Compugen Ltd (CGEN) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen Limited first quarter 2006 financial results conference call. [Operator Instructions] As a reminder, this conference is being recorded April 27, 2006. With us 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 contents of this conference call. If you have not yet 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?

Greetings, and thank you all for joining our conference call today. On our last conference call, we discussed the restructuring of our research and development activities into three operating units, each with clear short- and long-term business objectives. This restructuring reflects 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 leading partners under milestones and revenue-sharing agreements.

Today, we would like to share with you additional information about our activities and achievements to date in each of these three units. I will cover the therapeutics and diagnostic unit, and then I will turn the call to Nurit Benjamini, our CFO, who will provide an update on our financial results and status. Martin Gerstel, our Chairman, will then discuss some of the current activities in the research and discovery unit and comment on our longer-term financial situation. As the moderator stated, we will conclude this conference call with a question-and-answer session.

During the past quarter, the therapeutic unit completed the biological assessment of more than 70 novel potential therapeutic proteins and peptides discovered by Compugen. This assessment was designed to enable us to select the most promising molecules for further development and included the production and the study of these molecules by the appropriate biological assays to confirm their specificity, binding, and functional biological activity.

We are very pleased by the results of these efforts, and have already selected 12 proteins and peptides from different gene families that demonstrated the expected functional biological activity for further assessment.

Earlier this week, in Washington, D.C., we held a meeting with our scientific advisory board that reviewed these encouraging results and assisted us in prioritizing these 12 molecules in order to focus our immediate further efforts. For some of these selected molecules, we plan to generate additional supporting data, including specific disease-related assessments, which will likely be accomplished by utilizing in vivo animal models.

Our 2006 objectives include the completion of these disease-related assessments and the initiation of discussion with leading pharmaceutical companies on possible milestone and revenue-sharing agreements for further development and commercialization of our therapeutic candidates.

Moving to our diagnostic unit, as I mentioned in our last conference call, here the key short-term business objective is to substantially increase the number of products based on our biomarker discoveries entering development under milestone and revenue-sharing agreements. In this regard, I am pleased to inform you that, by the end of the first quarter of this year, our three current partners had selected more than 10 molecules as candidates for development as diagnostic products. We are collaborating with our partners in the development of these selected biomarker molecules and will continue to propose new molecules for consideration as they are generated by our current and new discovery engines in an expanding list of medical indications.

During the first quarter, we also continued to build and validate our capabilities in the field of nucleic acid testing. One of our objectives for this year is to identify one or more partners already involved in this state-of-the-art diagnostic technology.

As I mentioned earlier, Martin will describe some of these projects currently ongoing in our research and discovery units. I would like just to point out that Compugen’s unique ability to quickly create a discovery engine focused on a specific area of disease, what we call a discovery engine on demand, is possible only due to the extensive scientific understandings and infrastructure that we are building at Compugen over the past decade such as the LEADS platform and our successful efforts to obtain deeper understanding of alternative splicing and related biological phenomena.

Furthermore, as Martin will describe, our research and discovery unit is continuing to strengthen and broaden this capability by adding additional types of biological, medical, and related data and investigating new biological phenomena.

In conclusion, we are looking forward to an exciting 2006 as we continue to both advance our capabilities and provide to the financial world a clearer understanding of the uniqueness and commercial value of our predictive approach to the science underlying drug and diagnostic discovery. We have set ambitious business and scientific objectives for 2006 for each of our three units and I am confident that we will continue to achieve them.

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

Thank you, Alex. Total operating expenses for the first quarter were $3.4 million, including a non-cash expense of $547,000 related to stock-based compensation compared with $4.3 million for the first quarter of last year, including a non-cash income of $10,000 related to stock-based compensation.

Research and development expense of $2.7 million for the most recent quarter, compared to $3.5 million for the first quarter of 2005, remains our largest expense, accounting for more than 70% of our operating expenses this quarter. These amounts are before the deduction of governmental and other grants, which totaled $417,000 for the first quarter ended March 31, 2006, compared with $384,000 for the corresponding quarter in 2005.

