Enzo Biochem Inc (ENZ) 2005 Q1 法說會逐字稿

Good morning and welcome to the Enzo Biochem Inc. first quarter 2005 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 and section 21 E of the Securities Exchange Act of 1934 as amended. Such statements include declarations regarding net 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 developments occurring after the date of this conference call. Our speaker today is Barry Weiner, President. At this time, all participants have been placed on a listen only mode and the floor will be open for questions and comments following the presentation. Questions will be taken from analysts and institutional investors who have received a separate number.I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours.

Thank you. Good morning. Thank you for joining with us today. With me is Dr. Dean Engelhardt who is Executive Vice President as well as David Goldberg, who is our Senior Vice President at Enzo Clinical Labs.I'd like to begin my comments with a brief discussion about the Company's first quarter results which were released earlier this morning. Then we will hear some comments from David Goldberg, who will provide some insights into what has transpired in the operations at the clinical laboratory for the quarter, followed by remarks that I would like to make concerning our life sciences division. Then Dean Engelhardt will deliver a comment on the activities of Enzo Therapeutics, which will include some details about the exciting expanded trials that we are doing for our Crohn's product, which is currently underway. We will then open up the lines for a brief question and answer session.Our first fiscal quarter for the period which ended October 31, 2004, was marked by a number of events. First and perhaps most important was the settlement with the Digene Corp. This litigation settlement resulted in an upfront payment of $14 million and a future minimum guarantee against royalties of an additional 16.5 million over the next five years. As well as having a component for obtaining run royalties to determine the patent which ends in 2018. This was obviously a very important event for a number of reasons and we will talk some more about that further in our discussion.Secondly, on a sequential basis, our life sciences division was able to show revenues that were up about $.5 million sequentially from the last reported quarter fourth quarter of 2004; and we are pleased that this was approximately a 20 percent improvement over that period. Enzo Clinical Labs also showed sequential improvement in operating income of nearly 1.3 million going from a loss of 700,000 in the last quarter to a net income of 600,000 in this quarter. This took place as a result of increasing our specimen count, of better managing our receivables, and also of dramatically enhancing the installation of our EnzoDirect physician office computer systems which ties us in with the physician. These three issues were extremely important which -- in driving the improvements in the bottom line, which we're extremely pleased about.The Company also made significant progress in the development of a new system for Chemi (ph)Luminescence which has utility in our (indiscernible)or in our diagnostic system as well as in our product portfolio for research product. These are very novel new dyes that we have developed that will help to improve sensitivity as well as appeal to the market in areas that we believe we can contribute to improving the scientific aspects of their work. Also, there has been substantial work in the product using our proprietary chemistry systems for the study of CGH or Comparative Genome Hypertization. I have spoken about these products in past calls. These are new formats that have utility in the study and identification of certain cancers and are really quite interesting and are moving to the forefront in a lot of areas of biomedical research.On the therapeutics front, we presented five papers at the Annual American Association for the Study of Liver Disease. These included three in which detailed preclinical work on our new immune system modulator, EGS21. In addition the AASLD presentation identified several potential new lead compounds that could develop into new platforms for the treatment of diabetes and as well post possibly obesity. So we are very very excited about the work that is being done and this could lead to some very, very interesting new product opportunities for our Company. We also in this period studied the -- continued to study a variety of candidates, which we are targeting for the treatment of chronic liver diseases. Dean will comment on that a little bit. Interestingly, we also initiated a new collaboration, one with St. Jude's Hospital in Memphis. This collaboration is working on potential therapies for bone formation, another interesting extension to our work in the area of osteoporosis, one that I think could lead to some very interesting product opportunities as well. And, finally, we laid the groundwork and began again the additional studies that are required in the development of our Crohn's disease therapeutic (indiscernible)which Dean will comment on.As you can see, the quarter has been an extremely productive one for us. First, looking at the financial. It is clear that our performance was favorably impacted by the settlement and licensed agreement that we announced in late October with Digene. This agreement issue you may recall provides for the full and final settlement of the litigation which involved one of our life sciences patents, which was a matter of this particular lawsuit and the grant to Digene of a nonexclusive royalty-bearing license with respect to this patent. Pursuant to the agreement, Digene is irrevocably required to pay Enzo Life Sciences an aggregate minimum of $30.5 million, as part of the agreement we received at the beginning of this quarter the first payment which amounted to $16 million. In addition Digene has irrevocably agreed to pay at least another $16.5 million over the next five years. This payment is subject to a $2 million credit on the monies which we have already received. That is the reason that we booked 14 million instead of the 16 million in cash. And, basically, we will exceed this payment as a credit against future royalties which will run on the products covered by this patent through 2018. As we have stated before, we feel that this agreement supports our view that, with respect to Enzo's patent state, we have developed technology that is unique and groundbreaking. Our scientists have focused for years on areas of medical science that are now really beginning to unfold and Enzo is extremely well positioned to capitalize on this. Turning to the numbers. We reported revenues for the quarter of just over $10.3 million, a slight increase over last year but more significantly a 20 percent increase over fourth quarter of 2004, the last quarter reported on prior to today. While revenues did rise slightly, it is important to note that there were several factors that played into the fact that revenues did not rise even more. First, as was the case in the fourth quarter, there is the issue with Roche Diagnostic Systems, one of our life science product distributors. Because of an ongoing dispute with them, revenues from product sold were not recognized in this quarter. As we reported previously, we are currently in litigation with Roche.Second is the results of our decision last year to terminate our distribution agreement with FE Metrics. Over the past number of months, our internal sales force has made significant inroads in marketing and research product -- in marketing our research products directly to end users. As you can appreciate this is a process that takes time; but we feel with each successive quarter we are making gains in this area. On a sequential basis as noted in the press release revenues were up about $.5 million or about 20 percent. Finally the changing third party reimbursement environment continues to exert pressure on revenues at Enzo Clinical Labs. Despite this, we showed growth quarter over quarter and sequentially. Moreover, while operating income at the labs was essentially unchanged from last year it showed a dramatic turnaround of over 1.3 million in profit from the last reported quarter.Turning now to other financials for the quarter, we showed increases in several expense items. Research and development was up over 14 percent, indicative of our continuing therapeutic activity as well as our life sciences, product development efforts. SG&Awas up over 26 percent year-over-year, reflecting the direct sales initiatives we are implementing at both life sciences and clinical labs. Legal expense was also up as a result of the final cost associated with the Digene action which is, of course, now completed as well as other activities surrounding our patented state.Income before taxes for the quarter was 12.12 million versus a loss of $800,000 last year. We showed a net income for the quarter of a little over $7 million versus a net loss last year of $300,000.Earnings per share totaled 21 cents on a fully diluted basis versus a 1 cent per share loss last year. As has been the case for many years we continue to have an extremely strong balance sheet. Our cash equivalent and marketable securities as of October 31 were nearly 87 million, and working capital was almost $100 million. Shareholders' equity now exceeds 111 million and the Company remains debt free.I would like to turn the discussion over to David. I would like him to comment briefly on the progress of the laboratory over the last quarter and then we will return with the life sciences.

