Compugen Ltd (CGEN) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. The conference will shortly begin. Please continue to hold.

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen Limited 4th Quarter and Year-End 2005 Financial Results Conference Call. All participants are, at present, n 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 9th 2006.

With us on line today are Mr. Martin Gerstel, Chairman, Alex Kotzer, 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 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 972.3.765.8525.

Mr. Kotzer – would you like to begin?

Yes, I will. Greetings, and thank you all for joining our conference call, today. Those of you who participated in our 3rd Quarter call – which occurred shortly after I joined Compugen – may recall that there were already questions addressed to me about Compugen’s future direction. I answered that it was too early for me to respond, and mentioned that in the next conference call, I will be more prepared to answer.

Today, I believe I have a much clearer view of the Company’s direction, which I would like to share with you. But let me please start with what we have already done and achieved in the last few months, regarding the Company’s strategy and future direction.

When I joined the Company, Compugen was in the midst of its annual strategic review process. And I projected that we would complete the process by the end of 2005. After a thorough review of the Company’s strategy and business model, areas of activity, key competencies and many other aspects, it became clear to me that we have to continue to pursue our core activities, but to focus each one of them on clearer business objectives – which I will shortly describe.

The immediate action we took, based on those conclusions and our corporate goals, were – 1st – the organization of the Company into 3 units – aligned with our key core activities and business goals. And 2nd – a reduction of staff and other annual costs, consistent with our business goals – and now integrated into our 2006 budget. These steps were announced and implemented by year-end 2005.

The creation of the 3 new units, and the business objectives reflect the completion of our evolution, from a Company providing life-science software products and services on a fee basis, to a Company that discovers and licenses potential therapeutic and diagnostic products to [inaudible] partners under milestone and revenue-sharing agreements.

I assume it is not necessary to explain that these agreements will provide us the opportunity to share significantly in any revenues on future products, based on our discoveries. In addition, they allow us to leverage our resources by marrying in the area where we have a clear advantage – that is discovery – and look to our partners to share in the substantial costs required for such a large group of potential products, to proceed in development.

I would now like to provide more details on the business objectives and ongoing activities in each of the 3 new units.

In our research-and-discovery unit, we have discontinued activities related to upgrading and providing our [entire] platforms for use by others. We are now focused on utilizing these platforms as the starting point for creating new discovery engines in additional fields of interest.

Whereas most of our current molecule candidates are derived from our leadership in understanding alternative splicing, our new discovery engines will, in addition, incorporate understanding of other biological phenomena – such as viral piracy, genetic variation, [auto-encleavage], et cetera.

Our objectives for this increase in inventory of engines is the generation of additional therapeutic and diagnostic biomarker candidates, based on many different underlying biological phenomena.

Our therapeutic group is currently validating dozens of molecules discovered by our existing discovery engines. In the next few months, we will have the ability to prioritize them based on proven biological activity, and then to select a few promising molecules for further development. This selection will also dictate the therapeutic indication we will be focusing on, and for which we will continue to seek new candidates, using our new discovery engines.

From this point on, all additional development activities regarding the selected molecules will be targeted at increasing the potential return to Compugen, and the early-stage milestones and royalty-bearing licensing agreements.

The key business objectives for our diagnostic unit will be to substantially increase the number of products, based on our biomarker discoveries, and doing development under milestone and royalty-bearing agreements, most current and new agreements.

The units will continue to collaborate with our current partners, in the development of the molecules that have already been selected by them. In addition, on an ongoing basis, we will continue to provide our partners with new molecules for consideration, as they are generated by our current and new discovery engines.

During 2006, in addition to seeking server [purpose] in the field of immuno-diagnostic, an important new focus for this unit will be the biomarker discoveries for nucleic assay diagnostics.

In conclusion, I would like to share with you my belief that generating new discovery engines for most diagnostic and therapeutics, and validating new molecule candidates discovered by them, will not only enable our current partners to increase the number of products entering development, but it should also enable Compugen to sign additional licensing agreements with other leading companies during 2006.

Due to the nature of our activities, and of the agreements we have signed, I am unable to share at this point of time any information related to a specific molecule. But I will be happy to answer in the question-and-answer session that will follow, any general question that is related to our activities or business objectives.

Now, I would like to turn the call to Nurit.

Thank you, Alex.

As noted in the press release, we have made a change in the way our financial results are presented. In the past, we included governmental and other grants, as part of revenues and grants – based on the single-step income statement presentation approach.

