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. 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, and researchers 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 443 issued and in-licensed patents worldwide and 61 pending patent applications, to date, 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 fiscal years ended July 31, 2022, 2021 and 2020 is located in Note 16 – Segment Reporting in
the Notes to Consolidated Financial Statements. During fiscal years 2020 through 2022 we had a third operating segment, Enzo Therapeutics,
which is included as a separate segment in Note 16.
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 more
access 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 109 patents and patent applications.
The
Company’s primary sources of revenue have historically been from the clinical laboratory services provided by Enzo Clinical Lab
to the healthcare community and Enzo Life Sciences product revenues from customers worldwide. The following table summarizes the sources
of revenues for the fiscal years ended July 31, 2022, 2021 and 2020 (in thousands except percentages):
Fiscal year ended July 31, | |
2022 | | |
2021 | | |
2020 | |
Clinical laboratory services | |
$ | 74,428 | | |
| 70 | % | |
$ | 86,984 | | |
| 74 | % | |
$ | 47,964 | | |
| 63 | % |
Product revenues | |
| 32,643 | | |
| 30 | | |
| 30,747 | | |
| 26 | | |
| 26,561 | | |
| 35 | |
Grant income | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,496 | | |
| 2 | |
Total | |
$ | 107,071 | | |
| 100 | % | |
$ | 117,731 | | |
| 100 | % | |
$ | 76,021 | | |
| 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:
● |
the
increasing number of diagnostic tests being developed from discoveries in genomic research; |
● |
advances
in formats and other technologies that automate and accelerate gene-based diagnostic testing; |
● |
growing
emphasis by the healthcare industry on early diagnosis and treatment of disease and; |
● |
application
of gene-based diagnostics as tools to match therapies to specific patient genetics, commonly referred to as pharmacogenomics 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:
● |
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, |
● |
development
of commercial applications based on information derived from this research and, |
● |
on-going
advancements in tools that accelerate these research and development activities. |
Therapeutics
We
believe our core technologies have broad diagnostic and therapeutic applications. Historically, we 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. In years past, we tested technologies we believed
could 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 past efforts to develop 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 diagnostic platform technologies
may enable others to shorten the development time for therapeutic applications.
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 contingent on several factors, including:
● |
The
Company’s integrated structure that enables it to internally develop and advance products seamlessly from innovation through
validation and commercialization. |
● |
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 |
● |
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:
● |
AMPIPROBE®
Genetic Amplification Platform – easily adaptable, affordable, real time DNA amplification and detection |
● |
FLOWSCRIPT®
Gene Expression Platform – enhanced flow cytometry for single cell analysis |
● |
POLYVIEW
PLUS® Enhanced Immunohistochemistry – optimized reagents for clear, consistent immunohistochemistry and in situ
hybridization results moving Pathology to the next generation |
● |
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.
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 2022 and 2021, we were issued 15 and 21 patents, respectively,
expanding 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 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.
In October 2022, Enzo launched a new series of AMPIVIEW products for
gene expression analysis relying on Enzo developed LoopRNA™ technology. This suite of products will be sold through our Enzo Life
Sciences division with the first products focused on analysis of HPV and SARS-CoV-2. These tissue pathology products complement
Enzo’s current portfolio of oncology and infectious disease products and services.
In April 2022, Enzo received approval from the New York State
Department of Health for its AMPIPROBE® HPV test. The AMPIPROBE® HPV test is Enzo’s
PCR-based test designed to detect 14 high-risk human papillomavirus (HPV) variants. Also in 2022, Enzo received additional approvals from
the New York State Department of Health for our AMPIPROBE® CT/NG/TV tests, and full approval from the New York State Department
of Health for our AMPIPROBE® HBV viral load assay. These open platform tests will be run on the GENFLEX® system but also can be
run on any open molecular system.
