Enzo Biochem Inc (ENZ) 2011 Q2 法說會逐字稿

Good morning and welcome to the Enzo Biochem Inc. second quarter operating results conference call. Except for historical information, matters discussed on this conference call may be considered forward-looking statements in 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 the control of the Company including inter alia, the markets for companies, products and services, cost 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, 2010.

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 statement 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 alternate -- 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 this morning.

Our speaker today is Barry Weiner, President. (Operator Instructions)I would now like to turn the floor over to your host, Mr. Weiner, the floor is yours.

Thank you very much. Good morning. With me today are various members of our senior management and team that include Dr. Kevin Krenitsky who is the President of our clinical lab, Mr. Andrew Whiteley who is the Chief Operating Officer of Enzo Life Sciences, Mr. Drew Crescenzo, who is the SVP of Finance at Enzo, and Mr. David Goldberg, who is our Head of Corporate Development. Following my remarks, Mr. Crescenzo will discuss our finances in detail. And then we will open the floor to questions.

Last night we distributed a press release summarizing our financial performance for the quarter that ended July 31, 2011. As you can see by our performance, the strategic realignment of our resources continues to produce a positive impact year-over-year despite the impact of a couple of unusual events. First and foremost, we reduced our operating loss by nearly $5 million as we continue to manage our costs and expenses in a prudent manner. Specifically, for example, reducing SG&A as a percentage of revenue down to 49% which is down 10 percentage points quarter over quarter. Our total operating expenses dropped by more than $4 million while simultaneously our top line grew led by a 16% jump in revenues at our clinical laboratory unit.

In addition, we continued to substantially reduce our cash utilization in operations. For the six-months our cash utilization in operations has been reduced by $1.5 million, a sign of our continuing focus on operational efficiency without intending our future growth potential. We also, as indicated by this morning's announcement have begun marketing an interesting new assay system through our life sciences group. Our survival motor neuron or SMN, ELISA assay system is designed to measure survival motor neuron protein, the critical protein that is deficient in spinal muscular atrophy. This happens to be the leading genetically based killer of infants and toddlers in the United States.

Genetic tests which look at specific mutations that cause this dreaded disease are already in increasingly wide use at clinical labs around the world. This is the first assay that we are aware of that actually measures the level of the protein itself. We are delighted to make this announcement jointly with the Spinal Muscular Atrophy Foundation and we are very proud of the Enzo scientists that helped make this product a reality. I would encourage you to take a look at the release which was released earlier this morning if you have not had a chance yet.

Turning back to results, we had two issues that had negative impact on our numbers for the second quarter. First, we had about a $600,000 unplanned expense associated with the legal and procedural execution of our proxy solicitation. And second, an adjustment on our cost of goods of $700,000 or $0.02 per share as a result of a non-cash inventory adjustment. Going forward, as Drew will explain shortly our COGS line and thus, our gross margins, should normalize.

In our last conference call and at a number of recent investor presentations, we have reiterated our overall short-term operating strategy. The initiatives we have undertaken include, among other things, reducing expenses, strengthening our management, capitalizing on our strengths and life sciences, clinical labs and intellectual property, focusing our R&D towards high value products and finally positioning the Company to take advantage of the healthcare industry's new and emerging paradigms especially in the area of specialized diagnostics and personalized medicine of which today's announcement is symbolic of one initiative. All of these are designed to move the Company eventually towards positive cash flow.

Our corporate structure allows our Company to pursue a strategy to quickly get new, unique personalized tests and products into the marketplace with the intention that third-party healthcare payers will view them as a fundamental test that will drive down costs. The fact that we continue to have relationships and ongoing dialogues with these parties has further convinced us that they realize the potential values of these advancements. In fact, they are actually helping to drive these processes forward in some instance.

Because of the interrelationship of our technology, our intellectual property, our access to opinion leaders and clinical information from our clinical lab and the ability to discover and produce uniquely biologically-based products, we at Enzo are positioned to be in the forefront of what today is so-called the molecular revolution. Unlike others in the industry, we have a full complement of capabilities. For example, we can take a bio-marker, we can validate it using a given platform, we can then move it over to our clinical labs, and hopefully get favorable reimbursement coding and then get it out to a very desirable market.

We believe that the life sciences sector is emerging as a driver in three critical areas of healthcare delivery -- diagnostics, laboratory services, and therapeutics. All areas that Enzo has participation in. The life sciences world as Enzo views it, is central to the dissemination, digestion and execution where healthcare is moving today, because we believe that diagnostics is emerging as the portal through which one must travel for healthcare delivery. And if you can effectively employ screening and treatment processes you can change the economics as well as the outcome of the healthcare paradigm.

