Compugen Ltd (CGEN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen Ltd. 4th quarter and year-end results conference call. All participants are 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 February 8, 2005.

With our phone line today are Chairman, Martin Gerstel, President and CEO, Dr. Mor Amitai, and Nurit Benjamini, CFO. I would like to remind everyone of the Safe Harbor language contained in today’s press release also pertains 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. This is Martin Gerstel. Greetings and thank you for joining our call today.

From an opportunity standpoint, the recent past has been a wonderful time to a life science company. Unlike, high-tech and telecommunications, the understanding of the underlying phenomena of life science is at a very early stage. Therefore, these are very exciting times to be in life science. It is not at all unusual for scientists to discover that a firmly held and often fundamental belief about how life works at the molecular level is shown to be completely wrong, and of course, I am very pleased that Compugen has been a leader making these breakthroughs.

More importantly for us as a commercial entity is the fact that, again unlike high-tech or telecommunications, breakthroughs in life science lead to directly to product opportunities. Something not yet at all understood by most in the financial world, who like most of us, have been so conditioned by the very different world of high-tech and telecommunications.

The science underlying high-tech is physics, and there has not been a breakthrough in physics at the scientific level in the last 50 years that has affected in any meaningful way the current market for high-tech products. Of course, there has been a continue-to-be exciting new technologies based on these long understood principles of physics, but there is a big difference between science, which is the understanding of the underlying phenomena, and technology, which is a physical embodiment by which the science can be utilized in a practical way.

Even more importantly for commercial entities, if a scientist were able to make a breakthrough in physics, a technology then would have to be developed based on that scientific breakthrough before the company could even begin to think about product opportunities.

[Life contrast], as previously stated, breakthroughs in life science usually lead directly to product opportunities. For example, as Compugen continues to achieve ever deeper understandings of how genes alternatively splice, the resulting splice variants themselves are the potential products, and the same is true with respect to our breakthrough recognition of the existence of widespread human anti-gens.

Without question, our deeper understandings of the science is providing Compugen with an enormous inventory of discoveries at the genomic and proteomic level that we believe would be very difficult, if not practically impossible, for others to make without these understandings.

This brings us to 2005 and our initial discovery engines. As will be more fully described by Mor, the creation and usage of these discovery engines during 2004 was a major step forward in Compugen’s commercial development. It is important to note that our usage of the word “discovery” and the term “discovery engines” actually stands for a second and more advanced level of discovery.

As I previously stated, our continuing breakthroughs in the deeper understanding of the underlying science has lead and continues to lead to literally hundreds of thousands of discoveries at the molecular level. Now, out of this vast and growing IP inventory, we are beginning to use our discovery engines to identify those specific discoveries that should have diagnostic or therapeutic applications in specific fields of interest to us or our corporate partners. Since each of Compugen’s focused discovery engines, in addition to incorporating extensive data about the specific field of interest for that engine, is based on our deeper understanding of the science and our world leading capability in computational biology, they are truly both proprietary and unique.

I started my presentation today by saying that from an opportunity standpoint, the recent past has been a wonderful time to be a life science company, however it is also true that from a financial community standpoint the recent past has been a terrible time to be a life science company and also as many of you I am sure are aware in most cases to be a shareholder in a life science company.

Creating significant lasting value in our field in comparison with betting with the odds greatly against you on the successful development on one or a few products is neither appreciated nor even tolerated by most in today’s financial community. As you well know, our activities and accomplishments to date have not leant themselves to 6-month milestones or numbers to put into long-term financial models which have been 2 absolute requirements to a majority of the analysts following our field.

However, it is my belief that we are now approaching the end of this difficult period for us in the financial world for primarily 2 reasons. First, the more general reason is that with a growing number of phase 2 and phase 3 and even post marketing product failures, analysts are slowing beginning to recognize that more understanding of the science is clearly necessary and also that betting on individual products is a roulette wheel - you may win but the odds are very much against you. And when analysts begin to look around for companies that are focused on the real problem, which is increasing the probability of success of pharma R&D, I believe it will be very difficult for them to ignore Compugen.

The second reason is more specific to Compugen With the availability of our discovery engines, we should now be able to begin to provide very strong validation that not only can Compugen discovery IP that no one else can, a fact that no longer can be reasonably disputed, but that leading companies in the field believe that Compugen’s discoveries are important and are prepared to invest substantial resources under milestone and royalty varying agreements to develop products based on Compugen discoveries. The discovery engines we are now creating are possible only because of our long-term and successful efforts in both creating a world leading predictive biology capability, and in using that capability to achieve deeper understandings of life processes at the molecular level, 2 outstanding accomplishments that in general have not been appreciated or rewarded by the financial community.

However, as I have said, we expect that the actual usage of our discovery engines will now begin to make it much easier for the financial world to understand the potential power of our approach and recognize the commercial and medical value of these past investments and accomplishments. In closing, before giving the microphone to Mor, I would like to thank all of our longer term shareholders for believing in what we are doing, in spite of the fact that to date our activities have not fit the financial communities preferred model de jour.