In
July 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 an 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 |
|
|
|
|
|
FLU
AB-RSV Resp Panel 1 AMPIPROBE REALTIME AMPLIFICATION AND DETECTION |
|
Q1
2023 |
|
GENFLEX®
Molecular System |
|
|
|
|
|
HSV
1&2/VZV AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION |
|
Q1
2023 |
|
GENFLEX®
Molecular System |
|
|
|
|
|
Group
Strep B AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION |
|
Q1
2023 |
|
GENFLEX®
Molecular System |
|
|
|
|
|
Apolipoprotien
E (apoE) TaqMan®REAL-TIME AMPLIFICATION AND DETECTION |
|
Q1
2023 |
|
GENFLEX®
Molecular System |
|
|
|
|
|
Monkeypox
(orthopoxvirus) AMPIPROBE®REAL-TIME AMPLIFICATION AND DETECTION |
|
Q2
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); |
● |
labeling
the probe with a marker that generates a detectable signal upon hybridization; |
● |
addition
of the probe to the sample containing the DNA; and |
● |
binding
or hybridization of the probe to the target DNA sequence, if present, to generate a detectable signal. |
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.
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 five 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, 2022, 2021 and 2020, respectively, approximately 70%, 74%, and 65% 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, 2022, 2021 and 2020 were approximately 14%, 15%, and 23%, 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 21%, 22%, and 24%, respectively,
of the Clinical Laboratory Services segment’s net revenue for the fiscal years ended July 31, 2022, 2021 and 2020. Revenues from
Blue Cross Blue Shield represented approximately 11% and 13% of the Clinical Laboratory Services segment’s net revenues for the
fiscal years ended July 31, 2022 and 2021, respectively.
At
July 31, 2022 and 2021, approximately 59% 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; |
● |
disputes
with payers as to which party is responsible for payment; |
● |
disparity
in coverage and information requirements among various payers; and |
● |
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 |
● HPV |
● Signal
Transduction |
● ImmunoHistochemistry |
● Stem
Cell |
● Viral
signaling and detection |
● Stress
Proteins |
|
● Toxicology |
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, 2022, 2021 and 2020, the Company incurred costs of approximately $3.8 million, $3.3 million, and $4.4
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 65 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
specialty manufacturers. Our direct marketing and sales network includes fully-owned subsidiaries (USA, Switzerland, Germany, Benelux,
and UK), a branch office in France and a network of third party distributors in most other significant markets worldwide.
For
Clinical Laboratory Services, we focus our sales efforts on obtaining and retaining profitable accounts. We market these services to
a broad range of ordering physicians in the metro New York, New Jersey and Connecticut regions through our direct sales force who are
supported by client service and patient service representatives. We monitor and where appropriate, change the service levels and terminate
ordering physician accounts that are not profitable. We are focusing our efforts to attract and retain clients who participate with the
providers with whom we have regional contracts and are consistently looking to add higher value molecular and esoteric testing, both
internally developed and with partners, to our menu to assist sales in new account penetration as well as to improve our level of service
to existing clients.
Distribution
Arrangements
We
also distribute our life science products internationally through a network of distributors. Through these arrangements, we are able
to leverage the established marketing and distribution infrastructure of these companies in certain market places.
Competition
We
compete with other life science and biotechnology companies, as well as pharmaceutical, chemical and other companies. Competition in
our industry is intense. Many of these companies are performing research targeting the same technologies, applications and markets. Many
of these competitors are significantly larger than we are and have more resources. The primary competitive factors in our industry are
the ability to create scientifically advanced technology, offer innovative products at the forefront of technological development to
targeted market segments, successfully develop and commercialize products on a timely basis, establish and maintain intellectual property
rights and attract and retain a breadth and depth of human resources.
Our
clinical laboratory services business competes with numerous national, regional, and local entities, some of which are larger than we
are and have greater financial resources than we do. Our laboratory competes primarily on the basis of the quality and specialized nature
of its testing, reporting and information services, its reputation in the medical community, its reliability and speed in performing
diagnostic tests, and its ability to employ qualified laboratory personnel.
Intellectual
Property
We
consider our intellectual property program to be a key asset and a major strategic component to the execution of our business strategy.
A broad portfolio of issued patents and pending patent applications supports our core technology platforms. Our policy is to seek patent
protection for our core technology platforms, as well as for ancillary technologies that support these platforms and provide a competitive
advantage.
In
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 2022, we owned or licensed 443 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 required 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.
