Enzo Biochem Inc (ENZ) 2002 Q2 法說會逐字稿

Good morning, and welcome to the Enzo Biochem, Incorporated second quarter 2002 operating results conference call.

Except for historical information, the matters discussed on this conference call may be considered forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Such statements include declarations regarding the intent, belief or current expectations of the company and its management. Investors are cautioned that any such forward looking statements are not guarantees of future performance, and involve a number of risks and uncertainties that can materially affect actual results. The company disclaims any obligations to update any forward-looking statements as a result of developments occurring after the date of this conference call.

Our speaker today is Barry Weiner, president. All participants have been placed on a listen-only mode. I will now turn the floor over to your host, Mr. Barry Weiner. Mr. Weiner, the floor is yours.

Thank you. Good morning, and thank you for joining us this morning. Also with me today is Dr. Dean Engelhardt, who will join in and make some comments concerning our progress in many of our therapeutic areas.

I would first discuss our second quarter and first half financial results, and then I will turn to our operations and other events of the period. Our second fiscal quarter, the three months ended January 31, reflected a continuing strong showing at Enzo Life Sciences, where sales of our life science products to the research market, and specifically the genomic and sequencing markets, remained very robust. It also showed a decline in topline results at Enzo Clinical Labs, due primarily to reduced reimbursement rates, which were being experienced from various managed care agreements. And also, an unprofitable contract, which we cancelled effective January 31, 2002.

For the three months ended January 31, 2002 operating revenues amounted to 12.5 million, compared with 13.9 million in the corresponding period a year earlier. Including a half million dollar reduction in interest income, operating income for the second quarter of 2002 totaled 1.3 million, compared with 2.8 million in the corresponding period a year ago.

Net income amounted to 0.8 million, compared with 1.6 million a year ago. Per share earnings fully diluted adjusted for the recent five percent stock dividend amounted to $0.03 per share in the second quarter of fiscal 2002, compared with $0.05 per share in the corresponding year earlier period.

I think it's important that we look at the segment breakdown to understand what transpired this quarter. Research product revenues moved up to 2.6 million from 5.2 million. And Clinical Lab revenues moved down to 6.4 million from 8.6 million.

Enzo Life Sciences continue to experience increased research product sales, reflecting strong ongoing demand for labeling for the genomics and the sequencing markets. Revenues of the research products rose 17.3 percent in the second fiscal quarter, while operating income increased to 2.5 million, or a very healthy 63 percent for the period. In contrast, Enzo Clinical Labs' second quarter revenues declined 26.4 percent. And as a result, showed an operating loss for that particular segment.

The results at the lab reflected several factors. One, was an adjustment we made in how we bill certain accounts. Our practice at Enzo Labs is to recognize revenues for services on the accrual basis at the time the actual service is performed. Some of these revenues are derived from third party payers, such as Medicare and HMOs. And those are billed net of allowances that reflect contractual discounts and those for differences between the amounts we bill and the estimated amounts of what we expect to be paid. It has been a conservative approach.

What we essentially did was to further refine those allowances to reflect actual payments and historical data. We don't go so far as to call it a one-time event, because we are always measuring and remeasuring. But the actions taken this quarter should benefit the future outlook of the lab as we go forward. In addition, a per capita arrangement with one managed care company was terminated this quarter. This resulted in an adjustment on contractual allowances as well.

We are still servicing some managed cares, as anyone in the laboratory business must. But we are increasingly focusing on those areas of business, concentrating on self-payers and more lucrative third party payers, as well as focusing on more esoteric testing, where Enzo Clinical Labs historically has had its strength and the margins are far more attractive.

The result of this activity is the lab's revenues for the quarter declined 26 percent, as I commented, to 6.4 million, which incurred a loss of slightly under 800,000 for the period. The termination of the per capita managed care contract I mentioned a moment ago will result in reduced revenue at the lab as we go forward. But on the same side, it eliminates high costs associated with that business, which should favorably impact the lab's operating income and importantly allow redeployment of our resources towards profitable and growing business segments and the development of new assets and technologies to reposition this laboratory to thrive and survive into the future.

