Enzo Biochem Inc (ENZ) 2004 Q4 法說會逐字稿

[Enzo technical difficulty - audio drop out] Fiscal 2004 Fourth Quarter Operating Results conference call.

Except for historical information, the matters discussed in this news release 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, 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 statement as a result of developments occurring after the date of this press release.

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

Thank you very much and good afternoon. Thank you for joining with us. With me today is Dean Engelhardt, who is EVP of the Company, and David Goldberg, who is SVP of Enzo Clinical Laboratories.

I would like to accomplish several things this afternoon. One is to discuss the press releases, which we distributed, concerning our settlement agreement with Digene and our results for the fourth quarter and full year of FY04.

I would also like to provide a broad overview of some of our strategic approaches for the Company, which this year we began to implement. We believe these new directions will have an important benefit in shaping the future growth of our organization.

This year, we began the implementation of a number of strategic initiatives, which impacted our financial performance for the short-term, but which we believe will set the stage for long-term growth.

First, as you saw in the announcement today, our litigation with Digene has been resolved. Today we entered into a settlement and license agreement with them. The agreement provides for the full and final settlement of this litigation, which involves our Life Sciences Division U.S. Patent #6221581 and it also involves a grant to Digene of a nonexclusive, royalty-bearing license with respect to this patent.

Pursuant to the agreement, Digene is irrevocably required to pay into Life Sciences an aggregate of $30.5m at a minimum. As part of the agreement, we have received today the first payment of $16m. In addition, Digene has agreed to pay at least another $16.5m over the next five years, which is subject to a $2.0m credit that I will discuss in a moment.

Digene will pay us running royalties on net sales of licensed products. Each of the guarantee payments is creditable by Digene against the running royalties that may be due under the agreement. At its discretion, Digene may use that $2.0m credit that I mentioned against either the guarantee payment or the running royalties due to Enzo. I should note that this patent expires in the year 2018.

We wish Digene success in marketing these novel products that are used today to provide physicians and their patients with very important diagnostics information. More importantly, we feel that this agreement supports our view that, with respect to Enzo’s patent estate, we have developed technology that is truly unique, often pioneering, and groundbreaking.

Our scientists have focused for years on areas of medical science that are now beginning to unfold and Enzo is well positioned to capitalize on these trends and products.

Hi. This is Dean Engelhardt speaking and I actually want to make a comment. Because during the first part of Enzo history, we dedicated a large amount of our resources to developing the technology that’s now the underpinning of most of the procedures that are used in gene detection, in the genomics, in microarrays involving messenger RNA’s, and all of the other technologies that are currently sweeping the market and revolutionizing science and revolutionizing diagnostics and probably in the end, revolutionizing drug screening for therapeutic products.

So this patent, which is one of several hundred patents or patent applications that Enzo has and is based on Enzo’s work and development, represents the first of what I hope is many vindications of the work and effort we put in.

I’d like to discuss our results for FY04 now.

While we continue to make significant progress in many areas, our financial results were affected by a number of factors:

* In the Life Sciences Division, our decision to cancel our distribution agreement with Affymetrix, coupled with our rejection of a cash offer from another of our distributors, Roche Diagnostic Systems, to settle our claims of breach of contract and misappropriation of Enzo assets, had a significant impact on Life Sciences’ revenues.

* We also invested heavily during this year in a number of areas. These included the expansion of our direct sales force, the development of new products for the genomics market, and the expansion of quality assurance and production facilities.

* In the Clinical Labs, a number of factors impacted our results as well. We invested in our informational technology platform, as well as nearly doubling our field sales force. Additionally, the changing third party reimbursement environment had a negative impact on revenues we received.

* Finally, Enzo continued to incur significant legal expenses.

In many ways, FY04 was a transition year. For all of FY04, total revenues amounted to $41.6m, compared with $52.8m in the previous year.

Gross profit totaled $28.5m, compared with $39.8m, with the gross profit margin at 68.5%, compared to 75.4% in FY03.

The year’s net loss amounted to $6.2m or $0.20 per fully diluted share, compared with net income of $3.8m or $0.12 per fully diluted share in FY03.

Working capital at year-end totaled $92.3m and cash and cash equivalents and marketable securities amounted to $71.7m at year’s end and is closer to $87m today.

