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 R 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 472 issued patents worldwide and over 64 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. Financial information by geographic area and business segments for the years ended July 31, 2021, 2020
and 2019 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 utilized by customers worldwide. The following
table summarizes the sources of revenues for the fiscal years ended July 31, 2021, 2020 and 2019 (in thousands except percentages):
Fiscal year ended July 31,
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Clinical laboratory services
|
|
$
|
86,984
|
|
|
|
74
|
%
|
|
$
|
47,964
|
|
|
|
63
|
%
|
|
$
|
51,115
|
|
|
|
63
|
%
|
Product revenues
|
|
|
30,747
|
|
|
|
26
|
|
|
|
26,561
|
|
|
|
35
|
|
|
|
30,055
|
|
|
|
37
|
|
Grant income
|
|
|
—
|
|
|
|
—
|
|
|
|
1,496
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
117,731
|
|
|
|
100
|
%
|
|
$
|
76,021
|
|
|
|
100
|
%
|
|
$
|
81,170
|
|
|
|
100
|
%
|
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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●
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advances in formats and other technologies that automate
and accelerate gene-based diagnostic testing;
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|
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●
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growing emphasis by the healthcare industry on early
diagnosis and treatment of disease and;
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|
●
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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.
|
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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|
|
●
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development of commercial applications based on information
derived from this research and,
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●
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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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●
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Ample finances with which to execute and follow through
on the Company’s integrated strategy.
|
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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●
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FLOWSCRIPT® Gene Expression Platform – enhanced
flow cytometry for single cell analysis
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●
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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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●
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Enhanced Immunoassays – pushing sensitivity to
expand immunoassay applications
|
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 2021, we were issued 20 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.
With
the coronavirus pandemic affecting people on a regional and global basis, the Company launched a rapid response to market demand for
COVID-19 testing products and services. Enzo is delivering testing and lab services to schools, institutions, urgent care facilities,
and core multi-state network of medical practices. Furthermore, the Company’s GENFLEX® platform received Emergency Use Authorization
(EUA) from the Food and Drug Administration (FDA) in July 2020 for its proprietary product for the detection of SARS-CoV-2. FDA EUA demonstrates
the Company’s unique integrated in-house capability in developing low cost, high throughput sensitive detection platforms for COVID-19
as well as other diseases. The Authorization was for a comprehensive platform enabling rapid scalability of testing, including internal
use within Enzo’s Clinical Lab as well as for the sale of instrumentation, consumables, and reagents to other diagnostic testing
customers. The Authorization includes three diverse platforms: Enzo’s proprietary GENFLEX® automated high-throughput platform,
a medium-throughput industry standard platform, and Enzo’s manual workflow. Launching a COVID-19 test on its proprietary GENFLEX
™ molecular diagnostics platform serves as representative of the Company’s capabilities as it develops other tests on the
platform including an upper respiratory panel, STDs and expanded women’s health panels. The Company is well positioned to replicate
this success in response to new emerging health issues and needs, including, but not limited to, upper respiratory, sexually transmitted
diseases, viral load, and women’s health.
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 four Emergency Use Authorizations (EUAs) or EUA expansions 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.
On
July 20, 2021, we received an expansion of our FDA EUA for the rapid extraction method on our proprietary test system for the detection
of coronavirus SARS-CoV-2 including the genetic variants that are now proliferating globally. The EUA enables laboratories to immediately
use our faster extraction process to reduce the time by over one hour, or more than 25%, enabling more test runs on a single instrument.
The rapid extraction method can be used on platforms including our proprietary GENFLEX® automated high-throughput platform, Qiagen’s
QIAsymphony® SP lower-throughput platform and our manual workflow. The AMPIPROBE® SARS-Cov-2 Test System includes three components:
sample collection, AMPIXTRACT™ SARS-CoV-2 Extraction Kit for sample processing, and AMPIPROBE® SARS-CoV-2 Assay Kit for detection
and analysis.
In
April 2021, the FDA cleared our AMPICOLLECT™ Sample Collection kit (manufactured under GMP) for distribution under EUA. The AMPICOLLECT™
Sample Collection kit is now available for sample collection for COVID-19 testing protocols in the United States. Our sample collection
kit has been shown to meet the FDA’s policy standard as outlined in “Enforcement Policy for Viral Transport Media during
the Coronavirus Disease 2019 (COVID-19) Public Health Emergency.” The AMPICOLLECT™ kit is not only authorized for use
with our proprietary GENFLEX® molecular diagnostic platform, but can also be used for sample collection with other PCR-based molecular
diagnostic platforms or antigen-based testing platforms that require the collection of upper respiratory specimens.
