Enzo Biochem Inc (ENZ) 2011 Q4 法說會逐字稿

Good morning and welcome to the Enzo Biochem, Inc. fourth-quarter and full-year 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, 2011. 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 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 GAP on its website, www.Enzo.com, and in the press release issued last night.

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. Wiener, the floor is yours.

Thank you. Good morning and welcome. Thank you very much for joining with us. I'm joined today by members of our executive team including Mr. Andrew Whiteley, Mr. Drew Crescenzo and Mr. David Goldberg.

Last Friday afternoon we distributed a press release detailing our fourth-quarter and full-year operating results and I trust you've had an opportunity to review them. Following my brief remarks, Drew will discuss our financial results in detail and then we will open up the floor for questions.

In 2009 Enzo embarked on a strategic transition designed to capitalize on our historical vision and core technology strength, to position our Company in the evolving healthcare space that embraces personal medicine, molecular and companion diagnostics and to take advantage of the various channels of distribution to which we have access to. To do so we envisioned and we move towards a fuller integration of our Life Sciences and Clinical Laboratory capabilities.

It has been our belief for a long time that the healthcare industry as a whole has been moving towards a similar integrated structure. Witness, for example, the number of laboratory assets that have been purchased by nontraditional acquirers, deals involving companies such as Clarion, Genoptix and NTD Labs, as instances where life sciences companies, understanding the value of integrating technology and clinical information, moved to form entities that could provide service and channeling assets along with developmental capabilities.

Also we recognized that as the research products and equipment business shows increased market softness and uncertainty due to the economic environment, this has been supported by announcements made by other companies in our field as well, we believe our approach towards higher margin, more differentiated products is timely.

Our goal has been to both make Enzo more responsive to industry trends and to drive a more focused developmental effort towards key specific products and technologies that will make a difference in medical knowledge, decision-making and treatment.

The results we announce clearly show that we are heading in the right direction. Some of the highlights for the quarter include -- our revenues crossed the $100 million mark for the first time in our history; an 11.6% increase in product and lab service revenues from a year ago; an increase in revenue at Enzo Clinical Labs of 22%; a gross margin improvement to 45% from 41%; an EBITDA improvement of 36% or $1.7 million; and a 27% reduction or $1.5 million improvement in the quarter's net loss as compared to year ago.

The last point may be of the most importance. A year ago we announced that Enzo embarked on a streamlining of operations with a goal of reducing expenses by $4 million. In fact, in the past five months we have reduced our expenses by over $5 million, in particular through reorganization and removal redundant fixed costs at Enzo Life Sciences, as well as process improvements at Enzo Clinical Labs, and a downsizing of costs at the corporate side of our corporation. This will continue to improve profitability into the future and across all divisions in 2012.

Perhaps even more significantly, we accomplished this while growing top-line revenues, improving gross margins, lowering SG&A as a percentage of sales and advancing two key enabling platform technologies to the level where we believe we can begin to monetize them.

What has emerged at Enzo as we enter into fiscal 2012 is a more streamlined and focused Company with a clear vision of product objectives and a defined business plan that in many cases will contribute to multiple market segments serviced by both our Life Sciences and Clinical Laboratories channels of distribution.

Our results this quarter reinforce the financial improvement we spoke to our shareholders about during the last fiscal year and with that I'd like to turn the call over to Drew who will review our financial results for the quarter and the year in full. Thanks. Drew?

Thank you, Berry, and good morning. Now let me expand on both Barry's comments and last Friday's earnings announcement. With respect to the fourth quarter, our products and lab services revenues rose by 11.6% over the year ago period to a fiscal fourth-quarter record for lab revenues and comparable product revenues at Enzo Life Sciences.

Royalty and licensing fee income declined by $700,000 to $2 million, which was expected. Combined with the overall record earnings and the combined continued benefits from the year long process improvement cost containment initiatives, our net loss for the year was $4 million -- net loss for the quarter was $4 million or $0.11 per diluted share as compared to $5.5 million or $0.15 per diluted share in the same year ago quarter. Our EBITDA loss for the current year period decreased by $1.7 million or 36%.

