Compugen Ltd (CGEN) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you are for standing by. Welcome to the Compugen Ltd. second quarter 2005 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 July 27th, 2005. With us online today are Mr. 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 this press release also pertains to all content of this conference call. If you have not yet received a copy of today's press release and would like to do so, please contact Nurit Benjamini at telephone number 9-723-765-8525. Mr. Gerstel, would you like to begin?

Yes. Thank you very much. I want to thank everybody for joining us on our call today. If there's some confusion in answering questions or whatever, I just want to advise you that I'm actually making the call from California and the rest of the team is in Israel.

Last month, in June, we announced two pipeline agreements with leading diagnostic companies bringing to three the number of such collaborations announced within the last ten months. A Compugen pipeline agreement in a way can be thought of as a type of discovery on demand arrangement, under which we utilize discovery engines either currently existing or new ones that will be developed with our partner, to provide our partner with multiple discoveries, meeting their requirements in a specified field of interest in order to then allow them to select molecules of interest to them for the potential development by them of products under milestone and royalty bearing agreements, licenses. These licenses, of course, are on a product-by-product basis.

With respect to our business model, this type of agreement provides us with a complete and potentially very valuable commercial pathway. Of course, as of today, only in diagnostics, but all the way from discovery through marketing. In their remarks today, Mor and Nurit will provide you with more information regarding our first three pipeline arrangements and their potential financial consequences to Compugen.

Before they do that, however, I'd like to take this opportunity to make three observations about these agreements in general and our Company in general, which I believe are fundamental to understanding the strategy and outlook. First, from a direct financial standpoint, these are by far the three most important agreements we have signed in our Company's history.

In my opinion, the potential value of only one, or at most two of -- any two of them, more than justifies the entire current, and unfortunately very small, market value of our Company. This is because each of them covers multiple potential products and each product provides milestones and royalties. In fact, as Mor will discuss, it is not unreasonable to suggest that these agreements in total have the potential to yield to Compugen cumulative pretax profits, and I'm talking about profits, not revenues, of many times our total current market value.

The second observation that I want to make is that in spite of what I just said, these three agreements are not the most valuable asset of our Company. There is no doubt that if we had to make a choice between keeping 100% of this very substantial future value from these agreements, and let's even add in the potential value of our current therapeutic protein pipeline, or on the other hand giving up all of this financial potential and keeping only our unique discovery capability in terms of our people and scientific and technical know-how, it would actually be very easy for me to choose the better alternative for the Company.

In that case, the agreements and all of our current products under development would have to go, since the major long-term value and the unique value of what has been created at Compugen is our constantly improving discovery capability, which now has reached a point where we can create focus and predictable discovery engines, as we discussed in our last conference calls and described in our current annual report. Furthermore, this ability has now been validated by the signing of these initial agreements.

I doubt if there is any other life science or biopharma company that would or should make the same choice. What I'm talking about is if they were faced with such a very unlikely scenario, actually impossible scenario, that is choosing that they would choose, they would be better off giving up all of their future financial rewards from their current product line and their existing pipeline in order to keep their ability to hopefully create future products, it's really quite inconceivable that any other company would be in a position to make that statement. But for Compugen, this would be an easy, although very painful, choice to make. We have invested very substantial efforts for almost a decade in building a sound scientific structure and these three agreements, no matter how potentially valuable they are, are only the beginning of what we expect to harvest from these ongoing efforts and scientific achievements.

My third and last observation before turning the call over to Mor is that, unlike almost every other royalty-bearing product development agreement that is being announced in the biopharma industry at the current time, these three agreements are not based on the licensing of specific past discoveries, but instead, are based on the recognition that Compugen has created through almost a decade of dedicated work by a very talented multi-disciplinary team of over 100 scientists that demonstrated ability to reliably provide the types of discoveries that these companies are looking for to feed their product development pipeline.

This is what I referred to earlier as discovery on demand. The power and potential of this approach is demonstrated by the fact that we decided to add to our therapeutic discovery activities a second focus in diagnostics since it is more straight-forward and it suits our shorter-term objectives, we decided to add this second focus, less than two years ago. The resulting success that has been achieved in these two years in the tangible form of these agreements has been possible only because our underlying discovery capabilities are field independent. Therefore, what we have accomplished to date should be just the tip of the iceberg as we continue to create discovery engines focussed on other diagnostic and therapeutic segments.

