Enzo Biochem Inc (ENZ) 2007 Q1 法說會逐字稿

Good morning and welcome to the Enzo Biochem Inc. first quarter 2007 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, belief, or current expectation of the Company and its management. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that can materially affect actual results.

The Company disclaims any obligation to update any forward-looking statement 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 in a listen-only mode and the floor will be open for questions and comments following the presentation.

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 us for our fiscal 2007 first quarter conference call.

With me today is Drew Crescenzo, our Senior Vice President of Finance, Dr. Gary Cupit, who recently joined us as President of Enzo Therapeutics, and David Goldberg, who is our Vice President of Corporate Development.

I trust you have all seen the quarter's release, which went out this morning. Drew will, in a few minutes, discuss in greater detail the financial results for this quarter.

Dr. Cupit, who will deliver some comments has a wealth of experience in developing and preparing therapeutics for the market and he will provide some insight as to the opportunities he sees and the plans he expects to put in place. And David Goldberg will also comment on some of the strategic approaches we are considering to better coordinate our activities in various areas of Life Sciences and clinical laboratories.

The first fiscal quarter was marked by several key events that we believe will serve as a bellwether for the rest of this year and beyond for Enzo Biochem. Highlighted by the positive developments on our legal and patent front, we, during this quarter were awarded an Interference and named Senior Party against a patent currently held by Bayer Healthcare surrounding a technology used in labeling DNA that is the foundation for a number of products in the molecular diagnostics field.

We also reported a [inaudible] Markman ruling involving the legal action we brought against Applera Corporation. The court's decision adopted substantially all of Enzo's constructions of key patent claim terms. An appeal of this decision was rejected recently to pave the way for Enzo to establish infringement by ABI Sequencing Products and Systems, essentially moving this case forward.

Additionally last month in a separate action, Enzo was named the Senior Party in an Interference also involving Applera. In this action, an Interference was declared between one of our allowed patent applications and a patent originally issued to the California Institute of Technology involving gel sequencing, which is the primary procedure used for sequencing DNA.

This patent has been exclusively licensed to ABI and involves products with substantial market sales and potential.

With regard to the two Interference actions we recently announced, it is extremely important to note that in both of these actions, Enzo was named the Senior Party. Meaning that in both of these cases, our applications predate those of the patent holders.

In a recent article in the New York Times discussing our sequencing case, it was stated that, quote, "the party with the earlier application date wins about two out of three times."

In a second article, this one appearing in Genome Web, which is a biotechnology industry publication, it was stated and I quote, "that the Senior Party wins 97% of the time. It's a huge disadvantage to be the Junior Party because you have the burden to prove you had the invention beforehand. You have to prove you actually made the invention or that you had a full concept of the invention prior to the other person", unquote.

While we, of course, cannot guarantee the outcome of these Interferences or any other court actions, with these decisions, coupled with the three important patents that we have been granted over the past several months, it is clear that Enzo is being recognized for the important technological innovation in the genomic field that we have generated over the past quarter century.

In addition, this quarter we announced that we had reached the favorable settlement with one of the defendants in the breach of contract and patent litigation actions, which we brought in relationship to our proprietary nucleic acid labeling technologies.

We continue to aggressively pursue our claims with respect to the remaining defendants who include such companies as Affymetrix, Roche Diagnostics, Amersham Biosciences, Perkin Elmer, Orchid Biosciences and Molecular Probes. It is important to note that sales of products in question from these companies substantially exceed those of the party with whom we settled.

Considering what is at issue in these litigations, the markets related to Enzo's intellectual property state are truly considerable. According to industry research studies, the market is around $5 billion in sales for DNA sequencing products currently, which by the way, has market implications not only for diagnostic use, but also clinical development as well.

It is projected that molecular diagnostics represent approximately a $2 billion plus market, and that involving a raise is estimated in excess of $1 billion. When you add these figures to the other patents in other related areas that we have amassed over the years, you will see that Enzo's intellectual property and technology relate to markets that aggregate to a considerable amount.

And remember, this does not include the growth that products in this field could enjoy as they become further employed in potential therapies. What I think is important to grasp is that during the past few months we have established ourselves as one of the preeminent companies in the industry with respect to intellectual property in the genomics field.

