Enzo Biochem, Inc.
Q1 2008 Earnings Call Transcript

Published: 11 Dec 2007

[Operator:]

Good morning, and welcome to theEnzo Biochem, Inc. first quarter 2008 operating results conference call. Exceptfor historical information, the matters discussed on this conference call maybe considered forward-looking statements within the meaning of section 27-A ofthe Securities Act of 1933, as amended, and Section 21-E of the SecuritiesExchange Act of 1934, as amended. Such statements includedeclarations regarding the intent, belief or current expectations of the companyand its management. Investors are cautioned that any such forward-lookingstatements are not guarantees of future performance and involve a number ofrisks and uncertainties that could materially affect actual results. The companydisclaims any obligations to update any forward-looking statement as a resultof developments occurring after the date of this conference call. Our speaker today is BarryWeiner, President. (Operator Instructions). I would now like to turn the floorover to your host. Mr. Weiner, the floor is yours.

[Barry Weiner:]

Thank you, and good morning. Thankyou all for joining us for our fiscal 2008 first quarter conference call. Joining me today is DrewCrescenzo, our Senior Vice President of Finance, and Dr. Carl Balezentis, whois the President of Enzo Life Sciences. Yesterday, weissued a press release describing our earnings for the quarter. I trust you hadan opportunity to review it. Let me first touch on some of the highlights ofthe quarter. From anoperating standpoint, it was very strong, continuing the trends from the fourthquarter. Our revenues rose by over 86%, to almost $19.5 million, a recordquarter for our company on revenue over the last five years, with both salesand royalty income up sharply. Life Sciences' revenues rose more than 400%, andClinical Laboratory revenues were up more than 40%. Our grossprofit was nearly $9.9 million, and this was up from $6.3 million last year.Despite increases in SG&A expenses of over $1.9 million, our net loss wasimproved slightly over last year. And it is important to note that this isdespite the fact that we recorded a $2 million gain on the settlement of litigationduring the year ago period. In addition, wecontinue to recognize fair value inventory adjustments in connection with our Axxoraacquisition, which inversely affected pretax income by approximately $600,000. Our financial performance isreflective of the result of the strategic plan that we have laid out for ouroperating subsidiaries, and spoken about in pervious calls; namely, that we arebuilding infrastructure in order to increase our product and service offerings,to broaden our geographic reach, and ultimately, have as much control over ourown customer base as possible. We have laid the groundwork forthe next phase of growth in our operating subsidiaries, utilizing our strongbalance sheet, and as we aggressively look to build internal productdevelopment, add additional companies and external product lines wereappropriate to our operations, all this will broaden the scope of our productlines as well as our market reach. Our emphasis on divisionalorganic growth is also being supplemented from the program, to generate valuefrom our intellectual property estate where the licensing and partnering wereapplicable. We are engaged in this activity at this time, as we are seeing afurther consolidation within the research and clinical diagnostic areas. Theincreasing recognition of the importance of molecular diagnostics andpersonalized medicine will have in the future of modern medical practice isdriving a new order in the diagnostic space. The acquisition activity, as wellas the increasing value being attributed to companies in this area over thelast 18 months, is changing much of the landscape in this industry. Thisactivity is taking place not only in the product supply area, but also in theservice area. We, at Enzo, are fortunate thatour core technology estate, which is embodied in our intellectual propertyportfolio, touches on key areas that are fundamental to the application andexpansion of many of these new technological areas that could be central to thenew generation of diagnostic capabilities. These new capabilities useinformation and data from a person's genetic profile to diagnose, to select amedical strategy, provide a therapy, or perhaps, initiate preventive measures. In short, we are possible toprovide the appropriate drug at the appropriate dose to the appropriate patientat the appropriate time. These new techniques are opening up the possibility ofa new approach to drug development, as well as unleashing the potential ofsignificantly more effective diagnostic, therapeutic and patient care. Enzo's position in this area wasenhanced this past year, with the issuance of new Enzo IP in the area of genelabeling techniques, microarray capabilities, novel dye approaches and geneamplification techniques, to just mention a few. Our goal in this area is tocapitalize on our technological inflation both in-house, as well as, inconjunction with, other parties to play a role in this newly developing,exciting, and pioneering opportunity. I'd like Drew to give you a recapof the quarter's financial results; and then, we will discuss the divisionaloperations individually. Drew?

