.
Operating Segments
We are comprised of three interconnected operating segments
which have evolved out of our core competencies involving the use of nucleic acids as informational molecules and the use of compounds
for immune modulation and which have been augmented by previous acquisitions of a number of related companies. Information concerning
sales by geographic area and business segments for the years ended July 31, 2020, 2019 and 2018 is located in Note 17 in the Notes
to Consolidated Financial Statements.
Below are brief descriptions of each of our operating segments:
Enzo Clinical Lab is a clinical reference laboratory
providing a wide range of clinical services to physicians, medical centers, other clinical labs and pharmaceutical companies. The
Company believes having a Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified and College of American
Pathologists (“CAP”) accredited medical laboratory located in New York provides us the opportunity to more rapidly
introduce cutting edge products and services to the clinical marketplace. Enzo Clinical Labs offers an extensive menu of molecular
and other clinical laboratory tests and procedures used in patient care by physicians to establish or support a diagnosis, monitor
treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory is equipped with state-of-the-art communication
and connectivity solutions enabling the rapid transmission, analysis and interpretation of generated data. We operate a full service
clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout New York, New Jersey and
Connecticut, two free standing “STAT” or rapid response laboratories in New York City and Connecticut, an in-house
logistics department, and an information technology department. Under our license in New York State, we are able to offer testing
services to clinical laboratories and physicians nationwide.
Enzo Life Sciences manufactures, develops and
markets products and tools for clinical research, drug development and bioscience research customers worldwide. Underpinned by
broad technological capabilities, Enzo Life Sciences has developed proprietary products used in the identification of genomic information
by laboratories around the world. Information regarding our technologies can be found in the “Core Technologies” section.
We are internationally recognized and acknowledged as a leader in the development, manufacturing validation and commercialization
of numerous products serving not only the clinical research market, but also the life sciences markets in the fields of cellular
analysis and drug discovery, among others. Our operations are supported by global operations allowing for the efficient marketing
and delivery of our products around the world.
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 100 patents and patent applications.
The Company’s primary sources of revenue have historically
been from the clinical laboratory services provided to the healthcare community and product revenues, royalty and licensing of
Enzo Life Sciences’ products utilized by customers worldwide. The following table summarizes the sources of revenues for
the fiscal years ended July 31, 2020, 2019 and 2018 (in thousands except percentages):
Fiscal year ended July 31,
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2020
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2019
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2018
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Clinical laboratory services
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$
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47,964
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63
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%
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$
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51,115
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63
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%
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$
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71,077
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|
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70
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%
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Product revenues
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26,561
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35
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|
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30,055
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37
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|
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29,224
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|
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29
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Grant and royalty income
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1,496
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|
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2
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—
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—
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712
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1
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Total
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$
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76,021
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|
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100
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%
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$
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81,170
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|
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100
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%
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$
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101,013
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|
|
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100
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%
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Markets
Clinical diagnostics
The U.S. clinical diagnostics market has been reported by industry
sources to be greater than $25 billion per year nationally and over $60 billion worldwide. 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 bodily fluid based approaches.
Many of these tests employ traditional technologies such as
cell culture technologies.
Immunoassays are based on the use of antibody biomarkers 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 its 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.
Molecular diagnostics have many advantages over traditional
technologies. Since gene-based diagnostics focus on the identification of diseases at the molecular 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 $7 billion per year, and is acknowledged as one of the fastest growing
segments in the in-vitro diagnostics industry, growing at more than twice the rate of traditional diagnostics. Contributing to
this growth are, among other factors:
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the increasing number of diagnostic tests being developed from discoveries in genomic research;
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advances in formats and other technologies that automate and accelerate gene-based diagnostic testing;
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growing emphasis by the healthcare industry on early diagnosis and treatment of disease and;
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application of gene-based diagnostics as tools to match therapies to specific patient genetics, commonly referred to as pharmacogenomics or companion diagnostics.
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Diagnostic Products
There is a large and growing global demand by biomedical and
pharmaceutical companies for research and diagnostic tools that both facilitate and accelerate the generation of biological information.
This demand can be met by gene and protein target-based diagnostics for which a variety of formats and tools have been developed
that enable researchers to study biological pathways. These tools can identify mutations in gene sequences and variations in gene
expression levels that can lead to disease, or they can quantify biomarkers that provide insight into disease and potential therapeutic
solutions. These techniques use instruments such as DNA sequencing and genotyping equipment, microarrays, fluorescent microscopes,
high content screening platforms, flow cytometers and plate readers. Common among these instruments is the need for reagents that
allow the identification, quantification and characterization of 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:
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long term commitment to 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 genomics research,
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development of commercial applications based on information derived from this research and,
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on-going advancements in tools that accelerate these research and development activities.
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Therapeutics
We believe our core technologies have broad diagnostic and therapeutic
applications. We have focused our efforts on discovering how best to treat pathologies associated with growth or metabolic control
and immune-mediated diseases, including autoimmune diseases and cancers. Although the causes of disorders such as Crohn’s
disease, autoimmune uveitis and non-alcoholic steatohepatitis (NASH) remain 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, target and signal
amplification, and detection technologies and intellectual property to develop diagnostic and monitoring tests for various diseases.
We believe our expertise in developing and securing approvals
of novel platform technologies will enable us to shorten the development time and capture meaningful market share.
Strategy
Our strategy is focused on offering quality and affordable testing
solutions to high volume market segments where reimbursement pressures have caused challenges for our customers within these segments.
Our customers need cost of goods savings. To achieve this, we have taken common workflows and applied Enzo’s innovative technical
expertise to each platform part in order to achieve integrative cost effective solutions.
Our objective is to develop and manufacture high value, affordable
and reliable diagnostic products and services using our proprietary technologies to allow our customers to meet their clinical
needs. Our proprietary technology platforms, if successful, will alter the existing business models and improve economics across
the healthcare industry. Our strong intellectual property estate provides freedom to operate and compete in a rapidly growing molecular
diagnostic healthcare marketplace.
We believe our expertise in developing and marketing proprietary
technology platforms uniquely positions Enzo to provide products and services that will change the fundamental relationship between
molecular diagnostic companies and clinical laboratories. Our technology platforms will provide economic and market optionality
to use Enzo’s products and services for margin improvement. As such, clinical laboratories will be able to enter and compete
in markets that until now have been out of reach due to poor economic standing caused by high costs of reagents and equipment rental
arrangements from molecular diagnostic companies coupled with lower reimbursement from governmental payers and commercial healthcare
insurers.
Our objective allows clinical laboratories to purchase low cost
reagents and kits to be run on open system platforms already in use in their labs, or to use Enzo as a low cost reference laboratory.
Enzo’s integrated business model not only provides benefits to clinical laboratories, but also to insurance providers who
will benefit from more clinical laboratories being able to compete for testing services with national laboratories.
In addition to selling these highly effective and compatible
platforms and their assays, we are positioning ourselves as a reference lab for independent labs nationwide primarily by offering
lower cost reference services.
Our commitment to utilizing our proprietary technologies to
develop clinically relevant diagnostics, while helping to relieve the cost pressures that independent laboratories are bearing
is core to our strategy. It underscores the progress we are achieving in our strategy of utilizing Enzo’s integrated
structure to produce diagnostic products and services relevant to today’s dynamic and challenging healthcare marketplace.
By developing a broad technology base, we are positioned for
a robust flow of products and services that will provide medically relevant, cost effective solutions easily adaptable to the workflow
of the clinical laboratory, and its ability to do so is based on several factors, including:
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The Company’s integrated structure that enables it to internally
develop and advance products seamlessly from innovation through validation and commercialization.
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The unique ability to deliver high performance, easily adaptable products
and services that are also cost effective for independent labs as well as Enzo’s own clinical lab in a steadily declining
reimbursement environment
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Ample finances with which to execute and follow through on the Company’s
integrated strategy.
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Increase investment in research and development &
product development
We are increasing our research and development efforts to develop
new leading edge solutions in the rapidly growing molecular diagnostic marketplace, as well as in the important segments of Anatomical
Pathology, Cytology and Immunohistochemistry.
Our development activities are directed to each step of
the clinical testing process, from sample collection and processing through analysis. Our goal is to manufacture the
components required for each step in the diagnostic process for integration into an open platform. Enzo’s system
solutions will enable clinical laboratories to more effectively participate in the diagnostics market where declining
reimbursements and rigid costs from suppliers currently prevail.
Current technology platforms under development include:
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AMPIPROBE® Genetic Amplification Platform – easily adaptable,
affordable, real time DNA amplification and detection
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FLOWSCRIPT® Gene Expression Platform – enhanced flow cytometry
for single cell analysis
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POLYVIEW PLUS® Enhanced Immunohistochemistry – optimized
reagents for clear, consistent immunohistochemistry and in situ hybridization results moving Pathology to the next generation
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Enhanced Immunoassays – pushing sensitivity to expand immunoassay
applications
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Enzo’s proprietary platforms and the related assays developed
can provide more sensitive diagnostic information at lower costs than many other currently marketed tests. The Company designs
its products to be able to work with lower specimen volume which not only allows the laboratories to run more tests from of a single
clinical specimen, but also may reduce the need for patients to submit additional samples, thus reducing unnecessary physician
visits. The Company’s newly approved assays are the forerunners of a comprehensive line of diagnostic solutions under
development by Enzo to address the critical needs of clinical laboratories that are often locked into closed-system contracts with
molecular diagnostics suppliers which, with ever-declining reimbursements, reduce or even eliminate operating margins.
New Molecular Diagnostic platform
Enzo has developed and validated a new molecular diagnostics
platform, GENFLEX™ Molecular System, which, unlike current closed system platforms, has an open access feature, flexibility
and compatibility with a full clinical workflow. It is believed to be uniquely characterized as an automated, clinically compatible,
open platform that operates with multiple reagents and sample types allowing for cost savings and Laboratory Developed Tests (LDTs),
while remaining comparable with FDA-approved products. It has been optimized to fully address existing clinical work flows while
also providing the flexibility to develop and incorporate new work flows. The clinical diagnostic industry is challenged by declining
reimbursements and high reagent costs associated with “closed systems” diagnostic platforms that prohibit the use of
third-party reagents. The new Enzo “open system” molecular diagnostic platform is compatible with existing sample collection
devices. It runs on a standardized, simplified sample processing (fluid handling and nucleic acid isolation) and amplification/detection
workflow, and was designed to provide high performance and adaptable solutions to existing lab workflow, while addressing the critical
need for lower cost solutions. The platform is compatible with a sample input capacity up to 1 ml of whole blood, serum, plasma,
urine, gynecological and non-gynecological specimens, and offers high throughput, 96-well plate molecular testing in less than
four hours run time. At full capacity, the platform can process as many as three 96-well plates (268 samples total) in about eight
hours for most of the company’s tests. Using our proven AMPIPROBE® technology, Enzo has developed multi-target viral
load assays and multi-target DNA-based women’s health assays optimized for the new automated, open system platform, and is
currently in the process of developing a screening assay for oncogenic forms of HPV. The platform has current compatibility with
more than sixteen (16) Enzo-developed clinical tests in the areas of sexual health (STIs), women’s health, virology, upper
respiratory infections, plus others, with a built-in capacity to run new or esoteric laboratory developed tests.
