Compugen Ltd (CGEN) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen third quarter 2004 financial results conference call. All participants are at present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session.

As a reminder, this conference is being recorded November 1, 2004.

With us online 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 contents of this conference call. If you have not received a copy of today's release and would like to do so please contact (indiscernible) at telephone number 9723-765-8158. Mr. Gerstel, would you like to begin?

Yes, thank you. Good morning. For those in the United States, good morning anyway. For those in Europe and Israel, good afternoon. Thank you for joining us today. Before we proceed with our business as usual teleconference, where I, Mor and Nurit will review highlights of the past quarter, I would like to make a few comments regarding the announcement that Mor has decided that he intends to resign as Compugen's CEO by the end of 2005.

Although I am certain that many people particularly the media and now going to put 2 and 2 together and get 7 or maybe even 10 or 12, the facts are exactly as set forth in the announcement. Mor has provided great leadership to the Company as CEO for the past seven years and the decision to seek a new CEO at this time is 100 percent his decision.

When Mor first advised the board of his intention it was truly a shock to all of us. And, unfortunately, we have not been successful in convincing him to remain in the CEO role. Mor has great faith in the potential of the Company and although he enjoys the role of CEO he believes that Compugen has now progressed to the point where someone with more development commercialization experience will be better able to maximize the exploitation of our powerful and one-of-a-kind therapeutic and diagnostic discovery capabilities.

As stated in the release, Mor wants to stay fulltime with the Company but in a position where he believes he can make the most contribution moving forward.

I have been involved as an officer, director and consultant for many companies during the first past 30 years but I have to admit this is clearly a first for me. Mor has the full confidence of the board to continue as CEO; he likes the Company and his job, but in his opinion, we should be able to find somebody more qualified then he is to lead the Company through its next stage.

This definitely does not fit with the CEO ego mode that I am familiar with, unfortunately, including with respect to myself. Mor is correct in observing that this past year or so, it has become very clear at least to us in the Company and our client companies, if is not to the financial world, that Compugen has now achieved the critical mass required in terms of our multidisciplinary scientific team, its structure and workflow, our predictive and computational biology capabilities in the form of our existing models and discovery engines and our deeper understandings of key biological phenomena such as alternative splicing antisyns (ph) and RNA editing to absolutely prove that the predictive approach to pharma, diagnostic discovery is not only possible, but it can now be accomplished by Compugen on a routine basis.

For anyone who is willing to take the time to evaluate it, we can now conclusively demonstrate that this critical mass of world leading scientific talent, analysis and predictive tools and deeper scientific understandings can predictably discover the type of intellectual property in the form of tuitive (ph) therapeutic protein, diagnostic markers and drug targets that the rest of the industry is attempting to discover experimentally.

But for us, the orders of magnitude less expenditures of money and time, and with a much higher probability of successful discovery, and perhaps more importantly, the nature of our hypothesis-driven research essentially ensures that our capabilities will just get better and better as we continue our efforts.

Therefore, it is reasonable to say that the establishment proof of principal phase of our unique approach to improving the probability of successful drug and diagnostic discovery has under Mor's expert leadership now have been successfully concluded.

And even though the science and technical product achievements that we have made to date are only the tip of the iceberg of what we can and should now begin to achieve, we are entering -- in a sense -- the more of the same and better phase of our research efforts.

In comparison, the development commercialization aspect of our Company is now deeply into the establishment proof of principal stage. It was based on this recognition that Mor decided that he could most contribute to the Company focusing his efforts on our continuing research activities but that the CEO role should now be taken by someone with more Pharma biotech commercialization experience.

I think he is wrong but I understand his reasoning and for me the absolutely critical issue is that the Company and me personally will continue to have Mor's guidance on an active basis, long-term, as we continue to grow the Company.

And now I will turn the call over to Mor to discuss some of our major accomplishments since our last quarterly analyst call.

Thank you, Martin, for the very flattering and overly generous comments regarding my contribution to our Company.

Before I review the highlights of the quarter I would also like to say a few words about my decision to resign as CEO of Compugen by the end of next year. I've been fortunate to be part of Compugen for the past ten years. And to serve as CEO for the past seven years.

