Enzo Biochem Inc (ENZ) 2010 Q4 法說會逐字稿

Good morning, and welcome to the Enzo Biochem, Inc., fourth quarter and year end 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, including those related to cash flow, gross margins, revenues, and expenses, are dependent on a number of factors outside of the control of the company, including inter alia, the markets for the company's products and services, costs of goods and services, other expenses, government regulations, litigations, and general business conditions.

See Risk Factors in the Company's Form 10-K for the fiscal year ended July 31, 2009.

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.

During this 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 for 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 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.

Good morning and thank you. With me today is Drew Crescenzo, our VP of Finance; Dr. Kevin Krenitsky, the head of our clinical laboratory; Andrew Whiteley, the Chief Operating Officer of Enzo Life Sciences; and David Goldberg, our VP of Business Development.

As the moderator mentioned, after our comments we will open the floor for questions.

This year has been a year of consolidation, transformation, and focus for Enzo. While we have been engaged in transforming our company in a way that we expect will be more productive on all fronts and take advantage of the vast changes that technologically are sweeping across the medical and research worlds, we have also spent the recent months looking at and instituting programs that we hope and believe will deliver near-term operating results.

These efforts have been directed at first reducing expenses. They've been directed at strengthening our organization, positioning the company to take advantage of the healthcare industry's new and emerging paradigms. They're focusing on capitalizing on our strengths in the life sciences, clinical labs and intellectual property areas. We have been optimizing our research and development to maximize commercialization opportunities that we have been working on over the number of months in the past few years. And we have been most focused on improving cash flow.

Drew will walk you through the specifics of the financial impact of these decisions in the fourth quarter.

As is evident from the press release distributed last night and also our earlier comments in our pre-announcement, which was roughly about a month ago, the actions that have been taken will have considerable impact in the future performance of our company.

Specifically, total year revenues for the company were up about 8% to around $97 million. Gross profit, despite the fourth-quarter inventory adjustment, was up 23% to approximately $45 million. And gross margin at 46% compared with 41% a year earlier.

Operationally, we have been making progress in tightening our expenses and focusing on productivity.

Specific improvements going forward this year were centered first at Enzo Life Sciences.

Our activities involved more fully integrating our businesses acquired during the past [two] years, and focusing on product and staff consolidation.

Second, at Enzo Clinical Labs we have invested heavily over the past year in technology and process improvements. This has enabled us to even better serve our client base and venture into high-margin esoteric testing, while at the same time reducing our staff needs.

And third, we have reduced administrative expenses on the corporate level.

Companywide we continue to drive operating efficiencies. Meanwhile, we expect to realize substantial benefits from these measures beginning with the first quarter now underway.

On an annualized basis, these cost reductions are expected to reduce overhead in excess of $4 million, and we are targeting to be cash flow positive in 2011.

From an operational viewpoint, we're making good progress.

The integration at Enzo Life Sciences has yielded positive results. We have centralized our research and development activities, manufacturing and customer service, and we are now focusing on higher-margin and hence more profitable progress.

There are two aspects to our activities in this area. One is the global marketing and supply of over 40,000 products to the research, educational, and medical markets, of which approximately 9,000 are produced in-house, and the rest represent alliances we have with other specialist life-sciences providers.

We have entered into a number of agreements with outside parties to expand our bandwidth in the medical diagnostic area.

As an example, the supply and distribution agreement we reached this year with Cancer Genetics underscores our approach to meet rapid advances taking place in medicine. This agreement covers our proprietary florescent dyes that increase signal intensity in the labeling of nucleic acids.

Cancer Genetics for its part is an emerging leader in personalized medicine with products and services that enable cancer diagnostics and treatment tailored to specific genetic profiles of an individual.

This is a new frontier in medicine, and we are positioning ourselves to be among the pioneers.

The other key strategic initiative at Enzo Life Sciences is the integration of the research and development programs in coordination with Enzo Clinical Labs, and this provides us with a measurable developmental advantage.

For example, pharmaceutical companies are expanding activities to identify and characterize biological markers in order to more accurately select patient populations that have a higher likelihood of responding to a treatment.