One of the main reasons that I have been discussing in more detail today Compugen's unique discovery capability is because it has been created under the guidance and direction of Mor Amitai, and today is the last quarterly call that Mor will participate in as CEO of the Company. Overseeing the creation of this very unique capability has been by far his most important contribution to the success of the Company, and I am very glad that while he was still CEO we achieved the initial commercial validation of these efforts in the form of these initial agreements.

Acting both as a director on behalf of the Board and the Company and also as a major public shareholder on behalf of all of our shareholders, I want to take this opportunity to publicly express our appreciation to Mor for this enormous contribution, which in my view, clearly provides us with a base to now create a very successful and very profitable Company.

Mor and Nurit will now provide you with some additional information regarding these first three pipeline agreements.

Thank you, Martin, for your kind words. I was fortunate to have the opportunity to lead Compugen with you as my Chairman. As a [inaudible] company, in fact, one of a kind, we and the rest of our team successfully faced huge challenges in building the Compugen of today, which now includes the strongest management we have ever had. And with Alex Kotzer joining us as Chief Executive Officer in about one month, it will be even better equipped to face the many challenges in creating a very successful company both in terms of contribution to medicine and profitability, based on unique discovery capabilities created through the merger of biology with computational technologies.

As you mentioned, in my talk today, I would like to provide our listeners with some additional information about our diagnostic activities in general, and our current three pipeline arrangements in particular. Including some information about the financial potential with these agreements provide to Compugen. The establishment in less than a year of this recollaboration for the development and commercialization of our diagnostic products with leading diagnostic companies, I believe positions Compugen as a recognized leader in the diagnostic market discovery.

Each of these agreements is what we call a pipeline agreement. Under which we use our discovery engines to feed our partners for this pipeline with Novel genes and proteins selected for the fields of interest. In each one of these collaborations, Compugen is entitled to development milestone payments and royalties from future products. In addition, we benefit from our partner's knowledge and experience in diagnostic development, biological materials and extensive commercial capabilities. Furthermore, in order for our diagnostic arrangements, Compugen maintains the right to pursue therapeutic applications for any of our discoveries.

I would now like to give you some additional information regarding the status and progress in each one of our current agreements. The most advanced pipeline collaboration is with Diagnostic Products Corporation, also known as DPC, for the development and commercialization of Novel immunoassay based diagnostic products. We also have an area more limited agreement with DPC related solely to two Compugen discovered PSA-related proteins. DPC's results to date do not support the development of a [inaudible] product based on this protein.

Although disappointed by the PSA results, we are extremely pleased that this earlier agreement has led to a much broader pipeline collaboration with DPC. Our pipeline collaboration with DPC focuses on the cancer and cardiovascular fields. To date, DPC has selected to Compugen discovered diagnostic candidate and licensed them from us for development and commercialization. Both of these licensed candidates were discovered using Compugen's diagnostic marketable discovery engine. One of them relates to myocardial infarction and the other to [inaudible], both of which can prevent significant unmet medical needs for effective diagnostics. These two proteins are currently going through proof of concept validation experiment at DPC. And if successful, they will start the development of diagnostic tests.

Our second collaboration for the development and commercialization of immunoassay markers, is also clinical diagnostics known as OCD, a Johnson and Johnson company. OCD will have the right to select up to nine biomarkers for further clinical validation and development. Last month, in addition to announcing the signing of this agreement, both parties were informed by Baird that Baird, the Israel, U.S. international foundation has decided to grant us a $1 million, two-year grant in support of this project.

Our most recent diagnostics marker partnership was announced in June and Israel's Biosite. Under this agreement, Biosite is licensed to develop and commercialize immunoassay-based diagnostic products using Novel marker discovered by Compugen.

Although we cannot disclose the specific financial terms of our agreement, I would like to present to you some general guidelines regarding the relevant markets in these types of deals, which hopefully will assist you in evaluating the financial potential for Compugen. The innovative diagnostic market is estimated to generate $25 billion per year on a global basis. Within this market, the most relevant market segment is immunoassays, which is the subject of our first three pipeline agreements.