Enzo Life Sciences posted FY04 revenues of $13m, compared with $23.3m in the prior year, which included $11.5m in sales to Affymetrix, whose contract we terminated and whose actions are the subject of a lawsuit against Affymetrix brought by us.

While total sales declined for the year, it should be noted that, subtracting the sales to Affymetrix from the FY03 total, revenues actually rose approximately 10% during FY04, reflecting the early stage in our program to shift sales from distributors to direct sales.

In the fourth quarter, Life Science revenue amounted to $2.0m, compared to $2.6m in the corresponding year-ago period. The shortfall from the prior year’s quarter was due to the actions of one of our distributors, Roche Diagnostic Systems, in which revenues for products sold under an existing agreement were not recognized.

In addition, Enzo had a write-off in the amount of $1.8m for a receivable from Roche due to Roche’s refusal to satisfy outstanding invoices from sales previously reported under that same agreement. As we reported in June, we are currently in litigation with Roche.

At Enzo Clinical Labs, revenues for the year were $28.7m versus $29.5m a year ago. This shortfall was primarily due to a recent downtrend in the reimbursement rate of third party payors and HMOs. In addition, the provision for uncollectable account receivable at the Labs increased by $1.5m, which reflected a change in the mix of third party payors in FY04.

The Labs posted a 5.2% gain in patient specimens for the year and the expanded market effort, including added sales staff, has resulted in numerous additional physician clients in the Company’s expanded geographic reach. We believe that the investment made at the Labs during 2004 will produce improved results as we move forward.

Legal expenses last year reflected activity on the litigation front, which was quite intense. I have already commented on the costly but necessary aspect of that part of our business. Our legal expenses last year amounted to $6.3m, compared with $5.7m and I’m pleased to say were slightly lower in the fourth quarter on a year to year basis.

We would hope, over time, to reduce such costs even further, but the reality for the present would appear that they will remain as an ongoing expense, although we do not know to what extent. The Digene settlement surely will be a favorable factor on that behalf.

R&D expenses were comparable to those of FY03. Our accomplishments in both Therapeutics and Life Sciences are a testament to the fact that we are extremely efficient with our R&D dollars. Indeed, this past year was a highly productive one in terms of new Life Science products that will come to market.

Also, our efforts in Therapeutics saw no diminishment. This year we anticipate that we will be participating in a number of clinical trials in addition to continuing a number of promising preclinical investigations.

In summary, despite the challenges we confronted last year, we have been able to execute a number of strategic initiatives that will benefit the Company in its future activities and we ended the year with a strong balance sheet even further enhanced by today’s news.

Turning to Life Sciences, specifically, this was, as we stated, a year in transition. Specifically, we have shifted our marketing emphasis to a direct sales force as opposed to relying on distributors and we have begun to make significant inroads.

Earlier this year, we announced that Life Sciences had entered a supply agreement and license with GlaxoSmithKline for our proprietary RNA/DNA labeling detection and amplification technology and products. This agreement included a nonexclusive license to Glaxo under certain Enzo patents to generate genomic information for supporting Glaxo’s R&D activities.

In recent years, the analytical power of microarray technology to analyze thousands of genes for genetic variations in parallel has made this technology a valuable tool for gene expression monitoring and DNA analysis, most commonly used in drug discovery R&D and development in the study of human disease.

Additionally, we have begun the introduction of a variety of new products, which are extensions to our BioArray and GeneBeam product lines and which are now reaching the market. We also have recently developed the first in a new line of products designed to improve gene expression data derived from microarray experiments.

When completed, this line of amplification products will allow researchers to select a specific strand of genetic material they wish to study, as well as be able to choose the desired sensitivity. This proprietary and patent-pending technology appears to have overcome some of the shortcomings of other amplification methods, such as the need for larger amounts of starting experimental material, which is often very difficult to obtain.

We are also making progress on our product of the study of Comparative Genome Hybridization (or what we call, in the industry, CGH), which is used in genetic and cancer research to detect the number of copies of a particular chromosome that is present in each cell.

As you may recall, CGH effectively provides a scanning or bird’s eye view of a tumor. In a CGH protocol, two different samples of DNA are removed, one from a tumor and one from normal tissue. Each sample is then labeled with a different marker that produces a different color, and in our case, two of our labeled nucleotides. DNA from the tumor cells that have any additional copies of genetic material will then bind to the corresponding region on this spread and via our kit the location on the chromosome where an abnormality occurs can be identified. Conversely, if the tumor sample is lacking some normal DNA, this can also be identified.