Compugen’s most important financial consideration is to ensure the availability of the financial resources necessary for us to continue to develop until we attain positive cash flow from operations.

We ended the first quarter with approximately $34 million in cash and cash-related accounts, including approximately $700,000 that was received on the [unintelligible] and will be transferred to Research Consortium Partners, a decrease of $3 million from the end of last year. We have projected that the net cash usage for the remainder of calendar 2006 will be approximately $9 million, which would result in an estimated $25 million in cash, cash equivalents, and marketable securities at the beginning of 2007.

As Alex mentioned, 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.

And we have previously stated that anticipated primary sources of future revenues will be milestone and revenue-sharing payments from licensing and other arrangements covering the development and marketing of these products. We expect that we will begin to receive such payments from our existing arrangements by the end of this year or early next year, and these revenues are anticipated to increase substantially in the following years as products based on our discovered molecules progress toward commercialization. And with this, I will turn the call over to Martin.

Thanks, Nurit. As Alex mentioned, I would like to highlight some of our current activities in our research and discovery unit and then briefly comment on our longer-term financial situation.

Compugen’s research and discovery efforts are primarily targeted at creating proprietary diagnostic and therapeutic product discovery engines based on our continuously expanding scientific knowledge and predictive biology capabilities. Whereas most of the company’s current therapeutic and diagnostic engines, and therefore discoveries, are largely based on Compugen’s long-term leadership in the deeper understanding of alternative splicing and related phenomena, our research group is now building on this base to develop discovery engines incorporating additional powerful and broadly applicable biological phenomena.

A major focus during the past quarter was the phenomenon of large-scale genetic variation. And these efforts are already generating novel insights and discoveries. Most scientists in the field believe that genetic variations between individuals strongly affect individuals’ predisposition to disease. In addition, understanding this phenomenon will have a substantial impact on the field of pharmacogenomics -- that is, the science of predicting drug response. Based on our early achievements in this area, we feel that our investment will both significantly strengthen our capabilities in diagnostics in general and will allow us to enter the very attractive and rapidly growing market of theranostics.

Other current projects involve protein intramolecular interactions, integrated analysis of biological and medical data, and peptide functional characteristics prediction. Each of these research activities is done with at least one, and usually more, specific applications in mind, either therapeutic or diagnostic. These potential applications, in addition to being possible future revenue sources on their own, help to guide the research effort and make sure that if the research is successful, it will result in discoveries that answer unmet medical needs.

Moving forward, we intend to fully develop some discovery engines based on these new scientific understandings ourselves, and to enter into various forms of collaboration with respect to others.

I now would like to make a few brief comments regarding our longer-term financial situation. As I’m sure you are aware, Compugen, as well as all companies that have not yet achieved profitability, should maintain essentially two types of financial projections.

One type of financial projection attempts to provide the most accurate forecast for the company’s expected future revenues and profits or losses. And therefore, it is hopefully neither too optimistic nor too pessimistic. These are the projections that management decisions, such as project priority-setting or, in extreme situations like possible merger or sale of the company, are largely based on. These are also, of course, the projections that the financial community would like to base its stock price analysis on.

On the other hand, the second type of projections, which are used for solely for cash planning purposes, should be very, very conservative for companies like Compugen with current negative cash flows and the probable need in the future for additional funding. We are not in a position, nor would it be appropriate for us, to disclose anything at this time about the first set of projections -- that is, what our best guess is regarding Compugen’s future revenues and profits.

However, with respect to the second type, the projections that we are using for cash planning we have already disclosed enough information to enable some important conclusions to be drawn. As Nurit reiterated in her comments, we expect that the primary sources of future revenues will be milestone and revenue-sharing payments. And that, based on existing agreements, we anticipate that we will begin to receive such payments by the end of this year or early next year. Therefore, for cash-planning purposes, it would seem reasonable to assume that we will not begin to receive such revenues until next year; that is, 2007. And then, by the following year -- 2008 at the latest -- our annual cash burn would begin to decrease until profitability was achieved.