One cogent example of how our capabilities have positioned us for this paradigm shift is with the ColonSentry product, the risk stratification test for colon cancer developed by our partner GeneNews. This is an assay that measures the expression of specific panels of genes that studies suggest that if expressed in certain patterns that colon cancer risks might be elevated. After the assay was developed our team at Enzo ran correlation studies and submitted it to the New York State Department of Health for approval. We have already successfully concluded a site visit and have completed the pre-marketing program for this potentially valuable assay.

Once we receive approval, we will begin to market this test in our service area. To give you a sense of scale here, there are about 40 plus million Americans over 50 who currently do not comply with the recommendations for colon cancer screening. There may be a variety of reasons ranging from fear of a colonoscopy, to just general apathy. In any case this is a tremendous untapped market. This molecular diagnostics marketplace, a segment of which this assay fits into and where we continue to commit major resources to, is now emerging. We believe molecular diagnostics represents a market that is growing much faster than traditional clinical diagnostics markets, the clinical diagnostics market is estimated to be greater than $22 billion in annual revenues. And this includes a broad range of tests from the prosaic to the esoteric. Moreover, the molecular diagnostic segment of the market alone is anticipated to be a very material portion of that total.

At the same time, we are seeing a trend towards the development of companion diagnostics in the pharmaceutical industry. What this means is that many drugs will not progress through the approval process without an accompanying diagnostic product that will first determine if an individual will respond to therapy and then inform the practitioner whether the side effects could be serious. We view this as an opportunity to focus our efforts on products and services that serve this new emerging reality. As we continue to transform our Company on historical capabilities, we believe that we have the ability and talent to achieve basic research and product development in partnership with pharmaceutical companies right through FDA clearance.

Put another way, we are equipped with our clinical laboratory with full-service capability to handle prototype design, pre-clinical development, and clinical trials. Our life sciences expertise dovetails perfectly with the path we are on. Our ability to formulate life science products that will meet these new modes of interpretation and application, as well as the ability to seamlessly employ and integrate the activities of clinical labs and life sciences should materially enhance our position. The increasingly tighter bond between clinical labs and life sciences has been manifesting itself as we increase the custom research diagnostic projects we are now working on with former partners. Companies are now getting drawn to us since they see the ability to move a concept from an internally utilized kit to determine the potential efficacy or perhaps deleterious effect of a drug candidate on a particular cell type. All the way to a pre-approved test within one organization.

In the past 24 months we have acquired four important life sciences companies that have, in addition to providing us with unprecedented global marketing capabilities, added notable dimension to Enzo's product offerings at a time perhaps more so than ever before, when research and new product development is paramount. This past year we have been integrating activity including R&D, marketing, manufacturing and support. And we have consolidated for far greater effectiveness what had previously been four distinct information systems into one corporate wide and very cohesive IT group. We also have engaged in extensive product rationalization, so that our life sciences product flow is now on value-added products and systems. What is emerging is a focused life sciences Company with global distribution that will serve as a platform for future growth.

Meanwhile, on another note, I'm pleased to report that our clinical trial for Optiquel, our oral therapeutic for the treatment of chronic non-infectious uveitis continues to enroll patients and they are being treated. As a result of our cooperative research and development agreement with the National Eye Institute, which is part of the National Institutes of Health, our partner will bear much of the cost of this trial. I'd like to turn the call over to Drew for a few minutes just to review the quarterly results and then I will come back to make some more comments concerning the segments operations. Drew?

Thank you, Barry. Good morning. I want to take this opportunity to expand on Barry's comments and last nights earnings announcement of our fiscal second-quarter and then touch a bit on our year-to-date summary. My commentary will highlight certain achieved savings that directly relate to our previously announced and ongoing plan to optimize our operational efficiencies. Total revenues for the second quarter of fiscal 2011 increased to $23.7 million from $23.2 million a year ago primarily as a result of higher revenues at clinical labs partially offset by lower product revenue and lower royalty and licensing income at Enzo Life Sciences.

Net loss for the quarter was $5.7 million or $0.15 per diluted share as compared to $10.3 million loss or $0.27 per diluted share which represents a 44% decrease in the net loss over the prior year ago period. Excluding the litigation settlement and the related cost of $3.7 million in the prior year, it really represents a 14% decrease or $0.02 per share improvement. EBITDA loss adjusted to the aforementioned settlement improved by $800,000 over the year ago period to a $4.5 million EBITDA loss in the current quarter.

