Enzo Biochem Inc (ENZ) 2008 Q2 法說會逐字稿

Good morning. And welcome to the Enzo Biochem Inc second quarter 2008 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 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 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.

I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours.

Thank you very much. Good morning. And thank you for joining us for our fiscal 2008 second quarter conference call. I'm joined here today by several members of Enzo's senior management who will be speaking about activities in their respective areas of operation. Last night, we issued a press release describing our earnings for the quarter and six months. I trust you've had an opportunity to review it.

Let me first touch on some of the highlights of the second quarter. Looking at the results of operations, you can see that we are continuing the revenue growth and earnings improvement year-over-year. Revenues were up sharply in both operating divisions. Life Sciences revenues rose to $7.5 million, which was reflective of increases in both product sales in royalty and licensing income. Enzo Clinical Laboratories revenues increased by over 18%, as we saw increased specimen volume and increased esoteric testing year-over-year, the year over the prior year, I should say. The company's overall gross profit was $9 million, a rise of 48%, from fiscal 2007 and our net loss per share was reduced by 22%, or $0.03 per share to $0.11. Enzo Therapeutics under the guidance of Dr. Fischette, who you will hear from shortly, has made notable progress in moving our clinical and pre-clinical products through the pipeline and is building infrastructure as we proceed through the clinical evaluation process. Our performance this quarter reflects the ongoing implementation of the strategic operating plan that we've laid out for our subsidiaries in our previous calls.

This constitutes the building of infrastructure to handle higher specimen volume and the performance of more esoteric tests as we are doing at Enzo Clinical Labs. At Enzo Life Sciences, the Axxora acquisition has allowed us to enter many new segments in the research products marketplace, while retaining control of that customer base. Also, we are looking to expand our reach geographically, and this was demonstrated in our announcement of the consummation of the 10 Ps acquisition. 10 Ps is a leading life science product distributor in Brussels that now gives us a direct sales presence in the Benelux countries.

I am going to turn the call over to Drew Crescenzo, who will review our financial performance. Following Drew's remarks, Dr. Carl Balezentis will comment on the activities that are ongoing at Enzo Life Sciences and Dr. Fischette will talk about Enzo Therapeutics recent progress, as well as on her strategic plan for that division's near-term opportunities. After the formal remarks, I will be happy to turn the conference over for questions. Drew?

Thank you, Barry. And good morning. I will first discuss the consolidated fiscal 2008 second quarter results, and then turn to results of Enzo Life Sciences and Enzo Clinical Labs. I will wrap up and conclude my remarks with a recap of the six months results.

Our overall results have shown advances over the prior year quarter. Our net loss was $4.1 million, or $0.11 per diluted share, as compared to a net loss of $4.9 million, or $0.14 per diluted share in the year-ago period. Important to note, the prior year quarter included a $700,000 amount of other income received from a former distributor, Perkin Elmer. Without such other income, the overall improvement in the current quarter over the 2007 quarter would have been approximately $1.5 million, or $0.04 per diluted share. Our net revenues for the second quarter increased $7.6 million, or 72%, to approximately $18.2 million. From a year ago's revenue of $10.6 million. The results include $5.4 million in revenues relating to Axxora Life Sciences, which was acquired in May, 2007. And increases in royalty and license fee income of $600,000, all in the Life Science division. Clinical lab revenues increased 19% to $10.7 million in fiscal -- in the 2008 period, as compared to $9 million in the year-ago period. Our gross profit improves also by 48% to $9 million in the 2008 quarter. Inclusive of the contribution from Axxora and increases in tests performed in the clinical labs.

As in the previous two quarters, the gross margins have been negatively affected by a pre-tax fair value inventory adjustment which was $400,000 in the current quarter. This arose from the inventory acquired in the Axxora acquisition. We expect this adjustment to end in the third quarter. During the 2008 period, research and development expenses were comparable to the year-ago period. Research and development expenditures are attributed to clinical trial activities in the therapeutic segment, and those incurred within Life Sciences, which included $100,000 attributed to Axxora. Selling, general, and administrative expenses increased by 34%, or $2.4 million, of which 67% of that increase related to Axxora. Increases exclusive of Axxora were primarily related to compensation-related expenses and professional fees.

Important to note, our selling, general, and administrative expenses, as a percentage of revenues overall, declined to 53%, from 68% in the year-ago period. The provision for uncollectible accounts, principally related to the Clinical Labs, as a percentage of lab revenue, is 9%, 4 percentage points improved over the prior year quarter. This improvement was due to enhancement of our billings and collection procedures. Our legal expenses which fluctuate based on the level of activity, declined in the quarter by $700,000 to 1.2 million. As compared to $2 million in the year-ago period. We continue to protect our intellectual property estate and incur costs on ongoing litigation matters. Our invested cash and cash equivalents, which approximated $98.6 million, earned interest of $1.1 million in the 2008 period, as compared to $1.2 million in the year-ago period. Despite higher invested balances, interest income declined due to the lower average return on invested balances.