We continue to not record any tax benefits generated from our losses. To give some brief details on our results -- as a result of both increased overall revenue and improved cost structure gross profit improved to $12 million from $10.2 million a year ago, a 17.8% improvement with the gross margin at 45% for the 2011 quarter compared to 41% in the year ago period.

Our R&D expenses declined by $500,000 with our more focused program. Selling, general and administrative expenses as a percentage of total revenues improved to 44% from 46% a year ago. Our provision for uncollectible accounts primarily related to Enzo Clinical Labs improved as a percentage of lab revenues by 200 basis points. Despite the improvements our legal costs increased $200,000 in the year-over-year period.

Our financial position remains strong. As of July 31, 2011 our cash and cash equivalents and short-term investments approximated $24.2 million. Our working capital is over $33.7 million with almost a 3 to 1 current ratio. Our cash used in operations has decreased to $8.3 million in the current period as compared to $13.5 million in the year ago. We expect this improvement in cash used in operations to continue. Our stockholders' equity was over $115 million.

I'll now go back and give some highlights on the fourth quarter with respect to our operating segments. Enzo Clinical Labs reported record quarter revenues of $14.3 million or a 22% gain and 3% ahead sequentially, the result of 11% organic growth reflective of increased clients and test offerings and 10% growth from a new payor contract. This new payor contract has provided increased access to physicians not previously served.

As a result of the Company's strategy to continue to integrate our operating businesses, Enzo Clinical Labs continues to focus on the development of in-house developed test plus the addition of other esoteric assays to our test menu. The gross margin in Clinical Labs increased to $5. Million (sic -- see press release) or 42% of revenues compared to $3.7 million or just 32% a year ago.

The Lab's SG&A remained constant at $4.8 million in both periods despite increases in commissions and other selling costs. These result from greater revenue offset by lower personnel costs relating to the reductions and process improvement initiatives in 2011. SG&A at the Labs as a percentage of revenue declined to 34% from 41% a year ago.

And lastly, the Clinical Labs' operating loss was $400,000 in the current quarter as compared to the year ago loss of $2.5 million, an 84% improvement in our bottom line.

Let me now turn to Enzo Life Sciences. Fourth-quarter product revenues at Enzo Life Sciences were comparable to the year ago period at $10.5 million. Royalty and licensing income decreased $700,000 to $2 million due to no current royalties from Abbott in the current period. Gross margins on product revenues at Life Sciences decreased $1 million after giving effect for the prior year $1.3 million charge.

The declining gross margins were attributed to higher compensation costs, changes in cost allocations, effects of foreign exchange and other inventory costs. Contributing to the decline were higher legal costs and the aforementioned reduction in royalty and licensing fee income. As a result Life Sciences reported a fourth-quarter operating loss of $800,000 as compared to a loss of $100,000 in the year ago period.

With respect to our year over year, we commented in our press release as to the record year-over-year revenues of $102 million, an increase of 5% and the significant reduction in our net loss. After adjusting for the litigation settlement in the prior year we had a $5.6 million decrease or a $0.15 per diluted share. And on an EBITDA basis an improvement of $5.9 million or 41%.

These improvements are directly aligned with our streamlining project announced in the first quarter. Let me share some of the results of this streamlining project. Specifically, operating expenses with planned expense reductions being R&D and SG&A declined by over $5 million across all companies. Gross margins improved by 700 basis points principally at Enzo Clinical Labs.

Cash used in operations decreased $5.1 million and after considering the impact on working capital for the increase in Clinical Lab accounts receivable from the achieved growth, it would have decreased by almost $11 million to a net use of cash in operations of $2 million.

Lastly, significant progress at Enzo Life Sciences with the realignment and centralization of certain functions. The above improvements in both operating results and reduced cash flow used in operations are expected to continue. As Barry mentioned, we will continue to manage our cost structures and look to consolidate functions where it makes sense. Barry.

Thank you, Drew. I'd like to take this opportunity to expand on certain aspects of our operations beginning with the Clinical Laboratory. As you have heard, Enzo Clinical Labs has had another strong performance this quarter. What we are seeing is the realization of the strategic program that began more than two years ago.

