Enzo Biochem Inc (ENZ) 2010 Q3 法說會逐字稿

Good morning and welcome to the Enzo Biochem Inc. third-quarter 2010 operating results conference call. Except for historical information, the matters discussed on this conference call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such statements include declarations regarding the intent, belief or current 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 obligation to update any forward-looking statement as of a result of developments occurring after the date of this conference call.

During the conference call, the Company may refer to EBITDA, a non-GAAP measure. EBITDA is not and should not be considered an alternative to net loss, loss from operations or any other measure determining operating performance. The Company has provided a reconciliation of the difference to GAAP on its website, www.Enzo.com, and in the press release issued yesterday.

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 to your questions and comments following the presentation.

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

Thank you. Good morning and welcome. With me today are a number of senior executives of Enzo, including Dr. Carl Balezentis, Dr. Kevin Krenitsky, as well as Mr. Drew Crescenzo and David Goldberg. After my remarks Drew will provide an overview of our financial results, and then Carl and Kevin will discuss their respective units.

As I have stated before and as I have mentioned in my meetings with analysts and portfolio managers, as well as presentations at various institutional conferences, we are in the process of transforming Enzo to capitalize on the changes that are taking place in the healthcare market today. Our decision to undergo this transformation was the result of both internal and external factors, some of which I would like to touch on.

The ongoing changes in medicine now spurred on by health-care legislation is putting a greater role in addition to treatment on prevention and early detection of disease. Increasing costs have also made the development and clinical testing of innovative treatments and products extraordinarily expensive as well as time-consuming so that new pathways to discovery require exploration.

Enzo's many strengths play to these and other issues. First, our extensive technology and patent estate as underscored by recent important patent actions, which we will discuss in a few minutes, provides multiple product platforms upon which we can generate products and partnerships or otherwise in our own development or generate income through royalty agreements.

Life Sciences is a model of how we have transformed our participation in the global research and development market through both innovative proprietary products and acquisitions. In the process we have developed an extensive and broad global reach involving integrated manufacturing and marketing.

Our Clinical Labs, while continuing to provide outstanding comprehensive laboratory services, is now venturing into molecular and other advanced diagnostics. As a result, we see on the horizon new tools that we can offer utilizing partnerships, licensing and self-developed procedures to broaden our market reach in a very meaningful manner. To do so, we have added capacity and new equipment, and most important we have attracted unusually experienced professionals to our team to help us make our mark in this growing and important area that fits in perfectly with what is the new age of medicine.

Therapeutics has been transformed as well with our preclinical and clinical activities continuing but increasingly focused on utilizing partnerships, licensing and other joint ventures to more fully realize the potential of several proprietary products we own. This approach will allow us to allocate our capital more strategically with the greatest potential return.

Our teaming up with the National Eye Institute, another item we will discuss later, is certainly very much a case in point of this strategy.

Our third fiscal quarter performance was very similar to our prior year quarter performance. Overall revenue growth was up approximately 3% year over year. Our revenue growth was impacted during the quarter by several natural events that were beyond our control.

First, the volcanic ash in Europe affected air travel for a number of days, which impacted our ability to deliver certain products in our Life Sciences business during the quarter. This delayed our ability to recognize revenue.

Europe is a major market for us. Not only do we have numerous customers there, but we manufacture a number of our products and systems at our Swiss facility.

Likewise, the snowfall in the Northeast this winter was particularly severe, which reduced physicians' visits. This was similarly reported to having impacted our competitors in the Clinical Labs business as well. The result reduced specimens in the lab affecting the quarter's performance.

Overall the Company is currently running at a level which is approaching $100 million of revenue on an annualized basis. To put that into perspective, for all of fiscal 2007, we reported about $52 million in revenue.

As the Company's revenue has grown, it has required us and allowed us to make investments in each of our key businesses to support these activities.

In Life Sciences we have been focused on developing new products to capitalize on the strong distribution capabilities we have built both organically and through acquisitions. These R&D activities, including investments we made during the third quarter, have impacted near-term profitability, but should accelerate revenue growth and margin improvement in the future.

Through the acquisition of Assay Designs last year, we have been able to replace low margin, high distribution revenue with the sale of better margin products. Our future success will be predicted on our ability to continue to develop innovative Life Sciences tools.

