Enzo Biochem, Inc.
Enzo Biochem, Inc.
The first biotechnology company to go public, Enzo Bio-chem, Inc., located in Farmingdale, New York, consists of three wholly owned subsidiaries. Enzo Clinical Labs, Inc. offers diagnostic testing at laboratories in the New York metropolitan area and provides a steady income to support the company’s research efforts. Enzo Diagnostics develops and markets DNA probe-based tests to detect viral and bacterial diseases, including cancer and sexually transmitted diseases. (DNA probes operate at the genetic level, providing a faster and more definitive diagnosis.)Potentially the company’s most lucrative business, Enzo Therapeutics applies exclusively licensed antisense nucleic acid technology to find cures to cancer, viral, and other diseases by altering the generic makeup of cells and, in effect, “turning off” the traits of particular genes. Over the years, Enzo has been something of a cipher, riding on more than two decades of unrealized potential. Periodically, Wall Street bids up the company’s stock in anticipation of Enzo producing a scientific breakthrough, only to be persistently disappointed. In addition to research, Enzo has spent a great deal of time in the courtroom, involved in a series of patent disputes with rivals and broken contracts with allies.
Establishing Enzo in 1976
In 1953 Alan Watson and Francis Crick set the stage for biotechnology by revealing the shape of DNA and explaining how genetic information was passed from one generation to the next. Scientists rapidly began to search for ways to manipulate nature at the molecular level through genes, leading to such discoveries as cloning. Like the personal computer and Internet revolutions that would follow, biotechnology was based on publicly supported research that was then commercially exploited by individual entrepreneurs in small start-up companies. Genentech is generally regarded as the company that launched the biotechnology industry, founded in April 1976 by Herb Boyer, co-inventor of gene-splicing, and a young venture capitalist named Robert Swanson. Only a few months later, in August 1976, Enzo Biochem would become another early biotechnology pioneer.
The scientist behind Enzo was Elazar Rabbani. Born in Iran from a long line of Sephardic rabbis, including a grandfather who was the chief rabbi of Isfahan, Rabbani broke from family tradition, traveling to the United States to study science. After receiving a B.A. degree in chemistry from New York University, he earned a Ph.D. in biochemistry from Columbia University. Rabbani was completing his dissertation when he started Enzo with his brother Shahram, who also earned a chemistry degree, and their brother-in-law Barry Weiner, who held an M.B.A. from Boston University and was working for Colgate-Palmolive. Enzo started business in space located in Manhattan, just north of the Wall Street area, but eventually moved its headquarters and research operations to Long Island. Whereas the company began to conduct research, its primary business at first was the production of enzymes that it sold to research laboratories. Although the company would lose $3,400 on just $133,000 in revenues in 1979, Enzo became the first of the biotechnology companies to go public when it made an initial offering of stock in June 1980. The company sold 700,000 shares of stock at $6 per share, setting the stage for other biotech start-ups that would become hot Wall Street offerings during the next few years. Within a month Enzo was trading higher than $10. By 1983, following several splits, it would be trading in the low $30s.
Like other new biotech companies, Enzo did not lack in confidence or lofty ambitions. In its 1980 annual report, the company indicated that it was conducting wide-ranging research: from developing vaccines to creating microorganisms that could eat oil spills, and even to the creation of synthetic fuels. Soon, however, Enzo elected to focus its resources on nonradioactive DNA probes, making use of a patent awarded to a Yale University scientist on its advisory board named David Ward. In 1983 the company signed a major joint venture agreement with Johnson & Johnson to develop and market products based on DNA technology.
Enzo was perceived as a company on the verge of greatness, yet it never seemed to deliver. At the same time, it was beginning to gain unwanted notoriety. When Ward left the advisory board to work for Integrated Genetics in 1985, Enzo sued him, claiming that he disclosed trade secrets. The case was settled out of court, with the company agreeing to make royalty payments and provide shares of stock that it promised Ward before he resigned. Enzo also sued two other members of its six-member advisory board, including Robert Prensky of the Sloan-Kettering Institute, who established the board. More important, Enzo failed to bring products to the market, a situation not uncommon for biotechs, which require long lead time and enough cash to sustain research and development that in the end could still be leapfrogged by newer technologies. To generate revenues, in much the same way that it sold enzymes in its early days, Enzo acquired Lattingtown Cytology Center in January 1985 in order to offer testing services for New York doctors.
