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Enzo Biochem, Inc. (NYSE:ENZ)

F3Q08 Earnings Call

June 10, 2008  8:30 am ET

Executives

Barry Weiner - President

Drew Crescenzo - Senior Vice President of Finance

Carl Balezentis - President of Enzo Life Sciences

Christine T. Fischette - President of Enzo Therapeutics

Analysts

Jeffrey Frelick - Lazard Capital Markets

[Robert Smith - Pinnacle Performing Investing]

[Robert Gold - Century Investment]

[Bill Dupree] - RBC Wealth Management

Operator

Good morning and welcome to the Enzo Biochem, Inc. third quarter 2008 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 about 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 any development 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

Good morning. Thank you for joining us. With me today is Drew Crescenzo, our Senior Vice President of Finance, Dr. Carl Balezentis, who is President of our Life Sciences Division, and Dr. Christine Fischette, who is President of our Therapeutics group.

I will make some brief remarks, then my associates will also have some comments with regard to their areas of responsibility and review their activities, after which we will open the floor up to questions.

The results of the third quarter ended April 30, 2008 were posted last night, and I trust everyone has seen them. The press release is available on our website in the Investor Relations section at www.enzo.com for anyone who has not seen it.

As I've mentioned before, our strategy is dedicated to the enhancement of each aspect of our business and promoting our value proposition, which is built upon four very independent yet integral activities - Life Sciences, Clinical Labs, Therapeutics and Intellectual Property activities.

Increasing we are seeing the results of this effort. At Life Sciences, we now are having a growing presence in this market both through acquisitions and also through highly effective personal and online marketing. The integration of Axxora with our original business and also 10P in Brussels has moved smoothly and seamlessly. Now we have added to our Life Sciences group BIOMOL. With BIOMOL, we have acquired a knowledgeable team, an exciting complementary and proprietary product line, and among other assets, a presence in the United Kingdom. This could open up a door for us to get more deeply involved in pharmaceutical companies and the drug development activities as well.

While the sales increase in Life Sciences from the acquisitions have been impressive, our press release for the quarter plainly shows we have yet to fully realize the bottom line benefits thus far because of the necessity to apply purchase accounting to these acquisitions. However, as inventory turns, this will become less of a factor and indicates Axxora should cease to be one soon.

BIOMOL sales, since it was acquired after the April quarter's end, will be included starting in the fourth quarter that we are now in.

Enzo Clinical Labs in the fiscal third quarter posted lower volume due in large part to a surge of business from a new health care company customer a year ago. As that business settled down and we became more selective, year-over-year comparisons were affected. However, what we may have lost in test count has been somewhat been made up in higher margin tests that increasingly are becoming the norm for us. Our and the medical profession's use of esoteric tests includes a growing proportion of the business in molecular diagnosis. At the same time, our program to increase efficacy in billing and bill collecting has continued to be reflected in this quarter's reduced provision for noncollectible receivables, which is at its lowest in years.

Enzo Clinical Labs remains profitable and is essentially in line with the preceding December quarter.

On the intellectual property front we are still awaiting the decision on first phase of the oral arguments held at the Board of Patent Appeals and Interferences at the U.S. Patent Office. These involve patentability issues affecting Appleras and Enzo [inaudible] patent application in the field of nucleic acid cell sequencing. The appeal process involving the decision in the New Haven courts relating to the Applera case continues to be under way. Based on out attorneys' opinions, we feel very comfortable that we should prevail in this action. We are very optimistic that a significant result is achievable here.

As for our other [cases] before the federal court in New York City, we are hopeful that the trials will get under way in the near future. This litigation involves multiple defendants and goes to the issues of contract violations in addition to infringement. Our litigation expenses for the quarter were sharply lower than a year ago and, indeed, as compared to the preceding December quarter, but this reflects only timing issues and no less intensity on our part to see these matters to a successful conclusion.

Just a short note with regard to the first fiscal quarter results which Drew will take us through in greater detail in just a moment. Financially and otherwise, the quarter was another period of significant progress. We posted gains in total revenues and in operating income and a $1.7 million improvement in the net loss. The net loss per share was 40% below a year ago, again, as I noted earlier, without the fall earnings benefit because of purchase accounting rules of recent acquisition. And while we have used some cash to make acquisitions, our financial position remains very strong, with approximately $2.60 per share diluted cash. This puts Enzo in a very solid position to consider and act upon other growth opportunities, particularly in the present market and in the financial environment.