During my tenure at the Company I have seen situations in development of an exceptional multidisciplinary capability. This capability has enabled us to become a leader in important aspects of understanding life on a molecular level and building related predictive models for the integration of advancement (indiscernible) and computational technologies with biology.

These capabilities have led to a substantial and growing intellectual property portfolio, particularly in the area of potential therapeutic offerings and diagnostic model. I'm very proud of our achievement to date and have little doubt that the expertise, momentum, and leadtime that we have now established will facilitate acceleration in the rate of important scientific (indiscernible) resulting in therapeutic and diagnostic order in business opportunities.

With this in mind and with more and more of our efforts now being directed to the development and commercialization of our discovery I believe we should seek an executive with demonstrated experience in pharmaceutical order development and commercialization, to lead the Company forward.

That said, I still plan on maintaining an active role in Compugen for the long-term although in a different capacity.

And now I'd like to focus the rest of my presentation on our most recent commercial and R&D accomplishments. This past quarter saw a very important achievement with respect to implementation of our business model. This achievement was a successful (indiscernible) of our first diagnostic discovery engine. Several engines allow us to focus on a proprietory understanding for certain biological phenomena and our world-leading computational biology capabilities. (indiscernible) individual areas of interest in the pharmaceutical world.

This results in a predictable discovery capability for Compugen that, as far as we know, does not exist anywhere else in the world. Most importantly, this discovery engine will continue to improve as we add to them furthering deeper understanding of the underlying science.

For example, for an example of this, our recent announced breakthrough in our RNA editing and (indiscernible) via prediction, each of which I will briefly discuss in a few minutes.

Our first discovery engine is the for certain types of secreted therapeutic morphins and peptides and this engine has been responsible for most of the molecules in our initial internal pipeline.

The second engine, which I discussed previously, is primarily for (indiscernible) biomarkers and this engine is a key aspect of the recently announced pipeline agreement with the Diagnostics Order Corporation.

Moving forward, we anticipate we are producing what we have done in these two areas with engines for other diagnostics and therapeutic areas of importance. We expect it will also provide us with a rapidly growing IP position opportunities for additional royaltybearing agreements with living diagnostics and therapeutic companies in addition to our own pipeline.

The agreement we signed this past quarter with DPC (ph), our first (ph) diagnostic collaboration. Previously we licensed -- we had DPC (indiscernible) discovered potential use in (indiscernible) diagnostics. This second and much broader agreement with DPC will allow them to develop and commercialize a diagnostic order based on a number of Compugen discovered biomarkers. Including biomarkers we have already discovered as well as additional candidates arising out of the collaboration.

Compugen (indiscernible) to receive developments (indiscernible) containment in royalties on the sale of multiple diagnostic border while at the same time retaining rights to the development of therapeutics, based on the same target. We intend to pursue similar types of discovery engine-based pipeline agreement for both diagnostics and therapeutic.

In addition to further implementing our commercialization strategy, we also improved our predictive research approach and (indiscernible) of our discovery engine to our discovery of the abundance of (indiscernible) editing side in the human (inaudible) which was published this past quarter. This discovery is only one of a succession of valuable breakthroughs in understanding important biological phenomena.

In 1997, we predicted the abundance of (indiscernible) splicing, an expression of multiple transcripts for forming individual genes. In 2003, we realized the profusion of sense antisense (indiscernible) expression from both plans of DNA at the same location and now without any editing, we (indiscernible) to improve our predictive model and authority research efforts thereby increasing the probability of future novel therapeutic and diagnostic discoveries from our discovery engine.

In addition, just last week expanding on our early understanding of splicing we announced together with Tel Aviv University, the development of a new method for identifying spliced variants without the need for either EST or micro (indiscernible).

This is a very important breakthrough. This development means that our understanding of the basic science underlying 14 expressions has reached the point where we can use our model to make accurate predictions of the existence of 14 users absent of any expressed data (ph). This is particularly important for protein with low expression level.

We believe that this new development will allow us to significantly narrow the knowledge gap within the human genome and (indiscernible) by providing a much fuller picture of the spliced volume.