Lastly, and important to note, we continue to not record the tax benefit up to the statutory effective rate on our pre-tax loss, which affected both the current and the prior periods. Our financial condition remains strong, as of January 31, 2008, we had cash and cash equivalents of nearly $99 million, and working capital of over $103 million. Stockholders equity was approximately $138 million, and Enzo remains debt-free.

Let me turn to our segment operating results. At Enzo Life Sciences, segment profit was $100,000 in the current period, as compared to $600,000 last year. As previously mentioned, the prior year quarter included $700,000 in nonrecurring other income. The integration of Axxora continued in the quarter and we are pleased with the results and expected future benefits. Later, Dr. Balezentis will discuss these results in greater detail. Product shipments grew by $5.3 million or over 700%, principally due to the revenues attributed to Axxora. As noted, the increase in royalty and license fee income were attributed to increase in royalties under the Digene arrangement and the Abbott Molecular arrangement which commenced in the third quarter of fiscal 2007. Gross margins increased by $2.1 million, to $3.3 million, principally due to the Axxora contribution.

Segment operating expenses specifically selling, general, and administrative expenses, increased by $1.7 million, of which $1.6 million was attributed to Axxora. Our R&D costs within the Life Science segment were $1 million, of which $100,000 related to Axxora. Looking at Enzo Clinical Labs, segment operating profit improved by $700,000 to approximately $600,000 in the 2008 quarter. Revenue in the current period increased 19% due to the increase in specimen volume associated with United Health Care agreement, that became effective in January, 2007. Gross profit increased also, by $800,000, primarily due to the higher volume of testing offset by increased testing costs associated with the higher volume.

Selling, general, and administrative expenses increased 11% or $400,000, to $4.2 million, in the quarter. As previously noted, selling, general, and administrative expenses as a percentage of revenue decreased two percentage points to 40% in the 2008 quarter. The provision for uncollectible accounts receivable at the lab improved as a percentage of revenues over the year-ago period.

Turning now to our year to date results, for the six months ended January 31, overall revenues were $37.7 million, versus $21 million in fiscal 2007, a 16.7% increase -- a $16 million increase. Gross profit rose to $18.9 million, from $12.5 million. And our net loss was reduced by $800,000 to $5.3 million. The net loss in the quarter was $0.14 per share, versus last year's per share loss of $0.18 per share. This improvement in the net loss does not reflect other income of $2.7 million in the 2007 period, which was attributed to the Sigma Aldrich lawsuit settlement and the payment from a former distributor. Exclusive of such other revenue, the improvement year over year would have been almost $3.5 million, or 40%.

We continue to see growth and profitability in the Life Science and Clinical Labs segments. Exclusive of the aforementioned $2.7 million of other income in the 2007 period, the Life Sciences segment operating income increased $900,000, or 260%. The clinical lab segment improved segment operating income by $1.8 million over the prior six-month period. Barry?

Thank you, Drew. I would like to turn to some specific comments on each of the operating divisions now. At Enzo Clinical Labs, as Drew indicated, revenue increased over 18%, or about $1.8 million for the quarter, and operating income increased by more than $700,000. This is a result of the increased testing volume we have experienced this quarter. While we are showing record revenues in this division, for both the three and six-month period, we continue to execute on a multi-pronged approach to keep this division well positioned for the short and long-term.

First, we continue to add it to our molecular testing menu. We are adding additional management to the segment of the lab to help triage the many testing opportunities in this rapidly-growing field. We are about to add an expanded panel of genetic testing to Enzo which will allow us to identify a number of the most serious inherited conditions that we see within our service area. By developing this capability inhouse, we not only can look to improve our margins for this line of esoteric testing, but perhaps more importantly, we can substantially improve our turn-around time. Since many of these assays are very sensitive in that they involve a short window between the identification of the genetic abnormality and the treatment, turn-around time is a major concern to physicians. We will be marketing these assays to both our existing clientele as well as adding it as a value-added proposition to our new prospects as well.

Many of these physicians are also those that are enhanced anatomic pathology services, are of interest, and by adding this genetics module to our service menu, we hope to continue to make progress in our esoteric strategic plan. In order to meet the increased demand for lab testing, we are in the process of expanding our main lab facility in Long Island, and this process should be completed sometime later this year. This will allow us to enhance our testing load at the clinical laboratory, and it will also allow our Life Sciences division to have its own autonomous research facility to expedite work that is taking place on that front. In addition to these organic growth initiatives, we are still in the process of evaluating potential acquisition candidates, and should one emerge that has a good strategic and financial fit, we will consider it very, very closely. I would like to turn the comments over to Dr. Balezentis who will comment on the Life Sciences division.

