November 9, 2005
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth St., N.W.
Washington, DC 20549
Attn: Mr. Jim B. Rosenberg, Sr. Assistant Chief Accountant
Re: Enzo Biochem, Inc.
Form 10-K for the FYE 7/31/04, filed 10/14/04
File no. 001-09974
Comment Letter dated October 26, 2005
Ladies and Gentlemen:
In response to your requests made in a letter dated October 26, 2005, we are
pleased to provide you with this additional information:
Q1. Critical Accounting Policies, page 29, re: Contractual allowance percentage
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The reciprocal of the reimbursement percentage is the contractual allowance
expense percentage, which is applied to gross amounts billed. The reimbursement
percentage calculation is based on a monthly rolling analysis of the experience
of amounts approved and reimbursed by payers versus the corresponding gross
amount billed to the respective payers. This rolling analysis provides us with
an average reimbursement percentage. The reciprocal of that reimbursement
percentage is our contractual allowance expense percentage and represents the
proportion of the billed amount we do not expect to collect. The contractual
allowance is an adjustment that reduces our gross revenue, based on our gross
billing rates, to amounts that we expect to collect. If the Company experiences
a significant change in reimbursement policy or procedure for a particular
payer, we review the contractual allowance percentage for that payer. The
historical reimbursement statistics, determined over a rolling 24 month period,
provide us with payer mix trends, which are constantly reviewed and updated if
necessary by the Company.
The Company determines the allowance for doubtful accounts after the contractual
allowance has been applied to the gross open receivables. The allowance for
doubtful accounts is calculated based on a percentage applied to open
receivables. The allowance for doubtful accounts percentage is calculated by
comparing the sum of gross accounts receivable over 210 days at balance sheet
date and direct writeoffs during a rolling period, to gross billings during the
same rolling period. This doubtful accounts percentage is applied to net open
receivables under 210 days at the balance sheet date. The allowance for doubtful
accounts represents amounts that the Company does not expect to collect after
the Company has exhausted its collection procedures.
Q2. Quantify the amount of changes in estimates of prior period contractual
adjustments recorded in a current period
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The Company's laboratory accounting billing system does not have the capacity to
quantify the amount of changes in estimates of prior period contractual
adjustments, since it can only generate billing information at our standard
billing rates. The process to estimate contractual allowances is based on the
development of rolling monthly averages of historical reimbursement statistics.
We account for final settlements on a prospective basis by adjusting the
contractual allowance percentage based on the developed statistics, which we
believe encompasses an adequate time period of reimbursement experience, and
provides us with a reasonable estimate of our contractual allowances. On page 29
of our fiscal 2005 10-K, we noted in the paragraph denoted as "Clinical
laboratory services" the following: "Our accounting system does not record
contractual adjustments at the time of billing. Instead, contractual
adjustments, and the provision for doubtful accounts, are estimated based on
historical collection experience using a retrospective collection analysis and
aging models."
Q3. Change in contractual allowance percentage
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In our response of July 8, 2005, the Company used a 1% change in the contractual
allowance percentage to quantify the effect such a change would have on the
results of operations, and to provide a meaningful sensitivity analysis that
readers of our financial statements could utilize to understand the impact of
potential changes in our contractual allowance percentage.
Per Section V of Financial Reporting Release 72, the disclosure should be based
on our best estimate of the outcome we believe reasonably likely to occur. As
disclosed in our 10-K for the fiscal year ended July 31, 2005, the following was
our contractual allowance percentage experience, and the change over the prior
year:
FYE 2005 2004 2003
- --- ----- ----- ----
Contractual allowance % 72.5% 70.9% 68%
Change over prior year (% points) 1.6% 2.9%
On the basis of our disclosure in our Fiscal 2005 10-K, we modify our July 8,
2005 response as follows:
The Company's contractual allowance is an accounting estimate based on various
historical factors, and bears the risk of change. The contractual allowance
percentage increased to 70.9% during the fiscal year ended July 31, 2004, from
68% during the fiscal year ended July 31, 2003, an increase of 2.9 percentage
points. Had the contractual allowance percentage in fiscal 2004 remained the
same as in fiscal 2003, revenue from the clinical laboratory services would be
greater by approximately $2.9 million in fiscal year 2004.