At Enzo Clinical Labs our results were impacted by higher SG&A expenses related to the addition of professionals focused on developing and commercializing new esoteric tests, which will help drive margin expansion and serve to differentiate us in the minds of physicians in what is one of the most competitive markets in the world.

There are a number of other reasons to view our outlook very optimistically. One is the recent appeals court decision enabling the Company to pursue a claim for damages against Applera Corp., which has since been acquired by Life Technologies. The asserted patents in this case cover pioneering technologies relating to compounds used in DNA sequencing systems used to decipher the genetic code.

The complaint against Applera Corp. and its subsidiary, Tropix Inc., charged patent infringement arising out of the misappropriation of Enzo's proprietary and pioneering patented technologies related to DNA sequencing systems and other products, as well as providing others with unauthorized and prohibited access to the patented products -- to our patented products and technologies.

Recently the Court of Appeals rejected a motion by Life Technologies to reconsider its decision. It means that the case now returns to a trial court for further proceedings.

In addition, on another front, the Board of Patent Appeals and Interferences of the United States Patent and Trademark Office recently issued a decision denying a request for rehearing filed by Siemens Healthcare Diagnostics in a patent infringement preceding relating to Enzo Life Sciences' application for nucleic acid signal amplification relating to branch DNA diagnostic systems. The result of this latest decision is that the judgment of the Patent Office is now final. Subject to any appeals that Siemens might file in Federal or District Court, Enzo will receive a full 17-year patent for all the inventions covered by the claim, commencing on the date of the patent's issuance.

As we previously stated, this technology -- this is the bDNA technology -- is the basis for a number of significant products in the Clinical Diagnostics and in the Life Sciences field, which are currently marketed or licensed by various commercial entities.

In addition, we believe that hopefully soon to be issued a patent -- that this hopefully issued patent will allow us to expand the application of this key technology beyond the scope of gene-based applications into the field of Amino Diagnostics.

At Enzo Clinical Labs, we have entered into agreements ranging from proprietary blood tests for colorectal cancer screening to an oncoFISH server cervical test, another molecular diagnostic tool for cancer detection. Also, an anti-natal infectious disease panel that would bolster our already strong portfolio of women's health diagnostics. We also have signed a comarketing services agreement involving a state-of-the-art medical record system that we can make available to our client physicians, and that is very much in line with a trend to consolidating patients' medical histories.

Dr. Krenitsky will detail these and other developments at the lab shortly.

Perhaps most significantly we have been utilizing the core competencies of our Clinical Labs and Life Sciences groups to position us for what we believe is a major initiative going forward in healthcare, that of Companion Diagnostics. As Major Pharma begin to develop initiatives for the simultaneous development of diagnostic products to accompany their drugs in development, our unique blend of technological expertise across the molecular biology spectrum, coupled with a clinical reference lab concentrated in one of the most valuable and concentrated medical areas in the world, can position us as a partner of choice for such companies. Enzo's size and flexibility allows us to undertake projects that may ultimately not only result in a FDA-cleared diagnostic kit but also a lab-developed test that we can expeditiously obtain necessary approvals and then market through Enzo Clinical Labs.

Also, there may be projects where we can provide a component of our intellectual property and technology to overcome technical challenges that a drug company could face in trying to define or improve the efficacy of a therapeutic compound. Additionally, as big Pharma strains to refill their drug pipelines, they will need to employ methods to help them triage projects so they can decide to terminate a particular project before incurring high levels of expenditures. Enzo is extremely well-positioned to assist Pharma in these and other endeavors, and we look forward to continuing to build our core competencies in this field.

On that note I would like to turn the call over to Drew for a review of the third-quarter financials.

Thank you, Barry, and good morning. I want to take this opportunity to expand on both Barry's comments and Wednesday's earnings announcement -- (technical difficulty)

Ladies and gentlemen, this is the operator. There will be a slight delay in today's conference. You will be on music hold until the conference resumes.

Hello, this is Mr. Weiner again. It appears that there was a drop in the Thai line. I hope you all are back with us. I'm going to turn the call over to Drew Crescenzo to bring you up-to-date on the review of the quarter's financials.

Thank you, Barry, and good morning. I want to take this opportunity to expand on both Barry's comments and Wednesday's earnings announcement for our April 30 fiscal quarter, a period which produced record third-quarter revenues and gross profits. These operating results attributed to the ongoing transformation of Enzo into both a developer and provider of both value-added esoteric clinical tests, as well as unique and higher-margin research products and systems.