As I mentioned at the annual meeting this year, we are envisioning a strategic opportunity at the lab to position itself for a new generation of diagnosing testing needs, specifically in the area of measuring gene activity. It is an area that is now beginning to emerge with the development of new medicine that treat disease by modifying or interfering with gene activity.

We today ad Enzo have developed in our testing, the presence and activity of genes related to our HIV medicine, HGTV-43 in patients in our phase one trial that has been conducted. These are extremely intricate and complex clinical assets and we believe we can position to become a leader in this field.

Because of the increasing strength of our life sciences business, we believe this is the right time to refocus our laboratory operation. Looking at our life science activity, we are seeing good progress and unique product opportunity. Our research product sales continue to give a strong account of themselves. Revenues for the quarter increased 17 percent, slightly more than the first quarter and operating income rose a very healthy 63 percent to $2.5 million.

As a percentage of revenue, both R&D and general and administrative expenses increased slightly due to the reduction in revenues. However, on an absolute basis, the increases were slight around 46,000 for R&D and 73,000 for G&A. And while cash for the quarter remained -- while cash flow for the quarter, that is, remained positive, interest income declined 62 percent reflecting the generally lower interest rates that are prevailing.

Looking at the first half mark, revenues declined a little over one percent to 27.4 million while net income amounted to 2.6 million compared with 3.2 million a year ago. Included in that number, as I mentioned, is a $900,000 reduction in pretax interest income. Net income for the six months amounted to 2.6 million compared with 3.2 million in the corresponding year earlier period.

And per share earnings fully diluted amounted to nine cents per share compared with 11 percent -- 11 cents per share a year ago. Despite the reduction in interest income and the refocusing being implemented at the clinical laboratory unit, the company has managed to increase its cash position to almost $62 million as of January 31, '02, as compared to 54 million, January 31, '01, just one year ago.

Our balance sheet remains very strong, no debt; working capital as of January 31, 2002 up 88.2 million, of which 69 percent -- almost 62 million, as I mentioned -- was in cash or cash equivalents. Our current cash position is in excess of $63 million. Since there's a extensive focus on accounting practices these days, I'd like to comment on a few future issues that we are looking at. As I mentioned in our press release, we are evaluating the adoption of two new financial accounting standards.

One involves consideration we paid to distributors for the manufacture of certain products. This standard, if adopted, could be reflected in revenues, but is unlikely to have any meaningful impact on stated net income. The other standard, FASB statement number 142, relates to discontinuance of amortization of good will and intangible assets with indefinite useful lives. If adopted, and it is unlikely that we would so before the start of fiscal 2003, we currently estimate it would reduce annualized amortization by approximately $370,000.

On an overall basis, we tend to account conservatively on our financial performance, and we will maintain that practice as we move forward.

Overall, we are pleased with the progress being made in our life sciences group. We realize that moving from the status quo is hard -- change is hared -- but we are determined to create greater value in our clinical laboratory unit. And having made the strategic decision to refocus the laboratory, we are now positioned to change this direction, moving it more in line to capitalize on the inherent strength and technology capabilities that have been developed with over 20 years of work at Enzo Life Sciences. We believe this repositioning will move Enzo Clinical Labs to the forefront of future laboratory testing, and the time is right to do it now.

I would like now to discuss some of the activities we are currently engaged in, and to the extent that we can, provide you with a sense of our progress. Enzo Life Sciences, as I mentioned earlier, is doing quite well. The division currently markets over 3400 products in the life sciences market. The products are marketed by in-house sales and marketing groups, directly towards end-users, as well as through distributors, such as Roche, , Life Sciences, and Affymetrix, to name a few. The company's expertise in manufacturing and quality control of products that are targeted towards the labeling and detection markets for researchers, enjoys very healthy gross margins. In some cases those exceeding 70 percent.