Reimbursement
for Medicare services is subject to annual reduction (sequestration) of 2% under the Budget Control Act of 2011. Beginning in May 2020,
there was a suspension of annual sequestration, which resulted in a small benefit to us in the form of higher reimbursement rates for
diagnostic testing services performed on behalf of Medicare beneficiaries than had been expected. During December 2021, the suspension
of Medicare sequestration was further extended through March 31, 2022 and it was reduced to 1% from April 1, 2022 to June 30, 2022, with
the full annual 2% reduction in rates resuming thereafter. The impact of subsequent adjustments to Medicare rates are unclear at this
time
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.
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.
Eliminating
Kickbacks in Recovery Act (“EKRA”)
In
2018, Congress passed EKRA as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients
and Communities Act. Similar to the Medicare/Medicaid anti-kickback law, EKRA imposes criminal penalties for knowing or willful payment
or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in
exchange for the referral or inducement of laboratory testing (among other healthcare services) unless a specific exception applies.
However, unlike the Medicare/Medicaid anti-kickback law, EKRA is not limited to services covered by federal or state healthcare programs
but applies more broadly to services covered by “healthcare benefit programs,” including commercial insurers. As currently
drafted, EKRA potentially expands the universe of arrangements that could be subject to government enforcement under federal fraud and
abuse laws. In addition, while the Medicare/Medicaid anti-kickback law includes certain exceptions that are widely relied upon in the
healthcare industry, including compensating employees on a percentage basis, not all of those same exceptions apply under EKRA. EKRA
expressly does not protect employee compensation that varies by the number of individuals referred to a laboratory, the number of tests
performed by a laboratory, or the amount billed to or received from a health benefit program from individuals referred to a laboratory.
Because EKRA is a relatively new law, there is no agency guidance and only two courts have addressed the application of EKRA and the
courts reached different conclusions.
No
Surprises Act
The
No Surprises Act (“NSA”) prohibits nonparticipating or out-of-network (“OON”) Providers and Facilities from “balance
billing” participants in certain circumstances for plans years effective January 1, 2022. This means, generally, that the
OON Provider/Facility may not bill, and must not hold liable, a participant for a payment amount for the item or service furnished by
the provider/facility with respect to a visit at the facility that exceeds the participant’s cost-sharing requirement for that
item/service. In general, the NSA prohibition on balance billing applies to: (i) emergency and post-stabilization services
given to a participant by nonparticipating providers or a nonparticipating facility; (ii) nonemergency services given to a participant
by nonparticipating providers in nonparticipating facilities, and (iii) air ambulance services. The NSA requires both providers
and health plans to assist patients with accessing health care cost information. The NSA also allows providers and insurers an
opportunity to negotiate reimbursement amounts and, in the alternative, access to an independent dispute resolution process. Whether
the NSA applies to services provided by Enzo depends on various factors, including whether the service was an emergency service or a
non-emergency service, whether it is an in-network provider or an OON provider and additionally if the patient is uninsured or self-pay
(elects not to use insurance).
False Claims Act
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.
Stark Law
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.
Manufacturing
and Research Facilities
Our
integrated laboratory and scientific efforts currently take place primarily at three adjacent facilities in Farmingdale, New York. One
facility is utilized entirely 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 had centered its US logistics, reagent and
kit manufacturing at a leased facility in Ann Arbor, Michigan, and its 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, 2022, we employed 465 full-time and 55 part-time employees. Of the full-time employees, 139 were engaged in research, development,
manufacturing, and marketing of research products, 266 in performing testing, marketing and billing our clinical laboratories services
and 60 in finance, information technology, administrative and executive functions. Our scientific staff, including 65 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.
81
Executive Blvd. Suite 3
Farmingdale,
NY 11735
Tel:
(631) 755-5500
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:
● |
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; |
● |
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; |
● |
changes
in reimbursement policies by third party and government payers, especially those stemming from The Protecting Access to Medicare
Act of 2014 (“PAMA”); |
● |
customer
demand for our products due to changes in purchasing requirements and research needs; |
● |
the
introduction of new products by us or our competitors; |
● |
the
timing of our research and development, sales and marketing expenses; |
● |
general
worldwide economic conditions affecting funding of research; |
● |
seasonal
fluctuations in revenues due to the impact of weather and holiday periods |
● |
expenses
associated with defending our intellectual property portfolio |
● |
foreign
currency exchange rate fluctuations; |
● |
changes
in tax laws, the results of tax audits or the measurement of tax uncertainties; and |
● |
the
success of identifying, acquiring and integrating businesses that complement our product offerings, add new technology or add presence
in a market; |
Consequently,
results for any interim or full year period may not necessarily be indicative of results in subsequent periods.