Let me now share more specifics on the numbers. Gross profit margin decreased $500,000 to $10.3 million. Partially attribute to lower royalty and license fee income and a non-cash adjustment to the previous quarter cost of goods. However, despite these, we achieved strong achievements at clinical labs. We expect margins to normalize in the subsequent quarters with increased revenues at both the labs and life sciences. Research and development costs declined 14% from the year ago period due to the successful integration of functions and alignment of the workforces at Enzo Life Sciences. As Barry mentioned, our selling, general and administrative decreased $2 million or 15%. As a percentage of revenue, it is down 10 -- percentage points from a year ago, $900,000 resulting from the Company's cost reduction activities.

Legal costs increased $500,000 due to a greater level of general legal, and incremental proxy costs over the year ago period that Barry had touched on previously. Our provision for uncollectable accounts, principally related to the labs, increased $400,000 over the year ago period due to changes in payer mix and increase in service volume at the lab. As a percentage of revenues, the provision for uncollectible accounts was 7.8%, up from 4.8% in the year ago period. Sequentially the prior quarter was 8.7% as a percentage of revenues. We expect to see a more normalized percentage of revenues over the remaining fiscal '11 quarters as we are evaluating enhancements and operational processes currently.

Overall, operating expenses which include research and development, selling, general, administrative, legal, and provision for uncollectible accounts, declined 8% from the prior period. The Company's financial condition remains strong with working capital of $37.5 million. As of January 31, 2011, our cash and cash equivalents plus short-term investments in US Treasury bills totaled $30.8 million. For the six months ended, the Company utilized $2.2 million of cash in operations which represents a $1.5 million improvement over the corresponding year ago period.

Now I will share some more information on the operating segments. At Enzo Clinical Labs revenues increased 16% to $12.3 million as compared to $10.7 million a year ago. Revenues rose due to increased service volume resulting from both organic growth and the new payer contract with Empire Blue Cross of New York. Gross margins improved $1.2 million over the ago period due to the higher service volume and improved operational efficiencies. The lab continues to focus on providing additional molecular diagnostic and other higher margin esoteric services. Selling, general and administrative decreased $500,000 from the year ago period, a portion of it was related to the streamlining of our operations.

Overall the clinical labs operating loss improved $1.2 million to $800,000 from a year ago loss of $2 million. At Enzo Life Sciences, product and royalty and licensing income was $11.5 million in the current period compared to $12.6 million a year ago. Product revenues declined $500,000 over the prior year period, mainly due to the planned reduction in low margin distributed products and we also had lower royalty and license fee income of approximately $600,000. Gross profit margin declined $1.7 million year over year due to lower product revenues and also lower royalty and licensing income and we experienced higher cost of product revenues this quarter.

The segments other operating expenses including selling, general, administrative, legal, and research and development decreased by approximately $800,000 during the 2011 period. Primarily due to the lower marketing and selling expenses attributed to the refocused and lower planned spending, lower payroll related costs and the reduced research and development expenses consistent with a sequential quarter. Enzo Life Sciences reported an operating loss for the quarter of $400,000 as compared to an operating profit of $300,000 in the year ago period.

Turning now to our year-to-date highlights, for the six months ended January 31, 2011, the Company recorded a total revenue of $49.4 million, an increase of more than 2% despite a decline in royalty and licensing income of approximately $800,000.The net loss was reduced by more than $5.3 million to $6.8 million, an improvement of $0.14 per diluted share. Adjusting for the legal settlement in 2010, the net loss improved by over $1.6 million or $0.04 per diluted share. Gross margins year-to-date were 48% as compared to 50% in the prior year of which 1 percentage point of the decrease was attributed to the lower royalty and license fee income. Research and development expenses were reduced by about $1 million reflecting the Company's ongoing program of integration of its various sites. Selling, general and administrative declined by $2.5 million and as a percentage of revenue declined to 46% from 52%. EBITDA loss adjusted for the aforementioned litigation settlement improved by $1.8 million to an EBITDA loss of $4.5 million. Barry?

Thank you, Drew. I would like to make a few remarks about the divisions. During the past quarter we were very pleased to see the continued progress at our clinical laboratories in several financial areas as were highlighted by Drew. But perhaps the most important aspect was the top line growth of more than 16% at Enzo Clinical Labs in a market where many of our competitors are showing much lower or even flat organic growth. Looking at a couple of new specific test offerings, in addition to ColonSentry that I mentioned earlier, we have been marketing the oncoFISH Cervical test now for one year and the response continues to be excellent for our GYN clientele. This is a test to identify chromosomal changes in cervical cells that may be an early indicator of cellular transformation.

