Compugen Ltd (CGEN) 2006 Q2 法說會逐字稿

Welcome to the Compugen Limited second quarter 2006 financial results conference call. [Operator Instructions]. As a reminder, this conference is being recorded July 26, 2006. With us online 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 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. Last November, we described Compugen commercial roadmap for year-end 2007. In our conference call today, we would like to give you an update of our progress and I would like to start by stating that I am very pleased that we have been successfully following this roadmap and are looking forward to meeting the commercial objectives set in it for each one of our key units and activities.

As we did in the first quarter’s conference call, I will update you regarding the progress on the therapeutic and diagnostic units, 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, Chairman of the Board, will then conclude our formal remarks. As the moderator stated, after our formal remarks, we will end the call with a question and answer session.

Regarding our diagnostic biomarker activities, during the past quarter, Compugen continued to advance its collaborations with three leading diagnostic companies. Under these agreements, the companies’ partners have the right to choose multiple molecules in several selection rounds and have already chosen more than ten biomarker candidates for development of potential amino acid diagnostic follow-ups. Certain of these initial candidates should complete their key validation activities during 2006.

More recently, the company has engaged in discovery of nucleic acid diagnostic biomarkers and has begun to discuss potential licensees and its initial nucleic acid biomarker discoveries. During the remainder of 2006, we intend to expand our amino acid and nucleic acid biomarker portfolio for most current and new medical indication. In addition, we expect to sign additional development and commercialization agreements and new product candidates will be selected for development by our current and future partners.

And so therapeutic activities, we have initiated further biological validation for five potential therapeutic molecules in the anticipation of seeking licensing and co-development partners for those that successfully complete this stage. These five candidates were chosen as the most promising potential products out of approximately seventy novel proteins and peptides which were predicted by the company’s initial therapeutic discovery engines. In order to be able to select these therapeutic candidates, the seventy molecules underwent initial biological assessment in parallel, which included the production of the molecules in studies of binding specificity and functional biological activities. The chosen candidates, which are now undergoing further biological functionality validation, are potential therapeutics candidates for treating various forms of cancer and autoimmune diseases. For the selected molecules, we plan to generate additional supporting data that will include a specific disease assessment, which in most cases, if available, will be [unintelligible].

In accordance with our commercial roadmap, which I have mentioned before, we should finish this validation before year-end and expect to then begin to discuss with pharmaceutical companies in development of therapeutic areas and possible arrangements where they would become our partners for further development of the successful candidates. This partnership agreement should be based on our business model of milestone payments and revenue sharing.

With respect our activities in the research and discovery unit; I would just like to point out that although in order to protect our IP and confidentiality, we are not disclosing at this time any details. During the second quarter, we have seen some exciting preliminary results. As we have mentioned in the past, this unit is pursuing understanding of biological phenomena is the basis for creating new discovery engines targeted at the prediction and discovery of novel diagnostic and therapeutic candidates.

In conclusion, I am very pleased by our continuing product targeted progress and I am looking forward to additional diagnostic and therapeutic candidate products and entering development agreements with our current and future partners.

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

Thank you, Alex. As Alex discussed, the progress achieved during the last quarter was consistent with our two year commercial roadmap that was disclosed last November. I am pleased to report that our financial performance, which presently primarily relates to our expenditure levels, has also remained consistent with our projections.

As mentioned in today’s release and as anticipated, revenues for the second quarter of 2006, as well as for the corresponding quarter of 2005, were not significant. We have stated a number of times in the past and repeated again in today’s press release that this results from the fact that our anticipated primarily source of future revenues are milestone and revenue sharing payments from licensing and other arrangements, covering the development and marketing of diagnostic and therapeutic products based on our discoveries. In addition, amounts that we receive from governmental and other grants are not accounted for as revenues, but they are reported as a deduction for research and development expenses.

Total operating expenses for the first six months of the year were $7.2 million, including a non-cash expense of $4 million related to stock-based compensation, compared with $8.1 million for the comparable period in 2005, including a non-cash income of $19,000 related to stock-based compensation.

