Enzo Biochem Inc (ENZ) 2008 Q3 法說會逐字稿

Good morning and welcome to the Enzo Biochem Inc. third 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 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 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 embody 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 the development 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'd like to turn the floor over to your host Mr. Weiner, the floor is yours.

Good morning. Thank you for joining us. With me today is Drew Crescenzo, our Senior Vice President of Finance; Dr. Carl Balezentis, who is President of our Life Sciences Division; and Dr. Christine Fischette, who is President of our Therapeutics Group.

I will make some brief remarks and then my associates will also have some comments with regard to their areas of responsibility and review their activities after which we will open the floor up to questions. The results of the third quarter ended April 30, 2008, were posted last night and I trust everyone has seen them. The press release is available on our website in the Investor Relations section at www.Enzo.com for anyone who has not seen it. As I've mentioned before our strategy is dedicated to the enhancement of each aspect of our business and promoting our value proposition, which is built upon four very independent yet integral activities, Life Sciences, Clinical Labs, Therapeutics and intellectual property activities. Increasingly we are seeing results of this effort. At Life Sciences we now are having a growing presence in this market both through acquisitions and also through highly effective personal and online marketing.

The integration of Axxora with our original business and also 10 P in Brussels has moved smoothly and seamlessly. Now, we have added to our Life Sciences group Biomol, and with Biomol, we have acquired a knowledgeable team and an exciting complementary and proprietary product line and among other assets a presence in the United Kingdom. This could open up a door for us to get more deeply involved in pharmaceutical companies in the drug development activities as well.

While the sales increase in Life Sciences from the acquisitions have been impressive, our press release for the quarter plainly shows we have yet to fully realize the bottom line benefits thus far because of the necessity to apply purchase accounting to these acquisitions. However, as inventory turns this will become less of a factor and in the case of Axxora should cease to be one soon. Biomol sales since it was acquired after the April quarters end, will be included starting in the fourth quarter that we are now in.

Enzo Clinical Labs in the Fiscal third quarter posted lower volume due in large part to a surge of business from a new healthcare Company customer a year ago. As that business settled down and we came more selective year-over-year comparisons were affected; however, what we may have lost in test count has been somewhat made up in higher margin tests that increasingly are becoming the norm for us. Our and the medical professions growing use of esoteric tests includes a growing proportion of the business in molecular diagnosis. At the same time our program to increase efficacy and bill collecting has continued to be reflected in this quarters reduced provision for non-collectible receivables which is at its lowest in years. Enzo Clinical Labs remains profitable and is essentially in line with the proceeding December quarter.

On the intellectual property front we are still awaiting the deposition on the first phase of the oral arguments held at the Board of Patent appeals and interferences U.S. Patent Office. These involve patentability issues affecting Applera's and Enzo's patent application in the field of nucleic acid sequencing. The appeal process involving decision in the New Haven courts arraign to the Applera case continues to be under way.

Based on our attorneys opinions, we feel very comfortable that we should be prevail in this action. We're very optimistic that a significant result is achievable here. As for our other phases before the Federal Court in New York City, we're hopeful that the trials will get under way in the near future. This litigation involves multiple defendants and goes to the issues of contract violations in addition to infringement. Our litigation expenses for the quarter were sharply lower than a year ago and indeed is compared to the preceeding December quarter but this reflects only timing issues and no less intensity on our part to see these matters to a successful conclusion.

Just a short note with regard to the third fiscal quarter results which Drew will take us through in just a moment. Financial and otherwise the quarter was another period of significant progress. We posted gains in total revenues and in operating income and a $1.7 million improvement in the net loss. The net loss per share was 40% below a year ago. Again as I noted earlier without the full earnings benefit because of purchase accounting rules of recent acquisitions and while we have used some cash to make acquisitions, our financial position remains very strong with approximately $2.60 per share diluted cash. This puts Enzo in a very solid position when you consider and act upon other growth opportunities, particularly in the present market and in the financial environment. On that note I'm going to turn it over to Drew to give you a background on the financial performance for the quarter.

