Compugen Ltd (CGEN) 2006 Q3 法說會逐字稿

Welcome to the Compugen Ltd. third-quarter 2006 results financial results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder this conference is being recorded October 25, 2006.

With us on line today are Martin Gerstel, Chairman; Alex Kotzer, President; and CEO and Nurit Benjamini, CFO.

I'd 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 press release and would like to do so, please contact Nurit Benjamini at telephone number 972-3-7658-525. Mr. Kotzer, would you like to begin?

Yes I will. Greetings and thank you all for joining our third-quarter conference call today. Like we did in the last conference call, I will start by updating you with respect to Compugen's achievements and activities during the past quarter including the successful validation of (indiscernible) and [therapeutic] candidates as was announced last week.

Nurit Benjamini, our CFO, will follow with a short overview of our financial statements and then Martin Gerstel, our Chairman, will provide some closing remarks after which we all will be available to answer any questions you might have.

A year ago in November 2005, we described Compugen commercial [augment] through year-end 2007. I believed this augment is a very (indiscernible) for my briefing today. The first item from this commercial augment is our therapeutic candidates. It shows that we were planning to start licensing activities by the fourth quarter of 2006. The announcement we made last week confirms that we have generated enough biological data for our three highest priority therapeutic candidates to begin discussions with potential partners on licensings or codevelopment agreements which we have done.

Our discovery process for therapeutic and diagnostic candidates begins with in-silico prediction. That is utilizing discovery engines based on our (indiscernible) and algorithms. More specifically the engine used to discover this group of potential therapeutic molecules is based on our leadership in the field of alternative splicing.

In our last quarter call, we reported that following privatization of many molecules we selected five candidates for further evaluation. We are pleased to report last week the successful validation of the three highest priority molecules that have now been selected for further development in all licensing. In addition to the commercial opportunities that these three molecules represent, the validation of the predicted (indiscernible) activities was another important demonstration of the unique predictive capability of our science based discovery engines.

The three therapeutic candidates are CGEN-241, an antagonist variant of the c-Met receptor, a potential anti-(indiscernible) and anti-metastatic therapeutic candidate; CGEN 54, an antagonist variant of MCP1, a potential anti-inflammatory disease candidate. And CGEN 34, a variant of the ANP hormone, potential therapeutic candidate for cardiac and renal indications. The next step of our commerical enrollment for these molecules calls for signing first licensing and codevelopment agreement by mid 2007.

The second activity that's released in our roadmap is the immunoassay diagnostics, where agreements based on our first diagnostic discovery engine have already been signed with three leading partners. To date more than 10 candidates have been selected by our partners and are progressing with their validation.

The next projected milestone is for validation to be completed on the initial candidates selected by our partners. It is our understanding that this should be achieved as projected by year end.

The third item on the commercial roadmap is related to the use of our second diagnostic discovery engine tied with the discovery of the biomarkers for using nucleic acid testing. Nucleic acid testing technology that takes RNA molecules which are overexposed in disease centers is a force to immunoassay technology that requires the expression of the corresponding [protein]. The advantage we have in this technology is that our computation and discovery platforms are designed to directly identify such RNA molecules.

During the third quarter, we continued our activities in nucleic acid testing biomarkers discovery which have increased the number and quality of our discovered potential candidates. And we have initiated discussions with leading companies in this area.

The next milestone in the roadmap for nucleic acid area was to have an agreement signed at about this time which we have not achieved. Our new time target for the (indiscernible) agreement is for third quarter of 2007.

The next slide is on our commercial roadmap are related to new targets biomarkers and platforms. And here we are pleased to report that we have more than achieved our roadmap objectives. So far this year we have successfully validated two new discovery engines and initiated discussions with potential partners for various types of collaboration based on these two new engines. It is interesting to note that although the creation of this engine was based on the same (indiscernible) capabilities as our existing engines, these two new engines are based on understanding of different biological phenomenon and are allowing us to enter new and important medical areas.

In conclusion, we look forward to share with you in the coming months the results of these efforts in terms of new capabilities, new product candidates and new agreements.

Now I would like to turn the call to Nurit.

Thank you, Alex. As Alex discussed, the progress achieved during the last quarter is consistent with our two-year commercial roadmap that was disclosed last November. I'm pleased to report that our financial performance which at present primarily relates to our expenditure level has also remained consistent with our projections.