In view of our current burn rate of about $12 million a year, and our cash on hand, these assumptions suggest a maximum future need for the company of less than $20 million in excess of the cash we now have on hand. Furthermore, this amount would be necessary only if, in fact, it took a full 5 to 6 years from now to reach break-even.

The other half of the story is, of course, the development stage of the company and the likelihood and timing of significant revenues. In this regard, I have often stated -- actually, I’m certain more times-- I’ve stated it more times than our shareholders wanted to hear -- that our activities during this past decade have largely represented an investment in people, capabilities, scientific knowledge, technology platforms, and, more recently, discovery engines.

However, the fact is that last year, 2005, was the first full year that we attempted -- and with a lot of success -- to begin to commercialize, via licensing agreements, our initial immunoassay diagnostic discoveries. Furthermore, we are now beginning these activities with respect to nucleic acid diagnostics. And, as Alex stated, we expect to do the same with our initial therapeutic discoveries by the end of this year. And in back of this are the additional discovery opportunities in both current and new medical areas with respect to our current engines and the ongoing development of new engines based on our continuing research efforts.

And very importantly from a corporate validation and valuation standpoint, we expect to be able to report achievements in each of these areas by year end. This concludes our formal presentations and we will now be glad to respond to any questions that you might have.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Instructions] Our first question is from John Levy. Please state your company name, sir.

Hi, it’s John Levy at Neiman [ph]. Hey, Martin, Nurit, and Alex.

Hi.

I was-- my question is, how distinct-- you talk about the 10 biomarker candidates. Are these 10 different products? Like, how distinct are these 10 candidates? Are they-- basically, are they 10 different revenue streams?

This is Alex. They are completely 10 different molecules. Again, we have three partners. Some of these molecules are in the same indication, but they are completely different, novel molecules.

Okay. And I guess my other question would be, in the beginning of the release you talk about demonstrated biological activities on the 12 discovery candidates and, in Washington, how you kind of narrowed it down to these 12. Could you explain how you demonstrated activity for these proteins and the selection process, or any of-- Basically, how you validate the proteins.

I will try. It is a little complicated because validation depends on the indication you are looking [at] and the type of activity and so on. The idea was to accumulate some supporting data from each one of those molecules. As I said, it is-- to see that this is biologically activity, that it is functioning according to the expected results, and so on. In most of the cases, it was in vitro, but in some molecules the in vivo is easier, so it was-- included in vivo in some cases. But the idea was, generally, to see that the computer-designed, the in-silico molecules are really [extinct] and they have their biological activities.

All right. Well, thank you. Congratulations on the quarter and I look forward to the future.

Me, too. Thanks.

Thank you. Our next question is from Ronald Oveter of Capital Partners. Please go ahead.

Yes, thank you and good afternoon, everybody, and also congratulations on a lot more disclosure and explanation of how the company’s going to fund itself. That leads me to my question. In the -- Marty, particularly to you. You indicated in the press release, as you just said, that, based on existing arrangements, you expect revenues to increase in, let’s say, 2007. My question is, can you give us a little bit more information on the probability of whatever milestones are incorporated into that -- into these arrangements. Which I assume may be preclinical models or-- and I assume you can’t disclose any of them.

What I’m trying to get to is, what is the probability that, in fact, the arrangements allow for a high level of predictability? Or, on the other hand, are they a function of a lot of unknowns that are, in fact, unknowns as opposed to things that are predictable? I’m just trying to get a probability of how much we can count on these existing arrangements in getting the company to where you need it to get to financially.

First, the existing arrangements are in diagnostics, and diagnostics have -- once they pass kind of the initial validation stage, they have a very high probability of getting to the marketplace -- much different than therapeutics. Now, none of our molecules, to the best of my knowledge, have actually reached that stage yet. But clearly, they will be. As we talk about 2007, they’ll be getting to that point.

So right now you can -- I guess the best we can say is that we and the companies that really know these fields have a lot of confidence that the molecules that we’ve provided are going to be successful products. They haven’t really reached, as I said, kind of that critical point in diagnostics -- which, fortunately, happens much, much earlier than it does in therapeutics.