On that note, I'm going to turn it over to Drew to give you a background on the financial performance for the quarter.

Drew Crescenzo

Thank you, Barry, and good morning. I will first expand on Barry's discussion of the fiscal 2008 third quarter results and then turn to the operating results of Enzo Life Sciences and Enzo Clinical Labs. I will then conclude with a recap of the nine-month results of all consolidated and by segment.

Our operating results have shown advances over the prior year quarter. Our net loss has declined by $1.7 million to $2.1 million or $0.06 per diluted share as compared with a net loss in the prior period of $3.8 million or $0.10 per diluted share. The improvement is the result of increased overall revenues and lower expenses in the period.

Net revenues for the fiscal third quarter increased 36% to approximately $18.9 million from a year ago's period revenue of $14 million. Life Science segment revenue increased alone $6.2 million or almost three times over the prior year period, primarily attributed to revenue contributions from the May 2007 [inaudible] Axxora and modest increases in royalty and license fee income. Clinical Lab revenues decreased 11% to $10.3 million in the 2008 period as compared to $11.5 million in the year ago period.

Our gross profit improved by 19% to $9.3 million in the 2008 period, inclusive of positive contributions from Axxora and offset by higher costs and some price competition at the lab. As in the previous three quarters, the gross margin has been negatively affected by a pre-tax fair value inventory adjustment which was $300,000 in the current quarter arising from the acquired Axxora inventory. We expect this adjustment will continue through fiscal 2009 as we recognize the comparable adjustments related to the BIOMOL acquisition.

During the 2008 period, research and development costs were $615,000 lower than the year ago period due to timing of activities in the therapeutic segment. R&D expenditures are attributable to the clinical trial activities in the therapeutic segment and activities within Life Sciences.

Our selling and general administrative expenses increased by 35% or $2.2 million, of which 82% or primarily all of it was due to the contributions and the costs relating to Axxora. The percentage increase is consistent with the sequential quarter. Exclusive of Axxora, the increases were in the areas of compensation and related costs, professional fees, offset by lower information technology costs to service lab clients. Despite certain increases in SG&A as a percentage of revenues, it's unchanged from the year ago period.

The provision for uncollectible accounts relating to the Clinical Lab as a percentage of lab revenue is 9%, a 300 basis point improvement over the prior year quarter and consistent with the sequential quarter due to the results in the previous enhancements of our billing and collection procedures at the lab.

Our legal expenses, which fluctuate based on level of activities, declined $2.3 million to $800,000 in the current period. The decline is due to the current activity for the ongoing legal litigation proceedings. We continue to protect our intellectual property estate and incur costs on ongoing litigation matters.

Our invested cash and cash equivalents earned interest of $720,000 in the 2008 period as compared to $1.5 million in the year ago period. The decrease in interest income is attributed to both lower invested balances and a decline in the average rate of return or 200 basis points. Our invested balances declined due to the purchase of Axxora and other use of cash for operations.

Lastly and important to note, we continue to not record the corporate income tax benefits of the statutory effective rates which would be not less than 34% on our pre-tax losses. This affects both the current and the prior periods. The ability to record these income tax benefits would possibly impact our net loss and our EPS.

Our financial condition remains strong. Enzo remains debt free. As of April 30, 2008, we had cash and cash equivalents of nearly $96.5 million and working capital of over $107 million. Stockholders equity was approximately $137 million.

Let me now turn to the segment operating results.

At Enzo Life Sciences, segment profit was $1.1 million in the current period as compared to $400,000 in the 2007 period. The results from the Axxora acquisition continued to benefit Life Sciences. Dr. Balezentis will comment on these results in greater detail later.

Product revenues grew by $6.1 million or over 700%. With the recent acquisition of BIOMOL International, we expect continued product revenue increase in future periods.

As noted, the increases in royalty and license fee income of $100,000 were attributed to increases in royalties under the Digene arrangement and the Abbott Molecular arrangement.

Gross profits within the Life Science division increased by $2.6 million to $4.2 million.

Operating expenses, specifically SG&A, increased by $1.9 million, most attributed to the Axxora. R&D inclusive of Axxora was unchanged in the prior period. As a percentage of revenue, SG&A expenses of Life Sciences declined to 33% of revenues as compared to 47% in the prior year period.