The
COVID-19 pandemic has significantly affected our consolidated results of operations, financial position and cash flows, and may continue
to do so.
The
pandemic caused by the evolving strain of coronavirus (COVID-19) continues to severely impact the economy of the United States and other
countries around the world. Federal, state and local governmental authorities in the United States have implemented numerous policies
and initiatives to try and reduce the transmission of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders,
business shutdowns, and vaccination and masking mandates. These policies and initiatives have resulted in, among other things, a significant
reduction in physician office visits, the cancellation of elective medical procedures, customers closing or severely curtailing their
operations (voluntarily or in response to government orders), increased unemployment, constrained labor supply and loss of healthcare
insurance, and the adoption of work-from-home policies, all of which have had, and we believe will continue to have, an impact on our
consolidated results of operations, financial position and cash flows.
Due
to the COVID-19 pandemic, we have experienced significant volatility, including periods of material decline compared to prior year periods,
in testing volume in our base business (which excludes COVID-19 molecular and antibody testing) and this volatility, including periods
of material decline, could continue. Although we also have experienced heavy demand for COVID-19 molecular testing as a result of the
COVID-19 pandemic, which has had a positive impact on our overall testing volume, the duration and level of the demand for, and reimbursement
for, COVID-19 molecular testing is uncertain.
During
the fiscal years ended July 31, 2022, 2021 and 2020, COVID-19 testing revenues represented 44%, 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 an FDA EUA. This testing had a positive impact on revenue, profitability and cash flow throughout
fiscal 2021 and most of fiscal 2022.
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, 2022 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.
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:
● |
require
us to reduce our prices to retain market share; |
● |
require
us to increase our marketing efforts which could reduce our profit margins; |
● |
increase
our cost of labor to attract qualified personnel; |
● |
render
our biotechnology products uneconomical or obsolete or; |
● |
reduce
our revenue |
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 diagnostic 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
diagnostic 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, 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 diagnostic
products may not be developed successfully.
If
our diagnostic 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 diagnostic products,
which could reduce our revenue or prevent us from earning a return on our research and development expenditures.
Our
research, preclinical development, 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:
● |
significant
delays in obtaining or failing to obtain required approvals; |
● |
loss
of, or changes to, previously obtained approvals; |
● |
failure
to comply with existing or future regulatory requirements and; |
● |
changes
to manufacturing processes, manufacturing process standards or Good Manufacturing Practices following approval or changing interpretations
of these factors. |
Adverse
perception and increased regulatory scrutiny of gene medicine and genetic research might limit our ability to conduct our business.
Ethical,
social and legal concerns about gene medicine, genetic testing and genetic research could result in additional regulations restricting
or prohibiting the technologies we or our collaborators may use. Recently, gene medicine studies have come under increasing scrutiny,
which has delayed 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 $18.3 million, $28.5 million, and $10.3 million for the fiscal
years ended July 31, 2022, 2020, and 2018, respectively. If our revenues do not increase, or if our operating expenses exceed expectations
or cannot be reduced, we may 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 have an accumulated deficit of $288,261 as of July 31, 2022 and net cash
used in operating activities was $16,590 for the fiscal year 2022. We may continue to generate net losses for the foreseeable future.
We believe the combination of our cash and cash equivalents at July 31, 2022, expected cash flows from operations, and re-activation of
the Controlled Equity Offering program, if necessary, as disclosed in Note 12 of the financial statements will be sufficient for our operations
and non-discretionary capital needs for at least twelve months from the filing of this report. There can be no assurances as to the market
price or demand if and when we utilize the Controlled Equity Offering. Additionally, failure to generate additional revenues, obtain additional
capital or manage discretionary spending could have an adverse effect on our financial position, results of operations and liquidity.