Over this period of time we implemented both quality improvement measures as well as substantial cost efficiencies, specifically we improved and updated our physician connectivity capabilities, we bolstered our marketing efforts, we expanded our in-house testing capability and menu and, perhaps most importantly, we stepped up collaboration efforts with Enzo Life Sciences to further the development of key platforms and technologies.

This has resulted in improved client retention, a much higher level of productivity and the development of an enhanced high value molecular test capability which have all contributed to the very much improved financial performance this quarter. We have been working to expand our unique proprietary molecular product line specifically in the area of women's health, a core franchise of our Lab.

Enzo's scientific team is currently developing an assay which is based on our proprietary technology and may allow a pathologist to actually visualize human papilloma virus directly in the nucleus of a patient's cell, thereby providing perhaps even a more comprehensive indicator of the potential for progressing to cancer.

This is but one development arising from new platform technologies developed at Enzo that I will detail shortly that are being cross translated into actual products for our Clinical Laboratory and ultimately for laboratories around the world.

Additionally, another potentially high value molecular assay for which we are awaiting final regulatory approval is the ColonSentry test. This is 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, it's actually seven genes.

Interpretation of this expression of this panel may provide physicians with the ability to identify those patients that may have an increased risk for developing colorectal cancer. While not replacing colonoscopy, this blood test could be used by physicians to encourage their patients to comply with the need for colonoscopy screening.

After ColonSentry was developed our research and development team in house set up the molecular parameters that would be needed to run this test and our medical technology team performed correlation studies and submitted it to New York State Department of Health for their approval.

We have already successfully completed an assay specific site visit and have completed the pre-marketing program. Once we receive final approval we will immediately begin to market this new test in our service area.

To give you a sense of the scale that we are looking at, the CDC estimates that about 47 out of every 100,000 people develop or die from colorectal cancer in New York. This is the second highest occurrence rate in the United States. Moreover, there are about 40 plus million Americans over 50 who currently do not comply with the recommendations for colon cancer screening. This may be for a variety of reasons ranging from a fear of colonoscopy to just general apathy.

In any case this is a tremendously untapped market. If we are able to capture just a fractional percentage of a market this large it could have a significant impact on our Lab. Moreover, by getting more individuals into the healthcare system with regular examinations the benefits both medically and financially could be substantial.

At Enzo Life Sciences we have refocused the division's efforts towards more higher value products and assay systems as we shift our product focus and marketing towards pharma and biotech companies. These customers have increasing needs for tools that can comprehensively evaluate drug candidates through secondary screening and by assessing potential adverse toxicological effects prior to making decisions on new chemical entities that would enter the clinic.

To address this market opportunity we have increased our product menu in the area of live cell analysis and have begun to add a number of high value drug screening libraries to the Enzo Life Sciences catalog which have been well received by our pharmaceutical clientele.

We have also entered the market for screening of therapeutic proteins with new products that measure the byproducts of large-scale production of therapeutic proteins and antibodies in particular protein aggregates. Screening for the ideal conditions for protein manufacture that minimize formation of aggregates is a critical step in developing effective biological therapeutics.

To support Enzo Life Sciences initiatives we recently augmented our global management team with a number of new additions. These individuals collectively come to Enzo with over 100 years of relevant experience built up with larger and in some cases small life science and healthcare companies. Our new hires include Dr. Bruce Taillon as Head of Global Technology and Business Development; Dr. John D'Errico, who along with Mr. Brian Conkle will lead the Company's commercial merchandising operations; Dr. Paul Munger, who will direct Enzo's global manufacturing operations; and Kara Cannon, who is now leading our global marketing efforts.

Additionally, we have appointed Dr. Walter [Isler] to be our Global Director for Distributor Sales to assist us in the marketing of our productline in the areas of the world, most notably Asia, where we do not as of yet have a direct sales presence.

We believe that the opportunity to tighten the relationship with our end users will have long-term benefits as we continue to introduce new products throughout our system. Moreover, we believe this team can now help to move the Company forward as we begin to reap the rewards of our improved synergies that will come from an integrated organization.