Such governmental and other grants of $2.3 million for last year, and $0.8 million for the 4th quarter of last year, were significantly higher than the $1.4 million and $393,000 reported for the comparable period in 2004. However, as Alex noted in his remarks, we have now completed our evolution from a Company providing life-science software products and services on a fee basis, to a Company that discovers and licenses potential therapeutic and diagnostic products.

Moving forward, we expect to continue to participate in these types of programs. But with the primary purpose to add to our research knowledge base for future discovery efforts. Therefore, we have concluded that it is more appropriate to present governmental and other grants as a deduction from research and development expenses than as revenues, as these amounts have been reclassified for all periods presented.

Compugen’s most-important financial consideration is to ensure the availability of the financial resources necessary for the Company to continue to develop [inaudible] positive cash flow from operations. Therefore, the key short-term financial measurements for Compugen relate to cash balances.

We ended 2005 with $36.8 million in cash and cash-related accounts, representing a decrease of $11.6 million for the year. The lower-than-expected cash burn was primarily due to signing of cash receipts from governmental authorities, and lower-than-budgeted expenses.

In addition, the cash at year-end includes approximately $800,000. This was received on behalf of, and will be transferred to, Research Consortium Partners.

Our expectation is that our net cash usage for 2006 will be in the range of $11-13 million, and therefore, we expect to end 2006 with approximately $24 million.

With regard to our budgeted expenditure for 2006, in general, the funds are allocated approximately equally, in support of our 3 operating units. Therapeutics, diagnostic biomarkers, and research-and-discovery.

With this, I’ll return the call to Martin.

Thanks, Nurit. Before we move to the q-and-a session, I'd like to very briefly address 3 broad issues. First, the role of discovery – next, Compugen’s competitive advantage – and finally, what investors can expect from our Company.

First – with respect to the role of discovery, it is well-accepted that if you have a good pharmaceutical or diagnostic discovery, just about everything else that you would need to create a successful and very profitable Company – such as pre-clinical and clinical testing, regulatory, manufacturing and marketing – is available for-hire on a service basis. And in most cases, there is actually an excess of first-class capacity in the world. Good discoveries are the only missing ingredient.

Second – over the past decade, Compugen has created a world-class biological discovery capability, in the form of a large, multidisciplinary, experienced staff – leading computational biology capabilities – and deeper understandings of important biological phenomena. This capability, which is truly unique in the world, provides us with a significant competitive advantage in discovery.

It is also important to note that through the development of field-specific discovery engines, this competitive advantage can be quickly focused for discovery in many different diagnostic and therapeutic areas. A great example of this is the fact that only in early 2004 did Compugen decide to develop discovery engines for certain types of biomarkers, in addition to the therapeutic protein engines that we had previously focused on. And yet, by the end of the following year, we had agreements with 3 leading diagnostic companies, covering more than a dozen potential products.

Third – and lastly – What should investors expect from the Company, as we move forward? First – our investors can expect us to maintain our scientific lead – which provides the base and is the core of everything that we do. In some ways – although this would be the most-challenging aspect for other companies – with our achievements to date and our highly talented, multi-disciplinary and very experienced research team – we have full confidence that our scientific leadership will not only continue, but accelerate, as we move forward.

Therefore, investors should expect to be informed of further breakthroughs such as those we have already announced, with respect to deeper understandings of alternative splicing, natural antisens and post-transcription editing.

However, in this regard, please be aware that – in general – the public announcement will come months or even, as was the case with natural antisens – years after we actually make the breakthrough – in order for us first to establish our proprietary position, and incorporate the new scientific understanding in our own discovery efforts.

Additionally, our investors should expect to see the entry by Compugen on a continued basis, into new fields. In large part, through the development of new, focused discovery engines. As Alex discussed, our current engines relate to the discovery of [novels he created] therapeutic proteins and cancer and cardiovascular immunoassay diagnostics.

We are, of course, continuing our discovery efforts with these engines. And, as previously mentioned, we are modifying the immunoassay engines to discovery biomarkers for nucleic acid diagnostic products. Also, in his remarks today, Alex discussed the planned development of new discovery engines, incorporating additional biological phenomena.

Lastly, and most-importantly from the commercial standpoint, our investors can now expect to see additional agreements with other pharma and diagnostic companies – both in our established fields and in each new field that we enter. Our commercial objective is very straightforward. That is to create an ever-increasing number of Compugen discovery-based products entering our partners' pipelines – by both integrating more candidates into existing agreements, and all our agreements are structured to allow this to happen – and by entering into new agreements with new partners.

We are very confident that we have now reached the point where, through these mechanisms, it is reasonable to expect not only growth, but accelerated growth in the number of milestone and royalty-bearing potential products. In effect – bets that we have on the table – moving forward in the pipelines of an increasing list of partner companies.