Revenues for this segment are estimated at $7 to $9 billion per year. A single screening diagnostic product in this market typically generates from a few tenths to a few hundreds of million dollars per year. With a step to royalty rates, these types of agreements typically include royalties to a licensed soul in the range of mid-single digits to very low-double digits and milestone payments of several hundred thousand to a few million dollars per marker.

In addition, the average time from discovery to development in regulatory approval is about five years, and successfully developed products could have approximately 15 years of patent life after introduction onto the market. Therefore, if we assume that the average annual fill of a single screening molecule is $100 million and generates an average 8% royalty rates for Compugen, this resource in total royalty over the expected life of the diagnostic product is well over $100 million in pretax.

With respect to estimating the potential value to Compugen, it is important to note that successful markers can reach higher sales than the $100 million used in this example. In this calculation, I did not include the milestone payments on the product-by-product basis. Also, please notice that each of our fist three pipeline deals aimed at the development and consolidation of a number of markers, thus the revenues to Compugen from this agreement can potentially be very substantial.

Before I turn the call over to Nurit, I would like to take advantage of this phone to bid you all farewell as this is the last financial conference call that I will participate in as CEO of Compugen. I would like to thank everyone who has been following us in the past few years. I'm proud of our accomplishments, in particular, our outstanding R&D team and the therapeutic and diagnostic discovery capacities that has been established, and our first three-partner agreement to provide us with a vehicle to translate our discoveries into significant medical and financial success. I'm confident that Compugen is on the path to becoming a major player in worldwide drug and diagnostic discovery and a very successful and profitable Company.

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

Thank you, Mor. Mor presented to you financial principles regarding the relevant market and the type of diagnostic agreements that you are now entering into, which hopefully will assist you in evaluating our Company. Before commenting on our financial results and status, I would like to elaborate a little on the structure of these pipeline agreements. A typical biomarker pipeline deal involves milestone payments to Compugen, its various development stages which vary from agreement to agreement.

In general, these milestones represent key points in the development and regulatory process, which provide increased evidence to our partner of the merit and ultimate success of the product under development. These can be biological milestones such as showing the presence of a protein in serum [ph]. They also can be developmental or commercial milestones, such as FDA filing approval or first commercial sale. In general, a typical arrangement can include two to four milestones per product.

The major financial benefit from a successful product will be our share of the revenues obtained by our partner, which as Mor mentioned, could exceed a total of $100 million or more over the last time of a successfully developed product in a major diagnostic area. Thus, with three pipeline deals signed in less than a year, we are very enthusiastic about the financial potential that we are now demonstrating that has been created through our continuing efforts in predictive biology.

With respect to our reported financial results, it's previously stated, since 2002, in order to focus our efforts on our in-house discovery and on the development and commercialization of therapeutic and diagnostic products, Compugen has been discontinuing and/or substantially deemphasizing the licensing of platform and tools incorporating our technologies. This transition is now largely completed and is reflected by the decrease in product revenues from the same period of last year.

Research and development expenses remain our largest category of expenditure, as we pursue the development and use it for our discovery engines, and add new molecules to our list of therapeutic protein and diagnostic biomarker for the candidates. Research and development expenses increased from $2.9 million for the second quarter of last year to $3.1 million for the second quarter of this year.

Sales and marketing expenses for the most recent quarter was -- were $459,000 compared to $682,000 for the same quarter of last year. Our sales and marketing activities are now focussed on business and corporate development. As we stated last quarter, approximately 15% of our cash is invested in high quality financial instruments, where the principle amount is secure, but the final interest received at maturity will either be higher or lower than market rates depending on future interest rates.

Generally Accepted Accounting Principles require that non-cash interest income be recognized on a current basis on these types of instruments, based on estimated future interest rates, which can result in reported financial income and expenses that may fluctuate significantly from quarter to quarter. During the second quarter of 2005, this resulted in net financial income of $317,000, and for the year-to-date income of $307,000. We ended the second quarter of this with $41 in cash and cash-related accounts, a decrease of approximately $2.5 million for March 31st, 2005.

The cash flow for the first two quarters of this year is consistent with our previously-stated outlook for the year of a net cash decrease of $14 to $16 million. Our current cash resources should be sufficient for a little more than two and half years from now, which is early 2008, assuming no new sources nor major new uses of cash.