Continue to commercialize new platforms for molecular
diagnostics via multiple channels
We have developed several enabling platform technologies that
may have utility in the development of a new generation of molecular diagnostic products designed to meet the needs of the current
clinical marketplace. Our lead solution is the AMPIPROBE® platform, which is our proprietary target amplification and detection
technology that has been shown to require substantially less starting material than conventional methods such as polymerase chain
reaction (PCR) based products. With the GENFLEX™ platform it may be possible to increase the number of analytes that can
be assayed from a single clinical specimen, which in turn may reduce the need for physicians to recall patients to obtain additional
clinical material for testing. In addition by increasing the number of analytes tested in a single clinical preparation, the GENFLEX™
platform may be able to produce diagnostic tests at a significantly lower cost than conventional assays. Moreover, the need for
less starting material may also lead to diagnostic tests with improved sensitivity, thus allowing detection of certain analytes
present in minute quantities that are below the limit of detection of conventional assays. With several GENFLEX™ assays already
developed and validated, we continue to invest in the development of a consistent pipeline of additional assays.
The FLOWSCRIPT® Gene Expression platform is another unique
technology translation offering additional alternatives to common molecular assays. We have already introduced the first product
using our FLOWSCRIPT® platform technology for the identification of gene expression in clinical samples specifically detection
of mRNA from Human papillomavirus (HPV) oncogenes E6 and E7. Overexpression of these HPV oncogenes promotes the growth of malignant
cells, leading to the development of cervical cancer. The FLOWSCRIPT® technology platform is a proprietary, flow cytometry-based
molecular detection system for the multiplex analysis of cell function and identity that was developed by cross-functional teams
at Enzo. The HPV E6/E7 assay is the first product to utilize this novel platform. Analysis is performed on a small volume of a
liquid cytology specimen and can thus be easily incorporated as a reflex test measure following abnormal Pap smear results. The
assay, and the platform on which it is based, allows for the simultaneous analysis of several different genes expressed in every
cell in a given sample. In this manner, it is possible to produce clinically relevant data at the single cell level. Unlike other
assays that study mRNA expression, FLOWSCRIPT® assays are performed using a homogeneous system that eliminates washing steps
that can reduce fluctuation of results. Additionally, the assay’s use of an external control improves run-to-run consistency.
As a result, both hands on time and the number of steps are reduced, allowing for improved economics. In data presented at a 2015
pathology conference in Italy, Enzo’s assay was shown to produce reliable and consistent results near the limit of assay
detection. Furthermore, Enzo anticipates using this platform for a multitude of applications such as study of other cancers and
the evaluation of an individual’s immune state as well as products targeted to the drug development market, among others.
The FLOWSCRIPT® platform is used to help guide providers in assessing the risk of progression to cervical cancer and whether
colposcopy or follow-up screening should be the preferred course of action. This assay demonstrates Enzo’s commitment to
utilizing our proprietary technology and bringing forward clinically relevant diagnostics that can inform patient and physician
decision-making with potential to reduce spending associated with advanced stage disease. Moreover, it is indicative of how well
we are executing our strategy of utilizing our integrated structure to produce products that are relevant to today’s evolving
healthcare marketplace.
Expand platform development to other important, but financially
stressed, diagnostic areas
Enzo’s POLYVIEW PLUS® Enhanced Immunohistochemistry
platform offers solutions within the area of Anatomical Pathology through optimized assays for clear, consistent immunohistochemistry
and in situ hybridization results moving Pathology to the next generation. This platform has been used in conjunction with validated
biomarkers for detecting cancers and their progression especially in the areas of women’s health.
Maximize our resources by collaborating with others in
therapeutics research and commercialization activities
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 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.
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. Products 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 may 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.
Exploit our marketing and distribution infrastructure
Enzo Life Sciences maintains relationships with academic and
commercial groups worldwide in sourcing and commercializing high value reagents developed by leading researchers. We have also
developed a sales and marketing infrastructure to directly service our end users such as clinical laboratories, researchers and
pharmaceutical companies, while simultaneously positioning the Company for targeted product line expansion. Our global sales, marketing,
manufacturing, product development and distribution infrastructure is integrated and consolidated as a single global business.
Enzo Life Sciences operates, under its own name, 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. Our
comprehensive product portfolio allows us to deliver integrated solutions to basic researchers, drug developers and clinical researchers
around the globe. Our research allows us to provide solutions in all key research areas including: Genomics, Cell Biology, Biomarker
Detection, and in a multitude of applied research markets including: Bioprocess, Personal Care, Cancer Research, and Neuroscience
to name a few.
Expand and protect our intellectual property estate
Since our inception, we have followed a strategy of creating
a broadly 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 2020, we were issued 55 patents and expanded our patent estate in the area of nucleotides,
amplification, labeling and detection, among others.
Product Development and Pipeline
Enzo is committed to delivering a robust line of products and
services that will provide medically relevant, cost effective solutions that are easily adaptable to the workflow of clinical laboratories.
The Company’s integrated Life Sciences-Clinical Labs structure continues to be instrumental in its ability to seamlessly
develop and advance products from innovation and manufacturing in our life sciences group to validation and commercialization through
our clinical laboratory.
The Company’s development pipeline includes an extensive
line of assays for detection of numerous women’s health infectious agents, particularly sexual health infections (STIs) as
well as for the identification of other pathogens. The Company is also developing a proprietary line of products designed
to aid pathologists in differentiating the characteristics of various tumors from biopsy specimens. The Company’s molecular
products and services are targeted at a market currently estimated to be in excess of $7 billion annually.
Since 2015 we have had 10 submissions and
approvals on lab developed tests (LDTs) from the New York State Department of Health for clinical analysis based on Enzo’s
proprietary technology platforms, and one Emergency Use Authorization (EUA) by the FDA. The comprehensive program includes 16 analytes
and multiple specimen source and collection devices.
We have received approval of AMPIPROBE® HCV Assay for the
quantitative detection of Hepatitis C and AMPIPROBE® HBV Assay for the quantitative detection of Hepatitis B. These assays
are based on the proprietary nucleic acid amplification and detection technology platform which was the first in a line of products
to be developed at Enzo to address the critical needs of the molecular diagnostics market and serves as validation of Enzo’s
unique business strategy and structure. We were granted final approval of AMPIPROBE® Candidiasis Assay. This multiplex assay
is designed to identify the presence of five of the most common species of Candida from a single vaginal swab. Industry estimates
put the number of tests performed for the identification of Candida at over 10 million per year in the US alone. It is also estimated
that over 70% of women will develop a Candida infection during their reproductive lifetime. While an independent assay, it will
also serve as a component of a comprehensive women’s health panel. We were granted final approval for three additional women’s
health related molecular diagnostic tests for use with the Company’s versatile and economic AMPIPROBE® platform. Approval
was given for a real-time PCR-based method for qualitative detection of Neisseria gonorrhea, Chlamydia trachomatis and
Trichomonas vaginalis in vaginal swab specimens. The Company’s AMPIPROBE®-based pipeline includes an extensive
line of assays for identification of additional women’s health infectious diseases as well as for the quantification of
viral load in serum or plasma specimens. This proprietary technology platform is the foundation of our ever-increasing line of
medically relevant, cost-effective and easily adaptable solutions for clinical laboratories. We were granted conditional approval
of another women’s health infectious disease diagnostic panel, which when combined with the Company’s previously approved
panels, makes for one of the most comprehensive, efficient and affordable diagnostic products and services on the market
today. A variety of infections, including sexually transmitted ones, are detected from a single vaginal swab collection
via the Company’s proprietary, versatile and cost-effective AMPIPROBE® platform. In July 2019, we announced the New
York State Health Department approval for AmpiProbe Neisseria gonorrhea (NG) and Chlamydia trachomatis (CT) DNA tests with oral
(pharyngeal) and rectal specimens. This expands the Company’s menu allowing Enzo to provide one of the most comprehensive
panels for STI testing for not only women but also men, who represent a rapidly growing segment for such testing. These assays
are an important addition to Enzo’s expanding line of women’s health products, while also helping to solidify Enzo’s
position as a leading full service women’s health lab.
In July 2020 we received Emergency Use Authorization (EUA) from
FDA for our proprietary product for the detection of Coronavirus SARS-CoV-2. The EUA enables other laboratories to use this product
with three diverse platforms without requiring further validation. These platforms include our proprietary GENFLEX™ automated
high-throughput platform, Qiagen’s QIAsymphony® SP lower-throughput platform and Enzo’s manual workflow. The AMPIPROBE®
SARS-Cov-2 Test System includes three components: sample collection, AMPIXTRACT™ SARS-CoV-2 Extraction Kit for sample processing,
and the AMPIPROBE® SARS-CoV-2 Assay Kit for detection and analysis.
In February 2020 we received New York State approval for our
CT/NG/TV tests using liquid-based cytology sample collection on our proprietary GENFLEX™ platform. GENFLEX™ is a commercially
available sample-to-result molecular diagnostic platform that includes sample collection, sample processing, amplification and
detection. The GENFLEX™ open system delivers high-throughput, high capacity, workflow efficiency and flexibility at a much
greater level of affordability than existing systems. The platform will provide a cost-effective, comprehensive menu of molecular
diagnostic products and services and highlights our continued ability to deliver high performance, open, flexible, adaptable and
cost-effective products, devices and services. Compared favorably to all other proprietary platforms dominating the diagnostic
testing market, our GENFLEX™ platform offers 30-50% cost-savings over current closed systems and addresses the $450 million
annualized global CT/NG/TV diagnostic market as well as the $1.3 billion Women’s health market. Extensions of the GENFLEX™
platform, which we are currently developing, could eventually address the entire $7 billion molecular diagnostic market.
In January 2018, we validated p16, a marker used extensively
as a key diagnostic and prognostic biomarker of several cancers. Enzo’s validated p16 provides clear detection of tissue
abnormalities in the field of cancer diagnostics, including cervical cancer’s progression. Additional compounds validated
include in-situ HPV probes and antibody markers such as CD138, Ki-67, p53, Vimentin, and prostate cancer markers. P16 complements
our POLYVIEW® immunochemistry detection. With current mounting cost and reimbursement pressures, Enzo’s new p16 test
provides a highly cost-effective alternative. Other p16 tests on the market have of late become unaffordable as a result of increasing
reagent costs outweighing average reimbursements. When p16 is used in combination with Enzo’s POLYVIEW® detection system’s
reduction of false-positives, the economics are substantially enhanced. This and other similar compounds comprise a $200 million
market.
In 2016, we were granted conditional approval of PLAQPRO™
Lp-PLA2 Assay. This is a biochemical activity assay designed to identify lipoprotein-associated phospholipase A2, a
marker associated with the potential for coronary heart disease. The PLAQPRO™ Lp- PLA2 Assay can be useful as
part of a cardiac testing panel for individuals at intermediate or high risk for developing coronary heart disease. Early identification
of increased risk of developing coronary heart disease offers the opportunity to adjust patient lifestyles or utilize medical interventions
to reduce risk. The assay was developed using the Company’s strong expertise in assay development, antibody production, small
molecule chemistry, and detection technology. This cardiac assay delivers improved consistency and is designed to work on open
platform clinical analysis instruments. Enzo continues to support open platform configurations as one of the several factors that
contribute value and cost effectiveness, which is vital to today’s clinical labs which are being confronted by shrinking
reimbursements.
Products in the Company’s development pipeline include
an extensive line of assays for detection of numerous women’s health infectious agents as well as for use in the identification
of pathogens for other markets. The Company also reported that it expects to roll-out a line of products designed to aid
pathologists in distinguishing the characteristics of various tumors from biopsy specimens using technology developed by Enzo scientists.
Enzo is committed to delivering a robust line of products and
services that will provide medically relevant, cost effective solutions that are easily adaptable to the workflow of clinical laboratories.