The increased synergies that we are seeing amongst our divisions have manifested themselves in key developments which we believe may have significant long-term revenue potential that leads me to talk for a few minutes about our two lead molecular diagnostic platforms.

The first is what we have named [AmpiPrep], our internally designed proprietary technology which can enable one to perform real-time PCR type amplification and detection in a better, faster and more economical way. Enzo's proprietary platform has been designed with interchangeable components, formatted for open laboratory systems -- that basically means for equipment that will be able to accept our reagent systems without a change.

Initially generated results have shown 100% concordance with other systems and our platform is demonstrating substantial sensitivity. This is a critical advantage as we begin to formulate our commercial strategy. Improved sensitivity can convey with it several economic and service-level improvements that conventional PCR cannot match.

First, Enzo's platform requires less sample volume. This in turn lowers the amount of costly reagents needed to run the tests that are ordered, therefore reducing costs for the Clinical Lab.

Second, Enzo's increased sensitivity reduces the amount of patient sample that is needed. This can benefit both the physician and patient by reducing the need for second visits just to obtain additional specimen to run follow-up tests.

In addition, the reduced volume requirement may allow the Lab to run multiple different tests off the same specimen, thereby potentially reducing what is probably the most expensive component of the assays, sample processing. In some assays simple processing costs alone can be more than 50% of the entire cost of the test, and so a reduced sample volume may allow labs to spread this cost over multiple assays thereby reducing the marginal cost for each test.

And finally and perhaps most significantly is the ability to run multiple assays off the same specimen. This will position this platform well for the new molecular diagnostic reimbursement schedule that is scheduled to be released in 2012. The proposed new schedule will provide for molecular diagnostic assays to be reimbursed more in line with other lab procedures.

Today molecular diagnostic labs are reimbursed on what is called a stacked code basis, that is each process needed to arrive at a final result is billed at for itself specifically more than the summation of what the steps concur. For example, there are codes for extraction, purification, amplification. In the next set of codes that will be issued this process is expected to be replaced with unique codes that cover the entire procedure.

While specific reimbursement levels have not yet been established, it is clear that labs will be under more pressure to run operations efficiently and that more cumbersome assays will become less profitable. Thus our technology which employs less steps, smaller reaction volumes can enable the development of a highly desirable molecular diagnostic assay that can fill this growing market need.

Currently it is estimated that the market for assays such as viral loads that are now run by a real-time amplification detection methodology exceed $2 billion. Thus you can certainly understand our desire to move to this commercialization area in an expeditious manner.

In addition, we have also advanced the development of our next-generation branch DNA platform. Enzo's scientists have been able to apply this technology to the visualization of as little as a single copy of a virus that has been actually integrated into the cell.

We have applied our branch DNA platform to enhance the visualization of foreign DNA in a patient's chromosome and believe that it may be useful in the development of a battery of more sensitive tests that are looking for the presence of smaller amounts of genetic material in a clinical specimen. Examples of these could include assays to identify specific types of cancers such as breast and bladder to name just a few.

Additionally, this can be used as an even more sensitive predictor of the risk of progression to cervical cancer in the area of HPV. As Enzo moves to increase its HPV testing options we look to the presence of oncogene expression, our scientists have also used our next-generation bDNA technology to develop an assay that may allow the pathologist to actually visualize the presence of HPV DNA inside of a patient's cell's nucleus.

Being able to identify the integration into the genome of HPV is one of the most powerful indicators in the potential progression to cancer. And by being able to identify in which patients the virus is integrated physicians can target therapy and treatment to the correct subpopulation of infected individuals. In this way Enzo may be able to help more efficiently treat a disease that has become increasingly more serious especially in areas other than cervical cancer such as head and neck and anal cancers.

There is yet another set of value propositions that may result from these platforms. While the ultimate goal of these technology platforms is to produce clinical assays, and these can take the form of FDA cleared assays in the US, CE IVD mark products for Europe, or GMP manufactured products, reagents and reagents that laboratories themselves can validate an offer as lab developed tests, which we believe that products developed from these platforms can be introduced as research products by our Life Sciences team and thus produce more revenue more quickly.