As mentioned in today's release and as anticipated, revenues for the third quarter and first nine months of the year were not significant. We have stated a number of times in the past that this is the results of the fact that our anticipated primary sources 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 received from governmental and other grants are not accounted for as revenue but are reported as a deduction from research and development expenses.

Total operating expenses for the first nine months of the year were $9.9 million including a non-cash expense of $1.6 million related to stock-based compensation, compared with $11.9 million for the comparable period in 2005 including a non-cash expense of $313,000 related to stock-based compensation.

Research and development expenses of $8.3 million for the first nine months of the year compared to $9.5 million for the first nine months of 2005 remains by far our largest expense representing over 80% of total operating expenses. These amounts are before the deduction of governmental and other grants which totaled $1.3 million for the first nine months of the year compared with $1.5 million 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 obtain positive cash flow from operations. We ended the third quarter with more than $28 million in cash and cash related accounts, a decrease of $8.3 million for the first nine months of this year and consistent with our expectations.

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

Thanks, Nurit. Just about a decade ago I was introduced to Compugen which at that time was a small company that had essentially captured the market however unfortunately very small for special-purpose computers for biologists. After a few meetings I developed a very strong belief that Compugen could be the core of a very valuable and unique biopharma company. Therefore, very soon thereafter I both became Chairman and invested a substantial amount of my own money in the company.

To prove correct my belief had to meet three challenges. First, was it possible at least at that time to obtain deeper understandings of life at the molecular level and then use these deeper understandings to create accurate predictive models? Second, was the core team that already had been established at Compugen the right group to attempt this? And third was even if successful, would there be ways of being commercially successful based on this capability?

Since Compugen in its early days was really based largely on the belief that these challenges could be met but very little proof, knowledgeable, potential investors quickly divided into two groups. One group decided for whatever reasons that they shared our beliefs and since the opportunity if successful was obviously enormous, became enthusiastic investors. The other group wanted proof in the form of workable business models, specific product ideas, etc. Very quickly it became clear that potential investors in the second group were not going to invest in our company since the fact is we had neither a clear business model nor specific products that we could point to.

The only thing we could say was that we were creating a unique discovery capability out of deeper understandings of important aspects of life at the molecular level and in essence and substance, you really need to just trust us that we will find ways to ultimately make money out of this capability.

So, here we are a decade later. And I would argue that with the existence of the large number of peer reviewed papers and leading journals describing just some of our breakthroughs, it would be very difficult for anyone to argue that Compugen has not successfully met the first and second challenge. That is firstly that by incorporating mathematics, physics, related quantitative principles into molecular biology, we can now build predictive models that yield important discoveries that would be very difficult or not attainable at all using traditional wet biology methods.

And secondly, that the continuing flow of results I think leaves no doubt that Compugen has a unique advantage in accomplishing this. However, for our two groups of potential investors, it is interesting to note that this impressive achievement only solidified their pre-existing assessment pro or con regarding Compugen as an investment. Those who shared our belief that deeper understandings of life at the molecular level would be to many product opportunities were extremely pleased to see our continued scientific progress.

On the other hand for those who were focused on business models and specific products, this was further confirmation that we were not a good investment and we were functioning more like a university than a for-profit company. I am very pleased that now having met the first two challenges for the past year or so we have begun to prove and very successfully so far, the validity of the third and last aspect of our founding beliefs. That is, if successful in meeting the first two challenges which should now be very fairly obvious has been done, there would be many ways of making a lot of money with this capability.

And in spite of the success of our initial efforts it needs to be clearly stated that this last challenge has not yet been met. But the evidence is clearly very quickly accumulating.

First with respect to immunoassay diagnostics and more recently with therapeutic proteins, we have demonstrated that we have the unique capability to predict potential product candidates in silico and then prove that these predictive molecules not only exist but also have the functions we predicted they would have. Not cash in the bank but clearly a major step in that direction.

More importantly as Alex mentioned our accomplishments to date in specific product discovery are just the tip of the iceberg and as he reported we already have additional engines targeted at new and important medical areas that have reached prototype stage with very promising initial results. We are confident that we will be able to provide more information regarding these new engines and related commercial arrangements within the coming months.

Anyone investing in biopharma understands that with respect to any particular discovery or even group of discoveries, the odds of reaching the marketplace are very, very small. This is of course the reason for the very high-risk nature of essentially all small start-up biotech, biopharma type companies. Typically what they are doing are betting on one or a few molecules for their future success. And there likely will be a few winning companies but most will unfortunately fail.