Thank you, Barry, and good morning to all of you who have joined us on this call. Enzo Clinical Labs posted sharply increased sequential gains in both revenue and net income. As Barry said we experienced a turnaround from the last quarter as we saw our net go from a $700,000 loss to a $600,000 gain. We were able to do this despite increases in our cost of services, which is naturally directly related to our continually growing specimen count as well as higher expenses for marketing and other items, such as fuel for our medical couriers and phlebotomy supplies just to name a few. Perhaps as important we have been able to substantially reduce our provision for uncollectibles by over a third from a year ago by focusing on obtaining complete and accurate billing demographics. This has been accomplished by the expansion of our in-house billing group as well as our enhancements we have made and continue to make in our Enzo direct computer systems that we install in our client physicians' offices. These improvements allow us to more rapidly capture that demographic information and have it transferred to our in-house laboratory information system. In the coming quarter, we are planning to rollout an even more updated version of the system that will allow all of our patient service centers to be linked, speeding up the process of serving those individuals that wish to have our professionals draw their blood samples. To serve our growing client base and our expanded geographic coverage region, we have recently opened up new centers in New Jersey to allow us to more effectively cover those physicians and patients in our service area. Internally we are in the midst of updating a number of key laboratory instruments. Our growing volume has made this necessary. Once installation and on-site estimates are completed we should be able to cut our specimen turnaround time down, which will not only allow our results to be transmitted to our client in an even more expeditious manner, but also to produce some labor savings as well.Going forward through fiscal 2005, we are confident that we will continue to reap the rewards of the investments in marketing and information technology that were made in 2004. In addition to the afore mentioned upgrade to EnzoDirect we are planning further additions to our in-house testing menu, especially in the area of genetics, rheumatoid arthritis and infectious disease among others. Our ongoing program of evaluating our send out tests vis a vis what we perform at our core lab has resulted in an actual reduction in our reference lab cost, despite the fact that the number of samples tested has grown substantially over the past year. Barry.