By 1986 the state of Enzo could be described as uncertain. Minus research money, most of which came from Johnson & Johnson, revenues amounted to just $6.8 million. Its earnings essentially came from interest income and the Lattingtown lab business. Nevertheless, the company was valued at more than 110 times its earnings, and although a number of investors lost faith in the company, whenever its stock dipped below $9 per share, the price rebounded. A July 1986 Financial World article written by Ellen Benoit offers a somewhat critical portrayal of the company, maintaining, “Enzo’s promise and promises have frustrated many for six years. Take, for instance, those squabbles with prominent scientists. A rule of thumb for investors in gauging a high-tech company’s prospects is to assess the quality of its board of advisers; in this case, some of the advisers turned their own thumbs down.” While noting that Enzo had husbanded its money well, Benoit also quoted an analyst who called the company “stingy.” Overall, Benoit depicted Enzo as a company that was perceived to have failed to back up its hype, and one that would no longer be given the benefit of the doubt.
Filing Suit Against Johnson & Johnson in 1987
In January 1987 Johnson & Johnson expressed concerns about Enzo’s performance and asked for information and assurances that it was complying with its obligations before it would release $3 million in promised funds. In August 1987 Enzo sued Johnson & Johnson, alleging unfair competition, as well as failure to market some of the genetic diagnostic tests that Enzo had developed. The suit called for $100 million in damages and $500 million in punitive damages. While the suit made its torturous journey through the legal system, Enzo carried on, adding to its laboratory testing business and taking a major step on the research side by signing an exclusive licensing agreement with the Research Foundation of the State University of New York, located at Long Island’s Stony Brook, on its patents regarding antisense technology. A 1988 Wall Street Journal article on the promise of antisense provides a succinct overview of the method: “In its simplicity and specificity, antisense is utterly unlike mainstream biotechnology, which involves splicing a new gene into a medium such as bacteria to produce a desired protein that will combat a disease. Nor is it like ’gene therapy,’ which aims to splice in a good gene to compensate for a defective one. The new science looks to target and block bad genes—such as cancer-causing oncogenes—much as correcting tape blocks out a typographic error.” To be sure, antisense held out great promise, but cures, and profits for the companies like Enzo that sought to develop commercial products, were admittedly many years away.
In the meantime, Enzo found itself burdened with $30 million of junk bond debt and losing significant amounts of money, especially to debt service. In fiscal 1991 the company generated revenues of just $19.8 million and posted a $10.8 million loss, after losing $2.5 million the year before. In May 1991 it failed to make a semiannual interest payment of approximately $1.4 million, prompting First National Bank of Boston, trustee of the debenture holders, to demand immediate repayment of the entire debt. The parties worked out a prepackaged bankruptcy plan that would allow Enzo to make interest payments using stock instead of cash for three years. When the price of the stock suddenly took off, however, Enzo was able to exchange its bonds for shares of stock, as a vast majority of bondholders elected to convert their holdings at $5 per share, thus freeing the company of its onerous debt.
The run-up on Enzo stock was apparently precipitated by new-product announcements by the company. With its shares trading at just $1.12 in early December, Enzo announced that it had developed a test to detect the AIDS virus, claiming that it was more effective than what was currently in use. In less than a day of trading, Enzo’s stock soared 400 percent, eventually climbing as high as $8.50 per share. Some analysts were puzzled by the excitement generated by Enzo’s announcement, given that the new AIDS test would require the use of three patents held by other companies and for which Enzo was not licensed. This fact was made clear in an earlier press release to the research community but not mentioned in the general announcement. Enzo’s stock soon settled to the $3 level, then took off again in January 1992 when the company announced eight new tests to detect cancer. This time the stock surged to $7.50, at which point many of Enzo’s bondholders decided to convert to stock. What the second press release did not note was that seven of the eight cancer tests were not proprietary, nor did any have FDA approval. Enzo denied that its announcements were misleading, maintaining that the dramatic increase in the price of its stock was simply investor reaction to company progress.
Enzo Biochem is positioning itself for a fundamental role in the evolution towards biological medicines in clinical treatment.
Later in 1992, Enzo’s stock took off again, this time when the company announced that it would receive a patent on antisense technology, originally filed nine years earlier. Although the technology held potential benefits for humans, its most immediate application would be in agriculture. Indeed, a biotech company named Calgene only a few months earlier had received an antisense patent for tomatoes and other plants and was preparing to market its extended shelf-life Flavr Savr tomato. With Enzo believing that its patent should supersede all other existing antisense patents, it was inevitable that Enzo and Calgene would skirmish. Calgene went to court first, hoping to invalidate Enzo’s patent. A month later, in March 1993, Enzo sued Calgene, charging patent infringement.
