Enzo Biochem Inc (ENZ) 2004 Q2 法說會逐字稿

Good morning and welcome to the Enzo Biochem Inc. fiscal 2004 second-quarter 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 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, beliefs, 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 developments occurring after the date of this conference call.

All participants have been placed on a listen only mode. I will now turn the floor over to your host, Barry Weiner -- President of Enzo Biochem Inc. Mr. Weiner, the floor is yours.

Thank you and good morning. Again, I'd like to thank you for joining with us today. With me is Dr. Dean Engelhardt, who is Executive Vice President and our director of research. I would like to review the results and our activities for the second quarter which has ended January 31, 2004. Dr. Engelhardt will provide an update regarding our Company's research and development activities and hopefully focus specifically on some of the exciting activities in our therapeutics areas.

The release detailing the operating results for January 2004 the fiscal quarter which ended was distributed early this morning and I hope you have had an opportunity to review and if not I would encourage you to do so.

First I would like to review the financials. Operating revenue for the second-quarter amounted to $11 million as compared to $13.1 million in the corresponding year ago quarter. Our results in the quarter continued to be impacted by our Company's decision to terminate our contract with Affymetrix Inc. in the first-quarter of this fiscal year and subsequently against whom we've instituted a legal action. Shipments to Affymetrix last year were substantial through about the middle of the year so we would expect quarterly Life Sciences revenues in the future to be more on a more comparable basis and a period to period comparison. We have moved aggressively to offset the loss of that business through the establishment of our own direct sales effort focused largely on the genomics and molecular biology market and as I will discuss later I'm pleased to report that the marketing program is yielding increasingly favorable results.

Gross profit for the fiscal second-quarter declined to 8.1 million compared to 10.4 million a year ago. The net loss for the period equaled five cents per diluted share compared to a year ago profit of five cents per diluted share. Our balance sheet on January 31, 2004, continued to remain highly satisfactory. There was and is no debt. Working capital amounted to $97 million or so and cash and equivalents including current investments were in excess of $75 million.

Several factors impacted the quarter's results.

The Affymetrix order flow was one. However Enzo Clinical Labs experienced an unusually hard 10 days of severe weather that virtually shut down all of the metropolitan New York area. It meant that patients could not go see their doctors and, consequently, in addition to not being able to make specimen pickups, fewer tests were conducted. Our accession (ph) rate which measures the number of tests that are run through our various locations declined sharply due to the weather unfortunately. As we are aware skipped tests do not get deferred so most of the business typically is lost.

Moreover, since we are committed to providing a 24 hour/ seven-day week service, our costs remain constant.

Another factor that impacted our bottom line this quarter was that we continue to incur higher legal expenses, which in the second-quarter increased by roughly a quarter of million dollars to around $1.8 million. This is a result of our filing of new patents based on our novel exciting new technologies of which there are many and patents that are supporting our emerging products and our Life Sciences group and research organization. It is also a result of our determined litigation efforts to protect our products and patents and our intellectual property in the various litigations and lawsuits that are in action at this moment.

As you can appreciate, we can't really discuss the specifics of the litigation in which Enzo was involved. However we remain confident of our positions in relation to these suits and we feel the expenditure for these legal expenses represents a very sound investment -- one that is necessary to continue to protect our intellectual properties.

Enzo has one of the paramount intellectual property states in the biotech industry, covering a broad area of discovery with distinct areas of commercial value. I would like to assure you that we carefully monitor these approaches and expenses and we certainly have the wherewithal and the resolve to protect our IP and follow through in this course.

R&D expenses also increased in the recent second-quarter in-line with our strategic growth initiatives with more developmental and investigational products in our pipelines, especially in the therapeutic area, but I must comment also on Life Sciences. R&D amounted to 2.3 million compared with 1.6 million a year ago. While we spend somewhat less than many other biotech in research and development both on an absolute and relative basis we believe we're getting extremely high scientific return on our research and development dollar.

Apart from legal expenditures, spending on our new informational technologies system recently initiated and installed Enzo Clinical Labs for the new Enzo direct customer communications system as well as higher insurance costs contributed to increase SG&A expenses. We also increased at our lab the provision for accounts receivables by approximately 1.1 million to reflect a more conservative approach to the trends in the industry.

Nonetheless, it's worth noting that despite the weather and other factors Enzo Clinical Lab revenues remained on a par with a year ago, also with gross profit was only off slightly to 4.5 million compared with 4.8 million last year.