As for the Company's financial results about which Drew will speak in a minute, we posted increased operating income at both Enzo Labs and Enzo Life Sciences.

In the case of the laboratory, clearly, we are making good progress in driving down expenses and enhancing operating efficiencies. Enzo Clinical Labs, like most laboratories, is operating in a highly challenging reimbursement environment.

We have attempted to aggressively manage the Company in this environment, tightly controlling our operations. For example, the provision for uncollectible accounts receivable declined 20% in the October quarter from a year ago, reflecting the results we are achieving by placing a greater stress on billing and collection operations.

With the announced relationships with United Healthcare and Aetna and the additional new tests, the lab should continue in a positive direction.

At Enzo Therapeutics, the increase in R&D expenditures reflects the continued activity in this important sector of our business. We have four clinical trials underway and a fifth is likely to be added this year.

We are making a significantly greater investment in this division. With Dr. Cupit aboard, as he will detail in a few minutes, we are confident that we can move things along and even accelerate the progress we have been making.

The other major item in our financials was the increased expenditures for legal services, which is a direct result of our determination to protect our intellectual property estate. As I've said many times, this is less an expenditure than an investment and one we believe is very necessary.

I would like to turn over the call to Drew Crescenzo for a discussion of the details of our financial results and then we will ask Dr. Cupit and David Goldberg to make some comments. Drew?

Thank you, Barry. Good morning.

I will first discuss the consolidated results and then the results of our three operating segments, Enzo Life Sciences, Enzo Clinical Labs and Enzo Therapeutics.

References to the 2006 quarter, relate to the three months ended October 31, 2006 being the first quarter of our fiscal 2007. Our net loss decline to $1.2 million, or $0.04 per diluted share compared to a net loss of $3.3 million, or $0.10 per diluted share in the year-ago period. These improved results were partially impacted by a previously mentioned patent litigation settlement.

On a consolidated basis, our net revenues for the three months totaled $10.4 million, up 3% for the prior year-ago period with $10.2 million in sales. The increase was attributed primarily to the Life Sciences segment.

Contributing to the net loss this quarter was a 20% increase in our R&D development costs arising and approximating $1.9 million related to the increased clinical trial activities, a marginal increase in selling, general and administrative expenses of $100,000, and an increase in legal expense of $300,000 from a year-ago quarter attributed to the ongoing patent protection and litigation costs. These increases were offset by a decline in the provision for doubtful accounts of 200,000, or 20% due to continued improvement in billing and collection procedures over the prior-year period.

Despite lower invested balances, interest income increased 29% due to more favorable interest rates.

Despite our loss for this quarter, our balance sheet remains strong. As of October 31, 2006 we had cash and cash equivalents of almost $72 million and working capital of over $79 million. Stockholder's equity approached $95 million and our company continues to be debt-free.

I will now discuss the quarterly results for our segments. At Enzo Life Sciences, segment profit, inclusive of a $2 million patent settlement, increased to $2.5 million as compared to $100,000 in the year-ago period.

Revenues for the 2006 quarter were approximately $2.4 million, an increase of $400,000, or 11% from the prior year-ago quarter. The increased revenue is attributed to an increase in royalty revenues arising from ongoing licensing arrangements.

On a running 12-month basis, our royalty revenue aggregated $3.6 million and is up 44%. The royalty increase was offset by a $200,000 decline in product shipments.

On a sequential basis, product revenues have increased 20% from the July 2006 quarter. The increase from the July 2006 quarter is due to increased sales and marketing efforts and increased product offerings despite continuing highly competitive market conditions for a number of our Life Science products.

Operating expenses including research and development and SG&A decreased in the 2006 quarter by approximately $200,000.

At Enzo Clinical Labs segment profits grew to approximately $400,000 from $100,000 with comparable revenues for both the 2006 quarter and the year-ago quarter. Our gross profit remains unchanged from the year-ago quarter of 57%.

Our provision for uncollectible accounts receivable decreased $200,000 from a prior year-ago period, with the total provision for uncollectible accounts representing 11% of net revenue as compared to 14% in the prior year-ago period. The decline, which continued from the fourth quarter of 2006, is due to the heightened efficiency we have seen in billing and collection activities.