Those of you even vaguely familiar with the pharma-diagnostic world well know, clearly – not all – nor even a large percentage of these potential products can be expected to actually successfully complete development and be commercialized.

But unlike most companies in these fields, our financial success does not depend on one ore even a few specific product opportunities. Our unique discovery capability – which has taken us almost a decade to create – now allows us to leverage our commercial reach, in terms of potential revenue-producing products for Compugen – which already are in the tens of products. 2 – in the not-too-distant future, multiples of this amount.

Therefore, the next few years should be very exciting ones for our Company, as we begin to harvest the initial results from our past efforts and achievements, and establish Compugen as a premiere and well-recognized pharmaceutical and diagnostic discovery company.

We will now be pleased to answer any questions that you may have.

Thank you.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press *, followed by the 1, on your touchtone phone. If you wish to decline from the polling process, please press the *, followed by the 2. Your questions will be polled in the order they are received. Please stand by while we poll for your questions.

First question is from [Adam Narld, Merriman]. Go ahead, sir.

Good afternoon. How did you make the transition that you just described? Do you plan to bridge this organically, as you develop internal programs? Or is it possible that you may in-license at a later stage, diagnostic or therapeutic, to sort of bridge the gap in the middle?

We have no intention to be in-licensing anything. We're a discovery company, and that’s where our competitive advantage is. And that’s what we expect to build our Company on.

With respect to a gap, we don’t see one. Clearly, we're years away from seeing any of the products based on our discoveries to be entering into the marketplace. But this is all part of the planned evolution of the Company, and we would anticipate that the agreements will – in the not-too-distant future – start to throw off milestone payments long before we’ll get the royalties.

Thank you.

Thank you. Next question is from Jim Smith of Federal. Go ahead, sir.

Martin – there was a 13G filed a few days ago with your signature at the bottom. Does that reflect a change? I was a little confused by the number of shares, there – and the shares that [inaudible] power versus the sole [inaudible] power.

Yes. In the last few months, I have been buying more stock on the open market. Not a great number. And I really don’t know – I'm sorry, I don’t know – I think it’s like somewhere between 30 and 50,000 shares I've purchased in the open market in the last few months. That’s the only change.

Okay. So the 550 that gets you to a much larger total, then, shows up on the holder list of… It’s 1.69 million versus 1.1 on the holders list. Is that no change in previous holder…

Yes. They're just held in different… I've got some in an IRA, and I have some in a different kind of an account. And my wife and I have a corporate personal sort of holding company. Some shares in there. And under the regulations, you have to report these differently. Although, everything that I own is, in effect, direct ownership. It’s not shared with anybody other than my wife. And so it’s all the same. But as you read the fine print on the regulations, you have to report them separately.

I'm surprised. One of the things that’s unusual about foreign companies – which I never realized, before – was that there's no requirement for report… Not only a requirement. You do not… Officers – directors – do not file Form 3s or Form 4s – which, mainly, the financial community looks to, to see whether officers – directors – are buying or selling stock. There forms are not filed by foreign entities – which I find surprising.

So that had this been a US corporation, you would have seen a number of Form 4s filed on my behalf for the purchase of shares. I have never sold a single share of Compugen.

All right. And only one other question – regarding 2006 net cash usage. I know it’s a little difficult to predict milestone payments and other ways you might generate cash. But is there any sense of what the gross cash usage and the offsets of that might be, that result in a net cash usage of 11-13 million?

No, but as of now, we would anticipate that the gross would not be that much greater than the net. That’s of now.

All right. Thank you.

Thank you. Next question’s from Ronald Oveter, Capital Partners. Go ahead.

Alex – you had mentioned in the press release about – in terms of new-strategy, specifically, the therapeutic proteins – that they would be validated. And then, I presume from that point on, you'd begin to talk to various corporate partners. Are there different definitions of "validation?" Could you just go into a little bit more detail, given the fact that – I presume – this would still be preclinical? What exactly do you mean by, "validation?" And can you specify that that would be… I presume that would be in terms of them being able to begin to talk to corporate partners about it. Is that correct?

Basically, validation is a little different for any molecule. But basically what we have in mind – and this is what we are doing… We say that the validation… The basic one will be completed in a few months. We will have, for each of these molecules, we have produced the molecule and they are [correct]

Sorry – I missed that. Could you repeat that? I didn’t hear that.

I said that for each one of the molecules… I said for each one of the molecules that we are validating now – and which are dozens… We have produced the protein or the peptide, and then we test it in bioassays that are measuring its bioactivity.

The further validation will include – in most of them – in-vivo assay [virule]. Either specific indication we are looking for. And at that time, we – as you say – will start negotiating with others on licensing of the molecules.