Looking at Enzo Clinical Labs, our segment operating profit in the current period was $400,000. The decline in the 2008 period is due to decreased [service] volume attributed to competitive pricing and shift of payers to lower reimbursement providers. Moreover, in the prior year period we experienced significant service volume increases from the changes associated with United Healthcare/Oxford agreement, whose volume in the current period has been impacted by competitiveness in our service area.

Our gross profit decreased by $1.1 million due to lower service volume and higher testing costs. SG&A increased 8% or $300,000 over the prior year quarter.

As previously mentioned, the decrease in our uncollectible accounts decreased $400,000 over the year ago period.

Turning now to our year-to-date results, for the nine months ended April 30, 2008 overall revenues were $56.6 million versus $35 million in the fiscal 2007 period, a 62% of $21 million increase. Gross profit rose $7.9 million or 39% to $28.6 million, and our net loss was reduced by $2.5 million to $7.4 million or $0.20 per share. In the prior period, our loss was $0.29 per share.

This improvement in the net loss does not reflect other income of $2.7 million in the 2007 period which was attributed to the Sigma lawsuit settlement and the [inaudible] from a former distributor. Exclusive of such other revenue, the improvement year-over-year for the nine months would have been almost $5.2 million or $0.14 per diluted share.

We continue to see growth and profitability in Life Sciences and expansion opportunities at Enzo Clinical Labs. Exclusive of the aforementioned $2.7 million of other income, the Life Science segment operating income increased $1.5 million or almost two times from the comparable 2007 period. The Clinical Labs segment reported improved segment operating income of $2.4 million or $700,000 over the prior year nine-year (sic) period.

Barry?

Barry Weiner

Thank you very much, Drew. I would like to turn the call over now to Dr. Carl Balezentis, who is the President of Enzo Life Science. As you know, it's been a very active time in this division between the issuance of a number of key new patents as well as the substantial financial investments we've been making to build Enzo Life Sciences into a major player in the research products field. Carl?

Carl Balezentis

Good morning. I'd like to start by commenting on the vision and the strategies that we have for the Life Sciences division and then conclude with some brief comments on the financial highlights for the quarter.

As you've already heard from Barry, we closed last month on the acquisition of BIOMOL International as we continue to execute on our strategies to build the Life Sciences division into a leading international life sciences reagents company. Even though this deal was consummated only two weeks ago, we have already had a number of meetings within and among the various ELS entities designed to allow us to execute on a strategic innovation plan that will maximize the assets we have both developed and acquired, as well as lay the foundation for future growth.

I have stated in the past the mandate given by upper management was to build this division into one that has more than $50 million in revenue within a three-year timeline of my joining Enzo. As I reach my second year anniversary, you can see that we are well on the way to not only reaching this goal but exceeding it as well. We are accomplishing this with prudent investment in opportunistic acquisition targets which have led to a rational increase in infrastructure, a substantial strengthening in our manufacturing, marketing, product development and distribution capabilities on a global basis.

This vision for Enzo Life Sciences includes building a strong market position in specific high-growth areas within the cell biology, cellular biochemistry, [inaudible] genomics and [inaudible] arenas. The acquisitions of Axxora and BIOMOL have provided us with unique opportunities to establish market leadership positions within these areas and become market leaders in target market segments by providing high-value assays and products. Coupling this with the broad and deep intellectual property base that Enzo had built over the years and continues to build to this day, we are well positioned to exploit these markets to their fullest potential, and I'll provide one such example in the following minutes.

Internally we will continue to invest in new product development to fuel organic growth that exceeds the industry average of 6%, but our IP estate, when coupled with the technology platforms we have developed, will also be exploited in order to secure additional high value licensing arrangements that will allow us to establish and sustain market leadership positions in some of these key areas.

In terms of product development, we have already identified a number of new product opportunities that take advantage of our intellectual property and expertise. These span the ALEXIS, BIOMOL and traditional Enzo product brands and target specific markets we have identified as high-growth opportunities where we expect to establish market leadership.

We have just released the first of our FISH probe product lines for confirmation of array comparative genomic hybridization, providing research and valuable information as they look for and study genetic abnormalities. This is a perfect example where we utilized our intellectual property to negotiate a license agreement and gain cross-licensing rights and then coupled this with our own IP and expertise to develop products in a market where we believe we can establish a market leadership position. Later this year we have a planned launch scheduled for a number of [inaudible] assays for high content cell analysis and screening which are product lines that are important for PhRMA as part of the drug discovery process.

As I have mentioned previously, it is essential that we build a strong infrastructure to support our growth. We have developed and continue to expand the capable team which will be essential to driving innovation, continue to assimilate new acquisitions, and deliver increased operating efficiencies which will generate significant cash flow that we will utilize for continued investment.