Research and development expenses of $5.7 million for the first six months of 2006, compared to $6.5 million for the first six months of 2005, remains by far our largest expense, representing close to 80% of total operating expenses for the first six months of the year. These amounts are before the deduction of governmental and other grants, which totaled $522,000 for the first six months of the year, compared with $788,000 for the comparable period in 2005.

Our 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 second quarter with approximately $30 million in cash and cash-related accounts, a decrease of $6.4 million for the first half of this year and consistent with our expectations. Net cash usage for the remainder of calendar 2006 is projected to be between $5 million to $6 million which would result in an estimated $25 million in cash, cash equivalents, and marketable securities as of the beginning of 2007.

And with this, I will turn the call to Martin.

Thank you, Nurit. First, I would like to thank those of you who were among the shareholders and friends that have contacted us out of concern with respect to the ongoing military confrontations that Israel is now involved in. To date, this situation has not created any operating problems for us and we, of course, all hope that it will end as soon as possible, but only with a sustainable peace settlement.

With respect to today’s second quarter 2006 press release, you may have noticed the change in the wording of the company description towards the end of the release. It was our opinion that perhaps we were not clear enough in our prior wording regarding our mission and the basic business model of the company. Hopefully this has now been corrected with the new first sentence. Compugen’s mission is to be the world leader in the discovery and licensing of product candidates to the drug and diagnostic industry.

The competitive advantage that we believe will allow us to advance rapidly towards the achievement of this mission is our proven and continuously improving ability to predict and validate product candidates, based primarily on deeper and the proprietary understandings of certain aspects of the underlying science. In other words, we discover product candidates by first predicting their existence in [silico] based on an understanding of the underlying science that is not available to others and then validating these predictions in our experimental laboratories. This capability builds on our decade long multidisciplinary effort in predictive biology and is now both being further extended into new areas and being put to commercial use in the form of our initial diagnostic and therapeutic discovery engines.

We are extremely pleased with the performance of these initial discovery engines. As Alex stated, seventy potential therapeutic proteins, predicted by our first engine, completed initial biological validation and five, which we and our consultants judge as the most promising, are now proceeding with the next stage of testing. We expect to seek licensee or co-development partners for those that successfully complete this stage by the end of this year.

Our second engine was in the field of amino acid based diagnostics, primarily with respect to breast, ovarian, colorectal and lung cancer and cardiovascular diseases. The power of our approach and the exceptional value that has been created by our past investments were demonstrated by the fact that although we only began our efforts on the second engine in early 2004, by mid 2005, we had entered into multi-product development and commercialization agreements with three leading companies in the field.

If we are to achieve and sustain our mission of being the world leader in the discovery and licensing of product candidates to the drug and diagnostic industry, there are a number of requirements that we must meet. In addition to the obvious resource and infrastructure requirements such as maintaining and enhancing our very talented team, obtaining proprietary positions on our product candidates and assuring sufficient resources for our efforts, there are three key operational requirements.

First, we must successfully enter into lots of agreements covering many products based on Compugen discoveries. You have seen the beginning of this process with the three pipeline agreements for amino acid diagnostics, and this should now be followed by agreements for nucleic acid diagnostics and therapeutic proteins. In this regard, we expect that within a few years, several dozens of products, based on our discoveries, will have been licensed to other pharmaceutical, biotechnology and diagnostic companies.

Second, we must continue to create new discovery engines that accurately predict product candidates for additional fields of interest. Our experience to date would suggest that this will now happen on an accelerated basis.

Third, and perhaps most important for the long run, we must continue to develop deeper understandings of important aspects of the underlying science which, as I previously stated, provides the core, along with our world leading computational biology capabilities of our focused discovery engines. It is interesting to note that although this is clearly our key competitive advantage, to date it has been of very little interest to the financial community in evaluating our company.

Of much greater interest to the financial world is the direct commercial relevance provided by our unique predictive approach to discovery, something that up until recently was difficult to objectively demonstrate. Fortunately, this commercial relevance is now beginning to be clearly demonstrated by the exceptional product candidate discovery capabilities of our initial discovery engines and the ability of the company to continue to develop new engines in new fields.

The science underlying our initial discovery engines was primarily based on our long-term leadership and the deeper understanding of alternative splicing and related biological phenomena. As Alex mentioned, building on this base, our research and discovery unit is now exploring a number of important areas such as large scale genetic variation, protein intramolecular interactions, integrated analysis of biological and medical data, and peptide functional characteristics prediction.