The way we have structured these arrangements is that the initial milestones are quite modest. And really, the reason that we put them in was largely to be sure that people don’t put things on the shelf -- that they move forward and that we can demonstrate progress. The big milestones happen as you get toward the regulatory filing. And, of course, the big payoff is on the revenue-sharing at the end.

And that’s the thing we’re most-- as I’ve said many times, we are a very different biotech company. I mean, every other company that I’m aware of, the company is counting on a few products to create their future revenues and profits. We are not. Or, let me say, in the end, we probably will get most of our revenues and profits from two or three products -- in the end. But there are going to be two or three out of maybe 100 that we’re going to be placing with different companies and in development, and we’re not counting on any one of them, whereas most biotech companies, they’ve got their three that they’re putting their money into. I’m not saying that we’re a better company than they are; we’re just different. Our strength is in discovery, and it is, in today’s world, a very, very unique strength.

Let me just maybe rephrase, a little bit, my question. Would you characterize the predictability as conservative? In other words, the down side of that-- is it conceivable that, if things take 6 to 9 months longer, then for planning purposes you’d have to revise your current statements and, in fact, take a different financial tack? I just want to see how conservative this statement is that you’ve made.

As I said, I think what-- I mean I know, Ron you can push numbers as well as I can. I mean, we have a burn rate of 12-- current $12 million. We have no -- we intend to be spending more money, but not increasing our burn rate. I mean, if we spend more money, it will be under arrangements or whatever where the money comes from third parties or other sources or whatever. So we’re -- we have no intent on increasing the burn rate. So you’re dealing with $12 million, and as I said, we expect to start to see revenues coming in.

So even if you assume that in 2007 that they’re modest, that they’re very small, and if you even assume that’s going to be 2008 before they have any impact on the $12 million burn, then you just push the numbers. So we’ve got -- we’re going into next year with $25 million.

So it’s -- first, I would say that it’s hard to come to any conclusion-- it’s hard to have a realistic projection for this company that would say that we don’t need additional capital. It doesn’t necessarily have to come from stock. I mean, it can come from -- you can get cash from strategic deals, you can get cash from selling stuff; a lot of different ways. But I think we’d be misleading the shareholders if we thought that we believe we can get through -- that there’s some reasonable shot that we can get through without any additional capital. That isn’t going to happen. Or if it does, it’s because of some very big unexpected occurrence.

On the other hand, I think the company is in such a situation with the number of products, the number of deals that are there now, the number of additional ones that will be structured, and the very modest burn rate that we have -- cash that we have in the bank -- that when you push the numbers, as I said -- when I said less than 20 -- $20 million. If we spent -- if it takes another $20 million, that would have a lot of disappointment built into it. I mean, that would mean that revenues really didn’t become very meaningful until, like, 2009 or 2010.

Right. So that is a very conservative statement; that’s what I was trying to get at.

Yeah, as of now. I’ve lived this many times before. In the industry that we’re in, it’s hard to say what’s conservative. But I would say we’re going to be in a much better position to address that issue, like, by the middle of next year, when we have seen how many of these diagnostics have actually got through this critical validation stage.

And also, how successful we’ve been in our -- we’re only talking about one tiny area. It’s not tiny, but one -- from the standpoint of what we can do, it’s really a tiny piece of our potential -- immunoassay diagnostics. Next, the nucleic acid diagnostics. Next, therapeutics. And we’re not talking-- when I say next, I don’t mean 10 years from now; I mean this year. We’re going to start to sign these deals. At least, we’ll be out there trying to sign these deals. So we’re going to get enough bets on the table that -- if you asked me how confident I was of any individual milestone or any individual project, I’d have to say very low -- a very low level of confidence. But if you ask me in total how do I feel, I feel pretty confident. We’ve got a lot of numbers covered on the board.

A true statistical process. Thank you; it sounds good. Thank you very much.

Thanks, Ron.

Thank you. We’ll now move on to our next question from Harod and Barry [Zeiziger] of Capital Group. Please go ahead.

Hi, it’s [Ellen Berry Jessiger].

Hi, how are you?

Oh, good.