Recent articles, particularly in the New York Times and Wall Street Journal, have focused on this new direction, which hopefully will not only speed treatment but also enable patients to benefit earlier from new discoveries, particularly in molecular-based solutions.

We possess a unique combination of expertise to make headway in this market because of our skills in assay development, our developmental and manufacturing expertise, and our CLIA certified clinical lab facility.

At Enzo Clinical Labs, we have taken action that is expected to result in gross margin improvements and meaningful expense reductions. Our approach here is not only to better position the labs for whatever impact the new healthcare legislation will have in the way of Medicare reimbursements and others, but also, and perhaps more importantly, to also strengthen our strategic position with regard to higher-end esoteric testing.

For example, this past year we entered into an agreement with MultiGEN Diagnostics to exclusively market in New York its diagnostic test based on the multiplex D&A sequencing.

Because of our CLIA certification, we will be undertaking to validate and seek approval for several of MultiGEN's women's health diagnostics, including its antenatal infectious disease and thrombophilia panels.

The growing recognition of our clinical lab, which has been further enhanced with the addition of recognized experts in the field of clinical lab management and pathology has resulted in our inclusion as a provider for Empire Blue Cross Blue Shield, the largest healthcare insurer in New York State.

Similarly, we view the granting of a license to Enzo Clinical Labs by the Commonwealth of Pennsylvania as a precursor of other licenses for which we have applied in other key states. This approach, we anticipate, will facilitate our lab's growth as a national provider of esoteric and high-value diagnostics and by doing so, achieve greater throughput at our established facilities in Farmingdale.

I would like to put these recent developments into perspective, in particular, what they hold for Enzo.

The healthcare industry is undergoing significant change. Greater emphasis today is on cost reduction along with more targeted diagnosis and treatments. Drugs and/or treatments will be specifically targeted for specific patient populations. Molecular diagnostics is emerging, and medical practices between drug, diagnostic, and service providers is evolving and becoming more integrated.

For Enzo this is an opportunity to capitalize on the company's capabilities. These include our ability to bring forth new life science products, which we're doing internally and via acquisitions and partnerships, and also in providing diagnostic services.

As for Enzo Therapeutics, we have reduced its scale and are intent on monetizing our activities in this area.

In a recent article in The Wall Street Journal discussing cancer drugs, the author noted that currently the cost of developing a single drug has accelerated into the hundreds of millions of dollars in the past decade. Our programs have always been economically managed, but we must be realistic in terms of the economic impact of these programs in light of the tight capital markets that exist today.

Last week's announcement disclosed that in cooperation with the National Institute (sic) of Health's National Eye Institute, we initiated a phase 1/2 clinical trial for Optiquel, our oral therapeutic for the treatment of chronic noninfectious uveitis. The trials will be conducted at the National Eye Institute. Best estimates are that we should have results to announce sometime in 2012.

While we will be sharing in the test costs, which will be modest, commercial rights to Optiquel, should it prove efficacious, will reside at Enzo.

I would like to turn the comments over to Drew to give you a brief financial review of the quarter, and then we will discuss each of our operating segments.

Thank you, Barry, and good morning. I want to take this opportunity to expand on both Barry's comment and last night's earnings announcement.

With respect to our fiscal fourth quarter, our revenues rose by 2% over the year-ago period to a fiscal fourth-quarter record of $24.9 million. This gain is reflective of organic growth in our clinical lab segment, increases in royalty and license fee income, and a slight decline in product revenues at Enzo Life Sciences.

We reported a net loss for the quarter of $5.5 million or $0.15 per diluted share. This was negatively impacted by a $1.8 million charge or $0.05 per diluted share directly attributed to the previously announced streamlining projects.

This loss per share as adjusted compared to a number $5.3 million or $0.13 per diluted share in the prior year.

This prior year also included a purchase accounting adjustment of $400,000 or $0.01 per share in that period.

Our EBITDA loss for the current year period was about $400,000 higher than the prior year at $4.7 million.