What we are creating at Compugen is unique; discovery capabilities that are not based on any particular technology based platform, nor knowledge of a specific disease. But instead are based on deeper understandings of the underlying scientific principles. This is the reason we have been able to first focus on immunoassay diagnostics, then therapeutic proteins and as we have already announced currently nucleic acid diagnostics and to date about half a dozen other product categories that have not yet been disclosed.

And in each of these very different fields, we are confident that just as with immunoassay diagnostics, the leading companies in the field will after evaluation of our discoveries believe that they are exactly the type that they are looking for to feed their product pipelines and will enter with us into licensing and product development, codevelopment agreements. Thus with this capability for predictable repeatable and large numbers of discoveries that others will then further develop and commercialize, the results for any specific product become largely irrelevant.

Again we all understand that most of these discoveries will never lead to successful products but in view of our unique situation that is at large numbers of products are already involved in becoming involved in the pipelines of others, we are confident that many of our product discoveries will result in products in the marketplace and all of our arrangements call for milestone payments and future revenue sharing.

Therefore this very straightforward business model leverages our core predictive capability and we are confident it is now establishing a very low risk but extremely high return biopharmaceutical company.

In closing, I would like to thank both our long-term shareholders who for years have patiently shared with us our belief without a lot of proof and to welcome what I am sure will be a growing list of new investors as we continue to implement our strategy and business model providing proof that the third and final aspect of our founding beliefs is also rock solid.

And now we will be glad to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Jeffrey Grossman, a private investor.

Good afternoon, good morning. I have a group of questions concerning your announcement involving the status of the Company's therapeutic candidates. Let me ask all of these questions and then perhaps you might want to answer them in any order that you prefer.

First, perhaps you can elaborate on the advantages of the molecules, these molecules that you announced, compared with the known proteins of which there is a slight variance? Moreover, is the company examining novel therapeutic applications for these candidates?

I would imagine that the company is involved -- is already in contact with companies which might be interested in codevelopment of these therapeutics. I'm wondering if the Company has received any feedback from these or other companies concerning the results achieved, more specifically, are there any indications concerning the level of interest in codeveloping these molecules?

And finally, from where will the next batch of therapeutic candidates come? Will the Company now examine additional proteins from the list of 12 splice variants? Will they come from the company's more recent discoveries involving antisense A to I editing or junk DNA?

Has the Company developed additional therapeutic discovery engines and when might we hear about these new engines and the next batch of therapeutic candidates? Let's start with that.

I will try to answer, I'm not sure I remember all of the questions. So I will answer on those I remember and then if I forget some of them, please repeat. So let's start with the advantage. We announced that we have now in vitro and in vivo basic functional activity. Usually they are not (indiscernible) enough to show advantage compared to other (indiscernible) drugs. In some cases there are not other drugs either their under development but they are commercial and we mentioned also where there is a commercial drug, other (indiscernible) candidates and where there are not.

We think that what we are giving with some of these candidates and this is very important is [campaign] in new biologic pathways that current drugs does not address and this is one of the advantages that could be achieved through this.

In answering the second question if we are looking for new drug with indication we will first look naturally to the norm and to the most current indication that this type of drugs are addressing whether it is inflammation or cancer or cardiac and renal. It will be only probably next step to look for new indications.

As for the feedback, we said that we have just started discussion with companies. I can say that the feedback, the preliminary feedback that we've got that it is interesting, that they like to see more details and some of the companies have scheduled with us meetings to hear more is all I can say and actually this is all we have at this moment.

As to the next batch of therapeutic candidates, it will probably come from new discovery engines. And we mentioned and I mentioned in my talk that we hope that soon in the coming months we will be able to announce either the capability or the new target or that new candidates or new agreement. And we will choose the right time to announce depending on when we are sure that we have protected our IP and so on.

We guess that -- we assume that the next batch of therapeutic candidates will come from new discovery engines although we still have some interesting candidates that we gave at this moment less priority. So we say we take three candidates, the highest priority that we have seen forward from the current discovery engine and probably the next batch of candidates will come from a new discovery engine.

This is all I remember at the moment. So if you would like to repeat what I have forgotten I will try to answer as well.

