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Executives

Barry Weiner – President

Drew Crescenzo – SVP, Finance

Carl Balezentis – President, Enzo Life Sciences

Kevin Krenitsky – President, Enzo Clinical Laboratories

Christine Fischette – President, Enzo Therapeutics

Analysts

Robert Gold – Capital [ph]

Robert Smith – Center For Performance Investing

Enzo Biochem, Inc. (ENZ) F2Q09 (Qtr End 01/31/09) Earnings Call Transcript March 13, 2009 8:30 AM ET

Operator

Good morning and welcome to the Enzo Biochem Incorporated second quarter 2009 operating results conference call.

Except for historical information, the matters discussed on this conference call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectations of the company and its management. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. The company disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this conference call.

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.

Barry Weiner

Thank you. Good morning. Thank you for joining us for our fiscal 2009 second quarter conference call. I am joined today in our corporate headquarters by members of our senior management team including Dr. Carl Balezentis and Dr. Christine Fischette, as well as Mr. Drew Crescenzo, and David C. Goldberg, as well as the newest member of our management team, Dr. Kevin Krenitsky, who is the newly appointed President of Enzo Clinical Laboratories.

Just some background on Kevin for those who did not see the release upon his joining us, Kevin served as the CEO of Bioserve, a company well known in the genomics space. Dr. Krenitsky has also been Chief Executive Officer of Parkway Clinical Laboratories, a clinical diagnostic lab, which provides comprehensive routine and esoteric testing.

Kevin was also a board certified physician, and he brings a relatively extensive knowledge and experience in the clinical laboratory field, and we greatly expect to have him o help us to promote and grow our clinical laboratory operations, and the opportunity that he is involved with.

Last night, besides our financial results, we also announced the acquisition of Assay Designs, Inc. of Ann Arbor, Michigan, which adds to our expanding capabilities in the Life Sciences segment. This transaction further finances Enzo’s Life Sciences position as the leading provider of innovative research products and technologies. Dr. Balezentis, will provide further detailed about Assay Designs and its planned integration into Enzo Life Sciences, along with an overview of the current developments in that sector in a few minutes.

What these two events underscore is that despite the very difficult economic environment, our focus is very much on continuing to build Enzo, and to do the things necessary to achieve profitability. In recent calls, we have reported on other steps we have taken, particularly in the therapeutics area, where while continuing to develop those products among the many projects in our labs, we also have doctored a strategy to better utilize our resources by seeking partnering, joint venturing, or licensing of our proprietary technologies.

On substantial intellectual property estate likewise continues to provide growing revenues that contributes directly to our bottom line, and it provides a valuable foundation for many of the things in life science and in the Clinical Labs apart from therapeutics that we are now realizing.

Our focus is driven by a strong realistic strategy that recognizes how the markets in the world have changed. We were fortunate to build a strong capital base in an appropriate time in the market so that we remain debt free and with substantial cash. It also provides us with the necessary wherewithal to seek opportunities among excellent companies, such as the acquisition we announced last night, and we plan to continue on this path.

Let me say a few words about what is happening in the markets in general, before I turn to a brief description and discussion of our operating results. Prudent cash utilization and capital preservation continue to be critical to maintain and grow a business during a weak economic period such as this one. Since the capital markets are virtually at a standstill, it is more important than ever to invest wisely. Since our company's inception, we have always managed our expenditures extremely conservatively.

The acquisition of Assay Designs, we believe, is yet another example of prudent asset management. We were able to effect the transaction on terms that were satisfactory to the sellers, and by the way we are delighted to have them join our team and us, because we have maintained a strong and highly liquid balance sheet.

We believe that there will continue to be additional attractive opportunities in the market, which we believe, will help to accelerate our growth, and we will evaluate them with the same conservative financially measured outlook.

Turning briefly to an overview of our operating results, they were impacted by a number of cross currents on the corporate level that included an approximately $1 million reduction in interest income for the quarter, the result of clearly of hardest [ph] money rates that exist today. At Enzo Life Sciences results continue to improve reflecting the benefits of the acquisition and organic growth, as well as cost savings as reflected in the divisions SG&A and more effective integrated marketing.