[Drew Crescenzo:]

Thank you, Barry, and goodmorning. Initially, I will discuss the consolidated fiscal 2008 first quarterresults, then turn to the results of our three operating segments

[Barry Weiner:]

Thank you, Drew. At Enzo LifeSciences, given that this quarter reflected the first four quarter of Axxora,we showed more than a four-fold product sales increase. Not only were ourproduct sales up dramatically, our royalty income, which consists of paymentsas was mentioned from Digene, which is now QIAGEN. They were acquired byQIAGEN, recently, and Abbott nearly doubled over last year. Probably more importantly, if youexclude the one-time gain we booked last year as a result of the settlement ofour litigation with Sigma, we would have more than double the division'soperating profit quarter-over-quarter. Importantly, Enzo Life Sciencesnow contains the infrastructure that will allow us to actively and aggressivelypursue a wide range of opportunity, which could either increase our alreadybroad product line and/or provide Enzo with greater sales reach. We areactively working on one such transaction that should provide us with an evengreater European presence as an example. The management team we have builtat Enzo Life Sciences is highly experienced in a number of key areas today andwe believe is now able to support, a very seriously growing organization. Theexperience we have gained, through the success thus of the Axxora integrationis the strong reason to believe, that future transactions could be consummatedquickly and efficiently. Given the recent turbulence inthe capital markets, we are seeing a variety of more drafted integrationopportunities, as well. In addition, to improving our operating results forstrategic acquisitions, we are also focusing on two other objectives

[Operator:]

(Operator Instructions) Thankyou, our first question is coming from Jeff Frelick with Lazard CapitalMarkets. Please go ahead.

[Jeff Frelick:]

Thank you, good morning folks.

[Barry Weiner:]

Good morning.

[Jeff Frelick:]

Hey, Barry, given the managedcare contracts and the esoteric offering that you are seeing really benefitingthe Clinical Labs business. Can quantify just the test volume growth now inthis quarter?

[Barry Weiner:]

It's a difficult issue toquantify, partially, because the mix of the business is changing and evolving.We are definitely seeing a rise in our esoteric testing volume, as a percentageof total volume. We tend not to release specific specimen account numbers forconfidentiality purposes, but I can relate to you that we are seeing withoutquestion an enhanced growth in the proprietary of the esoteric testing group oftests.

[Jeff Frelick:]

Okay. And then you had talked alittle bit about the gross margins as Axxora manufacturing will be, I guess,transitioned over to Enzo. I think it should be around 5,000, just another inmanufacturing. Where does that number go to over, maybe you can help usunderstand is that over the next year or next year and a half?

[Barry Weiner:]

Maybe I am going to ask Dr.Balezentis to respond to that.

[Carl Balezentis:]

Okay. There's several things tokeep in mind there, first of all, Axxora also distributes for approximately 40companies, and that's a lower margin product line, and that kind of brings itdown. But then, of the products that we manufacture, really the goal over thenext year--and that's calendar year 2009--is to really focus on marginenhancement and improvement. Specifically, what that number will be, we don’tknow. But it should improve significantly in that, as well we are starting todevelop a number of products, which will have much higher gross margin, ingeneral, and so we should see significant-and I would say, really, quarter-over-quarternext year, you should see a significant improvement.

[Barry Weiner:]

Just as a point of reference, wetook about an 11% hit in margin at the Life Sciences this past quarter, becauseof the accounting. You would have to factor that in going forward as we utilizethose products that are affected by that rule. And looking forward to moveforward it will be a slow incremental improvement. Our margins now in that areaare about -- if you look at them fully in, without the accounting effect, isthe mid 30's, and we certainly hope to push those up into the 40-plus range.

[Jeff Frelick:]

Okay. Well then, if I might askone more or two more questions. On the royalty side, Barry, it’s pretty solidthis quarter, and a little bit better than we were looking for. I guess, asmuch as you can say, is there additional activity in this area, otherdiscussions with folks, kind of sitting down with you guys at the table andlooking to access some IT?

[Barry Weiner:]

Yes. We've had extensive activitythis quarter in a number of different areas. As I mentioned in my comments, wewere very fortunate this year to have a wealth of new intellectual propertyissues covering some very significant segments of the genomic and life sciencesmarkets. This new group of intellectualproperty issuance is contributing to, I would suggest, an enhanced portfolio intotality, and has captured, I suspect, a lot of interest by other parties inthe field. We are in negotiations; this is a very important area for Enzo, becausewe are looking at it from a couple of perspectives. We have multiple partiesthat, potentially, could have sort of minor or modest types of licensingrelationships; and you have other parties that are looking for much moreextensive relationships, and it is a balancing act trying to define how we canoptimize the total values of these packages. So, we are definitely excitedabout this and we are looking forward to new opportunities emerging from thisactivity.

[Jeff Frelick:]

Okay. And this is my lastquestion. With respect to the Axxora acquisition, has it met your expectations?Or whether there are some surprises and this has been integrated--why don't youor Carl answer me that?

[Drew Crescenzo:]

I'll let Carl deal with that.