Thank you, Barry. And good morning. Mr. Crescenzo has already given financial information in some detail I would like to start by expanding on some of the financial highlights for Life Sciences segment. Enzo Life Sciences operating profit before purchase accounting adjustments for inventory resulting from the Axxora acquisition was approximately $500,000 and $2.1 million for the second quarter and six months respectively. We will continue to be affected by some acquired Axxora inventory in the third quarter. However, we will not be negatively impacted thereafter. Comparing second quarter 2008 product revenue, versus first quarter 2008 product revenue, we realized a 3% increase in Q2 over Q1 for the Life Sciences segment. Cost of product revenue decreased as a percentage when comparing Q2 and Q1 by 5%.

We want to continue to demonstrate quarter over quarter revenue growth, as well as continued focus on profitability. Furthermore, and probably more telling, if we compare 2008 six months product revenue to date for the entire Life Sciences division to 2007 on a pro forma basis, that is as if we had acquired Axxora at the beginning of fiscal year 2007, we realized an 18% increase over 2007. This demonstrates that we are not simply growing by acquisition, but that we also are experiencing strong organic growth as well. The average growth rate in Life Sciences industry has been estimated to be between 7 and 9%. We have a royalty rate increased as of January 1, 2008, and we expect to see a corresponding increase in royalty revenue for the remainder of the year as a result. We are focusing our efforts to ensure that these positive trends continue in subsequent quarters, as well as -- and we will continue to focus on improved operating profitability.

Enzo New York product revenues were affected by delays and orders tied to supply agreements, much of which was contractually obligated. We had expected shipments of up to 300,000 in each of the first two quarters, and did not realize any revenue from these agreements. We do, however, expect to book this revenue in the third and fourth quarters of the fiscal year. Commenting further on Enzo New York operation, we have restructured their R&D and manufacturing groups over the past several months and expect to see a significant flow of new products being released as a result.

Over the short-term, we will be releasing a new product that incorporates a combination of Enzo IP and expertise. The first of these products is to be field for the genomic analysis research. We expect to release a line of fish probes for nondiagnostic confirmation of array comparative genomic hybridization results along with companion dies and labeling kits. These products were also enabled by our cross-license agreement we entered into with Abbott last year. The second group of products will be a set of Enzo proprietary dies for broad use in cell biology assays that outperform commercially available dies. We will be able to comment in more detail on these once we have filed provisional patents. We expect an early summer release time frame for these novel products and we expect significant revenue to be generated once they become adopted in the science community.

I will briefly comment on the progress of the integration of Axxora. We have established a strong worldwide management team covering all sites. We have nearly completed all of the scheduled integration activities. And as a result, we have executed and are now executing many of the action plans that we feel will continue to contribute to strong revenue growth and will begin to have an impact on improved profitability. The goals set for the recent acquisition and subsequent integration of Axxora, include one, that we maintain the current revenue rate and ensure that we do not disrupt the current business, two that we significantly grow the revenues, and three, that we increase profitability. We believe we are achieving these goals and we are especially focused on point three of improving profitability.

As you may have seen in yesterday's press release, we have closed the acquisition of the company 10Ps, which supports our initiative of increasing the efficiency and effectiveness of our global sales force and distribution network. In this case, the Benelux, which serves Belgium and the Netherlands to Luxembourg, we now have an Enzo owned sales operation in that region and given our recent experience with Axxora, we expect that the integration issues will be minimal and we expect to complete that activity in a very expeditious manner.

Very briefly I want to turn my attention to the other ongoing initiatives in the Life Sciences segment. First, we continue our acquisition programs activities and we expect to continue to make fiscally responsible strategic acquisitions as the opportunities arise and we hope to make some announcements in the near future in this regard. In regard to leveraging the IP assets to develop the relationships that will result in revenue generating activities for the company, we continue to approach and engage and pursue those activities in earnest.

In conclusion, then, in a very short period of time, we have built a global infrastructure, supporting our broad portfolio of Life Science products. We continue to execute our plan and are aggressively pursuing additional opportunities which will allow us to apply our intellectual property and expertise to a broader product offering and accelerate our time to market for new products. We continue to look for opportunities to leverage Enzo IP, to develop additional collaborative relationships with major Life Sciences companies, which will bring revenue to the company in the form of royalties or product sales. And finally, we continue to strive to meet our long-term goals to become a significant player in the Life Sciences marketplace. Barry?

Thank you, Carl. I would like to turn the conference over to Dr. Christine Fischette. Doctor Fischette joined us a few months ago as many of you may be aware. Chris?