Thank you, David. The lab has actually had a very good run this quarter. We are pleased with the progress. We are implementing a lot of different programs. A lot of new products are coming online. We are seeing a very strong renaissance take place at the laboratory.With regards to the Life Sciences I am pleased to report that we have continued to make progress towards our strategic goals in that division. As I said earlier, Enzo Life Sciences showed a sequential revenue gain in excess of 20 percent for the quarter. Enzo's field sales force continues to penetrate a number of key accounts and this quarter we began to focus our efforts internationally.Historically many U.S.-based life science companies have used distributors for overseas marketing and sales efforts. And we continue to do the same. However, in this past quarter we embarked on a program where our own sales reps are working directly with our end users to better gauge the impact of our distributors. We expect to be making some changes in the way we market our products in Europe and Asia in the near future as we ascertain the most prudent use of our sales in marketing dollars.This quarter we also began a marketing campaign for an important new kit used in the genomic analysis area. Our BioArray RNA amplification and lay billing system provides researchers with all the reagents they need to study gene expression from both plants and animals. The Enzo kit has several advantages over other commercially available kits in that the Enzo system uses our own proprietary nucleotide mixture for better generation of a signal for the researchers to see. The maintenance of the sample integrity through multiple rounds of amplification is itself a critical benefit since starting materials are often scarce and fragile. This is a critical issue for researchers. Finally because we provide a complete kit our customers are assured that each of the components optimized to work with each other giving them confidence in their end result. We were also busy during the quarter in the design and development of an enhanced Enzo Life Sciences website due for launch in early 2005. This website will provide our customers a true e-commerce portal through which they can securely order. Until recently, ordering research products was almost always done via purchase order placed over the phone or fax. However we are seen more and more orders that are being placed using credit cards that are issued by certain entities such as that is now being done at the International Institute of Health, as an example. We shall now authorize users to place orders without having to go through the effort of obtaining purchase orders, which can slow down the ordering process. In addition when the orders are placed via credit card, funds are transferred to Enzo immediately upon placement of the order thereby improving our cash flow. Additionally as our overseas efforts start to increase such orders do not carry the expense of foreign currency transfers. The site will also have improved navigational capabilities allowing customers to more easily access the site's content and giving us the flexibility of marketing complementary products to them more easily. We will also to quickly upload technical updates as specification changes, so our customers will be able to keep current on product offerings.Here might be an appropriate place to speak to you on some of our legal issues. As you know, it is difficult to comment specifically about ongoing litigation but what I can tell you is that each of our matters that we are involved in is in process. With respect to our action against Affymetrics (ph) the change of the new motion was granted in January and the actions of the parties are now pending. Our suit with Roche is still in early stages of discovery while our action against PE Biosystems and Amercham (ph)are scheduled to have discovery closed in early May 2005. With respect to our action against (indiscernible), discovery began a few weeks ago. I can't give any further details about these matters except to say that we are following them through with the utmost of diligence and with the ultimate goal of obtaining the most favorable results we can. You should understand that every one of these actions has little downside for Enzo. While we naturally cannot guarantee the results of any of these actions we are naturally very pleased with the Digene decision. And we believe it should serve us well in future settlement discussions and litigation.I'd like to turn to therapeutics for a few minutes. I would like to make a few comments and then ask Dean to give us some of his views on what has transpired over the last quarter. We are pleased to inform you that we have commenced the next phase of work in the area of our Crohn's trials; and we do hope to report preliminary results to you in the future. During the last quarter, we presented five papers at the American Association for the Study of Liver Disease, which took place in Boston. In three of these papers we detailed the preclinical work we did to show that our new immunomodulatory agent EGS21 worked to impact responses in the body by modulating the function of natural killer T cells. The work presented showed the compound significantly ameliorated graft vs. host responses and have had a cellular carcinoma in animal models. We also showed that EGS21 apparently place an immune modulatory role in the progression of non-alcoholics (indiscernible)hepatitis or NASH. And glucose intolerance such as exist in Type II diabetes. Based on these papers and their acceptance, we are planning to expand our efforts to study EGS21 in several additional human trials. With regards to our hepatitis B. virus therapeutic, EHGH 899. We have just completed the manufacture of a master sell bank cnd are now valuing the next steps to move those programs along. Our HIV trial has been subject to a number of manufacturing and regulatory diligence issues that had to be overcome. This has been taking us time; but like any other pioneering approach, it is being approached with diligence and caution and we are optimistic that it will emerge very very shortly. On that note I'd like to turn over to Dean and he has some comments I believe on some of the other specific issues that have transpired in the therapeutics area.