Our net loss for the quarter was $4.6 million or $0.12 per diluted share, slightly higher than the year ago period's loss of $4.2 million or $0.11 per diluted share. We have reported improved revenues and margins at Life Sciences. As Barry indicated, unusually severe weather-related conditions in the Northeast in February, a general slowdown of physician office visits, and reduced reimbursement rates for Medicare affected the Clinical Labs service revenue growth. I will explain further in a few moments.

As the table in Wednesday's press release indicates, we also present our operating results on an EBITDA basis. We feel that the EBITDA presentation provides a more accurate picture of our operations. Our EBITDA loss was $3.4 million in both the current and the year ago period. At Enzo Life Sciences, operating results for the quarter are reflective of the continued execution of our growth strategy. Enzo Life Sciences showed topline improvement of $600,000 with product revenue gaining 6% to $11.1 million. Gross profit increased 35% and advanced to 58% as compared to 45% a year ago.

Consistent with the prior quarter, the improvement is due to the shift from low-margin contract revenue to the sale of higher-margin product, realignment of personnel from manufacturing to trading assignments, as well as the operational results from the purchase of Assay Designs in March 2009.

Operating expenses being SG&A and legal increased $1.4 million, primarily due to the impact of Assay Designs and the above realignment of personnel. Segment income before taxes more than doubled to $500,000 from $200,000 a year ago.

At Enzo Clinical Labs, service revenue increased by 2% to $10.8 million due to increase in higher priced esoteric testing volume. This occurred despite the severe weather in the Northeast affecting volume by approximately 5% to a general slowdown of physician office visits affecting volume by approximately 4% and lastly a federally mandated 1.9% reduction in Medicare reimbursement rates in 2010. Additional lab operating costs were incurred relating to our reagent and supply costs, increased headcount to expand our data collection center network, and other personnel to manage the expanded operations and to a lesser extent, as Barry mentioned, the development of our esoteric and gene-based capabilities.

As a result, gross profit at the lab declined to $3.2 million, down from $4.1 million the prior-year quarter. Operating expenses, being SG&A and legal, increased 27% to $4.8 million, primarily attributed to increases in our sales force and management headcount, both partially attributed to efforts to market and develop further our esoteric and gene-based testing capabilities. Dr. Krenitsky will expanding on these initiatives in a few moments.

Our ability and collection activities continued to improve with our provision for uncollectible Accounts Receivable lower than the prior year by approximately $100,000. At April 30 our days sales outstanding is at 45 days, primarily relating to the lab.

Reflective of the above information, the Clinical Labs reported a segment loss before taxes of approximately $2.2 million as compared to $400,000 in the prior-year period. We continue to invest in our businesses. Our research and development expense increased by $100,000 in the quarter and represent 10% of our total revenues.

More specifically R&D expenditures at Enzo Life Sciences rose approximately $300,000 due to the increase in activity in product and systems development attributed to Assay Designs, offset by a $200,000 decline at therapeutics, particularly partially due to the timing of planned clinical trials. We are maintaining our very pragmatic approach to our therapeutics expenditures.

In the third quarter, we also made further investment in our infrastructure. Our capital expenditures so far this year have exceeded $2.6 million as we continue to invest in technology with an emphasis on lab operating systems, overall financial systems, and our Enzo Life Sciences website to enable future growth and expansion.

Finally and important to note, we are not recording any future tax benefits on our tax losses because of the uncertainties related to future taxable income. Given our effective US tax rate of 34%, this would have had an additional benefit to Enzo of more than $1.5 million or over $0.04 per diluted share.

Let me now turn to the nine months. For our nine months, our results reflected solid improvement over the year ago period. Total revenue increased 11% to $72 million, and gross profit increased 35% to $34.7 million, and overall gross margin improved to 48% from 40% in the previous period.

We reported a net loss of $16.7 million or $0.44 per share compared to the year ago loss of $18.3 million or $0.49 per share. EBITDA as adjusted for the settlement of litigation with a former officer and the related legal costs improved $6.6 million from the EBITDA loss of $16.2 million in the year ago period.

Let me conclude my remarks with a brief look at Enzo's liquidity. Our financial condition remains strong. As of April 30, we had cash and cash equivalents and short-term investments of more than $34.4 million. Our working capital at April 30 was in excess of $46 million and stockholders equity was over $102 million.