[Carl Balezentis:]

It has clearly exceeded ourexpectations, if you remember the purchase price. I think for above in terms ofrevenue where we expected from them. Integration has gone extremely well, Ihave been through a number of acquisitions in companies and this is the bestthat I’ve ever been through and has to do with the quality of the managementthat we acquired, everybody has worked together. In agendas and things likethat often happen with some acquisitions, so it's gone extremely well and I thinkthat we haven't lost any customers, we are very focused on sales and marketing,I think it shows you can kind of run out the numbers so to speak of revenue,but it's clearly exceeded what we thought and we are extremely pleased with it.

[Barry Weiner:]

I can comment from seniormanagement perspective the acquisition has really been integrated in a seamlessmanner. I think Carl and his team have done a terrific job, and I think what isbeing built will be a platform from which this company can truly make a mark inthe industry, and to be very competitive, as well as significant player in thisspace.

[Jeff Frelick:]

Okay. I'll jump back in thequeue.

[Barry Weiner:]

Thank you.

[Operator:]

Thank you. Our next question iscoming from Anthony [Swofford] with Paramount Capital. Please go ahead.

[Anthony Swofford:]

I have two key questions. Oneabout the diagnostic web business, it seems that the LabCorp and the Quest servicingof the Aetna and the United Healthcare contracts has added increased revenue inthis area, and it seems that one of the advantages, I just wanted to commentis, that the physicians who are sending lab testing specimens, who are both UnitedHealthcare and Aetna providers, can access Enzo for a common drop in thoseareas, and from a practical sales perspective, that seems to be an area thatcould be leveraged. And another question to Jeff'spoint. It seems to me that the Genzyme acquisition of IMPATH assets, where theyacquired--FISH, immunohistochemistry, market testing for leukemia lymphoma, andmore recently, EGFR and VEGF testing--that the intellectual property that Enzocurrently holds would enable Enzo to increase a high-end case mix, wheretesting would be available for higher rates, or reimbursement for thoseparticular test. And I'm wondering, is Enzoinvesting in hiring pathologists, and sales, thereafter, are specific for thosehigher end testing, and is that a focus to improve the profitability even moreof the diagnostic group?

[Barry Weiner:]

Thank you. First to comment onthe managed care contract--Enzo is fortunate in that. We both can provideservices for United Healthcare clients, as well as Aetnaclients, and for those on the call who may, or may not, under-appreciate thateach of the large national labs with those contracts. So, for Enzo, it's aterrific benefit to be a one-stop shop for many physicians, who do not wish toput specimens--and that's what our question has been a strong sellingpoint--for the laboratory, in attracting new clients health. In terms of the movement into themore esoteric, or high margin testing areas, the areas referred to were the fluorescencein situ hybridizations areas, which are a cornerstone, in the testing forbloodborne cancers currently. That market has been dominated by the Abbott FISHsystem, or the (inaudible) FISH system--very strong, good product this pastyear. We cross licensed, our technology, as well as became a provider for thereagent, and we do get a royalty on the sale of that system. But at the same time, it hasprovided us a capability to develop a system that we can market on our own.This past year we also in-licensed specific probes for Mercy Hospital in KansasCity--which we can add to this complex of products--the whole area of moleculardiagnosis, if I come to my original comment, is one that we are focusing on,and one that we believe we can implement or utilizing our clinical laboratoriesas a strategic provider to give it an enhance presence in the market and alsoto increase it's value from our perspective of market capitalization.

[Anthony Swofford:]

Okay. And then a follow-upquestion, concerning on Axxora? The platform is a global one, truly in Europeand Switzerland than the US,and they have a certain customer mix which includes academic centers andindustry. What, currently, are the plans to enhance industry customers andmaintain and enhance the academic customers, and is that sales mix somethingthat requires additional assets to expand in that area and then how are youworking on that?

[Drew Crescenzo:]

I think that's a great question,and exactly what we're doing is, we are investing in the marketplace itself,you'll see that change in the next six to nine months to really enhance that,we are looking to leverage these products from the development stage on towardsthe pharma biotech and other things we have some plans to do that, as well. Ithink these are some of the real hidden gems and the synergies that areavailable there. Certainly our customer base fromEnzo was a little bit heavier towards the pharma, or the biotech things likethat, so we will complement that, and we're trying to cross sell and do somethings like that. And a lot of focus of our product development and as wellwill be towards leveraging some of the products that currently offered to moreresearch setting from Axxora and leveraging those into the higher growthmarkets across in the biotech and pharma. And I think one of the great thingsas we continue to enhance our international global distribution, Axxora gave usthe great foundation in Europe and with itsdistribution network throughout the world but we still have some opportunitiesthere as well.

[Anthony Swofford:]

Well. Congratulations, again andkeep the growth and revenue recognition coming strong. Take care.

