Enzo Biochem Inc (ENZ) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Enzo Biochem Inc. fiscal 2003 year end Operating results conference call. Except for historical information the matters discussed on this conference call may be considered forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 as amended in section 21 E 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 could materially affect actual results. The Company disclaims any obligations to update any forward-looking statements as a result of the developments occurring after the date of this conference call.

At this time, all participants have been placed on a listen only mode for the duration of the conference. I will now turn the floor over to your host, Mr. Barry Weiner, President of Biochem Inc. Mr. Weiner, the floor is yours.

Thank you. Good morning and thank you for joining with us. With me to discuss our company's therapeutic program is Dean Engelhardt. Dr. Engelhardt is an Executive Vice President and as some of you may know deeply involved in our Company's research and development of new products - especially therapeutics.

Our discussion today will focus primarily on two subjects - our progress in therapeutics and our operating results for fiscal 2003 that ended on July 31.

Our program in therapeutic this past year has been highly significant. As I will lay out shortly and as Dr. Engelhardt will discuss in greater detail, we continue to achieve our goals in what we view as the mainstream future for Enzo Biochem. This is not to minimize the importance of Enzo Clinical Labs and Enzo Life Sciences - both of which very much figure prominently now and in our future - but, clearly, Enzo Therapeutics with its promising portfolio of new products and two additional new platforms that we recently announced this week for treating a variety of immune mediated disorders hold some very exciting and promising opportunities for the future.

Earlier this morning we released our financial results for both the fourth-quarter and for all of fiscal 2003. For the full year, revenues amounted to 52.8 million - a decrease of 2.3 percent from the 54 million in total revenues in fiscal 2002.

Gross profit margins were slightly reduced to about 77.7 percent from 79.9 percent in 2002. And we remained soundly profitable with a net income of $3.8 million. Earnings per share fully diluted were 13 cents versus 22 cents in the prior year.

The fourth-quarter clearly did not meet our expectations. Operating revenues amounted to 10.7 million compared with 13.8 million in the fourth-quarter of fiscal 2002 - a decline of about 22 percent. Gross profit fell 30.2 percent to 7.7 million and gross margins were reduced to 71.9 percent from 79.7 percent. We experienced a net loss for the final quarter of 2003 of $2.5 million or 8 cents a share fully diluted. In the year ago, fourth-quarter net income was 1.7 million or 6 cents a share. These results reflect several factors.

Let's start first with the expense side. Because of our ongoing and accelerating R&D efforts - which have resulted in important advances and promising new therapeutic approaches as well as new life science products and their applications - these expenses as you might expect rose sharply. Our R&D expenses last year rose by over 34 percent to approximately $8.3 million.

This is an important investment in our Company's future and it will be our (indiscernible) significant dividends for Enzo as we move ahead. It is a critical component to move forward the wealth of technologies and products that we have developed at Enzo and to bring them to commercial reality. Our legal bills also climbed substantially this year - they totaled 5.7 million - an increase of roughly 3.5 million from the previous year. We have underway 2 major patent suits and I'll discuss the Company's latest filing in a minute or so.

And again we view these as important investments in our Company.

Few things are more important to a Company with the kind of research we are doing than its intellectual property. Our IP is one of Enzo's most important assets. We intend to protect that asset and when we come across violations of our patent rights and cannot properly reach an accommodation with those who might be unfairly capitalizing on our inventions, we have little recourse.

Litigation is not something to be entered into lightly. But our corporate view is that it can also and sometimes must be necessary. And it is a responsibility we have not only to the Company but to its shareholders.

Besides legal expenses other SG&A costs increased as well. Rising insurance and benefit costs which - of course - all companies and individuals have been experiencing is one component. Another key item in this category is an increase in marketing expense. Enzo has embarked on a new marketing effort which again I'll discuss shortly that represents a shift in how we're going to market our products to give us greater control in reaching customers, specifically, for our life science products.

It is important to note that even with the shortfall in the fourth-quarter, cash flow from operations improved substantially - rising 27 percent to 12.1 million for all of fiscal 2003. A very sound performance from our financial organization.