And with this, we conclude our formal presentations and open the call to any questions you might have about the presentations today, the financial statement and press release for Q2 '05 or any other aspect of our Company.

Thank you. [OPERATOR INSTRUCTIONS] We have a question from Travis Meyers of the Balkan Fund. Please go ahead, sir.

Hi. How are you guys this morning?

Good, thank you, Travis.

In the diagnostic products agreement, they have selected two of the biomarkers. Is there a limit to how many they can select in total like the other agreements?

Yes, there is a limit. We cannot disclose it, but there is a limit. It's certainly more than two.

Okay. Is there an average time that it would take for the clinical validation process to be complete on average?

The proof of concept validation on average should take about a year.

And once-- the proof of concept validation is generally the trigger for one of the different milestones in the agreements?

I apologize. We cannot answer this question. We cannot answer about specific milestones.

In general, there are between two to four milestones for each agreement, but we cannot say exactly when a milestones happened and what depends on receiving the cash.

Since two of us have thrown in our answer to this, I'll complete the circle and make it three. It's important to recognize that the milestones in these agreements, they vary from agreement to agreement. As Nurit had described. And so I guess the answer to the question is, it's that in some -- certainly in some agreements is a milestone. Whether it's in this particular one or not, we're not in a position to say.

Also, please recognize that as of now, our policy has to be that the partner will really decide what and when is announced about the progress of these agreements. It's really not appropriate for us to -- I'm not suggesting that you've asked us for now, but as we move forward, we're really not going to be in a position to update you product by product unless the partner has either agreed to it or already done it himself.

Okay. That's fair. I guess I'm just curious, do you have any way -- the partner controls the timing on the rate at which these concepts are validated, correct?

Yes.

Okay.

There are, of course, these requirements that you either work on something or you give it back. These things -- our agreements as most people who write agreements in this industry who have been around for a while recognize that what you want is for the partner either to move forward to the marketplace or to give you back the intellectual property.

Sure. And you guys had said earlier on the call that, in general, it took five years for the -- I guess one of these diagnostic products to kind of go through the full development and approval cycle?

Yes. This is what is about in the industry.

Okay. That's all of my questions. Thank you very much.

Thank you. We now will take a question from Jeffrey Grossman, a private investor. Please go ahead.

Fist of all, congratulations on the most recently announced pipeline agreements. And I, too, would like to express my gratitude to Mor and my appreciation for all that he has accomplished over the past several years. Best wishes to you, Mor, in the future. I hope you'll be staying with the Company.

Thank you.

In the Company's 2004 Annual Report, it stated regarding the Company's therapeutic candidates, "We expect to reach preliminary proof of concept for most of the currently selected molecules before the end of 2005." Perhaps you can elaborate as to what this means.

Martin, I assume that you'll let us answer this.

I assumed you would answer it, Mor.

Okay, fine. We take articles that we discover so the process of that stops with a very initial over course of validation and then [inaudible] that we use actually for screening those products that we select to invest in them to the next stages, and then select the molecules and go through animal studies. We consider animal studies as a proof of concept in the disease area where there exists an animal model that is considered to have a good predictive value with respect to human trials.

Are we anywhere near Phase I?

We didn't announce anything with respect to Phase I or being close to Phase I.

Okay. If we look to the Company's website, there is absolutely no indication of future meetings with the investment community. Perhaps there's something planned. I mean, very often it can be said of a person that he's all form and no substance. Sometimes when I see Compugen, I think there's -- it's all substance and too little form. Perhaps there should be some more reenforcement of the contacts with the investment community. It seems sometimes we go months without an update at the website or indications as to the Company's concepts.

Let me say this, first of all, I agree with you. You have to choose a balance between are you going to overdo the form or overdo the substance? My history is at Compugen, my view is that in the long run, you are much better off overdoing the substance and the form will take care of itself over time. Specifically, with respect to our Company, it has, in an earlier attempt to try and explain to the financial community what we were doing and the value of it, I was very discouraged and found that -- and it's understandable, but because it was really, believe me, yes, this is a very, very unusual team of people, and yes, it's an unusual way to try and discover, make discoveries that are going to be useful in diagnostics and therapeutics, but believe me, it makes sense. Rationally, you could agree that yes, this approach made sense. But the fact was that we had very little proof.