Barry?

Thank you. I would like to ask Dr. Krenitsky to make a few comments about the lab.

Thank you, Barry, and good morning. During the third quarter, we finalized our operational improvement at Clinical Labs, and we began to seek regulatory approval for the second molecular test we will offer exclusively, which is the Colon Sentry test that Barry referred to earlier. I will discuss that more in a bit.

In addition, we have been marketing the Ikonisys oncoFISH cervical test now for six months, and the response has been excellent with steadily rising volumes.

As I just mentioned, our collaboration with gene use is progressing very well. Initial and subsequent validation experiments have been promising, and we on target to release the test later in 2010. Because this test is a novel potentially first to market blood test for colorectal cancer prescreening stratification, we are engaged in extensive market research and beginning our marketing plans. The most promising development is that we have reached the regulatory stage and have submitted a test in the New York State Department of Health for approval.

We have applied for licensure in Florida, California and Maryland as we expect to eventually service a wider geographical area with some of these novel esoteric tests.

It is very important we begin receiving specimens from a large account in Puerto Rico, which would bolster our volumes moving forward.

Our deal with MultiGEN is progressing very well. MultiGEN's Founder was at our facility this week, working with us on validation of the two new tests we plan to offer later this year in infectious disease and thrombophilia. All-in we expect Enzo to have four exclusive MDx tests to be commercialized by early 2011.

In Q3 we underwent successful inspection by both the New York State Department of Health, as well as the College of American Pathologists. Based on that feedback we have received, we are confident that the lab is operating at an all time high with regard to the quality of our technical services. This has provided our growing sales team with excellent opportunities to gain new business and rapidly accelerate our growth.

In addition, we will shortly be announcing that effective at the beginning of August Enzo will be in-network with a major third-party payer, which will allow both our existing as well as new clients the opportunity to send us higher volumes on a daily basis.

Despite our operational improvement and aggressive sales growth, as Drew mentioned, we face stiff challenges from a very soft economy and the tail end of winter storms in Q3. We surveyed a large number of our current physician clients who almost universally reported decreased patient volumes over the last year.

Because of effective sales growth, we were able to offset these outside factors and actually produce a 2% increase in net revenue year-over-year. Our revenue increase is partly due to improved testing mix, notably the effect of the higher-margin esoteric tests we have brought in-house. Because of the continued sales effort, as well as improved and unique test offerings, we look for significant growth in the coming quarters.

Continuing on the sales and marketing front over the last quarter, we have continued our sales force expansion with two additional hires, each with more than 10 years of experience with one of the national laboratories. One professional will enhance our presence on Long Island, while the other will greatly assist our efforts in New Jersey.

Since the arrival of our new Medical Director, Dr. Robert Boorstein, we have already engaged in promising discussions with providers of AP services and have outlined early deal structures as well. Our plan is to mimic in the AP arena what we have done in the esoteric non-pathology space, namely to build our existing infrastructure where possible, as well as partner with established companies. These areas, along with broad-based esoteric testing, are the prime drivers of improved margins and revenue per session in the lab industry today.

Finally, we are beginning to realize the synergies that exist between Enzo Life Sciences and Clinical Labs. Combining the robust R&D firepower, biomarker discovery, and Assay Designs capability of Enzo Life Sciences with the commercial test development, regulatory approval skills and existent client sounding board of Clinical Labs, Enzo is extremely well-positioned to be a significant player in the emerging companion diagnostic market. We have had several meetings with major pharmaceutical companies and received very positive feedback. We will continue to aggressively pursue these opportunities in an ongoing manner.

Barry?

Thank you, Kevin. As you can deduce from Kevin's comments, the lab is at a very, very interesting inflection point in its history. The improvements made both infrastructure, personnel, the advent of our programs to bring on novel esoteric products, as well as the strong quality improvements made in the lab, have really positioned this division to really move forward in a very aggressive and we hope very opportunistic way.

On that I would like to ask Dr. Balezentis to give us some comments about Life Sciences.

Thank you, Barry, and good morning. I would like to briefly comment on the progress of the Life Sciences division, as well as provide some insight into our activities going forward. Drew has already reviewed the financials for the division, so I will focus on our strategic efforts to improve our overall business.