Apart from various non-cash charges, fair value accounting, foreign exchange, goodwill amortization among others, Life Sciences produced an operating income in the January quarter, and for the six months of fiscal 2008. Enzo Clinical Labs posted reduced operating results in the January quarter. This was largely related to softening of our service levels and a shift to lower reimbursement payors.

Further, we needed to take an adjustment for our allowance for bad debt for $400,000 for the phase-out of our legacy billing system. This non-cash adjustment relates more to timing issue than a natural revenue loss. We will continue to work to recoup more of the previously written off or reserved amounts over the next two quarters.

Our investment in this system has been designed to enable Enzo Labs to better manage the billing and collection process. The system has other features that we expect will increase operational metrics, and will contribute to improvements of overall efficiencies at the laboratory.

In Enzo Therapeutics, we were recently informed that an abstract discussing the results of our current Phase 2 B, double-blind placebo-controlled clinical trial for Alequel, our innovative immune regulation medicine for the treatment of Crohn's Disease has been accepted for presentation at the prestigious Digestive Disease Week conference, which will take place in Chicago at the beginning of June.

In addition, we are proceeding with our previously discussed IND submission for Optiquel, and we're working on possible partnership opportunities that would minimize our investment going forward, but position us to obtain value once and if the treatment gains approval.

I would like to now turn the call over to Drew Crescenzo, who will detail the operating results for the quarter and six months.

Drew Crescenzo

Thank you, Barry, and good morning. I will take this opportunity to discuss our financial position and then our operating results for the fiscal 2009 second quarter and six-month period.

As Barry indicated, and is reported in previous calls, our financial position is strong, especially in the current economic market. As the quarter closed, we had approximately $74 million in cash, cash equivalents and short-term investments. Despite our loss, which I will discuss in a few moments, for the fiscal six months our cash decreased by approximately $5.3 million, which includes cash used for capital expenditure of $1.6 million.

We used approximately $12 million yesterday to acquire Assay Designs. We limit our investments to high-grade, highly liquid money market accounts in US government-backed instruments. Nevertheless, as a result of the change in the rate yields, our interest income has declined sharply over the prior periods. Underscoring our strong financial position, we have working capital of nearly $79.3 million and our stockholders equity is over $123 million at January 31, 2009. As Barry mentioned we are debt free.

Turning to our results for the quarter, total revenues for the 2009 period increased $2.7 million to $20.9 million from $18.2 million in the corresponding year ago period. We experienced higher expenses resulting from higher revenue and higher selling, general and administrative costs primarily attributed to our fiscal 2008 acquisitions, and we experienced increases in our provision for uncollectible accounts receivable for the continued phase-out of the Enzo Clinical Labs legacy billing system.

Also we experienced a foreign currency loss of approximately $400,000 on inter-company loans resulting from the strengthening dollar. These items, along with previously noted sharper, lower interest income, primarily as a result of a reduced yield resulted in a second quarter net loss of $7.7 million or $0.20 per diluted share as compared to the year ago loss of $4.1 million or $0.11 per diluted share.

The fiscal 2009 quarterly results were negatively impacted by non-cash pretax charges of approximately $3.9 million almost $0.10 per diluted share. These included among others, purchase accounting adjustments for inventory, depreciation and amortization, provision for uncollectible accounts, and again that foreign currency loss.

In the prior rear quarter, those non-cash charges would have affected the net income by approximately $2.1 million or $0.06 per share. As more specifics on the operating results, Life Sciences revenue increased to nearly $11.4 million, more than a 51% increase over the prior year ago quarter.

Product revenue gains of 58% of which 48% was attributable to fiscal 2008 acquisitions, organic growth of 13%, and a 3% negative effect from foreign currency. Royalty and licensing income increased 27% to $1.9 million, as compared to 1.5 million in the prior year.

Clinical Lab revenues as Barry mentioned declined by $1.2 million due to reduced service volumes, somewhat attributed to the effects of the economy, we continue to see a shift in revenue mix to lower paying providers, and further competitive pricing continues to affect our business.

At Enzo Life Sciences, gross profit increased 45% to $4.8 million. This figure includes the pre-tax inventory fair value charge of $400,000 in royalty through the Biomol acquisition. We expect this type of adjustment will continue through the fourth quarter as we proceed with the Assay Designs acquisition. And the Assay Designs acquisition and this will be affected for the next year probably.