Well, is it your belief then, that at that point, when you've accomplished what you've just set out – that this will be sufficient to enable you to begin fruitful discussions with partners? Or is it possible that they would require a further kind of development?

We haven’t been able to share in a further development. There are cases known in the market that in this stage, if the molecule looks good – if it is an interesting indication – it is enough for entering a partnership agreement. But the idea like we do with the diagnostic – this is – in diagnostic, once we have a partner, it’s easier for us to develop or to preserve the development plan. And this is where we are targeting, also, with the therapeutic. Once we have a partner, it is easier to prepare the appropriate development plan, and we plan to share this development plan.

We do believe that we will be able to find partners at this stage.

I see. So then is the case that the partner would share with you the ongoing development process itself? Is that correct?

Now, let me say – of course, this will run the whole gamut. Some of them we purely license out and have no part in after the… other than we’ll just transfer what we have. And then they will continue under this milestone-royalty basis. And others could be, actually, some type of a joint-development. And then all kinds of combinations, in-between.

So we expect to be fairly flexible, with respect to the way that we will structure these arrangements. Although, given our current financial situation, I don’t think we will be undertaking substantial obligations on our part – over the next couple of years.

The second question I had was… Alex, you'd mentioned – or, you all mentioned – you've cut your burn. You'd let some people go, last year. And then you indicated, of course, that the main focus of the Company is on the discovery engines – which is where you create the value.

Can you just characterize a little bit what part of the research effort you were able to shrink without hurting your main effort, here?

Yes. I mentioned it in my speech. We have discontinued activities that were supporting and upgrading our platforms that – usually, in the past – we were providing for our partners. This part was reduced. And it is less-important for our future, as we use these platforms as the basis for the new discovery engines. So this was the part that was eliminated.

We reduced, also, our general and administrative costs. And we reduced, slightly, everywhere. Like you do in a company in this situation.

I'd mention very specifically, for example… We had a number of software engineers. These people were required in the organization when we were developing these platforms for use by other people. Now that we're using them just for ourselves, this is a group of people that… Very, very talented people that we didn’t need.

I might just make a comment. It’s really irrelevant for our shareholders, but it matters something for us, as managers of this Company. We have followed what has happened with these people. Essentially, every one of them has now been hired by a new organization.

The type of people that we have are really first-class. When something is discontinued, and we don’t need that type of service any more, these people don’t find any difficulty in relocating.

One last question, and I’ll get back in the queue. Just coming back to sort of a broader question about the advantages of the discovery engine, itself. As you begin to develop these therapeutic proteins, could you just talk a little bit more as to what, in fact, are the specific advantages of those proteins as opposed to other proteins discovered through other processes? Could you just characterize the advantages of these proteins, as it relates to discovery engine?

I should note – because if they have advantage, we should be able to detect them through this validation that we are running, at the moment. The advantage we have is the discovery of large numbers of molecules, which we have accumulated by families, and we are validating, now.

The results will come. Through the validation, we will be able to select those that have the better or more-expected performance versus other molecules. The other advantage is that through understanding of the phenomena… Sometimes, the phenomena is directly related to the yield. Or at least we believe that we do have the potential to find the most-suitable therapeutic candidates.

Also, I think it’s important to remember that the thing that really separates us from most of the other people – perhaps all the other people – is that we rely much more on sort of the scientific method on prediction for the initial stage. We do our initial work – our initial discovery is done in silico. And then we look to find – to document and to validate. So that we're in situations where we actually have… We actually have discovered many proteins where there is literally no evidence that we are aware of anywhere in the world that these proteins actually exist.

So that people who are looking for them experimentally would never find them, unless they have data sources that we're not aware of. Because there is nothing in the experimental data that’s out there that says that these things exist.

However, our predictive models that are totally proprietary to our Company say that looking at this segment of DNA – based on what we know about these deeper understandings of how the expression takes place – there should be out there a transcript or a protein that looks this way. And so, we predict it. And then we go to our laboratory and – very often – we will find these things.

So that we are clearly in a position now… We're without any doubt. We can find proteins – transcripts and proteins that other people are not able to. Now, that doesn’t necessarily say that they are valuable. But it is a tremendous competitive advantage. And it really… When you think about it, that’s the reason why these diagnostic companies have come to us for their pipelines.

That’s very helpful. I really appreciate that. Good luck, and thank you.

Thank you. If there are any further questions, please press the *, followed by the 1, on your touchtone phone. If you wish to cancel your query, please press the *, followed by a 2.

Next question’s from Peter [Ederick] of Legg-Mason. Go ahead, sir.