During last year's call, I stated that one of the overriding goals is to improve our gross margins. During the third quarter and year-to-date, we reported improvement in our product gross margins as compared to the prior year.

For the quarter our gross product margins were 52% for the quarter as compared to 42.9% in the prior year. The ELS core product margins, which exclude our distributed product sales to Axxora were 59.1% as compared to 47.3% in the prior year. The gross margins for Axxora distribution business, which accounts for approximately 29% of the total product revenue in the division, were 38.1% for the quarter as compared to 29.4% in the prior year.

We continue to structure our efforts to gain further improvements in this area, primarily by prioritizing our product development efforts toward higher margin, higher growth markets which continue to contribute to improved margins.

Additional margin improvements are also expected through continued consolidation and improved efficiencies in our manufacturing capabilities. Much of our attention and resources over the last three quarters have been devoted to integration activities, including building the necessary infrastructure to unify the companies we acquired and to support the combined operations. We are now redeploying our resources into operational and consolidation activities that will directly result in improving operating profit and cash flow to our business. We are strategically prioritizing our efforts on our higher value products across the organization, and we have identified opportunities in our operations that will result in significant efficiency gains that will be directly reflected in our bottom line.

Clearly, though, we have not lost focus on our top line. I have already mentioned that we are prioritizing our product development efforts focusing on high value, high growth products that will feed our organic growth. An example of such an effort is our new cellular analysis systems, several of which debuted at scientific conferences in the past few weeks and were accompanied by scientific presentations by our R&D scientists. In the past quarter alone, we launched 12 new assays, which included are our efflux IV assays, which detect multi-drug resistant phenotypes and live cells, and our ProteoStat family of assays, which provide a unique method for measuring protein aggregation in key pharmaceutical applications. Both of these are specific examples of products that incorporate proprietary Enzo IP, resulting in unique benefits unavailable from other suppliers.

Several of these have been formatted to be useful in high throughput screening, an essential feature in today's world of drug discovery.

In addition to our proprietary technology and intellectual property position that we enjoy, we have been able to announce several partnerships with other life science companies over the past few months. We are beginning to see positive results from these deals and expect to close several more in the near future.

Finally, the opportunity to deliver to our IP estate is significant, especially in light of some of the recent events Barry has already mentioned and we have reported on that favorably impacted Enzo.

One specific example has been the recent actions in the Patent Office, which essentially has cleared the way for Enzo to receive a patent on a broadly applicable bDNA for signal amplification. This patent alone can significantly affect our ability to offer a platform of products in the areas of nucleic acid and immunoassay detection. It further provides significant collaborative and licensing opportunities in both the life science research and diagnostic markets. In conjunction with our other significant Enzo patents, we are looking forward to monetizing these assets into collaborative business opportunities, as well as product and licensing revenues.

In conclusion, we expect to continue to see improved gross margins. We are looking for significant improvements in our operating profit. We are focusing on high-growth value opportunities to fuel our organic growth, and we're looking to bring significant value to our business by leveraging our IP estate.

Barry?

Thank you, Carl. I would like to just turn to a few comments about our therapeutic initiatives. As of today, we are awaiting final regulatory clearance to begin our clinical study for Optiquel. These are the last steps to clear before the commencement of the double-blind placebo-controlled clinical trial for our proprietary Uveitis study drug.

The clinical trial will be conducted at the National Eye Institute of the National Institutes of Health under the auspices of Dr. Robert Nussenblatt. He is one of the preeminent leaders in the field. This is an excellent example of how we are utilizing a partnership study agreement with a prestigious organization where we share the cost of investigation and yet are able to retain full commercial rights to our products.

Additionally we are continuing our dialogue with both large and specialty Pharma in an effort to monetize our other therapeutic assets that are in our portfolio.

Before turning the call over for questions, I would like to leave you with a few thoughts. This third quarter has represented a turning point for our Company from which we can now move forward to pursue our objectives in building value, representing the growth in revenues in our Life Sciences and Clinical Labs groups, as well as moving our research projects along. As always, we are trying to balance our R&D expenditures between improving our bottom line and investing in future growth opportunities. We are focused on improving margins, reducing our costs and expenses to both expand our base of business, as well as to move towards bottom-line improvement.

On that, I would like to turn the call over for questions.

(Operator Instructions). [Yago Moshonowitz], Rodman & Renshaw.