The CGH market is forecast to one of the fastest-growing ones in the overall genomics market and we are determined to enter it in a major fashion.

On the Diagnostics front, we earlier this year received an important patent coverage our linear amplification of specific nucleic DNA, the first in a series of pending applications for the Company’s genetic analysis technology. In brief, this technology permits a sequential series of copying reactions to occur at a constant temperature, which produces a sensitive and robust amplification.

Our technology avoids some of the shortcomings of other amplification systems such as the nonspecific amplification or false signal generation. It allows us continued and I would say unfettered access for the development of the next generation of diagnostic capabilities, which more and more will be based on DNA analysis than on less conventional methodologies.

This technology is the core of our diagnostic approach for performing a rapid identification of specific pathogens and it’s embodied currently in a prototype that we are evaluating in our Clinical Laboratory.

We have a significant number of activities in the Life Sciences Division. I believe this division is set to embark on a very, very strong performance as we move into this year.

On that note, I’m going to ask David Goldberg, who is SVP of Enzo Clinical Labs, to give a brief review of the laboratory over the past year.

Thank you very much, Barry, and good afternoon. At Enzo Clinical Labs, as mentioned earlier, despite the fact that revenue was lightly down for the year, the number of patients tested actually grew.

As noted from our earnings release, recent trends in the reimbursement rates from third party payors contributed to the reduction in revenue. To address this, as I indicated in the last conference call, we have rolled out an enhancement of our system, which allows instant scanning, something that’s not only the laboratory information contained on our clients’ order forms, but the billing information as well.

This enhancement is a two-dimensional (2-D) bar code that allows our data entry groups to rapidly and accurately process patient information. Our rollout has increased over the several months and we believe this will benefit Enzo Clinical Labs.

As a result of the increased marketing and sales programs that have been previously discussed and this 2-D bar coding that has more fully ramped up, we anticipate more favorable results. Not only because we are able to ascertain the particular payor more rapidly, but also we can focus our efforts on marketing to a more profitable mix of business.

On the testing front, Enzo Clinical Labs in 2004 introduced a new cardiac screening test panel, the Vertical Auto Profile or VAP. This set of laboratory assays has been shown to increase the detection level of at-risk patients to 90%, versus about half that number with conventional screening.

VAP is a combination of various related tests such as total cholesterol, HDL and LDL, as well as numerous cholesterol sub-classes. The results are combined into an algorithm, which provides physicians with a picture of the patient’s risk. This panel has helped provide our sales force entrée into a number of internal medicine/cardiology practices. Along with the [aspirin works] assay that we offer, it gives in to a comprehensive menu of offerings directed at this medical specialty.

Combined with new assays we brought in-house for Pap Smears and HPV testing targeted towards OB/GYN, as well as a comprehensive panel of flow cytometry that we now offer for infectious disease specialists, we significantly broadened our testing capability in the last year.

Turning to our quality control program for a moment, it is noteworthy that the College of American Pathologists has selected Enzo Clinical Labs’ technical personnel to both perform inspections at other facilities seeking to earn this prestigious accreditation as well as to actually lead these teams. It is a testament to the level of skill of the employees at the labs that our services are held in such high regard.

As for our Laboratory Information product line, we continue to increase the number of EnzoDirect computer systems installed in the field. We also introduced additional versions of our system that allows physicians who, for example, have space limitation and thus may not need or cannot use a full standalone EnzoDirect. This enhancement allows us to provide these particular physicians with just those system features that best service their needs.

Finally, during the past fiscal year, we expanded the Lab’s geographic reach and we now serve physicians in the Central and Southern New Jersey areas.

We believe that the combination of a highly experienced professional sales force, a fleet of physicians connectivity products, the additions that we have made in our accounts receivables group, and the proven quality of the services we offer bode well for Enzo Clinical Labs as we go forward. We have made significant investments in this business and are confident that they will benefit Enzo.

Barry?

Thank you, David. Let’s turn to Therapeutics now.

There has been substantial activity in this particular area over the past year. We acquired the assets of OraGen Corporation, principally because of its proprietary intellectual and technological capabilities in immunological regulation as it relates to the treatment of infectious diseases.