Thanks Barry. I want to make comments on the HIV clinical trial. The Crohn's clinical trial, the trial for fatty acid, fatty liver or NASH and the development of stronger healthier for the management of osteoporosis.So let me begin by talking about HIV. The HIV trial has -- is proceeding as quickly as we can. Barry has mentioned some of the issues that we have been dealing with. You must know the Company is fully dedicated to moving forward for this project as expeditiously as possible. When we began the Phase I, II clinical trial our intention is to increase the number of blood cells that are resistant to HIV -- or should I say the proportion of blood cells that are resistant to HIV. And the goal of this trial is to develop an immune system that is fully functional even in the presence of HIV. We are fully committed to moving forward on this process as quickly as possible and you as our investors must understand this is the number one, one of our No. 1 priorities in therapeutics.Crohn's disease. We announced the clinical trial data at the end of last quarter and we have moved into an expanded Phase II B double-blind randomized clinical trial. The results were positive in the clinical trial data that we'd reported and our intention now is to continue to accumulate data to the point where we can reasonably expand the trial into a Phase IIIand also into a multicenter continuing to make it a double-blind randomized trial. One of the variables in this second arm of the clinical trial is dosage; and we are changing the dosage slightly in some of the subjects we're dealing with to see if that has a better effect. But, again, I reiterate, as we reported the results were positive in this clinical trial and we are moving forward as quickly as we possibly can to get this product out.When I decide what to do during the course of the day, I start with the most advanced products first. Our intention is to get a product out as quickly as possible and, again, you must understand that. The Crohn's product is a little unusual compared to the standard methods of treatment of Crohn's disease. It is not an immune modularity agent. It does not shut down the immune system or create a condition where the body's immune system is crippled in some way so that it no longer is able to produce the symptoms of Crohns disease but in addition also is slightly crippled for normal immune functioning. Our product is a natural body product that is produced for each individual person. The product should have -- has shown no adverse events, and it should have no outbursts of events of the type that all of the traditional medicines that exist have. In particular the immune modulatory agent like Immuran and the steroids like prednisone and even the new biologic products all which shut down the immune system. Our reagent has this unusual characteristic. Not only are the results positive but in addition, it probably will have no safety problems that are associated with the traditional treatments for Crohn's disease. So from that point of view we feel we have a strong competitive advantage as soon as we can get this product into a sale. Thirdly, we are dealing with a condition that actually is emerging as a major health concern in the United States, which is fatty liver. It turns out about 2 percent of all Americans have a condition where they are accumulating fat at an unnaturally high rate in their livers and some significant minority of those Americans -- in fact it is also true for all of the Western world economies. In some significant minority of those people the liver becomes inflamed and actually begins to be destroyed or injured because of this information process. Now this is called nonalcoholic Gaddo (ph)hepatitis. And it is present in a very high rate and associated with a number of pathologies.We discovered in animal models systems that the compound that we're calling now EGS21, which is one member of a class of compounds, and we are involved also in a little combulatory (ph) chemistry to see if we can -- we can improve it any. But we have discovered that this compound manages NASH in two animal models. This has provided enough information. Not only managing Nash but also creating a condition where we are relieving glucose intolerance. In other words, these animal model systems have symptoms similar to Type II diabetes; and we find that our EGS21 is able to relieve the symptoms.We are moving ahead as quickly as possible to deal with human subjects with NASH. We have finished; we have completed the safety trial using this compound and as soon as it is expeditiously possible, we will begin this trial on human subjects.Lastly we have discovered a class of compounds that will interfere with an inhibitor of bone cells. That is to say as human beings grow older, the ability to make bones very often becomes compromised; and then weak bones are characteristic of the aging process for many people. We have discovered a compound that will interfere with the biochemistry, causing these bones not to be produced and we have developed this optimum (ph) animal model system and it works very well. This compound is -- leads to the strengthening of bones not just the laying down of mineral bone matrix; but actually the laying down of natural bones and within our animal model system the bones are stronger and healthier upon the addition of this compound. Again we are moving -- this is a class of compounds which, of course, we are not going to describe in any great detail but which of course are proprietary according to our understanding. Propriatary to Enzo Therapeutics. We are moving ahead as quickly as possible, again, to get into safety trials and manufacturing of one of the lead compounds that we have identified where the strengthening thickening of bones in a natural healthy way as a method of treating this thinning of bones characteristic of many of these people of the aging process. Now while I say our top priorities are our lead products, we -- I will reiterate that we have a portfolio in excess of 20 preclinical products that we are working on. Remember the principle of Enzo, because of the way we are financed and set up, the principle of Enzo is that we are not a one product company. We are a company that will produce 1,2,3,4 continuous products until we hit the successful one. Also remember because of the way we are set up we truly believe every product we are putting in the clinical trials will work as a medicine. And that is our commitment to you.