No, I think you did very, very well. Thank you very much. One more question before -- I have many questions but I will let someone else take the stage after this next question. During his recent presentation at the Bioinvestor forum, Dr. Alon Amit mentioned a toxicity predictor as monoclonal antibody targets I think. And in the press there's also been -- you've mentioned at some of your conferences discoveries involving large scale genetic diversity. When might we hear a little bit more about these discoveries?

Unfortunately I have to answer the same answer I just gave. It is true we have found some advancements in some of these discovery engines more. We already mentioned two of these new discovery engines when successfully show proof of concept and we now look what is the best approach. We started to approach potential partners and we are discussing several opportunities like making an agreement based on the potential success on the capability or making a (indiscernible) on potential candidates. We feel it is too early to say anything at this time but I can assure that once we have news to tell, we will announce it.

Okay. Thanks very much. I have more questions but let someone else ask some questions at this point.

Ronald Urvater, Capital Partners.

Thank you. Good afternoon, everybody. I wanted to sort of extend the previous question as follows. The therapeutic candidates that just dropped out of the discovery process, what I'm curious about is as follows. You have so many different possibilities here to your discovery engines. What I'm trying to get to is looking back over the last number of years, you've had relations with Novartis and many big corporate partners. To what degree do you try and tailor or focus the orientation of the discovery engines to surface product candidates that you know in fact are going to be very valuable to large corporations?

Or alternatively is it just whatever drops out you try and ferret out those that you think might be valuable? There's a huge range of possible value propositions here and I'm trying to get a sense of what is your degree of knowledge as it relates to the large pharmaceutical companies on the highly specific basis as to what they are really looking for. Can you just provide a little more detail in that area?

I will try to give a little more. We have to say and we have said the discovery the engine that is using alternative splicing the way we use it is to look for alternative splice of known drugs or underdevelopment drugs where we believe we can give new molecules that can have different, better or antagonist effect.

If we look at the three molecules and we say cancer and inflammation and cardiac, it means automatically that big pharma that you mentioned like Novartis, like other companies, they are definitely involved in this area. And naturally we are trying to collect all of them some of them we already succeeded and so on. But it was not targeted at the specific company. It is targets of the capability that we use.

The new discovery engine we look not on alternatives to known drugs; they will look in new targets. It could be antibody target. It could be other targets. And again, it will bring discovery not necessarily specific to a specific company or indication. But of course once we identify and prove the indication, we will try to contact the appropriate company that is dealing and has the expertise in this specific therapeutic area. This is an advantage we see in looking for partners that have this knowledge and access to patients and so on. And to make partnership with such companies or licensing to such companies of all discoveries.

Just one more question. In other words, if you come up what an array of seven or eight different possibilities even out of the new discovery engine, I presume you still try and tailor or refine the selection because you know in advance what the market is going to assume to be highly valuable? Is that a correct statement?

I mean, you can't just go and take all these discoveries and try and market them and show them because it's not an efficient process. I presume you have enough knowledge to know what in fact even on a novel basis is going to be perceived as being highly valuable. Is that a correct statement?

The statement is very correct. But this is done on a very preliminary stage when we do the preliminary selection because our in Silico discovery is giving hundreds of candidates and we are going through preliminary selection that includes potential market size, everything like this. So this is done on a very early selection stage.

Okay, we'll just have to wait and see. Thank you very much.

(OPERATOR INSTRUCTIONS) Jeffrey Grossman.

Okay, another question. I'm just curious. I'm wondering if there has been any activity by officers or directors with respect to the company's shares since the publication of the last 20-F? Martin, I know in your instance you have no reporting requirements except with respect to the 20-F. But I'm wondering if perhaps we could have a little indication of whether or not there has been any such activity?

Nothing of substance. With respect to myself, I think my current holdings are about 10,000 shares, or I'm pretty confident my current holdings are 10,000 shares more than were reported in the 20-F. I'm not -- the other major holders, we just -- we haven't seen any filings so I assume there haven't been any changes. Nurit, do you have any additional information on that?

No, but we will know in three months time.

I've been a big buyer, 10,000 shares.

Another question. During his presentation at the Bio investor forum, Alon presented a slide saying that the current projected need for additional cash until breakeven is based upon current agreements. If there are to be additional agreements signed involving nucleic acid diagnostic candidates, might this amount change?

Amit also seemed to be suggesting that the company might be moving away from its plan to issue additional shares in favor of some other means of raising capital. I'm wondering if the company is now considering seeking a line of credit in order to finance its operations until achieving positive cash flow or is there something else in mind?