In an effort to maintain our focus on predictive biology and discovery engines, we established a new subsidiary and processed to it, our small molecular drug discovery (indiscernible). This new subsidiary, hidden by (indiscernible), aims to to dramatically improve the success rate for the development of new drugs for that by developing an applied technology platform that consistently enables the design of small molecule modulator for potentially any given protein target.

With all this recent exciting development, I want to reiterate once again that I have great faith in the future of the Company, in our vision and our ability to the Company that will have an important impact on pharmaceutical industry. I believe that the capabilities that we have built and are continuously improving, the technologies we are developing and the proteins that we are discovering represent potential and growing business opportunities for us.

I look forward to continue to support and developed other multidisciplinary principles both in my current role as president and CEO and in whatever future position I may hold with Compugen.

I am certain that we will continue to maintain and reinforce our unique competitive advantage. Leading the Company to the heights I know it is capable of reaching. And now I will turn the call over to Nurit Benjamini, our CFO.

Thank you, Mor. As in previous calls other than with respect to a few general comments and an update on our case statutes, I will not review the financial results for the past quarter. So if you have any questions about the statements we will be glad to address them during the Q&A session following my remarks.

Our reported financial results reflect our ongoing effort to build a mixed revenue genomic discovery company based on the integration of computational stances (indiscernible). As part of this goal, about two years ago we decided to exit the tools business and focus on extending our discovery capabilities and establishing a therapeutic protein in the diagnostic marker pipeline.

Our decision to spin off to the subsidiary Chem and BioScience, our chemistry oriented program this quarter is another step in this direction. As part of the implementation of our strategy, during the first three quarters of 2004 we have increased our efforts with respect to our therapeutic protein pipeline as well as technology-based and internal and select property portfolio.

Therefore research and development development expenses remain our largest category of expenditure and accounts for over 50 percent of our operating expenses. Managing our Company financially on a cash-flow basis we began 2004 with approximately $61 million in cash and cash related amounts. And as of December 30th, have approximately $52 million representing a net use of cash during the first three quarters of the year of approximately $9 million.

We previously stated that we anticipate 2005 with approximately $45 million in cash and cash-related accounts.

And with this, we conclude our formal presentation and open the call to any questions you might have about the financial statements and press release for Q3, '04; the presentation today; or any other aspects of our company.

(OPERATOR INSTRUCTIONS) Geoffrey Bruce (ph).

Martin, at the recent UBS conference, you stated that the Company's short-term goal was a minimum of two therapeutic proteins at Phase 1 clinical trials each year. My first question is when you say short-term do you mean as the financial community understands it? Within one year?

No.

Perhaps you collaborate?

These things, of course, are very difficult to predict specifically but I would say it's a reasonable thing to be in that situation within two to three years.

Within 2 to 3 in Phase 1?

Right. You know, it's very very difficult to but -- I would -- it's not -- let me put a little bit differently. It's not going to happen within two years, but and it will if we haven't done it within four or five years then we clearly have failed.

And now what we're talking about are not when will our first product enter clinical. You asked me not when we first get products into human clinical trials. You asked me when do I believe that we will be in a position where on an ongoing basis of at least two? And on that and now I think it's probably more towards the end of that timeframe which I consider the intermediate term.

In other words there might be one or two selective molecules that might enter sooner?

Sooner, you are still talking about not -- I don't want to give anyone the impression that we expect to get stuff into human clinical trials in the next year and possibly not in the next two years. But it really depends on how the preclinical work goes.

Well that's in fact my next question. How is the preclinical work going?

Well we're still in -- I mean we're in the early stages. As you know we just discovered these protein therapeutics and we are beginning to go through the initial steps in evaluating them.

Are you already in animal trials?

No.

One more question and then I'll turn it over to someone else. With respect to the agreement with CDP, ordinarily you can have a diagnostic in the market within two or three years. Is it the Company's expectation that this agreement with DCP can also affect the Company's balance sheet within two to three years?

No.

No. The most important financial aspects of the (indiscernible) DCP is royalties; and even if we're optimistic, it will take more than three years before a diagnostic case that we develop together over -- if we (indiscernible) discovery to market and before the sales of diagnostic product are substantial and it ususally takes at least one or two years. So before we see from this agreement a substantial important cash-flow it should take something like five years.