Enzo Therapeutics operating loss grew from $600,000 to $1 million due to increased client trial activities and the results are within the Company's expectations, considering the ongoing activities. Later Gary Cupit will discuss more of the Therapeutics segment.

Barry?

Thank you, Drew.

Our financial performance this quarter was marked by some dramatic and important approaches to improving our procedures and internal operations. I think that those were reflected in the numbers.

We are continuously working to improve our operating and financial activities and we look forward to this year to see the implementation of approaches that we think will directionally maintain and improve these performance issues.

On that, I'd like to introduce Dr. Cupit. Gary brings to Enzo extensive experience and accomplishment in the therapeutic area.

We now have a team of excellent scientists and scientific advisers to carry out our trials, and with Gary aboard, I think we have an individual who is very familiar with the entire pharmaceutical development process and we believe will help to bring these products through the commercialization process and into commercialization. Gary?

Thank you, Barry.

I'm very pleased to have joined Enzo Therapeutics from several viewpoints. The revolutionary compounds that are in clinical development, the growing momentum of the discovery team, and the commitment of the organization to bring these products to the market. I think that Enzo's ongoing analyses will determine the path that will accomplish that effort.

The evolving demands of healthcare and its intersection with the advances in biopharmaceutical treatments have positioned Enzo Therapeutics compounds to meet both current demands and unmet needs in therapy. With the FDA emphasis now shifted to safety more than in prior decades, our compounds are poised to address these challenges.

Interest from managed care in developing more tailored, individualized treatments to reduce side effects while offering enhanced efficacy, dovetails with the goal of Enzo Therapeutics. Our immunomodulation platform utilizes a concept of inducing individual patient quote, unquote tolerance to evaluate treatments for Crohn's disease and autoimmune uveitis. The potential for approach is to offer equivalent efficacy to currently aggressive treatments but with a more tolerable side effect profile.

In addition, unmet needs in medical care are being addressed by Enzo Therapeutics with the development of our treatment for nonalcoholic steatohepatitis, or NASH, all capital NASH, as it is frequently called. This condition is increasing from a current baseline of 2 to 3% in the adult population.

It is a condition that results from alterations in metabolism that causes a deposition of fat in the liver. The underlying metabolic abnormally is pronounced in patients with obesity or diabetes. Two conditions with increasing incidence in the U.S.

The cause for the concern is the progression from fatty liver to fibrosis, resulting in a decrease in liver metabolism and function. NASH is an increasingly common cause of end-stage liver disease, resulting in the need for liver transplantation, at a substantial cost to society. The projected frequency of liver failure, [at a] hepatocellular, or liver carcinoma due to NASH is expected to surpass that due to hepatitis C.

In a recent study, lifetime medical costs was estimated at over $27,000 for male NASH patients and over $35,000 patients for female NASH patients. This leads to a total cost or burden of $2.7 billion related to patients with NASH.

Projections of societal burden based on current prevalence estimates of 5 to 7 million U.S. adults affected by NASH, predict that between 2006 and 2015, nearly 1 million more people in the United States will progress to cirrhosis, secondary to NASH. There are no medications currently approved for the treatment of this condition.

In the evolving area of gene research and treatment, Enzo Therapeutics has developed a proprietary vector to deliver genetic material targeted to improve the immune status of affected HIV patients.

As I moved into my current position, I have initiated a review considering the resource requirements, market sizes, and competition and positioning of our compounds. For selected compounds from this review, we will seek partnerships for development or commercialization.

For other agents, we are evaluating the potential for Enzo Therapeutics to commercialize products in areas where we may be cost effective in both development and focused in our market approach.

Now for individual programs and development, we are progressing. In the opthalmology arena for autoimmune uveitis, we are initiating additional studies that will support clinical trials for autoimmune uveitis with B27PD in the United States. Manufacturing supplies have been secured for these studies.

This will support the phase I data on B27PD that had been obtained from a completed trial in Europe. This plan has been discussed with regulatory authorities in the U.S. and we have scheduled discussions with the European regulatory authorities.