It's important to note, we continue to not record any deferred tax benefits generated from our losses. Further, and a very positive note, our cash used in operations decreased to $200,000 in the fiscal fourth quarter, from $2.7 million in the year-ago period, reflecting an improvement of $2.5 million.

To give some brief details to our results, we reported a decline in our gross margin of $400,000 to $10.2 million or a 41% gross margin, which was directly attributed to an inventory charge relating to the rationalization of low margin products at Enzo Life Sciences that Barry previously mentioned.

Excluding this charge, our gross margin would have increased $900,000 or to 46% or 200 basis points higher than the year-ago period.

We expect that our gross margins will increase in fiscal 2011 due to the benefits from our streamlining actions, including, among others, headcount realignments, expense reductions, and process improvements.

Selling, general, and administrative expenses as a percentage of revenues decreased to 44.5%, after adjusting for the one-time severance of $300,000, from 48% in the year-ago period.

We believe that moving forward, SG&A as a percentage of sales will improve.

Our provision for uncollectible accounts, principally related to Enzo Clinical Labs, increased 100 basis points or $200,000 as a percentage of service fees, but primarily due to the shift in payer mix.

Turning now to our segments' fourth-quarter results, fourth-quarter revenues at Enzo Life Sciences approximated $13.2 million and were comparable to the prior year period. Product revenues were $10.5 million as compared to $10.6 million in the year-ago period. Royalty and licensing income totaled $2.7 million, a 6% increase over the prior year. Gross margins on product revenues at Life Sciences decreased to $3.7 million. Excluding the aforementioned $1.3 million inventory charge, gross profits would have been 48% as compared to 38% in the year-ago period.

The improved margins are attributed to the nonexistence of inventory purchase accounting adjustments and the realignment of overhead personnel.

The segment reported a fourth-quarter operating loss of $100,000 as compared to a profit of $200,000 in the prior-year period.

The current-year results again were negatively impacted by the inventory charge of $1.3 million and severance costs of approximately $400,000.

We do not expect any additional charges relating to the streamlining project going forward.

At Enzo Clinical Labs, revenues for the fiscal fourth quarter increased 3.4% to $11.7 million, reflective of increased service volume, including from higher priced tests, despite a continued slowdown in physician office visits due to the economy.

Gross profit, which was positively impacted by revenues, declined 9% to $3.7 million for the current period due to increased costs of services. These increased costs of services have been addressed and will be impacted positively going forward with the streamlining project.

The provision for uncollected accounts as well as SG&A administrative expenses increased $100,000 and $800,000, respectively, in the fourth quarter.

The operating loss was $2.5 million, compared to an operating loss of $1.2 million a year ago.

The streamlining actions positively will impact the lab operations going forward, with certain portions providing immediate benefits, and others throughout the future year.

Our financial condition remains strong. Enzo remains debt-free. As of July 31, our cash and cash equivalents and short-term investments approximated $34 million, which is comparable to the April 30 amount.

Our working capital is over $42 million. Our cash used in operations, adjusted for the litigation settlement of $3.7 million, which was taken in the second quarter, was $9.8 million, as compared to $11.4 million in 2009 -- a noted improvement.

Stockholders' equity today is ever $115 million.

Turning now to the streamlining project, with respect to our streamlining project, as a result of the realignment of our workforce, which resulted in the fourth-quarter charge of $500,000, we have already achieved $4 million in process improvements and expense reductions. As previously mentioned, no further charges are expected.

However, we believe that this is just the beginning. We expect incremental benefits from investments over the past year in our management team, technology, expansion of our sales forces, which is expected to improve margins and operating results for fiscal 2011.

In addition to the $4 million in annual operating expenses, which have already been taken out of the business, we expect additional savings going forward through renegotiation of contractual supply agreements, and operational process improvements.

Specifically related to Enzo Clinical Labs, we have begun to process additional tests internally that were previously sent out, which will result in improved margins and cost reductions.

On an aggregate basis, we believe these ongoing efforts will contribute to improved profitability at our operating companies, and moving forward, towards our target of being positive cash flow from operations in 2011.