Our finances remain very sound and it is noteworthy that our Company continues to have funds available in the near-term to undertake all projects I mentioned earlier and then some without having to rely on outside financing.

Working capital at year end of fiscal 2003 was $98 million and cash and marketable securities totaled 78.5 million. We are and I would say are currently higher. Shareholders equity I am pleased to say established a new record of 109.4 million and we continue to be debt free.

Overall - a very sound financial footing.

Let's now turn to a discussion of each of these Company's divisions which I will collaborate and Dean will give some comments as well.

First, Enzo Clinical Labs. The clinical laboratory had an excellent year in fiscal 2003 as evidenced by our financial performance. In 2003, we produced an operating profit of $3 million as opposed to an operating loss of $3.8 million in 2002. This represents a profit turnaround of nearly $6.8 million. We're quite pleased with these results. When I discussed the 2002 results for the lab last year, I indicated that we were entering the year with a plan to refocus the Company into its core business which constitutes physicians and private practice in our geographic area. We had at the time recently ended an unprofitable service contract which caused our performance to be unsatisfactory. Enzo Labs developed and implemented a multi pronged program designed to quickly strengthen our operations, collections, processes and billing procedures.

The first step was of course the elimination of that contract. Next we focused our efforts in beefing up our sales and marketing group and we directed them to place their efforts back to the core constituency, the source where the real revenue and profitability could be generated. We aided this effort by increasing our in-house test offerings and expanding our menu in new areas such as reproductive genetics and molecular diagnostic - which resulted in our clients receiving their results faster than before. At the same time, we instituted a comprehensive review of our expenses and made a conscious effort to contain costs.

While it was not easy to implement such a comprehensive program, we were able to accomplish it. The results speak for themselves.

Our achievements in 2003 were not just in the financial area at Enzo Labs. During the past year, Enzo clinical labs were awarded an accreditation with distinction from the prestigious College of American Pathologist, the voluntary Accrediting Society whose standards are ore stringent than government licensing authorities.

The laboratory was congratulated for quote 'excellent' of the services being provided.

During the cap process inspectors examined the laboratory's records and quality control procedures of the preceding two years. Cap inspectors also examined the entire staff's qualifications, the laboratory equipment facility, safety programs and records as well as overall management.

This stringent inspection program is designed to specifically ensure the highest standard of care with the laboratory's and its patients and we are all proud of this accomplishment. With all of this, we produced fourth-quarter revenues or revenues over 30 percent above last year to 8 million with a substantial increase in operating income as well.

Enzo has always been a company with enormous synergies among the three divisions. We believe the success of that Enzo Clinical Labs this year - that was a result of a refocusing of its marketing efforts and an increase in services offered can translate successfully to Enzo Life Sciences as we look toward the near-term future.

Enzo Life Sciences started the year strongly. However as we indicated to you after the first quarter, we had benefited from an unusually strong order flow at Enzo Life Sciences. The levels of results achieved in the first quarter could not have been construed as indicative of what successive future quarters would look like.

While we believe that the demand for our products remains strong we more recently observed that there was a bit of a slowdown in the life sciences market, overall, as one industry analyst recently quoted that "cautious capital spending and soft end market demand for discretionary life science equipment as well as conservative research and development spending by pharmaceutical companies negatively impacted the market."

To compound the situation, in the fourth-quarter we witnessed a total absence of orders from our largest distributor Affymetrix Inc.. This was reflected in the fourth-quarter results of the division where research product sales by Life Sciences fell 2.6 million impacting our overall results. We anticipate that revenues for Enzo Life Sciences in the fiscal first-quarter that ends in just a few days on October 31 will be comparable to the fourth-quarter of fiscal 2003.

Obviously these results are not acceptable to us and we're in the process of dealing with this.

As we announced yesterday Enzo Life Sciences filed a lawsuit in Federal Court in which we charged Affymetrix with a repeated and continuing series of breaches of a contract that has been in place between our two companies since 1998. As the complaint states, Enzo believes Affymetrix - among other things - manufactured and sold Enzo products in violation of the terms of the agreement and improperly used, transferred, or distributed substantial business assets of ours including portions of our proprietary technology and improperly induced collaborators to use our products in unauthorized fields or otherwise in violation of the agreement.