That was a very comprehensive overview. I do have a few questions. Maybe we could start with the Siemens case and the victory there. So my understanding is this could be associated with up to $100 million in revenues for the patent. So I presume you are going to seek some sort of licensure agreement. But could perhaps you go into a little bit more detail there as to how you proceed to do that and when revenues associated with those patents could potentially flow into the Company?

That case is in the legal process as we speak. It is not concluded yet. I mean Siemens still has some avenues of legal activity if they wish to pursue them. We are not sure what their approach may be. What we do know that is if all things stay constant as they are, we will be issued a patent for 17 years going forward. This particular patent covers the labeling of DNA or nucleic acid-based products. There are claims within this patent that expand the patent beyond the use that Siemens has used it for into the immunodiagnostics area, which is very opportunistic for us because it really gives us a broad reach. It is a technology which has been proven. There are products on the market in the area of viral load analysis. These are -- for those who may not understand the technology -- these are the tests that are used to measure the amount of circulating virus in individuals who might have hepatitis C, HIV or hepatitis B. So it is a very important area.

The technology itself is very user-friendly. So it provides, we believe, an opportunity for expansion beyond certain markets that have been developed already.

I really cannot comment on where we are in terms of commercializing. We are developing products on our own, I will say that. In terms of our interaction with other parties, I still cannot comment on. But I will make a statement to the point that we are extraordinarily pleased with this development. We believe it may provide us with a very important technology platform and base from which we can build a very strong business model, which has already been validated in terms of the acceptance of this technology and expand it to an important revenue line for our Company.

So just so I'm clear, this patent essentially would be issued after what additional proceedings, or would you just have to have an absence of an appeal after some period of time?

We have asked for this patent to be published and we are optimistic it will be so in the next one to four months perhaps. I cannot tell you how the patent office will address it. Once the patent is published, we then have an ability to utilize it in house as we are doing right now. We are waiting to see, as I said, the reaction from Siemens in the court system. And then we will be able to better plan our approach as to how we will progress with either licensing or self-developing this technology.

Got it. Okay. So I understand now turning to the laboratory business, there are a number of new hires that were recently brought on board. And my understanding is that they are either are on non-compete clauses now or are going to be coming off those noncompete clauses. And maybe you could just go into a bit of more detail there regarding when they are going to move into their operating capacity at the Company and begin to bring additional revenues into the laboratory?

That is correct and thanks. That's a good point actually, especially when discussing growth and the ability to bring on new clients in a timely manner.

As you mentioned over the course of the last 13, 14 months, we have hired a number of individuals, seven of them very high producing sales professionals. Six of the seven remain on their noncompetes and will begin to come off their noncompetes starting in late August. All of them, of course, will be off their noncompetes at some point in fiscal 2011. And, as a result of that, we are optimistically looking forward to the accelerated growth that comes along with those events.

And could you give any sense on an individual basis what sort of book of business these individuals are bringing with them on a dollar figure or is it too early to say?

Well, these are individuals who have serviced very large books of business before, anywhere between $10 million and $14 million. So, of course, the challenge is that that business comes over in time. It is not like the moment these individuals come off their noncompetes they bring over their entire book of business. But it is what occurs is that as they do come off their noncompetes, they are are obviously able to solicit that business and then bring it over as rapidly as possible. But it is difficult to comment on exact numbers at this point.

Okay. So turning to the plans for Colon Sentry, so you mentioned that you have now submitted the application to New York State, California, Florida, Maryland. I'm just a little bit not as familiar with the state approval pathway. Clearly with the FDA there is a PDUFA date and so forth. But is there a date by which you expect a decision, or is this more of a rolling application where you just have to wait to hear from them?

Right. It is more of a rolling application. Our early discussions -- and just to be clear we have submitted it to New York State, and with that we -- when that approval comes, we are effectively able to -- clearly to commercialize the tests in our current service area. But, in addition to that, should the plan unfold, otherwise we are able to also commercialize it anywhere within the United States.

The process is a process that certainly will take several months. It could take up to six months. But, as you stated, it is more of a rolling process. There will be queries on their part, information that we will have to provide. We are quite confident based upon our early discussions that they are pleased with some of the data that we have produced and our validation data, and we look forward to having those discussions with them and keeping everyone updated on where it goes. But, as I mentioned, it is to a certain extent out of our control.