Enzo Labs, combined with a decline in revenue and higher cost of services our gross profit declined by $2.2 million to approximately $3.5 million. On a consolidated basis, during the current quarter, research and development costs decreased $200,000 from a year ago due to lower clinical trial activities and payroll of Enzo Therapeutics, offset by expansion of product development efforts at Enzo Life Sciences attributable to Biomol.

Our selling, general and administrative costs increased $1.3 million or 14% over the year ago period. Of this, $800,000 was due to the Life Sciences segment of which most of this was related to Biomol.

Lastly, it is very important to note, we continue to not record the corporate tax benefit on our losses up to the effective statutory rate. Let me turn to the Life Science and Clinical segment operating results in total.

Life Science overall revenues increased, product revenues benefited from acquisitions and organic growth, royalty and licensing income increase. Operating expenses specifically, selling, general and administrative increased $1.3 of which $1 million related to the acquisitions, 200 related to increased amortization, and 200 relating to legal costs to effect the realignment and salvage of new entities in connection with the integration of the acquired businesses.

As a percentage of revenue, SG&A actually decreased 5%. Segment operating income increased to $1.2 million at Enzo Life Sciences after reflecting the following incremental non-cash charges for inventory, amortization, foreign currency loss. Looking at our Clinical Labs, for the second fiscal quarter, the Clinical Labs reported an operating loss of $2.3 million as compared to an operating income of $600,000 in the prior rear quarter, as a result that were previously mentioned, reduced service revenue and lower reimbursement.

Cost of services, which includes reagents and laboratory costs, and higher personnel costs increased and lowered our gross profit to $3.5 million from $5.7 million in the prior year. Included in our operating loss was an increase in non-cash charges for our provision for uncollectible accounts receivable of $400,000 over the prior year ago quarter.

Selling, general and administrative expenses increased approximately 6% due to increase in personnel overhead.

Let me now turn to our 6 month results. For the six months ended January 31, overall revenues increased 11% to $42 million as compared to $37.8 million in fiscal 2008. Our loss was $14 million of $0.38 per diluted share versus a loss of $5.3 million or $0.18 in the comparable six-month period.

We experienced a decline of interest income of $2 million, as previously noted due to lower interest rates. After adding back non-cash charges, including among others, purchase accounting for inventory, depreciation and amortization, provision for uncollectible accounts, and foreign currency loss, our net loss would have been lower by $6.7 million and $3.8 million [ph] for the 2008 six-month period.

At the Life Sciences segment, product revenue grew $7.6 million or 64% to $19.5 million. Operating expenses in 2009 were attributed to the Biomol acquisition of $1.5 million, legal costs for the realignment and establishing of new entities, increased marketing for the integration of our brand.

Segment income for the 2009 period improved $100,000 to $1.3 million. Non-cash charges, previously mentioned, impacted the 2009 and 2008 [ph] operating results downwards by $2.4 million and $1.2 million respectively. At the Clinical Labs, we reported an operating loss of $5.7 million in the 2009 period as compared to a profit of $2 million in the year ago period. The decline was principally due to reduced service revenues of $4.3 million, higher cost of services of $1.7 million, and an increase of provision for doubtful accounts of $1.2 million, primarily attributed to the reduced collection efforts on the legacy billing system, while implementing a new billing system in the current fiscal year.

We are currently working to recover previously reserved or written off amounts for the old legacy system. Barry.

Barry Weiner

Thank you, Drew. For the last 18 months has been a very eventful period for the Life Sciences division. As many of you are aware, we have been integrating a number of acquisitions, we have been building brands, we have been organizing an entity, which we think will become a world-class Life Sciences marketing and sales organization. I'm going to let Dr. Balezentis bring you up to date on the most recent acquisition and the strategy for where we are heading.

Carl Balezentis

Thank you, Barry. As Barry indicated, we have recently announced that we have acquired the assets of Assay Designs, a highly regarded developer of detection and quantification assays for small molecules and proteins that are important in key research areas such as inflammation and immunity, oxidative stress, steroid and hormone biology, cell signaling, and bioenergetics.