The complaint also seeks damages for failure to account for significant shortfalls in sales of our products and unauthorized manufacturing and sale of products.

Let me tell you this was not an action that we brought without a lot of careful consideration. We have been in negotiations with Affymetrix for a long period of time in an attempt to resolve these serious issue. Those negotiations [technical difficulty] failed to yield an appropriate resolution and therefore the Company felt it had no choice but to terminate the Affymetrix agreement and file this action.

Enzo's products and technologies are the cornerstone for labeling the detection approaches for biochip arrays. Our products have established the standards for the industry and we will continue to provide the same products that our customers are used to and prefer for their research needs.

Let me now turn our attention to the changes we are now making and the way we're marketing and planning to future market our Life Science projects.

First, we are in the process of expanding our direct sales and marketing team. While we still rely on distributors to assist us in this effort we have made a conscious decision to place a far greater emphasis on our direct customer efforts. To that end, we have brought on a seasoned life science professional and are in the process of adding substantially to our direct sales force.

Next we are in the midst of expanding our product offerings. We announced previously that we unveiled a line of products specifically targeted at the glass slide array market, one that does not rely on biochips and are now planning to augment this line with products for target amplification to allow Enzo to be one of the first life science companies to offer a completely integrated system from the nucleic [indiscernible] amplification and detection.

However as I have stated times in the past, the ultimate goal of our life science program is to get as many products and technologies into the diagnostic area as possible. Part of our large research and development expense this past year has been for that purpose and I'd like to share with you some details about one aspect of this approach.

Gene amplification - a process by which the number of copies of a particular genetics sequence can be increased or amplified with the use of specific enzymes has been an incredibly strong focus for our Company. This is a very important area and we have made a very important development in it. We have developed, currently, a methodology that will allow us to very rapidly and easily amplify or multiply the number of genes in a specimen of any sort.

Currently there are methods on the marketplace that use some technologies that can allow this but they have limitations.

First they carry out their amplification reactions under repeated periods of heating and cooling called thermocycles. This can lead to degrading of the end products. In addition they require the use of relatively expensive enzymes to carry out the reactions. Because of these limitations, penetration of this technology into the clinical diagnostic market is not as deep as it might be.

Enzo Life Sciences has developed a methodology that we believe overcomes many of these limitations. Our so-called [indiscernible] thermal amplification system carries out its reactions at one temperature, thus eliminating the need for thermal cycling equipment. IT utilizes a commonly available relatively inexpensive enzyme to assist in the reactions. The name Inchworm comes from the process itself whereby the targeted region of the nucleic acid or DNA in question after the addition of the enzyme pulls away from the rest of the genes in a loop fashion - much like the locomotion of an inchworm.

This product has been in beta testing at our Long Island facility. At this time we're now accumulating data and are looking at a variety of applications of this technology to a large number of disease targets. Simultaneously we are exploring opportunities to commercialize this platform. We feel, for example, our amplification technology can be the main component to align products that allow rapid microbiological identification without the need for culture and recently we were informed by the United States Patented Trademark Office that it has issued a medicine of allowance for the main component of this technology.

This key technology has been demonstrating reproducible data as I mentioned in beta testing in a broad range of approaches.

We have stepped up our activity extremely aggressively and we're now looking very very formidably (ph) to partner and exploit this technology and its benefits in different commercial settings.

Turning to Enzo Therapeutics. Enzo Therapeutics this week unveiled plans to pursue two new platforms that we believe hold great promise in the treatment of such immune mediated disorders as hepatitis B virus, hepatitis C virus associated with liver diseases and other various diseases of the liver - and even cancer. Crohn's Disease and other forms of inflammatory bowel disease.

We have looked at this approach. It is a very exciting approach and new platforms revolve around the identification of a new specific small molecule that appears to promote and direct certain specific immune responses. The other involves a cell therapy platform based on the use of regulatory immune cells.

Even though these exciting platforms cover similar diseases they utilize different biological pathways and thus give us even more therapeutic options.