Barry?

Thank you, Drew. The fourth quarter brought to a conclusion a two-year process of restructuring of Enzo Life Sciences' business and it's acquired companies -- ALEXIS Biochemicals, BIOMOL International, and Assay Designs.

On August 1 we completed three major initiatives.

First, we completed the formal integration of Assay Designs into Enzo Life Sciences, and therefore from this date we have fully integrated our channels to market, including a single US customer service team and product supply logistics.

We also completed the integration of supply lines to our direct European customers and distributors that supply all of our other markets.

This integration was enabled in great part by the investment in a global ERP system that has now been rolled out to all of our operating units in the company.

We have also taken steps to strengthen our management in sales and operations, building a new business team in Europe and growing our market in New York.

Second, we completed a rationalization of duplicative staff functions across our sites, and overall rebalanced the investment of resources in the business, in line with the sales projections of the business.

We have also transitioned a large number of products into our main manufacturing site in Ann Arbor, Michigan. Overall this has resulted in a reduction of headcount of approximately 15% when including attrition that has taken place over the last six months.

Third, we took key steps to upgrade our e-commerce capability by launching our new EnzoLifeSciences.com website. We are now set to reduce our overall marketing costs and focus expenditures on electronic commerce to drive sales of our innovative product lines.

In addition to completing these initiatives, we also took steps to streamline our burgeoning product lines. This has involved the determination of some low-margin distribution business and rationalization of low selling items that reduces our product list, but it will enhance our margins.

We have also expanded one of our OEM met arrangements that increases the scope of a key part of our business.

As a result of this discontinuance of low-margin product lines, we can expect some softening of the topline growth in the short term in Enzo Life Sciences. But we are hopeful and optimistic that this will be recovered very quickly soon thereafter as our organization builds on the consolidated product line and focuses on our channels of distribution, specifically driving our high potential product offerings.

The overall reshaping of the Enzo Life Sciences business and to some extent Enzo Clinical Labs, resulted this quarter, as Drew mentioned, in one-time charges of about $400,000 for the staff reduction and about $1.3 million in the inventory reserve for low-selling products.

Enzo Life Sciences now has a strong organization with rapidly growing recognition in the marketplace, providing a corporation with a product business that addresses the needs of researchers in pharma, biotech, and academia, supported through our global network of companies and distributors.

Turning to Enzo Clinical Labs, this year we consummated our third molecular diagnostic partnership, which now gives us agreements covering areas as diverse as clotting disorders, women's health, and cancer risk stratification screening.

These opportunities were made possible because of investments we have made in this segment, positioning Enzo Clinical Labs as a molecular diagnostic specialist underpinned by a broad laboratory services infrastructure.

Esoteric testing is becoming one of the fastest-growing segments in the laboratory industry. It is expected to grow in excess of 18% this year.

Also, we are preparing to submit for New York state approval the ColonSentry risk-stratification assay because of its novel potential first to market utility. It is a blood test for colorectal cancer prescreening stratification.

Additionally, our partnership with MultiGEN, as I mentioned earlier, in which we hope to be first to market with a multiplex assay from a single specimen for antenatal and infectious diseases, as well as thrombophilia risk, is continuing to progress very well.

All in all, we expect Enzo Clinical Labs to have up to four exclusive molecular diagnostic based assays to be commercialized by -- in early to mid 2011, depending on the regulatory agencies.

Additionally, we are also actively engaged in discussions surrounding a specific strategy for the anatomic pathology marketplace, which is focused on examining the nature, course and resolution of disease.

We are currently exploring various partnerships. There has been a move toward consolidation in this space, and challenges for companies that reside there.

The technical component/professional component arrangements are one clear example of this. As such, growth in many of these companies has been limited.

As a result, we are evaluating very carefully how to approach this market, especially the anatomical pathology segment of the clinical lab area, which despite the challenges is growing at an estimated 8% a year.

Finally, we are continuing to combine the synergies that exist between Enzo Life Sciences and Enzo Clinical Labs, combining the R&D capability, biomarker discovery, and assay design skills of Enzo Life Sciences with the commercial test development, regulatory and approval skills of Enzo Clinical Laboratories.