We are very excited about this latest addition to the Enzo Life Sciences family, as this company is very complimentary to our existing portfolio of products, and strongly aligns with our acquisition target criteria. Assay Designs is a first-in-class company with operational capacity and capabilities, which we expect will provide long-term growth and increased profitability.

Our immediate plan is to continue to operate the Ann Arbor facility, and develop it into one of Enzo Life Sciences worldwide centers of excellence. At the annual shareholders meeting in January, we gave a brief overview of how we ever reorganized Enzo Life Sciences into five and now six centers of excellence. This coincided with the February 2 worldwide launch of our new corporate identity. The launch included the consolidation and channeling of all our in-house branded product lines of Alexis, Apotech, Biomol and Enzo under Enzo Life Sciences.

A significant amount of planning and execution was required to ensure a smooth launch, which required a number of major initiatives including the design, development and launch of a new Enzo Life Sciences website, introducing the consolidation of the Enzo Life Sciences products.

We have already begun to see the results of this major initiative through increased traffic to our website, which we hope will translate into increased organic growth. As a consequence of these changes, it was also necessary to rename all of our acquired legal entities, and today we offer our more than 8000 products to the research community directly through our global Enzo Life Sciences companies in the US, Switzerland, England, Belgium and Germany.

Our highly skilled global marketing team in Switzerland was responsible for establishing the new corporate identity with its corresponding inventory, providing all the promotional literature, organizing advertising campaigns, establishing e-marketing strategy, and establishing training and managing consolidated distribution network.

The consolidation of the in-house brands under Enzo Life Sciences coincided with the separation of the Axxora distribution business into a stand-alone business unit. All of the greater than 20,000 products from original manufacturers are now marketed and sold exclusively to the Axxora electronic marketplace.

This division effectively eliminates any potential conflicts, which may occur as a result of our expanding portfolio of in-house manufactured products as compared to our distribution business. Moreover, it will allow us to begin to provide separate financials in these two different business units, and we will affect this change once all entities are consolidated onto a single ERP platform later this year.

The changes I just described were not only necessary to consolidate our current expanded and diversified portfolio, but it also provides the operational structure needed to bring on and consolidate products for future acquisitions such as the recently acquired Assay Designs.

I would like to make a few brief comments on the financials, and we really want to reiterate that we realized Q2 and six-month year-to-date growth of 58% and 64% respectively. It is important to note, however, that this growth was not entirely as a result of the acquisitions that we have made. Of the 58% and 64% growth, the effect of foreign currency exchange was a negative 3% and 1% for the second quarter and six-month year-to-date, while most importantly, organic growth accounted for 13% and 16% in the same periods.

In conclusion, in a very short period of time, we have successfully executed on our plan to build a significant presence in the life sciences market with a broad portfolio of products, and a global sales and marketing infrastructure.

We continue to execute on our plan in aggressively pursuing additional opportunities, which will allow us to apply our intellectual property and expertise to a broader product offering, and accelerate our time to market for new products. We look for opportunities to leveraged Enzo IP, to develop additional collaborative relationships with major life science companies, which will bring revenue to the company in the form of royalties and product sales.

We are committed to meet our long-term vision of becoming a leading global life science reagent company. Barry.

Barry Weiner

Thank you, Carl. As you can see, the Life Sciences division has developed the infrastructure needed, not only to integrate the latest acquisitions, but to be able to build organically as well. Our catalogue of reagents and kits for the academic and pharma markets will soon exceed 35,000 offerings covering numerous life science, research applications and these include products manufactured in-house as well as those available through outside manufacturers.

So we are very excited about the growth opportunities in the direction that we are taking in the Life Sciences division.

I like to make a few comments, before I ask Dr. Krenitsky to make a little bit of a statement in here just a few weeks, and so we are really just beginning to get the integration efforts, and the value of his expertise in place.

I would like to make an important point just regarding the clinical laboratories. As I mentioned earlier, the current environment in the financial markets as well as the advances and developments in molecular diagnostics are providing Enzo with another opportunity for growth. There are, in fact, a number of companies and research institutions that have invested heavily in the development of unique diagnostic assays that may have relevance in applications such as predicting the recurrence of a specific type of disease, such as cancer or how a given patient may react to a specific pharmaceutical regimen or product.