These platforms and I will tell you the planning is already going forward on implementation of human clinical trial in at least one instance will be complementary to our ongoing efforts in a new regulation by oral presentation of antigens which is the technology which is being used in our existing human clinical trials.

If they're successful, it will provide Enzo with a highly developed and well rounded line of therapeutic approaches to deal with immune mediated disorders. It is noteworthy that Enzo was awarded the opportunity to make six separate presentations this past weekend at Boston at the annual meeting of the American Association for the Study of Liver Diseases. Also our colleague at Hadassah Hospital in Israel, Dr. Yaroni Lon (ph) also delivered another related talk this past Sunday at a New York Academy of Science Conference on Oral Tolerance.

What this strongly underscores is that Enzo's work in this area is drawing increasing attention and interest as we continue to make important headway in our clinical trials. Dr. Engelhardt will elaborate on our various programs shortly.

Our Phase 2 randomized double-blind study involving our drug for managing Crohn's Disease is progressing - the study plan for EHT899 our medicine for Hepatitis (indiscernible) associated with chronic hepatitis as well our medicine to manage hepatitis C virus associated (indiscernible) hepatitis also continued to move ahead. During the year clinical trials involving Enzo's StealthVector [indiscernible] gene medicine for HIV infection received approval to move ahead after the FDA initiated a temporary half on all gene trials in the United States.

Our expectation is that the first of these advanced Phase I II trials could get underway shortly as we wait [indiscernible] at the institutions we will be working at. New protocols established on these tests had to be approved by the institutions that will be conducting the trials which require added time. And now we are hopeful that the clinical trials are close to getting started. I might note that among some of the HIV infected individuals we continue to follow, more than 40 years has elapsed and all of the subjects Enzo's proprietary gene product is still functioning.

With that I'd like to turn the conversation over to Dr. Engelhardt who will deliver a bit of an update on the specific projects.

I want to go through a detailed discussion of some of the new technologies as well as an update on our current clinical trials that Enzo is motivated by a very simple principle. A lot of people have - I understand it and we do too - this is a very important area for us. It represents the future of our Company and our intention is to make the best products in the shortest possible time and those are two almost conflicting issues because to get the best product sometimes you have to stop and start whereas the shortest possible time indicates that you should move as quickly as possible.

We understand the tension and believe me it is something we deal with on a daily basis and we will make as our commitment the best possible products in the shortest possible time and Barry mentioned we have three products that are either in clinical trials or have finished some phase of clinical trials and are about to or we are planning to move forward on those products and I'm going to discuss those after I have discussed our new technologies.

Recently, we made an announcement, a press release based on a series of papers and publications from Enzo and our colleagues in Hadassah and I'd like to go through them. We're naming these two new technology platforms but actually they're related. And not only are they related, they're related to our basic technology of immune modulation or immune regulation.

The principle of the new platforms is that inducing an immune response sometimes a very small subset of all the immune cells is critical. The way we have described it is some cells in the immune systems act as generals and they direct huge systemic global responses in the body. And it is possible that many or most of the immune mediated disorders that we're dealing with represent a decrease in the number of such generals and, therefore, the cells ready to go eager to go simply can't go because they don't have the proper instructions.

For example, we have managed in animal model systems graft versus host disease and also a form of diabetes simply by increasing the number of one subset, one small subset of the total number of immune cells called NKT cells. Simply by increasing the number within these animals we've eliminated the symptoms. For example in the diabetic mice, we were able to render them tolerant of glucose surges. So when you inject glucose in a diabetic mouse as is with humans you get a surge of increased amount of glucose in the blood and this takes a little while to burn off, and it indicates a defect in glucose metabolism.

The same thing happens in our diabetic mice and by simply treating them by adding this one subset of cells we have essentially eliminated that surge. So that under those conditions, the mice do not have at least that symptom of diabetes. And of course we're pursuing that as aggressively as we can.

The same is true for graft versus host when you put stem cells from a nonrelated mouse and this is also true what humans, into your experimental mouse - experimental animal - you can get an attack of those nonrelated cells on the body called graph versus host reaction. Again, simply by adding these generals - this subclass of immune cells - we have eliminated this -- largely eliminated this graph versus host. Both of these are issues that we're now pursuing, obviously, with the intent of moving into human clinical trials as quickly as possible.