Over the next year we expect to continue to see significant top line revenue growth as well as improvements in our gross margins, which should come from several areas. First, we will see the elimination of the purchase accounting rules which cost us several basis points in gross profit as we move through the next several quarters. Secondly, the increased manufacturer's cross-zone capacity that we recently acquired will allow us to internally produce a greater number of products, thereby providing the opportunity for further margin improvement.

However, you should also note that at its core, Enzo has always been a bottom line driven company. As we look to increase our margins through integration and operating efficiencies, we may experience some short-term fluctuations in the top line without, however, a corresponding effect on profitability. In the very near future, however, the operational changes that we are putting in place today will bring increased revenue growth and margin improvement.

Since my arrival, we have been consistent in the communication of our vision and strategies. More importantly, we have delivered on our promises to transform the Life Science division, and over the coming year we will continue to do so by executing our strategies to support our vision.

I'd like to conclude with some brief comments on the quarter's financials. Comparing Q3 2008 product revenue versus Q2 2008 product revenue, we realized a 16% increase in Q3 over Q2 in the Life Sciences segment. Gross profit percentage product sales has improved sequentially this quarter, and we are optimistic that this trend will continue as we continue to focus on profitability.

Furthermore, if we compare the 2008 nine months' product revenue to date for the entire Life Sciences division to 2007 on a pro forma basis - meaning looking at our sales revenue as if we had acquired Axxora at the beginning of fiscal 2007 - we realized a 13% increase over 2007, demonstrating that we have been able to seamlessly transition Axxora customers to Enzo with minimal disruption. We have every reason to believe that we will have the same experience with the BIOMOL transition.

As we move forward with our operating plan, we will continue to seek out additional strategic opportunities, meaning an acquisition of either a company, a specific product line or a technology if we believe it to be accretive to our operations. I look forward to reporting on further progress at our next conference call. Barry?

Barry Weiner

Thank you, Carl. As you can see, we have been in a very active state in the Life Sciences area over the past 12 months. We are looking forward to the furthering of our penetration and our value enhancement in this particular division, and we are very, very pleased with the performance to date.

I'd like to now turn the call over to Dr. Christine Fischette. Dr. Fischette is President of our Therapeutics group, and she will share with you some comments on the direction [inaudible] taken within Enzo Therapeutics.

Christine T. Fischette

Yes. Thank you very much, Barry, and good morning. I'm very pleased to speak with [inaudible] update on where we are and how we have progressed during the last quarter.

As I indicated last time, our goal is to build a fully autonomous integrated operating entity that has the capability for expansion and growth. By developing and accelerating our pipeline, we can position Enzo Therapeutics as an entity that can grow organically as well as become a source of drug candidate for eventual out-licensing or partnering in those therapeutic areas where Enzo cannot go forward alone, that is, those areas that require significant expenditures, global regulatory relationships and marketing muscle.

We already have a number of products in the clinics as well as a robust pre-clinical program that presently is generating multiple candidates in high-profile areas. As you may recall from our last conversation, we have now reached a stage where it is in the company's interest and in our shareholders' interest to focus our activity on the drug candidates that have the best chance for development and commercial success.

Our team has been and continues to be one of focus, that is, we are pushing forth each of our candidates on a selective basis, enhancing their development status and product profile and producing a gold star package suitable for either regulatory permission to start clinical trials in the U.S. in the form of an IND or to out-license or partner them to a larger pharmaceutical or biotech entity that has the financial, clinical, regulatory and marketing expertise to bring our products to their full commercial potential.

Turning to our clinical programs, our priority is to advance two products - Optiquel, our candidate for the treatment of autoimmune uveitis, which has completed Phase I in an open, uncontrolled trial in Europe, and Alequel, our proprietary treatment for Crohn's disease which currently is in a Phase II double blind placebo controlled trial in Israel.

For Optiquel our goal is to complete all of the pre-clinical pharmacokinetic, toxicologic and manufacturing studies required by the FDA in order to initiate a clinical study in the U.S. via an IND. To this end we are well on our way towards accomplishing this goal. Our primary toxicology study of six months' duration has been completed with no drug-related adverse effects due to Optiquel.