Settling the Johnson & Johnson Suit in 1994
While Enzo and Calgene engaged in a protracted court battle, Enzo finally settled its case with Johnson & Johnson in October 1994. Johnson & Johnson agreed to pay Enzo $35 million. At the same time, Enzo announced that it would post a profit for fiscal 1994, its first since 1986. On revenues of $22.8 million, the company made $5.3 million. Its entry into the clinical laboratory business appeared to be paying off, supplying steady cash flow. At the same time, Enzo Diagnostics also was beginning to generate significant sales, accounting for about 30 percent of the company’s revenues. Only a year earlier the laboratories supplied 90 percent of all revenues. Enzo Therapeutics remained the business with the greatest possible payoff in the future. Overall the game plan was clear: diversify, maintain a positive cash flow, invest in research, and wait for the scientific breakthrough that would launch Enzo to another level.
The company suffered some setbacks in the next couple of years. The courts ruled in February 1996 that Calgene had not infringed on Enzo’s patents. The clinical laboratory business was hurt by reductions in reimbursements for Medicare services, leading to a loss of $7.7 million in net income for 1996. Nevertheless, the company recovered and was profitable again in 1997. It followed with a steady increase in both revenues and profits in 1998 and 1999. Annual sales grew from $40.4 million in 1998 to $44.3 million in 1999, with net income of $3.4 million and $6.5 million.
After the price of Enzo stock dipped to the $6 range in the summer of 1998, it began a steady rise that eventually would reach a fever pitch. Encouraging test results of a new treatment employing antisense technology for people with HIV appeared to be behind the enthusiasm for the company’s prospects. In July 1999 Enzo’s stock traded at $14 per share. By November it reached $25, then following a move from the NASDAQ to the New York Stock Exchange in January 2000, it soared past $75, eventually topping out at an incredible $139. The roller coaster ride continued for the next several months, before the price settled to a more sustainable level in the $20 range.
Enzo reached $50 million in annual sales in 2000 and posted a record profit of $6.6 million. Although exhibiting steady growth, Enzo remained a small company with big hopes. In contrast, its fellow pioneering biotech company, Genentech, was generating more than $1.6 billion in sales in 2000. In December 2000 Enzo entered a second phase of testing for its new AIDS drugs. It also had two hepatitis drugs in early phases of tests. The company clearly had taken positive steps, but the ultimate goal of producing commercial products remained in the uncertain future. Enzo, with its clinical laboratory business and income from its diagnostics subsidiary, was financially stable enough after 25 years of existence to at least stay the course.
Enzo Clinical Labs, Inc.; Enzo Diagnostics, Inc.; Enzo Therapeutics, Inc.
Abbott Laboratories; Biogen Inc.; Bristol-Myers Squibb Company; Calgene, Inc.; Chiron Corporation; E.I. du Pont de Nemours & Company; Eli Lilly & Company; Johnson & Johnson; Merck & Co., Inc.; Schering-Plough Corporation; Certex Pharmaceuticals.
- The company is established.
- Initial public offering of stock is made.
- Joint agreement is made with Johnson & Johnson.
- The company sues Johnson & Johnson.
- The Johnson & Johnson suit is settled out of court.
- Stock price peaks at $139.
Benoit, Ellen, “Promises, Promises, Promises,” Financial World, July 8, 1986, pp. 102–07.
Chase, Marilyn, “Promise Seen in ’Anti-Sense’ Medicine—Approach Aims at Neutralizing Harmful Genes,” Wall Street Journal, August 22, 1988, p. 1.
“Enzo Biochem, Inc.,” Wall Street Transcript, April 17, 1995, pp. 1–4.
Hardy, Eric S., “Technobubble,” Forbes, September 25, 1995, p. 206.
“The Hunt for Plays in Biotechnology,” Business Week, July 28, 1980, p. 71.
Kadlec, Daniel, “Patent Heals Bruised Enzo Biochem,” USA Today, August 20, 1992, p. 3B.
Power, William, “Johnson & Johnson Is Sued by Enzo for Breach of Pacts,” Wall Street Journal, August 25, 1987, p. 1.
Spalding, B.J., “Engineering Cells to Destroy Viruses,” Chemical Week, July 29, 1987, p. 27.
Unger, Michael, “Enzo Takes Investors on Wild Ride,” New York Newsday, January 31, 1992, p. 35.
——, “Separated at Birth,” New York Newsday, September 23, 1996, p. CI.