Compugen Ltd (CGEN) 2003 Q2 法說會逐字稿

Welcome to the Compugen Ltd. second quarter 2003 financial release conference call. (CALLER INSTRUCTIONS). With us on the line today are Martin Gerstel, Chairman; Dr. Mor Amitai, President and CEO, and Nurit Benjamini, CFO.

I would like to remind everyone that the safe harbor language contained in today's press release also contains to all content of this conference call. If you have not received a copy of today's release and would like to do, so please contact Nurit Benjamini at telephone number 972-3765-8525. Mr. Gerstel, would you like to begin?

Yes, thank you very much. For those in the US good morning. For those in Israel and Europe, good afternoon. In today's call we would like to provide you some insight into one of the most important challenges for Mor Amitai and the rest of our management team; that is maintaining an appropriate balance between focus and breadth. On the one hand, focus is required to achieve success in our chosen activities. However, at the same time, scope and breadth are necessary if we are to maximize the value from our broadly applicable underlying technologies.

This challenge arises due to the fact that our unique approach to pharmaceutical research provides many opportunities for us to consider pursuing. For example, in the area of deeper understanding of important biological phenomena such as our discoveries with respect to alternative splicing and antisense each of these areas was identified by us and selected for more intensive effort at a time when it was considered by the general scientific community to be not very important. And these two phenomena were selected from among many that we could have pursued. These decisions regarding where to focus our research efforts are not easy but are critically important to the continued leadership position of our company.

In the area of specific discoveries such as the PSA and VEGF variance, our challenge is to select those discoveries that deserve further evaluation from among the many punitive discoveries arising from our deeper understanding of biological phenomena and resulting predictive models. In this regard, I want to emphasize the importance of our understanding of important biological phenomena to our making of specific discoveries.

For example, although the disclosure of our discovery of the abundance of natural antisense in the form of the paper published in Major Biotechnology occurred only this last quarter; the discovery itself was made by our scientists approximately two years ago and prior to our public disclosure we had an intensive effort to identify and file for patent protection on many antisense molecules we believe could be of importance.

Before turning the call over to Mor who will give you more information about the focusing efforts at Compugen, I would like to point out an additional important difference between our predictive modeling approach to improve key aspects of drug discovery and the high throughput observational methods relied on by others. That is our constantly increasing ability to make discoveries. A discovery made through observational experimentation may prove to be very important and many have. However, each such discovery itself does not in general change the ability of the researcher to make further discoveries. This in fact, has been the key problem of the pharma industry; a Company might discover a great drug but even with substantially increased efforts, it might not make another discovery for many years. In comparison, the underlying iterative nature of Compugen's predictive modeling process results in the fact that each discovery that we make and we already have a track record of many discoveries, increases the probability of us to make future discoveries. Although this advantage already is having an impact, such as antisense following alternative splicing, it will become much more important and obvious as we continue our pioneering efforts. Thus, we believe our unique multi-disciplinary capabilities and approach provides the basis for Compugen to continue as a worldwide leader in this very important ongoing revolution in life science.

And now, I will turn the call over to Mor Amitai, Compugen's President and CEO.

Thank you Martin. We're confident that Compugen has the best team to manage the (indiscernible) sciences with the sciences (ph) underlying drug discovery and development. However, the product discovery and development field is huge with many different areas where we believe our unique capabilities could be very useful. In addition, our efforts are already providing more potential drugs and diagnostic discoveries than we could possibly pursue.

Therefore, as Martin discussed, one of my major challenges is to lead the process whereby we select the areas where we should focus our efforts. In the area of understanding of biological phenomena we have two major criteria for selecting phenomena to pursue. First is the potential of the phenomena to significantly improve our understanding of human life and disease processes. Second is the degree to which our unique capabilities are critical for the understanding of the phenomena. In this area, we often go against the generally accepted understanding of the science as we did with both alternative splicing and antisense, and we may need to proceed with very limited prior knowledge.

Under these circumstances, it's critically important to not only select carefully but also to plan and closely monitor our progress in terms of go no go decision points and be prepared to terminate activities when appropriate. We obviously are very proud of our recognized achievements in this aspect of our business today.