The first on the 20 million, on the $20 million issue. Clearly if we enter into new arrangements, that could either increase or decrease the requirements depending on what these arrangements call for. To be honest the reason that we started to talk about this $20 million was that people were suggesting that, my God, you're going to need hundreds of millions of dollars -- where are you going to get it? Whatever. I don't think people really looked carefully at our financial statement.

As you know we're burning $12 million a year. We've signed agreements that call for reasonable milestones and then large revenues. But I think if you just look at some reasonable projection under the current ones, you could see that if we're burning 12 now and we start to get even modest milestones over the next two to three years, it doesn't take long to close the $12 million gap and then when you add up the amounts that would be needed, it is in the range. I mean we clearly don't know what this number is.

But it's not hundreds of millions. I mean it's 15, 20, $25 million. It's some number like that based on what we now have in hand with respect to the commercial arranging. Again assuming certain success. It's a whole bunch of assumptions in there.

With respect to your second question, first I want to say we never did state, and I hope we never stated, that we plan to issue additional shares because as far as -- we never have made that decision and we haven't made it as of this point in time. We clearly recognize that within the next 12, 18 months, whatever, the company if it is going to remain secure financially secure will have to have available to it additional resources. But there are many ways to get it.

I can just tell you my own bias is against for a company like ours even though it appears that we are approaching commercialization, profitability, whatever, I'm generally against anything that involves debt for companies like ours. So I would be much more interested in things like strategic arrangements, equity, different kinds of things. I should say that may or may not involve equity.

Okay. When might any such negotiations for an example with a strategic partner begin?

Well, first of all, there's a question of what do you mean -- what are negotiations? I mean for the last four or five years we had times and had discussions with various companies about things that could lead to something. The issue and also with respect to negotiations, it really doesn't matter when they begin, what matters is when they end. Unfortunately that's almost impossible to ever kind of predict.

The only thing we can say is that if, when we were to sign something that was binding and that had a substantial impact on our situation, we would of course make it public. But keep in mind that the type of company we are -- I mean as Alex was describing and as I was describing we are a unique player in that we are not an antibiotic company, or we're not a cancer company, we're not a diagnostic company, whatever. We are a discovery company that can target our discovery engines at almost any area of human health.

And so therefore it makes sense for us at least at some preliminary level to be having ongoing discussions with the leading companies in many different fields. And it's hard to say when do they become negotiations, when are they just discussions?

I will say in this phone call -- this conference call just so I don't leave the wrong impression, that we are not near any significant arrangement that would provide capital at the present time and we are not actively trying to do that right now. And the reason is very simple. We believe that over the next three to six months we will be hopefully reporting a lot of good things that are based on as I said a decade of hard work. So let's wait and let the market determine the value of what we are doing before we move forward.

I would like to add, if you look at our commercial roadmap, we assumed nine months, signed the first agreement in the field or in an area. And I was announcing today that actually in the nucleic acid technology, it will take us even more. And I held that this is more than normal. Unfortunately in this type of business from the time you start talking with somebody until everything is clear sometimes there are asking for more data, for more information. It is nothing that we are not expecting tomorrow to sign agreements. Just to be clear as Martin was saying.

Okay, one last question. I'm wondering if there have been any developments involving Keddem or Evogene?

Evogene is progressing very well but I think it's for Evogene to -- we're a minority shareholder there. They are a separate company. Although they're using our technology. To some degree I think that the perhaps the most important for our shareholders aspect of Evogene is going to be the sort of sense, the validation of our technology.

It's very interesting, as a company that makes predictions, when you predict things it would be nice if you could be totally accurate and say here it is, here is the molecule that is going to cure whatever. But of course you can't do that. With predictions what you come up with is 30, 40, 50 or in some cases 100 maybe molecules out of the literally millions of potential ones out there but you narrow it down to say you know within this 30 or 40 or 50 molecules there is very highly, there's very likely a gem. Something that one or more gems that are going to do exactly what you want.

In the human world which you then do is what we're doing, you prioritize and you go after the first one and maybe after a couple of years you are in humans and you see whether they work or not. Evogene is doing exactly the same thing in the plant world. But when they come up with their 30 or 40 molecules, the next season they put them in the plant. If 10 plants die, they don't worry about lawsuits or feel bad about the plants dying. I mean that is it.