Well, listen -- we’re glad-- maybe I shouldn’t say this over the phone, but we’re really glad to see you people as our shareholders; thank you very much.

Well, thank you. We’re very interested in Compugen, and congratulations on meeting your stated goals. That’s always a delight.

Yes.

Could you just give us a little more color -- I know this might be difficult in a short space here, on -- when you talk about the phenomenon of large-scale genetic variation. It’s an interesting area. I just wondered what more you could say about it.

Me, personally, I can say very little. Not because I’m secretive, but because it’s not an area that I have a great deal of knowledge in. As you -- this is a -- this general area of predisposition to disease is -- and theranostics and the rest of it -- is perhaps the hottest area now in all of the medical research that’s going on.

And people started by looking at snips, and there’s been an awful lot of work, and there are a lot of companies that basically-- people are betting on snips. Which are single-nucleotide chains, where you just have one base that’s different. We did not --

So that’s like Perlegen.

Yeah, a lot of companies are spending a lot of money going after that. Now, recently -- and we did not discover this. Recently, someone else discovered that there are large blocks of the human genome that seem to vary consistently in different people. It isn’t just the snip. It isn’t just that there’s one word misspelled. It’s that when you really step back and you look at the big picture, you see, “Hey, this person has this paragraph in their genome,” paragraph A and B instead of paragraph A’ and B’ -- large blocks. This is now generating a tremendous amount of interest in the medical world. Very, very few have actually been documented.

This is so similar to what we did with alternative splicing and what we did with antisense and what we did with post-transcription editing, where we weren’t necessarily-- we weren’t the first to identify the phenomenon. But other people found the phenomenon kind of by accident. Doing experiments, they identified that this phenomenon existed.

Once they did that, we turned on our computational predictive skills, went in, and built models of how this works. So, like with alternative splicing, the world said it’s not important -- 2 or 3%. We build our model and say, “No, it’s 50%.” And everybody laughs until the human genome is finished, and then they say, “My God, tiny little Compugen was right.”

Again, a few people had found a couple of antisense compounds in the human. But they came to the conclusion that it basically was a phenomenon that had been left; with evolution, it was gone. We built predictive models, we found antisense all over the human genome. It was a cover feature of Nature Biotechnology. And I could go on and on, which I’m boring some of our shareholders who have heard this story before, so I will stop on that issue.

But what we’re talking about in large-scale genetic variation is essentially the same thing. Someone else identified this phenomenon. Now, most people would believe -- there’s no evidence of this, but most people in this field would say that a large genetic variation is going to have a lot more to do with predisposition to disease than a snip. That it’s most likely that these will be much more important. But they’re so hard to find that -- I think there have been, like, maybe 3, 4, 5 of them identified throughout the whole world. Again, we have built a predictive model here of this stuff, and the numbers that we’re coming up with -- I’m not going to state numbers now -- but they’re really orders of magnitude beyond what the world knows about. And so that’s why we have this real enthusiasm for this field.

Great. Okay, that’s good. Thank you. Just wanted to get a little more color on an interesting area.

Thank you. [Operator Instructions] Our next question is from Jim Smith of Bedrock. Please go ahead.

Hello. I was wondering if the recent assay commercialized by Quest Diagnostics licensed from MD Anderson in the leukemia and lymphoma areas could provide any sort of indication or trail map or template for us in trying to understand how your diagnostic assays will come to market, how they’re licensed, how you protect your intellectual property there, and things of that nature.

Sorry, I don’t have enough -- I don’t have the data to answer that question. We can -- if you want to drop us an e-mail, what I can try-- we can try and get some information and get it back to you. We have people, I know, that would be able to answer it. But Nurit, do you--

No none of the--

None of the people on the phone here.

But we can relate to the intellectual property. The fact that all the molecules that we are licensing out, we make sure that we have a patent position on them and, of course, the freedom to operate on these molecules. And our partners probably will not license in any of our molecules if it doesn’t have the needed intellectual property position.

Are you aware of any-- apparently, you’re not aware of the Quest Diagnostics Leumeta product. Are you aware of any other diagnostic assays in the biomarker area that have been commercialized?

