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UPDATE: Investment Firm Agitates for Change in Enzo Biochem's Board

This story has been updated to include comments from advisory firm Glass Lewis.

NEW YORK (GenomeWeb) – Investment firm Lone Star Value Management has issued an open letter to all Enzo Biochem shareholders, urging them to vote for two Lone Star nominees to Enzo's board of directors.

In the letter published Tuesday, Lone Star said it has "serious concerns" with Enzo's "poor performance and disregard for shareholder rights."

Enzo has responded to Lone Star's letter, calling the shareholder's contentions and board nominees into question. On Wednesday, advisory firm Glass Lewis published a note recommending that Enzo shareholders vote for the incumbent board members.

Lone Star owns approximately 600,000 Enzo shares, and has been involved in the company since 2013, the firm's statement said. It added that Enzo's stock has fallen 67 percent over the course of the last decade and that the company has been unprofitable since 2005, underperforming all its relevant peers and market indexes.

The firm has also taken exception to Enzo's corporate governance structure, including its classified board and combined chairman and CEO positions.

In order to fix the problem, Lone Star suggested, two incumbent directors — Dov Perlysky and Gregory Bortz — must be replaced as they "lack healthcare and intellectual property experience." To replace them, Lone Star has nominated Dimitrios Angelis and John Climaco. Angelis serves as executive counsel for the Life Sciences Law Group and director of medical imaging company Digirad and technology solutions company Ameri Holdings. Climaco currently serves as executive vice president of medical radioisotopes developer Perma-Fix Medical and also as director for Digirad.

"Enzo has failed to generate positive net income or free cash flow in any year since 2005," Lone Star said in its letter. "Nothing in the board's current rhetoric gives us any confidence that things will change under the leadership of the incumbent board or that focus will ever shift to the shareholders of Enzo."

As an example, the letter cites the concerns of Enzo's Cofounder and former Enzo Labs President Shahram Rabbani, who initiated proxy contests at the 2009 and 2010 annual shareholder meetings seeking the election of a new independent director.

The firm added that it has tried to engage Enzo in constructive dialogue for the past two years, but that the board has "disregarded our input and left us no choice but to run a proxy contest in order to align the company's board with the best interests of ALL Enzo shareholders."

In response, Enzo issued an open letter of its own, calling on its shareholders to resist Lone Star's attempts to "seek control of your independent board members." Lone Star is a small-cap investor owning only 1 percent of Enzo's outstanding shares, the company said. Importantly, Enzo added, the firm's Principal and Founder Jeffrey Eberwein is "a serial short-term activist investor that has demonstrated a track record of value destruction at the expense of shareholders and the companies that [Lone Star] systematically targets."

Enzo characterized the proxy fight as "misguided and disingenuous," adding that the two Lone Star nominees are "not qualified to serve by any measure or standard, lacking even a rudimentary understanding of both our business and our industry, unprepared and unable to provide any true plan for shareholder value, and conflicted and lack any independence."

Some of the companies that Climaco and Angelis have helmed or directed have lost value or been delisted during their tenures, Enzo added. The company also defended Perlysky — saying its stock had appreciated 100 percent since he joined the board in 2012 — and Bortz.

Further, Angelis and Climaco have not purchased any Enzo stock, the company said in its letter, and Lone Star itself has sold 226,784 shares since Oct. 30, 2015 while only buying 1,784 shares during the same period.

As to Lone Star's accusations of poor stock performance and unprofitability, Enzo said it is on the "right path to increasing shareholder value," citing its "extensive" IP portfolio, "which the company believes positions it now to make a significant impact on the clinical laboratory marketplace."

The company also cited its first quarter financial results as proof that its fortunes are taking a turn for the better. Enzo reported 2 percent revenue growth for Q1 earlier this month, driven by an 8 percent increase in clinical laboratory services. It also posted a profit of $4.4 million compared to a loss of $3.7 million one year ago.

Independent advisory firm Glass Lewis has issued a statement saying shareholders should vote against many of Lone Star's recommendations, including its two board nominees. 

While it does recognize that Enzo's long-term financial performance and stock returns have been "unfavorable," Glass Lewis said the company's recent performance "has been satisfactory and indicates improvement." Over the one- and three-year periods, the firm added, Enzo's stock returns have been in line with its peers, and the company has provided a "detailed and well-reasoned plan to confront significant challenges in the industry and appears to be making strong progress toward achieving its strategic objectives."

Lone Star, however, has not provided any suggestions that could improve the business or offered any strategic plans its board nominees might undertake if elected, Glass Lewis said. The firm also echoed Enzo's contention that Lone Star has been actively selling shares recently, "drawing into question its commitment, in our view."

Further, while Lone Star may be correct in calling the current board's independence into question, Glass Lewis said, electing Climaco and Angelis wouldn't solve this problem as Perlysky and Bortz are already independent.

"Both management nominees are independent and appear to provide qualifications and experience that are of value to the board, in our view," the advisory firm added. "We do not believe appointing the dissident nominees would improve the overall qualifications, independence or functioning of the board and we believe the incumbent board should be provided additional time to oversee the strategic transition of the company and to improve corporate governance."

Enzo's shares were down a fraction of 1 percent at $4.65 in Tuesday afternoon trading on the New York Stock Exchange, but were back up to $4.70 in midday trading on Wednesday.

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