As we previously indicated and as you well know, the healthcare industry has and is undergoing change. Greater emphasis today is on cost reduction along with more targeted diagnosis and treatments. The changes sweeping across the pharma market are supporting the creation of companion diagnostics, impacting not only what drugs or treatments will be successful, but more specifically, which patients will benefit. Personalized medicine is developing tighter relationships between drug diagnostics and service providers.

For Enzo this is an opportunity to capitalize on the company's integrated capabilities. These include our ability to bring forth new life science products, which we are doing internally and via acquisition and partnerships, and also by providing services.

We believe we are well positioned and are very much in sync with the market, and we expect these efforts will prove to be increasingly valuable in the years ahead.

The results of the past fiscal year reflect the key steps taken to position ourselves within this market. The investments made over the past two years in building what we believe is a world-class, integrated, specialized life sciences organization with products, technology, IT capability, and a unique distribution platform have been instrumental in shaping our company for growth.

We have by our measured investments provided Enzo with optionality across numerous market segments, and the streamlining that we announced last month has strengthened our financial position for the future.

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

The floor is now open for questions. (Operator Instructions). Ren Benjamin, Rodman & Renshaw.

Congratulations on the progress. Maybe we can go ahead and start with a little bit of a broader question. The organic growth that you see for 2011 and the potential for being cash flow positive, does that guidance include the potential approval and marketing of the molecular diagnostic tests that you mentioned? Or how is that growth being accounted for?

We -- due to the vagaries of the approval process in terms of New York State and the timing that could potentially be involved, we have not included in our thought process the approval or sales of these new molecular diagnostic products.

We have targeted our projections of cash flow utilization based on existing product growth. Also we have certain built-in growth variables such as with the Empire Blue Cross contract in our revenue stream. But they do not include the molecular diagnostic products.

Okay. So we should be viewing that as potential upside to your numbers?

That is correct.

Looking at specifically some of these molecular diagnostic tests, as you mentioned, the field is growing by leaps and bounds. Can you help us understand the products that you currently have and where they can be positioned within this test?

So for example, something like ColonSentry, is that primarily going to be targeted to primary care physicians? To specialists? To pharma? Can you just take us through the three products that you have right now? And maybe can you give us an idea as to what the four one could be?

Kevin? Dr. Krenitsky maybe can reply to that.

Yes. I'm happy to answer that.

So with regards to positioning of these particular tests, the GeneNews test is a test that is -- it's actually very favorable with regards to our current -- the current physician market that we serve now and we serve today. So yes. That is a test that particularly will help both primary care physicians across the board -- so internal medicine physicians, family practice physicians, and OB/GYN physicians, who as you know, in this day and age very often serve as the primary care physician for their women patients. And this is a test that is directly marketed to them.

What we are attempting to do is to take a significant public health issue in this country, which is lack of compliance with colonoscopy, and improve that. So the way you did that is to give really the gatekeepers, which are the primary care physicians, the ability to have a test that can drive their patients to colonoscopy and at the very least keep them on the normal screening track.

And the second part of your question was --? If you could repeat it please?

Just what the potential fourth molecular diagnostic product could be, in what particular areas. And would that again focus on clinicians? Or would that be something more targeted towards pharma and helping them develop better clinical trials?

The -- well, I'll answer the second part of your question.

But the first part of the second part of your question is that it's actually in the area of oncology, and it is also a risk assessment test in a particular area of oncology in which we are very strong with regards to our physicians and ultimately the patients. And to a certain extent, particularly if you look at the GeneNews test, any of these tests have the opportunity to assist pharmaceutical companies and the pharmaceutical industry, particularly with regards to stratification of patients as they move into trials, or even prior to that in the preclinical phase of discovery they can potentially be used.

We predominately evaluate these tests for their scientific validity, for their -- our ability to get them through a regulatory approval process and then ultimately their clinical adoption and uptake and our ability to market them and sell them. So that is really the process that we look at when we determine whether or not to pursue any of these tests.

