Battle Continues Between Enzo And Harbert Discovery Fund

Battle Continues Between Enzo And Harbert Discovery Fund

Battle Continues Between Enzo And Harbert Discovery Fund

 Alabama-based investment management firm Harbert Discovery Fund continues to feud with Elazar Rabbani, PhD, Chairman and CEO of Enzo Biochem (New York City) over the future of the clinical lab and diagnostic products company.

Harbert is an activist investor fund that targets small-cap companies that it believes are undervalued. Harbert accumulated shares in Enzo from May to August 2019 at prices ranging from $3.07 to $3.65 per share. It currently owns 5.6 million shares, or an 11.7% stake, making it Enzo’s largest shareholder.

In February 2020, Harbert nominated and won Enzo board seats for two directors, Fabian Blank and Peter Clemens (see LE, March 2020). However, Clemens and Blank both resigned from Enzo’s board in November. “It appears that Chairman and CEO Rabbani has created such an extremely hostile environment that Pete and Fabian found their position untenable as minority members in opposition to Mr. Rabbani’s continued mismanagement,” according to a letter Harbert sent to Enzo’s board of directors on November 18. Harbert called for the resignation of Rabbani, followed by an immediate pursuit of the sale of the company. Harbert believes Enzo could be sold at a minimum of 2x its current annualized revenue, or $5.51 per share.

Dr. Rabbani, age 77, is a founder of Enzo and has served as the company’s Chairman and CEO since its inception in 1976. He holds a 4.1% stake in the company. His board seat is up for reelection to another three-year term this January.

In response to Harbert’s letter, Enzo filed a lawsuit against Harbert on November 27 in the Southern District of New York. Enzo alleges that Harbert has made material misrepresentations to Enzo’s shareholders and that its board nominees, Clemens and Blank, were unprepared and never proposed a single strategic plan to help Enzo. Enzo says that Harbert is seeking to “force a fire sale” to the detriment of shareholders. Enzo alleges that Harbert has made false or misleading statements in violation of Securities Exchange Act rules. Enzo is seeking a permanent injunction to stop Harbert from making future misrepresentations, correct past alleged false statements, and pay monetary damages to cover Enzo’s related proxy contest expenses and attorneys’ fees.

Enzo’s Revenue Jumps Driven by Covid-19 Testing
Separately, Enzo reported net income of $299,000 for the three months ended October 31, 2020 versus a net loss of $7.6 million for the same period a year ago; total revenue increased by 42% to $28.7 million.

Enzo’s Clinical Lab Division recorded a 66% revenue increase to $21.2 million. The improvement was driven by Covid-19 testing. Total volume grew to 300,000 accessions in the latest three month period  versus approximately 200,000 a year earlier. Average revenue per accession increased to more than $69 per accession versus $62 in the previous year’s period.

Enzo Got $7 Million PPP Loan
The CARES Act expanded the U.S. Small Business Administration’s (SBA) business loan program to create the Paycheck Protection Program (PPP), which provides employers with loans for the purpose of retaining employees and maintaining salaries. PPP loans are wholly or partially forgivable if spent on payroll and certain other operating expenses. Enzo, which has 408 full-time and 40 part-time employees, was one of four publicly-traded lab companies that received a PPP loan. Enzo received a PPP loan of $7 million in April, while Interpace Biosciences received $3.5 million, Psychemedics got $2.2 million and Aspira Women’s Health (formerly named Vermillion) got $1 million. 

Battle Continues Between Enzo And Harbert Discovery Fund

Harbert Wins Two Board Seats At Enzo Biochem

Harbert Wins Two Board Seats At Enzo Biochem

Two nominees from the Alabama investment management firm Harbert Discovery Fund (HDF) have won board seats at Enzo Biochem (New York City), following a vote at Enzo’s delayed shareholders meeting on February 25. Fabian Blank and Peter Clemens now represent 40% of the voting power on Enzo’s five-person board. Shareholders rejected Enzo’s proposal to
amend the company’s bylaws to increase the size of the Board (see LE, February 2020).

The board seat of Elazar Rabbani, PhD, Co-Founder, Chairman and CEO of Enzo Biochem, is set to expire at the next shareholders meeting in early 2021.

HDF owns 11.8% of Enzo’s outstanding shares, making it the company’s largest shareholder. HDF has been pressuring Enzo to sell its drug development business and focus on its clinical lab business.

Separately, Enzo reported a net loss of $7.7 million for the three months ended January 31, 2020, compared with a net loss of $8.4 million for the same period a year earlier. Total revenue was up slightly to $19.4 million versus $19.3 million.

Enzo reported that its clinical lab division recorded revenue of $12.5 million for the quarter, up 4% from $12 million. Patient requisition volume was up 7%, while average revenue per requisition was down approximately 3%. Gross profit margin for Enzo’s clinical lab division was 18% in the most recent quarter versus 8% in the same year-ago period. Enzo attributed the margin expansion to cost cuts, including lowered outside reference testing expense and employee headcount efficiencies, partially offset by increased reagent cost from higher accession volume. On an annual basis, Enzo currently processes approximately 813,000 patient requisitions.