Yes. Thank you very much, Barry. And good morning. I'm very pleased to speak with all of you this morning. As you know, this is my time speaking to the Enzo shareholders base and I would like to take this opportunity first to tell you a bit about my background, and secondly to share with you my vision and strategy for Enzo Therapeutics, and also give you an update on where we are and how we have progressed.

I jointed Enzo to head the Therapeutics division after an eight-year career at Novartis where I was an Executive Director on various therapeutic business franchise boards. These boards were responsible for the strategy and the implementation of both development and marketed products. On those boards, I also functioned as head of negotiation in the global business development group, responsible for our pipeline deals for each of those business franchise boards. Prior to Novartis, I spent 12 years at Pfizer in clinical development, marketing and licensing and business development, progressing a number of drug candidates over a variety of therapeutic areas. While at Pfizer, I directed the full development of Glucotrol XL, an antidiabetic therapeutic, from proof of concept, IND stage, through NDA submission, and subsequently to its commercial success as a product generating upwards of $350 million in annual peak sales.

There were two items that attracted me most to Enzo. One is the strong technological foundation on which this company has been built. The other is the depth and breadth of the drug candidates and therapeutic areas presently in the company's pipeline. Enzo's drug candidates derive from different platform approaches, which are capable of producing a progeny. That is, multiple candidates with different chemical structures that may become viable therapeutics for a number of different disease areas. Naturally, having multiple opportunities is a way to hedge our bets in this vicarious drug development world. And this certainly is in stark contrast to many other biotech companies which rely only on one or two products for their future. We are not your one-trick pony.

Our plan here is to build a fully autonomous integrated operating entity that has the capability for expansion and growth. By accelerating our pipeline, we can position Enzo therapeutics as an entity that can grow organically as well as become a source of drug candidates eventual outlicensing or partnering in those therapeutic areas where Enzo cannot go forward. That is, those areas that require significant expenditures, global regulatory relationships, and marketing muscle.

We already have a number of products in the clinic as well as a robust pre-clinical program that presently is generating multiple candidates in high profile areas. However, we have now reached the stage where it is in the company's interest and in our shareholder's interest to focus our activities on the drug candidates that have the best chance for development and commercial success with of course the requisite efforts, including those that can be optimized for outlicensing or partnering. We will therefore be pushing forth each of our candidates on a selective basis, Enhancing their development status, and product profile, and producing a gold star package suitable for regulatory permission, to start clinical trials in the U.S., in the form of an investigational drug application or IND, or to outlicense or partner them to a larger pharmaceutical or biotech entity that has the financial, clinical, regulatory, and marketing expertise to bring those products to their full commercial potential.

Turning to our clinical program, our priority will be more focused on two products. Optiquel, our candidate for the treatment of uveitis, which has completed Phase I in Europe and Alequel, our proprietary treatment for Crohn's disease, which currently is in a Phase II double-blind placebo-controlled trial in Israel. For Optiquel, we are presently completing all of the preclinical pharmacokinetic, toxicologic and manufacturing studies required by the FDA in order to initiate clinical studies in the U.S. via an IND. We are well on our way towards accomplishing this goal. Our main toxicology studies of six-month duration have been completed with no obvious significant adverse effects. We are planning to file an IND this year upon conclusion of all of the necessary studies required by the FDA, pending acceptable results from them of course. For Alequel, our autologous protein preparation based on immuno modulation, we still have a few patients to go. Upon confirmation of our previous indications that Alequel is beneficial and has an acceptable safety and toleration profile, we plan to file an IND with the FDA for this product as well.

Simultaneous to our clinical program, we are investing in our new state of the art discovery platform involving the Wint signaling pathway, which is presently in the forefront of discovery research. The Wint pathway describes a complex network of proteins most well known for their roles in embryogenesis and cancer and also involved in normal physiological processes in adult animals. We have identified key targets on macromolecular structures that we believe are promising areas of exploration. Our scientists have synthesized and tested those small molecular weight compounds that interact with these key sites. We have screened them in bio-chemical and cell-based assays. We have selected viable candidates to test in preclinical pharmacological models and we found it active in high profile areas such as bone growth, osteonecrosis of the jaw, and others. And we are currently expanding our efforts in these programs and will further explore the therapeutic potential in more complex animal modeling systems and in a variety of animal models for other therapeutic areas as well as testing for safety and specific mode of action and other parameters.

We are very pleased about this exciting line of research and see this platform technology as a pipeline generator, a solid foundation for significant growth of Enzo Therapeutics in the future. Next, we are working to advance our pioneering antisense gene platform with our inhouse developed Vector technology currently in use for HIV in a Phase I-II study. The significance of this approach in HIV lies in the fact that it is a possible therapeutic where the goal is to exercise long-term control over a perpetually mutating virus. Although there are a number of anti-viral therapeutics on the market today for HIV, there is a constant battle for a drug that remains effective despite viral mutation, which is an ongoing process. It also must be remembered that our proprietary Vector technology theoretically may be used for other therapeutic areas. This remains as an opportunity for further future development, as a technology available for outlicensing.