Thank you, Dean. The therapeutic division is emerging with extraordinary strength. I think we are -- for a company our size -- dealing with a number of extraordinarily viable compounds that could emerge into important therapeutic products.I'd like to conclude with a few comments. Throughout our history, Enzo has been unique among biotech companies. We've realized early on that the identification and modification of DNA could serve as the foundation for new exploration and products in the health care field and we have concentrated on developing and enabling technologies that have opened the field of modern biomedical research to produce novel approaches and products. Much of what we have accomplished to date is embedded in a patented state that we believe is extremely valuable. Valuable in the sense that we anticipate realizing significant future product development from it and valuable, too, because we expect anyone who we believe infringes on our science will be held accountable. As important as the Digene award was monetarily, it also underscored the fact that our proprietary technologies are potentially highly valuable in developing new novel treatments and new tools for the diagnostician. We have an extraordinary company here and we are very much focused on getting as much value out as we can for our shareholders.Thank you and I would like to entertain questions now.

(OPERATOR INSTRUCTIONS) Ron Vincent. Morgan Stanley.

Great presentation, guys. I have a threefold question. First, how long does the sales force currently, what -- how large is your pipeline and thirdly, how long does the sales cycle for new customers?

Sales forces. The life sciences sales force currently embodies about eight individuals in various locations around the country. The sales force is growing significantly. We are in the process of adding more individuals to broaden our reach and scope. This particular sales force has been targeted towards the institutional side of the clinical research market meaning the large Pharma operations out there which really goes to your question of the sales cycle. We have been focusing on the segment of the market that we believe constitutes the largest return in the shortest time to us and that is large Pharma, who is utilizing our products, particularly our BioArray products in the area of screening for new therapeutic compounds. That cycle is a bit longer than a small researcher. It could be a six- to nine-month sales cycle because obviously you have to -- we're dealing with large contracts such as the one we executed with Glaxo SmithKline recently. These are long-term supply agreements which have to go through a variety of different levels to get approval by. But we are very pleased with the penetration to date. We plan to keep continuing that as I commented in my remarks. We are addressing the overseas markets which constitute a significant proportion. We have individuals that have been working through the overseas markets, trying to establish a base with our distributor partners out there and that is improving as we move on.In the clinical labs light side of the market. We have 22 sales reps and that is also growing. That -- we recently made the decision to expand our markets into New Jersey and lower Connecticut. We saw an opportunity to build on the lab and we have really increased the size of the lab sales force quite significantly over the last year. And they are making nice inroads as well. So overall we are committed to building sales, both in life sciences and in laboratories. And we feel that coupled with the sales force our product pipeline is increasing in both divisions as I mentioned in my call. The trick in the life sciences area is to continuously introduce innovative new product that is going to drive the researcher to expand his horizons and to be on the cutting edge and we definitely are on that cutting edge right now. In the clinical laboratory, our product portfolio is also increasing because we are bringing in-house more tests as our volume grows, which will help to improve our margins at the end of the day as well as to provide a service to the clinician in a more rapid turnaround time capability for his testing procedures. Next question please.