Enzo's Life Sciences forwards part (ph) registered sharp sequential improvement. This strategic decision to build our internal sales force and internally build our business made positive strides this quarter. The building of our business has resulted in sequential gain, that is as compared to the proceeding first quarter of fiscal 2004, research product sales increased approximately 44 percent. Gross profit sequentially grew 50 percent.

As we indicated in our last conference call, we anticipated that on a sequential basis Life Science revenues should strengthen. We are optimistic that the favorable trend will continue in the second half of this year.

Looking at the activities of our specific divisions, Enzo Clinical Laboratories made significant investments this quarter. Enzo labs expanded its geographical reach. We opened two new patient service locations in parts of our coverage area that we determined were underserved. We also continued to invest in the expansion of our in-house testing capabilities at the labs, concentrating on the more profitable esoteric tests that are available.

Enzo Clinical Labs now performs a higher percentage of test in-house than ever before and the use of esoteric tests which further differentiate our service is targeted to having a favorable impact on the labs' margins. The labs also recently published and distributed a new comprehensive reference manual that outlines many of the service enhancements we have added. The manual has met with excellent reception from our physician clients and we also are successful and have been very successful over the past quarter in attracting new clients. The lab has also added to its sales staff and the group continues to make solid progress.

The investment at Enzo Labs in which it has made in its infrastructure, its information systems and marketing is paying off. Particularly noteworthy is our Enzo direct suite of physician connectivity products which is now being installed widely and with excellent results. The state-of-the-art system allows clients to order tests, receive results and -- in general -- communicate electronically with our lab in a very highly efficient manner. Using high-speed DSL lines we're able to transmit data exponentially faster than with the older system, thus providing accurate and speedier service.

Overall, this quarter has been a strong building period for the lap. We have now begun to install our state-of-the-art physicians' connectivity system and doctors' office offering a new approach to the static communication and giving our clients a very rapid turnaround time for their work.

We have continued to expand the sales force, we continue to expand the geographic area and we continue to invest in expanding our menu of research test and our clinical traditional test -- particularly those in the high margin areas. This quarter, we have put into place the foundation for building a more profitable business enterprise and we are highly optimistic in Enzo Labs' strategic financial outlook.

Enzo Life Sciences, also, is making notable progress, benefiting from continued expansion of our marketing efforts. We have been actively training new sales representatives while aggressively recruiting additional experienced reps around the United States. As we indicated previously, the Life Science division also is now more strategically focused to marketing its own products. We are appearing at tradeshows as exhibitors and delegates, we're advertising, promoting our products. We're introducing new catalogs that will help get these products in the marketplace in a more expeditious fashion. This is a very focused and concentrated effort and we are pleased in the way it is moving.

Life Sciences has successfully launched the first in a line of amplification and labeling products that will allow researchers to substantially increase the amount of high-quality DNA that can be used in their research. Our bio (indiscernible) amplification system is an important and integral adjunct to the research being done in the area of genomic analysis. Research scientists are now able to purchase a completely integrated Enzo Life Sciences system that runs the gamut from starting material to the generation of expression data.

Previously, researchers had to purchase separate products from different suppliers. Given the minute amount of material they have to work with it was difficult to run experimental controls needed to match up the systems utilizing these multiple suppliers. Our integrated proprietary bio raise (ph) system illuminates this major drawback.

Let me cut in for just a second, I mentioned -- this is Dean Engelhardt -- I mentioned last time we spoke about our amplification system but we have new data and I want a pass it on to you. The principal that we're working with is to see which genes are turned off and which genes are turned on and more importantly which gene activity changes with the addition of medicine or the change in some condition in the body.

This has proved to be extremely fruitful. It's in fact one of the exploding areas of scientific knowledge. Enzo is providing the color for this so the material that allows you to read the spots for example on an array system. Therefore we are very central to this. We have now devised an amplification system that allows you to identify the genes that are turned off and turned on in an extremely low number of cells. We can for example detect which gene is turned on and which gene is turned off if we were with only 10 cells. Quite extraordinary.

One of the problems that has been raised over and over in doing this is that you may be throwing messages away. There are so few met (ph) sales and so little messages you may not be picking up all the messages, all the genes that are turned on and, recently, we've completed a set of experiments that says that isn't true, that we're getting very good fidelity, that we're picking up the same sets of genes, working with [indiscernible] cells as we would be working with huge tissue biopsy samples.

So I'm extremely excited about that because it's going to validate this product. And it's going to broaden the use of the individual gene activity assays that are currently so exciting and so acceptable in the system. In addition, we have known we have continued to be the premier supplier of the color of the signal generating systems for any array system that is being used and many many customers, many scientists have been using our system and would find it very difficult to change to another system.