Another product in clinical development is EGF21, our small molecule candidate for the treatment of NASH, non-alcoholic steatohepatitis, which in plain English is a liver disease. That is currently ongoing and we await the results. In summary, I believe that we have a bright future with a number of possibilities which could help us develop and grow Enzo Therapeutics. We have a strong scientific foundation, and fortunately are not dependent on any one drug or one technology, allowing us to expand, explore, and reap the benefits of our scientific insight. We plan to develop our drug candidates with a view to commercializing specialized niche products in the U.S., pending convincing data, of course, on the workable infrastructure, and an appropriate market environment, and we will look to outlicense or partner those products that require significant financial development or commercial commitments. I look forward to a busy and exciting future.

Barry?

Thank you, Chris. I'm going to conclude my formal remarks shortly to allow sufficient time for questions. But I would like to make a few brief comments on our legal activities. We continue to expend significant resources on our legal front. We view this as an important investment in which we are committed to securing our rather important intellectual property state. On November 29, oral arguments were held at the Board of Patent Appeals and Interferences at the U.S. Patent Office, concerning patentability issues affecting a Polaris patent and Enzo's allowed patent application in the field of nucleic acid gel sequencing. As the senior party in the action, we hope that the first phase can be concluded satisfactorily so we can proceed into the next priority phase. We are awaiting direction on this and hopefully that will emerge in the very near future. In the priority phase, the board determines who is the inventor first. Historically in about two-thirds two three-quarters of these cases, the senior party does prevail.

In other actions involving a player, we are currently working our way through the appeal process. In a case that was adjudicated in September in the New Haven courts, our attorneys have stated they believe that we should prevail in this appeal action. We believe there is significant upside potential here. There is is no down side risk as we see it, because the patents involved in this particular litigation have already expired. But we are proceeding with the appeals process, and we believe we have a very strong position to feel confident in the overruling of that decision.

Finally, in our other cases, the litigations that we are involved with in the Eastern Court of New York, which involve multiple defendants, which go to issues of not only infringement but contract violations, are moving forward, and hearings have been held on these cases, and we are hopeful that the trials will progress also in the near future. Additionally, on the governance front, we are pleased to announce that Dr. Stephen Kent has rotated into the position of lead directer, and Dr. Kent, if are you not familiar with list background, is a Professor of Biochemistry and Molecular Biology, at the Institute for Biophysical Dynamics at the University of Chicago. Also, we welcomed a new director this year who was voted in at the annual meeting in January. He is Dr. Bernard Caston. We welcome Dr. Caston. He is the director of Cleveland BioLabs. He has served as the Chairman of the Board of that company since 2006. Most importantly, Dr. Caston was the chief laboratory officer at Quest Diagnostics and Vice President of Medical Affairs at the Med Plus subsidiary. He is a Diplomat of the Board of Pathology and he has certifications in anatomic and clinical pathology and subspecialties in medical microbiology. Dr. Caston certainly brings tremendous expertise in the area of clinical laboratory medicine and clinical diagnostics and we welcome him and look forward to his contributions on the board.

I would like to take the opportunity to comment on one more additional item and that is the recent price of our stock, which has been a disappointment to all of us. Obviously, these are turbulent times in the marketplace. Whatever the reasons, I can assure you, it has nothing to do with the commitment throughout our organization to deliver value across the board. We are highly enthusiastic regarding the programs we have under way. We are fortunate that we are in a strong financial position, which we believe will help us to realize these goals.

Now, at Enzo, we have continued to show improved bottom line results, and as has been inferred in the different presentations here, we are driving the direction of profitability. We have attained a dynamic growing position in the Life Sciences market, with the infrastructure to drive both revenue and profit, we are excited about that, and our clinical reference laboratory is expanding so it can handle increased workload and continues to add new testing capabilities to its menu. We have a promising proprietary therapeutic lineup which has a full line of potential in different areas to treat metabolic and immunological disorders which we are also driving with great interest. And we also have the physical plant, the experienced executives on board, and perhaps most importantly, in this market, the capital which we think can allow us to successfully pursue our business objectives.

On that note, I would like to thank you you and turn the floor over to questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Questions will be taken in the order they are received. Thank you. Our first question is coming from Jeffrey Frelick. Please state your company.

Lazard Capital Markets. Hey, Barry, you can hear me?

Yes, I can. Good morning.

Good morning. So just maybe with respect to the patent interference preliminary phase, has there been any communications with the PTO panel in the last 90 days? Have they come back to you guys with requests for additional information? Or the other parties? Anything you can comment on there?