Due
to our historical operating losses we anticipate needing 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 $22.6 million in cash, cash equivalents and restricted cash on its balance sheet as of July 31, 2022. Also as of that date,
we had approximately $3.5 million of short term debt, primarily the current portion of operating lease liabilities and $16.8 million
in long term debt, of which $12.8 million is non-current operating lease liabilities. The other component of long term debt is primarily
a ten-year mortgage obligation of approximately $3.8 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 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, 2022, goodwill represented approximately 8% 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. As of July 31, 2022 the
Company has no other intangible assets.
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. Beginning in May 2020, there was a suspension of sequestration, which resulted
in a small benefit to us in the form of higher reimbursement rates for diagnostic testing services performed on behalf of Medicare beneficiaries
than had been expected. During December 2021, the suspension of Medicare sequestration was further extended through March 31, 2022 and
it was reduced to 1% from April 1, 2022 to June 30, 2022, with the full annual 2% reduction in rates resuming thereafter.
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:
● |
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; |
● |
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; |
● |
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; |
● |
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; |
● |
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 |
● |
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. |
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 12% of total revenues in fiscal 2022. Our
sales and earnings could be adversely affected by a variety of factors resulting from our international operations, including
● |
future fluctuations in foreign currency exchange rates; |
● |
complex regulatory requirements and changes in those
requirements; |
● |
trade protection measures and import or export licensing
requirements; |
● |
multiple jurisdictions and differing tax laws, as well
as changes in those laws; |
● |
restrictions on our ability to repatriate investments
and earnings from foreign operations; |
● |
changes in the political or economic conditions in
a country or region, including the actual and potential impact Brexit has on our UK operations; |
● |
changes in shipping costs; and |
● |
difficulties in collecting on accounts receivable. |
If any of these risks materialize, we could face substantial increases
in costs, the reduction of profit and the inability to do business.
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:
● |
fluctuations in our quarterly operating and earnings
per share results; |
● |
the gain or loss of significant contracts; |
● |
the carrying value of our goodwill and intangible assets; |
● |
loss of key personnel; |
● |
announcements of technological innovations or new products
by us or our competitors; |
● |
delays in the development and introduction of new products; |
● |
legislative or regulatory changes; |
● |
general trends in the industries we operate; |
● |
recommendations and/or changes in estimates by equity
and market research analysts; |
● |
biological or medical discoveries; |
● |
disputes and/or developments concerning intellectual
property, including patents and litigation matters; |
● |
public concern as to the safety of new technologies; |
● |
sales of common stock of existing holders; |
● |
securities class action or other litigation; |
● |
developments in our relationships with current or future
customers and suppliers and; |
● |
general economic conditions, both in the United States
and worldwide. |
In addition, the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price of our common stock, as well as the stock of many companies in our industries.
Often, price fluctuations are unrelated to operating performance of the specific companies whose stock is affected.
In the past, following periods of volatility in the market price of
a company’s stock, securities class action litigation has occurred against the issuing company. If we were subject to this type
of litigation in the future, we could incur substantial costs and a diversion of our management’s attention and resources, each
of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could
also subject us to significant liabilities.
Because we do not intend to pay cash dividends on our common stock,
an investor in our common stock will benefit only if it appreciates in value.
We currently intend to retain our retained earnings and future earnings,
if any, to finance the expansion of our business and do not expect to pay any cash dividends on our common stock in the foreseeable future.
As a result, the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee
that our common stock will appreciate in value or even maintain the price at which investors purchased their shares.
It may be difficult for a third party to acquire us, which could
inhibit stockholders from realizing a premium on their stock price.
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 due to a majority stockholder vote requirement. 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 advance notice requirements for the submission
by stockholders of nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders
at a meeting
Future sales of shares of our common stock or the issuance of securities
senior to our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new equity
offerings.
We are not restricted from issuing additional common stock, preferred
stock or securities convertible into or exchangeable for common stock. Future sales of a substantial number of our shares of common stock
or equity-related securities in the public market or privately, or the perception that such sales could occur, could adversely affect
prevailing trading prices of our common stock, and could impair our ability to raise capital through future offerings of equity or equity-related
securities. No prediction can be made as to the effect, if any, that future sales of shares of common stock or the availability of shares
of common stock for future sale will have on the trading price of our common stock.
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.