Mr. Gerstel – 6 months ago, you made an analogy that, "Imagine that there are no houses built in the world, and we're the only ones that know how to build that house." Is that still? Does that analogy still hold true?

Well, I think it’s more complicated than that. Because clearly, there are many people out there that can. I mean if the analogy has to do with sort of finding proteins or discovering things, obviously, there are thousands of organizations out there that are – through all different kinds of ways – are attempting to find things.

Let me make a comment, which I think – for people who aren’t that familiar with the life-sciences – what’s going on, now – you can get confused by listening to… by all of the terminology that’s used out there. That there are genomic companies and proteomic companies and systems-biology companies. And the list goes on and on and on.

What is important to understand is that these descriptions are only the way that they are trying to make their discoveries. Everyone is looking for the same thing, essentially. And that is, "What are the proteins that really matter, with respect… and protein pathways… that really matter, with respect to either creating bad situations or making good situations happen, in like?"

What we can do that is very different than what other people can do is that we rely on prediction. To use another analogy that I think has some relevance, here… In physics today, it’s not very often that somebody is going to discover something in physics experimentally. That suddenly, they find something that they didn’t know was there.

Usually, the models – the predictive models – tell them that something should be there. And then, years later, they finally find it. The models tell you what should be there. Now, that is what we are attempting to do, here. Life is much more complicated, probably, than physics. But physics isn't, that simple, by any means. And we're at early stages. But we've already shown that this works. I mean we have already shown – without doubt – that we can predict real things that apparently are very valuable.

Now, time still has to pass. They have to be tested and everything else. But the people who are most-familiar with these fields… particularly in the diagnostic areas, as of now… have looked at the things that we predicted existed, and then shown that it really did. Looked at them and said, "You know – these are things that we think could be very valuable. And we're willing to bet a lot of money in our development pipelines to find out whether they really are as valuable as they look."

So I'm not sure that I've really answered… Without more information, I don’t really… I thought I remembered using that analogy, but I don’t remember exactly how I used it.

Well, it was just to make it seem like you had the proprietary information. One more question. Though your cash burn is down to $11 or 12 million a year – if, by chance, you get less than 2-years' cash in your balance sheet, will your plans alter the Company’s future?

I don’t think anything is going to alter the company’s future. I think it might alter the ownership. It’s not like [the Who], sort of. But I think our path now, as Alex has described it, is very strict. And really, very straightforward. Very clear. We have tremendous competitive advantages. We're now targeting those competitive advantages in areas where there is tremendous need out there in the world. And we're seeing a lot of early success.

It will be hard for me to imagine anybody looking at this organization now and saying, "Well, you ought to be going in a different path." I think we have a lot of – already – very good evidence that we're on the right path.

I believe that if we require additional resources… And let me say, it’s very clear that if you just look at the cash that is on our balance sheet today… if you just look at that, it’s highly unlikely that that cash will be sufficient to take us until we reach break-even or profitable operations.

However, there are ways… It’s conceivable that we could get funding in ways other than sort of equity or other… There are other kinds of strategic arrangements. Also, given – as you said… and you worded it very well… that the time you really begin to worry is at the point where you have 2-years' of cash left in the bank.

Basically, what that means is that really, we have pretty much 2006 – almost as a year – where we can… we don’t have to be panicked about our tax situation. We're probably better off than an awful lot of the life-science companies that are out there, with 3-years' of cash ahead of us. And that 2006, as I said, is a year where we don’t have to be that concerned. We're obviously going to look at it, but we don’t have to – as I said – panic over any situation.

And it is my expectation that by the second half – or the end, in any event – of 2006, we're going to be a very different company. Not from the standpoint of doing things differently than what we're doing today, but insofar as really seeing much more validation that our past efforts… The decade of investment that we have made here was made in areas which truly have created value.

I believe we're going to be able to demonstrate that, during this year. Which would then put us in a situation where the raising of capital – be it by equity or strategic or whatever – would be a very different type of a situation than it would be if we were attempting to raise capital, today.

So your company's in a similar situation…. They've taken more cash upfront and lower royalties on the backend, where you're holding off for the royalties on the front, and lower cash.

Yes. This is my philosophy. I think that if you want… Companies are run like people. The big companies. If you take a lot up front, typically… Particularly if you're doing what we are doing. That is, we will be – in general – licensing things out at a relatively early stage. If we want to get significant up-front monies, it’s going to vastly reduce the amount that we have on the back-end. And I don’t see any reason for us to do that. I think that I just want to continue to add these products to our pipeline under very favorable terms. And again, I would say most of them are going to fail. Our shareholders must understand that most of our products in development are going to fail. So that’s 9 out of 10 in the industry fail. I think we're going to do better than that. And clearly, that’s on the therapeutic side. On the diagnostic, the odds are much better.