The additional studies required by FDA have been completed. All graph toxicology study reports have undergone expert review and are in the process of being finalized for submission. Our mutagenicity and gene toxicology study has been completed with no adverse findings. Our cytotoxicity study has been completed, and the drug has proved safe. Our pharmacokinetic study to determine the extent of absorption is about 50% completed. With regard to drug supply and manufacturing, we have put into place with a contract manufacturer the studies required by FDA for analytical validation, and these are ongoing.

So you can see we have done quite a lot of work in the last quarter to move this process forward.

We are planning to file for an orphan drug designation in the U.S. this year, and following that we will file an IND using the electronic submission process. We are presently surveying the infrastructure necessary for the esubmission process, and we are putting in place what is required to implement a publishing system that will allow direct twoway correspondence with FDA and all its departments.

Considering all the missteps that could possibly occur with paper submissions and lost or misplaced documents, this is of obvious importance. However, this is not a matter of just pressing the send button, as in an e-mail. An FDAcompatible system requires a significant amount of infrastructure and specific technology to transfer our Word documents into an acceptable format. We have initiated the process to determine the scope of this work and will continue to explore and implement this critical system.

For Alequel, our autologous protein separation, our double blind placebo controlled study is on track for completion at the end of this year as we previously relayed to you. Pending confirmation of our previous indication that Alequel is beneficial and has an excellent safety profile, we plan to file an IND with the FDA next year for this product as well.

Simultaneous to our clinical programs, as you may recall, we are investing heavily in our new stateoftheart discovery platform involving the Wnt [Finlay] Pathway, an area of research which is presently at the forefront of discovery at major pharmaceutical and biotech companies. The Wnt pathways describe the complex network of proteins most well known for their role in embryogenesis and cancer, but are also involved in normal physiological practices in human adults. We have identified key targets on macromolecular structures that we believe are promising areas of exploration.

Our scientists have identified active sites on those macromolecules via computational screening, and through an [integer] process they have identified small molecules that interact directly with those sites. Enzo scientists then synthesized new chemical entities and tested these novel small molecular compounds that interact with these key sites. They screen them in biochemical and cell-based assays and have collected viable candidates to test in standard pre-clinical pharmacologic models. And we found them active in very high profile areas such as metabolic diseases and [inaudible] necrosis of the jaw and others.

Enzo Therapeutics is currently expanding its efforts in these programs and will further explore their therapeutic potential in more complex and more [modeling] systems and in a variety of [andramodel] for other therapeutic areas. We will continue to advance these drug candidates to identify their specific mode of action, to complete testing for safety, pharmacokinetics, absorption, drug ability, manufacturing considerations, and other parameters. Our intent is produce a gold star package so that we can license these products or develop them internally for niche areas. We're very pleased and excited about this line of research and see this platform technology as a pipeline generator, a solid foundation for significant growth of Enzo Therapeutics.

Next, we are working to advance our pioneering [inaudible] gene platform with out in-house developed vector technology currently in use for HIV in a Phase 1/2 study. The significance of this approach in HIV lies in the fact that it is a possible therapeutic where the goal is to exercise long-term control over a perpetually mutating virus. Although there is a number of antiviral therapeutics on the market for HIV, there's a constant battle for a drug that remains effective despite viral mutation, which, of course, is an ongoing process.

It also must be remembered that our proprietary vector technology theoretically may be used for other therapeutic areas as well. This remains an opportunity for further future development as a technology available for outlicensing.

As you may recall, following our earlier Phase I trial, which met with technological success and confirmed safety of the vector, we have a Phase 1/2 trial ongoing. Our one patient in the study continues to do well, and we continue to be comfortable with the safety profile of our vector technology. This is especially important given the current regulatory environment and FDA scrutiny of safety in developing and marketing products. We all read the papers.

Enrollment of additional patients into the study has been challenging, but we are exploring further approaches to completing the study.

Another product in clinical development is EGS21, our small molecule candidate for the treatment of NASH, nonalcoholic steatohepatitis. It's a type of liver disease. This study is currently ongoing in Israel, and we await the results.

In summary, I believe we have a bright future based on a strong scientific [inaudible] with a number of opportunities that we can explore to develop and grow Enzo Therapeutics. Fortunately, we are not dependent on any one drug or one technology, allowing us to expand, explore and reap the benefits of our scientific insights. We plan to develop our drug candidates with a view to out-licensing, partnering, or commercializing specialized niche products in the U.S. pending robust data that confirm its efficacy, safety and especially in the current environment, its cost benefit. I look forward to a period of high, intense activity and an exciting future.

Barry Weiner

Thank you, Chris.