For HIV program, we are currently actively screening and interviewing patients for participation in this exciting protocol. As a reminder, this is a therapy utilizing a proprietary vector where we take blood from the patients, inoculate it with a form of gene therapy that has the potential to restore the immune system, and reinfuse the blood into the patient. This trial is being carried out at the University of California in San Francisco.

Our compound for NASH, EGS21, is enrolling in a Phase II trial in Israel and progressing. Investigators presented results on the Phase I study at the American Association for the Study of Liver Diseases annual meeting in Boston, Massachusetts, in early November.

The data was well received and was featured in a post conference review published by Medscape. The preclinical model developed and utilized for this disease was presented as a poster and received the top award for research presentations by the society.

Also at Hadassah Medical Center, there are two ongoing trials for the treatment of Crohn's disease, a type of inflammatory bowel disease. The first trial is a Phase II utilizing the platform of oral induction of autoimmunity, or oral tolerance.

This involves the administration of patients of proteins derived from the patient's own gastrointestinal system. Results form the Phase I trial were sufficiently encouraging to undertake the Phase II trial. Enrollment is underway.

Another treatment for Crohn's is the oral administration of EGS21. This compound has the affect of inducing immunomodulation without many of the side effects currently associated with utilized immunosuppresents in steroids. It is also enrolling and progressing well.

In the area of business development, we have recently had discussions with several companies interested in collaborating our licensing compounds and technology from Enzo.

Since these discussions are based on both our preclinical work and our clinical programs, they will continue to mirror our progress on our research and development. Enzo is also actively seeking additional potential partners for our programs.

Thank you, Barry.

Thank you, Gary.

As you can see, we have a rather significant program in place in the therapeutic area. We are actually extremely optimistic and excited as to the directions that many of these products are now taking.

I'd like to ask David Goldberg to deliver some remarks on our ongoing strategic initiatives. David?

Thank you very much, Barry.

Over the past several months we announced two end licensing agreements that are designed to accelerate the pace of new product development. In May, we announced that we had acquired the rights to several patents that allow for construction of diagnostic DNA probes that may be useful in examining various inherited disorders or cancers. Our plan is to produce the single copy DNA probes in Farmingdale and market them worldwide.

In addition, we recently acquired right for several patents related to the technology that might be issued into the future. We also acquired rights to approximately 50 DNA probes developed at the Children's Medical Center and Clinics in Kansas City, where this technology was developed, in which peer review publications have been listed as being able to identify numerous genetic maladies.

Linked to be able to produce products, we are currently planning to add genetic testing assays to our service menu at Enzo Clinical Labs so that we may be able to more fully capitalize on this technology even faster.

Second, in October, we announced that we had received a license to comprehensive non-PCR--based amplification technology that allows researchers to increase amplification from relatively small RNA samples in DNA expression studies. These six patents now allow us to augment our existing line of DNA labeling products by adding a set of amplification systems based upon this technology.

These new systems are in the late developmental stages and we hop to release them shortly.

Dovetailing this technology is the latest product to emerge from our Life Sciences Group. We recently introduced our BioScore Kit at last month's American Association of Molecular Pathology meeting.

This product, which is being marketed to research institutions worldwide, can be used to assess the quality of archived tissue samples to ascertain whether they can be used for genomic analysis. With this product, we are hoping to drive the market for a study of such samples because up until now, evaluating these old specimens was time consuming and expensive, since in many instances full-blown expression analysis needed to be run and the results analyzed before one could even assess the tissue's quality.

With BioScore, this may be eliminated as such specimens could be more easily and economically triaged. Should BioScore prove successful, this could increase the market for gene expression analysis, which in turn could help propel sales of both our new amplification kits as well as our other bioarray systems.

We believe by increasing a number of products available at Life Sciences that we will be able to increase revenues at this division.

These are but two of the strategic projects that we are working on. We are also considering a number of other options and on various levels of discussions in such initiatives as acquisitions of companies for both products and services as well as co-marketing programs, and joint development projects just to name a few. We look forward to reporting progress on these fronts as soon as practicable.

Barry?

Thank you, David.

Let me conclude with a few more thoughts on our intellectual property portfolio, because it is an area that has considerable weight and significance for Enzo into the future. Our pioneering portfolio of patents and technologies, which is coupled with the events of the last few months, specifically the declaration of the last Interference, the favorable court rulings that we believe have placed the Company in an important strategic position.