2
The effect of a 1% change for the fiscal year ended July 31, 2004 was
inaccurately computed in our July 8, 2005 response; however, it is correctly
reported in our fiscal 2005 10-K filing. We disclosed on page 30 of our Form
10-K for fiscal 2005 the effect such a change would have on operations for all
three years presented.
Q4. Gross billing percentages by billing category
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On page 29 of our Form 10-K for fiscal 2005, we disclosed gross billing
percentages by billing category, which represents the gross billings during
fiscal 2005 and 2004, not gross billings outstanding as of the end of the
periods. In future filings, we will provide this information on a net basis; see
Table 1 for this information. In future filings, we will also disclose the net
accounts receivable by billing category. See Table 2 for net accounts receivable
by billing category for the three years ended July 31, 2005.
Q5. Allowance for doubtful accounts
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The Company's closing procedures include the review of the collectibility of the
receivables based on a number of factors, besides the period they have been
outstanding. The historical collection experience is an integral part of the
estimation process related to the allowance for doubtful accounts. The
collectibility of our receivables is directly linked to the timing of our
collection procedures, most notably those related to obtaining the correct
information in order to bill effectively for the services provided. During
fiscal 2005, we put into service at the ordering physician's office a
sophisticated information technology system (Enzo Direct) to obtain upfront
billing information directly from the ordering physician at the time of service.
This new "IT" system reduced the timing of the collection process for inaccurate
or missing billing information. Also in fiscal 2005, the Company increased the
billing department's collection staff, and refocused collection procedures and
processes, which allowed for an acceleration of collection procedures for
calendar year 2004 open invoices. Based on the expanded review procedures, the
Company determined that collection procedures had been fully exhausted for
receivables outstanding from the calendar year 2004 and prior as of July 31,
2005. These improved collection procedures will continue in the current fiscal
year.
With the increase in the collection and billing department staff and the
improvement in information technology system during fiscal 2005, we were able to
shorten the time required to complete our collection procedures. In fiscal 2005,
internal collection efforts occurred on a regular basis 90 days after invoice
date using an electronic mailing process system. In fiscal 2004 and prior the
collection process occurred 150 days after invoice date using a manual
mailing system. On the basis of the above enhanced collection procedures the
Company gained an improved visibility which enabled it to conclude that the
collectability of the open receivables from all billing parties that are 210
days and older is doubtful.
3
We consider this change a change in accounting estimate, as contemplated by APB
20, since it is a change based on the evaluation of current experience factors.
The change was accounted for in fiscal 2005 since the change affects only that
fiscal year presented and future periods.
I hope this information is helpful. Please do not hesitate to contact me if you
have additional questions.
Very truly yours,
/s/ Barry W. Weiner
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President, Chief Financial Officer and Director
enclosures
4
Enzo Biochem TABLE 1
Clinical laboratory services, net of contractual allowances, by billing category
7/31/2005 7/31/2004 7/31/2003
--------- --------- ---------
CATEGORY In $ As % to total In $ As % to total In $ As % to total
- -------- ---- ------------- ---- ------------- ---- -------------
MEDICARE 6,905,914 21% 7,431,637 26% 6,276,010 21%
THIRD PARTY CARRIERS 17,527,645 53% 12,882,527 45% 12,380,284 42%
PATIENT-SELF PAY 6,904,016 21% 6,929,926 24% 7,152,500 24%
HMO'S 1,519,048 5% 1,428,069 5% 3,705,085 13%
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Total 32,856,623 100% 28,672,159 100% 29,513,879 100%
================== ============= ==================
Enzo Biochem TABLE 2
Accounts Receivable, net of contractual allowances and allowance for doubtful accounts
% to % to % to
CATEGORY 7/31/2005 Total 7/31/2004 Total 7/31/2003 Total
- -------- --------- ----- --------- ----- --------- -----
MEDICARE 1,593,624 13% 3,830,010 29% 1,880,098 13%
THIRD PARTY CARRIERS 6,742,469 54% 4,227,131 32% 3,372,415 23%
PATIENT-SELF PAY 3,819,442 30% 4,580,187 35% 6,117,059 43%
HMO'S 393,959 3% 479,322 4% 3,025,446 21%
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Clinical Labs accounts receivable, net 12,549,494 100% 13,116,650 100% 14,395,018 100%
Life Sciences accounts receivable, net 870,963 1,677,717 2,871,295
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Consolidated accounts receivable, net 13,420,457 14,794,367 17,266,313
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