As Martin stated, the successful application of our initial discovery engines was a key accomplishment for Compugen during 2004. Our discovery engines are designed to enable researchers to accurately identify proteins and mRNAs with properties suitable for therapeutic and diagnostic developments. These engines rely on our well-established computational biology platform and our high quality periodically dated database of human gene, mRNA and protein sequences, which are associated on a patient.

In today’s call, I would like to give you some additional information about our initial engines for diagnostic discovery. It is not by coincidence that most of our initial engines are focused in the area of diagnostics. Our potential biomarkers are more in advanced commercial stages than our therapeutic proteins because it is sufficient to know that a gene is over-expressed and has a few additional properties in order for it to act as a potential biomarker. Therefore, there is a relatively close correlation between the output of our diagnostic discovery engines and end product.

I would like to briefly describe six diagnostic engines. First, our cancer biomarker engine detects mRNA which are differentially expressed between cancer and normal state in a given tissue based on (indiscernible) notation data. As with all of our engines, a greater understanding of (indiscernible) and additional biological phenomena is of critical importance in this effort. This engine specifically targets the 5 most prevalent cancers: lung, breast, colon and prostate.

The second engine is our disease-associated antigen engine which detects disease specific mRNA without differentially expressed interactive disease areas other than cancer and is currently focused specifically on autoimmune diseases. Third, is our immunoassay engine, which has been designed to identify novel secreted variants of non-cell markers or variants of non-secreted markers that can be found in cells. Fourth, the tissue-specific engine detects genes, [transcripts] and proteins that are expressed in specific normal tissues such as health specific tissues.

This engine has already yielded very interesting results with differential expression in health issues as initially validated in our lab (indescernible). Fifth, our en vivo engine detects differential expression in familiar cancer versus normal tissue, similar to the previously described cancer biomarker engine, but in this case only for membrane-bound molecules. Finally, the nucleic acid testing engine seeks biomarkers which can be used as a nucleic acid level also primarily in the field of cancer.

The output of each of these engines are clusters of candidates predicted to have applications in the selected area of interest. These discoveries have been subjected to possibility analysis and preliminary freedom to offer a test is undertaken. Successful candidates are then transferred to the lab for validation by us and by our partners.

Currently, certain genes containing potential cancer biomarkers discovered using our various computational discovery engines have entered our lab for initial validation. Of these, about half have shown to have mRNA differential expression in tissue.

Our results for health disease are even more impressive, with 6 of 7 biomarkers showing differential expression in tissue. Of course, these results are only preliminary and require further validation either by us or in collaboration with potential partners. However, we have only begun to utilize the power of these engines and anticipate both further refinement in the engine and in new candidates for diagnostic pipelines in the coming year.

Our discovery engines, as these examples show, provide us with the ability to focus our predictive discovery capabilities on specific therapeutic and diagnostic areas of interest. [Recibility] is fundamental to both of our out-licensing activities and our in-house development. For example, 2 of the engines I described, the cancer biomarker and the tissue-specific engines are already providing candidates for potential point of development, to Diagnostic Products Corporation and there is a broad diagnostic collaboration signed with them last year. This is the first of our partner agreements.

As I mentioned earlier, our potential biomarkers are in more advanced commercial stages than our therapeutic proteins, because it is sufficient to know that the gene is over expressed and has a few additional purposes in order for it to act as a potential biomarker. As a result, in the short term, we will be seeking additional diagnostics (indiscernible) bearing agreements while we continue to further advance our potential for equity proteins for out-licensing.

During 2004, we committed a higher than planned percentage of our resources to our growing diagnostic activities, including identification, selection, and validation of immunoassay, [nokiac] acid and membrane bound biomarker.

One result of the chief (indiscernible) location was a three to six month delay in adding additional molecules to our therapeutic protein pipeline, with 4 being added during 2004 instead of the planned 6. During the first half of 2005 we intend to both add new molecules to our pipeline, and to initiate certain clinical studies we expect to increase the molecules. In addition, we will continue to expand our technology base and intellectual property portfolio.

And now, I would like to turn the call over to Nurit.

Thank you, Mor. As in previous calls, today I will not be reviewing the financial results for the past year other than with respect to a few general comments, and an update on our cash status. 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 results reflect our ongoing effort to build a unique driving diagnostic discovery company based on the integration of computational sciences with biology. As part of these goals, last year we spun off Keddem Bioscience. Also during 2004, we threefold the size of our molecular biology laboratory including the establishment of initial protein production facilities.

In addition, we increased our investment in our diagnostic activities, our initial therapeutic pipeline and in the protection of our growing base of intellectual property. Therefore, research and development expenses remain our largest category of expenditure and accounted for over 60% of our operating expenses.

To manage our company financially on a cash flow basis we ended 2004 with more than $48 million in cash and cash related accounts, a decrease of approximately $12 million from December 2003. This greater than expected cash balance at year end 2004 was due primarily to the timing of cash receipts, lower than budgeted expenditures and exercise of stock options.