Yeah, there are quite a few of them.

Again, unfortunately, you’re asking -- you’ve got the wrong people on the other side of the phone here to -- What you can do is -- if you want to actually just e-mail me your phone number, I will have one of our people who’s much more familiar with this call you and you can have a one-on-one in this area with -- because what you’re asking about is what we know about other situations. So you’re not asking for any confidential information about us. So I would have no problem if you wanted to send us an e-mail. I can think of two or three people in our organization that would be able to give you a lot of information about what you’re asking.

All right. It’s really more in the area of the -- there’s a gold rush, or there seems to be a gold rush, in this biomarker area [multiple speakers].

It is. The world of medicine is going to change. It isn’t quite changing as fast as people thought it would 10 years ago or whatever, but keep in mind, up until relatively recently, no one understood at all the molecular sort of underpinnings of disease and of life and whatever. So now that the human genome and the transcriptome and proteome -- now that these things are beginning to be understood, there are amazing opportunities here.

And many observers in the field are taking the position that the real -- as you said, the real gold mine is going to be in the biomarker area, both from the standpoint of identifying predisposition, in theranostics, as you’re giving therapy, as it’s working or not; whether or not a person should get a certain medicine; all of this relates to biomarkers. It’s a very hot field, and I think that we’re going to play a major role in it.

Just maybe in a little bit more generic sense, is it extremely difficult to know whether you have valid intellectual property on behalf of either yourself or your diagnostic partners? That you have something that can be protected and put out on the market without being knocked off pretty easily?

It depends at what time you are in the process. I mean, there are a lot of people working in this field and whatever. So there’s all kinds-- the patent situation in all of life science is a mess, and it’s going to become more of a mess because people are patenting different things at different stages.

In the end, what typically happens is if you have any patent position on your product, and we will -- As Nurit stated, we’re not going to do anything or move forward with anything that we don’t have some patent protection in. If, in the end, you do run into any kinds of issues, you end up with cross-licensing deals.

Where you’re really in trouble is if you don’t have any patent coverage and someone else covers a small part of your product, you’re finished, because they basically can stop you. But if you have patent coverage on whatever it is that you’re doing, and some way or another there’s another patent out there that somehow crosses in or clouds the area a little bit, the typical way out of that is in cross-licensing. And the reason the other party is willing to do it is they can’t do anything with their license because our product’s patented itself.

If I may, I would like to add a few things. I hope it is helpful in addressing what you are asking. When we do our discovery, we are looking for potentially expressed molecules within sick tissues and healthy. Then when we discover it is a novel molecule -- so, when we apply for IP [protection] for the molecule itself; and we prove, because of differential expression, that it could be an indicator for the disease -- So we have also in the application the specific disease. I think this gives the protection we and our partners develop. We are not developing the diagnostic tool by itself. This will be done by our partners. So I think what we are giving them is a molecule that is differentially expressed which is protected by IP. I hope this answers a little more.

That does answer the question. So you’re confident, and your partners can be confident, and there is a method to do that by which you can confirm, and they can validate, that the molecule you give them is protected.

The partners that we already have, which are three companies, this is their business. They are in this business, they are of the biggest in the field of diagnostic tools -- out of the 10 leading in diagnostics. And this is exactly their business.

And also, you have to remember that they have to invest, also, time and money in developing these molecules. And they wouldn’t start to work on molecules without knowing that it has the intellectual property position.

Okay, thank you.

Thank you. Our next question is from Ronald Oveter, another follow-up question. Please go ahead.

Yes. I just wanted to come back to another point, which you’ve alluded to several times in the past as well. In terms of the use of the discovery engines, which is your core competency, or one of them, is there a significant economic -- in terms of the economic types of transactions you hope to craft, would there be a significant difference between pharmaceutical companies that come to you with their requirements, using your discovery engines in terms of generating certain kinds of discoveries of molecules versus those that you’ve generated yourself, and then you’d approach other corporate partners? I’m just trying to understand what bearing that has, the use of your discovery engines, on the economic outcome in a more typical corporate partnering transaction.