Keith Marquis with Value Line.

I was just wondering if you could give us a timeframe as to the new product rollouts from the research business?

There are a number of products which are coming into onto stream at this point in time. We just relaunched the amplification system that I spoke about that was just recently done. The ads are moving out right now. Again, this product will take us probably one or two quarters to get this into the system in a full complement. This CGH product is due somewhat near-term. I can' give you the specific time because it is going through a lot of print QC issues right now. We tend to beta test all of our products. We feed them into the market. We get results back from our researchers around the country before we introduce the product. It is in that stage right now so that should be coming out sometime in the near future; and we have probably three to four other new products in the next three to six months that we are working on. So we -- again it is critical that we keep attempting to fill this pipeline up and we have made a very concerned effort to do that. Next question, please.

(OPERATOR INSTRUCTIONS) Otis Bradley, Guilford. Otis Bradley: Two questions. Couple years ago there was a lot of excitement about a diagnostic -- clinical diagnostic product. What has happened with that? Secondly, could you discuss progress with hepatitis B?

The diagnostic system I believe you are referencing is what we tend to call our inchworm system. It is a very unique approach for doing gene-based diagnosis in a very rapid methodology. The approach that we have taken is to look at the ability to replace culture-based technologies, which have a very long timeframe for giving results to a physician. We have been working on this for quite some time. We have been beta testing our system now for well over a year at the laboratory. But it has been more than a beta test. We have over this last year developed adjunct products that will enhance the sensitivity of this product, a variety of new color metric and die systems that will be used in complement with this to drive the mechanics of this system even more than it is currently in. I can't say too much but I can say to you that many and some are -- some of the technology that are involved in this system and approach are technologies which are covered by intellectual property, which is the subject of some of the litigations in which we are currently engaged.That being said, we are seeing an interest to partner these particular approaches and technologies and we are in active discussions to do that. I can't give you anything more specific on what will transpire but the system is alive. It is well, it is working very excellently and we believe it may have a material contribution to the future of diagnostics.

Is the technology the same as litigated in the Roche problem?

I can't comment on the issues but there are complements of that technology which would be involved in the Roche litigation, yes.

And hepatitis B?

We have completed a master sellback on the manufacturing of hepatitis B. As we have spoken in the past, the key challenge for a hepatitis B product has been to produce a product at a cost point that would allow it to have penetration in the Third World markets. We believe we have accomplished that. Dean Englehardt: We have a -- what Barru os saying I will just repeat because that is the correct answer. We have completed a master sell bank which is a method to make sure that the lifetime of the product you always have the same product produced under current good manufacturing factors as far as we can judge. And this is a significant step in the yield of the material which we took some time to increase dramatically. The yield of this material has been maintained after this process. So the next step will be to initiate manufacturing sales for this product.

And are you in Phase II?Dean Engelhardt:We have been in Phase II open label. As soon as we have this material manufactured we will initiate a Phase IIdouble-blind randomized at multiple centers. We have enough data from the open label to indicate that this is warranted.

I would also comment because I have done this publicly. It is also -- this is also an area of probable partnering for us. There are negotiations in motion right now because of the parts of the world where this product would most likely have an impact it is, in our opinion, wise to probably have partners there.

So would you likely partner before you entered the double-blind testing?

Not necessarily.

You could do that yourself overseas?

We could, yes.

Yes. Next question please.

Moran Davis with VH Blair.

I have two questions. One with respect to the liver, at the medical applications for the liver. Does it have therapeutic possibilities in addressing cancer? Then I want to ask in terms of restructuring your clinical activities and the capital investments you are making in that area. What is the impact going forward on future profitability and even, possibly, separating it from the Company? Dean Engelhardt:The first question. We are talking about EGS21. There are two answers to that question. First answer is that we actually have animal model systems in which this material was used to manage with significant positive results, the panacelluluar carcinoma and in addition in separate animal model systems to manage a melanoma. And we have every reason to think that this these data could be transferred to human subjects as soon as possible.No. 2, when you have an inflammatory response in the liver, it is inevitably associated -- at a low rate, it is inevitably associated with development of liver cancer. And without having any data to substantiate this, it is our full anticipation that NASH subjects by being removed from the category of having an inflamed liver will have a decreased probability of developing cancer. I don't want -- I'm not trying to be a scare person. The number of people who would get cancer from a chronic inflammation in the liver would be very low. But it is our anticipation that the number would drop we can eliminate the the inflammation.