However, clearly the opportunity at any time for these tests to have value in the pharmaceutical world is there as well.

Okay. Timing is everything in life, and so can you give us a sense as to the timing of the submission of something like ColonSentry? And how are our reimbursement discussions going right now? Are they going right now? Is that something you have to wait for only after approval? Can you give us a sense as to when these things will be taking place?

Sure. So they've been ongoing really since the beginning, because reimbursement is actually the other -- the one key aspect that I didn't touch on, and that is, you need to be reimbursed for tests before you can bring them in and develop them and market them.

And the answer is actually yes, and it's a positive yes, because we have had reimbursement discussions. The reimbursement for these tests, any of the tests we are offering, is good. And more importantly, we have actually have carve-out discussions and have at least one of our major payers carving out the ColonSentry test, which is very favorable, because it essentially doubles the reimbursement that we would achieve for that test.

That's good for two reasons. It's good for the obvious reason of it's double the reimbursement, which is always great, but it also validates the test, and in discussions when we are able to speak about critical issues like to health economic outcomes, which any payer is acutely interested in seeing these days, as you mentioned, you have a significant pipeline, clearly not only at Enzo but in the industry right now of new molecular diagnostics coming out.

One of the key issues is the health economic data that one can generate or show. And if one can generate or show health economic data to the payers, they will then be much more receptive to carving these tests out and paying for these tests, because ultimately they realize that downstream if these tests are utilized it will save them money.

And then maybe a little bit on the timing of the submission?

Sure. We're just -- we're very -- we're in the final stages of polishing our submission for the ColonSentry test. As you know, this is quite a novel test with regards to the fact that it is a molecular oncology test that is being utilized in individuals who have not either, one, already been diagnosed with cancer; or two, it is not using tissue, it is blood based, which of course makes it much more favorable in terms of ease.

And as a result of that, we have a couple of experts that are looking at the submission, and we expect to submit that very, very soon. Behind -- Barry had mentioned the multiplex DNA sequencing test. That is just behind the ColonSentry test with regards to our regulatory submission.

And then just to help us understand where a test like ColonSentry would be placed in the paradigm -- clearly you have colonoscopy, sort of the end-all, be-all of the diagnosis. There's quite a buzz being created with some new stool-based tests. Where does ColonSentry fit into this paradigm? Does it compete with a stool-based test? Does it compete with colonoscopy? Can you help us understand how it's positioned?

Sure. Yes. It's -- this test is a prescreening risk stratification tool for the physician to use. So as a result of that it does not compete with colonoscopy. It is meant to complement colonoscopy.

Colonoscopy is the current gold standard for diagnosing colorectal cancer and/or precancerous adenomatous polyps, and we want -- we intend to increase compliance, which is a significant issue.

And it really segues into the other significant issue, which is compliance with fecal or stool-based testing. Historically, if you look at fecal occult blood testing, compliance for that has been really abysmal and really has been a failure.

So there are a number of tests that are really kind of fecal occult blood testing on steroids, if you will, which are tests that are looking at DNA, looking at other components of stool testing components that really perhaps increase the sensitivity and specificity.

But unfortunately, the reality is that as we look at compliance of these tests, individuals just do not prefer to test themselves in that manner. It's messy. There's a stigma that is carried along with it.

So to us -- and colonoscopy shares some of the same issues. So the value of a blood-based test -- patients go to their physician, getting their blood drawn -- is typically, in the vast majority of individuals, not an issue. They get their blood drawn yearly. Some individuals obviously get their blood drawn far more often than that, depending upon what the conditions are.

So this is a test that really -- it bypasses any of the unpleasantness that one would see with the stool-based testing. And we think that positions the test very favorably with regards to patient use.

And that's the feedback we've received unanimously, from patients and from physician clients.

So once again, we are not competing with colonoscopy. We hope to increase colonoscopy compliance in this country with this test, and we are very firmly convinced that the uptake of this test, when put side-by-side with stool-based testing methods, will be superior.