Again, the therapeutic activity has been incredibly intense over the last three to four months. Hopefully we will start to see some material benefits emerge from these programs that we are engaged in.

On these remarks, I would like to close the conference and open it for questions. Our next conference call will be in October, when we will report on the results of all of fiscal 2008, which concludes on July 31.

Just as a footnote, last month I made a presentation at a major institutional investor conference in Europe. It gave me an opportunity to visit with a number of existing European investors as well as a group of new investors. And it's an interesting footnote that I gauged the reaction in Europe to be very favorable to the activities in the U.S., and the fact that we now have multiple assets throughout the European corridor has served as a very added plus in their interest in our activities.

On that note, I'd like to wish you well and open the floor for questions.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Jeffrey Frelick - Lazard Capital Markets.

Jeffrey Frelick - Lazard Capital Markets

Barry, any communication whatsoever you can speak to regarding what's going on with the PTO? Have they given you any indication of how much longer it will be or at least acknowledged any inbound calls from you or your counsel?

Barry Weiner

We have had no communication to speak of at this point in time. We are awaiting their response to the interference proceeding. It is well overdue. Unfortunately, we have no basis to be able to find out what is the timing on this. We are aware that there is a considerable backlog in that particular agency, and we have been apprised that petitions are emerging on cases that preceded us by quite a few months.

So we are just awaiting the decision. There's not much more we can do.

Jeffrey Frelick - Lazard Capital Markets

So you're, maybe your legal team, their read is that the recent decisions out of the PTO may be two or three months ahead of you guys?

Barry Weiner

Well, even more than that it appears. There are decisions that are coming out that were four to five months ahead of us.

Jeffrey Frelick - Lazard Capital Markets

And then any update on the New York cases?

Barry Weiner

The New York cases are progressing according to the events that we've been made aware of. We are awaiting some trial dates. There's still a little bit of discovery activity that has to be concluded, but we're optimistic we will have some dates emerging from this, hopefully some time - we should have some answers some time this summer.

Jeffrey Frelick - Lazard Capital Markets

Okay, dates coming out soon, and do you think that the court dates will be this year or into next year?

Barry Weiner

I don't know the answer to that.

Jeffrey Frelick - Lazard Capital Markets

And then also one more legal question - update on the Connecticut appeal?

Barry Weiner

The Connecticut appeal is in process, and we're just awaiting this to play itself out.

Jeffrey Frelick - Lazard Capital Markets

And then with respect to the Clinical Lab business, can you give a little bit more detail, I guess, kind of on the strategy now going forward? Obviously you talked about there's some attrition, some pricing, some decreasing in special [inaudible]. Kind of what's going to be the strategy, I guess, going forward for Enzo on the Clinical Lab side?

Barry Weiner

Over the last six months or so, as we've spoken in the past, we are attempting to move the lab more to an esoteric testing base. These are higher margin forms of tests. It's a trend that is very apparent within the industry. There is a publication out that projects approximately onethird of all clinical testing done will be esoteric based over the next five years. So we feel that it is a target market that is predicated to move towards.

I think, just to address the shortfall in volume in the Clinical Laboratory, a year ago we had this enormous bolus of business which came in on top of us in a very short timeframe. In a one to twomonth period, we had this huge influx of business. At that time, much of our sales force activity was dedicated to absorbing, integrating and putting into place, you know, the necessary requirements to maintain and sustain that business. This required infrastructure enlargement, which we did. As we've spoken in the past, we actually have acquired and are now moving the entire Life Sciences group into its own independent facility to make more expansion room in the Clinical Lab to be able to grow and prosper, not only in organic volume growth but through geographic as well as product diversity growth.

I think what happened over the last two quarters is that there was a settlement, a settling of the business to a certain degree. In the Clinical Lab business, there is always an inflow and outflow of activity. I think our sales group focused a significant amount of time to the integration and absorption. I think at this point in time they are now comfortable with that and hopefully they will be moving forward to, again, address the new business development activities, which I think were put a little bit behind as a result of this huge influx of business.

I think strategically, hopefully we've seen what I would call the integration settlement. We are now moving forward with the business. The infrastructure has been expanded so that the absorption capacity is quite adequate to grow at this point in time. So I'm optimistic that in conjunction with new development of tests and product growth as well as geographical growth, the Clinical Lab will start to move forward in a positive direction.

Jeffrey Frelick - Lazard Capital Markets

So it's just more sales force kind of took their eye off the ball the last couple of quarters on new business? Nothing really to do with menu offering or anything like that?