Thank you, Barry and good morning. I'll first expand on Barry's discussion of the fiscal 2008 third quarter results and then turn to the operating results of Enzo Life Sciences and Enzo Clinical Labs. I'll then conclude with a recap of the nine months results both consolidated and by segment. Our operating results have shown advances over the prior year quarter. Our net loss has declined by $1.7 million to $2.1 million or $0.06 per diluted share, as compared with a net loss over prior period of $3.8 million or $0.10 per diluted share. The improvement is the result of increased overall revenues and lower expenses in the period. Net revenues for the fiscal third quarter increased 36% to approximately $18.9 million from a year ago's period revenue of $14 million. Life Science segment revenue increased alone $6.2 million or almost three times over the prior year period. Primarily attributed to revenue contributions from the May 2007 at Axxora and modest increases in royalty and license fee income. Clinical lab revenues decreased 11% to $10.3 million in the 2.8 period as compared to $11.5 million in the year ago period. Our gross profit improved by 19% to $9.3 million in the 2008 period, inclusive of positive contributions from Axxora and offset by higher costs and somewhat price competition at the lab.

As in the previous three quarters, the gross margin has been negatively affected by a pre-tax fair value inventory adjustment which was 300,000 in the current quarter, arising from the acquired Axxora inventory. We expect this adjustment will continue through fiscal 2009 as we recognize the comparable adjustments related to the Biomol acquisition.

During the 2008 period, research and development costs were $615,000 lower than the year ago period due to timing of activities in the therapeutic segment. R&D expenditures are attributed to a clinical trial activity in the therapeutic segment and activities within Life Sciences. Our selling, general and administrative expenses increased by 35% or $2.2 million, of which 82% or primarily all of it was due to the contributions and the costs relating to Axxora. The percentage increase is consistent with the sequential quarter. Exclusive of Axxora, the increases were in the areas of compensation or related costs, professional fees offset by lower information technology costs to service lab clients. Despite certain increases in SG&A, as a percentage of revenue, it's unchanged from the year ago period. The provision for uncollectible accounts relating to the clinical labs as a percentage of lab revenue is 9% a 300 basis point improvement over the prior year quarter and consistent with the sequential quarter due to the results in the previous enhancements of our billing and collection procedures at the lab.

Our legal expenses which fluctuate based on level of activities, declined $2.3 million to $800,000 in the current period. Decline is due to the current activity for the ongoing legal litigation proceedings. We continue to protect our intellectual property and incur costs on ongoing litigation matters.

Our invested cash and cash equivalents earned interest of 720,000 in the 2008 period as compared to $1.5 million in the year ago period. The decrease in interest income is attributed to both lower invested balances and a decline in the average rate of return of 200 basis points. Our invested balances declined due to the purchase of Axxora and other uses of cash for Operations.

Lastly, and important to note, we continue to not record the corporate income tax benefits of the statutory effective rates which would be not less than 34% on our pre-tax losses. This affects both the current and the prior periods. The ability to record these income tax benefits would positively impact our net loss and our EPS.

Our financial condition remains strong. Enzo remains debt free. As of April 30, 2008, we had cash and cash equivalents of nearly $96.5 million and working capital of over $107 million. Stockholders equity was approximately $137 million.

Let me now turn to the segment operating results. At Enzo Life Sciences, segment profit was $1.1 million in the current period as compared to 400,000 in the 2007 period. The results from the Axxora acquisition continued to benefit Life Sciences. Dr. Carl Balezentis will comment on these results in greater detail later. Product revenues grew by $6.1 million or over 700% with the recent acquisition of Biomol International, we expect continued product revenue increase in future periods. As noted the increase is in royalty and license fee income of 100,000 were attributed to increases in royalties under the Digene arrangement and the Abbot Molecular arrangement. Gross profits within the Life Science division increased by $2.6 million to $4.2 million. Operating expenses, specifically SG&A increased by $1.9 million mostly attributed to the Axxora. R&D inclusive Axxora was unchanged from the prior period, as a percentage of revenue, SG&A expenses of Life Sciences declined to 33% of revenue as compared to 47% in the prior year period.