We're also working to bring to market a number of unique molecular tests that fit extremely well with our current client base and strength in women's health. As we previously discussed, our target of having a number of unique molecular tests filled exclusively by Enzo in fiscal year 2011 is on track. We anticipate this partnering track and the novel testing content it delivers to serve as a viable machine to drive revenues above and beyond our organic growth plan. In addition, to this organic growth at Enzo Clinical Labs and the new test content from partnerships, we have been successful at reducing our reference or send out costs. For example, for fiscal 2010 our reference costs were roughly 9% of revenue. Through diligent negotiation and in sourcing we have reduced that number of 6.9% in Q2 of 2011. Keep in mind this is a significant percentage reduction, especially considering our overall 16% year-over-year growth rate. In addition we have received responses to a program which we initiated recently that will allow us to further reduce costs while reducing the number of providers we use which ultimately tends to improve quality. As you can see, we are executing on a comprehensive business plan that includes substantive moves to new higher value, higher margin tests.

This will serve Enzo Clinical Labs in three key ways in 2011 and beyond. First these exclusive high value tests will insulate the laboratory from external factors such as payer contract realignment and routine market erosion. Second, test mix alone will drive higher margins and finally an enhanced unique esoteric test menu will continue to drive synergy with the Life Sciences division opening up the door to more internal test development and companion diagnostic services.

Despite significant volume increases in Q2 as we discussed, our staffing levels were additionally reduced from the July 30, levels. This has been accomplished without any discernible uptick in overtime costs. In general, we believe that we will experience continued aggressive growth while practicing efficient cost containment throughout the remainder of 2011. Overall the lab is well-positioned to be a significant provider and developer in the emerging companion diagnostic market.We will continue to aggressively pursue these opportunities in an ongoing manner. In our Life Sciences division, from a strategic operation standpoint, we are making progress.

As we described to investors in our last call our Life Sciences division has been in the process of a multi-year restructuring of the business from its acquired companies ALEXIS Biochemicals, BIOMOL International and Assay Designs. During the last quarter the newly strengthened management team of Enzo Life Sciences has worked to finalize the integration actions. As a result, Enzo Life Science showed net of royalties increased EBITDA as compared to Q2 last year following the reduction in headcount and other integration activities that have improved our sales, marketing and manufacturing efficiencies. Enzo Life Sciences for it's part and as we've noted recently has been undergoing a far-reaching reorganization. The objective has been to better integrated the units we acquired to focus more on higher margin in-house products, to utilize our own distribution network instead of relying heavily on third-party distributors and to reduce overhead. Indeed, we have as an aside reduced debt throughout the companies as one of our cost-saving measures aimed at greater efficiencies.

As anticipated in our last call our sales volume in the past quarter was affected by the ongoing rationalization of low margin distributed product business that is no longer in our portfolio. Overall compared to last year revenues declined slightly on both exchange rates and due to those rationalized products as well. The reductions of sales of certain products will continue over the rest of the financial year as rationalized product revenue is targeted to be replaced by core Enzo product sales so through our direct channels to market, to a more focused set of distributors in international marketplaces. We are looking to expand our reach into the Asian markets, one of the fastest-growing in our segments. In Europe, as part of our integration plans we have already successfully transitioned important businesses from distributors to our local officers in the UK, Germany, France, Benelux and Switzerland. This was achieved despite the rationalization of specific distribution businesses we just mentioned. Overall by the end of next quarter, we expect further increases in our European direct sales activity without increasing headcount thereby improving overall efficiency in our business.

We continue to aggressively roll out new products for use in a life sciences research marketplace with particular focus on functional testing and drug development and predictive toxicology testing of new drug candidates. The other key strategic initiatives at Enzo Life Sciences is the integration of the research and development programs with Enzo Clinical Labs which provides us with measurable developmental advantage. This has manifested itself with an increasing number of dialogs with large pharma and tools companies to explore mutually beneficial business relationships. This is also emerging in a couple of ways. If you have been following the clinical laboratory markets and the number of transactions in recent months, then you'll no doubt realize that the laboratory valuations are at record highs because among other things clinical labs provide unparalleled access to the marketplace and an early entry point to both niche and general healthcare providers. The clinical laboratory also contains a wealth of information not only due to outcomes but due to access of clinical specimens and it is the ultimate control of a specimen that both diagnostic and pharmaceutical companies view as key. What we are seeing is a renewed recognition of the high value of having a clinical lab provider as a channel distribution and as a provider of informatics in the development of new drugs as well as diagnostic tools.