But the name of the game – and the thing that’s really going to separate us from the crowd – is the number of bets that we're going to have on the table. As I said – it’s already in the tens. And you're going to see that number get bigger and bigger and bigger, over the next couple of years.

Thank you.

Thank you. If there are any further questions, please press the *, followed by the 1 on your touchtone phone.

Next question is from Jim Smith of Federal. Go ahead, sir.

Missed a little bit, just now. But can you talk a little bit more, in regard to the predicted value of your discovery engines, vis-à-vis proteins? The existence of proteins and transcripts – versus the predicted value that they have, regarding commercialization potential? And if there's a big difference between those 2 predicted values. And where you are… or if you can even gauge, at this stage of the game, the predicted value of commercial potential?

First, let me say that’s a very good question. As of now, we would be guessing. We believe that, because of the way that we find things, that hopefully, we're finding them because they should be there – rather than finding them just "by chance." That this would suggest, perhaps, that they will have greater value. But we have no evidence, whatsoever, that that is the case.

I think we clearly have evidence of the first predictive value, that our models can predict more accurately – and discover stuff that other people cannot. The aspect of, "In the end, will these things be more valuable," or can we predict the amount or the level of sort of "goodness," in each one of these predictions?" We really don’t have any evidence that could even… Only at this point, hopes and dreams. But no evidence.

How about on the [flesh]-bearing side of the equation. Do you see enough sort of [inaudible] candidates where they resemble, very closely, commercial proteins out there, that you may be able to say, "This is an 'as-good' or 'better,'?" Are there any candidates that are already out there?

Yes. No, as Alex mentioned – almost our entire protein pipeline – the dozens of molecules that he was referring to – most of them… Correct me if I'm wrong, Alex… Most of those fall into the splice-variant category. Is that right?

From the current?

From the current. Yes.

Yes.

Yes. So I mean essentially, the bulk of our current generation of therapeutic proteins fall into that category. But again, what you stated about, "They're close to, and therefore, they may have…" kind of… That kind of thinking – we believe that that is the case. And that’s why we're pursuing this pathway. But have to admit that there really isn’t any scientific evidence, with [risk] people to do this. So there's really no scientific evidence existing now that, in fact, that will be the case.

I would like to add that when we use our own predictive engines in diagnostic, we are really testing tissues. And we are really able to detect differential expression of a specific molecule in healthy versus sick tissue. So the problem or the disadvantage that we are discovering on an RNA level, and the current immunoassay diagnostics are detecting them on a protein level.

So we still need to bridge and to prove that the RNA is really expressed into a protein, and then this protein is expressed into the serum and could be detected in patients.

When we talk about therapeutic -- and we've used in the past splice variants – we were able to identify many variants of protein. All of them could be produced by the human body. So this is one advantage that they are human proteins. That has an advantage in immunogenicity and other aspects.

And theoretically, there are many aspects why they should be better or worse from what is considered to be the wild-type. But theoretically, they could be different. They might be different in a specific disease situation, where they might have the advantage or the disadvantage. But basically, we say they should be [inaudible], which is better or worse than what is considered as the wild-type.

This is why we are testing them and try to see or to detect those that have the advantage – the disadvantage. So the predicting methods we are using are really detecting the proteins that the body could produce. And I think this is one of the advantages.

And as Martin said – despite variants -- we’ll use mainly for our current line. But we are looking, now, and we have now the ability to create and to generate other discovery engines, so we will count on different phenomena other than the splice variants.

Only one related question. Your intellectual property capture is at the point where you discover these potential proteins? Or some unique way you can harness the therapeutic or diagnostic power? Or at what point can you really get true intellectual property?

It is most. We first apply for the molecule, itself, when it is detected and sequenced. We are supporting this information with the bioactivity. And of course, once we will have a specific proof of activity and a specific indication, it will be confidential.

Thank you.

Thank you. Our next question is from Peter Ederick of Legg Mason. Go ahead. Legg Mason?

Yes. One more question. You had said last conference call, or before, that the prostate collaboration with Diagnostic Products wasn’t going well. Is that [edited], or is it still in process?

Let me say that we have an excellent relationship and a very substantial relationship to Diagnostic Products. I think what you're probably referring to is that, prior to the current agreement with Diagnostic Products, we had licensed to them one of our early discoveries – an alternatively spliced KSA protein. That one, to date, has not shown, or it doesn’t appear like that’s going to be useful – at least the work that’s been done, to date – to be useful as a diagnostic, with respect to prostate cancer – to some other activity that’s still going on. But that did not go and proceed as we had hoped.