We had proof that it was interesting. Companies like Pfizer, Novartis, whatever would not have entered into the kinds of research agreements with us if it wasn't obvious that this really had great research interest. But as far as proof that says, look, the discoveries that we can make and the kinds of capabilities we put together can lead to the types of discoveries that the industry is looking for and is willing to invest big dollars in putting them in and continuing them in their pipeline, we really had none. So it was really a conscious decision to not keep sort of beating our head against the wall and wait until, we are in a position where we have more proof. And I think we've reached that point now. At least with diagnostics.

And diagnostics are more straightforward than therapeutics, but the -- but the capability we have for sort of, as I mentioned, discovery on demand with respect to the diagnostic area is quite phenomenal. And I think that the proof of that is the three of the major leading companies in this field worldwide in a period of ten months have entered into substantial agreements with us, not for stuff that we've already discovered, but for stuff that they're confident that we will discover and we are providing them on an ongoing basis now with discoveries for them to evaluate. And as was mentioned, they're beginning to select these things.

The other thing about making press releases and keeping people up-to-date, you have to make a judgment as to what's important? What's substantial? For example, a number of our proteins are now in animal studies. We don't believe that that's the type of thing that we should make press releases on. I think you will find other companies having a different philosophy, but we're very proud and pleased by the progress of the -- of the pipeline.

Clearly, they're all not -- or even a majority of them most likely are not going to end up as successful products, but I would expect that our batting average is going to be far higher than is norm in the industry. And because of the unique capability of discovery on demand, we have the ability to put many, many more potential products into the pipeline and select from a vast number rather than being essentially forced to proceed with those that we've been lucky enough to discover by accident, which is not the approach we take.

Okay. But is there room for additional agreements with other diagnostic companies now?

The short answer is yes, but Mor, maybe you want to give more information on that.

[Inaudible]

Okay. The short answer is --.

We are not limited by this agreement from signing additional agreements with other diagnostic companies.

The diagnostic field -- the diagnostic field, first of all it's growing dramatically and almost everyone states that this is the share of the overall health field that's going to go into diagnostics and prognostic kinds of things is going to be far greater. That's why there's this people -- there's this real strong focus on our biomarkers. As a matter of fact, that's what we do in some cases -- in some sense at this point in time. We have a tremendous ability to predictively identify biomarkers that are relevant for different disease processes utilizing our discovery engines.

We -- and the field of biomarkers is something that I think you are going to hear more and more about. Actually, we're going to have a seminar in New York in early August where we have one of the world's experts, Juda Fulkman [ph], who will be giving a lecture seminar -- that's an overstatement, will be presenting certain of his work in this field. It's a very, very exciting, very exciting area.

Thank you very much.

Thank you. We will now take a question from Jim Smith of Bedrock. Please go ahead, sir.

Hello, Martin. Can you talk a little bit more about the tradeoff, if that's the right word or whatever sort of decision-making process you go through when you have an in-house developed biomarker or potential therapeutic protein, and how you conceptually decide to out-license it or develop it in-house as opposed to possibly just doing a discovery on demand, for example, type of process with one of your partners.

Well, first, the reality of what -- of the world is that very early stage therapeutics people are not very enthusiastic about licensing under any really substantial terms. Because the record with therapeutics is that so many of the early stage ones end up dying, and so people are -- given the state of where life science is today, people are discovering things all over the place that appear to have some validity, and so there isn't -- if we decided tomorrow that we were going to license out all of our therapeutic proteins, I do not think that we would get anywhere near what I believe the real value is, because they're just too early now.

Diagnostics are something else because when you -- given the way we discover them, you're in a much -- companies -- the overall process is much shorter. And by what we do when we hand it over to them is a much higher percentage of the validation than it would be with therapeutic. So in large part, the market determines this. Clearly, our bias, and this should be understood by our shareholders, our bias is to license things out as soon as we can, assuming that we will get a reasonable share of the ultimate revenues. We are not interested in licensing things out and ending up with a 1 or 2% long-term share.

Unlike probably any other company that I can think of, the real asset we have is the ability to make many, many discoveries. To say a simplistic example, I believe we're creating a goose that can lay golden eggs. There is no doubt that other people are wandering through fields in different ways and now and then are finding golden eggs. And in some cases, the ones they find will be bigger, better, whatever than the ones we find. But that's very different than focusing on this -- on the goose itself. That's what we continue to do. And I think we have now reached a point where our scarce resource is not discoveries.