Looking at Enzo Clinical Labs, our segment operating profit in the current period was $400,000. The decline in the 2008 period is due to decreased specimen volume attributed to competitive pricing and shift of payers to lower reimbursement providers. Moreover, in the prior year 2007 period we experience significant service volume increases from the changes associated with United Healthcare, Oxford agreement whose volume in the current period has been impacted by competitiveness in our service area. Our gross profit decreased by $1.1 million due to lower service volume and higher testing costs. SG&A increased 8% or $300,000 over the prior year quarter. As previously mentioned, the decrease in our uncollectible accounts decreased $400,000 over the year ago period.

Turning now to our year-to-date results, for the nine months ended April 30, 2008, overall revenues were $56.6 million versus $35 million in the fiscal '07 period, a 62% or $21 million increase. Gross profit rose $7.9 million or 39% to $28.6 million and our net loss was reduced by $2.5 million to $7.4 million or $0.20 per share. In the prior period our loss was $0.29 per share. This improvement in net loss does not reflect other income of $2.7 million in the 2007 period which was attributed to the Sigma lawsuit settlement and the payment from a foreign distributer. Exclusive of such other revenue the improvement year-over-year for the nine months would have been almost $5.2 million or $0.14 per diluted share.

We continue use to see growth and profitability in Life Sciences and expansion opportunities at Enzo Clinical Labs. Exclusive of the aforementioned $2.7 million of other income , the Life Science segment operating income increased $1.5 million or almost two times from the comparable 2007 period. The Clinical Labs segment reported improved segment operating income of $2.4 million or $700,000 over the prior year nine year period. Barry?

Thank you very much, Drew. I would like to turn the call over now to Dr. Carl Balezentis, who is the President of Enzo Life Science. As you know it has been a very active time in this division between the issuance of number of key new patents as well as the substantial financial investments we've been making to build Enzo Life Sciences into a major player in the research products field. Carl?

Good morning. I'd like to start by commenting on the vision and the strategies that we have for the Life Sciences division and then conclude with some brief comments on the financial highlights for the quarter. As you've already heard from Barry, we closed last month on the acquisition of Biomol International as we continue to execute on our strategies to build the Life Sciences division into a leading international Life Sciences reagents Company. Even though this deal was consummated only a few weeks ago we have already had a number of meetings within and among the various ELS entities designed to allow to execute on a strategic integration plan that will maximize the assets we have both developed and acquired as well as lay the foundation for future growth.

I have stated in the past the mandate given by upper management was to build this division into one that has more than 50 million in revenue within a three year timeline of my joining Enzo. As I reach my second year anniversary, you can see that we are well on the way to not only reaching this goal but exceeding it as well. We are accomplishing this with prudent investment into opportunistic acquisition targets which have led to a rational increase infrastructure, a substantial strengthening in our manufacturing, marketing, product development and distribution capabilities on a global basis. This vision for Enzo Life Sciences includes building a strong market position, specific high growth areas within the cell biology, cellular biochemistry, also genomics and cardiomics arenas. The acquisitions of Axxora and Biomol have provided us with unique opportunities to establish market leadership positions within these areas and become market leaders in targeted market segments by providing high value assays and products. Coupling this with broad and deep intellectual property base that Enzo has built over the years and continues to build to this day, we are well positioned to exploit these markets to their fullest potential and I'll provide one such example in the following minutes.

Internally, we will continue to invest in new product development to fuel organic growth that exceeds the industry average of 6% but our IP estate when coupled with the technology platforms we have developed will also be exploited in order to secure additional high value licensing arrangement that will allow us to establish and sustain market leadership positions in some of these key areas. In terms of Product Development, we have already identified a number of new product opportunities that take advantage of of our intellectual property and expertise. These span the Alexis, Biomol and traditional Enzo product brands and target specific markets we have identified as high growth opportunities where we expect to establish market leadership. We have just released the first of our fish probe product lines for confirmation of array comparative genomic hybridization providing researchers valuable information as they look for and study genetic abnormalities. This is a perfect example where we utilized our intellectual property to negotiate a license agreement and gain cross-licensing rights and then couple this with our own IP expertise to develop products in a market where we believe we can establish a market leadership position. Later this year, we have a plan launched scheduled for a number of kits and assays for high content cell analysis and screening which are product lines that are important for pharma as part of the drug discovery process.