For us here at Enzo, these transactions, again, underscore the advantages of our integrated capabilities worldwide. These include our ability to bring forth new life science products which we are doing internally and via acquisition with partnerships, and also in providing services. We believe we are well-positioned and we are very much in sync with the markets and we expect that these efforts will prove to be increasingly valuable over the next months. The investments made over the past couple of years in building what we believe is a world-class integrated specialized life sciences and clinical lab organization with products, technology, information technology capabilities, and the 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 which we have implemented has already begun to strengthen our financial position. With that I would like to turn the call over for questions before we make our concluding remarks.

(Operator Instructions)Our first question comes from the Yigal Nochomovitz of Rodman Renshaw.

Hi. Good morning gentlemen and thank you for taking the question. Maybe we can talk with ColonSentry, you mentioned that the application has been submitted to New York State, I believe it was in the Fall of last year. Could you provide any sense regarding feedback with the New York regulators in terms of how they view the application and when potentially we can see the product be approved?

Sure. Yes, we submitted back in November and to date we have been in contact with the state and we know that it's in the queue for review. We cannot put a time on when that approval will come. But we can say that we were, after the submission of ColonSentry, the lab, our new molecular oncology lab which obviously will be our hub for processing the test and delivering results, was inspected by the state without any issues and essentially is approved. What that means is that, when the paperwork portion of the approval occurs we will not have to wait for a lab inspection to happen. We will be able to commercialize the test instantly essentially as soon as we achieve that approval. So we have said I think now for sometime that we expect it to occur late in this calendar year and we are still hoping that is the case. The reality, of course, is that it is, as with other regulatory bodies, somewhat out of our hands. Once again, we are extremely pleased with the pre-marketing work we have done in testing the market with regards to interest from clients and those clients, of course, being physicians but also even patient interest is extremely high so it is a very positive move forward with regards to a new molecular diagnostic that we will obviously offer exclusive

Okay, thank you, Kevin. And just following up on that, in terms of pricing and reimbursements for the tests as well as the market potential for this novel test could you just give us a sense of how far those analyses have come? Have you arrived at a price and what is going on with reimbursements?

I think pricing the test is -- however, you price the test is a little bit less relevant than what your reimbursement profile is. And in looking at our contracted reimbursement for the test as we mentioned before, it is favorably reimbursed in the $500 plus range, $500 plus range per test across our payers more or less universally. We have carved out pricing for this test with one lower payer which also is an extremely favorable occurrence. It shows that they understand the potential value of the test. With regards to the market I mean I think Barry touched on the market nationally. Initially we will begin to market this regionally within our current service area. The potential for a national rollout after that does absolutely exist. But the market is obviously extremely substantial.

Okay. Let me just switch over to talking about the revenues. It is certainly very nice to see with the laboratory that you sort have hit the $12 million mark for quarter and it seems to be solid and steady over the last quarter and then as well this quarter. I just wanted to get a sense from everyone in terms of the trend going forward. How much of this $12 million run rate has already absorbed the impact of the Blue Cross Blue Shield payer contract and in terms of the new hires that you have brought on, what sort of additional uptrend in the revenues could we see with that, with the new hires, as well as ColonSentry although it seems that may be more of a 2012 impact than a 2111 one.

I think if you look at the number itself, and you look at the growth last quarter, the growth we had this quarter at roughly 16%. It is an extremely favorable indicator of where we're headed. I think the good news on top of that, is that most of this growth really has come just from hard work organically as you mentioned. We were able to attract a number of sales people that were sales professionals that were very high quality. Many of them are operating now without restrictive covenants as you mentioned and in the next few months the few remaining individuals will come off restrictive covenants. I think that the positive -- one of the other very positive aspects of Enzo Clinical Labs at this point is that, you are only seeing a minor portion of the growth that we have shown coming from increased or a shift of our testing towards higher value, higher margin tests whether they be molecular tests, whether they be other non molecular esoteric type tests and with the programs we have in place, we anticipate that moving forward, we will be able to -- we anticipate continued robust growth because of the shift towards these higher value, higher margin tests which to date, once again, we have improved or margin significantly year over year but we believe that there is additional room there that really is not manifested in numbers yet.