The Company’s integrated Life Science and Clinical Lab structure continues to be instrumental in its ability to seamlessly
develop and advance products from innovation and manufacturing in our life sciences group and validation and commercialization
through our clinical laboratory. Our product development activity and pipeline include the following products:
Product/Technology
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Expected Availability (1)
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Platform
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FLU Panel 1/AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
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Q4 2020
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GENFLEX™ Molecular System
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SARS-CoV-2 IgM ELISA Kit
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Q4 2020
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ELISA
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Absorbance 96 Plate Reader
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Q4 2020
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Instrument
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Vitamin D ELISA
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Q4 2020
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ELISA
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SARS-CoV-2 Antigen Detection
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Q1 2021
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ELISA & Lateral Flow
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HPV High Risk Screen/ AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
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Q1 2021
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AGENFLEX™ Molecular System
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RNA ISH
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Q2 2021
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IN SITU HYBRIDIZATION RNA DETECTION
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HIV Viral Load/AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
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Q2 2021
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GENFLEX™ Molecular System
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HSV/VZV/AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
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Q2 2021
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GENFLEX™ Molecular System
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Group Strep B/AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
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Q2 2021
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GENFLEX™ Molecular System
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(1)
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Represents the calendar period. There can be no assurances these products can be successfully developed within these timeframes or available on these dates, if at all.
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Core Technologies
We have developed a portfolio of proprietary technologies with
a variety of research, diagnostic and therapeutic applications.
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);
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labeling the probe with a marker that generates a detectable signal upon hybridization;
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addition of the probe to the sample containing the DNA; and
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binding or hybridization of the probe to the target DNA sequence, if present, to generate a detectable signal.
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We have developed AMPIPROBE® as a broad technology base
for the labeling, detection, amplification and analysis of nucleic acids which is supported by our significant proprietary position
in these fields. This and other proprietary technologies are the building blocks of our GENFLEX™ Molecular System and other
molecular diagnostics platforms.
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 acids, 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. We have also developed isothermal amplification procedures that can be performed at constant temperatures; unlike polymerase
chain reaction (PCR) the most commonly used method of target nucleic acid amplification. These platform technologies could thus
potentially lead to assays with advantages over PCR-based tests which require expensive heating and cooling systems or specialized
heat-resistant enzymes. Moreover, our AMPIPROBE® Nucleic Acid Amplification Platform, because of the reduced amount of starting
material needed for analysis, may lead to a next-generation of molecular diagnostics that can impart higher sensitivity at a lower
cost than currently available assays.
Flow Cytometry
We have developed and launched our first product using our proprietary
FLOWSCRIPT® platform using flow cytometry to analyze messenger RNA (mRNA) transcript expression in individual cells in a mixed
cell population. By studying whether a gene or a set of genes is turned on or off, it is possible to obtain clinically relevant
information at the single cell level. Our first product, the FLOWSCRIPT® HPV E6/E7 Assay, examines the levels of E6/E7 mRNA
transcripts from multiple high risk types which account for over 95% of cervical cancers. We are planning to develop and introduce
other products based on this platform technology in the future for applications such as immune-mediated disorders, metabolic disorder
patient monitoring, and other cancers.
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 and 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
The sphingosine pathway is a cell signaling pathway that has
been implicated in tumor cell growth and pathological inflammation. The enzyme Sphingosine kinase 1 is a critical enzyme in this
pathway that acts by phosphorylating the cellular lipid Sphingosine to Sphingosine 1-Phosphate (S1P), an important biological mediator
of tumor cell proliferation and drug resistance in various cancers, and of immune function. The compound SK1-I is Enzo’s
proprietary small molecule inhibitor of Sphingosine kinase 1, which the Company is currently developing for the treatment of hepatocellular
carcinoma (HCC), the most common form of liver cancer. SK1-I has shown activity against HCC in both in vitro cell culture
experiments and in an in vivo xenotransplantation animal model of human HCC.
The compound SK1-I and related compounds, as well as their use
in oncology and other therapeutic areas, are covered by a family of issued U.S. patents co-owned by Enzo and Virginia Commonwealth
University (VCU) and exclusively licensed by VCU to Enzo. Foreign patent family members have also issued or been allowed.
Wnt 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 biological
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 and antibodies. We have performed
pioneering work on the structure and function of lipoprotein receptor-related protein (LRP) and its ligands, developed a screening
technology to identify active compounds, and synthesized proprietary molecules capable of producing biological effects in cell-based
systems and animal models of disease.
Through this work, we have identified both small molecules and
peptides capable of reversing sclerostin-mediated inhibition of Wnt signaling. Preclinical animal studies with several of the
candidate small molecules produced the following results: significant increases in total and femoral bone density through new bone
formation; significant reduction in alveolar bone loss; and significant reduction in bone resorption
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 Crohn’s disease.
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.
Clinical Laboratory Services
We operate a regional clinical laboratory that offers extensive
diagnostic services to New York, New Jersey and Connecticut medical communities. As part of our ongoing strategic growth plan we
have recently expanded service to Connecticut and other New England states. 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, diagnosis,
evaluation, monitoring and treatment of diseases and other medical conditions. Clinical laboratory testing is generally categorized
as clinical testing or anatomic pathology testing. Clinical testing is performed on body fluids, such as blood and urine. Anatomical
pathology testing is performed on tissues and other samples, such as human cells. Many 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 and broad range of routine esoteric,
and molecular diagnostic 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 to search for an otherwise undiagnosed condition.
Our full service clinical laboratory in Farmingdale, New York
contains an infrastructure that includes comprehensive information technology applications, logistics, client services and billing
departments. We have a network of over thirty strategically located patient service centers and a full service phlebotomy department.
Patient service centers collect from patients the specimens as requested by physicians. We also operate two fully equipped STAT
laboratories in New York City and Connecticut. A “STAT” lab 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 and in most instances are transmitted to us via
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 the corresponding laboratory testing instrumentation and the results are uploaded primarily
through an interface from the laboratory testing instrumentation or in some instances, manually entered 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 EnzoDirect to a physician office Electronic Medical Records (EMR) 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 accordingly notified by our customer service personnel.
For fiscal years ended July 31, 2020, 2019 and 2018, respectively,
approximately 65%, 63% and 70% of the Company’s revenues were derived from the Clinical Laboratory Services segment. Revenues,
net of contractual adjustment, from direct billings under the Federal Medicare program during the years ended July 31, 2020, 2019
and 2018 were approximately 23%, 21% and 16%, respectively, of the clinical laboratory services segment’s total revenue.
The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved
and reimbursed. 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. Other
than the Medicare program, revenues from UnitedHealthcare and Oxford Health Plan represented approximately 24%, 36% and 39%, respectively,
of the Clinical Laboratory Services segment’s net revenue for the fiscal year ended July 31, 2020, 2019 and 2018.
At July 31, 2020 and 2019, approximately 68% and 63%, respectively,
of the Company’s net accounts receivable was 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 third party
payers that insure individuals. 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.
Gross billings are based on a standard fee schedule we set for
self-payers, all third party payers, including Medicare, health maintenance organizations (“HMO’s) and managed care
providers and expanding institutional relationships with direct billing. 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, and 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.
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
add 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;
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disputes with payers as to which party is responsible for payment;
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disparity in coverage and information requirements among various payers; and
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differences in medical policies established by various payers.
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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 and stringent
federal and state regulations including those relating to coverage, billing and reimbursements. Future changes in regulations
could further complicate our billing and increase our billing expenses. These additional costs include those related to: (1) complexity
added to our billing processes and changes to our reimbursements; (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 establishes procedures and continuously evaluates and implements changes
in the reimbursement process.
The established 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 provided for reductions in the Medicare clinical laboratory fee schedule
of 1.9% for five years beginning in 2010 and also included a productivity adjustment which reduces the Consumer Price Index (“CPI”)
market basket update beginning in 2011.
Diagnostic Products
We are a manufacturer of labeling and detection technologies
from DNA to whole cell analysis. Enzo’s products are backed by innovative technology platforms and a deep patent portfolio.
With over 40 years of experience, Enzo continues to provide integrated solutions for drug development, pipeline basic research,
drug discovery, quality control in drug development and diagnostics. Enzo Life Sciences offers a broad range of high-quality products
to advance research including proteins, antibodies, peptides, small molecules, labeling probes, dyes, and kits. Enzo operates
in a highly competitive and price-sensitive marketplace and is repositioning itself by narrowing its product mix to concentrate
on improved profitability, while also adding staff who are more experienced in operations. We have become a specialized assay supplier
as part of our integrated strategic plan to deliver highly efficient, cost-effective assays for our own use and to sell to independent
labs. With direct sales operations in the US, Switzerland, Germany, UK, France, and Benelux, Enzo Life Sciences also supports
its products through a global network of dedicated distributors.
With a passion for genomics, Enzo was the first to develop products
for non-radioactive labeling of nucleic acids. This technique was instrumental in the development of today’s genomic analysis
market. Our pioneering research in genetic modification medicine was the first to recognize that nucleic acids could be used as
therapeutics. Our innovations in the detection of nucleic acids in solutions and solid matrices led to the development of technology
platforms such as hybrid capture, as well as fluorescent and chromogenic in situ hybridization. Enzo remains at the forefront
of target amplification technologies critical in the detection of infectious agents, cancer markers, and genotyping. Our work in
the genomic space has resulted in technologies in gene expression and immune system regulation, which opened the door for the well-known
molecular diagnostics assays used today.
The products we produce and supply include small molecules,
proteins, antibodies, peptides, probes, immunoassays, biochemical assays 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:
● Bioprocess
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● Immunology/Inflammation/Innate Immunity
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● Cancer
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● Metabolism
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● Cell Death/Autophagy
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● Pathology
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● Cell cycle
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● In situ Hybridization
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● Drug discovery
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● Microarray Labeling
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● Epigenetics
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● Neuroscience
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● FISH
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● Oxidative Stress
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● Genomics
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● Proteostasis
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● HPV
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● Signal Transduction
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● ImmunoHistochemistry
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● Stem Cell
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● Viral signaling and detection
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● Stress Proteins
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● Toxicology
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We maintain the technology and products from acquired brands
including Alexis, Biomol International, Assay Designs, and Stressgen. Enzo strategically uses these brands to complete our product
portfolio, allowing us to offer complete solutions to researchers in all fields. These brands are complementary to our core expertise
in genomics and molecular biology. The Company intends to maintain the rights to the acquired brands which have long product histories.
The Company believes the emphasis on the Enzo Life Sciences brand will result in stronger and clearer brand awareness and allow
the Company to execute the sale of higher value products and promote more products into the drug development, clinical research
and diagnostic markets.
Axxora.com -“The Reagents Marketplace”, Thousands
of Reagents, One 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 connect with over 40 specialty manufacturers and gain
access to over 100,000 products.
Research and Development
Our principal research and development efforts are directed
toward developing innovative new clinical research and diagnostic platforms, and selective expansion of our research product lines,
given our manufacturing and distribution capability. We have developed our core research expertise in the life sciences field as
a result of over 40 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, 2020, 2019 and 2018, the
Company incurred costs of approximately $4.4 million, $3.2 million and $3.2 million, respectively, for research and development
activities. Starting in fiscal 2018, the Company’s research and development program was refocused to areas that had greater
opportunity in molecular diagnostics and immunology chemistry to maximize revenues.
Internal Research Programs
Our professional staff, including 33 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, immunology, flow cytometry and fermentation. In addition, we continuously review in-licensing opportunities
in connection with new technology.
External Research Collaborations
We have and continue to explore 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.
Sales and Marketing
Our sales and marketing strategy is to sell our life sciences
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)
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 Clinical Laboratory Services, we focus our sales efforts
on obtaining and retaining profitable accounts. We market these services to a broad range of ordering physicians in the metro New
York, New Jersey and Connecticut regions through our direct sales force who are supported by client service and patient service
representatives. We monitor and where appropriate, 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 are consistently looking to add higher value molecular and esoteric testing, both internally developed and
with partners, to our menu to assist sales in new account penetration as well as to improve our level of service to existing clients.