Understood. And then you also, of course, mentioned oncoFISH. So you mentioned steadily rising volumes. Could you go into any more detail there regarding quantifying that statement?

I can simply tell you that on a month over month basis since its launch that our volumes have gone up every single month, and that is quite promising. We have had the opportunity to meet with several of the key academic OB/GYN physicians in the region here to gauge their interest. Universally the number of publications, the trial that is being run by our partner is moving forward. So it has actually been in a linear fashion over a month to month basis steadily improved, and we are quite optimistic about that.

Okay. And then maybe coming back to Barry in a more big picture sort of question, you have now achieved a number of molecular diagnostic tests that are either in the regulatory pipeline or being marketed like oncoFISH, and Kevin mentioned also the MultiGEN tests which are coming online.

I'm just trying to get a sense in terms of a critical mass for how many of these tests and you also mentioned, of course, the potential for companion diagnostics to be brought on board. How many of these tests do you think are necessary to achieve a critical mass and really start to drive an inflection point in the revenue growth for the laboratory? And then, of course, as an aside question regarding the blended margin, the blended gross margin -- when would you expect that to stay solidly above 50% going forward?

In terms of the critical mass tests, obviously one successful test will establish a very significant -- (technical difficulty)

Ladies and gentlemen, this is the operator. I apologize but there will be a slight delay in today's conference. Please hold and the call will resume momentarily.

Hello. We are back, I believe. I apologize. It seems to be some Thai line problems here. Are you with us?

Yes. Do I need to restate the question, or did you hear it?

No, I don't think so. I have asked Kevin to give you a few comments on that.

Yes, you know, I think Barry started to mention clearly any one of these tests has the potential to really accelerate growth in a significant manner. I think when we look at these tests, we look at tests that are in diseases that are extremely significant with regards to their incidence, their prevalence and the ability to intervene.

Obviously the Colon Sentry test being in one of the most prevalent cancers on the planet in colorectal cancer is something that is quite interesting. And because we are dealing with a test that has a current gold standard of screening in the area of colonoscopy that is underutilized and we have a test that is potentially going to allow physicians to drive patients more to comply with that, we think that we have a great potential test there.

But we look and we evaluate tests for a number -- I think we have discussed all the number of things that we look at. But I think it is safe to say that we are on pace with the tests we have now. I mentioned a number of tests that we will be offering exclusively by the end of the year or early in 2011. And, of course, we are currently evaluating others right now. Any one of them can potentially be a game changer for us.

Okay. Thanks. And just regarding the question on the gross margins, I'm not sure if you caught that.

Sure. I think that also relates to obviously these are higher-margin tests, and clearly, as we drive volumes, they will improve our gross margins moving forward. They have to get approved first, and then we have to go out and effectively market them and sell them.

So I think based upon some of the uncertainties with the regulatory bodies, we have already seen some improvement in those margins as we have mentioned. But we clearly have to get them launched. So I think the timelines, you can kind of put those together with regards to when we might see improvement in our margins to the levels that you mentioned.

Got it. All right. Thank you very much, gentlemen, and good luck in the next quarter.

[Anthony Passel], [Bearing Circle].

I had two questions. One the MultiGEN PCR sequencing assay in terms of being able to get that out and its implications. And the second question would be in concert with healthcare reform, with the ability to get reimbursement for the electronic web-based connections with practices, how is Enzo exploiting its current technology platform to maximize customers and getting them set up with IT connections that will facilitate that process both in ordering labs and receiving results?

Right. So to answer your first question, we made an appropriate capital investment in the DNA sequencing technology that was necessary to implement the MultiGEN test actually that those are unique multiplex DNA sequencing-based tests. That was part of our R&D spend over the past year. So we are well-positioned to bring that up. Two of those tests, of course, will be proprietary or I should say exclusive to us in our region.

The other issue is a very pertinent one. We all know that by 2014 it is expected that even all prescriptions will be ordered electronically, and I think we are well positioned to do that. Our recent announcement with MMF Systems that allows us to offer free EMR services in conjunction with them is something that hitherto we could not do in New York State. So we have gotten some really good feedback from that. A lot of excitement from new clients. So I think we are very well positioned in that space because of those deals.

Patrick Ryan, Stifel Nicolaus.

Could you comment on the drawdown of cash quarter to quarter of approximately $10 million, and should we be overly concerned with this, or do you have this under control so that you can start getting the cash flow positive so that the cash does not turn into red ink?