No, there hasn't, to my knowledge, been any communication. We're just awaiting their decision on the first phase of this proceeding. We have been told it does take 60 to 90 days, and as you state, it is beyond the 90-day period. The only direction I can give on that front is that they appear to be running behind with cases, decisions on cases that were argued somewhat before us, now just starting to appear, so unfortunately, I can't give you any more guidance. There is no way that we can infer that. When it happens, it will happen.

Okay. So this is just more of a scheduling issue than anything else, correct?

That's what I perceive.

Okay. So I mean let's move on to the licensing and royalties. Maybe can you speak a little bit regarding the activity surrounding licensing, products and technologies? Any sense of new announcements that we can expect, maybe this year, or just kind of maybe give us an update of what is happening on that front.

As a company, we are engaged in multiple discussions with parties and we have a very broad intellectual property estate. And we have a number of legal actions, as everyone is well aware about. We are in discussions with multiple parties. And it is very difficult to say when something could or might happen. I can only tell you that we are very much engaged in discussions with a number of different parties, on different fronts, and not only on the IP fronts but also in the therapeutic areas as well. So it is a key focus to drive opportunities in the IP front, and Dr. Carl Balezentis has been working on fronts to build value with IP in his respective areas, and we on the legal front are looking to try to define possible resolutions on that front as well. Again, I can't comment on anything specific, but it is a key priority.

Does it seem like it is more frequent? Or the activity has picked up say versus a year ago or so?

I would say we are in serious discussions across the board in many fronts.

Okay. And then maybe on the gross margin side, maybe speaking about when do we start seeing improvement, we were kind of expecting the Axxora inventory impact in this quarter. You commented you will probably see it through the third quarter. And like I said, the first question is, that the end of it, through the third quarter? And when do we start seeing the benefit from -- starting to move, absorb products over to manufacturing, and then also do we see a benefit from acquiring 10P distributor? Does that benefit the gross margin?

This is Carl Balezentis. I just wanted to comment on that. Like you said, we will see some continued inventory in the third quarter, and that will be the end of it. It is done. And then we are putting things in place that are to improve margins to increase our manufacturing of the Axxora products. So you should -- we expect to see this as an increase quarter over quarter, climbing through the next year or two.

Okay.

And 10Ps, we will get some benefit from that, and really, we will build that and you will see some significant growth going forward, but there is some revenue there that we will pick up.

Okay. Well, so the gross margin that you paid your distributorships, where did that appear? In cost of goods?

Yes, it appears in cost of goods.

Okay. And then maybe for Christine, maybe just an update on Alequel, so the study in Israel, timing on the completion, and as far as the data being made public or presented?

Yes. Well, the -- we still have a few more patients to go, on that Alequel study. We anticipate that the study will be finished by the end of this year. And as soon as the results are analyzed, we will be presenting that publicly.

In a conference, likely?

In a conference likely, assuming that it is positive and we are very hopeful and the preliminary evidence so far has indicated that Alequel certainly does has efficacy and sufficient safety and toleration so we are very bullish on this.

And then another question for Carl, with respect to future Life Science acquisitions, would those be more focused on acquiring distribution channels or should we think about Life Science products and content being acquired?

I think it would be more product content, certainly manufacturing, things like that.

Okay. Thanks, guys. I will jump back in the queue.

Thank you.

Thank you. Your next question is coming from [Anthony Pavel]. Please state your company.

Paramount Capital. Good morning. I just have several questions. One concerning the diagnostics business. Carl, when will we see the impact occurring in terms of the revenue mix in -- regarding the esoteric high-end genetics testing, cancer testing, et cetera, versus the core blood and urine testing that accompanies the contracts with both Aetna and United Health Care, and is that an ongoing integration process? Could you comment on your plans to expand the pathology portion of the lab testing? And on a physical plant basis, in terms of expanding your capabilities, and your through-put, in terms of square footage, et cetera, what is going on in terms of the -- with what Barry had mentioned, investing in the diagnostics lab?

I think I will take half of it and let Carl take half. In terms of the question on the testing mix, that is more directed towards the clinical lab there, rather than the Life Sciences division. And we are aggressively moving to shift many of the testing modalities to the higher margin side of the business. That is ongoing right now. We are on a quarterly basis introducing new tests into the mix, and hopefully over the next six to 12 months, we will obtain a critical mass of products in what we call a high margin bucket. So that is an ongoing and very dedicated goal of the clinical lab right now.

And Barry, would that be offering products -- I know you have a license with Abbott. Could you be offering fish, could you be offering potentially hybrid capture platform testing, and could you describe what types of tests? You mentioned the genetic panel that was being integrated into it.

It could be any of those tests that you are referencing. It could be the fish and the various genetic profile tests that are being offered. Carl, maybe make the comment on the infrastructure buildout.