But based on that experience with us, Diagnostic Products came back and signed a much-larger arrangement with us – with one of these what we call pipeline agreements – for a whole series of markers for diagnostic products.

Thank you. Our next question is from [Jeffrey Garsmon], private investor. Go ahead, sir.

Good afternoon. Concerning the 3 diagnostic agreements, I'm wondering where we stand, with respect to the number of molecules selected by these 3 companies. Has the number increased, over the past 3 months?

I think we had mentioned in the past that all those agreements are confidential, and we are not disclosing either the numbers or the specific nature of the molecules that have been selected by the companies.

I think it’s specific, and we're not going to go beyond this, Jeffrey. But in specifically answering your question, yes. The number over the last 2 months has increased.

I think that’s a very important piece of information. Thank you, Martin. I would also like to ask… I just want perhaps if you could be just a bit more specific. Perhaps I didn’t understand. Is the Company, in fact, hoping? Is it the objective of the Company to sign an agreement involving therapeutics, in 2006?

What we said – that we believe that by the end of 2006, we will be in a position that we can start looking for such an agreement. We are not confident that we would be able to sign such an agreement in 2006, and this is what we're saying. We say that we believe that by end of 2006, we will be in a position that we can start looking for such an agreement.

As Alex mentioned, what’s going on right now… I mean we're doing things methodically and we're doing them broadly. Rather than taking 1 or 2 compounds and pushing them through, we're taking large numbers. I mean we're taking advantage of our discovery capability. So we're taking large numbers, and moving them in-parallel. And what’s happening now with the therapeutic proteins – the 1st-generation – they're going through this validation step.

And so for us to try and… without even knowing which ones we're going to select after this validation process takes place… for us to say when we think we're going to have an arrangement is really kind of pushing it. But I mean it’s conceivable that when we look at the results, they're not conceivable that we could have – for 1 compound, we could have 3 or 4 companies beating down the doors to get a license, based on the very early validation. I wouldn’t count on it, but until we see the results and select the compounds we're going to move forward with, it’s very difficult to estimate when we will be in a position to sign agreements.

Martin, it sounds like there's been a change in policy. In the past, you were speaking of introducing 2 molecules into the pipeline each year. I understand that that’s gone by the wayside.

You're absolutely right. This is a significant change in policy, with respect to the therapeutic-protein aspect of our business. The idea that we would just have a sort of basically do what everyone else was doing, but with more compounds. Keep putting compounds into our pipeline, and sort of continuing to develop them until we either could license them or they failed – which was what we were planning on doing previously.

Alex’s view – and I share it 100% -- is that in order to take advantage of – really – the strength of the Company – is that we should look at a large group. And, as Alex said, dozens of therapeutic proteins. And move them all in-parallel. To identify, for each one, very specific tests that would give us a good comfort level that this is something that we should proceed further with. Get the results from these dozens of compounds. Make a selection from those. And those would be the ones that we commit our resources to, moving forward.

So, it is. I mean it’s a very good observation. You're absolutely right.

I would like to elaborate a little more. Because if you have – let’s say – 100 molecule companies, and we have to select 2, which ones would we pick? I'd say the previous policy… At the early stage that we discovered them, we don’t have reason to select one among the others. While if you do what we have done – and we think the only… We do one step forward. And we have more information about all of them… then the selection of 2 or 4 or 6 – those that we'd really count with the best results would be much more logic. This is one aspect.

And the other one – that by selecting 2 to proceed… We are not taking advantage of our real ability to discover many. So one of the advantages that we have is only the discovery engine – it’s this ability to produce or to discover many, many molecules. So we are targeting, now, to really do the preliminary validation, and find those that have sense to continue – and try to license them out. As many as we can. Like we do in the [inaudible]. So, as you say, this is really a change in the policy.

Okay. Last question. You indicated by the middle of 2006 – by the end of 2006 – the Company would be in a very different position. How will investors be able to gauge this change? This difference? Should we be expecting anything, short-term?

Much happier than they do, today. I think clearly, the issue – I mean as I mentioned in my talk – what can investors expect from us? I believe that we will be able to actually provide in each one of these areas, the information that clearly shows progress. 1 – that we're maintaining our scientific lead in very important areas. That – 2 – we're entering into areas – and we are moving in areas – some of which we've announced. We've announced the nucleic acid. We're moving into other areas that have not been announced, yet – but will be, during the year. And, thirdly, the aspect of agreements.