As also mentioned by Alex, we have been very pleased to see substantial and rapid progress in these activities and recently have obtained some very exciting preliminary results. We should be in a position to disclose additional information regarding these very promising projects by year-end 2006.

And with that, we will open the Q&A session. I’d like to mention to the listeners that we are in different locations at the present time, and so therefore there may be some hesitation with respect to who answers the questions. But let’s open up the session. Thank you.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. [Operator Instructions]. The first question is from Ronald Oveter of Capital Partners.

Yes. Good afternoon, everybody. Alex, this is a question for you. You indicated just a moment ago, and Martin, you confirmed that the discovery engines had predicted, I believe, you said seventeen product candidates which you then narrowed down to five. Could you just give a little more detail, given the fact that you predicted this in silico, what were the specific parameters that you used in narrowing down the initial pool of candidates from seventeen to five? What are the characteristics of the parameters that you discovered in the validation process that weren’t initially present in the prediction process?

I will try to answer. We started with seventy peptides and proteins, and we have mentioned that they are representing twenty-four families or what we call twenty-four genes. We produced all of the seventy and we also produced the reference or we have started biological activity. So the selection was based on the biological activity on the predicted disease, on the strength of activity, on the market capacity of the target and so on. And so it is based on many aspects. And what we are saying now is that now we have selected the five that looks, based on all of this, to continue and do the final assessment which is needed to enter what is usually called the clinical studies. Thank you.

This is Martin. Ron, I may have misheard you, but the number of product candidates that were predicted in silico that we actually then went ahead and did the preliminary biological testing on were seventy (70), not seventeen.

Yes, I misunderstood. Thank you. But just to go a little further, in other words, you made these predictions and you had these parameters. So in terms of selecting, what turned up in the actual validation part that was not apparent in the predicted part, if I can perhaps oversimplify? I’m trying to understand what is it that you end up finding out about in the actual validation part that leads you then to the selection of the further five. Can you give some more insight into that?

Let me comment that the -- the major thing, of course, that we look for is that the candidate has at least the same level of functionality that the product or the protein in development that we’re -- has. All of these are alternative splice variants of known therapeutic proteins or proteins that are in development. So the key hurdle for them in this initial biological assessment is to be certain or to validate that they have that level, the same level or a greater level of relevance for the activity of interest. Now there are obviously many, many others, but that’s the key hurdle that they have to get over.

And then is it fair to say that with the splice variant that you will look for incremental functionality vis-à-vis that which is out there already?

Absolutely. Alex, do you want to add anything to that?

Yes. I would like to mention that actually we had started with more than seventy, but they were in the [enphilical] stage, so we have done some dry selection and we looked at targets which are interesting, so either if it’s a known wild type, it’s shown activity or [inaudible]. Then, of course, when we dealt with so many molecules, we look for quick assessments -- the quickest one, just to show the activity’s there. And, of course, that will then into it -- that will then show in less strength and so on. So this was one way of selecting.

And then, as I mentioned, we look further toward the indication of what is known in the market and what is the market size, so there were a lot of other parameters that were included in it. And I think we mentioned last time that we consulted our scientific advisory board also in this selection and also what could be and should be the next stage assessment assays so we can see results that will be convincing.

So this is more the commercialization consideration you’re talking about.

I missed the beginning.

In the parameters you applied in these final selections, it sounds like you’re then bringing in more of the commercial considerations in terms of final selection in addition to the biological activity.

It is both, I would say.

Okay. Thank you and look forward to continuing progress. Thank you.

Thank you. The next question is from Mr. Jeffrey Grossman.

Hi, good afternoon. Hello?

Yes.

Good afternoon. Hi. Martin, I’d like to address this question to you. I’d like to talk a little about the Unterberg presentation. Towards the bottom of the presentation, you made a reference to the company’s discovery of ten thousand of new cases of medium and large nucleotide polymorphisms. You said that we’d be hearing a lot about this in the coming months and I’m just wondering, what is the magnitude of this discovery? Has the company been able to define functions and commercial applications for any of the polymorphisms and how does the company expect to derive revenues from these discoveries? Is this something that is better developed with a strategic partner?