And again, this goes back to the integrated structure we spoke about earlier where our channels of distribution are both directly related via the service operation of the lab and the direct sales effort of our Life Sciences' effort to the research and pharma community. And this is another manifestation of Enzo's integrated structures and the synergies that can result from it.

These two platforms are really the culmination of decades of developmental work. As many of you know, we have developed technologies in and around the labeling of detection of DNA and RNA for most of our history. About five years ago or so we focused in on these two technologies and began to work on ways to make them potentially more commercially viable.

The synergetic effort of having our research and development group co-located with our Clinical Lab has made these advancements a possibility and we look forward to updating you regularly on the progress. Before concluding I would like to mention that our clinical trial for Optiquel, our oral preparation for the treatment of chronic noninfectious uveitis that is being conducted at the NIH under [Acrada] continues to enroll and treat patients. We hope to have results in 2013. As you know, the NIH bears the brunt of the cost here and so the financial risk to Enzo is minimal.

Let me conclude with a final word on our strategic vision. Looking further out, the outlook for Enzo has become extremely robust. Our business model which offers a hedged approach that mitigates risk but also develops innovative market offerings is well positioned to address the changing face of healthcare today.

Going forward healthcare will require solutions that solve practical problems. These will include diagnostics that offer prognostic insights, economically driven assessment tools that motivate clinical decision-making and therefore improve the efficiency and effectiveness of healthcare delivery.

Historically we have tried to meet these challenges by going after existing markets that are well established and well recognized with better, faster and more economical means. But we pursue these opportunities through licensing and distribution relationships. While we will continue to pursue alliances and partnerships with other life sciences companies, we have shifted our emphasis to a product and services marketing model that touches these markets directly.

The demands placed on the healthcare system will continue to increase and we are working to meet these challenges with new innovative solutions and products. Our integrated structural realignment is critical to our success in this area. We are excited and energized at the opportunities and we are motivated to bringing them to commercialization quickly. On that note I would like to turn the call over for questions.

(Operator Instructions). Yigal Nochomovitz, Rodman & Renshaw.

Barry, if you could just comment a little bit more on the HPV technology. You in licensed the test from IncellDx, HPV OncoTect, but you've also mentioned that you have your own technology to visualize the HPV integration in the human genome. I'm just a little unclear -- is this a supplementary technology that will be integrated into HPV OncoTect or is it a separate test altogether? Could you just clarify that?

Yes, I'm actually going to allow David to respond to that. But it is a separate test.

Yes. Yigal, actually our goal has always been to give the physician clients at Enzo Clinical Labs the broadest menu of assays. And so the test that Barry described is based upon Enzo's next-generation branch DNA technology. And I'll explain to you how both complement each other.

The Incell test is a flow cytometry-based test that looks for the expression of two oncogenes which are related to HPV integration and that really is a -- in our opinion a better way of looking at HPV infection. It's estimated that over 70% of HPV high-risk infections spontaneously regress. And so being able to give the physicians a more -- potentially a more definitive prognostic indicator of progression to perhaps cervical cancer has always been a goal of ours.

So that's why we're in the process of submitting the OncoTect test to New York State Department of Health. At the same time we're also developing an [anokind] pathology-based assay based upon our next gen bDNA technology that will allow the physician to visualize HPV actually in the nucleus of a cell. And we believe that both of these approaches are complementary and we believe can give us and will give us the widest range of HPV assays that any Clinical Lab offers. So they're really both complimentary assays to each other.

So how do you envision this working? Would the doctor then basically order both in parallel and use information from both to (multiple speakers)?

It depends. It depends upon what the physician is looking at. We think that the OncoTect test will probably -- potentially be a reflex test off of a thin prep sample or a SurePath sample. And the integrated -- the next-generation bDNA test could be done off of a biopsy specimen or it could be done if the physician feels that he wants to have a pathologist actually visualize the cell. So it really depends upon the physicians' choice and we'd like to offer them as many as we can.