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 in certain market places.
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 technologies, applications and markets. Many of these competitors are significantly larger than we
are and have more resources. 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.
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.
In June 2020, we announced the issuance of a patent entitled
Sphingosine Pathway Modulating Compounds for the Treatment of Cancers. This patent is directed to methods for treating hepatocellular
carcinoma (HCC), the most common human liver cancer, using our proprietary compound SK1-I.
In May 2020, we announced the issuance of a U.S. Patent entitled
Sulfonated Sclerostin, Antibodies, Epitopes and Methods for Identification and Use Therefor. The patent is directed to methods
for producing monoclonal antibodies against specific regions of human Sclerostin, a protein that is a negative regulator of bone
growth. Inhibition of Sclerostin using monoclonal antibodies can be used to promote bone growth for the treatment of osteoporosis.
This patent is a member of a broader U.S. and international patent family that includes issued patents and pending patent applications
directed to antibodies and their use in inhibiting Sclerostin as well as small synthetic peptides and their use in inhibiting Sclerostin
in the treatment of bone disorders such as osteoporosis
In April 2020, we announced the issuance of a U.S. patent entitled
Sphingosine Kinase Type 1 Inhibitors and Uses Thereof. This patent is directed to methods for inhibiting the enzyme Sphingosine
kinase 1 in patients using the company’s proprietary compound SK1-I and related Sphingosine kinase 1 inhibitors. Based on
the results obtained in the lupus model and prior work demonstrating the anti-inflammatory activity of SK1-I in animal models of
other immune disorders and on isolated human blood cells, the company is exploring avenues for the development of SK1-I as a potential
treatment for COVID-19.
In August 2019 we announced the issuance of a U.S. patent entitled
Nucleic Acid Probes for In Situ Hybridization. This patent is related to a new probe technology developed by Enzo and transformative
methods of testing using the probes, which allow for significantly more cost effective, simple and scalable processes. These new
probes can be used to detect clinically relevant genomic targets with high-sensitivity in cell samples and biopsy tissue obtained
from patients.
At the end of fiscal 2020 we owned or licensed 475 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.
REGULATION AFFECTING OUR BUSINESSES
Clinical Laboratory Services
The clinical laboratory industry is subject to significant federal
and state regulation, including inspections and audits by governmental agencies. Governmental authorities may impose fines, criminal
penalties or take other actions to enforce laws and regulations, including, but not limited to, revocation of a clinical laboratory’s
certificate and/or license to operate a clinical laboratory. Changes in regulation may also increase the cost of performing clinical
laboratory tests, increase administrative requirements, and/or decrease the amount of reimbursement. Our clinical laboratory and
where applicable patient service centers (PSCs) are licensed and accredited as required by law.
CLIA (the Clinical Laboratory Improvement Amendments of 1988
and its implementing regulations) regulates virtually all clinical laboratories in the United States. Among other things, CLIA
requires non-exempt clinical laboratories to earn certification from 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 pre-empt state laws that are more stringent than federal laws. As such, certain clinical laboratories must
also meet state specific standards, including inspection, proficiency testing, and personnel requirements. Clinical laboratory
certificates, permits, or licenses are also required by various state and local laws, including certain jurisdictions that require
an out-of-state clinical laboratory to obtain a license/permit if they accept specimens from the state. Enzo has obtained licenses
or permits in the states of New York, New Jersey, California, Pennsylvania, Maryland, and Rhode Island. Enzo also operates a clinical
laboratory in the state of Connecticut.
CLIA assigns testing services into one of three categories on
the basis of complexity (waived, moderate complexity and high complexity) and establishes varying requirements depending upon the
complexity category of the tests performed. A laboratory that performs high complexity testing must meet more stringent requirements
than a laboratory that performs only moderate complexity testing, while those that perform only waived testing may apply for a
certificate of waiver that if granted, would exempt the laboratory from most CLIA requirements. Our laboratory in Farmingdale,
NY is certified to perform high complexity testing. In general, regulations promulgated by the United States Department of Health
and Human Services (“HHS”) require clinical laboratories that perform high or moderate complexity testing to implement
systems that ensure the accurate performance and reporting of test results, establish quality control and quality assurance systems,
ensure that personnel meet specified standards, conduct proficiency testing by approved agencies, and undergo biennial inspections,
among other requirements.
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 an exemption from CLIA. Therefore, as long as New York maintains a licensure program that is CLIA-exempt, laboratories
in New York may comply with CLIA requirements by establishing that they meet requirements for clinical laboratories under New York
law. Enzo’s two New York laboratories are licensed in New York State and have ongoing programs that ensure that their operations
are in compliance with all applicable regulatory requirements, including the requirement to obtain approval to perform certain
analyte-specific testing or other methodologies which are not reviewed by FDA as laboratory-developed tests (LDTs).
Sanctions for non-compliance with applicable regulations may
include, but are not limited to, suspension, revocation, or limitation of a laboratory’s CLIA certificate and/or state license,
as well as fines and criminal penalties. The loss of, or adverse action against, a certificate or license, the imposition of fines,
penalties or other sanctions, or future changes in Federal, state or 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 are
subject to complex federal and state laws, rules and regulations, the violation of which may include, but is not necessarily limited
to: (1) exclusion from participation in federal health care programs (including Medicare and Medicaid); (2) asset forfeitures;
(3) civil monetary penalties; (4) criminal fines and penalties; and (5) the loss of licenses, certificates and/or authorizations
necessary to operate some or all of a clinical laboratory’s business.
The health care industry has been undergoing significant change
because third-party payers, such as Medicare, Medicaid, 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 insurers and health maintenance organizations are likely to
occur as well. We cannot predict the effect that current and future health care reform measures, if enacted, would have on our
business, and there can be no assurance that such reforms, if so enacted, would not have a material adverse effect on our business
and operations.
Containment of health care costs, including reimbursement for
clinical laboratory services, has been a focus of on-going governmental activity. In general, clinical laboratories must bill Medicare
directly for the services provided to Medicare beneficiaries and may only collect the amounts permitted under the Medicare Clinical
Laboratory Fee Schedule. Under the Patient Protection and Affordable Care Act, expansion in the pool of covered lives may expand
the market for clinical diagnostic testing while at the same time, various policies aimed at reducing costs or bundling care may
reduce the rates paid for such services; the net impact of these factors on the market for our services is not clear . In April
2014, Congress passed the Protecting Access to Medicare Act of 2014 (PAMA), which included substantial changes to the way in which
clinical laboratory services will be paid under Medicare. Beginning in 2018, Medicare payments for clinical laboratory services
are paid based upon the volume-weighted median of private payer rates as reported by certain clinical laboratories across the US,
replacing the previous system which was based upon fee schedules derived from historical charges for tests from the mid 1980’s.
Since Enzo’s clinical laboratory receives more than 50%
of its total Medicare revenue from the Part B Clinical Laboratory Fee Schedule (CLFS) and the Physician Fee Schedule and receives
more than $12,500 in Medicare CLFS revenues per year, we are considered an “applicable laboratory”, and as such, are
required to report private payer rate information to CMS. Enzo initially reported data from the first two quarters of CY 2016 during
Q1 2017, and this information was used (along with data from other relevant laboratories) to calculate Medicare reimbursement rates
for CY 2018-2022. The current reporting cycle requires us to report private payer rates for fee reimbursements for the period January
1, 2019 to June 30, 2019 to CMS during Q1 2022. This combined data (and data from other laboratories) will be aggregated and utilized
again as the basis for the 2023-2025 Medicare CLFS that is expected to be finalized in November 2022.
Future changes in federal, state and local regulations (or in
the interpretation of current regulations) affecting governmental reimbursement for clinical laboratory testing may 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,
(1) reimbursement denials by third party payers, commercial insurers and health maintenance organizations, (2) reductions or delays
in the establishment of reimbursement rates, (3) carrier limitations on the insurance coverage of the Company’s services
and (4) the use of the Company as a service provider may have a negative effect on the Company’s future revenues. During
our fiscal 2016 and 2017, Medicare reimbursement rates remained constant with 2015 levels. However, PAMA-based cuts in Medicare
reimbursement for certain services impacted fiscal 2018 results beginning in January 2018. PAMA cuts were implemented in calendar
year 2019 for certain services, which also impacted our financial results for our fiscal 2020 and 2019. Additional cuts are mandated
in calendar year 2020 and are expected to negatively impact our fiscal 2021 results. The impact of subsequent adjustments to Medicare
rates are unclear at this time.
Anti-Fraud and Abuse Laws
Existing Federal and state laws also regulate certain aspects
of the relationship among healthcare providers, including clinical laboratories, and their referral sources (i.e., physicians,
hospitals, other laboratories, etc.). One of these laws, known as the federal “Anti-Kickback Statute,” contains broad
prohibitions against knowingly and willfully offering, paying, soliciting (i.e., asking for) or receiving remuneration (i.e., anything
of value) in any form (e.g., cash, gifts, certain discounts, cross-referrals between parties, etc.), either directly or indirectly,
to induce or in return for the referral of an individual for the furnishing of or arranging for the furnishing of any item or service
for which payment may be made in whole or in part by a federal health care program. or the purchasing, leasing, ordering, or arranging
for or recommending purchasing, leasing, or ordering of any good, facility, item or service for which payment may be made in whole
or in part by a federal health care program.
Violation of the Anti-Kickback Statute may result in, among
other things, a criminal conviction, significant monetary penalties and exclusion from federal health care programs (including
Medicare and Medicaid). Any person or entity involved in a prohibited transaction is potentially subject to criminal and civil
penalties. A laboratory that claims payment for business generated by the Anti-Kickback Statute may also be subject to prosecution
for violating a separate civil statute, the federal False Claims Act.
Federal substance abuse legislation enacted in October 2018
(Eliminating Kickbacks in Recovery Act of 2018 or EKRA) contains an all-payer anti-kickback provision that is, by its terms, applicable
to laboratories. We are attempting to clarify the application of that legislation.
The federal False Claims Act is also a broad statute that the
government often utilizes to combat fraud and abuse in the health care environment. Among other things, the statute is violated
by any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; knowingly
makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; conspires to commit
the above (or other specified) violations; or knowingly makes, uses, or causes to be made or used, a false record or statement
material to an obligation to pay or transmit money or property to the government, or knowingly conceals or knowingly and improperly
avoids or decreases an obligation to pay or transmit money or property to the government. The federal False Claims Act also provides
that private parties may bring an action on behalf of (and in the name of) the United States to prosecute a federal False Claims
Act violation. These private parties (known as “qui tam relators”) may share in a percentage of the proceeds that result
from a federal False Claims Act action or settlement. A person or entity found to have violated the federal False Claims Act may
be held liable for a per claim civil penalty. For penalties assessed after June 19, 2020, whose associated violations occurred
after November 2, 2015, the penalties range from $11,665 to $23,331 for each false claim, plus three times the amount of damages
sustained by the government. The minimum and maximum per claim penalty amounts are subject to annual increases for inflation. A
person violating the federal False Claims Act is also liable for the costs of the civil action brought to recover any such penalty
or damages. Other consequences may also result from a violation of the federal False Claims Act or similar state laws. For example,
New York has also adopted its own false claims act statute, which closely mirrors its federal counterpart.
Another federal law, commonly known as the “Stark”
law, prohibits physicians who have (or whose immediate family member has) a financial relationship with an entity that furnishes
Medicare-covered “designated health services,” which includes clinical laboratory services (including anatomic pathology
and clinical chemistry services), from referring Medicare beneficiaries to that entity for “designated health services”
unless a specific exception applies.