As I have mentioned previously it is essential that we build a strong infrastructure to support our growth. We have developed and continue to expand a capable team which will be central to driving innovation, continue to assimilate new acquisitions, and deliver increased operating efficiencies which will generate significant cash flow that we will utilize for continued investment. Over the next year, we expect to continue to see significant top line revenue growth as well as improvements in our gross margins, which should come from several areas. First, we with will see the elimination of purchase accounting rules which cost us several basis points in gross profit as we move through the next several quarters. Secondly the increased manufacturing Product Development capacity that we recently acquired will allow us to internally produce a greater number of products thereby providing the opportunity for further margin improvement. However, you should also note that at its core, Enzo has always been a bottom line driven Company. As we look to increase our margins through integration and operating efficiencies, we may experience some short-term fluctuations on the top line, without, however, a corresponding effect on profitability. In the very near future, however, the operational changes we are putting in place today will bring increased revenue growth and margin improvement.

Since my arrival we have been consistent in the communication of our vision and strategies. More importantly we have delivered on our promises to transform the Life Sciences division over the coming year we will continue to do so by executing our strategies which support our vision. I'd like to conclude with some brief comments on the quarters financials. Comparing Q3 2008 product revenue versus Q2 2008 product revenue we've realized a 16% increase in Q3 over Q2 for the Life Sciences segment. Gross profit percentage, product sales has improved sequentially this quarter and we are are optimistic that this trend will continue as we continue to focus on profitability. Furthermore if we compare the 2008 nine months product revenue to date for the entire Life Sciences division to 2007 on a pro forma basis, meaning looking at our sales revenue as if we had acquired Axxora at the beginning of fiscal 2007 we realized a 13% increase over 2007, demonstrating that we have been able to seamlessly transition Axxora customers to Enzo with minimal disruption. We have every reason to believe that we will have the same experience with the Biomol transition.

As we move forward with our operating plan we will continue to seek out additional strategic opportunities, be it an acquisition of either a Company, a specific product line , or a technology if we believe it to be accretive to our operations. I look forward to reporting on further progress at our next conference call. Barry?

Thank you, Carl. As you can see, we have been in a very active state in the Life Sciences area over the past 12 months. We are looking forward to the furthering of our penetration and our value enhancement in this particular division and we are very very pleased with the performance to date. I'd like to now turn the call over to Dr. Christine Fischette, Dr. Fischette is President of our Therapeutics group and she will share with you some comments on the direction we will face within Enzo Therapeutics.

Yes, thank you very much, Barry, and good morning. I'm very pleased to speak and update on where we are and how we have progressed during the last quarter. As I indicated last time, our goal is to build a fully autonomous, integrated operating entity that has the capability for expansion and growth. By developing and accelerating our pipeline we can position Enzo Therapeutics as an entity that can grow organically as well as become a source of drug candidates for eventual out licensing or partnering in those therapeutic areas where Enzo cannot go forward alone. That is those areas that require a significant expenditure, global regulatory relationships and marketing muscle.

We already have a number of products in the clinic as well was a robust pre-clinical program that presently is generating multiple candidates in high profile areas. As you may recall from our last conversation, we've now reached a stage where it is in the Company's interest and in our shareholders interest to focus our activity on the drug candidates that have the best chance for development and commercial success. Our theme has been and continues to be one of focus. That is we are pushing fourth each of our candidates on a selected basis, enhancing their development status and product profile and producing a Gold Star package suitable for either regulatory permission to start clinical trials in the U.S. in the form of IND, or to out license or partner them to a larger pharmaceutical or biotech entity that has the financial, clinical, regulatory and marketing expertise to bring our products to their full commercial potential.