In
January 2021, we received an expansion of our EAU from the FDA authorizing the use of pooled samples containing up to five individual
swab specimens with our AMPIPROBE® SARS-Cov-2 Test System utilizing tests on three different platforms including our proprietary
GENFLEX® automated high-throughput platform.
In
November 2020, we began the commercial launch of a small portable microplate reader for use with the company’s immunoassays and,
ultimately, molecular diagnostics, providing new opportunities in point-of-care medicine. This affordable device enables us to offer
a complete solution to academic, CRO, and industrial customers.
In
October 2020, we launched GoTestMeNow™, an online platform that enables consumers to directly order physician-authorized laboratory
testing. GoTestMeNow™ can be used to access necessary medical tests without the need for a doctor’s office visit. Specimen
collection and testing is accomplished through a network of patient service centers in the New York/New Jersey metro area. Consumers
can obtain results through a secure online portal. The GoTestMeNow™ direct-to-consumer laboratory testing capability will initially
support access to COVID-19 molecular and antibody testing, and the platform will be expanded to offer access to a broad range of additional
tests in the near future.
In
July 2020, we received Emergency Use Authorization (EUA) from the 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.
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
|
|
Expected
Availability (1)
|
|
Platform
|
|
|
|
|
|
HPV high risk AMPIPROBE® REAL-TIME AMPLIFICATION AND DETECTION
|
|
Q1 2022
|
|
GENFLEX® Molecular System
|
|
|
|
|
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AMPIVIEW SARS-CoV-2 RNA Probes
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Q1 2022
|
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IN SITU HYBRIDIZATION RNA DETECTION
|
|
|
|
|
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AMPIVIEW HPV High Risk RNA Probes/RNA ISH
|
|
Q3 2022
|
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IN SITU HYBRIDIZATION RNA DETECTION
|
|
|
|
|
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AMPIVIEW HPV 6/11 RNA Probes/RNA ISH
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Q3 2022
|
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IN SITU HYBRIDIZATION RNA DETECTION
|
|
|
|
|
|
FLU AB-RSV Resp Panel 1 AMPIPROBE REALTIME AMPLIFICATION AND DETECTION
|
|
Q4 2022
|
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GENFLEX® Molecular System
|
|
|
|
|
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HSV 1&2/VZV AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
|
|
Q1 2023
|
|
GENFLEX® Molecular System
|
|
|
|
|
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Group Strep B AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION
|
|
Q1 2023
|
|
GENFLEX® Molecular System
|
(1)
|
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.
|
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:
●
|
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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●
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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.
|
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, 2021, 2020 and 2019, respectively, approximately 74%, 65% and 63% 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, 2021, 2020 and 2019 were approximately 15%, 23% and 21%, 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 22%, 24% and
36%, respectively, of the Clinical Laboratory Services segment’s net revenue for the fiscal year ended July 31, 2021, 2020 and
2019. Revenues from Blue Cross Blue Shield represented approximately 13% of the Clinical Laboratory Services segment’s net revenue
for the fiscal year ended July 31, 2021.
At
July 31, 2021 and 2020, approximately 59% and 68%, 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:
●
|
pricing differences between our standard gross fee
schedules and the reimbursement rates of the payers;
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●
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disputes with payers as to which party is responsible
for payment;
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●
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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.
|
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.
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 nearly 45 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
|
● Immunology/Inflammation/Innate
Immunity
|
● Cancer
|
● Metabolism
|
● Cell
Death/Autophagy
|
● Pathology
|
● Cell
cycle
|
● In
situ Hybridization
|
● Drug
discovery
|
● Microarray
Labeling
|
● Epigenetics
|
● Neuroscience
|
● FISH
|
● Oxidative
Stress
|
● Genomics
|
● Proteostasis
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● HPV
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● Signal
Transduction
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● ImmunoHistochemistry
|
● Stem
Cell
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● Viral
signaling and detection
|
● 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, 2021, 2020 and 2019, the Company incurred costs of approximately $3.3 million, $4.4 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 35 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.
Recently
issued patents
In
February 2021, we were issued U.S. Patent No. 10,899,827 entitled “Antibodies Specific for Sulfation Sites of Sclerostin.”