In this next quarter, we will be hoping to roll out our gene system, a new product, a name for which we have applied trademark protection as an important addition to our bioarray product line. Our bioarray system is a product line that functions in concert with researchers using bio chips or micro arrays. And it is specifically formatted for use with high throughput screening. We essentially provide the light bulb by which the gene can be visually labeled and thus detected. The gene at low density arrays in contrast to the high density arrays for which we are already actively involved.

The bioarray market for research is about 500 million in size. And we estimate the new market we are aiming for to be about 50 million in size. It opens up a broad new opportunity for us, and we feel we are going to enter it in a very strong position.

A second new product we are developing is an instrument for the detection of double-stranded nucleic acids in gels. Today, we have the good fortune of having an immense -- immense overlay of intellectual property which gives Enzo not only protection from prosecution, but unfettered access to a variety of new products. One of the very exciting products which has been developed and is being worked on today in the laboratory is a system for the direct detection of double-stranded nucleic acids of genes in a gel system.

This proprietary system may alter, for the good, the way molecular biology and, ultimately, certain laboratory procedures are performed. Currently, to visualize a particular sequence of DNA or a gene sequence with a restriction fragment, researchers must use a technique which is called a technique, which was developed in the mid 1970s. This procedure involves the separation according to size, via of labeled DNA fragments -- to labeled genes -- followed by the transfer of those genes or fragments on to an absorbent filter paper. The transfer time consumed can be very inefficient in doing these types of experiments.

This new Enzo technology allows the elimination of the transfer , as the hybridization or the blending of the two gene sequences can occur directly on the gel. Since the technology allows for the detection of multiple targets or multiple genes, this can lend itself to automation extremely well. And this will have significant utility in molecular biology labs, and can serve as a catalyst and tremendous benefit in the field of drug discovery. So we are very excited and we are working aggressively on that particular area.

The Life Sciences group is creatively churning away with new ideas in products and strategy that we hope to emerge in the near future. But our diagnostics effort is also gaining momentum. From time to time, we were asked about our diagnostic platform, which has been developed. It is an advanced technology that involves not only our proprietary D&A labeling capability where we are the unquestioned leader, but also unique amplification and collection capability.

The unit involves amino cycling isothermal amplification system and currently is being used and evaluated at the clinical laboratory. The medical world is looking to shift from culture-based diagnosis to real-time diagnosis. We are focused on tests and platforms that can provide central laboratories, stat laboratories, which account for roughly three-quarters of all diagnostics as well as pathologists and physicians offices. The aggregate market is about a $20 billion market and we are determined to present our systems into this marketplace.

The large sciences and diagnostic market in recent years has changed dramatically and so far our wait-and-see approach to aligning ourselves with any one or more parties while continuing to add our products mix has not in our view adversely affected us. As we have stated, we are in ongoing discussions with a number of companies as to how best we can on behalf of Enzo fully realize and capture the potential of our platform and more important the proprietary products we plan to provide this vast market.

We are looking for the right partner or partners and we want to make the best relationship for our company and our shareholders. This is a high priority item. And while we recognize that in the absence of any news from us, this can be interpreted as no progress. This is not the case, but we cannot and won't comment explicitly or publicly until we have made the determination based on our discussions and analysis of how most effectively it will benefit Enzo.

I will say that we are mindful of the dynamics of the market and we have every intention of capitalizing on it. We have too much of a major opportunity for us to do otherwise. We have gotten stronger over time. The industry has consolidated to a certain degree. We find ourselves in a position where the markets are at last coming to close to the technological capabilities that had needed to be developed.

And as we move forward, we as a company, will in many cases enter a variety of possible transactions. As a matter of fact, we have spent a fair amount of time carefully evaluating our strategic approach. Looking at the way we want to deal with the world, how we want to commercial our products and what will deliver the highest return to us as shareholders, it is a complex issue. But one thing I can assure you is that it is something, which is very paramount right now.

The timing is important and critical. The elements are very nicely in place. And on an overall basis, we are moving forward aggressively to bring this technology to commercialization. I'd like to turn to our therapeutic activities.