Our laboratory, which is both CLIA certified state registered, New York State registered, has allowed us to emerge as an ideal potential partner to help commercialize and exploit some of these promising technologies. In addition, we have the good fortune, because we have the capabilities of our staff at Enzo Life Sciences, which have skills where we can work in conjunction with other parties on assay design and validation.

In conjunction with our intellectual property state, we also can in certain cases provide these entities with the freedom to operate in a very, very efficient and proprietary manner, which they may not have otherwise open to them. This convergence of technology advances and the current turmoil in the financial markets has positioned Enzo Clinical Labs as one of the more attractive products partners for companies looking to enhance their molecular diagnostics market presence.

Furthermore, we are in the process of investing in both infrastructure and content at Enzo Labs, implementation of a new collection and billing system, despite the short-term impact has positioned us for future growth as (inaudible) often have complicated billing requirements such as the matching of multiple procedure codes to one lab assay or another one, and it is prudent to move forward with the most advanced systems available.

We have already seen evidence that this new system has enhanced our collection process going forward, and this gives us confidence that our investment will pay off. I would like now to introduce Kevin, perhaps to just give a few words and we will proceed.

Kevin Krenitsky

Thanks, Barry. First off, I would like to say that I'm extremely excited to join Enzo at this very exciting time, while Enzo Clinical Labs has established a strong footprint in the routine clinical testing market, as Barry mentioned, I believe significant opportunities lie ahead.

As the clinical diagnostic space evolves, and common routine testing can more advance in molecular and genetic assays, Enzo is well positioned to establish itself as an emerging player in this area. Currently, we are sitting in the middle of the largest regional market for esoteric testing in the world, in the metro New York City, and northern New Jersey area.

The synergy and the expertise of our growing Life Sciences division and the Clinical Diagnostics division are evident, especially when we consider advanced molecular assays and the translation from the bench into clinical use.

I believe we can leverage these technical synergies and rapidly attract and select clinical testing opportunities that lead to sustained growth. If you look at estimate, many of the numerous estimates for growth in the global molecular diagnostic market, the DNA testing market alone is projected to grow from approximately $3.5 billion in 2007 to roughly $6.2 billion in 2012. It is essential that we take advantage of this opportunity given our current position, I believe we will. Thanks.

Barry Weiner

Thank you, Kevin. We are faced with what we believe are very unusual and special times for growth in the clinical laboratory and we are highly optimistic on the trajectory where this division will take us in the future. Even with the current environment surrounding the pharma industry and economic constriction within the biotech sector, we have been moving methodically and strategically with the development of our therapeutic options. I like Dr. Christine Fischette to give you just a brief update on our progress.

Christine Fischette

Thank you, Barry. First, Optiquel, as you may remember, Optiquel, our candidate for the treatment of autoimmune uveitis already has completed a Phase I open uncontrolled trial in Europe. Our goal was to complete all of the preclinical pharmacokinetics, safety and manufacturing studies required by the FDA, and to file an IND with the FDA in order to initiate a clinical study in the US.

We are well on our way towards accomplishing that goal. All FDA required toxicology studies have been completed satisfactorily, and all reports are in final form. Our preclinical pharmacokinetics study to determine the extent of absorption is 100% complete. With regard to drug manufacturing, we have some hurdles to overcome, and I'm happy to report that we have solved all previous issues.

We have successfully completed the analytical portion of the studies, and we now have a method of manufacture suitable for FDA scrutiny. We have executed a supply agreement with our contract research organization, and they have now manufactured the clinical supplies necessary for our upcoming study.

The completed capsules are now undergoing quality testing, which is required by FDA. Once that information is available, we will incorporate it into our IND, while other sections of the IND have been completed with the exception of a few critical documents that need to be filed by the clinical investigator.

We are very close to announcing an important collaboration for this product, which will allow us to share the cost of the next phase of the clinical trial. We hope to be able to be provide details on this exciting development shortly.

Alequel, our autologous individualized therapy for Crohn's disease was being evaluated in a double-blind placebo controlled study. The study has completed and the data has been reviewed. The findings have been submitted, and I'm pleased to say accepted for publication at the Digestive Disease Week, CDW, meeting of gastroenterologists in June of this year. After the findings have been published and publicly announced, we will be able to further comment on them to you.