But the Company doesn't have cash for five years, of course.

Oh no, I didn't notice that.

Again my usual question, what about possible merger or inviting one of your partners to invest in the Company?

We have, I know it is difficult for shareholders who have very short-term objectives, but we are attempting to build a substantial company that is going to have a major impact on the Pharma diagnostic world. We are doing it in a very different way by approaching it through predictive models. These are the kinds of things that, when you do things experimentally you can get lucky, find somethings quickly.

When you do things predictably, unfortunately, you can't -- it's unlikely for you to get lucky. You have to gain the understanding, build the predictive models and that's why I attempted in my talk to what I would like our shareholders to understand is that we have now reached a very important point for the Company where we have -- clearly have the critical mass of -- in terms of this predictive capability that is represented in our people and the technologies we've developed and the discovery engines.

We have a critical mass which can now begin to produce just on a routine predictable basis the types of discoveries that the entire industries are looking for. Now to turn discoveries into products and profits, whatever, is a long-term situation in our industry.

And we understood this when we began to go down this road. Clearly the Company will -- the success of our Company, I believe, will be recognized by the financial community much before we have earnings, substantial earnings. Because I think that now with the type of discovery capability that we have, we have incredible opportunities for collaboration with the types of agreements that would be difficult for other organizations to enter into.

Because, again, because they are built on predictable capabilities and not based on experimental work. So to the degree that -- I know it's frustrating but, unfortunately, it takes a long time to establish something of real value. I've been there before; and I've watched how it takes to develop companies. I'm very pleased with respect to the developments in this Company to date. I'm a very happy shareholder in this Company and I'm very optimistic about the future.

But the type of work that we're doing just takes time.

Martin I'm just wondering whether shareholders can't be -- I know there are patent issues involved here and disclosure issues but nevertheless if shareholders can't be provided with a bit more information concerning the scientific significance of some of these molecules in your pipelines?

Geoffrey, we are going to need to have other people -- (MULTIPLE SPEAKERS) but let me address that issue. We want to be sure that we maintain some level of credibility with respect to the technical capabilities of this Company and our accomplishments. I think if you look back at what we have when we have stated that accomplishments we have done whatever. I mean, it's usually will in conjunction with publications and major scientific journals or whatever.

We are discovering, literally, hundreds of things now that we believe could be of potential value. Clearly many of them will prove not to be of value. We don't think that it is appropriate to start to give a lot of information as many companies do about products in early stages of development, talking about the enormous market potential for them, whatever, when the fact is that most -- for everybody -- most products at early stages ultimately fail before ever getting to the marketplace.

And as a matter of fact, if you look at the major drugs that are out there selling in today's world, very few of them are selling for the conditions that the companies thought they were going to when they started to develop them.

So, yes, we could, I mean we could easily build a very nice short-term story by presenting all of the products -- that the early stage products we have in our pipeline now and the enormous markets that they go after. But I think it could very well prove to be misleading in the long run.

And at this point, personally, at this point in my career I have no interest in doing that.

(OPERATOR INSTRUCTIONS) Ronald Oveter, Capital Partners.

Congratulations on all the seminal discoveries I've been watching in the Company the last year and a half and I am very excited about the announcements. I really have two questions, one related to Mor's announcement and then on the science.

Mor, I guess this affair to assume then that, given the fact that you want to step down as CEO by the end of '05, but you want to retain an interest in the Company and your background is basically R&D, is it fair to assume that your involvement will continue on the R&D, in the R&D area? That is my first question.

My second question is a little bit more complicated. Mor, you've mentioned many times that the sciences, the predictive biology is an alternative to Group Four synthe-screening. I wanted to derive a better understanding of the types of relationships you could craft through the potential corporate partner and let me be specific.

For example -- this is a theoretical example. A pharmaceutical company comes to you and says "We're an endocrinology company. We want to develop a better form of long-acting insulin with a different metabolism. For example. And we know the biology, we know endocrinology. Can you help us to generate both a target and a lead, given the fact that I would assume that they are related given the fact you pose this predictably." And my question really comes down to: is that the kind of approach that you hope to consummate?

And secondly, if that is a good example who then owns the peptide of the protein in that kind of relationship which I presume you are going to begin to start to craft over time.