And so that leads to my earlier comment that -- two things, one, the market will largely determine when we license things out and our bias will be to license things out as early as possible subject to us getting the type of rewards that we believe are appropriate for the -- for bringing the discovery to the table. And that just by the way the world works and as of today and the nature of diagnostics and therapeutics means that we can get that with the diagnostics at a much earlier stage than we can with therapeutics.

Just by way of example, Martin, take, for instance, CGEN-B2, which is listed as both a therapeutic protein as well as a biomarker candidate, and I think I heard that with DPC, you're working on immunoassays, as well as -- in the diagnostic area as well as ovarian cancer. Would you work in a parallel way in those areas internally developing CGEN-B2 or have you already licensed CGEN-B2 out to DPC in the biomarker area? Or just how would your initiatives with, for instance, CGEN-B2 and your relationship with DPC proceed?

In principle, in all of the diagnostic agreements, all of the [inaudible] rights to Compugen, so we are not limited by this agreement in any way from developing with other companies' therapeutic applications on the same molecules. And in the Company, with different teams working on the diagnostic applications and therapeutic applications and sometimes they work on the molecule, it saves some work with each other. But we put this as a tool separate and that somehow don't share the same molecule, but the development any terms of the business activities created the two separate projects.

And so you're working -- DPC has soft license or hard license, CGEN-B2 in the diagnostic area, is that what you're saying? Whereas you kept all rights to it in the therapeutic area?

I cannot refer to specific molecules, but when we give DPC or the other companies licenses to develop -- to take our molecules and develop diagnostic for that based on them. We give them rights only for the diagnostic field and we keep all the rights for therapeutics Compugen, which means that with respect to each one of these molecules, we can license them to another company for the development of therapeutics based on this molecule.

Thank you.

Any more questions?

I have one more question.

Okay, go ahead.

In the therapeutic area, it sounds like it's a little bit farther down on the time line than the -- sounds like two to five years in the diagnostic area. Is that a correct assumption that therapeutics is a little bit farther off and yet it still has some potential down the road?

Well, rather than some, I believe that in the long run, that the therapeutics would be the larger part of Compugen's profitability long term. I think maybe Mor should comment. He might have a different view. But clearly, the diagnostics, one, are major, and two, we can move much quicker in that area. Mor, would you want to comment on that?

Yes. I agree. One of the key advantages of diagnostics for us, I think, in general, especially -- but certainly for us is that everything in diagnostics is easier and faster, and we can move in diagnostics both in the discovery and [inaudible] validation and in the business developments much faster than we can do in therapeutics. On the other hand, of course, the potential in therapeutics, in general, are larger than diagnostics.

Does that answer your question?

Yes.

Okay. Thank you. [OPERATOR INSTRUCTIONS] We have a follow-up question from Travis Meyers. Please go ahead, sir.

Hi. I have one additional question. Under these different diagnostic contracts in general, is there any financial incentive or more of a consulting type arrangement where you guys would get paid for giving outsourced R&D and kind of like a time and materials basis, or is all of the financial incentive structured around delivered products?

As a Company, we have very little interest in being a service provider or a -- if that's what you're saying. I mean, we look at these arrangements and our interest is to get them licensed, get them into the hands of other people who will use their resources to move them further. Our idea is that we have -- we really have the -- we're developing a machine that creates poker chips. And we want to get them down -- or roulette chips. We want to get them down on as many numbers as possible, as quick as possible. So it's -- let me end it there.

Is there some sort of an industry hit ratio for how many early stage diagnostic biomarkers actually make it to production?

That's a toughie, the same way that it is in the therapeutic area. It kind of depends on where you start from. People talk about in the therapeutic area, 1 out of 1,000, 1 out of 10. Probably even higher than 1 out of 1,000 if you move back really into the chemistry. I know it's much less than 1 out of 1,000. Even in the clinic, it's 1 out of 10. Diagnostics, without any doubt, has a far, far higher hit rate for -- related to the reasons that Mor was talking about, the more straightforward. The unravelling of where they sit in these processes is a lot easier.