First, in January, the prestigious peer review publication of the "American Cancer Society," entitled "Cancer," published a paper authored by Dr. Yaron Ilan, one of our principal collaborators, in the area of immune regulation therapies. The paper was also authored by our own Dr. Rabbani and Dr. Engelhardt. The paper discusses the use of Enzo's proprietary oral immune regulation medicine in suppressing human liver cancel cell growth in experimental animals. It is a very exciting technological paper. I'm going to ask Dr. Engelhardt to make a few comments to try to transfer some of the critical issues of this particular paper.

This paper actually added to our understanding of oral immune regulation. What the paper demonstrated, in its simplest form, is that at the same time that we were able to knock out the immune response against these human tumor cells growing in a mouse, we also eliminated the growth of the tumor. This distinguished oral immune regulation from any other conventional or traditional immune regulation, and demonstrated beyond any doubt, in my mind, that we have a unique and special form of immune regulation. This has several implications.

First of all, having shown that oral immune regulation is now something different than the traditional vaccination that is being used quite often to try to regulate the tumor growth, we also then gained the impetus to initiate human trials, because we now have an animal model system that does define the function of this immune regulation.

Secondly, and just as important to me, there is no evidence from this -- in fact, every indication -- that not only is this a good candidate to test for human liver cancer, but in addition, there are undoubtedly many other cancers that would be subject to the same type of regulation. So we consider this an important science breakthrough. And opens to us the gate for looking to see the breadth of this type of immune regulation in managing cancer.

Thank you, Dean.

I'd like to comment on the status of our other clinical programs. In our HIV program, all five patients tested to date that were included in our phase one trial, are still proceeding extremely well. The most interesting thing is that they all continue to have CD4+ cells containing the specific medicine or gene we put in circulation. And it is present in their bone marrow. What that simply means is that the cells we've put in with our genes have begun to replicate. They're children, the children of these cells, are carrying the gene. And those subset of cells which are replicating within the body are demonstrating a resistance quality to HIV. This is very good. It's very exciting. We are extremely pleased with the first aspect of this trial.

What we are doing right now is expanding to multiple sites. We are at the point where our multiple arms studies -- meaning there are differing protocols that will be tried at all three different sites, and there are three in this program. In a sense, what we are doing is we are seeing if we can escalate the effect in a very short time frame to give a therapeutic to these patients in the new trials.

The -- excuse me -- at all three clinical sites, we have passed all oversight committees submitted to date. We are awaiting the final quality cleared manufactured material to begin these studies. This process has been a slow and methodical one in light of the stringent review process imposed on gene medicines in the recent future. But we are looking forward to initiating these trials, and all the parameters are met and documented according to FDA standards. We are extremely excited about this product.

I would like to actually cut in here from Barry and point out that the vector that we're using continues to surprise and please us. We -- the principle that we used was to -- to take the protein from a virus that specifically infects our target cells and put it into our vector. Now the vector is not infectious in any way, except it delivers our anti-HIV gene. But it delivers it to the cells -- the same cells that the virus prefers.

For the virus -- for the vector that we're performing in this clinical trial, we obtained the envelope from a virus, HTLV-II. That seems to prefer blood stem cells. We've done the same thing using the envelope protein from HIV, and that seems to prefer to transfer genes to CD4+ plus cells. We are also, at this point, working on various vectors, including certain viruses that prefer to infect liver cells. Our idea is that this is a generalized principle, and that any time a virus will specifically infect a tissue, we can develop a vector to deliver the genes of our choice to that particular tissue. So we think the vector itself is broadly applicable for gene therapy for any tissue or any cell within the human body that has -- that has a virus that is known to infect it.

Secondly, I'd like to point out that our five patients now are all above 20 months after the gene has been delivered to them. None of these five patients, at this point are showing any serious adverse events. These -- some of these -- patients have higher viral loads, but most of the patients have lower viral loads and we continue to track our one patient, which has extremely -- relatively highly elevated CD4+ count to see if that patient continues to develop these healthy signs.

So by an large we are extremely encouraged by this and very eager to get onto the Phase II, in which we had -- which are going to increase the amount of gene we deliver with the hopes that we can reach these phases of efficacy, if indeed we're at that level, much more quickly and more readily. Looking to the hepatitis B study as we've commented in the past, the hep B Phase II was incredibly encouraging as well.