Barry Weiner

Oh, not at all. I think that's exactly it on the head. Basically we had a focal point on integrating and absorbing, and I think we have to shift a little bit of the emphasis now to new business development again.

Jeffrey Frelick - Lazard Capital Markets

Barry, just one question on the Clinical Lab business. Average quarter, what percent of business falls out and what percent new accounts are kind of picked up and added to the system?

Drew Crescenzo

Over the past few quarters we've been looking to -- our plan is to balance attrition with new customers and some departing. As I mentioned, in the last quarter, you know, our marketing effort was a little bit off, so there was probably a higher attrition than we had planned.

Jeffrey Frelick - Lazard Capital Markets

Now I guess my question - if you look back over the last couple of years, though, what's typical attrition in the business - 5% maybe?

Barry Weiner

I think as a rule of thumb in the Clinical Lab business, you can look to 5% attrition per quarter as an average in the industry. It ebbs and flows depending on, you know, there are insurance mix issues here. There are a whole bunch of variables that can impact that.

Jeffrey Frelick - Lazard Capital Markets

And just one final question for Carl. If I look at the BIOMOL acquisition, nice add-on to run the product offering with the functional [product mix] of business line. Going forward, anything that you see that the product portfolio must have and then anything that could kind of be nice to have, a nice addition?

Carl Balezentis

Certainly, you know, if you look across ALEXIS, Enzo, BIOMOL, what you see is eight specific product categories that each of those have that we're trying to - we have the market presence in; we want to establish at least half of those market leadership in.

When you look, there are some glaring obvious ones which, you know, I don't want to necessarily go into all the details of but, yes, there are. And we target those and they're strategic things that we want to go after.

So we're not just going after acquisitions just to fill revenue and whatnot, but there's some obvious ones  a few. We have very nice coverage now. Extremely, you know? To have - two years ago, we probably had four categories or specific areas. Now we're at, you know, 21 to 24. We have some real opportunity now to build those areas, build those product lines.

Barry Weiner

There are a few gaps.

Carl Balezentis

Absolutely.

Operator

Your next question comes from [Robert Smith - Pinnacle Performing Investing].

Robert Smith - Pinnacle Performing Investing

Carl, what's your gross margin target, and what kind of critical mass do you have to achieve to get there?

Carl Balezentis

Oh, I don't think - I think we're at critical mass, honestly. And I think we just need to - we have some operating efficiencies that will get us there. It's over 50% as an initial target. We'd like to get that higher as we go through the following years.

Robert Smith - Pinnacle Performing Investing

How much higher do you think you can get it?

Carl Balezentis

Well, I mean, you can look at some companies [ratings] - if they're only simply [ratings] companies, it can be up to 70%. It just depends on the mix, you know? Really what we do focus on - the margin is important, but really we want to - how much operating profit are we bringing to the table? So a lot of times we will focus on the gross profit and the gross margin, but a lot of times it's more important what you bring to the bottom line.

Some companies have a 15% gross margin and yet they threw off a lot of cash to the bottom so, you know, we don't want to just focus only on one thing. We really focus on profitability.

Robert Smith - Pinnacle Performing Investing

And in Therapeutics, did I hear correctly that Alequel, your idea is to file an IND in '09?

Barry Weiner

I think the response is we will file an IND subsequent to the conclusion of the testing that is in process at this point in time. That can take place this year or it could take place after January. It just depends on how the data flow emerges.

Robert Smith - Pinnacle Performing Investing

I thought it was mentioned in '09?

Barry Weiner

Well, Chris said next year, meaning within - we have a July 31 fiscal, so sometimes I think that gets a bit confusing.

Operator

(Operator Instructions) Your next question comes from [Robert Gold - Century Investment].

Robert Gold - Century Investment

I have two questions. One regards the enrollment of the HIV candidates in San Francisco. In the May 22nd New England Journal there were two centers, one where the disaster occurred at the University of Pennsylvania that threw everything back in gene therapy, but they just completed another study, as did a group in England, and there was an editorial in the May 22nd New England Journal encouraging such.

I was wondering why, in spite of this or despite this, there's still such difficult in the enrollment of patients out in San Francisco? That's my first question.

Christine T. Fischette

Well, this protocol is a very difficult one for patients to undergo. It actually involves gene therapy, of course, which some people are afraid of. And it also involves radiation, which tends to -

Robert Gold - Century Investment

I'm well aware of the protocol. It's been done. It's not so unique. Ablation therapy is not the most unique thing in the world.