And with this, we conclude our formal presentations and open the call to any questions you might have about the presentations today, the financial statements and press release for Q4 ‘04 or any other aspects of our company.

[OPERATOR INSTRUCTIONS]. There does not seem to be any questions at this time. Before I ask Mr. Gerstel to go ahead with his closing statements, 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 03-925-5901. Internationally, call 972-392-55901. Mr. Gerstel, would you like to make a closing statement?

Yes, also I hope that there hasn’t been a problem with the telecommunications here since we usually do have a number of questions. If there is a problem, I apologize, and those of you, who have questions, please send them to us by email and we will attempt to answer.

Excuse me sir, we do have a question. Okay, our first question is by Mr. Brett Rice of Wachovia Security. Would you like to go ahead?

There is a sentence in the press release, “Therefore, as previously announced, revenues in 2005 and thereafter will largely depend on royalties and other payments associated with such activities. Such revenues are not projected to be material during 2005.” When I see that statement and then square it with some of the upbeat comments that I heard in Mr. Gerstel’s introductory remarks and Mor’s listing of just the tremendous progress you have made, there seems to be a little bit of a disconnect there. Are you being like a politician, biting down expectations so we can only be positively surprised in 2005?

No, we are not. I mean, if you are asking me is it possible that we could get some milestone payments, or whatever that could potentially be meaningful, yes, it is always possible. But, I would not count on it and personally I do not expect, I do not expect it to happen. As I mentioned in my remarks, we are attempting, and I believe we are showing that we are getting successful in building value for the long term here. We are now, it has taken us quite a number of years to build the underlying capability to have these discovery engines that we have begun to now develop the initial ones, and we are now in the process of signing agreements. The first major one was with Diagnostic Products Corporation. I think it is reasonable to expect us to continue that process of signing agreements with these discovery engines, but it will still be a few years before there would be very significant or meaningful payments to us arising out of those agreements. So, I really do not think that there is anything that is not, consistent with, the, this is a, this is sort of the way we are - I also should mention the way we are structuring our agreements is that to some degree we are giving up modest but meaningful short term payments in order to have higher long term royalties and milestones. This is, you know, the just, this is the basis on which we are building our commercial, our commercial expectations.

We do have another question by Ron Libitz (ph) of Libitz and Associates. Sir would you like to ask your question?

Yes, Marty, Mor, I would like to know how you are accounting for the entities that were spun off?

Neither of them have any significant impact on our financial statements. As of now, the Keddem is fully consolidated. It is as if it was, still a part of the company since we continue to own 100% of it. I don’t… Nurit? Do you happen to know approximately how much is in the loss?

A few hundred thousand dollars.

A few hundred thousand. It is not a meaningful part of it. Ebegen (ph) is not consolidated anymore and is for very strange accounting reasons, is actually carried at a negative number on our financial statement.

Yes, it presents on the equity basis.

On the equity basis, so neither of them have any real impact on our financial statements. I guess other than I believe that with respect to Keddem there’s about $1 million of assets, I believe, on the balance sheet that relate to Keddem that when we deconsolidate, they would disappear. Other than that, it’s not really meaningful.

Two questions. Continuation on this one, what percentage of both of the companies do you still retain, and two, on the asset side, both for Compugen and the entities, do you place any value, monetary value on the intellectual property?

I’ll answer the second question, first, no there’s no, we don’t have any monetary value on any of our intellectual property either the current company nor either of the affiliated companies other than, I believe, its patent expenses I think are there, but it’s a very minor amount, we write off as incurred all R&D expenses of the company and of the subsidiaries. With respect to your first question it’s the - with respect to averaging, it’s somewhat complicated because it’s a number of different types of options and convertible securities but Nurit, correct me if I’m wrong, I think like in the 20% to 30% range. Is that right of Ebegen?

Yes

Ebegen has gone through, I guess three financings at this point in time and we have between 20% and 30% of the company.

Out of curiousity, how much has Ebegen raised so far?

I’m going to be guessing, I think it’s about 6 million or 7 million, I think it’s about 6 million or 7 million, sorry I don’t, Ron, if you send me an e-mail, I’ll send you the exact, I send you a number exactly.

It’s between 6 to 7.

With respect to Keddem, it’s as if it was part of our operations, it’s 100% consolidated, so it’s just included in our numbers.

[OPERATOR INSTRUCTIONS] There does not seem to be any further questions. As a reminder, a replay of this call is scheduled to begin in 2 hours for a period of 48 hours. In Israel, please call 03-925-5901. Internationally, 972-392-55901. Mr. Gerstel?

Thank you very much. Again, thanks to the participants for being with us today as both Mor and I have suggested we’re enthusiastically looking forward to 2005 in the coming years as our past investments. Hopefully we’ll begin to pay-off in the form of interesting and important products and relationships with the industry. So thank you for believing with us, in us, and remaining interested in our company. Bye-bye.

Thank you sir. This completes the Compugen Limited 4 Quarter and Year End 2004 Results Conference Call. Thanks for your participation, you may go ahead and disconnect.