Turning to our clinical program, our priority is to advance two products. Optiquel, our candidate for the treatment of autoimmune uveitis which has completed Phase I in an open uncontrolled trial 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, our goal is to complete all of the pre-clinical pharmacokinetic, toxicologic and manufacturing studies required by the FDA in order to initiate a clinical study in the U.S. via an IND. To this end, we are well on our way towards accomplishing this goal. Our primary toxicology study of six months duration has been completed with no drug related adverse effects due to Optiquel. The additional studies required by FDA have been completed. All draft toxicology study reports have undergone expert review and are in the process of being finalized for submission.

Our mutogenicity and gene toxicology study have been completed with no adverse findings. Our cytotoxicity study has been completed and the drug has proved safe. Our pharmacokinetics study to determine the extent of absorption is about 50% completed. With regard to drug supply and manufacturing, we have put into place with a contract manufacturer the studies required by FDA for analytical validation and these are ongoing. So you can see we have done quite a lot of work in the last quarter to move this process forward.

We are planning to file for an Orphan drug designation in the U.S. this year and following that, we will file an IND using the electronic submission process. We are presently surveying the infrastructure necessary for the e-submission process and we are putting in place what is required to implement a publishing system that will allow direct, two way correspondence with FDA and all of its departments. Considering all the missteps that could possibly occur with paper submissions and lost or misplaced documents, this is of obvious importance; however, this is not a matter of just pressing the send button as in an e-mail. An FDA compatible system requires a significant amount of infrastructure and specific technology to transfer our Word documents into an acceptable format. We have initiated a process to determine the scope of this work and will continue to explore and implement this critical system.

For Aloquel, our target protein preparation, our double-blind placebo controlled study is on track for completion end of this year as we previously related to you. Pending confirmation of our previous indication that Alequel has been official and has an excellent safety profile, we plan to file an IND with the FDA next year for this product as well. Simultaneous to our clinical program, as you may recall, we are investing heavily in our new state-of-the-art discovery platform involving the Wnt signaling pathway, an area of research which is presently at the forefront of discovery at major pharmaceutical and biotech companies. The Wnt pathways describe the complex network of proteins most well then for their role in embryogenesis in cancer but are also involved in normal physiological processes in human adults.

We have identified key targets on molecular structures that we believe are promising areas of exploration. Our scientists have identified active sites on those macro molecules via computational screening and through an integral process, they have identified small molecules that interact directly with those sites. Enzo scientists then synthesize new chemical entities and tested these novel small molecular weak compounds that interact with these key sites. We have screened them in biochemical and cell based assays and have selected viable candidates to test in standard pre-clinical pharmacologic models and we found them active in very high profile areas such as metabolic diseases and (inaudible) necrosis of the jaw and others.

Enzo Therapeutics is currently expanding its in these programs and will further explore their therapeutic potential in more complex and more modeling systems and in a variety of animal models for other therapeutic areas. We will continue to advance these drug candidates to identify their specific mode of action, to complete testing for safety, pharmacokinetics, absorption, drug ability, manufacturing considerations, and other parameters. Our intent is to produce a Gold Star package so that we can license these products or develop them internally for niche areas. We're very pleased and excited about this line of research and see this platform technology as a pipeline generator, a solid foundation for significant growth of Enzo Therapeutics.

Next, we are working to advance our pioneering antisense gene platform with our in house developed 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 therapeutics where the goal is to exercise long term control over a perpetually mutating virus. Although there is a number of anti-viral therapeutics on the market for HIV, there's a constant battle for a drug that remains effective despite viral mutation which of course is an ongoing process. It also must be remembered that our proprietary vested technology theoretically may be used for other therapeutic areas as well. This remains an opportunity for further future development as the technology available for outlicensing.

As you may recall, following our earlier Phase I trial, which met with technological success and confirmed safety of the Vector, we have a Phase I-II trial ongoing. Our one patient in this study continues to do well and we continue to be comfortable with the safety profile of our Vector technology. This is especially important given the current regulatory environment and FDA scrutiny of safety of developing end marketed products. We all read the papers. Enrollment of additional patients into the study has been challenging but we are exploring further approaches to completing the study. Another product in clinical development is EGS21, our small molecule candidate for the treatment of NASH, non-alcoholic sciatic hepatitis, it's a type of liver disease. This study is currently ongoing in Israel and we await the results.