The data showed that there were of the 42 patients in the trial 75 percent of those showed a response -- a positive response -- to one of three or four parameters. Forty percent showed a reduction in viral load, that is the amount of circulating virus in these individuals went down. Forty percent showed improved liver function. Fifty-eight percent showed improved hepatitis antigen biopsy scores and very important and what is maybe one of the most critical parameters is that 33 percent showed the improvement by liver inflammation by biopsy.

That's the gold standard in this type of test. And if you look at the current prevailing technology or product in this case, which we can compare this to it probably would be Interferon and we are almost showing a doubling of the improvement relative to straight Interferon. The key for this is that this a product, which has relatively economical manufacturing costs and could be provided at reasonable prices.

It's an orally administered product. Thus making it particularly applicable for Third World use, which is where it is directed. The next step is a multi-centered double blind randomized study. We have identified the site, contracts and protocols and approvals in process. Unlike the HIV study, the same protocol will be utilized at all sites so that we will be executing a consistent program here.

We've defined the dosage in our Phase I study. This one is a real interesting one for us. And unlike the HIV medicine, which is a product, which we are committed to retain in-house because of its unique channels of distribution, we are looking differently with the HBZ medicine. It is not improbable we will partner with this product. And as we gain more information as we gain further strength. And again, it serves us and our shareholders extremely well to maintain control of these products as far into the successful pipeline as we can go, because the return will ultimately be greater for us. But I would like to emphasize that it is not improbable that the hepatitis B product will be partnered.

Also, we have begun the enrollment, and have patients have been treated to date, in our Crohn's trial, and that is progressing as expected. Our Hepatitis C product trial is also being monitored. And coupled with all of this activity -- and we have an extremely full pipeline in our therapeutic program today -- we have as much as we have focused on the laboratory, and looked at its positioning in the market, and where we want to put it in the future, we are also looking the diagnostic and therapeutic operations, evaluating our manpower requirements. We are adding staffing where we need to support and focus our talent and to gain the most productivity.

I would like to comment on an event which transpired on Friday. There was a statement which was released on Friday by Digene Corporation. We issued a statement this morning, which I would refer you to. On Friday, Digene Corporation filed an action in the Delaware Federal Court that involves a patent that was issued to us just a year ago. This patent covers innovative nucleic acid formatting that is applicable to diagnostics and gene analysis. It covers the technology that can be used as a platform for multiple applications, including the diagnosis of infectious diseases in cancers, as well as for use in complex genetic analysis. And what we will do with this is, and what it is being used for, is provides a simple, cost-effective method for diagnosing both direct and amplified specimens.

It's a very, very good technology, and a very strong patent. I think its representative of the intellectual property portfolio that we have been able to amass over the last 20 years. And as we see technologies emerging, we are fortunate that we have had the good insight and years of experience to be able to file intellectual property to cover our ownership in these areas.

Digene, interestingly, is seeking to have the court decide whether Enzo's patent rights in the field of this hybrid capture technology, are being violated by Digene's sales of its hybrid capture products. We firmly believe Digene has infringed out patent, and we will shortly file a counterclaim to seek monetary damages, as well as a permanent injunction barring Digene from continuing to infringe and violate our patent rights. We will have more to comment on this in the future. But for us, I think it is a representation of the strength of our intellectual property estate and the scope of this estate.

As you can tell, we have many irons in the fire. And as you can see from our research results, we tend to use our capital very efficiently. Probably more efficiently than many companies in our industry. We give really quite strong thought to how we spend our money and the actions we are taking.

With this, we feel that the company is extremely well positioned. It is well poised to move forward. The quarter has been a very strong and productive quarter for us. We are in a very, very good position as we move into the future on all fronts, and we are extremely enthusiastic about where we are moving as a company.

I want to thank you for joining us, and we look forward to continuing our progress and reporting to you as such. Have a good morning.

Thank you.

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This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.