With regard to our exciting state-of-the-art preclinical programs, we are continuing the studies involving the LRP and Wnt-related cell signaling pathway and its co-receptors. This is an area of research that is presently at the fourth round of discovery, at a number of major pharmaceutical and biotech companies. These cell signaling pathways describe a complex network of proteins that involve normal physiological faculties in human adults. We are very excited about the new work that is being generated in our laboratories using Enzo's proprietary technology.

In a nutshell, we have identified key targets on macro molecular structures that we believe are promising areas of exploration. Through our proprietary screening systems using computerized virtual screening and cell-based assays, we have synthesized a number of proprietary compounds that are orally active in standard animal models of disease in very high-profile areas such as diabetes, bone pathology, osteonecrosis of the jaws, and others.

These compounds are first-in-class. We're looking to develop our proprietary compounds in high-profile areas that can be advanced into the clinic with a potential licensee. To that end, we are in dialogue with a number of companies concerning our new compound and their first-in-class profile.

To summarize our therapeutic strategy, we will develop our drug candidates in a fiscally conservative rate with a view to out licensing or partnering to exploit the fundamental value of our discoveries.

Now let me just take a few moments to give you an update on the tumultuous pharma market that many of you, I'm sure have been following. The current market environment has set forth an edict. It is very clear, and they are dictating physical conservatism. We at Enzo Therapeutics have embraced the new role. We have and are undergoing a strategic allocation of funds, and are supporting projects that we consider have the highest return on investments.

We have moved forward, but in a measured fiscally responsible way. Consequently, expensive projects have been put on the backburner, and expenditures for ongoing projects are being creatively financed. We are making the most of what we have, while aggressively pursuing partnering opportunities.

So stay tuned. Thanks Barry.

Barry Weiner

Thank you, Chris. Overall, just let me add that these are very trying times for many companies in our industry. We are fortunate to have the financial capabilities to take advantage of the unique opportunities as they appear in the market. We continue to look at the value proper proposition of our company, and explore approaches for value optimization, which presents themselves due to the integrated nature of our three operating units.

Currently, we have revenue generating business, a robust intellectual property estate, as of the end of the quarter approximately $73 million in cash that does not include the cash expended for the Assay Designs acquisition, and the infrastructure and the management team needed to execute. Today, we are a company of over 600 employees. We have growth opportunities in our divisions. We are extremely well positioned with capital and capability to not only survive, but to build an extraordinary organization in these very, very difficult market times.

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

Question-and-Answer Session

Operator

(Operator instructions) Thank you. Our first question is coming from Robert Gold. Please state your company.

Robert Gold – Capital

Capital [ph]. Barry, I have a couple of questions for you. One is, the $1.2 million shortfall with a change over in the computing in the lab. How much of that has been recovered and how much of that is expected to be recovered. That's my first question. My second question regards the Alequel announcement, since it is now in abstract. When is that going to be published and when will that data be available, and third, is the use of the word soon that was used to when the Optiquel stuff might be out is analogous to the use of the word soon that my children used in the past, when describing when they would clean their rooms, and so I just would like to be a little more specific of the use of the word soon. Thank you.

Barry Weiner

First, we have been working on our collectables, and again this is a timing issue. We've collected a little over 200,000 I think at the moment. We are continuing – that is of a few weeks ago, and we are continuing to move forward on that collection. We hope to collect a good percentage of it. The issue of the abstract that is scheduled to be published in June. So at that point in time, we will be talking about that data and in terms of the Optiquel, we're looking – and again this is a very difficult time to project exactly because there are many moving pieces and we're working with another organization at this point in time. We're looking, you know, to be able to announce where this will go probably over the next few months. Next question please.

Operator

Our next question is coming from Robert Smith. Please state your company.

Robert Smith – Center for Performance Investing

Center for Performance Investing. Good morning.

Barry Weiner

Good morning.

Robert Smith – Center for Performance Investing

What are your short, intermediate, and long-term gross margin objectives of Life Sciences, and how do you define the terms?