First, let me put it in context when we said that this is one of a number of the projects that I refer to as very exciting and promising projects that are in our research unit. It’s interesting to also note that these projects, although that the work was being done before casually. But from the standpoint of actually forming these projects, they only began at the beginning of this year. But based on our inherent capabilities and basic knowledge in this field, we’ve already seen very, very significant progress on a number of these projects, one of which is this genetic variations issue.

As I’m sure for all of you who are listening are fully aware, one of the hottest, if not the hottest area in the whole field of therapeutics diagnostics now, is to attempt to understand why certain people or groups of people either get disease or don’t get disease or respond differently to drugs or have different kinds -- in terms of both either efficacy of side effects, etc., that it is recognized that this is now the next really big hurdle that needs to be overcome. And historically, on a simplistic basis, this was why everybody basically when you saw your doctor, they asked you for your family history and what disease has your family had. Now with the beginning of the --we’re being able to understand life at the molecular level, we’re trying -- people all over the world are attempting to find out if we can identify the more basic structural issues that lead to these different differences between people. And I’m sure you’ve all heard of [Smitz] which is a very, very hot area.

The area of medium and large scale genetic variations whereas Smitz means where there is just the change in one nucleotide, where as the large genetic variations means that you actually see large amounts of additional genetic material, DNA or either being added or subtracted from on a regular basis from different groups of people. This is a very, very new area and people are beginning to strongly believe that this is going to be a much more powerful way to determine these preconditions and reactions to drugs.

It is a very, very difficult -- computationally and experimentally, extremely difficult area to try and get information. And as far as we know, there have been probably less than one hundred of these variations reported in the literature up until now. Using our very, very powerful computational capabilities and the underlying knowledge that we have about how these -- how genes express transcripts and those transcripts become proteins, that we have on a predictive basis identified an extremely large number in silico. We have not, and we are not, making any claims at this point in time with respect to whether these actually, in fact, are associated with any specific disease or not. I think it’s a reasonable expectation that we are going to find that. But that process is now underway. We’ve done the in silico prediction. The results far exceeded our expectations. We now are in the process of trying to determine whether these in silico predictions -- we know they exist. We now have to figure out whether they have any real meaning from a medical standpoint.

Okay.

I would like to add that when we started this project or when we internally pooled it, the idea was to look for a new discovery, diagnostic discovery, [inaudible]. This is where we started and why we started. So you’ve asked what would be the product. The product will be diagnostic products. This is the target. As Martin just mentioned, it opens the door to many other products. Thank you.

The obvious thing here also is to be able to work with, assuming that we find relevance to important disease characteristics or reactions to drugs, is to work with pharmaceutical companies in the development of what’s now called theranostics and other very, very hot fields. And, of course, this also gets into personal medicine which, without something like this, it’s just the slogan “personal medicine.”

Thanks very much. One more question. Concerning the company’s diagnostic candidates that have already been chosen by partners, are you receiving any indications of continuing progress towards commercialization from your partners?

I will answer, and I think we’ve answered it. In some cases, we are doing the validation ourselves. In some cases, [unintelligible] partners. And we, of course, are following the results. I mentioned before that some of them should complete these validations before the year-end, and then we will have the full answer to your question. Thank you.

Thank you very much.

Thank you. [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 forty-eight hours. In Israel, please call 03-925-5901. Internationally, call 972-3-925-5901. In the U.S., please call 1-866-276-1485.

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

Thank you. For those of you -- I think it’s probably obvious in this phone call that all of us in the company are extremely pleased watching the progress of the company as we pursue the commercial roadmap that was laid out. For me, it’s particularly a very positive thing in that, as you know, I’ve been with the company now for the past ten years and watched the evolution and the focus on the science for a long period of time. This was obviously a necessary condition to getting us in the situation that we are now. But it obviously is much easier and much more fun to be able to begin now to talk about the commercial relevance of all of these past efforts and the science and how we hopefully -- and expect to create some very meaningful contributions to medicine and to the extremely successful company based on these past efforts.

So I thank you all for joining with us today and look forward to our call next quarter.

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