Christine T. Fischette

Absolutely. We know that it's not unique. The physicians know that it's not unique. The patients, however, are much more reticent when it comes to total body radiation.

Robert Gold - Century Investment

So is the problem that you can't find a candidate to enroll or - I'm not sure why it's over a year, and you only have one candidate. I don't understand why you used the term challenging because that always worries me.

Barry Weiner

Well, I think the word challenging is because the process of gene therapy is a challenging process in the medical world today.

Robert Gold - Century Investment

I'm well aware of that.

Barry Weiner

I mean, it carries with it multiple oversight and scrutiny and perhaps unnecessary diligence to confirm a safe pathway. We have been very cautious in the execution of this trial. We've done so purposely because of, you know, the very, very extreme oversight we face, both from institutional sources as well as the federal regulatory sources.

Robert Gold - Century Investment

Well, that's why I mentioned the fact that they were able to get things back on track at the University of Pennsylvania, where the whole - where everything came off the tracks. So I wouldn't imagine that the scrutiny was any less at the University of Pennsylvania than it is at UCSF. And so I still don't get why it's taking so long.

Barry Weiner

All I can suggest to you is that the internal organization as well as the regulatory oversight has been extremely conservative. We pay the price for what others have done before us to a certain degree in forcing parties to be more diligent in their oversight, perhaps. The good news, I think, is that the process has shown, at least in the one patient that we've seen so far, the patient is doing really well. We're pleased about that, and we are very much interested to see the development in the direction of this testing process go forward.

Robert Gold - Century Investment

And my second question regards the inflammatory bowel disease studies out of Israel. It originally was supposed to be submitted last year, and now I gather the data still is not ready so that - I just want to get a real timeline. At the annual meeting, it was now supposed to be this year, and is it now being put off until '09 or did I miss interpret what was said?

Barry Weiner

I think you misinterpreted what was said. We are awaiting the conclusion of this arm of the trial. There are patients that are still running. Patients over time were added to replace patients that have dropped off during the period of time.

Robert Gold - Century Investment

You expect the study to be done when?

Barry Weiner

We expect the study to be concluded this year.

Robert Gold - Century Investment

And you expect, then, submissions to be this year or next year?

Barry Weiner

It'll depend on the timing within the course of the year when that happens, whether it will fall within this year or next year.

Operator

Your next question comes from [Bill Dupree] - RBC Wealth Management.

Bill Dupree - RBC Wealth Management

I have followed Enzo for numerous years. I have listened to numerous conference calls, read a lot of material that Enzo has put out, and there's a lot of questions that need to be answered. Investors want some answers.

One is do you remember, Barry, eight and a half, nine years ago on a conference call, you and Dean Engelhardt were talking about this diagnostic platform. And both of you talked about it, and then Dean said that in a typical situation a lady comes to the physician's office, has some kind of an illness, and Dean says, okay, the doctors says okay, we'll perform this diagnostic service, and then why don't you just have a seat over there and in about 30 minutes we'll have an answer. And then he elaborated on that. And since then, in written form and on conference calls, you have mentioned that you believe there's a $19 billion market.

Now where are we? That's been years. Investors need some answers.

Barry Weiner

The system you're referring to is a genetic-based amplification system for doing clinical diagnosis. This is a product in process that was in development for quite a period of time. It has intellectual property issues which are interwoven with some of the legal issues that are ongoing currently, and in many cases it is an intertwined with some of the ongoing legal issues that we are engaged with with some of the parties.

My suggestion to you, we do know that the system is effective in its capability to amplify DNA. It is cost-effective. It is time effective. We have run this particular capability in house for quite a long time. We have been developing applications of this technology, and we feel that it will be a part or parcel of some of our activities with other companies in which potentially we have litigation issues with.

We are looking forward to the resolution of some of these litigations, which would free us up and allow us to be able to exploit this type of technology more effectively, and we're confident it will be.

Operator

Sir, there appear to be no further questions at this time.

Barry Weiner

Thank you very much. We look forward to chatting with you at the next conference call in October.

Operator

Thank you. A replay of this broadcast will be available until Wednesday, June 24th at 12:00 midnight. You may access this replay by dialing 18006421687. The PIN number is 49651828. This replay is also available over the Internet at www.InvestorCalendar.com. 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. F3Q08 (Qtr End 4/30/08) Earnings Call Transcript
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