So I believe Enzo is extremely -- is central to the entire array system in this entire new exciting initiative in biological research.

In addition to what Dean just spoke about, the division will also introduce an expansion to its line of products aimed at the glass slide array market. The array market is divided into two principal research groups. One involves those involved in array work that uses chips and these scientists tend to screen large numbers of targets -- hence, the name high-density arrays. And as you might expect these customers are more concentrated in the pharmaceutical side of the market.

The glass slide or low-density array segment does not use chips. It screens lower numbers of targets at one time and is widely spread, principally, throughout academia. Market research suggests that these two markets nonetheless are approximately the same size as are other growth rates. Thus we at Enzo are committed to making unique proprietary products that will serve both sides of this market.

In addition, our research efforts have led to the development of products for a wide range of other research applications. Among products in development for example are those using our proprietary die chemistries that potentially could assist pathologists visualizing antibodies that would help in determining cancer cells are present in a clinical specimen or not.

Our new Life Sciences product flow is promising and is expected to accelerate. And our growing direct sales group should enable us to effectively market their use. The strategic direction for the life science division is twofold. We are moving internally to build a research arm of the division by relying less on distributors and gaining control of our markets. We also are expanding our product lines to becoming a more full-service shopping cart for our target markets.

At the same time, we are defining our diagnostic opportunities. We are in discussion with a variety of parties concerning the myriad of opportunities that our platform offers.

The testing of our beta site has progressed very well. We have built a database that validates and verifies the initial concepts and goals for the system. This quarter we focused on applying Enzo's newly developed die products which Dean just commented briefly on in conjunction with our detection formats, to further increase the utility of this system. The work at the Life Sciences group has been intense and extremely productive. It has required a dedicated investment of time and money.

We view this as a necessary building period for the Life Sciences division in order for it to reach its potential as a freestanding independent company. The staff and management has been working very diligently to meet this challenge and we are pleased with the progress and look forward to the future of this area.

This quarter, we've purchased the assets of OraGen Corp., a privately owned biotechnology company that specialized in immune regulation technologies. The purchase brought to Enzo technology and know-how that complements and extends our own work in this particular field. Specifically, it brings additions to our intellectual property estate that will support and extend our position in protecting our IP assets.

This is very important as our product for Hepatitis B moves into the next phase of clinical development. This was an opportunistic acquisition that underscores our determination to extend our activities in therapeutic areas. It also signals a new avenue that Enzo is strategically embarking on, not only to build from within but to acquire and license from the outside as opportunities present themselves also to explore all opportunities available to help us to reach our goals.

OraGen has been working diligently on a product area that is complementary to Enzo's which is a presentation of medicine orally to regulate the immune system and they have several complementary technologies for inducing tolerance or oral immunoregulation that we are going to put into our systems as quickly as possible.

In addition, they have something that's quite extraordinary. They can go the other direction -- that is to say, they have an oral presentation technology that will actually vaccinate. Whereas our technology eliminates immune responses they have a technology that will induce immune responses and it may turn out to be the technology of choice for standard -- for certain standard vaccinations.

We're very excited to have this group join us and this technology now a part of Enzo's technology.

This is just another activity in the furthering of Enzo's therapeutics reach this past year. Enzo Therapeutics is having an extremely eventful period. Last Thursday, we announced interim results from our Phase II double-blind study of Alequel.

This is our investigational therapeutic modality for the management of Crohn's Disease.

Dean will comment a little bit more about these results. I'd just like to comment that while this is an active ongoing trial and that while the outcome cannot be predicted, we are extremely encouraged by the data so far. As a result, we are planning to expand this trial to include a large number of patients and increase the diversity of the patient population.

We're also seeking to determine the duration of the effects of the treatment. And if all goes as planned we could see the results from this during this year.

I want to make three points on that. First of all we just put out a press release on this. And I want to emphasize that we are continuing to medicate subjects and to go through the follow-up period so this trial is as of yet not closed.

But based on the preliminary data that we've announced and published, we are going to initiate a second arm of this trial. And this arm is going to -- first of all -- add more subjects and, therefore, more good data in a double-blind randomized format. But in addition, we are broadening the patient population. That is to say, we are allowing different -- new and different types of subjects or patients with Crohn's Disease to enter into the trial in order to make a more broadly applicable medicine.