In addition, laboratories may not bill federal health care programs,
or any other payer, for services furnished pursuant to a prohibited referral. Violation of the Stark law may result not only in
denial of payment for the underlying testing services, but also the imposition of civil monetary penalties and, potentially, False
Claims Act liability. The Stark law also prohibits state receipt of federal Medicaid matching funds for services furnished pursuant
to a prohibited referral. This provision of the Stark law has not been implemented by regulations, but some courts have held that
the submission of claims to Medicaid that would be prohibited as self referrals under the Stark law for Medicare could implicate
the federal False Claims Act. Many states, including New York have adopted laws that are similar to the federal Stark law, which
contain similar prohibitions and penalties and apply regardless of payer.
Various federal and state laws, including the Stark law and
New York State laws, may also apply in ways that impose restrictions on the supplies and other items that laboratories may provide
to their clients without charge. For example, in the case of the Stark law, laboratories may provide clients with items, devices
or supplies that are used solely to collect, transport or store specimens for the laboratory or to communicate results or tests
without implicating the law, but not surgical items, devices or supplies.. The Company has implemented procedures to ensure compliance
with these laws and restrictions.
In 1997, the Department of Health and Human Services, Office
of the Inspector General (OIG) released a model compliance plan for the clinical laboratory industry and in 1998 released a voluntary
compliance program guidance for laboratories. One key aspect of the OIG guidance was an emphasis on the responsibility of laboratories
to notify physicians that Medicare covers only medically necessary services. The OIG guidance on notices focuses 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, the notice could potentially affect physicians’
test ordering habits more broadly. The Company is unable to predict whether, or to what extent, notices have impacted, or may impact,
utilization of the Company’s services.
The federal health care reform legislation adopted in March,
2010, known as the Patient Protection and Affordable Care Act, contains provisions requiring providers to establish compliance
programs as a condition of enrollment in Medicare, Medicaid and the State Children’s Health Insurance Program. Implementing
regulations and guidance for clinical laboratories has not yet been issued yet by the Centers for Medicare and Medicaid Services.
In addition, New York State has adopted mandatory compliance program requirements for certain specified providers, including those
who directly or indirectly bill or collect more than $500,000 annually in Medicaid payments, and entities licensed under certain
articles of the Public Health Law and Mental Hygiene Law, respectively. The Company has adopted its own Corporate Compliance Program
based upon the OIG model program guidance and in accordance with New York State’s requirements.
The Company’s compliance program focuses on, among other
things, establishing clear compliance standards; auditing and monitoring of the Company’s billing and coding practices; training
personnel on compliance standards, policies and procedures; preventing and detecting fraud, waste and abuse, enforcing a policy
of non-retaliation and non-intimidation for good faith participation in the compliance program; and establishing good faith reporting
of actual or suspected compliance violations.
The Company seeks to structure its arrangements with physicians
and other customers in compliance with federal and state Anti-Kickback laws, Stark laws, False Claims Acts, and other applicable
laws, rules and regulations, and to keep current on developments concerning their application to the Company, including consultation
with legal counsel. However, the Company is unable to predict how such laws and regulations will be interpreted and applied in
the future, and thus no assurances can be given that its arrangements or processes will not become subject to scrutiny by a governmental
agency.
Standards for Electronic Healthcare Transactions and Privacy,
Security and Breach Notification Requirements
The Health Insurance Portability and Accountability Act of 1996,
as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH Act”) (together,
“HIPAA”), 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. HIPAA’s implementing regulations set forth standards for conducting certain electronic transactions, as well
as privacy, security and breach notification requirements applicable to certain health information. As part of its standards for
electronic transactions, HIPAA requires the use of a National Provider Identifier in electronic health care transactions. The National
Provider Identifier is an identifier that replaced all other identifiers that are currently used or healthcare transactions (e.g.,
UPIN, Medicaid provider numbers, identifiers assigned by commercial insurers). The regulations promulgated under HIPAA have very
broad applicability, including by specifically applying to health care providers that engage in certain standard electronic transactions,
which may include physicians and clinical. Such health care providers, together with health plans and health care clearinghouses
are subject to HIPAA as “Covered Entities”. HIPAA also applies to the “Business Associates” of Covered
Entities, which are generally individuals or entities that create, receive, maintain, transmit, use, or disclose protected health
information in performing certain functions or services for or on behalf of Covered Entities.
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 health care provider, health care clearinghouse or health plan, we must comply with the standards set
forth in the regulations. The regulations established standard data content and format requirements for submitting electronic claims
and other administrative health transactions. Health care providers and health plans are required to use standard formats when
transmitting claims, referrals, authorizations, and certain other transactions electronically. The Company believes it is in compliance
with these standards. However, to the extent the Company engages in electronic standards that do not comply with applicable standards
under HIPAA, payments to the Company may be delayed or denied.
Adhering to the privacy, security and breach notification requirements
under HIPAA requires an extensive compliance infrastructure. 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 in place to safeguard
the privacy of PHI that is transmitted or maintained in any format (e.g. oral, written, or electronic). Failure to comply with
these requirements can result in criminal and civil penalties. In addition, to comply with the HIPAA security regulations in particular,
we must ensure the confidentiality, integrity and availability of all electronic PHI (“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 periodically conduct an accurate and thorough assessment of the potential risks and vulnerabilities
to the confidentiality, integrity and availability of our EPHI and then document our response to the various security regulations
on the basis of that assessment.
The privacy, security and breach notification regulations under
HIPAA were last modified in 2013 as a result of final regulations published pursuant to the HITECH Act (“Omnibus Rule”).
The HITECH Act requires, among other things, that Covered Entity health care providers, which may include laboratories, notify
patients of breaches of unsecured PHI, enter into business associate agreements with their business associates that meet certain
requirements, and take other steps to comply with the privacy, security, and breach notification requirements of the HITECH Act,
which include making necessary revisions to many of their existing privacy policies and procedures. In addition, the HITECH Act
makes Business Associates directly liable to the Federal government for compliance with certain aspects of the privacy, security
and breach notification regulations. In addition, as implemented in the Omnibus Rule, a downstream subcontractor of a Business
Associate that creates, receives, maintains, or transmits PHI on behalf of the Business Associate is also itself considered a Business
Associate.
Covered Entities and Business Associates are subject to potentially
significant civil and criminal penalties for violating HIPAA. Under the Omnibus Rule, health care providers, such as laboratories,
that are subject to HIPAA as a Covered Entity are also vicariously liable for violations of HIPAA based on acts or omissions of
their agents, including Business Associates, when the agent is acting within the scope of the agency. Complying with the electronic
transaction, privacy, security and breach notification rules requires significant effort and expense for virtually all entities
that conduct health care transactions electronically and handle PHI.
We may also be subject to state laws that are not pre-empted
by HIPAA to the extent the state law is more stringent than HIPAA, provides individuals with greater rights with respect to their
protected health information, or are broader in scope than HIPAA. Every U.S. state has also enacted its own breach notification
law that requires regulated entities to report certain data breaches to affected individuals, state regulators, and other parties.
Failure to comply with applicable state privacy, security or breach notification laws may result in civil or criminal liability,
private causes of action by individuals, administrative actions brought by state regulators, or other consequences that may adversely
impact our business or reputation.
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. 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 Diagnostic Products
On February 4, 2020 the HHS Secretary determined that there
is a public health emergency that has a significant potential to affect national security or the health and security of United
States citizens living abroad, and that involves the virus that causes COVID-19. On the basis of this determination, the Secretary
then declared that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or
diagnosis of the virus that causes COVID-19.
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 undergo premarket
review (and receive “510(k) clearance”, de novo 510(k) authorization, or pre-market approval (“PMA”)
from the FDA, as may be applicable) before they can be marketed in the United States. The FDA’s premarket review processes
may be costly and time consuming, but the process of obtaining PMA approval is typically the most costly, lengthy and uncertain,
followed by the de novo 510(k) process, and then the 510(k) process. Regardless of the premarket review pathway that applies
to a particular product, we cannot be sure that we will successfully complete the FDA premarket review process for any product
we propose to market.
The FDA decides the premarket review process that applies to
a particular device 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. In a pre-market notification, the applicant
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 a “pre-amendment” class III device (i.e., one that was
legally in commercial distribution before May 1976) for which the FDA has not yet called for submission of a PMA application, or
a device which has been reclassified from Class III to Class II or I, a device which has been found substantially equivalent through
the 510(k) process, or a device that was granted marketing authorization via the de novo classification process that is
not exempt from premarket notification requirement.
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 de novo 510(k) authorization or PMA approval (as applicable). The FDA requires each
manufacturer to make the determination regarding whether a modification triggers the requirement for a new submission in the first
instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek premarket
review for the modified device, the agency may retroactively require the manufacturer to do so. The FDA also can require the manufacturer
to cease marketing and/or recall the modified device until the premarket review process has been successfully completed.
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 provide sufficient valid scientific
evidence of the safety and effectiveness of the device. A PMA application typically requires the collection of 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, its labeling or its manufacturing process.
Although clinical investigations of many devices are subject
to the investigational device exemption (“IDE”) requirements, clinical investigations of certain in vitro diagnostic
(“IVDs”) tests are exempt from the IDE requirement provided the testing is non-invasive, does not require an invasive
sampling procedure that presents a significant risk, does not by design or intention introduce energy into the subject, and is
not used as a diagnostic procedure without confirmation by another medically established test or procedure.
Notwithstanding the above, certain IVD products can be marketed
without going through the premarket review process if they are intended for use in the laboratory research phase of development
and not represented as an effective IVD (i.e., labeled for Research Use Only (RUO)) or for use in product testing prior to full
commercial marketing (i.e. for Investigational Use Only (IUO)). Because RUO and IUO-labeled products are exempt from most regulatory
requirements that would otherwise apply to medical devices, it is important that they are not distributed for clinical diagnostic
use. Mere placement of an RUO or IUO label on an IVD product does not render the device exempt from otherwise applicable regulatory
requirements; indeed, FDA may determine that the device is intended for use in clinical diagnosis on the basis of other evidence,
including how the device is marketed. FDA recommends that manufacturers assess the totality of the circumstances surrounding the
distribution of their RUO and IUO labeled products to ensure that they are not engaging in practices that conflict with their labeling.
The FDA expressed its intent to exercise heightened enforcement with respect to IUO and RUO devices improperly commercialized without
FDA clearance, authorization or approval in a 2013 final guidance document.
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, our failure to comply with the regulatory limitations on the sale and distribution
of RUO devices could result in enforcement action by the FDA, including the imposition of restrictions on our distribution of these
products.
Although FDA has long asserted it has jurisdiction over laboratory-developed
tests, the agency has historically exercised discretion enforcement with respect to most such tests and not required laboratories
that furnish these tests to comply with FDA’s regulatory requirements for medical devices. In recent years, however, the
FDA has indicated that it intends to end enforcement discretion and regulate certain LDTs as medical devices. In October 2014,
the FDA officially a draft guidance document that set forth a proposed risk-based regulatory framework that would apply varying
levels of FDA oversight to LDTs. The FDA has indicated that it does not intend to modify its policy of enforcement discretion until
the draft guidance documents are finalized. Subsequently, in January 2017, the FDA published a “discussion paper” in
which the agency outlined a substantially revised “possible approach” to the oversight of LDTs. The discussion paper
explicitly states that it is not a final version of the 2014 draft guidance and that it does not represent the agency’s “formal
position;” rather, the discussion paper describes the evolution of the agency’s thinking on LDTs, which the agency
posted to “spur further dialogue.” Notably, in the discussion paper, the agency expressed its willingness to consider
“grandfathering” currently marketed LDTs from most or all FDA regulatory requirements. It is unclear at this time when,
or if, the FDA will finalize its plans to end enforcement discretion, and even then, the new regulatory requirements are expected
to be phased-in over time. Nevertheless, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time.