We have also made a discovery and tested it successfully, identifying a particular molecule that serves, specifically, to cause the activation of a subset - another one of the subsets - probably the same, although we don't know for sure - another one of the subsets in the immune system. This is a polar lipid that we developed.

Initially we noticed that it was characteristically high in patients with Gauche's (ph) Syndrome because of lack of an enzyme to metabolize this particular lipid and we found out that by correlation that those patients did not have as serious acute active acute chronic active hepatitis associated with HCV - hepatitis C virus infection. And we took that as a sign that, perhaps, this particular polar lipid was inducing the production of the activity -- excuse me -- of a certain subset and by having an excess of this lipid, we were able to activate the subset of cells and, therefore, manage the inflammation. And in order to test that, we created another animal model system of liver failure, acute hepatic (ph) failure and again by simply adding this power lipid we eliminated that - indicating that we were able to direct an immune response that prevented or interfered with or eliminated the immune attack on the liver.

So we have two platforms now but really they are basically the same platform. That is, there are subsets of immune cells that will effectively direct an appropriate immune system - immune reaction. So that if you have an immune mediated disorder, this disorder can be managed by simply turning on or amplifying or activating this subset.

By the way, we took these same NKT cells outside of the body and put them in the presence of a tumor. Educated them. And put them back into a mouse with the same tumor and the tumor's inevitably fatal in the mouse. We eliminated that. So we have activated outside of the body which gives us a good clear strategy for picking up the true medicine involved in this very exciting anticancer procedure.

So we have two new -- we have two new platforms but really, basically, we're pursuing the same platform that we've been pursuing previously and that we're now in clinical trials on, which is a platform of naturally finding the components that will naturally allow the immune system to respond properly to immune mediated disorders leading to their correction if that's possible.

We have three clinical products now that either are in clinical trials or between clinical trials and I want to discuss them.

The first is the trial that is ongoing right now in managing Crohn's Disease - which is an inflammatory bowel disease and represents an attack of the immune system on the bowel on the alimentary canal and somewhere it can actually be above the stomach or below the stomach but, traditionally, it's in the small intestine.

It's a very serious immune mediated disorder. And we have finished - as we have announced - we have finished a Phase I clinical trial in which we're managing the immune system by inducing a tolerance of the body to eliminate the attack of the body's immune system on the small bowel and then to carry forward with a secondary immune response that allows the immune system to fully restore and yet to eliminate the attack on the small bowel.

The first clinical trial, as we've announced, we had extremely good results in the course of the trial all of our patients showed at one time or another efficacious response. And we had upwards of 7 of our patients in complete remission at one time or another during the trial.

This was enough information in open label trial for us to initiate a closed trial. So if a double-blinded trial with random access so we don't need a patient nor physician or frankly we know who is getting the medicine and who's getting the placebo. And the trial is powered at a level that we will have a high degree of confidence that if the data that we got in the open trial - open label trial - is consistent, that we will have a very good product and we can move forward to a Phase III, get this product out as quickly as possible. Bearing in mind was going on in at least my mind the shortest possible time.

That is essential for us - it's a very important issue to get the products identified properly and then to move as quickly as possible to get them out.

This represents -- this will represent what I call a personalized medicine. The best medicine is material manufactured from the patient themselves. This personalized medicine is going to have major applications as soon as we've approved the principal (ph) with Crohn's. Including other virus infections included for example HCV and including HIV - both of which have strong immune mediated attacks in the course of the genesis of the viruses.

No. 2, we have a trial - we finished a Phase I and a Phase II trial with hepatitis B virus and at that time we had data in the open label trial, which indicated that this was a very good candidate medicine. The gold standard for a clinical trial is a double biopsy - a biopsy of the liver at the beginning of the trial and at the into the trial. And what we found is that in a third of our patients - 33 percent of our patients in the open label trial - we had a significant improvement in the course of the trial, which is absolutely an excellent product candidate.