Those are the 3 – as I said. It’s our shareholders and our investors should… That’s what they can expect from us. Further proof that scientifically, we're a leader in areas that just aren’t important, for theoretical reasons – but are important as a base for products. So that we continue to take this information and the expertise of our group, and focus into more and more fields of therapy or areas of diagnostics, et cetera. And, 3 – that the results of that is an increasing number of agreements in current [annual sales].

I have confidence we're going to be able to do that, and I'm assuming that the financial world will recognize the importance of that, and what it means for the future of this Company. But time will tell.

And Martin, just with respect to the therapeutics. It seems that we may not be receiving very much information. We're not being [given it] – if you look at the website. There is no longer reference to any specific molecules in the pipeline.

Well, but as Alex mentioned, it would really be misleading of us, at this point in time, to be talking about any specific molecules, other than to just show different kinds of molecules as an example of the kinds of discoveries that we can make. That’s fine. But to show them as examples of things that you can count on, or that we're going to be pushing forward to commercialization – it would be very misleading of us, at this point. Because we really don’t know.

I mean we've got a whole… dozens of them going through the initial phase. Then we’ll make a selection process. And at that point, we’ll have to go look at it and consider our relationships with clients or potential clients, or whatever. I'm assuming that we will be able to give more information by the second half of this year, about the therapeutic protein.

Also, keep in mind that therapeutic proteins are a lot more complicated than diagnostic biomarkers, from the standpoint of just… When we discover… our discovery capabilities are unbelievably superb for biomarkers. I mean, our ability to predict what should be in a tissue, and then to go and see whether it really is there… And if something is present in a diseased tissue, and not present in a healthy tissue, you're halfway there to having a biomarker.

With respect to a therapeutic protein, the fact that it’s present in a diseased tissue is interesting, but it really says nothing about whether it’s going to be a therapeutic, or not. So it’s just a longer process.

I think every management should look back at the Company and what they've done, and kind of now-and-then sort of assess their performance. If I were to say one area where I think we probably made a mistake – a judgment mistake – in our history, here… I think by focusing so much of our efforts initially in the therapeutic protein area, rather than the diagnostic area, was a mistake. Because the diagnostics, for us, are so much easier. As I said – we worked in the protein area for a number of years. And then in 2004, we decided, "Well, why don’t we look at diagnostics?" Then a year later, we have 3 major agreements with 3 of the leading diagnostic companies in the world. That could've been done 2 years earlier. I think we've learned from that.

And also, Alex’s view of the Company, I think has, also. I mean his view of, "You need to look at commercial opportunity, and work back from there," has been helpful in redefining and sort of refocusing or focusing more clearly, our activity.

Martin, should we be looking for additional diagnostic agreements during the year?

I would hope so. Again – as I've learned through my many years in this business of licensing arrangements – nothing is ever 90% done. It’s either done or not done. I've had situations in the past – not at Compugen – but situations where everything is worked out. The agreements were just being sent to the president of the Company for his signature – and for some strange reason, it wasn’t signed. And there, the other Company was as surprised as we were that it wasn’t signed.

So, you never know until something is done. I'm really very pleased, though, by the [cursed] by this. We have a superb team out there. I don’t know whether we… We've probably never talked about it. But our commercialization capability… Our commercialization activities are run out of our US subsidiary. And we really have a superb team of people, who are absolutely first-class. And they have done a marvelous job of introducing what we can do to the industry. And we're beginning to see a lot of interest in what we can do. So in answer to your question, I am very hopeful that we are going to see additional agreements. I know we will. The question is, "when?" We announce them after we sign them. But we can’t say anything before that.

Thanks, very much. I'm looking forward to some agreements.

Me, too.

Thank you. And 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 2 hours, for a period of 48 hours.

In Israel, please call 03.925.5901. Internationally, 9723.925.5901. In the US, please call 1.877.332.1104.

Mr. Gerstel?

Just thank you very much, everybody, for participating. I'm very pleased to see that – clearly – the number of people we have on this call is a multiple of what we have in the past. So it’s clear – looking at that, and looking at the volume of trading of our shares – it’s very clear that there is some level of new interest in our Company. As you're aware – as of this point-in-time, we don’t have any analysts on the Street following our Company. Hopefully, we will be able to correct that, at some point in the near future.

But I think that the things – the agreements we've been signing, the announcements we've been making about scientific breakthroughs and other things – I think are actually getting to – beginning to – force people to notice that’s sort of a very special little company over here. Over across the Atlantic. And I'm very confident that we are on our way to building a premiere discovery, and a very successful discovery company. So, thank you very much.

Thank you. This concludes the Compugen, Ltd. 4th Quarter and Year-End 2005 Conference Call. Thank you for your participation. You may go ahead and disconnect.