This acquisition complimented our capabilities in this field. It was an opportunistic purchase. It enabled us to broaden a segment of our area of interest and allowed us to move forward, we felt, in a number of areas that we think will be productive in terms of enhancing our therapeutic pipeline.

One of the technologies - I think I’ve mentioned it before - from OraGen is very timely now, given the flu vaccine problem, although, of course, in no way are we dealing with that directly, is the ability to produce a vaccine that rather than being injected, as vaccines are traditionally done, can be administered orally and yet is effective, just as effective in animal model systems as the traditional vaccination mode.

This would make administration of the vaccine far easier and therefore the penetration and the use would be much better to regulate, much better to monitor. We’re very excited about this new technology, one of the many technologies that we obtained when we purchased OraGen. Their primary technology, of course, was in the area of oral immune regulation, which we are very actively involved in currently.

During the year, we also introduced an entirely new therapeutic platform utilizing a small molecule, which is called glucosylceramide. This particular molecule holds tremendous promise in terms of being a new, naturally-occuring immunomodulatory agent in which a number of preclinical studies, the results of which have been reported at several professional conferences, demonstrated that GC’s ability to modulate specific immune regulatory cells was quite, quite good.

It appears possible that GC can be an important candidate drug in the treatment of such immune mediated diseases as Crohn’s Disease, hepatitis B, HIV, and diabetes. We recently completed a phase I trial relating to the safety aspect of glucosylceramide and it demonstrated its safety quite accurately. We are now moving forward in this area.

Glucosylceramide, actually it sounds like a single molecule, but it’s a class of molecules and it seems to interact with several cells. Most notably, it interacts in a way to change a cell type called NKT, natural killer cells.

Natural killer cells may be the traffic cops - or some people call them the generals - that react early in an immune response to direct what happens. And very often, if you’re producing an inflammatory response and you can interfere with the function of these cells, this leads to a decrease in inflammation and it also deals with issues of autoimmunity and the corrective action in the case of managing autoimmunity.

Therefore it’s going to be useful for a number of medical conditions. We have animal model systems now that deal directly with the issue of diabetes, for example, and that also deal directly with the issue of Crohn’s Disease or, in the animal model system, its called “experimental allergic colitis”.

We also have animal model systems in which this molecule directly interferes with the growth of human tumors, in particular human liver tumors, out of cellular carcinoma.

We’re very excited about this new class of molecule. It will have many different forms. The ones that we’re pursuing now, we have the therapeutic candidate drugs in trial.

Also during the year, we initiated the Phase I/II trial of our StealthVector HGTV43, which is our gene medicine approach for the treatment of HIV. Again, it is targeted at strengthening the immune system of individuals afflicted with this very rampant disease.

We have been busy this year on HIV. We have -- currently, what we are doing is responding to a change in the direction, a change in the management of human blood stem cells, according to the new directive enacted this year by the FDA, under the guidance of the FDA.

The management of these cells is now under good manufacturing practices or current good manufacturing practices, according to their guidelines. This is a change. In the past, it was under good clinical practices. So we are completing the process of establishing the management of these cells. Which, therefore, are considered a medicine under this definition, completing the management of these cells by this new set of regulations.

We’re very eager to begin this trial and we have extremely high hopes as to the outcomes of this trial, based on our Phase I data.

The trial has been initiated and subsequent to the GMP approval process, we will then initiate the initial candidates in this particular area.

We also reported recently on the completion of the double blind Phase II study of Alequel, our immune regulation treatment for Crohn’s Disease. This study met its endpoints.

The next area of activity here is an expanded Phase II trial. This will include a larger and more diverse group of subjects and also examine the affects of higher dosages to determine whether it can provide an even greater degree of efficacy.

Subsequent to a successful expanded Phase II, we plan to bring these trials to the United States. Based on the data to date, Alequel could very well become a medicine of choice for treating this debilitating condition, which effects, I think, in excess of a half a million people in the U.S. and an equal number in Europe.

Yeah. The data were, in particular, our endpoint established as clinical remission. For those of you who know the terminology, a CDAI score of below 150, in the course of the trial. 58% of our drug treated subjects reached that clinical endpoint, only 29% of the placebos - this gives us a delta that’s extremely encouraging and we intend to move forward.