Oh, that, yes, as we mentioned previously, we acquired the adjacent building to our current one, and we are building that out. The Life Sciences laboratories will move over this summer. And that will then free up a great deal of space for clinical lab expansion. So we will have plenty of space over there for them to expand these things. We have plenty of capacity, will be available.

In term, could you also comment on revenue recognition, one thing that was impressive is that at least in the diagnostic part of the business, the ability to recognize revenue from the Aetna and United Health Care contracts is evident, and also, could you comment on that delay in delivery of materials and is that something in terms of kits, is that something that has been fixed, and is it a one-term event?

I will comment on the delay and then Barry can comment on the mix products if he would like. The delay was not on our end. It was on the other end from the ordering, they weren't quite ready and as I said most of that was contractually obligated. Our -- what we want to do is make sure we establish a collaborative relationship so we are working through that and we expect to see that as we said in the third and fourth quarter, and we're ready to deliver. So it is not on our end.

I'm sorry, what was the second question?

The second question, I think Carl had basically answered my concern, the second question is, being able to leverage Axxora and 10P to follow up on Jeff's question, what percentage of the current product profile or menu that's being offered by Axxora and is offered through 10P can be augmented, and then what time period by the offerings, the organic offerings that Enzo has available?

As I mentioned, the integration will be simple and expeditious. We have the Swiss office which is very strong and very close and we will be able to move all of our products through that location.

The same products coming through Switzerland through the Benelux countries, through the United Kingdom?

Yes.

And would further acquisitions in that area be based upon growing out that geographic reach or would they be more U.S.-focused? I mean I know Axxora has offices, facilities in California, but what is sort of the strategy there in terms of creating a global footprint for distributing the Enzo tools and kits?

All of the major markets, we pay attention to, and we look at opportunities, as they arise in those markets, whether it is the Asian markets whether it is the European markets or the U.S. markets and anywhere where there is an opportunity arises, we want to be physically responsible, we will continue to expand our global reach, and you know, it is a good thing that we have a very strong European and global presence.

From a financial perspective, it seems that the Axxora acquisition, or at least the revenues coming out of that are at a run rate that exceeds the $16 million acquisition costs of buying Axxora, and is that correct, and how much more reasonably can we see that run rate of revenue being enhanced in the next year or so.

Well, without giving guidance, you know, you're correct. It has exceeded. As I mentioned, a pro forma basis, combined the entire division has grown 18%, which is significant, so you can do some math, you can see that we are growing significantly. And we expect that to continue. In the near future, we don't see any slowdown right now.

Well, other -- just two more questions. Will other acquisitions, when they're analyzed, follow that profile of acquiring companies with current revenues that have a potential of being enhanced through the acquisition by Enzo?

Absolutely. I think that is the reason we built the infrastructure we currently have now, as we acquire other companies who may not have the sales and marketing infrastructure, we would expand that.

And then the last question is the therapeutics one for Christine or Barry. I think a lot of the drugs, the therapeutics, whether they're proteins, the small molecule program, the win programs have very exciting, but to capture what Christine said, I think the key here is partnering those programs with a larger entity to defray some of the development costs. Some of the major successes you've had on the core businesses of diagnostic labs, and tools and kits have driven a lot of revenue for the company. Therapeutics in an uncertain period generally is buffered by a partnership with a larger entity. Can I ask, is there a potential in the future in therapeutics, if you're able to develop a partnering agreement, to spin off the therapeutics division, as a free-standing entity? Is that a possibility?

I will take part of that, I think, Tony. We are building each of the divisions at Enzo as free-standing autonomous entities. This past year, strategically, we made a discerned decision here to create autonomous activities in each of the divisions. That being that each division could potentially stand on its own. And as a result, any of these decisions could we hope be free-standing autonomous entities. We continuously look at the corporate structure to define how we can best serve the shareholder's interests, and all I would suggest is that over the last year and a half, we have brought in strategic sophisticated management to run these operations, we have defined specific spatial needs and have defined the operations both in clinical labs and Life Sciences, as well as therapeutics, so in terms of corporate structure, this is an evolving type of structure. I think we are fortunate as a company that we have the potential and the opportunity to capitalize on each of these operating divisions, and we're looking to do such. If that means that at a point in time they will become a free-standing entity, that is certainly a step we would consider to take.

Thank you very much.

Thank you. Our next question is coming from [Jack Lasday]. Please state your company.

Good morning. I'm with Smith Barney. Gentlemen, I have a couple of questions here. First of all, Barry, can you give us an update on the inch worm? As of last conference call, you had mentioned that all of the road blocks had been removed and that you were progressing to try to move toward the commercialization of that product. Can you let us know where are you, please?

Yes, that is subject to specific partnering discussions at this point in time. The amplification technology is party to some of the intellectual property interactions that we are engaged in at this point in time. When I said that the road blocks were moved, key patents have been put out there and we were waiting for certain developments on that front. All I can tell you is that it is a component of discussions that we are engaged in.