I think both Alex and I can add to this. In our industry, the issue as to how do you get to a discovery is very unimportant. The issue is the value of the discovery. So I think that there -- first, there are a number of issues with respect to what you’re asking.

When -- and I’m not sure we’re there yet in most fields; maybe we are in certain areas of diagnostics. But when it’s pretty well accepted in the industry, and I hope it will happen, that, “Hey, if you have a need for a certain type of discovery, go to Compugen. Because even if they’ve never done it, they can build an engine for you and they’ll deliver it to you.”

If we get to that point, then I think whether we’ve built the engine and have already found it, or we’ve done sort of what Alex said, this engine on demand basis -- they come to us -- I think we’ll get the same amount.

In today’s world, most likely, we would get less, probably, if they come to us -- particularly in the therapeutic area, if somebody comes to us. Because we can’t convince them. We don’t have any really rock-solid evidence that they’re going to get what they want. We believe that -- we’ve proven it in certain areas of diagnostics, and now we’re moving into a second area, and we’ve got the therapeutics at a very early stage.

So what I’m saying is that -- the answer to your question largely, I think, relates to the level of confidence that the other party has in our ability to actually deliver. If it’s very high, then I think the terms will be almost exactly the same, whether we do it on demand or whether we already have done it.

Alex, could that be outcome-based irrespective of their level of confidence? Wouldn’t the results speak for themselves?

Well, that depends. What I’m thinking mainly of now are royalties. And I’m not thinking of -- I think the milestones and all this kind of stuff might be the same in the agreement. But to be honest, if a large pharma came to us today and said, “We want to develop -- you to put together a discovery engine for Alzheimer’s disease, and we’ll pay you royalties on all the products that come out of it,” it’s not today. It’s not going to be a big number on the royalty because we have -- they’re going to be spending a lot of money. They’re going to spend the money to develop the engine. They’re going to take the risk. In the end, how do they know it’s going to work or not? Whereas I think had we done three different diseases with discovery engines and we were successful in all three of them, it changes the situation.

You could command more, then, in that case.

Command much more, yeah. And in general, it’s -- there’s no question that right now, we can command much, much higher -- the highest royalties or revenues-sharing that we can command today is clearly in immunoassay diagnostics. We’ve essentially shown it not just once but over and over again. We’ve done it; whatever.

I think we’re going to reach that place very quickly in nucleic acid diagnostics. And we just have to then move sort of field by field. We’re very proud of what we’ve done, but we have to admit that we’re still, in the big picture, a very, very small player out there. I think people are going to be quite surprised as they watch us move forward, but we have to admit, right now we’re a very small player.

Thank you very much, Marty. That’s very helpful. Thank you.

Okay, we have a follow-up question from Jim Smith of Bedrock. Please go ahead.

In the therapeutic area, where you have the 12 candidates that you’ve shown that they have some validity and you’ve selected and prioritized them for what you call further assessment, it sounds like you don’t have partners there yet. Could you just help us understand, maybe, what further assessment means? Whether there are any joint initiatives, if not partnering, or joint funding, possibly? Or, just what further assessment entails.

We will probably start to do both things. First of all, as we said, we prioritize them because we probably will not take the 12 forward -- we’ll take less than that. In most of them, as we stated, it will be disease-related information, mainly; when available, in vivo studies in animal models. But it depends on the molecule and depends on the status of the industry and the interest in the market.

If we go to partners and we start collecting information, what partners would expect us -- which kind of data they would expect us to bring with us when we come to attract their interest, we will probably complete this information. But again, it’s important to mention that we’ve identified 12 with the most promising results so far. And we’ll take some of them, several of them, further and complete the information that we believe that the industry is willing to see before they are ready to make agreements.

And one of the things that Alex did in changing the way we were doing things here was with respect to the therapeutic proteins. Prior to his arrival, what we were doing is as we discovered things, if they looked interesting, we put them into our “pipeline” and started developing them. When he came here, he quickly recognized that the real strength in this company is the discovery. And we can make hundreds of discoveries. I mean, it’s almost limitless.