With respect to specific discoveries of potential pharmaceutical importance, our focus and challenge is somewhat different. Since our predictive analysis results in a large number of punitive discoveries. Here, our challenge is to establish criteria and the process for the selection (indiscernible) from this long list. At present, we use a three stage process to select and prioritize which potential therapeutic proteins will enter our pipeline for further validation and development.

First, our protein has to be closely related to either an existing drug or one that's in advanced stages of development by another company. Second, in our judgment it must be highly unlikely that our protein could be discovered without the use of our proprietary technology and discovery methods. And third, there needs to be reason to believe that our protein has a substantial advantage has a substantial advantage over the existing protein. While (indiscernible) related proteins, a good example from our current pipeline of specific discoveries that meet these three criteria.

Another focusing decision recently implemented was (indiscernible) sale of the Bioaccelerator product line to BioAcceleration Ltd. Bioaccelerator is a special-purpose computer that (indiscernible) similar searches in (indiscernible) and protein databases and was Compugen's first product. In fact, it was our interaction during the early years of the Company with leading pharmaceutical and biotech companies using our Bioaccelerator that let us to the conclusion that the most important need in the new world of life science was for more predictive technologies for discovery. That let us in the mid-90s to establish a team of molecule (ph) biology in a wet lab, in addition to the (indiscernible) and other engineers that developed the Bioccelerator. It is the transfer of the Bioccelerator product line as with the establishment of evergene (ph) as a separate subsidiary, we now have the ability to focus on our two chosen (indiscernible) pathways, science (ph) platforms and services that we offer to leading bio-pharmaceutical companies and the development and commercialization either by ourselves or others of drugs and diagnostic products based on our in-house discoveries.

Thank you and with this, I will turn you over to Nurit.

I would like to elaborate on Compugen's focus from the financial perspective. In the beginning of this year we succeeded in raising initial venture(ph) funding for our subsidiary evergene (ph). Thus, enabling us to continue to utilize our resources in the field of human health.

In addition, the transfer of the Bioaccelerator product line to Bioacceleration as discussed by Mor, further allows our management to focus on our two primary commercialization pathways. Because of the manner in which the Bioccelerator transfer will be accounted for, it will have a slightly negative impact on reported revenues. However, it is not expected to affect our cash flows during the next few years, which as we have stated in the past, is the key short-term financial consideration for the company.

We began this quarter with approximately $67 million in cash and cash related accounts compared to $65 million at the end of the second quarter. Both amounts include $1.4 million resulting from the consolidation of evergene.

Revenues for the second quarter of this year were $2.9 million compared to 2.8 (ph) million for the second quarter of last year. Revenues for the first six months of this year amounted to $5.5 million compared to $5.6 million for the same period in 2002.

We're cautious with our expenses but continuing to invest significantly in research and development --in research and research and development.

Research and development expenses for the second quarter of this year not including deferred compensation, was $3.4 million compared to $3 million for the second quarter of last year.

We continue to expand our (indiscernible) base and internal intellectual property portfolio, research and development expenses for the second quarter remained our largest category of expenditure and accounted for over 50 percent for our total operating expenses.

Research and development and development expenses for the first six months again not including deferred compensation, were $6.5 million, the same as in last year.

Net loss for the most recent quarter decreased to $2.4 million compared to a net loss of $2.8 million for the corresponding quarter in 2002. The net loss for the first six months of this year raised to $4.7 million compared with a net loss of $6 million for the same period last year.

Before I turn the call over to the Q&A session, I would like to request that you limit your questions to two at a time while others are waiting. Thank you and now we will begin the Q&A session.

(CALLER INSTRUCTIONS). Brad Reece, Prudential.

Good morning and good afternoon. The marketable securities are up about, under long-term investments, are up around $10 million. Could you just give us some color as to what that's comprised of?

Yes, this is Nurit answering. It's mainly comprised of corporate bonds that can mature anytime between now -- not now, a year from now and approximately 36 months.

Our policy in general is to hold to maturity so we don't buy long-term and we have very very high qualifications in order to buy corporate bonds.

Yes, our policy provides us with AAA, AA and A (indiscernible). This is the minimum.

Okay, could I ask you this? When you are showing the technology that you have to the drug companies that are potential customers of yours, is there a problem that once they see what you have, they can copy it in some way or what you have is so unique and proprietary that is not a danger?