Enzo’s latest results suggest that the company’s clinical lab business has begun to stabilize after several years of severe pricing pressure related to the PAMA reimbursement cuts.

Swedish Flag
Battle Continues Between Enzo And Harbert Discovery Fund

Enzo Delays Shareholder Meeting; Harbert Files Lawsuit

Enzo Delays Shareholder Meeting; Harbert Files Lawsuit

Enzo Biochem (New York City) has delayed its annual shareholder meeting, originally scheduled for January 31, until February 25. The move comes as Enzo’s executives are engaged in a bitter battle with the Alabama investment firm Harbert Discovery Fund (HDF) over board seats and the
strategic direction of the company

Enzo says the delay is needed so that shareholders can consider a new proposal to keep President Barry Weiner on its board by increasing the size of the board from five to six directors. In addition, Enzo wants to add a seventh board seat to be filled by an independent director to be identified in the near future.

HDF says that all three leading independent proxy advisory services had recommended voting in favor of HDF’s two board nominees, Fabian Blank and Peter Clemens. And that by January 28, three days before the election, with most of the expected votes cast, it was clear that both its nominees would win seats.

HDF has filed a lawsuit in Southern District of New York court against Enzo’s board, alleging it has engaged in “acts of entrenchment and misuse of the corporate machinery” to keep Barry Weiner on the board after most of the company’s shareholders had voted and it had become clear that Weiner would be removed.

“Recognizing that it was too far behind in votes to defeat HDF’s nominees, Enzo agreed in the January 28 Enzo Press Release to no longer oppose HDF’s nominees but instead would seek shareholder approval to expand the size of the board by at least one additional seat in a desperate attempt to keep Weiner on the board and reduce the influence of HDF’s nominees,” according to the lawsuit.

HDF says that Enzo has violated federal securities laws, and is seeking recompense for those actions which have cost hundreds of thousands of dollars in additional, unnecessary legal, proxy and other advisory fees. HDF says that its lawsuit also lays “a marker so that the director defendants’
gamesmanship stops.”

HDF owns 11.8% of Enzo’s outstanding shares, making it the company’s largest shareholder (see LE, January 2020).

Battle Continues Between Enzo And Harbert Discovery Fund

Enzo Hires Investment Bank Lazard

Enzo Hires Investment Bank Lazard

Enzo Biochem (New York City) has hired the investment bank Lazard to assist in “strategic relationships and new venture creation.” This news comes as Harbert Management Corp. (Birmingham, AL) has purchased a 12% equity stake in Enzo and nominated two new independent directors to its board. HMC wants Enzo to sell its drug development business and non-core patents, and focus on bringing its laboratory division, Enzo Clinical Labs, back to profitability (see LE, October 2019).

Separately, Enzo reported net income of $2.5 million for its fiscal year ended July 31, 2019, compared to a net loss of $10.3 million for the previous fiscal year. Total revenue was $81.2 million, down 20% from $101 million a year ago. The company’s laboratory division recorded revenue of $51.1 million, down 28% from $71.1 million, as a result of reduced reimbursement rates and changes to medical and procedural requirements for genetic testing by payers.

Battle Continues Between Enzo And Harbert Discovery Fund

Harbert Pushes For Change At Enzo

Harbert Pushes For Change At Enzo

Funds managed by Harbert Management Corp. (HMC-Birmingham, AL) have purchased an 11.8% equity stake in Enzo Biochem Inc. (New York City) and nominated two new independent directors—Fabian Blank and Peter Clemens—to Enzo’s board. Enzo currently has a fivemember board and the next annual shareholders meeting will take place in early January 2021.

In a September 17 letter to Enzo’s shareholders, Harbert said, “For decades, Enzo has operated as a ‘lifestyle business,’ where management has seemingly placed its own personal and financial interests ahead of its shareholders’ best interests.” Harbert noted that Elazar Rabbani, PhD, age
75, has served as Enzo’s Chairman and CEO since he founded the company in 1976, while his brother in-law Barry Weiner, 68, is President, CFO and board member.

Over the past 10 years (ended August 31), Enzo’s total shareholder return has been -36% versus +199% for the Russell 2000 Index of small cap stocks and +337% for its peer group of lab and biotech companies, according to Harbert. In addition, Harbert notes that Enzo has reported operating losses every year since 2004, with cumulative negative operating income of $180 million, excluding legal expenses and settlements.

Harbert wants Enzo to sell its drug development division as well as non-core patents in its diagnostic products division.

Harbert says Enzo should focus on its clinical lab division, which operates a 44,000 square-foot lab in Long Island and 30 PSCs in New York and New Jersey. Focusing on the densely populated New York City area and prudently cutting costs could return Enzo’s lab segment to profitability,
according to Harbert.

In the nine months ended April 30, 2019, Enzo’s clinical lab division recorded an operating loss of $13.3 million versus operating income of $2.7 million for the same period a year earlier; revenue fell by 32% to $38 million as a result of pricing pressure related to PAMA and lower genetic testing volume due to increased competition.