This is a very optimistic thing. And I'm looking forward to getting this trial started as soon as possible so that we can reach the broadest possible patient population with our new medicine.

We're very excited about the Alequel opportunity at this point in time. We believe the program that we are putting into place will be an expeditious one, one that hopefully will increase the opportunity to move this product through the pipeline in a much more rapid and predictable fashion.

At the same time, work is continuing to progress on our immune regulation medicine for Hepatitis B virus infection. It's interesting that, even with an effective vaccine available, Hepatitis B still remains one of the most consequential diseases facing mankind and a truly serious global health problem. We're faced with a problem of staggering proportion where around the world about 2 billion people are affected. And of those 2 billion about 350 million people worldwide and in the United States 1.25 million have chronic infections.

We feel that our approach might offer a different option for the chronic carrier from what is currently available which is, basically, three various products used in various formats which are interferon, Mamividine (ph) and something called a nucleotide reverse transcript base inhibitor.

Cost is a very key factor for this product because of the areas of the world in which it is most problematic. We have been addressing this factor by optimizing the manufacturing process to reduce the cost -- the per dose cost -- to the lowest possible areas so that this can truly become a public health or world health drug.

We have been proceeding with validating the manufacturing protocols and, shortly after this is done, we will then initiate what we expect will be a multisite double-blind randomized study.

Actually, this is a product that is going to be an ethical pharmaceutical product when and if it clears for regulatory agencies, of course. And it is going to be sold in a competitive level and, therefore, our group decided we'd better spend some time to drop the cost of goods. And in fact I'm very proud of what we've done. We managed to drop the cost of goods to manufacture by at least twentyfold and the current cost of goods and manufacture will make this product extremely competitive -- even in the Third World market as as far as we can tell.

So I'm very proud of that. We're now in the process of transforming this manufacturing process into a process, according to the guidelines of good manufacturing practices published by the FDA. And as soon as is possible will get back into the clinical trials that have actually yielded very good results in the same product manufactured by a different process.

Moving to the HIV area, the I/II study of our Stealth Vector HGTV43 was initiated at New York Presbyterian Hospital. As we've spoken in the past, the object of this study is to expand the number of engineered cells containing anti-HIV genes in order to achieve therapeutic effect, namely increasing resistance to HIV.

The early Phase I trials at UCSF demonstrated the safety and also the ability of HGTV43 to survive and function in vivo. This trial -- Phase I trial -- showed that the anti-HIV-1 genes could successfully be inserted in to stem cells and that the engineered stem cells were able to survive and produce CD4+ cell progeny which contained functioning antisense genes.

It seems now it's as long as four years and the longest -- in the case of the longest participant in this study.

None of the subjects in this trial we're pleased to note encountered any treatment-related serious adverse events.

HIV has taken on a new growth in the United States and it continues to be a major problem worldwide. There are limited long-term treatment options and recent figures indicate the number of individuals with HIV infection worldwide at around 40 million. Approximately 5 million new cases developed in 2003, along with 3 million deaths from HIV. And while much attention has focused on the prevalence of HIV in Africa where it is estimated that up to 7.5 percent of adults are HIV infected, it is truly a global problem.

In 2003, it was estimated that as many as 1.3 million individuals in North America have HIV with perhaps 50,000 new infections diagnosed last year. Current treatments which include hard or highly active antiviral therapy cocktails and proteus (ph) inhibitors have effectiveness but are limited as a long-term solution to the problem. Meanwhile, increasing numbers of patients with long-term infections are becoming resistant to these drugs.

If we are successful, Enzo's approach could result in a much-needed option for the treatment of HIV.

This is what's happening in the Phase I trial we put our genes in and as Barry said they simply don't go away. They continue cranking out the anti-HIV antisense RNA after four years and we're continuing to track our patients and will continue year -- our subjects -- year after year. So I'm very optimistic that if we get a large enough number of these cells in the body we will be able to observe the efficacy of therapeutic effect.

And this trial has been initiated and we will be enrolling patients over the next period of time as quickly as possible to get this trial begun.

Another point I want to make. It's not what you don't see in these -- in this presentation of therapy is the fact that we have an immense preclinical program going on that Enzo as you'd expect is not relying on one product or another although all products that are in clinical trials I fully expect and anticipate will work. We're not relying on one product or another. We're filling a pipeline as quickly as possible in a professional and clean manner.