Let me start and then Mor will have to address the issue with respect to -- that he would probably want to comment on my statement. But I think it is important to step back for a minute and recognize that what we're trying to do, again, is to try and bring sort of the scientific approach to going after pharmaceutical products, diagnostics, therapeutics, whatever.

And so far what we have done and done exquisitely well is to understand better than anybody in the world, how do genes express protein? And in some way you can it's perhaps not a terrible overstatement to state that perhaps the three most important things you can possibly say about how genes express proteins have often been pioneered by this one little Company.

The fact that one gene expresses many proteins. The fact that you can get expressions from both strands of the DNA at the same time and the fact that (indiscernible) follow this enormous post MRNA editing that goes on.

So we are now in a position -- I don't want to overstate where we are. I haven't talked anything about disease models or pathways or anything. Just stating where we are today is that we have a better understanding of how genes express proteins than anyone in the world and have the only predictive capability of looking at the entire transcript film and the entire protean.

Now what people are looking for in the world of pharmaceutical biotech research and development. Especially they're looking for four things.

They are looking for therapeutic proteins, there are looking for diagnostic markers, they are looking for targets for small drugs, and they are looking -- small molecule drugs. And they are looking for small molecule drugs themselves.

The first three things I mentioned: therapeutic proteins, markers of disease, and targets for small chemicals are all proteins or transcripts, free proteins. We have the best understanding, the only predictive understanding in the world of how, of the proteins on the transcript zone (ph). And I thought that's what -- when I say I think we have reached this critical mass now of being able to now exploit this capability, it has taken a long time to build that capability.

I know this well from my (indiscernible) days. It took many many years to establish the (indiscernible) in transdermal technology for those of you who might be familiar with it. But once they were established, then you just turn the crank and out come products.

Well we are now the only company in the world as far as I know that can turn the crank and out comes discovery. Now these discoveries may or may not end up proving to be successful but are they the type of discoveries that everyone else is looking for been spending enormous amounts of money and time? And in many cases being successful in going the more traditional routes of discovery. So. Sorry to have lectured.

Well can I get -- to that point. That's exactly my point so for example as you've just indicated you know how these genes express proteins and if I have an understanding of a certain gene that I have a good understanding of but I might want to inhibit a certain protein and your knowledge of the gene tells me as a big pharmaceutical company I want to inhibit or promote the expression of a certain protein is not that in fact, the very kind of capability you could bring to the pharmaceutical partner?

That, I'm going to let Mor directly answer that one.

Let me first answer your first case, the question which is an easier one is after we find a new CEO. I agree with you the multicorporate position for me in the Company (indiscernible).

Let me just go on the record I disagree but that's all right.

(inaudible) (MULTIPLE SPEAKERS)

With respect to the second question. And I believe that understanding different (indiscernible), understanding what additional proteins belong to the same gene in some -- in many cases -- can be essential to the development of small molecules (indiscernible) sometimes you want a molecule that will inhibit all the (indiscernible) of a certain gene. Sometimes you want a small molecule will inhibit one but not the other.

So either at the top or further down the cascade?

Yes and in order to do this, you need a good understanding of this picture. As it can be explained (indiscernible). However, and looking at business aspects and we -- there is usually much higher volume in the discovery of a (indiscernible) protein which is (indiscernible) drug than the discovery of a 14 target small molecule that is just a target for another molecule which is the drug. And this is the reason that they led us (indiscernible) focusing on the discovery of (indiscernible) proteins. (inaudible)

That would suggest you're going to retain this for yourselves (inaudible).

Over the long term. Perhaps. I mean the real value that we bring is the discovery capability and I am hoping that we get to a point where we will be able to capture a lot of our value in the discoveries by very in their life; so that we don't have to go ahead and develop tons and tons of them that people will recognize as the kind of things we discovered inherently have higher probabilities of success, because they come from the predictive capability. And that we will be able to make (inaudible) the collaboration and licenses is better at kind of that earlier stage.

I think perhaps the easiest way for people to try and understand who we are today and where we are probably are attempting to go in the future is to really think hard about this concept of discovery engines and it's probably not too much of an overstatement to really say that at the end of the day who are we? We are a discovery engine company.