So a much more rational way of approaching this problem would be to put together a lot of these discoveries and then assess all of them in parallel, pick the best, and then put those into the pipeline, either on our own or with a partner.

And then -- meanwhile, our discovery efforts go on. So then there’s another generation, another class. Because our scientific understandings get better, our computational capabilities get better, more data’s available in the world. So it’s a continuing process. And what you’re seeing now is really the tip of the tip of the tip of the iceberg. I mean, you’re seeing the first coming from the first engine, coming from the first application, coming -- Hopefully, what we’re building here is something that will have tremendous momentum.

Your question, though, made me realize -- I want to make two very clear statements, because comments that we’ve made may have been misinterpreted on this phone call. One, we have no partners at the present time in the therapeutic area. We’re not hinting that maybe we have some that you don’t know. We have no partners with respect to this -- Now, we have some earlier agreements on some inventions that -- discoveries. But what I’m talking about now is this -- what we’re talking about, these 12 therapeutic proteins that now we’re going to move forward on a priority basis, we have no arrangements with any companies.

And secondly, my comments with respect to the cash needs of the company -- I don’t want anybody to sort of say, “Well, I wonder why he’s saying it now?” Maybe they’re talking -- “Maybe in a week we’re going to see that they’re doing a pipe or some type of a financing,” whatever. I just want to make it very clear that was not the reason. This was solely that we get a lot of questions about the financial situation and whatever. And it was my judgment that I think that we can sort of package the information that we’ve given in a somewhat different way so that people will understand where we’re at.

I won’t be able to, obviously, continue to make this comment quarter after quarter. But just to make sure that I clarify it right now, I will state absolutely -- we are having no discussions with anybody at the present time with respect to raising money in any manner. So don’t misinterpret my comments.

Fair enough. The only thing I think I’m hearing, and correct me if I’m misinterpreting it, is -- On the therapeutic side, the science is pretty well validated. When you’re talking about further assessment, it sounds like you’re talking about whether they’re really prime for partering sort of relationships or potential as much as any other type of assessment.

I think there are still some scientific questions there. I think that’s stating it a little bit too strongly. I think what is proven right now is something that’s very important, and that is that our discovery engines in the therapeutic area work. Work from the standpoint that they give us molecules that are exactly the kind of molecules that biotech companies, if they found, they would be interested in pursuing.

And that’s a very comforting feeling. Actually, I have to say, the results really far exceeded our expectations with respect to how many of the in-silico predictions would end up showing-- seeing the actual biological activity that was forecasted for it. So we sort of-- in some ways, I think, it’s probably fair to say that we validated our discovery engine probably more than we validated the individual molecules, at this point.

If I may -- in diagnostics, the objective is to find the molecule that is differentially expressed. Once you find this molecule, the rest of the work is to make sure that it could be identified in patients.

In therapeutics, it’s a little different because most of our, [this pipeline of our] molecules that the body can’t produce. Many drugs are not natural or not exactly similar and they still have the drug effect. So when we say they should work by blocking a specific receptor, this is an assay we can do, and this was part of the validation we have done. So we say, “This molecule should be blocking this specific receptor.” This we have done. So this was part of the validation, for example. But to prove that it has the specific therapeutic effect is a much longer process.

Right. Okay, thank you.

Thank you. One last opportunity to ask a question. [Operator Instructions] There are no further 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 two hours for a period of 48 hours. In Israel, please call 03-925-5901. Internationally, please call 972-3-925-5901. And in the US, please call 1-866-276-1485. Mr. Gerstel, would you like to make your concluding statement?

I just want to thank everyone for participating in the call. I want to thank our long-term shareholders for hanging in there as we were going through building all the infrastructure and whatever. I think you’re going to enjoy the foreseeable future as we begin to harvest some of the products out of this very long-term and extensive development. For our newer shareholders, welcome. And I hope we can see some more new shareholders, so talk to your friends. Thanks again, and we look forward to talking to you next quarter. Take care; bye-bye.

Thank you. This concludes the Compugen, Ltd., first quarter 2006 conference call. Thank you for your participation. You may go ahead and disconnect.