We are now, I believe, recognized as having designed and created pioneering and fundamental technology in DNA labeling, sequencing amplification and microarrays.

Enzo Biochem has achieved important recognition for our years of research and technological development. This is important as personalized medicine and pharmacogenomics become more and more the fabric of the healthcare world.

Enzo is in, I believe, an enviable position. Not only have we been recognized for our achievements and are working towards monetizing this work, but this IP provides us with a very clear path to further technological advancements.

We have built an impressive technology and patent portfolio here, and the management additions and realignment during 2006 will help us, we believe, to capitalize on this in 2007 and beyond.

On that, I would like to conclude the formal comments and entertain any questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Vincent Hoban of H&L Global Securities.

Barry, good morning. It's Vincent Hoban.

I had a question as it related to the Applera litigation. In terms of their total sales, they do about $2 billion in sales. Could you clarify what your expectations are in terms of how much a percentage of their sales you cover with your patents?

I really am unable to comment on that because this item is involved in a litigation. All I can comment on is that the gel sequencing market is a significant market, as I mentioned. The totality of the market is upwards in the $5 billion range.

Unfortunately, I'm unable to comment on anything specific to deal with any party that we are involved in a litigation. As you are aware with Applera, we have an ongoing litigation in the Connecticut court on issues involving our DNA labeling technologies as well as the gel sequencing Interference, which was just declared. So we are really unable to make much comment on that.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from George [Smoken] of Westrock Advisors.

Good morning, Barry. George [Smoken] here.

Yes, good morning.

You ended your talk, Barry, by referring to the treatment of Enzo as important recognition through the scientific community. That's all well as outlined and reassured by the litigations in the Markman hearing and the other rulings in our favor at this time. Barry, in my opinion, and I'm talking for my shareholders, we have not achieved that recognition on Wall Street, and I feel the major reason, which goes back years, Barry, when I said to you several years ago at two consecutive annual meetings, when are we going to get a major name associated with the Company? Now, that is my question now.

I want to ask you, is it reasonable after all this time to feel that a major name will be added to the Company in the form of a joint venture or anything like that? And in addition, you also referred to me at the last annual meeting, we are working with an major investment banker.

My second question is, if that is so, Barry, are we possibly withholding material information for shareholders? Again, these two questions are for my shareholders that have been asking this me considerable times.

First of all, we have over the years have been involved with many different parties. As you are aware, we have a distribution relationship with Hoffmann-La Roche, which is still an ongoing activity. We are engaged in a litigation with Roche.

We are in dialogue with parties continuously over our technologies. The fact that we have such a broad encompassing IP portfolio almost predicates that we engage in discussions with multiple parties.

To answer your question to the point, we have dialogue ongoing with parties. Our goal here is to optimize the value of our technologies, our patents. I am willing to estimate that we will see relationships emerging.

It is interesting in the therapeutic area. We have been engaged rather extensively recently in discussions over some of our key therapeutic compounds. So I believe that is an area which you will see some activity as well as in the Life Sciences area.

In terms of investment banking activity, we as a company, as you are aware, have not been to the markets for over 30 years to raise capital, yet we have been in dialogue and we have utilized investment bankers on many activities and many fronts in which we have been involved.

And I believe the issue of an investment banker is one that is present when you need one and we, today, have access to bankers, we do call on them from time to time. I believe that this is an area that will become relevant and present when the time is necessary for us to utilize their services.

Thank you. I would like to hand the floor back to Mr. Weiner for any closing remarks.

Thank you for joining us today.

I want to remind you that our annual meeting of shareholders will take place on Tuesday, January 23rd at 9:00 a.m. at the Yale Club in New York City. We look forward to seeing you at that time and hopefully sharing with you additional information as to the directions and focus of our company.

We are all here very optimistic, very excited. Things have been very dynamic for us over the last few months and we are encouraged by the directions of the Company on an overall level.

Thank you, again, for joining us.

A replay of this broadcast will be available until Monday, December 25th at 12:00 midnight.

You may access this replay by dialing 1-877-519-4471. The pin number is 8179354. This replay is also available over the Internet at www.investorcalendar.com.

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