We are going to complete a supplement to this Phase II double blind trial that we’ve completed. Which will give us enough data, if the data continues as it is, to reasonably look for an IND -- begin to establish an IND in the United States and to begin to develop this product both for the United States and in Europe.

I have to point out: the advantage of this medicine, compared to the traditional medicine, is that we didn’t have any treatment-related side effects, of course, on a small sample. But there’s no reason to expect a treatment-related side effect, because the traditional medicines that are used for Crohn’s are medicines that have a systemic or global impact on the immune system. And pretty well you can expect side effects.

Our medicine has a very precise effect, if it works as it did in our animal model system. It has a very precise effect on the immune system and does not lead to global impact. So therefore we anticipate, moving forward, we will not have a series of clinical effect.

We’re very, very excited about our Alequel product. It has the potential to be one of the first therapeutic opportunities for us as a Company and we are committing our resources to move this as far as we can as quickly as we can in this pipeline.

Let me also say one of the power of Enzo: we are, we have been, we are a technology rich Company and you must know that. Of course we are driving as hard as we can to make revenue-generating product and that’s our first priority. But you do have to realize that our basket is full. The Horn of Plenty is overflowing onto the table of Enzo, you might say.

For example, we are now working very diligently on establishing renewing technologies for stem cells. Sometimes and with age, everyone runs out of adult stem cells. The number goes down in the blood, in muscle, in heart, in various tissues, even in the lungs and even in the brain and the idea that the stem cells can be replaced or supplemented requires the renewal of these stem cells.

We have excellent new technologies that permit this and we’re looking forward to developing a number of products, using the infusion of stem cells as our medicine.

In addition, during the course of the year we’ve established a working relationship and we’ve made data and actually patent applications in the area of bone density. We now have a candidate drug, a number of candidate drugs, small molecule drugs, seeder drugs that are useful in cell culture and in some animal model systems for bone thickening.

As one grows older and in particular those who experience osteoporosis, the bone density continually decreases with time, with age and sometimes, under pathological conditions, at a high rate. Our new candidate drugs act to produce new bone. Not just new mineral bone - new mineral bone, new organic bone, real new bone, and we think, again, this is a unique initiative not only for Enzo but actually in the area of bone wound healing.

This is not only -- we have two candidates, two sets of candidates, as usual. We have a broad approach. One of them represents a series of injectable peptides and the other represents a set of medicines that, when they’re administered, would probably [be] administered orally as a pill.

So we have two different initiatives in the area of bone density, bone thickening and we’re moving forward. We think this is a valid product for Enzo and we think it’s an important product, medically.

Thank you, Dean. What Dean’s comments underscore is that we at Enzo are involved in a significant number of therapeutic activities.

We have a very full and growing pipeline of clinical candidates. In addition, we have underway a number of preclinical investigations such as one focused on potential treatment of fatty liver, a condition that is considered a risk in the development of NASH, or Nonalcoholic Steatohepatitis. NASH is one of the top causes of liver disease and a form of chronic hepatitis recognized as a predisposing condition for the development of liver cirrhosis.

Our business model has embraced several fundamental elements. One is to remain, as much as we can, financially self-sufficient. Another has been to utilize our resources wisely. We believe, that Enzo, especially given the breadth of the projects we have undertaken and have underway, remains one of the most efficient in terms of utilization of capital.

Dollar for dollar, our R&D efforts have yielded far greater results than many of our peer companies that we are aware of and we have applied our considerable expertise carefully and I would say precisely. Which is why we believe we’ve attained a high rate of success thus far in the development and clinical phases of our products.

This year, we were also pleased to welcome Dr. Marc Conant to our Board of Directors. He has a vast practical and clinical-medical experience. We believe he will be of considerable value as we move more into our therapeutic programs, in order to achieve our overall corporate objectives.

In conclusion, this past year has been challenging. It’s been complex. It’s been exciting. We’ve started this year off particularly well and we look forward to reporting to you in our first quarter in December.

Thank you for your support and thank you for joining me on today’s call. Good afternoon.

Thank you. A replay of this broadcast will be available until Sunday, October 31st at 12:00 midnight. You may access this replay by dialing 1-877-519-4471. The PIN number us 5274309. International callers can dial 1-973-341-3080 and use the same PIN. This replay is also available over the Internet at www.vcall.com. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful evening. 1

1 Enzo Biochem Inc. Q4 2004 Operating Results