In summary, I believe we have a bright future based on a strong scientific scaffold with a number of opportunities that we can explore to develop and grow Enzo Therapeutics. Fortunately, we are not dependent on any one drug or one technology, allowing us to expand, explore, and reap the benefits of our scientific insights. We plan to develop our drug candidates with a view to outlicensing, partnering or commercializing specialized niche products in the U.S. Pending robust data that confirms efficacy, safety, and especially in the current environment, its cost benefit. I look forward to a period of high, intense activity and an exciting future.

Thank you, Chris. Again, the therapeutics activity has been incredibly intense over the last three to four months. Hopefully we will start to see some material benefits emerge from these programs that we are engaged in.

On these remarks, I would like to close the conference and open it for questions. Our next Conference Call will be in October when we will report on the results of all of fiscal 2008 which concludes on July 31. Just as a footnote, last month, I made a presentation at a major institutional investor conference in Europe. It gave me an opportunity to visit with a number of existing European investors as well as a group of new investors and it's an interesting footnote that I gauged the reaction in Europe to be very favorable to the activities in the U.S. and the fact that we now have multiple assets throughout the European corridor that has served as a very added plus in their interest in our activities. On that note, I'd like to wish you well and open the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Jeffrey Frelick of Lazard. Please go ahead.

Yes, thanks for taking the question. Barry, any communication whatsoever you can speak to regarding what's going on with PTO? Have they given you any indication of how much longer it will be or have they at least acknowledged by inbound calls from you or your counsel?

We have had no communication to speak of at this point in time. We are awaiting their response to the interference proceeding. It is well overdue. Unfortunately, we have no basis to be able to find out what is the timing on this. We are aware that there is a considerable backlog in that particular agency and we have been apprized that decisions are emerging on cases that preceded us by quite a few months, so we are just awaiting the decision. There's not much more we can do.

Okay, so maybe the recent decisions are the PTO maybe are two or three months ahead of you guys?

Or even more than that it appears.

Okay.

There are decisions that are coming out that were four to five months ahead of us.

And then any update on the New York cases?

New York cases are progressing according to the events that we've been made aware of. We are awaiting some trial dates. There's still a little bit of discovery activity that has to be concluded but we're optimistic we will have some dates emerging from this, hopefully some time, we should have some answers some time this Summer.

Okay. Dates coming out soon and do you think that the court dates will be this year or into next year?

I don't know the answer to that.

Okay. And then also, one more legal question. Update on the Connecticut appeal?

Connecticut appeal is in process, and we're just awaiting this to play itself out.

Okay, and then with respect to the lab business, can you give a little bit more detail on the strategy now going forward? Obviously you talked about some attrition, some pricing, some decreasing and specimen volume. Kind of what's going to be the strategy I guess going forward for Enzo on the clinical lab side?

Over the last six months or so as we have spoken in the past, we are attempting move the lab more to an esoteric testing base, these are higher margin forms of tests. It's a trend that is very apparent within the industry. There is a publication out that projects approximately one-third of all clinical testing volume will be esoteric based over the next five years so we feel that it is a target market that is predicated to move towards.

I think just to address the shortfall in volume in the clinical laboratory, a year ago, we had this enormous bolus of business which came in on top of us in a very short time frame, in a one to two month period. We had this huge influx of business, at that time, much of our salesforce activity was dedicated to absorbing, integrating and putting into place the necessary requirements to maintain and sustain that business. This required infrastructure enlargement which we did, as we have spoken in the past, we actually have acquired and are now moving the entire Life Sciences group into its own independent facility to make for expansion room in the clinical lab to be able to grow and prosper not only in organic volume growth but through geographic as well as product diversity growth.