All of the -- I mean we're not a company who lives to combine science, combine life science with math and computer science, etc. That isn't our purpose. That is the tool that we use in order to be able to build these discovery engines.

And these breakthroughs that we make in scientific understanding, they also are not the purpose of the Company. We are not a University that is interested in getting tons and tons of publication.

But the only way you can have a discovery engine, the only way you can have at least a discovery engine that discovers things that other people cannot and do not discover is to have as a part of it an understanding of the science that they do not have.

And so everything that we have done to date, everything that we talk about on the research side, all those aspects of the types of technologies and capabilities and disciplines we bring together is for one purpose and one purpose only. To create these discovery engines.

And moving forward, the business model of the Company, the strategy of the Company will be to get the maximum value we can out of these discovery engines by -- in a number of ways. One, some of the discoveries that we come up with, we actually will put into our own pipeline and will, over time, determine how far we develop them perhaps. Some we will take all way to the marketplace. But there's no need to make that decision now and there's no -- so we just aren't focusing on it. We are clearly entering some into our pipeline.

A second way that we will use these discovery engines is in collaboration with a partner. But it's very very important to understand. We are not going to give a discovery engine to a partner. We are going to give them the output from a discovery -- from our discovery engines in the form of they tell us the types of proteins, the types of targets, the disease area they are interested in, such as our first pipeline agreement with Diagnostic Products.

And we will deliver to them a list of potential products that meet all of their specifications and have been discovered out of an understanding of the science and the computational biology ability that does not exist anywhere in the world other than at Compugen.

This is a very powerful position to be in. It's taken many years to get here. And there's been, as far as I'm concerned, there are sort of two outcomes from us reaching this objective. One in my judgment is good and one is bad.

The good one is that we are now in a position where we can really begin to commercialize our capabilities. The bad one is that Mor's decided he's not the person to do it. But, nevertheless, we will move forward.

(inaudible) and I'll stop. The goal of the Company at this point is once you substantiated the value of predictive biology you can command more for presenting these discoveries to third parties. (inaudible) substantiated.

Yes, but as of now, we must point out that is a theory. There are certain things we can say now that are proven. We can discover things that other people cannot discover. I mean anybody who wants to argue with that statement -- they don't know anything at all about what we have done. I think the discoveries, the few that we've published I think absolutely prove that point. We are in the areas that everyone is looking.

We have discovered things that no one has discovered and they may or may not turn into great products but they are the type of discoveries that if anyone else had found them experimentally they would said, "Great let's do something with these. Let's put them into our pipeline."

There are no further questions at this time. Before I ask Mr. Gerstel to go along with his closing statement I would like to remind participants that a replay of this call is scheduled to begin in two hours for a period of 48 hours. As well call 039255901, internationally, call 9723-9255-901.

Mr. Gerstel, would you like to make your concluding statements?

Again just thank you for joining us on this conference call. There are two aspects of what we have been discussing here today. One is that in my judgment just incredible progress we have made recently in getting into a position where we really can commercialize the long years of R&D that now are behind us and commercialize them largely from the standpoint of making use of what will be a growing set of discovery engines.

The other thing that we discussed is the fact that Mor that our CEO who has served us admirably well has really led this effort -- has decided that he is not the person in his judgment to take us -- further us along on this commercialization area and wishes to take a different role moving forward.

I just want to make sure that everybody understands that as of now this is not -- Mor has not resigned from the Company. There have been no changes from the standpoint. We had people wondering why we released this on a Sunday which was very unusual. The reason is because we obviously wanted to have an opportunity to discuss this with the employees who also, obviously, this impacts in a major way.

And Sunday is a working day in Israel. So we took advantage of that but then, obviously, we had to make the announcement right away after. That is why we really stood on a Sunday.

It continues here to be sort of business as usual, and will continue that way until we identify a CEO with the types of experience that Mor and the rest of us now are focusing on. And after that we will, hopefully, have a much stronger management team, senior management team which will include Mor.

So with that, I want to thank you again and I look forward to our call next quarter.

Thank you. This concludes the Compugen LTD third quarter 2004 conference call. Thank you for your participation. You may go ahead and disconnect.