I think one key differentiator is in the bDNA test it's a visual evaluation, so the pathologist not only can see the presence of the virus in the nucleus, he can also review the morphology of the tissues which can give an added aspect to a diagnostic process.

And so it's a little bit different -- I mean they can come out with the same conclusion using multiple pathways, but it offers a little bit different aspect. And again our goal is not to dictate to the market but to provide the market with the broadest compendium of opportunity for which they can then decide and choose to better serve their client base.

Okay, thank you. And, Barry, you spent some time discussing this new platform technology called AmpiPrep. Could you just give us some color there as far as what the business strategy is? Is this something that you would develop as a kit to sell to other labs or to other companies or is it something that you would license the technology and allow others to develop their own internal LDTs?

The answer will be both of the above. We today have developed this platform and are validating analytes as we speak. We are preparing in the near future to start to submit for approval to New York State specific analytes to clear to be run as an LDT within our own laboratory.

At the same time, the products and tools that are emerging from this approach, which is an extremely powerful approach, I spent a fair amount of time in my dialogue today about it because we feel it carries a significant weight of opportunity and potential into the future. We have validated and gotten extremely good concordance with our comparative testing out there and we believe we can deliver a less costly, equally efficient test to help laboratories save money as we move into the future.

We will hopefully be providing specific kits and products related from this approach via our Life Sciences division both here and abroad. At the same time we will be offering this as a service provision via our own Clinical Lab and ultimately as a product and service provision to smaller to medium-sized labs to help them develop their own LDT approach to be able to stay competitive within this marketplace. So it is ideal in that it has multiple channels of opportunity and it fits very perfectly with our own internal structure and capabilities.

And do you have any initial forecast as to the timing of launching this effort to the market?

We hope within the next year we will start to have the first product out.

Okay. Let me just quickly turn to the laboratory. Certainly a very good quarter, solid, solid growth. Could you just discuss in brief which of the factors that you pointed to are sort of most significant going forward? Certainly the payor contract is important, the sales executive improved organic expansion. Is it all of those or is there one in particular that's really going to lead the charge as far as driving the growth in the Lab?

Obviously it's all of the above. I think what you're seeing is a combination of factors here. Obviously the payor contract was a big boost for us for fiscal year 2011. As we move forward we're going to continue to expand organically obviously. At the same time the process improvements and quality improvements that we put into the Lab over the past year have resulted in a decline in the -- or an improvement, excuse me, in the client retention rate.

And in a clinical laboratory client retention is very important, that's really a key driver for growth. Good sales executives can often get new business, but if you're not able to service it properly, if your quality isn't where it needs to be a lot of times it doesn't have any net impact.

So we're going to continue to grow organically, we're going to continue to look for new molecular tests, as Barry indicated, to overlay on top of a strong full service operation and continue to drive efficiencies. As you saw, the large improvement that we had in our cost of goods really resulted in gross margins that were substantially improved quarter over quarter and we're going to continue to drive those as well.

And then just if I may one last question on the regulatory landscape for ColonSentry. Could you just give us any sort of updates there as far as potential timing? And then similarly for HPV OncoTect, what's the plan as far as submitting that to New York State and getting approval?

The OncoTect test based upon the HPV test for E6/E7, the oncogene expression, will be submitted to New York State imminently. And again, it's really up to them as to what the approval process will be. With regards to ColonSentry, we're just waiting for the final approval. There's been no hurdles thrown our way.

Everything has been accepted and we're just waiting for the state to give us the final okay to begin marketing the test. Once we get that we will immediately be out to our client physicians. As Barry indicated, we've completed the pre-marketing, we've done a fair amount of discussions with our current client base and we're very excited about this.

The advantage that we have here is that we will hit the ground running the minute we get the approval. In terms of timing, it's just very hard to handicap New York State. But as soon as we get the approval we will announce it and we'll be out there marketing it imminently.

Okay, thanks very much. Good luck with the continued progress.

Sam Bergman, Bayberry Asset Management.

Barry, a quick question on the cost structure of the Company (technical difficulty).