I think what happened over the last two quarters is that there was a settlement, a settling of the business to a certain degree and in the clinical lab business, there is always an inflow and outflow of activity. I think our sales group focused a significant amount of time to the integration and absorption. I think at this point in time they are now comfortable with that and hopefully they will be moving forward to again address the new business development activities which I think were put a little bit behind as a result of this huge influx of business. I think strategically, hopefully we've seen the what I would call the integration settlement. We are now moving forward with the business. The infrastructure has been expanded so that the absorption capacity is quite adequate to grow at this point in time, so I'm optimistic that in conjunction with new development of tests and product growth as well as geographical growth, the clinical lab will start to move forward in a positive direction.

Okay so it's just more salesforce kind of took their eye off the ball in the last couple quarters on new business? Nothing to do with menu offering or anything like that?

Not at all. I think that's exactly it on the head. Basically we had a focal point on integrating and absorbing and I think we have to shift a little bit of the emphasis now to new business development again.

Barry, one more question on the clinical lab business. On average quarter, with what percent of business falls out and what percent new accounts are kind of picked up and added to this system?

Over the past few quarters we've been looking to, well, our plan is to balance attrition with new customers and some departing and as Barry mentioned in the last quarter our marketing effort was a little bit off so it was probably a higher attrition than we had planned.

But I guess my question, if you go back over the last couple years what's typical attrition in the business, 5% maybe?

I think it's a rule of thumb had in the clinical lab business, you can look to 5 to 7% attrition per quarter as an average.

Okay.

In the industry. That ebbs and flows depending on there are insurance mix issues here, there are a whole bunch of variables that could affect that.

Just one final question for Carl. If I look at the Biomol acquisition, nice add-on to run up the product offering with a functional proteomics business line. Going forward, anything that you see that the product portfolio must have and then anything that would kind of be a nice addition, nice to have?

Certainly if you look across Alexis Enzo, Biomol, what you see is about eight specific product categories that each of those have that we're trying to, we have some market presence in and we want to establish at least half of those market leadership in. When you look, there are some glaring obvious ones which I don't want to necessarily go into all of the details of but yes , there are, and we target those and their strategic things that we want to go after so we aren't just going after acquisitions just to fill revenue and what not but there's some obvious ones, a few. But we have very nice coverage now, to go for two years ago we probably had four categories of specific areas and now we're at 21 to 24. We have some real opportunity now to build those areas, to build those product lines but there are a few gaps.

Absolutely.

Okay, I'll jump back in the queue.

Next question, please?

Thank you. Our next question comes from Robert Smith from the Center for Performance Investing. Good morning.

Good morning, Bob.

This is a question for Carl. Carl, what's your gross margin target and what kind of critical mass do you have to achieve to get there?

Oh, I think we're at critical mass, honestly and I think we just need to, we have some operating efficiencies that will get us there. It's over 50%, as an initial target. We would like to get that higher as we go through the following years.

How much higher do you think you can get?

Well, you can look at some companies but they're only reaging companies can be up to 70%. It just depends on the mix. Really what we do focus on the margin, it's important but really we want to, how much operating profit are we bringing to the table, so a lot of times we'll focus on the gross profit but in those margin, a lot of times it's more important what you bring to the bottom line. Some companies have a 15% operating gross margin and yet they throw off a lot of cash to the bottom, so we don't want to just focus only on one thing. We really focus on profitability.

And in therapeutics, a question, did I hear correctly that Alequel, your idea is to file an IND in '09?

I think the response is we will file an IND subsequent to the conclusion of the testing that is in process at this point in time. That can take place this year, or it could take place after January. It just depends on how the data flow emerges.

I thought it was mentioned in '09.

Well, Chris said next year meaning, we have a July 31, fiscal but sometimes I think that gets a bit confusing.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from Robert Gold of Century Investments. Please go ahead.

Yes. I'd first I'd like to congratulate Dr. Carl Balezentis, who I think has done a wonderful job here and I have two questions. One regards the enrollment of the HIV candidates in San Francisco, in the May 22, New England Journal, there were two centers, one where the disaster occurred at the University of of Pennsylvania that threw everything back in gene therapy but they just completed another study as did a group in England and there was an editorial in the May 22, New England Journal encouraging such. I was wondering why in spite of this or despite this there's still such difficulty in the enrollment of patients out in San Francisco. That's my first question.