We are obviously very focused on our cash flow. The last quarter was a particularly heavy investing quarter. Actually the last year we have invested quite heavily. As I mentioned in my comments, there is always a balance between investment in the future and R&D and bottom line return. We have been trying to measure that.

We have never invested as deeply as we have in our Clinical Labs because we have not seen the opportunities that are now currently presenting themselves. We have taken a very close look at our cash flow. The quarter also had a rather sizable one-time expense incurred due to the resolution with the former officer of the Company.

So I think when you look at that we are plotting out our future. We are looking for revenue growth to emerge over the next period of time. We are taking measures to contain our costs very, very significantly right now. We believe our capital structure is fine for us as we move to the future, and we think we will be able to demonstrate both topline growth and bottom line growth within that capital structure.

On the Optiquel product for uveitis, how many patients in each side of the trial will there be in that trial? And would this be considered a Phase 2 trial or a Phase 3 trial to use a terminology we are more used to as far as the size goes?

This would be termed a Phase 2 trial. We have not -- since the trial design is still in the approval phase, we have not really divulged the numbers in each side, but they will be numbers that will allow us to move this product through the pipeline we believe expeditiously.

(Operator Instructions). Robert Smith, Center for Performance Investing.

Could you give us a picture of the Crohn's disease effort at present?

As we stated in the prior calls, we have completed the Phase 2b study. We have completed a number -- actually there were two arms of a Phase 2b study. We have evaluated the data. We are at a junction now where we have to determine whether to move forward on our own or partner this off. We also have another option that we are considering. As part of the uveitis program, there is a research component with a novel adjuvant to enhance -- which we believe might enhance the efficacy of this particular compound. We are looking to explore that as well.

So we have a number of routes. But we are in dialogue over partnering that particular product, as well as setting up our own continuing clinical trial on it as we speak.

[Robert Gould], [Gould Capital Management].

I'm just curious about the share price being a long-term investor and actually a double board-certified physician who I think understands the science. For years we have been well positioned, and I'm just -- I mean the share price is acting almost as if the Company owns oil wells in the Gulf. And I was just curious as to the Company's position on this for both those of us who are long-term shareholders and those people who are short-term shareholders.

Obviously we have certainly not been happy with the performance of the shares in the marketplace. This has been a particularly difficult market for biotechs as you see from what has transpired in ASCO over the last week. There usually is some excitement or positive reaction in stocks subsequent to the news of ASCO in the last week. Most of the stocks reporting have decreased in share value.

We are seeing some unusual behavior in the markets. These are volatile markets. We are a high beta stock. Over the last few weeks, we have witnessed a lot of activity, which we have been trying to pinpoint. As you may or may not be aware, there is a rebalancing of the Russell Index I think it is tomorrow, which could impact us since we are participants. We believe that may have some effect within our market share price.

I can give you many suppositions as to what is going on. I can only report to you on what we are doing as a company in terms of the fundamentals, in terms of the basic core directions of the Company. I believe we are moving aggressively. We are on track. We have made significant improvements and progress in our areas. We are fighting an environment which has not been particularly strong for participants in the healthcare industry. That is no excuse. All of the issues I gave you are no excuse. We have to work harder, and believe me --

When do you expect the Company to become profitable?

We are looking to drive to cash flow positive within the next year, and that is a reach in some respects. But we believe that we may be able to achieve that goal. Some of that will depend upon what happens internally in terms of our control of costs. The other may be a result of external input of dollars from joint ventures and strategic alliances, but but there is one thing I should mention.

If we cut our R&D to a point, we can certainly drive towards that profitability quite easily. It is an all an issue of how much we wish to invest for the future, and I think that is the message that we all have to concentrate, and we try to balance in house.

We are a company that is positioned in a high-tech sector, a sector that is evolving, changing. We have assets. We believe it is an important aspect for us to drive our key assets towards the value centers that we see emerging. There are many out there. So we still have to make investment we believe. At the same time, we do have to have a responsible bottom line, and we respect that and understand that and we are driving towards that goal.

I believe that is the last question we see in the queue. We thank you for your participation in the call. It is a very dynamic period in the life of our Company at this point in time. We look forward to sharing with you the progress at our next quarterly call, which will be our year-end call.

Thank you very much.

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