Legislative proposals addressing the FDA’s oversight of
LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time to
time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s
plans to regulate certain LDTs as medical devices is difficult to predict at this time.
In so far as the products that we manufacture or distribute
are subject to regulation as medical devices, a host of additional regulatory requirements may apply beyond premarket review requirements,
including establishment registration, device listing, 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
may also be subject to 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 with applicable requirements,
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, 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 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, authorizations, and approvals, as well as
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 certain 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 therapeutic products that we develop will require regulatory
review before clinical trials, and additional regulatory approval 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.
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 review and approve 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 our pharmaceutical products, we (as
the sponsor) would file an IND application with FDA 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 also reviewed, approved and overseen
by an Institutional Review Board (“IRB”). In considering an application to perform a clinical trial, IRB will consider,
among other things, ethical factors and the safety of human subjects participating in the trial. 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), typically 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 may take several years to complete, but the period may vary. 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. 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
efficacy, safety, purity and/or potency of human gene medicine products, or that the clinical and other data generated will be
acceptable to the FDA to support marketing approval.
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, unless
shown to be clinically superior. Certain expedited pathways may be available and would 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.
After completion of clinical trials of an investigational 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 10 months and 6 months for priority review. 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, recordkeeping and other quality assurance
procedure requirements that must be met.
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.
Manufacturing and Research Facilities
Our integrated laboratory and scientific efforts for our three
segments currently take place primarily at two adjacent facilities in Farmingdale, New York. A major part of one facility is utilized
by Life Science products as its global headquarters, and also for research and manufacturing with special handling capabilities
and clean rooms suitable for our operations. The Life Sciences segment has centered its US logistics, reagent and kit manufacturing
at its facility in Ann Arbor, Michigan, and has European logistics operations in Lausen, Switzerland. We began renovation of an
acquired facility in Farmingdale, NY which is adjacent to the other two in July 2020. This facility will be used for manufacturing
operations and some administrative functions. 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, 2020, we employed 408 full-time and 40 part-time
employees. Of the full-time employees, 111 were engaged in research, development, manufacturing, and marketing of research products,
252 in performing testing, marketing and billing our clinical laboratories services and 45 in finance, information technology,
administrative and executive functions. Our scientific staff, including 33 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 services 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.
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 Pathologists (“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 CAP accredited.
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
Item 1A. Risk Factors
Business Risks
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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The
continued impact on our operations from the COVID-19 pandemic depending on its severity and duration competition from larger commercial
clinical laboratories, hospital affiliated laboratories, and physician office laboratories;
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health
care reform regulations affecting providers and plan sponsors, including those stemming from the Affordable Care Act of 2010 (ACA)
or its repeal, amendment or replacement;
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changes
in reimbursement policies by third party and government payers, especially those stemming from The Protecting Access to Medicare
Act of 2014 (“PAMA”);
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customer
demand for our products due to changes in purchasing requirements and research needs;
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the
introduction of new products by us or our competitors;
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the
timing of our research and development, sales and marketing expenses;
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general
worldwide economic conditions affecting funding of research;
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seasonal
fluctuations in revenues due to the impact of weather and holiday periods
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expenses
associated with defending our intellectual property portfolio
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foreign
currency exchange rate fluctuations;
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changes
in tax laws, the results of tax audits or the measurement of tax uncertainties; and
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the
success of identifying, acquiring and integrating businesses that complement our product offerings, add new technology or add
presence in a market;
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Consequently, results for any interim or full year period may
not necessarily be indicative of results in subsequent periods.
The COVID-19 pandemic has significantly and adversely affected
our consolidated results of operations, financial position and cash flows, and may continue to do so depending on the severity
and duration of the COVID-19 pandemic, the pandemic’s impact on the U.S. healthcare system and the timing, scope and effectiveness
of federal, state and local governmental responses to the COVID-19 pandemic.
A novel strain of coronavirus (“COVID-19”)
continues to spread and severely impact the economy of the United States and other countries around the world, the Company has
made substantial investments to expand the amount of COVID-19 testing available and is currently offering direct testing at its
drive-through testing facilities as well as accepting tests for processing at its clinical laboratory. The Company and its employees
are committed to being a part of the coordinated public and private sector response to this unprecedented challenge. The Company
has also put preparedness plans in place at its facilities to maintain continuity of operations, while also taking steps to keep
colleagues and customers healthy and safe.
Beginning in March 2020, the Company
experienced, and anticipates it will continue to experience, a material decline in its laboratory testing volumes due to the COVID-19
pandemic as patients have reduced physician office visits. Additionally, our products customers have reduced or suspended purchases
or temporarily closed and/or reduced operations on a global basis. This decline continued in the fourth fiscal quarter and, depending
on the extent of future COVID-19 recurrence, could continue through the fiscal year ending July 31, 2021. Federal, state and local
governmental policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, the
aforementioned significant reduction in physician office visits, the cancelation of elective medical procedures, customers closing
or severely curtailing their operations (voluntarily or in response to government orders), and the adoption of work-from-home or
shelter-in-place policies. The Company believes the COVID-19 pandemic may continue to have an impact on the Company’s operating
results, cash flows and financial condition. Global supply chain issues due to the pandemic may hamper both the manufacturing of
products within the life sciences division as well as the testing capabilities in the clinical laboratory services division. It
is possible that the Company may experience an adverse impact on cash collections from customers, clients and payers as a result
of the impact of the COVID-19 pandemic.
The Company expects COVID-19 related
products and services to partially offset revenue declines. Enzo applied its technical expertise in molecular diagnostics to develop
next generation COVID-19 diagnostic and antibody testing options which were approved under the FDA Emergency Use Authorization
(EUA). This testing had a positive impact on revenue, profitability and cash flow in the fourth quarter of fiscal 2020. However,
it is too early to determine the long term significance of any positive impact from increased COVID-19 testing and our proprietary
COVID-19 product offerings on revenue, profitability and cash flow.
We believe the COVID-19 pandemic’s adverse impact on its
consolidated results of operations, financial position and cash flows will be primarily driven by: the severity and duration of
the COVID-19 pandemic; the COVID-19 pandemic’s impact on the U.S. healthcare system and the U.S. economy; and the timing,
scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic. These primary drivers are
beyond the Company’s knowledge and control, and as a result, at this time the Company cannot reasonably estimate the adverse
impact the COVID-19 pandemic will have on its businesses, consolidated results of operations, financial position and cash flows,
but the adverse impact is likely to be material. Even after the COVID-19 pandemic has moderated and the business and social distancing
restrictions have eased, we may continue to experience similar adverse effects to our businesses, consolidated results of operations,
financial position and cash flows resulting from a recessionary economic environment that may persist. The impact that the COVID-19
pandemic will have on our businesses, consolidated results of operations, financial position and cash flows could exacerbate the
additional risks identified below.
A significant proportion of our Products revenues are from
academic centers, funded by government grants in our major markets globally.
Governments around the world have been reviewing long term public
funding of life science research in response to the problems arising from global financial pressures. As a result, the available
funds for discretionary purchases from market to market have been capped or reduced based on available National budgets. Reduced
grants for researchers could impact our business, in the amount, price and type of products bought and used by customers.
A significant proportion of our Products revenues are from
customers in pharmaceutical and biotech companies.
Globally, pharmaceutical companies are challenging internal
budgets, and the return of investment from their R&D spend. This could impact our business, in the amount, price and type of
products bought and used by customers.
Our future success will depend in part upon our ability to
enhance existing products, develop and introduce new products and realize commercial acceptance of those products, in a rapidly
changing technological environment.
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, develop and introduce new products, and realize commercial
acceptance of those 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, state-wide agency 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.
Our strategy envisions, if an opportunistic target is identified,
future growth from acquiring and integrating similar operations and/or product or services 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. Failure to implement successfully our acquisition strategy would limit our potential growth.
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 product segment continues a marketing program
designed to more directly service its end users, while simultaneously promoting the Enzo Life Science brand, with reference to
our acquired brands. We will continue to reach out to our customers using our direct field sales force, in-house business team,
the on-going enhancement of our interactive websites, continued attendance at top industry trade meetings, and publications to
customers and 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 significant 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 services 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;
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require us to increase our marketing efforts which could reduce our profit margins;
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increase our cost of labor to attract qualified personnel;
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render our biotechnology products uneconomical or obsolete or;
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reduce our revenue
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Ethical, legal and social concerns surrounding the use of
genetic information could reduce demand for our products.
Genetic testing has raised ethical issues regarding privacy
and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation
of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that
have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these
scenarios could reduce the potential markets for our molecular diagnostic products, which could have a material adverse effect
on our business, financial condition and results of operations.
We depend on distributors and contract manufacturers and
suppliers for materials that could impair our ability to manufacture or distribute our products.
We manufacture and distribute our own brand products and the
products of third party manufacturers and suppliers. Distributors also sell our branded products. 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.
Outside distributors, suppliers and contract manufacturers provide
key finished goods, components and raw materials used in the sale and manufacture of our products. 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.
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.
We rely on network and information systems and other technology
whose failure or misuse could cause a disruption of services or loss or improper disclosure of personal data, business information,
including intellectual property, or other confidential information, resulting in increased costs, loss of revenue or other harm
to our business.
Network and information systems and other technologies, including
those related to the Company’s network management, are important to its business activities. The Company also relies on third
party providers for certain technology and “cloud-based” systems and services that support a variety of business operations.
Network and information systems-related events affecting the Company’s systems, or those of third parties upon which the
Company’s business relies, such as computer compromises, cyber threats and attacks, computer viruses, worms or other destructive
or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities,
or any combination of the foregoing, as well as power outages, equipment failure, natural disasters (including extreme weather),
terrorist activities, war, human or technological error or malfeasance that may affect such systems, could result in disruption
of the Company’s business and/or loss, corruption or improper disclosure of personal data, business information, including
intellectual property, or other confidential information. In addition, any design or manufacturing defects in, or the improper
implementation of, hardware or software applications the Company develops or procures from third parties could unexpectedly compromise
information security. In recent years, there has been a rise in the number of cyber-attacks on companies’ network and information
systems, and such attacks have become more sophisticated, targeted and difficult to detect and prevent against. As a result, the
risks associated with such an event continue to increase, particularly as the Company’s digital businesses expand. While
the Company has developed and implemented security measures and internal controls that are designed to protect personal data, business
information, including intellectual property, and other confidential information, to prevent data loss, and to prevent or detect
security breaches, such security measures cannot provide absolute security and may not be successful in preventing these events
from occurring, particularly given that techniques used to access, disable or degrade service, or sabotage systems change frequently,
and any network and information systems-related events could require the Company to expend significant resources to remedy such
event. Moreover, the development and maintenance of these measures is costly and requires ongoing monitoring and updating as technologies
change and efforts to overcome security measures become more sophisticated. While the Company maintains cyber risk insurance, this
insurance may not be sufficient to cover all losses from any future breaches of our systems.
A significant failure, compromise, breach or interruption of
the Company’s systems, or those of third parties upon which its business relies, could result in a disruption of its operations,
customer, audience or advertiser dissatisfaction, damage to its reputation or brands, regulatory investigations and enforcement
actions, lawsuits, remediation costs, a loss of customers, advertisers or revenues and other financial losses. If any such failure,
interruption or similar event results in the improper disclosure of information maintained in the Company’s information systems
and networks or those of its vendors, including financial, personal, credit card, confidential and proprietary information relating
to personnel, customers, vendors and the Company’s business, including its intellectual property, the Company could also
be subject to liability under relevant contractual obligations and laws and regulations protecting personal data and privacy. In
addition, media or other reports of perceived security vulnerabilities to our systems or those of third parties upon which the
Company’s business relies, even if nothing has actually been attempted or occurred, could also adversely impact our brand
and reputation and materially affect 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 and anticipate continuing to incur 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 and
no assurance can be given that others will not independently develop substantially equivalent proprietary technology, that such
proprietary technology will not be disclosed or that we can meaningfully protect our rights to such proprietary technology.