Well, this protocol is a very difficult one for patients to under go. It is actually involving gene therapy of course which some people are afraid of and it also involves radiation which--.

I'm well aware of the protocol. Yes. It's not, but it's been done. It's not so unique, ablation therapy is not the most unique thing in the world.

Absolutely. We know that it's not unique. And the physicians know that it's not unique but the patients, however, are much more reticent when it comes to total body radiation. So--.

So is the problem that you can't find a candidate to enroll? I'm not sure why it's over a year and you only have one candidate. I don't understand why you use the term "Challenging" because that always worries me.

Well, I think the word challenging is because the process of gene therapy is a challenging process in the medical world today.

I'm well aware of that.

It carries with it multiple oversight and scrutiny and perhaps unnecessary diligence to confirm a safe pathway. We have been very cautious in the execution of this trial. We've done so purposely because of the very very extreme oversight we face both from institutional sources as well as the federal regulatory sources.

Well, that's why I mentioned the fact that they were able to get things back on track at the University of Pennsylvania where the whole, where everything came off the tracks. So I'm just, I wouldn't imagine that the scrutiny was any less at the University of Pennsylvania than it is at UCSF, and so I still don't get why it's taking so long?

All I can suggest to you is that the internal organization as well as the regulatory oversight has been extremely conservative. We pay the price for what others have done before us to a certain degree in forcing parties to be more diligent in their oversight perhaps. The good news I think is that the process has shown at least in the one patient that we've seen so far, the patient is doing really well. We're pleased about that and we are very much interested to see the development in the direction of this test being processed go forward.

My second question regards the inflammatory bowel disease studies out of Israel. I had, originally it was supposed to be submitted last year and now I gather the data still is not ready so that I just want to get a real time line, at the annual meeting it was now supposed to be this year and is it now being put off until '09 or did I misinterpret what was said?

I think you misinterpreted what was said. We are awaiting the conclusion of this arm of the trial. There are patients that are still running. Patients over time were added to replace patients that have dropped off during the period of time.

You expect the study to be done when?

We expect the study to be concluded this year.

And you expect then submissions to be this year or next year?

It will depend on the timing within the course of the year when that happens, whether it will fall within this year or next year.

Thank you.

Next question, please?

Thank you. Our next question comes from Bill Dupree of RBC Wealth Management. Please go ahead.

Yes, this is Bill Dupree. I have followed Enzo for numerous years. I have listened to numerous conference calls, read a lot of material that Enzo has put out, and there's a lot of questions that need to be answered. Investors want some answers. One is do you remember Barry, 8.5, 9 years ago on a conference call, you and Dean Engelhart were talking about this diagnostic platform and both of you talked about it and then Dean said that in a typical situation, a lady comes to the physicians office, has some kind of an illness, and Dean says okay, the doctor says okay, we'll perform this diagnostic service and then why don't you just have a seat over there and in about 30 minutes we'll have an answer and then he elaborated on that and since then, in written form, and on conference calls, you have mentioned that you believe there's a $19 billion market. Now, where are we? That's been years. Investors need some answers.

The system you're referring to is a genetic based amplification system for doing clinical diagnosis. This is a product and process that was in development for quite a period of time. It has intellectual property issues which are interwoven with some of the legal issues that are ongoing currently and in many cases, it is intertwined with some of the ongoing legal issues that we are engaged with with some of the parties. My suggestion to you, we do know that the system is effective in its capability to amplify DNA. It is cost effective, it is time effective. We have run this particular capability in house for quite a long time. We have been developing applications of this technology, and we feel that it will be a part or parcel of some of our activities with other companies in which potentially we have litigation issues with. We are looking forward to the resolution of some of these litigations which would free us up and allow us to be able to exploit this type of technology more effectively and we're confident it will be. Now the next question, please?

There appear to be no further questions at this time.

Thank you very much. We look forward to chatting with you at the next conference call in October.

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