And, for example, with HIV, we have two preclinical studies ongoing that are within striking distance of hitting the clinical phase. One of them is oral immune regulation. There's a very good evidence that some of the symptoms of HIV infection or AIDS are immune (indiscernible) caused by an immune attack on by the body's immune system on itself and we have -- we have formulated a clinical trial based on oral-immune regulation to eliminate some of these immune responses to see if we can alleviate the symptoms of AIDS.

Secondly, again, there's very good evidence that one of the causes of the failure of the immune system is a failure to produce new cells, new T-cells, to be explicit. And given enough time the failure to produce new T-cells will ultimately lead to the turnover or destruction of the current T-cells in the body.

And this failure is probably caused by a selective destruction of regulatory cells. Enzo is pursuing this. Our intention is to identify and we have 4 good candidates for the regulatory cells that are selectively destroyed -- 4 good candidates -- that we intend to make resistant to HIV. If HIV is selectively destroying these cells, if we make these cells alone resistant they will continue to function in the presence of HIV and lead to the continued -- a new re-initiation of production of T-cells.

So we have not only a clinical program ongoing that I'm very optimistic about that but in addition we have preclinical programs that are coming close to clinical presentation.

And while I am on the subject, the same is true for Crohn's disease. Crohn's disease is very often correlated -- subjects with Crohn's disease are very often also have certain mutations. And it is conceivable, very possible, that we can perform gene transfer which will replace these mutant genes with wild type genes, at least transiently, and maybe permanently, which will then lead to the change in the genetic makeup of the subject with Crohn's and, therefore, the milieu more likely to cause that subject to control the Crohn's symptoms.

I don't want to go -- we don't have enough time but we do have an extensive preclinical program, for example, in our subject we call immune potentiation where we are initiating as soon as we have approval a trial for HCV. But we're also working on fatty liver disease and on diabetes and on many other subjects.

We have a preclinical program dealing with education of individual cells that has been very useful in animal model systems for managing a couple of types of cancer -- including melanoma and liver cancer. And we also have a preclinical program in which we've identified at least four separate individual proteins that could be made into an injectable protein medicine, comparable in its use to arithropoetin (ph) for example or other -- insulin, for example.

So we have -- I consider -- an extremely broad and very active preclinical program and I think you can count on us continuing to put new product candidates into clinical trials at a fairly rapid rate going forward.

The program Dean was just referring to, the GC or glucocelseramite (ph) program is awaiting clearance to begin a Phase I trial as we speak. As you can infer from our conversation or Dean's conversation, specifically, what is taking place in the therapeutic area of our Company is a explosion of activity. We have been very fortunate in being able to -- as of this date focus on products which we think may have very strong clinical utility.

We're not counting on a single product for success. We are following the platform strategy that we have followed since the inception of this Company whether it be used in the Life Science division and now being executed in the therapeutic division.

We are expanding on our platforms, we're focusing selectively on bringing into human clinical trial those products which we feel have the most immediate near-term capability of demonstrating a function.

At the same time, we are building a very strong base underneath a preclinical work which we are building up through this pipeline and focusing not on one given approach to attacking a given disease. We recognize the the complexity of many of these diseases which to date have still yet to have been able to be treatable in a very successful, concerted effort. And we are building a swelling population of therapeutic approaches that we think will deliver value to us as shareholders as we move down the pathway.

I would like to comment a little bit on the overall strategic focus of Enzo.

Today, we are a group of three distinct companies that have intertwining interests and benefit each other. This corporate design has been somewhat unique in the biotech world, somewhat non-traditional. Yet it has served over the years to be a wise financial and technological structure.

And as we mature as companies, we must look at approaches that will allow us to evolve and bring forth our inherent value which can sometimes be hidden. We are a Company with a wealth of resources and tremendous technological capabilities, as well as a swelling pipeline in both Life Sciences and therapeutics. We have to invest and we're committed to invest to bring forth the inherent value in these products and technologies. We have the resources, we are willing to invest these resources and we will do what is necessary to bring them to commercialization.

On that note, I'd like to thank you for joining us on this teleconference. So we will keep you updated as the facts and events permit us and the progress progresses here. We have built a company with a very solid foundation and with significant growth opportunities. And we are all very committed and highly optimistic as to the Company's future. Thank you.

A replay of this broadcast will be available until Sunday, March 28th, at 12 midnight. You may access this replay by dialing 1-877-519-4471. The PIN number is 458 -5101. Again domestic participants may dial 877-519-4471 with the PIN number of 458-5101.

The international callers can dial 973-341-3080 and use the same PIN number.

This replay is also available over the Internet at www.vcall.com.

Again this replay will be available until Sunday, March 28th, at 12 PM midnight. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.