Okay. Thank you. And in terms of the additional high-value molecular diagnostics that you are potentially going to bring on board in 2011 there are a number of therapeutic areas that you mentioned today and in the past including women's health, oncology, internal medicine, I think you also mentioned in the past, autoimmune as well as AP and [systemic pathology]. Could you just give us a sense in terms of what is the relative prioritization here and would a future end licensing agreement look something like what we saw with of GeneNews and in terms of specifics, are you at the term sheet stage with any of these above indications and could we see something in the coming months?

Yes, we are -- right now we are at the term sheet stage with three additional tests that would be novel tests. Those tests are all -- those tests are in the areas of oncology and oncology respectively as well as test -- cardiovascular tests, major complement to the current suite of cardiovascular testing options that we offer. So we are -- we are at that stage with three companies. I think we talked about having four unique tests that were exclusive to Enzo. Notwithstanding the oncoFISH tests we have been selling for about a year and a half now. And once again, that is an oncology test in the area of women's health. So what we are doing and where we are with regards to the testing, our esoteric testing program if you will is aligning tests that fit our profile of sales capabilities. So when we roll these tests out as we did with the oncoFISH test, we can realize sales immediately. We are not in a position where we have to go and reach for new markets or new clients. So hopefully that has answered your question but that is currently the stage we are at.

Okay. Just in terms of the process I assume that you also would to an in-house validation of these tests along the lines of what was done with ColonSentry. Is that the plan?

Right, for the vast majority of these -- I will call them business development type opportunities we will take these tests and we will validate them against some predicate data set and come up with an LVT that is developed at Enzo keeping in mind that we are always aware of the moving regulatory landscape and always have contingencies for that out there. There are some tests that we are bringing in that are above and beyond what we mentioned, what I just mentioned to you now that may have some component of FDA approval to them as well as a component of them that falls under that LVT category that we bring in and bring up simultaneously and then launch. So for the most part when I talk about unique programs, I talk about programs that will deliver us unique content in the molecular arena but that is not to say that we're not looking at the entire landscape of esoteric testing whether they be FDA approved or not and see what we can bring in and have fit into our portfolio of tests right now once again with the idea to continually drive revenues but also to continually drive margin improvements going forward.

Okay. And I think Barry, you mentioned oncoFISH. Can you give us an update there in terms of the sales performance? You mentioned it was an excellent response. Is it possible to provide any concrete numbers at this point or not?

For competitive reasons we do not release specific test numbers. But we have been making increasing penetration over the last year with that test and we have plans to actually accelerate that penetration into the future.

Yes.

We have been fairly pleased with it.

I think the one thing to realize is when you take the strategy that we have taken which is to bring in a suite of new testing options, be they molecular or otherwise esoteric and you fit them into a current client paradigm you already have that when you grow your business organically you have the opportunity to see those tests grow along with it. So you can imagine that if we were selling that test last year and, of course, we were and it was a very successful year for us and selling that test, we see this growth, the 16% growth for example. And by picking up new clients we thus have the opportunity to sell more tests. So it really is part of the philosophy of bringing in tests so when you grow the business organically that test volume will grow as well and really taking reaches only on tests that move into an area where the market potential is very significant.

Okay, thanks. Let me switch over to the Life Sciences division. So in terms of the relative ratio between the low margin products that you are attempting to rationalize or that you have rationalized and the new high-margin ones that are coming in, could you just give us a sense as to how that process is going and how many more quarters we should expect additional rationalization of the low margin products as well as, when the more significant impact of the high-margin tools and tips could be realized?

Yes, of course. We are obviously concerned about a couple of items and the dynamics of the business here. Going forward we really want to focus on Enzo produced products, Enzo labeled products so the majority of the rationalization today has been around distributed products and obviously distributed business we have a specific channel that we manage and I see great opportunities from but we want to make sure that within the old rationalized companies where there were distributed products that we're moving these out particularly where they're in sort of internal and competitive pressures from those suppliers. So there has been a significant impact on that rationalization over the first two quarters. We see it going through at a somewhat reduced level of the final two quarters and then will be minimized from the beginning of the new financial year.

And is the expectation that the suite of products that you offer will still carry some small or low percentage of low margin products or are they more or less all of being pushed out with the high-margin one's?

We have, internally manufactured products which we focus our growth and our campaign efforts around we also do OEM products which are at a somewhat lower margin. We do not split out the proportion of those areas obviously for us going forward it is all about the new products. The SMN kit that we mentioned in our press release today is a good example of a product that we collaborated with a scientific expert in the field. Brought this product to market place with essentially a funded R&D effort from their part and something that we rollout now into clinical research, pharmaceutical research, and eventually into pre-clinical applications so this is very typical of the model that we are adopting as we move the business forward.