This is Mor answering. In the past, we haven't faced any problems with the technologies that we show them and literally (ph) technologies that are used buy (indiscernible ) companies. They are mainly protected by trade secrets and we never found the problem of them copying or using something available based on other technology. However, with new technologies that we are currently showing companies and we are taking some protective measures, we filed patents to protect the technology when appropriate and we ask them to sign a nondisclosure agreement when appropriate and we feel at least so far the risk is quite low.

Thank you.

Bob Stafford of Stafford Capital Management.

Hi Martin. In your introductory comments on breadth versus focus, I felt you were leading up to a punchline and maybe you did, but I did not get it.

(laughter) You were just like this when we were classmates in business school, Bob.

(laughter)

No, I think that the punchline really was just in disclosing that this is the way we operate. There really wasn't any kind of a hidden message there or anything.

Okay, got it. It was just --

How is the weather in California?

Warm.

Good.

Ronald Oveter of Capital Partners.

Yes, good evening. I wanted to focus a little bit if you could shed a little more light on the Novartis collaboration, specifically what degree -- I don't know if you can talk about this but when you are collaborating with Novartis, what kind of information do you want to bring back from Novartis in terms of your collaborative process that helps Compugen and your own methodology? It's not clear to me. I can visualize what you are doing for Novartis. I am just curious what happens the other way back? In other words, what kind of data information can you integrate into your methodology that you might learn from the Novartis collaboration?

Our agreement with Novartis -- say all of our agreement with the industry allows us to use any improvement in our technologies and any general knowledge that we learn from working with them so actually except specific information about genes and drugs, we are allowed to use anything that we learn from them. And we learn two types of things, one by using our technology together with them, we find ways to improve it, we find bugs, we find some idea how to -- just to improve our technology and everybody benefits from it, them and of course, us for internal discovery. In addition, although we use our technology for different discovery process than they use it for, we learn to benefit a lot from learning what they do with our technologies for their discovery process and then I believe when we do our own discovery process, we're using the same technologies and different technologies that we do not share with the industry, we are in a better position.

Can I add one more question for more detail. My understanding is what is most proprietary about what you have is your software algorithms and mapping out in some way or integrating these express sequence tags that you try to come up with. My question to go in more detail you have this proprietary technology lets say in software which I presume Novartis does not have a full understanding of, correct? If on the one hand you have something that's very proprietary but you're sharing with Novartis, how do you compartmentalize that which is proprietary to you and at the same time you leverage the collaboration? I don't know if I made my question clear.

Yes, yes. Your question is clear. Maybe we can start with something maybe to add to your description of our relationship with Novartis and our technology. I think that we have two types of proprietary things, one as I said is the software itself and the other is the method and expertise in making discoveries based on this software and other tools. What we share with Novartis is certainly -- actually the results of -- basic results from just using the software on their database. And we also share with them part of our experience in proprietary discovery methods that are based on the use of this software. And so -- part of your question if I understood it correctly is what is left for us after we share this with Novartis?

Yes, in a way.

I think what is left for us is the fact that we in general, we use our technology to find discoveries in areas sometimes also with data in looking for things that as far as we know, other companies that have our tools are not looking for. And in addition, we believe we have a huge advantage by having the team that developed the tool and the team -- and the biologists that work with the team developing the tool, these people are doing -- utilizing the technologies in confidence (ph) and from our experience, they can find things that other people cannot find even when they are using the same technology and in addition as I said earlier, we do not share all of our technologies with our partners. We just share part of it.

Thank you.

(CALLER INSTRUCTIONS). There are no further questions at this time.

Before asking Mr. Gerstel to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours for a period of 48 hours. In Israel, please call 039255900-- 01, I'm sorry. Internationally call 97239255901. Mr. Gerstel, would you like to begin?

Thank you. I want to thank everybody for participating in today's call. I hope you had a chance to get to read and review our press release and are as pleased with our continuing progress as we are. I would like to remind people that our annual meeting will be held July 30 10 AM here in Tel Aviv and encourage those of you who are shareholders if you have not voted, please do so. And we would love to see you here if there's any possibility of that. Again, thank you very much for participating and sharing with us the joy and excitement of being a leader in this new world of life science. Thank you very much.

(CALLER INSTRUCTIONS).

(CONFERENCE CALL CONCLUDED)