The new patent is a member of a broader U.S. and international patent family that also includes issued patents and pending patent applications
for therapies including monoclonal antibodies and small synthetic peptides used to inhibit sclerostin in the treatment of bone disorders
such as osteoporosis. This patent focuses on polyclonal antibodies that bind a specific region of human sclerostin, a protein that is
a negative regulator of bone growth. Sclerostin is produced in osteocytes, a type of bone cell, and is known to inhibit bone formation.
The maintenance of bone over time requires a balance between the formation of new bone tissue and the breakdown and removal (resorption)
of old bone tissue.
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 2021, we owned or licensed 472 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 Calendar Year (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 were mandated in calendar year 2020 and negatively impacted 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
In February 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 three 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 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 starting in July 2020. This facility is being used for manufacturing operations and some administrative
functions. Effective September 30, 2021 we exited the Ann Arbor, Michigan facility and brought its manufacturing operations to Farmingdale,
NY in order to consolidate our United States operations into one geographic location. 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, 2021, we employed 451 full-time and 63 part-time employees.
Of the full-time employees, 132 were engaged in research, development, manufacturing, and marketing of research products, 270 in performing
testing, marketing and billing our clinical laboratories services and 49 in finance, information technology, administrative and executive
functions. Our scientific staff, including 35 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 significantly and adversely affected our
consolidated results of operations, financial position and cash flows during fiscal 2020. Though our operations recovered in fiscal 2021,
the pandemic may adversely affect future operations depending on the severity and duration of the pandemic, its impact on the U.S. healthcare
system and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic.
The novel strain of coronavirus (“COVID-19”)
and its variants continue to spread and 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 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.
While the rate of transmission of COVID-19 fluctuates in the US and
Europe, it continues to spread in other parts of the world and negatively impact the world economy. Federal, state and local governmental
policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, a significant reduction
in physician office visits, the cancellation of elective medical procedures, customers of our products remaining closed or continuing
to severely curtail their operations (voluntarily or in response to government orders), and the continuation of work-from-home or shelter-in-place
policies. The COVID-19 impact on the Company’s operations is consistent with the overall industry and publicly issued statements
from competitors, partners, and vendors.
During the fiscal years ended July 31, 2021 and 2020, COVID-19 testing
revenues represented 48% and 8%, respectively of Clinical Services revenues. 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 throughout fiscal 2021. 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 our businesses.
The extent to which our businesses may continue to be affected by
the COVID-19 pandemic will largely depend on both current and future developments, including its duration, the emergence and spread of
variants, its treatment with authorized vaccines and vaccines in various stages of development and federal approval, work and travel
advisories and restrictions, and the timing of their easing, all of which are highly uncertain and cannot be reasonably predicted at
this time. Global supply chain issues due to the pandemic continue to hamper both the manufacturing of products within the life science
segment as well as testing capabilities in the clinical laboratory.
The extent to which the COVID-19 pandemic impacts the Company’s
business and consolidated results of operations, financial position and cash flows will depend on numerous evolving factors including,
but not limited to: the magnitude and duration of the COVID-19 pandemic, the extent to which it will impact worldwide macroeconomic conditions
including, but not limited to, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental
and business reactions to the pandemic. These factors 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 but the adverse impact
could be material. The Company assessed certain accounting matters that generally require consideration of forecasted financial information
in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of July 31, 2021 and
through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s patient self-pay
revenue concessions and credit losses in the Clinical Services segment, accounts receivable, inventories and the carrying value of goodwill
and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors,
could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods. We
expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases. However, the emergence
and spread of variants may cause our COVID-19 testing volume to increase again.
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 2021 and 2019, 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 years 2021 and 2019, when we reported net income
of $7.9 million and $2.5 million, respectively, we incurred net losses of $28.5 million, $11.4 million, and $2.5 million for the fiscal
years ended July 31, 2020, 2018 and 2017 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 $13.5 million in cash, cash
equivalents and restricted cash and $30.0 million in short term investments in bond funds on its balance sheet as of July 31, 2021. Also
as of that date, we had approximately $3.4 million of short term debt and $18.9 million in long term debt. The short term debt is primarily
related to operating leases. The long term debt is primarily related to operating leases and a ten-year mortgage obligation of approximately
$4.1 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, 2021 and 2020, goodwill and finite lived intangible
assets represented approximately 7% 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 (CLFS) for years after 2021, based on future surveys of private payer market rates; reimbursement rate
reduction from 2021-23 is capped by PAMA at 15% annually. The CARES Act provided a one year delay of a reimbursement rate reduction of
15% for clinical laboratory services provided under Medicare that was scheduled to start January 1, 2021.
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 may be 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.