[Operator:]

Thank you. Our next question iscoming from Robert Smith with [Spero-Smith Investment]. Please go ahead.

[Robert Smith:]

Good morning, you mentionedadvancing certain clinical programs in 2008, a long year so to speak. Could yourefine that somewhat to give us better time lines?

[Carl Balezentis:]

I will try my best. Basically theAlequel trial has, we're basically completely enrolled in the third arm of thePhase IIb study for Alequel in Israel.The data for that will be digested. It will take a few months to do that. Atthe time that that is taking place, we are complying our legal and regulatorysubmissions, we are identifying and looking to set up clinical trial sites.There is a whole big process that is taking place and we are currently engagedin. We look, hopefully, to have theinitiation of this trial sometimes towards the middle to the end of next year.I think that would be a realistic timeframe and one that we feel could meetwith a reasonable standard of opportunity for us. In terms of the Optquel, weare in the process of completing the manufacturing of the materials of the drugthat will be utilized in this particular trial. We have begun to put together theregulatory filings that will be required. Again, it is a process where we havea rather sophisticated panel of experts that is working with us to define theprotocols, and to assist us in the implementation of this particular program tothe regulatory agency. Our clinical sites also have been identified and we arein the process of evaluating the best process to expedite this particulartrial. Again, the timeframe for thiscould be approximately the same thing. Obviously, we are here to push these asquickly as we can. We have to be realistic. We can't cut any corners. I thinkit's very important to do it right, and to do it right the first time. And sofar, we have been deliberate in the execution of all of our clinical programs. I think the good news is, that wehaven't really wasted money, we haven't expended money frivolously, and theresults we have achieved for the dollars that we have expended, I believe,really surpasses many companies in our industry. I think the game plan now is tomove these things into the clinics, so we can move towards the in stage trialsand again these trials are not long trials. We are talking 15-week trialdesigns for both these products, approximately, so that we could hopefully havesomething up in running and have some data coming through within the next yearor year plus timeframe as we move forward.

[Robert Smith:]

And secondly, perhaps I missedit. Did you state the R&D figures for the quarter?

[Barry Weiner:]

Yes, we did. We expended about$900,000 in R&D associated with therapeutics only. That's correct.

[Robert Smith:]

Okay. Thank you. Good luck.

[Barry Weiner:]

Thank you.

[Operator:]

(Operator Instructions). Our nextquestion is coming from Jack Lasday of Citi. Please go ahead.

[Jack Lasday:]

Good morning. Gentlemen, over theyears interim and diagnostic they were to be important parts of the revenuesand cash flow. We've heard on calls like this that Enzo is waiting for patentsand associated approvals which would then led to believe that those have comethrough. Can you give us an update on something that appeared to have been veryimportant, that we are not hearing much about, please?

[Barry Weiner:]

The technology you are referringto is our linear non-cycling amplification approach, which interestingly thepatents came forth this past year, it is intertwined with much of ourintellectual properties. As a matter of fact, I think it's one of the legs ofwhat I consider the four pillars of Enzo's core in IT in the field of genomics,which could be viewed as gene labeling, sequencing arrays and genetic labeling. So I think the amplification is acore piece of this whole mosaic. It is intertwined in many respects with manyof the other technologies it is the subject or integrated parts of ourdiscussion. It is highly probable that any relationship we engage in with theinterim will be in a relationship that will be integrated beyond just thisamplification technology. What I am referring to on that,it is not necessarily though it could be a technology we would licenseindividually, it would be coupled with other Enzo intellectual property andpackaged in a way that would give critical mass to a whole series or union ofcapabilities that would allow a company to participate in this new molecularmedicine space with a genomic platform that would be somewhat unnecessarilyimpeded by other intellectual property. So, it is and is still a veryimportant aspect, it is a technology that is, one that is highly of interest toparties out there, because it is competitive with PCR technology and it affordsan alternative route to PCR and is one that we believe will have a place in thefuture of modern molecular medicine.

[Jack Lasday:]

Well, is it fair to say then, thatat this point there is nothing impeding your progress to move forward otherthan negotiating some kind of a deal?

[Barry Weiner:]

I would agree with thatstatement, yes.

[Jack Lasday:]

Okay, thank you very much.

[Operator:]

Thank you. Sir, there appears tobe no further questions at this time. I'll turn the floor back over to you.

[Barry Weiner:]

Thank you very much. Weappreciate your time and your questions. We are in a very, very interesting andI think important trajectory right now. We look forward to reporting to you atour annual meeting, which is on January 24th. And after that the next quarter,which will take place in March. Thank you for joining us.

[Operator:]

Thank you. A replay of thisbroadcast will be available until Tuesday, December 25th at 12