So the hit, let me just say I think if somebody was doing diagnostics and ended up with less than 10% success rate from early stage, you'd probably look at them and say there's probably -- you asked the question what they're doing. Do they know what they're selecting in the beginning to start their process. On the other hand, if the hit rates You know, on the other hand, if their hit rates, like 40 or 50%, you'd be very, very impressed. But it'll vary all over the place.

Okay. Thanks.

Thank you. We'll now take another question from Jim Smith. Please go ahead, sir.

Last question. Martin, given the value of the team you put together, the discovery on the demand capabilities, et cetera, et cetera. What should we look for over the next few quarters from your team in terms of things you can talk about to outside parties and announce?

First, let me correct you. I think I played hopefully a meaningful role in the guidance of the strategy and the business, whatever, but I played very little role in putting together the R&D team. That was fully under the direction of Mor, and I think he did an unbelievably great job in that area.

With respect to looking forward, we're really not, and I know this is very, very frustrating for our shareholders, but we just are not in a situation where we can comfortably say these are the three to six month milestones that we will be in a position to announce. Clearly, internally, we have all kinds -- we have milestones set for different projects and whatever. But with respect to the ones that are -- the activities that have to do with other companies, we're not in a position to release them. With respect to the things that we're doing particularly in the therapeutic area, we still have to decide what our long-term policy would be. But I want to be relatively conservative.

Again, I personally have a history here. Some of you may know from my background at IALSA, and I know this is very different and potentially a much, much bigger activity than IALSA was ever involved with. There are certain things I just believe in. I think I would be willing to go back over every press release while I was there that was ever out about drugs that -- products that they we were going to develop and my bet is that at least 80% of them actually became real -- actually ended up in the marketplace, of the ones where we put out press releases.

The other thing is that I never would accept up-front money with any deal that I would enter into at IALSA. All of the people -- I know some of our shareholders are screaming this deal isn't valuable because there's no up-front money. My policy is I think it's a major mistake to take up-front money. I would take up-front money only if I didn't think the product was going to be successful. Or if I was in a financial situation where I had no choice.

But at IALSA, I can't literally recall a single instance, even after our technologies were fully developed and people were banging down the doors to get them. Those of you who maybe remember that, it was a long time ago. I would never accept front-end monies. The same thing here. I think that philosophically, first, it's right for us to share in the risk from the standpoint that if it doesn't make it, why should we make money out of it? On the other hand, if it does make it, I want to get my full share. So by giving up on the front-end money, you are able to get much, much higher long-term royalties. To me, that's what matters in the long run.

Does that answer your question?

What you're saying is expect announcements of partnering relationships and/or other activities when we see them, but don't anticipate any --?

Thank you. I wish I had said it that way. I would have saved everybody listening to my latest speech. That's perfect.

Thank you.

Okay. We have a couple more participants that have joined us. I just want to let them have a chance to perhaps ask a question. [OPERATOR INSTRUCTIONS] Okay. There are no further questions at this time.

Before I ask 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 two hours for a period of 48 hours. In the U.S., please call 1-866-276-0485. In Israel, please call 03-925-5901. And internationally, please call 9-723-925-5901. Mr. Gerstel, would you like to make your closing statements?

Thank you. Again, thanks, everyone, for joining in our call. With respect to our longer-term shareholders, I assume you share our sense of perhaps even relief as you start to see the real life validation of what we've been talking about over the years. In our industry, there are two ways to try and make a creative successful company. Only time will tell which is the better pathway. One is to try and get lucky and to place all your bets to find something, license something in, whatever, one or two drugs and just move forward and hope that it's going to work out, and if it does, you become a great company. And most -- 90% of those companies, as we all know, will fail.

The other approach is to just play it for the long run, build an underlying capability that is -- that can give rise to multiple products on a predictable basis. Again, sorry to keep referring back to IALSA, but I learned that that's, in my judgement, the better approach. And that's what we have attempted to do at Compugen and I think we have now reached the point where we're beginning to show that we actually have achieved it.

So for those of you who hung in there while the only thing we could say was "believe us," I really want to thank you, and again, want to thank Mor for having the great talent and understanding in both of the fields that we're looking at. I mean, both on the mathematical side and on the life science side to put this tremendous team together. So thank you and I look forward to our next call.

Thank you. This concludes the Compugen Ltd. second quarter 2005 conference call. Thank you for your participation. You may go ahead and disconnect.