I would like to deal with the capital investment issue. We have made significant capital investment in the labs over the last, actually it has been six months or so. This has been comprising significant investment in our IT, our informational technology, our computer systems. It has also been any area of upgrading our automated machinery for doing work. These investments have an impact because the machinery itself impacts the reagent cost and as our volume goes up our reagent costs now can be reduced. So in many ways we are able to get better efficiency at a cost savings as we move forward. We are upgrading all the systems that are needed. We feel that we are at a point in the laboratory today where as we demonstrated this quarter, our volumes are now ticking up and we are seeing an ability to drop to the bottom line material value from our efforts. In terms of the strategic design of the Corporation, your question of potentially separating the divisions, all of our three divisions are looked at and accounted for and managed independently. Right now, we have somewhat of a symbiotic relationship where our clinical laboratory does serve to support our therapeutics work. It does serve to support our life sciences in terms of being able to run internal clinical studies and research studies for ourselves. At any point in time upon the maturity of these divisions it is inevitable that these divisions will ultimately find their own position independently. We are always looking for optimizing the values of our organization. I think our structure as has been designed is very opportunistic to capitalize on an opportunistic issue, whether it is a venture, a sale, a merger or just an expansion of our business. We do, and we are completely aware of this particular opportunity and it is a central focus in how we run our businesses today.From the investor's part of view, I believe our corporate structure is one of our most significant attributes and one that I think can, at a point in time, move to generate significant shareholder value. Next question please.

Otis Bradley with Gilford. Otis Bradley: Two questions. Would you give us a timetable on when you think you'll finish Phase II on the Crohn's crimes and apply for Phase III? And secondly is there any possibility you might market the product in Israel after completing Phase II?Barry Weiner:In terms of a timetable I am reticent to give you any specific timeframes. What I can say to you is that we hope by the summer or early spring to be able to deliver the results of the expanded trials. Based on that data and it could be earlier, it could be a little bit later. It depends on the enrollment timeframe that takes place. We will then move to progress to a Phase IIIstudy. So I think you'd have to look through the spring of this year and then we will be able to determine of the statistical data that emerges from this trial, what the timing will be to move forward. In terms of marketing the product, that is a decision that has to be looked at. I don't have a specific answer for you. I guess it will depend, again, on the results of the trial and where we -- what strategy we ultimately adopt. For moving that into the United States which is the predominant market for us as well as Europe's. Next question please.

Keith Marquis with Value Line.

Couple of questions related to your margins. I was wondering if I read you correctly, it seems like gross margins on your clinical labs might improve going forward, due to the capital investments you made and possibly on the research side with the larger volume of business?

That is correct.

Okay. If I could ask you one other thing. Related to the hepatitis B product, would you be manufacturing that yourself or would you possibly be looking for a partner to manufacture that?

Yes we have developed the capability to manufacture ourself. But that ultimate decision will be defined by a partner and a locale and the specific requirements that that partner may have which may be different than our requirements here in United States.The key for us was developing the process in the cell bank that would give us the economic manufacture of the product. That can be easily transferred if we desire to do so. Some parts of the world you may not want a partner because of the non-respect for patents that take place around the world. So you may want to keep proprietary your manufacture. So it will really depend on the specific partner, and where that partner is located and how that partner wishes to deal with the local environment with where it is selling.

Thank you. If I could follow up on that, would you -- are you saying, then, that you -- O understand you have the ability to manufacture it, but you have the capacity to go commercial at this point or is that something that would have to be built up?

We have the capacity to produce enough to run our clinical studies. And that, at this juncture, is the critical volume for us. In that period of time scale of, assuming the studies move up again we do not wish to make capital investment if it will not prove to be required or necessary or if a partner will prefer to do that on their own. So at this point we do have scale capability for our trials. We have economic capability for the trials and we are proceeding on that basis.

Thank you very much.

At this time I want to turn the floor back over to Mr. Weiner for any closing or further remarks.

Again I would like to thank you for joining and listening to us. We look forward to speaking with you again in March when we release our second quarter report. Have a good day and goodbye.

Thank you. A replay of this broadcast will be available until Monday, December 27th, at 12 AM midnight. You make access this replay by dialing 1-877-519-4471. The PIN number is 5484581. 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.