Barry Weiner

The long-term – one of the reasons we split the two different business units up is because the gross margins are masked by our distribution business, which is typically a very low margin business. For our own in-house manufactured businesses now represents most of our business. We expect the margins to approach and exceed 60%, and then in the future and we continue to hope to improve upon those, and so I don't know what else to say other than that. Does that answer your question.

Robert Smith – Center for Performance Investing

Again in the near term, the intermediate term, and the long-term.

Barry Weiner

Near-term.

Robert Smith – Center for Performance Investing

When you say approach, I mean, how are you defining?

Barry Weiner

Well, near term, we have seen improvement versus the prior year. So, we've seen a small increase but again it is masked, because we have split up the business units. In the near term, we continue to work on gross margins. You’ll see those climb, and I think once we are on a standardized, (inaudible), and be able to split those out, you’ll see that they are – they will approach and probably exceed 60% within 12 months.

Robert Smith – Center for Performance Investing

Okay. And can you give us an update on HIV-AIDS area and also what's happening with the patent office?

Barry Weiner

The HIV, we are following one patient that we have infused a little over 16 to 18 months ago. That project was slowed due to the environment and the obstacles put forth by the regulatory processes. What we are seeing today is a more welcoming attitude to stem cell treatments, as well as novel biomedical approaches for treating certain disease conditions, and we are watching these very closely. This is a project where we’ve attempted to follow very, very closely.

We have had a long legacy interest in this particular product, as we have had historically a strong belief in the technology, which is very novel and very pioneering. I think our efforts as you know, the Phase I trial, where we treated five patients reported on it. We were able to demonstrate that we were able to infuse, we were able to demonstrate we had long-term survival of our constructs, which were reducing antisense RNA, and we were very encouraged by it. We were somewhat slowed by the prevailing environment, the regulatory environment surrounding this particular approach.

We are in a watch and wait method right now to see where this moves. It is something that we obviously have a high interest in and we have a high belief in. So, we will see where this goes. We are looking at the opportunities in front of us right now.

Robert Smith – Center for Performance Investing

Can you say anything about the progress of the patient?

Barry Weiner

I'm reluctant to report on one patient. It really doesn't give us adequate representation, but I think the patient is fine and – but I can’t really give you much more details on that.

Robert Smith – Center for Performance Investing

All right, and the patent office.

Barry Weiner

We are waiting decisions still on the interference proceedings within the patent office. They are long overdue. We still have really not much to say. It is in their hands, and we awaiting a response from them before we can move forward.

Robert Smith – Center for Performance Investing

Do you have any idea where in-line you are, I mean so to speak?

Barry Weiner

I really you know, the – it is purely up to the patent office as to when they will issue their decisions. It is out of our hands.

Robert Smith – Center for Performance Investing

Anything else on the legal issues.

Barry Weiner

Really nothing more to comment on at this point in time.

Robert Smith – Center for Performance Investing

Thanks, good luck.

Barry Weiner

And the next question please.

Operator

(Operator instructions) Thank you. You have a follow-up question from Robert Smith. Please state your company.

Robert Smith – Center for Performance Investing

Performance Investing. So when the abstract is – when you published in Crohn’s, where do we go from there?

Barry Weiner

Well once we – once we are able to release and review the data, the decision will be, you know, how to proceed forward. Whether we partner it, whether we develop it ourselves, whether what type of trial designs work there. There are multiple pathways that could be explored.

Robert Smith – Center for Performance Investing

Well, how much preliminary work have you done to arrive at decisions that you have to make?

Barry Weiner

We've done quite a bit of preliminary work. I'm just – I’m unable to really talk too much about the progression of that until we can talk about the data. Thank you. Anything else? If there are no other questions, then I am pleased to conclude the call. Thank you for your time. We look forward to reporting to you at the next conference call in June. Thank you.

Operator

Thank you. A replay of this broadcast will be available until Friday, March 27 at 12 o'clock midnight. You may access this replay by dialing 1-800-642-1687. The pin number is 888-222-41. This replay is also available over the Internet at www.wsw.com/webcast/cc/enz/. This concludes today's teleconference. You may now disconnect your lines at this time and have a wonderful day.

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Source: Enzo Biochem, Inc. F2Q09 (Qtr End 01/31/09) Earnings Call Transcript
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