Our business is subject to governmental
laws and regulations. Changes in the way the FDA regulates the reagents, and other consumables we use when developing, validating,
and performing our tests could result in delay or additional expense in bringing our tests to market or performing such tests for
our customers. 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. The FDA has
regulatory responsibility over, among other areas, instruments, software, test kits, reagents and other devices used by clinical
laboratories to perform diagnostic testing in the U.S. The tests we develop internally are offered as lab developed tests or LDTs.
The FDA has claimed regulatory authority over all LDTs, but has stated that it exercised enforcement discretion with regard to
most LDTs performed by high complexity CLIA-certified laboratories. As the FDA moves to regulate more clinical laboratory testing,
its approach to regulation is impacting industry practices and participants, new competitors may enter the industry, and competition
may come in new forms. In late 2018, legislation was introduced in Congress that would enable the FDA to regulate LDTs, in vitro
diagnostics, software and other items used in the diagnosis of disease. If this legislation were to become law, the FDA could regulate
diagnostic tests and components and platforms used as part of these tests. If such legislation were to become law, it could have
a significant impact on the clinical laboratory testing industry, including regulating LDTs in new ways and creating avenues of
opportunity and competition regarding clinical laboratory testing. New competitors may enter the industry, and competition may
come in new forms. Pursuant to the 21st Century Cures Act, the FDA issued guidance regarding its position on the regulation of
clinical decision software, which may be used in, or in connection with, LDTs. The guidance attempts to clarify whether FDA approval
of certain software is required. In January 2019 the FDA issued draft guidance on a pre-certification pilot program to help software
developers have a speedier and less restrictive path to clearance or approval of their software.
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;
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loss of, or changes to, previously obtained
approvals;
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failure to comply with existing or future regulatory
requirements and;
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changes to manufacturing processes, manufacturing
process standards or Good Manufacturing Practices following approval or changing interpretations of these factors.
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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 on-going 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.
Financial
Risks
With
the exception of fiscal years 2019 and 2016, we have experienced significant losses in our previous 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.
Although
for fiscal year 2019, when we reported net income of $2.5 million, we incurred net losses of $28.5 million and $11.4 million for
the fiscal years ended July 31, 2020 and 2018 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.
We
may need additional capital to fund growth, which may not be available on acceptable terms or at all, and could result in our
business plan being limited and our business being harmed.
Our
ability to increase revenue and improve profitability and liquidity will depend in part on our ability to grow our products business
with higher margin products and increase our market share and continue to grow the Laboratory Services business with new tests
with higher reimbursements and increase our service volume which may require significant additional capital that may not be available
to us. We may need additional financing due to future developments, changes in our business plan or failure of our current business
plan to succeed, which could result from increased marketing, distribution or research and development costs. Our actual funding
requirements could vary materially from our current estimates. If additional financing is needed, we may not be able to raise
sufficient funds on favorable terms or at all. If we issue common stock or securities convertible into common stock in the future,
such issuance will result in the then-existing stockholders sustaining dilution to their relative proportion of our outstanding
equity. If we fail to obtain any necessary financing on a timely basis, then our ability to execute our current business plan
may be limited, and our business, liquidity and financial condition could be harmed.
Our
outstanding debt may impair our financial and operating flexibility and a failure to satisfy the covenants under agreements governing
our outstanding debt could limit the availability of borrowings or result in an event of default under such agreements.
The Company had over $48.6 million
in cash, cash equivalents and restricted cash on its balance sheet as of July 31, 2020. Also as of that date, we had approximately
$11.5 million of short term debt and $21.4 million in long term debt. The short term debt is primarily related to operating lease
liabilities and a $7 million SBA Payroll Protection Program loan of the CARES Act (“PPP loan”) which may be forgiven
by the SBA upon application by the Company. The long term debt is primarily related to operating leases and a ten-year mortgage
obligation of approximately $4.2 million with Citibank, N.A., which bears a fixed interest rate of 5.09% per annum and contains
various restrictive covenants. These restrictions could limit our ability to use operating cash flow in other areas of our business
because we must use a portion of these funds to make principal and interest payments on our debt. Our ability to comply with the
restrictive financial ratio and liquidity covenants in the mortgage debt agreement will depend upon our future performance and
various other factors, including but not limited to the impact on our business, consolidated results of operations, financial condition
and cash flows associated with the COVID-19 pandemic, any prolonged recessionary economic environment that may develop and competitive
and regulatory factors, many of which are beyond our control. We may not be able to maintain compliance with all of the
covenants. In that event, we may not be able to find and access any other borrowing availability and we may need to seek waivers
to the covenants or amendments to the mortgage agreement or would need to refinance the mortgage. There can be no assurance that
we can obtain additional waivers of our mortgage agreement covenants, or be able to refinance it, and, even if we were able to
obtain a waiver or additional amendment in the future, such relief may only last for a limited period. Any noncompliance by us
with the covenants under our mortgage agreement could result in an event of default under the agreement, which may allow the lender
to accelerate payment of the mortgage. In the event our creditor accelerates the repayment of our mortgage, we cannot assure that
we would have sufficient assets to make such repayment.
We
may incur impairment charges on our goodwill and intangibles which 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. Intangible assets with finite lives
are assessed for impairment when, and if, an indicator of potential impairment is identified.
As
of July 31, 2020 and 2019, goodwill and intangible assets represented approximately 7% and 8%, respectively, 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. The Company has no intangible assets with indefinite lives.
Risks
relating to our Clinical Laboratory Services segment
The
clinical testing business is highly competitive, and if we fail to provide an appropriately priced level of service or otherwise
fail to compete effectively it could have a material adverse effect on our revenues and profitability.
The
clinical testing business is a fragmented and highly competitive industry. We primarily compete with three types of clinical testing
providers: other commercial clinical laboratories, hospital-affiliated laboratories and physician-office laboratories. We also
compete with other providers, including anatomic pathology practices and large physician group practices. Hospitals generally
maintain on-site laboratories to perform testing on their patients (inpatient or outpatient). In addition, many hospitals compete
with commercial clinical laboratories for outreach (non-hospital patients) testing. Hospitals may seek to leverage their relationships
with community clinicians and encourage the clinicians to send their outreach testing to the hospital’s laboratory. As a result
of this affiliation between hospitals and community clinicians, we compete against hospital-affiliated laboratories primarily
based on quality and scope of service as well as pricing. In addition, hospitals that own physician practices may require the
practices to refer testing to the hospital’s laboratory. In recent years, there has been a trend of hospitals acquiring physician
practices, increasing the percentage of physician practices owned by hospitals. Increased hospital ownership of physician practices
may enhance clinician ties to hospital-affiliated laboratories and may strengthen their competitive position. The diagnostic information
services industry also is faced with changing technology and new product introductions. Competitors may compete using advanced
technology, including technology that enables more convenient or cost-effective testing. Competitors also may compete on the basis
of new service offerings. Competitors also may offer testing to be performed outside of a commercial clinical laboratory, such
as (1) point-of-care testing that can be performed by physicians in their offices; (2) advanced testing that can be performed
by hospitals in their own laboratories; and (3) home testing that can be carried out without requiring the services of outside
providers.
Our
clinical laboratory services 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 other 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 including managed care organizations and Medicare, upon which our clinical laboratory business is dependent,
are subject to varying rates and coverage and legislative reform that are beyond our control. Any reforms that decrease coverage
and rates could reduce our earnings and harm our business.
Our
clinical laboratory services business is primarily dependent upon reimbursement from third-party payers, such as Medicaid, Medicare
(which principally serves patients 65 and older) and commercial insurers. We are subject to variances in reimbursement rates among
different third-party payers, as well as constant renegotiation of those reimbursement rates. Government and non-government payers
have in the past sought, and continue to seek, to reduce and limit utilization and reimbursement of healthcare services, including
the areas of clinical and genetic testing. We also are subject to audit by Medicare and the commercial insurers, 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.
Since
each payer makes its own decision as to whether to establish a policy or enter into a contract to cover our tests, as well as
the amount it will reimburse for a test, seeking these approvals is a time-consuming and costly process. In addition, the determination
by a payer to cover and the amount it will reimburse for our tests will likely be made on an indication by indication basis. To
date, we have obtained policy-level reimbursement approval or contractual reimbursement for some indications for our test from
a small number of commercial third-party payers, and have not obtained coverage from Medicare or any state Medicaid program. Further,
we believe that establishing adequate reimbursement from Medicare is an important factor in gaining adoption from healthcare providers.
Our claims for reimbursement from commercial payers may be denied upon submission, and we must appeal the claims. The appeals
process is time consuming and expensive, and may not result in payment. In cases where there is not a contracted rate for reimbursement,
there is typically a greater co-insurance or co-payment requirement from the patient which may result in further delay or decreased
likelihood of collection.
We
expect to continue to focus substantial resources on increasing adoption of, and coverage and reimbursement for, our current tests
and any future tests we may develop. We believe it may take several years to achieve coverage and adequate contracted reimbursement
with a majority of third-party payers. However, we cannot predict whether, under what circumstances, or at what payment levels
payers will reimburse for our tests. If we fail to establish and maintain broad adoption of, and coverage and reimbursement for,
our tests, our ability to generate revenue could be harmed and our future prospects and our business could suffer.
Government
payers, such as Medicare and Medicaid, have taken steps to reduce the utilization and reimbursement of healthcare services, including
clinical testing services. U.S. healthcare reform legislation may result in significant change and our business could be adversely
impacted if we fail to adapt.
We
face efforts by government payers to reduce utilization of and reimbursement for diagnostic information services. We expect efforts
to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical test services will continue.
Pursuant to The Protecting Access to Medicare Act of 2014 (PAMA), which was implemented in 2018, the Centers for Medicare and
Medicaid Services (CMS) promulgated revised reimbursement rate schedules for the years 2018 through 2020 for clinical laboratory
testing services provided under Medicare. Reimbursement rates for clinical laboratory testing were reduced in 2018 and 2019 and
were reduced again by approximately 10% in 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee Schedule
for years after 2020, based on future surveys of market rates; reimbursement rate reduction from 2021-23 is capped by PAMA at
15% annually.
Private
health plans and other third parties have taken steps to reduce the utilization and reimbursement of health services, including
clinical testing services.
We
face efforts by non-governmental third-party payers, including health plans, to reduce utilization of and reimbursement for clinical
testing services. Examples include increased use of prior authorization requirements and increased denial of coverage for services.
Since the passage of ACA, there is increased market activity regarding alternative payment models, including bundled payment models.
We expect continuing efforts by third-party payers, including in their rules, practices and policies, to reduce reimbursements,
to impose more stringent cost controls and to reduce utilization of clinical testing services. The healthcare industry has experienced
a trend of consolidation among health insurance plans, resulting in fewer but larger insurance plans with significant bargaining
power to negotiate fee arrangements with healthcare providers, including clinical testing providers. These health plans, and independent
physician associations, may demand that clinical testing providers accept discounted fee structures or assume all or a portion
of the financial risk associated with providing testing services to their members through capitated payment arrangements. Some
health plans also are reviewing test coding, evaluating coverage decisions and requiring preauthorization of certain testing.
There are also an increasing number of patients enrolling in consumer driven products and high deductible plans that involve greater
patient cost-sharing. The increased consolidation among health plans also has increased pricing transparency and bargaining power
and the potential adverse impact of ceasing to be a contracted provider with any such insurer.