And by the way, our patients were very pleased. Our subjects -- excuse me, were very pleased - the ones that went into significant liver improvement were very pleased by this procedure and have expressed an interest to continue as soon as we have made a medicine.

We stopped that trial, realizing that we had an excellent product candidate and have been working to take the manufacturing of that product out of the contract manufacturer we've been working with and bringing it into Enzo and without going into too much detail I would say at this point, we're very -- we're in a position to within a very short time set up this manufacturing procedure and then move into a double-blind multi center trial to confirm the data that we've gotten from the open label trial and continue to produce this medicine.

Again in the shortest possible time, we will make the best possible product in this and that is our commitment.

No. 3. HIV. HIV is different than the immune modulation that we've been working with with other products. This is a product in which we're transferring genes to cells and these cells then become resistant if they act as they do outside the body. These cells would then become resistant to HIV infection.

We -- the reason that HIV causes AIDS is, frankly, not even understood at this point after a lot of work. One of the best models for why and how HIV can cause AIDS is that it selectively destroys cells, immune cells and I hope when you hear me say that you'll understand there's a tie-in with our other work with immune modulation.

We are at this point as well as continuing our clinical trials - which I'll discuss - we're beginning to identify particular cell types that are selectively affected in the body of a subject who has HIV infection and these cells are also general cells. These cells are regulatory cells that induce an immune response and it is possible that when the cells are selectively eliminated, not only do you not only not maintain healthy cells in circulation especially T4 cells but also you probably decreased the production of these cells which leads to an overall decrease in the production of the T4 cells which is of course the main characteristic -- immune characteristic of HIV infection.

So we're beginning to identify these potential generals or regulatory cells and move towards -- to put our particular anti-HIV gene into these cells. Now remember if these cells are protected from HIV, we will then be well positioned to create what I call a box within a box. A box of functioning cells that will allow the immune system to restore itself and maintain itself even in the continued presence of HIV infection.

Now the HIV trial was put on clinical hold by the FDA as a part of a broader response to an adverse event from another trial. The FDA has released us from that clinical hold and we are now permitted to move forward under their advice and counsel and the counsel of the federal regulations of course into a Phase I II trial. We have passed through most of the regulatory bodies in our host hospital. And we anticipate - of course a committee has its own mind and can do anything it wants - but we anticipate in a very short while, in a very short while, that we will be able to initiate our Phase I II trial, moving forward to get a large amount of our anti-HIV antisense gene into the appropriate cells so that the immune system has a chance to restore its full functioning in the presence of this.

So those are our three - so we have now a number of candidate products that are in late pre clinical. We have our three products that are either in or have been or will be in clinical trial. And we have two new exciting platforms which are going to give us a tremendous jump forward in producing products.

All of this is done with from my point of view with a sense of urgency and remember my mantra "the best products in the shortest possible time."That's operating in my mind all the time.

Thank you. As I mentioned earlier, the future of Enzo Biochem would reside heavily with our efforts in therapeutics. As you can see, as Dr. Engelhardt has detailed, the outlook for our Company is, we believe, very bright, particularly in regard to the many new developments that have been coming out of our extended research program. In the meantime our financial condition is quite strong and we continue to make progress at our divisions.

The combination of a solid proprietary product line up at Enzo Life Sciences and the move to more direct sales activities, we believe, will add value to that division. We are moving forward very aggressively and we should -- we do believe that these marketing efforts will put the Life Sciences Division in a very strong and much sounder footing.

Again I would like to thank you for participating in our call. We look forward to speaking with you at the next conference call, which is in the middle of December. Again, we value all of the support of all of our shareholders. We've had a very loyal following and, as management of the Company, we are committed to bringing forth our products and delivering what we think will be value to you as shareholders. Thank you and goodbye.

Thank you. A replay of this broadcast will be available until Sunday, November 9th, at 12 midnight. You make access this replay by dialing 877-519-4471. The PIN number is 4251552. International callers can dial 1-973-341-3080 and use the same PIN number. This replay is also available over the Internet at www.vcall.com. This concludes today's teleconference. You make disconnect your lines at this time and have a wonderful day.