Sam? Hello? I think we lost the questioner. Hello?

The question has been withdrawn. Robert Smith, Center for Performance Investing.

Just looking back at the history of the Company, can you give me a clue as to what you perceive as the value of the many patent (technical difficulty)?

The patent has stayed, over the last 20 years has generated significant value to date. And we anticipate the value yet to come is significant as well. If you take a look at the cost of our IP effort over the last 20 years, we've probably invested in excess of $20 million plus in patent filing and enforcement.

If you look at the return based on that from our current licensees alone, we have generated in excess of $40 million to $50 million worth of royalty income. On top of that historically we have sold aggregately products in excess of $300 million which have been covered by our proprietary technologies and patents, which would not have been marketed or accepted by us without the protection of the IP estate.

So the patent estate has more than generated its value to date. Looking forward we have a number of potential resolutions and litigations in process that could return to the Company value. As you may be aware, we have a case in front of the New Haven Federal Court against Life Technologies in which Life Technologies appealed a decision by the court which overruled them and returned our case back to the lower court to the Supreme Court. It was not addressed. That case has now been set to go to trial and we are approaching a period where after many years of litigation and legal entanglements, we are hopefully trying to get some clarity and resolution.

That involves our technology for labeling genes in a gene sequencing system, one which has a very high value to us and we believe is consequential to us over the period of time involved.

The other cases which have been invested in to date have involved companies such as Roche, Affymetrix, General Electric which is formerly the Amersham entities, a company called Microprobe -- these are all cases which involve both contract and patent issues. They too are now moving forward subsequent to the Supreme Court ruling -- or non-ruling, I should say, which we believe could have significant possible return to us into the future.

We've made investment in all of these areas already. So for us being the plaintiffs in these cases we have only upside, no material downside risk. And we're actually looking forward to finding some resolution in some of these cases.

And the third and perhaps most interesting one is also our branch DNA technology, which, you may be aware, we received a positive ruling from the patent office over an interference process with Siemens and that is also now moving through the queue. So I mean the IP estate has been extremely valuable to us. I think we have gotten significant return in the past and, quite honestly, we are looking for significant return into the future.

Okay.

Sam Bergman, Bayberry Asset Management.

Good morning, I'll try again. I wanted to find out in terms of, Barry, your goals for fiscal 2012 in terms of cost reductions for the next 12 months.

I'm going to let Drew respond, then I'll come in at the end of this one.

The programs that we put into place in the beginning of 2011 where we identified cost savings in excess of $4 million, those programs were successful and we continue to work in those areas. We continue to centralize functions across all companies and skinny down the Company and some of these costs. So we would expect to see further cost containment, expense reductions going forward; probably not to the magnitude that occurred in 2011, but we will see positive improvements and some economies of scale especially as the Lab grows.

Okay. Barry, did you have a comment on that?

Not really. I think Drew addressed it fairly succinctly.

Okay. Is it your feeling that the direct sales model for perhaps Asia will negate most of those -- further cost cutting that's going to happen?

I'm sorry, can you elaborate on that a little bit?

It's my understanding that you want to -- you hired somebody for Asia and you need to put some feet on the ground there. How is that going to affect costs going forward?

I'm going to let Andrew Whiteley deal with that.

Okay, yes, we made mention to our initiative to focus more effort towards the rapidly growing Asian marketplace (technical difficulty) into the Life Sciences business. We focus that business and deliver that business through distributors. So we're not carrying substantial headcount costs. We've asked Dr. Isler to invest his time to make sure that we get the returns.

Dr. Isler has been with the Company for just over a year and his costs are already covered within our economic framework. So no additional headcount are going to be needed to get better performance out of the market. We just need to promote and develop our relationships with distributors more strongly going forward.

What's your opportunity for licensing fees from Abbott in 2012?

We can't really comment on any of our licensing discussions or contracts that are in discussion. The Abbott contract is one that has been in place for a number of years. It has certain provisions and clauses in it dealing with certain specific patent types. So I really can't comment on that.