Okay. That leads me to my next question. I did want to ask about the test -- the SMN test. So could you give us a sense there in terms of what the gross margins may be on this kit as an well as an early read if possible on the market potential for the SMN tests?

Yes, again we do not establish publicly margins on individual product basis or, indeed, individual product sales. Suffice to say, we have been delighted with the uptake in the first quarter of third-party sales and the SMN kit will be one of our top products I am sure as we move forward to the rest of the financial year.

And just so I understand the goals of this test correctly, my understanding is that this is a research tool but is there any potential for this to be over developed as an in vivo diagnostic in utero or is that not the aim?

I think -- if you look at this test, one of the unique trends out there is with spinal muscular atrophy, there is an SMA test on the market now.It is a test frankly that is trending wildly in sales, trending very favorably in sales. This is a test that is a test that we currently send out. In fact, it is our number one send out test with regards to costs. In fact, it is a test that cost us the most over the course of the year. And the reason for that is, as you look at some of these pre-natal diagnostic tools, things like cystic fibrosis which, of course, is a test that has been very successful in trending up upwards, we see that test where one can actually measure something that leads to distinct clinical outcomes and changes clinical behavior like FMA, like CF, these are tests that tend to grow year-over-year. So the value that we see with a particular product that life sciences put out is really the opportunity initially as Andrew mentioned to drive -- it is a research use only tool that eventually can be a significant pre-clinical player in theranostic development, the development of a companion diagnostic, that not necessarily -- it will not be like the SMA tests, the pre-natal SMA test that is out in market currently but it could very well help to define and drive the development of novel therapeutics of which we know several pharmaceutical companies are aggressively working in this area. So from the standpoint of its clinical utility we certainly see its value in potentially helping to stratify patients into as you look at numerous companies going through these stage three adaptive trial designs with theranostic markers and markers that help to predict who may or may not benefit from these tests.This one is a particular promising one that obviously fits nicely with the growth we see of the SMA test in the clinical arena.

I am just curious if we should be expecting other such research based tests to be announced in the coming months that have been developed in collaboration with academic groups.

Yes, of course that is one of our key objectives. Any time that we can work with leaders in the field like the Spinal Muscular Atrophy Foundation that are committed to excellence in science and advocating new opportunities like this similarly with pharma and biotech companies that are looking for as Kevin said the companion or linked testing environments. We can bring to bear the skills and expertise of our acquired units within the Company.

Barry, let me just ask you a separate question regarding the IT landscape, obviously Enzo has a very strong IT portfolio specifically regarding the branch DNA patent on Siemens interference proceeding, do you have any specific updates there regarding that process?

We are just awaiting the Boston court decision on the case filed against us in the interference office on the decision which granted us seniority on that patent. It is very difficult to predict, of course, the outcomes of time as we all know in the legal system but we are highly optimistic. We ourselves though are now developing products based on that technology internally. We are in dialogue with other parties on products based on that technology. So we are moving forward and that decision will happen when it happens.

Got it. Thanks. And just one final question on the therapeutics pipeline. You mentioned the optical study and that it's continuing to enroll. Do you have any sense there as to when we can see the study reach the enrollment target as well as the potential for the first readout of the data?

Hi, Ugal. David Goldberg here. As the plan indicates, we should have something middle of 2012 again it depends. The speed of enrollment here is really the "X" factor. But we still believe we will be on target for sometime middle of next calendar year. Again in terms of results a lot of it depends upon statistical significance and the numbers.

Okay. Thank you very much for taking the questions and good luck with your continued progress.

Thank you.

Next question, please.

Your next question comes from Anthony Pfaffle of Darrin Circle Capital.

Hi gentlemen. Good morning. Two questions. One, in terms of oncoFish Cervical in testing volume it's largely driven by your footprint in women's health OB/GYN. Recently you have been expanding out your licenses into other states. In terms of your ability to increase testing volume for oncoFish Cervical through your expansion, through your current sales force what is the strategy there going forward and do you have a similar type of commercial strategy that lends itself to the primary care G.I. community of physicians for oncoFish for ColonSentry that would potentially follow in the second half of the year and then I understand, you don't release numbers on the different tests but what would -- sort of the testing volume for a SMN protein test be and what are the margins on the kits and what for that generic type of test would sales be generated from that type of tests? Thank you.