The lab revenues obviously increased, and I wanted to know how much of that increase was due to the new sales force hires that you have brought onboard, and how might the Blue Cross Blue Shield patient population impact the ongoing lab revenues.

Sure. So we've -- yes, we have -- we have seen a nice uptick in our revenue, and we expect that to continue, as we are now in fiscal 2011.

The organic growth from the sales component has been a -- has been still relatively a small percentage of the organic growth. We have had our first individual come off their non-compete clause, so now we are able to see kind of the fruits of the efforts we've put in, in some of these sales individuals being able to go out and solicit business. And we have seen a nice, strong uptick from our additional payer contract that Barry mentioned before with Empire Blue Cross Blue Shield.

If I can -- it's David Goldberg here. Let me just add to that. For the first time in memory, organic growth in the clinical laboratory business as a whole has actually decreased. And this is based upon the releases given by the large national and regional public competitors.

The fact of the matter is, the increases that you are seeing on Clinical Labs obfuscate the fact that the market had softened based upon economic conditions. So we believe that as the economy turns around, you may see even better growth.

So I think that that's really a -- something that is very important to note, that we have grown this business in spite of the fact that organically, as a whole, the number of patients that are being seen has actually decreased because of the economy.

That's a fair point. And I guess just one last question. I just want to clarify this. While the expenses were higher than expected, at least for us when we were modeling it out, the majority of the charges or the things that threw off the expenses were inventory charges, and these are non-cash items, right? And that's what's contributing to the $200,000 in cash burn that you had for the quarter. Is that correct?

Well, the non-cash charges would not have affected cash from operations. They're non-cash.

Right. So it is non-cash?

They would have had no impact on cash. In other word, the --

Rennie, this is Barry. The burn from the quarter was just purely operational burn. But I think the key -- the note here is that from the third quarter to the fourth quarter, cash utilization was only $200,000. And [as I say], the change in our cash position was only $200,000. And I think that is really the keynote point.

And so it seems like -- and there can be some variability going forward obviously from quarter to quarter, but it seems like you are well on your way to achieving your cash flow positive goal.

We believe we have put into place the appropriate economies and structuring to allow us to achieve that in 2011.

Obviously quarter to quarter there will be differences in cash utilization. Some quarters will have more cash. Others will be less. But I mean, we look at this on an annualized basis. And we feel that we are on the right trajectory right now to achieve our goal.

Great. Thank you guys very much, and good luck.

Robert Smith, Center for Performance Investments (sic).

So in saying that you've reduced your activities in Enzo Therapeutics for greater cost effectiveness, where does this leave you with Alequel and the Crohn's Disease?

Alequel -- we did -- we have completed the phase 2b studies of Alequel. We have a component in the Optiquel trial. It is not only a clinical trial, it is a research program associated with that, where the NEI believes that they may be -- have a component, an adjuvant that will accelerate or enhance the effect of this particular compound. If this proves valid, it can also be utilized in the Alequel product.

We are positioning to move forward with Alequel based upon the outcome of that particular research program. We still are keeping this high on our list. We are also in partnering dialogue ever Alequel.

So it is an active area of work for us at this point in time.

And could you give us an overview of the IP picture and comment about the recent CalTech decision and what part that plays?

The CalTech decision is still partial and party to activity. So I really can't comment too much on it. It's a process within the Patent Office, and this is one part of the process. We are awaiting the issuance of that patent, because when that patent issues, we will then have more -- fuller disclosure of the claims that we will be granted, and so I really have to defer and wait until that time comes.

Any idea as to the timeline?

I really don't know, to be honest with you. I've predicted timelines with the Patent Office in the past. I can't say I've ever been correct.

Thank you. Good luck.

At this time we have no further questions. Mr. Weiner, I'll turn the floor back over to you.

Thank you very much. Again thank you for your time in listening to our call. We look forward for you to join us in December, when we report our first quarter. Have a good day. Thank you.

A replay of this broadcast will be available until Friday, October 29, at 12 midnight. You may access this replay by dialing 1-800-642-1687. The pin number is 16372257.

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