So are you saying then that there still are some patent-type of road blocks that exist that would prevent you from possibly bringing this to commercialization at this point?

No, I didn't say that.

Okay, I misunderstood then. Let me move on. You had mentioned the stock price is cheap but certainly we haven't seen these prices since I believe back in '99. Have you considered using some of the cash that you've got on the balance sheet for purposes of buying back stock?

Certainly that is an option that is always on the table? I would like to comment that having the capital resources we do have is a very, very beneficial in times such as these. The capital markets have dried up very significantly for companies in the biotech universe. The result is that it is presenting us withdrew business opportunities -- with true business opportunities. And as we look to acquire product lines and opportunities, and valuations have come down-to-earth somewhat across the board and this has given us a unique opportunity to explore and hopefully build value utilizing our capital sources. If the determination by the board is that the best and highest value use of the dollars is to repurchase stock, then that is something we certainly could consider as well.

If you made an acquisition, would it be immediately accretive or would you consider something that potentially could be dilutive initially?

Our focus has always been to acquire accretive structures.

My last question is, with regard to the income statement, you had mentioned that the gross profits were up about 50% to about $9 million, about a $3 million increase. Yet the net loss went from basically $4.7 million to $4 million. Not much color on the release with regard to the expenses. Can you give us a little more color on what happened in the quarter that created the additional expenses to get you down to that number?

With respect to our SG&A, all of these expenses -- although we increased at the gross profit line, you need to consider that both SG&A, R&D, we had the contributions from Axxora, so the significant increases related to the Axxora contribution, and as Carl indicated, the Axxora profit margins, we are looking to increase them, which will impact the bottom line directly. Does that address your question?

Thank you. Our next question is coming from Robert Smith. Please state your company.

Center for Performance Investing. Good morning.

Good morning.

I assume you choose your words carefully, so I'm a little confused and I would like some clarity. In the press release, it says the Phase II-B study of Alequel, our innovative immune regulation approach for treatment of Crohn's disease are moving towards completion and if results continue to favorable we plan to continue to file a new drug application with the FDA. So Chris, in your comments this morning, you said an IND. So do you have the capability of moving from Phase II B to an NDA?

An IND is basically an application to the FDA, which will allow us to conduct clinical studies in the U.S. An NDA, as you well know, is the mountain of material that goes to the FDA for marketing approval.

And that's what I'm asking about.

Yes. Well, we need to file -- we have a Phase II-B study conducted in Israel. Our next plan would then be to, if the results are positive, to then file an IND in the U.S. so that we can conduct Phase III clinical studies in the U.S. Upon completion of Phase III studies, and the FDA will tell us, basically, what they think of our program, normally it is two Phase III studies that are required in order to submit an NDA. So the sequence of events is we finish off the Phase II-B studies being conducted in Israel. If the results are positive, we bring that back to the U.S. We file an IND, which will allow us to conduct clinical studies, Phase III studies in the U.S., conduct those studies, complete those studies, and then file an NDA. Does that clarify?

Yes. As far as the royalty and licensing stream, it appears that the growth rate moderated in the second quarter. Is there something in the first quarter numbers from last year, one-time payment or something that color that?

Traditionally in our second quarter, the royalties are lower than in our Q4 period. So if you are looking sequentially, the royalties do drop from the Q4 to Q2.

I'm looking at Q1 to Q2.

That is just a matter of how we got reported information from our -- from two different companies.

So there is nothing to read into that?

Nothing to read into it. We're on target with our expected royalties.

And finally, what is the time line to say something about the first patient in the HIV/AIDS trial?

We are awaiting that -- I can't say too much about that at this point in time.

I realize, that Barry, but I'm wondering when you could.

Well, we are awaiting -- you know, this patient, which we have been following now for close to a year, has been progressing very well, and we're pleased about that. We have been moving cautiously. It is a very pioneering project. Hopefully, in the near future, you will hear something about this. We are enthused about this process. I don't want you to think that the timed delay in this has been attributable to anything from our direction in terms of optimism on this particular approach. As a matter of fact, as Chris commented, what we're seeing is that the Vector that we've used in this is gaining some really important interest in the field as well. And the only thing I can comment on is that we will report when we can do this. It is a very, very unique and very pioneering area, one which is of high interest in the medical community, and thus we are moving very conservatively and very cautiously.

I'm glad to hear that. How would you define near-term?

I can't comment. It could be in months.

Okay. Thank you.

Thank you. There appears to be no further questions. I would now like to turn the floor back over to Mr. Weiner.

Thank you very much. It has been a rather lengthy call. I hope it has been informative. We are quite enthused and excited about the future directions here. We look forward to speaking with you again at the next conference call in June. Thank you.

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