Okay. I will handle the first two questions and then I think I will let Andrew talk about the SNM kits which is not currently obviously being marketed by clinical labs, the life sciences tool really. So the -- as I mentioned before, we are seeing significant organic growth by expansion of our client base. Yes, we have a very robust women's health initiative and as a result of that as we see that organic expansion we see the opportunity for tests like oncoFish to increase in volume and that is what we have consistently seen quarter over quarter since launching this test. We do expect that to continue. Your second question--?

Kevin - would it be like at 10% or 20% increase year on year? Or it's hard to put a number on it in terms of what type of trajectory do you see in terms of the samples coming in and the reimbursement.

Well, it, it is a marketing arrangement so our reimbursement is solid and set. With regards to growth, it is roughly mimicking our organic growth which has been anywhere in the now 12% to 16% range. On the ColonSentry test, we have done extensive pre-marketing work not only in terms of our own sales force, in terms of utilizing our proprietary IT connectivity solution Enzo Direct to pre-market the test to the appropriate segment which by the way is for the most part, primary care physicians of which we have a large segment in our client base. Not so much--?

I'm sorry, so if you got approval in two weeks, you'd be ready to roll with your sales force in service and ready to sell the test in a short period of time?

Absolutely, yes. Yes.We have been very happy with the pre-marketing and we an extensive marketing plan that frankly right now we are simply trying to determine what the scope of that marketing plan will be because as you can imagine it can be anything from a very targeted sales approach with current sales force to a massive approach of consumer awareness campaigns and anything in between. So that is an ongoing part of our valuation right now. With regards to the spinal muscular test I will let Andrew speak to that.

As I mentioned earlier on we do not put out individualized revenue targets for products. We have over 9000 products and within that portfolio we have everything from blockbuster products in a life science context to much smaller range fillers. In this case we see that the SMN kit is worthy because not only did we fund the development of this test through the collaboration that's in the press release today but we benefit downstream from the tests that can be put out to the marketplace and it will be one of our top products that we will be launching initially here in the States but then increasingly wanting to push this out into the European marketplace.

And also there is an internally developed test so that the margins of that test will be on a more favorable level for us.

Thank you very much.

Next question, please.

Your next question comes from Robert Smith of Center for Performance Investing.

Good morning. Could you give us an update on your work in Crohn's and a second question, could you discuss the -- or give us some color on -- about the materiality of the Caltech decision.

The first question in terms of Crohn's, as part of the CRADA, with the National Eye Institute there is a research component in which there is work being done currently on an adjuvant that will -- might have the ability to enhance the effectiveness of this particular drug. That adjuvant, if it proves successful, may have applicability in use in Crohn's because of the mechanisms of actions which have some similarities associated with that. We are closely looking at that mechanism of action and evaluating the next steps with the Crohn's as you may aware, we have completed two phase 2B studies on that. We are prepared to move forward with that test. We do have dialogue with partners on that test before we initiate a further study though we are awaiting and seeing if the enhancement will make sense to include that in the protocol and mainly because once to start a test you don't want to go back and have to redo it do it with a different combination of compounds. In terms of the second question, the patent world as you know is a very complex case particularly in the area of patent litigation in the Caltech case we went through an interference proceeding, initial comments were unfavorable to us. We have applied for a rehearing on that that was denied and then there is the next step which will be looking at potentially revisiting that patent and re-examining the validity of that patent in totality. This is all part of the process. Unfortunately it is a long process but we are moving down that pathway.

Barry, when you speak of the Crohn's test I am not too clear -- I'm a little unclear as to what you mean by that.

We have the ability now to move to another arm.

I mean what has happened with the treatment phase? As a therapeutic.

That is what I am referring to, we have completed two phase 2B studies. The next step would be--.

So you are trying to enhance it with--?

No. We can take it as it is to a much broader market and push towards statistical significance in a full-blown trial. We can do that either alone or with a partner. We do have pending research that might enhance the efficacy of that particular compound. So we are waiting to see if that adjuvant does make sense to integrate into the next study level before we initiate the next trial.

Okay. Thanks.

Thank you. I think if there are no more questions we will move on. I wish to thank you for your attendance and listening to us for this quarterly call. We look forward to chatting with you again in June. As you can discern there has been an enormous amount of activity taking place within the Company on all fronts. We are very excited about where we are heading. We believe we are in the center of activity where healthcare is moving today and we believe we as a Company will be making a contribution and impact and we look forward to sharing that information with you as a move into the next few months. Thank you very much.

Ladies and gentlemen, that concludes the Enzo Biochem Inc. second quarter operating results conference call. We appreciate your time. You may now disconnect.