But I can say throughout all of our licensing activities, and we have been stepping up the process on that basis across the board with many of these new products and patents that are coming out, we do anticipate pushing to enhance the licensing return to the Company on an overall basis.

And a last question. Can you give us an idea of legal costs for the next fiscal year if at all?

That's actually a very good question mainly because it's very hard to predict. We do not believe our legal costs going forward will be greater than the current fiscal -- the past year that we just completed. If anything we were going to try to marginalize this costs a bit more.

But that being said, you can't anticipate what comes out at any point in time. We have nothing in the queue that would indicate increasing these expenses at all. But we all have to be aware that legal costs are very (inaudible) and are deepened upon the moment.

Thank you, best of luck in the upcoming quarters.

Paul Nouri, Noble Equity Funds.

Building on the question about the legal costs, I guess almost $4 million this year -- and I realize that it does add a lot of value to the Company. But if we look out five years is this going to be something where you do have to put the money into legal costs to defend the patent portfolio or is that kind of winding down over time?

We've actually made the investment already. As I mentioned earlier, the case of Life Technologies is coming to trial right after the first of the year. So the expense -- the heavy expense in terms of discovery and process has already been invested.

The same is much true for almost all of our other cases. So we made the investment already. And that being said, we believe going forward the expense of the legal activity will be hopefully no more and very much hopefully much more moderated than it has spent this past year.

Okay. And are you guys interested in acquisitions? I mean you have $24 million in cash on the balance sheet. And if you are what space might it be in?

We continue to look at opportunities, obviously in the area of life science [Volden] is an interesting one, Clinical Laboratory enhancement via tests is an interesting one. So I mean it has to be very -- it will have to be accretive, it will have to be very selectively fitting into our organization today. Capital is tight in the market or is very expensive, I should say. So if we use our capital we certainly want it to be used in a very effective and targeted way. So -- but we are looking at properties, we do on a continuous basis.

And for the Clinical Lab, are you in network with most major providers?

Hi, David Goldberg here, the answer is yes, we are.

All right. Well, thanks.

Robert Smith, Center for Performance Investing.

Yes, just circling back to the question of the patent state. So you did early pioneering work in gene therapy and I remember one specifically was turning on and off individual genes. Does that still have currency or has it been superseded? I mean what is --?

No, it actually still has currency. And it's interesting to note that there are emerging technologies, some just recently announced, which followed the same technological or scientific vision of those properties, those patents. And there are certain academic institutions that are still pushing forward and exploring these areas.

Quite honestly we, to this day, still believe in the technology that drove many of those gene modification approaches. The reason we slowed down and basically halted the HIV test was one of practicality, not science. The regulatory environment became too onerous, the cost structure became too debilitating for us as a Company. And I think for us as a Company one has to make decisions that put our shareholders first in terms of getting a return on investment rather than developing science.

And in some respects what has come out of that technology has been our AmpiPrep system which came out of being able to visualize a gene product. So there's been extended residual benefits. But what we are seeing in academia is now some of the bright hopeful aspects of this early technology. I know at the City of Hope they are using somewhat a similar approach in the treatment of viruses that we used in our HIV system.

It was even most poignant to see only two months ago at the University of Pennsylvania where they put out a paper in the treatment, the gene therapy treatment for chronic lymphatic leukemia, which basically from their perspective came about as close to announcing a cure in an incurable situation from a treatment methodology that has ever been viewed before. And this is based again on removing certain cells, transforming them, putting certain killer aspects or activating killer aspects in those cells and then returning them to the body as a whole and letting them do their work.

So the basic philosophy of these patents is still being utilized and the aspects are being applied academically. And hopefully, and I truly believe at some point in time, these will become commercial products.

I think from our point of view we do have the IP, it is still valuable, we are watching where the industry is moving, we are watching how the regulatory environment is addressing these particular technologies, and we have the means and the wherewithal to reinstitute and to reemploy our resources if we feel that it is economically viable and acceptable to try to gain value from them. Are there any other questions, please?

There appear to be no further questions at this time.

Well, thank you very much for joining with us this morning. We look forward to our next quarterly report in first quarter in December. Thank you for being with us.

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