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 visits to our customer physician locations and the complexity and
expense of the billing process in our clinical laboratory services 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. 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 on-going 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. Because a significant portion of our costs is fixed, these Medicare reimbursement reductions and
changes have a direct adverse effect on our operating results and cash flows.
The
development of new, more cost-effective tests that can be performed by our customers or by patients, and the continued internalization
of testing by hospitals or physicians, could negatively impact our testing volume and revenues.
The
diagnostic industry is faced with changing technology and new product introductions, including technology that enables more convenient
or cost-effective testing. Some of our competitors also may offer testing to be performed outside of a commercial clinical laboratory,
such as point-of-care testing that can be performed by physicians in their offices; complex testing that can be performed by hospitals
in their own laboratories; and home testing that can be carried out without requiring the services of outside providers.
Advances
in technology also may lead to the need for less frequent testing. Further, diagnostic tests approved or cleared by the FDA for
home use are automatically deemed to be “waived” tests under CLIA and may be performed by patients in their homes;
test kit manufacturers could seek to increase sales to patients of such test kits. Development of such technology and its use
by our customers would reduce the demand for our laboratory-based testing services and negatively impact our revenues.
Our
business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes
in, or changing interpretations of, CLIA or state laboratory licensing laws to which we are subject.
The
clinical laboratory testing industry is subject to extensive federal and state regulation, and many of these statutes and regulations
have not been interpreted by the courts. The CLIA amendments are federal regulatory standards that apply to virtually all clinical
laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices,
by requiring that they be certified by the federal government or by a federally approved accreditation agency. CLIA does not pre-empt
state law, which in some cases may be more stringent than federal law and require additional personnel qualifications, quality
control, record maintenance and proficiency testing. The sanction for failure to comply with CLIA and state requirements may be
suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well
as significant fines and/or criminal penalties. Several states have similar laws and we may be subject to similar penalties.
We
cannot assure that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial
authority in a manner that would adversely affect our business. Potential sanctions for violation of these statutes and regulations
include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a
material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements
on us, which may be costly.
Our
business operations and reputation may be materially impaired if we do not comply with privacy laws or information security policies.
In our
business, we collect, generate, process or maintain sensitive information, such as patient data and other personal information.
If we do use or not adequately safeguard that information in compliance with applicable requirements under federal, state and
international laws, or if it were disclosed to persons or entities that should not have access to it, our business could be materially
impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. In the event of a data security
breach, we may be subject to notification obligations, litigation and governmental investigation or sanctions, and may suffer
reputational damage, which could have an adverse impact on our business. We are subject to laws and regulations regarding protecting
the security and privacy of certain healthcare and personal information, including: (a) the federal Health Insurance Portability
and Accountability Act (HIPPA) and the regulations thereunder, which establish (i) a complex regulatory framework including requirements
for safeguarding protected health information and (ii) comprehensive federal standards regarding the uses and disclosures of protected
health information; (b) state laws; and (c) the European Union’s General Data Protection Regulation.
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, among other areas, instruments, test kits, reagents and other devices used by clinical
laboratories to perform diagnostic testing in the U.S. A number of tests we develop internally are offered as lab developed tests
(LDTs). The FDA has claimed regulatory authority over all LDTs, but has stated that it exercised enforcement discretion with regard
to most LDTs performed by high complexity CLIA-certified laboratories. The FDA has published a “Discussion Document”
that provides the FDA’s views on legislation to govern LDTs. New legislation could significantly impact the clinical laboratory
testing business, including by increasing or modifying the regulation of LDTs, hindering our ability to develop and market new
services, causing an increase in the cost of our services, delaying our ability to introduce new tests or hindering our ability
to perform testing.
We
are subject to federal and state healthcare fraud and abuse and other laws and regulations and could face substantial penalties
if we are unable to fully comply with such laws.
As
a provider of clinical laboratory testing services, we are subject to extensive and frequently changing federal, state and local
laws and regulations governing various aspects of our business. For example, we are subject to healthcare fraud and abuse regulation
and enforcement by both the federal government and the states in which we conduct our business. These healthcare laws and regulations
include, for example:
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federal
anti-kickback laws, which constrain our marketing practices, educational programs, pricing policies, and relationships with healthcare
providers or other entities, including third-party laboratories, by prohibiting, among other things, persons or entities from
soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral
of an individual for, or the purchase, lease order or recommendation of, any good, facility, item or services for which payment
may be made, in whole or in part, under a federal healthcare program such as the Medicare and Medicaid programs;
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federal
civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payers
that are false or fraudulent, and which may apply to entities like us to the extent that our interactions with customers may affect
their billing or coding practices;
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HIPAA,
which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information,
and also established federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or
making false statements in connection with the delivery of or payment for healthcare benefits, items or services, and which imposed
certain requirements relating to privacy, security, and transmission of individually identifiable health information;
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the
federal physician self-referral law, commonly known as the Stark Law, which prohibits a physician from making a referral to an
entity for certain designated health services reimbursed by Medicare or Medicaid if the physician (or a member of the physician’s
family) has a financial relationship with the entity, and which also prohibits the submission of any claims for reimbursement
for designated health services furnished pursuant to a prohibited referral;
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the
federal Physician Payment Sunshine Act, and its implementing regulations, which requires manufacturers of certain drugs, devices,
biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program
(with certain exceptions) to report annually to the United States Department of Health and Human Services information related
to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and
chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members;
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federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially
harm consumers; and
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state
law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services
reimbursed by any third-party payer, including commercial insurers and state laws governing the privacy and security of health
information in certain circumstances, many of which differ from each other in significant ways, with differing effects.
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We
are unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future regarding
our business or the healthcare industry in general, or what effect such legislation or regulations may have on us. Federal or
state governments may impose additional restrictions or adopt interpretations of existing laws that could have an adverse effect
on us.
We
incur significant costs in complying with these laws and regulations. Because of the breadth of these laws and the narrowness
of available statutory and regulatory exemptions, it is possible that some of our business activities could be subject to challenge
under one or more of such laws. If our operations, or our sales techniques or product placement strategies, are found to be in
violation of, or to encourage or assist the violation by third parties of, any of the laws described above or any other governmental
regulations that apply to us, or if we fail to maintain, renew or obtain necessary permits, licenses and approvals related to
our in-house laboratory, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from
the Medicare and Medicaid programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings,
suspension or revocation of certifications or licenses that are required to operate our business, injunctions and other associated
remedies, the curtailment or restructuring of our operations, denial or withdrawal of product clearances, or private “qui
tam” actions brought by individual whistleblowers in the name of the government, any of which could have an adverse effect
on our business. If we or others determine that any of our existing customer relationships do not comply with applicable laws
and regulations, either due to changes in such laws and regulations or evolving interpretations of such laws and regulations,
we may be required to renegotiate or terminate such relationships. Any penalties, damages, fines, exclusions, curtailment or restructuring
of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being
found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a
variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could
cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
Other
risks relating to our business
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 manufacturing, inventory, distribution and website and the
clinical laboratory services processes for: processing specimens, managing inventory, processing test results and submitting claims,
collecting from insurers and patients, responding to 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.
Cyber
security risks and the failure to maintain the confidentiality, integrity, and availability
of our computer hardware, software, and Internet applications and related tools and functions
could result in damage to the Company’s reputation and/or subject the Company to
costs, fines, or lawsuits.
The
integrity and protection of our own data, and that of its customers and employees, is critical to the Company’s business.
The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve.
Maintaining compliance with applicable security and privacy regulations may increase the Company’s operating costs and/or
adversely impact the Company’s ability to market its products and services to customers. Although the Company’s computer
and communications hardware is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood,
power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. These
events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements
to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the
world. As a result, the Company may not be able to address these techniques proactively or implement adequate preventative measures.
If the Company’s computer systems are compromised, it could be subject to fines, damages, litigation, and enforcement actions,
customers could curtail or cease using its applications, and the Company could lose trade secrets, the occurrence of which could
harm its 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 laboratory 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.
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 losses or 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 16% of total revenues in fiscal 2020. Our sales and earnings could be adversely affected by a
variety of factors resulting from our international operations, including
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future fluctuations in foreign
currency exchange rates;
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complex regulatory requirements and changes
in those requirements;
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trade protection measures and import or export
licensing requirements;
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multiple jurisdictions and differing tax laws,
as well as changes in those laws;
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restrictions on our ability to repatriate investments
and earnings from foreign operations;
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changes in the political or economic conditions
in a country or region, including the potential impact Brexit will have on our UK operations;
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changes in shipping costs; and
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difficulties in collecting on accounts receivable.
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If
any of these risks materialize, we could face substantial increases in costs, the reduction of profit and the inability to do
business.
With
our commercialization activities outside of the United States, we are subject to the risk of inadvertently conducting activities
in a manner that violates the U.S. Foreign Corrupt Practices Act and similar laws. If that occurs, we may be subject to civil
or criminal penalties which could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
We
are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits corporations and individuals from
paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff
member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person
working in an official capacity. We are also subject to the UK Anti-Bribery Act, which prohibits both domestic and international
bribery, as well as bribery across both public and private sectors.
In
the course of establishing and expanding our commercial operations and seeking regulatory approvals outside of the United States,
we will need to establish and expand business relationships with various third parties and we will interact more frequently with
foreign officials, including regulatory authorities. Expanded programs to maintain compliance with such laws will be costly and
may not be effective. Any interactions with any such parties or individuals where compensation is provided that are found to be
in violation of such laws could result in substantial fines and penalties and could materially harm our business. Furthermore,
any finding of a violation under one country’s laws may increase the likelihood that we will be prosecuted and be found
to have violated another country’s laws. If our business practices outside the United States are found to be in violation
of the FCPA, UK Anti-Bribery Act or other similar law, we may be subject to significant civil and criminal penalties which could
have a material adverse effect on our financial condition and results of operations.
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:
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fluctuations in our quarterly
operating and earnings per share results;
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the gain or loss of significant contracts;
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the carrying value of our goodwill and intangible
assets;
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loss of key personnel;
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announcements of technological innovations or
new products by us or our competitors;
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delays in the development and introduction of
new products;
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legislative or regulatory changes;
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general trends in the industries we operate;
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recommendations and/or changes in estimates
by equity and market research analysts;
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biological or medical discoveries;
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disputes and/or developments concerning intellectual
property, including patents and litigation matters;
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public concern as to the safety of new technologies;
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sales of common stock of existing holders;
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securities class action or other litigation;
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developments in our relationships with current
or future customers and suppliers and;
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general economic conditions, both in the United
States and worldwide.
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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.
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:
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a staggered board of directors,
so that it would take three successive annual meetings to replace all directors; and
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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.
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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.
Our
failure to establish and maintain effective internal controls over financial reporting and information technology access could
result in material misstatements in our consolidated financial statements, our failure to meet our reporting obligations and cause
investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common
stock to decline.
Under
Section 404 of the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC, companies are required to conduct a comprehensive
evaluation of their internal control over financial reporting. As part of this process, we are required to document and test our
internal control over financial reporting; management is required to assess and issue a report concerning our internal control
over financial reporting; and our independent registered public accounting firm is required to attest to the effectiveness of
our internal control over financial reporting. Our internal control over financial reporting may not prevent or detect misstatements
because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or
fraud.
Over
time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies
or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be prevented or detected timely. Even effective internal controls over financial reporting can provide only reasonable
assurance with respect to the preparation and fair presentation of financial statements.
The existence
of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements,
which could cause us to fail to meet our reporting obligations, lead to a loss of investor confidence and have a negative impact
on the trading price of our common stock.