And so the aspect of going from prediction to proof of concept of our -- it's the same kind of predictions -- I mean they are looking for -- they are looking to try and identify the genes and the proteins that impact the traits of plants. And it's not a big jump to say that traits in plants are like diseases and health and human beings. It's sort of the thing. What proteins, what genes are affecting this thing.

And so they use the same capability that this is the power that Evogene has, they licensed in this capability and they can -- but when they do their predictions, they immediately can do proof of concept. They don't have to go through the rigor that any company dealing with human products has to go through.

With respect to Keddem, the research continues at a low level. We have not been successful in finding -- first, we're interested in maintaining this capability because we believe it is a very, very unique and it's something that could really make a fundamental difference to small molecule growth discovery.

However, we recognize that given where the venture community is today, this is not -- it's a longer-term project, no -- if Keddem started tomorrow full bore, the first products that were actual products that would get to the marketplace out of that capability would be maybe 20 years from now. Because it will take at least five years to create this technology and then what you do is this is the technology to find lead compounds which means you now have ahead of you seven or eight -- I guess I overstated, I guess more like 15 --

(inaudible)

At least. It is 80 or double figures without any doubt. The venture community has never seen a company like this and has had very poor success with so-called platform technologies. And it just doesn't fit the venture world.

The pharma world in general is -- those of you who have been following the pharma world know that they -- are much more now committed solely to their pipeline. It's true and this helps Compugen that they are willing to get to take on earlier and earlier things but they are not looking in general for to start a program now that will create a capability five years from now if successful to identify lead compounds. It just doesn't fit.

So it has been -- I have to say it's been a discouraging kind of a process. As you know, I'm also the Chairman at Keddem because the -- as we talk with people, the scientific feedback that we get is fantastic. People are just astonished by the approach and just about everyone wh0o looks at it from a scientific standpoint ends up one way or another saying this must be tried because it is so substantial.

But as of now, it is not moving forward very rapidly because as you know we've made a corporate decision that we are not going to be utilizing our further funds from Compugen in that direction. Not because we don't want to but it is very -- we have it very clear pathway for our own financial situation. We have money through the end of '08 or early '09. That means that we can have some degree of flexibility during at least through mid '07 or whatever to continue to prove our capabilities. So if we were to utilize our funds for Keddem, what that would mean -- that we would have to go through our financing much earlier which I don't think is in our best interest. So anyway, that is the long and short of it, mostly the long.

Okay, thank you very much.

Jim Smith, Bedrock.

Just one question in regard to discussions becoming negotiations and hopefully becoming at some point agreements. Can you speak in the general sense although it's not a specific as to what factors you expect to becoming factors in pushing that process along so that discussions in therapeutics ultimately become agreements? What are the things that would create the urgency on the counterparties to go over the threshold into the agreement stage? What type of companies -- are they companies that are having existing products that are threatened or potential competitors that see an opportunity? Or can you give us any sort of color as to what really (indiscernible) be in that continuum of discussions becoming contracts?

You've raised a whole bunch of issues that we and our commercial people are -- struggle with all the time. If you come up with something that looks like a very good compound, do you go to somebody who already is in the field and well looked -- and has a major product and whatever and so therefore they would see this as something that fits exactly into their category? Or are you better off going to a substantial player who wants to get into that business? There really is no way to answer that aspect of it specifically.

Everything in this world is in our business is kind of case-by-case. It even depends on who is the head of the CEO or the head of research in that company and what is his or her attitude toward license in products versus in-house products, follow-on products, what ever. So everything becomes case-by-case.

But with respect to your issue of how do these things move along, it is not very unusual that we basically we have a list of molecules and of other capabilities that we have that we're in contact with major players in these areas. First, I should say that we don't show anything to anybody before we have filed for proprietary coverage, have a patent on -- a patent that we have filed. So that we can go to them with some comfort that we can show them the specific information.

I think to some degree the more interesting discussions that are now going on between Compugen and other companies do not have to do with specific intellectual property that we have discovered, but have to do with either building new engines or targeting our current engines towards areas of interest of our -- of a potential partner. Where a company has an interest that they've been trying to find certain kinds of biomarkers, or targets, or proteins, or whatever in their research. And we do offer a very unique capability where they can come to us and to sort of what I call discovery on-demand, they can come to us and say, we'd like you to find five molecules that sort of do this, or appear to do this. Pardon?

Can you just base on a (indiscernible) basis or is that something that you might try to do your own (technical difficulty)?

Could you repeat the question please?

My question is, in both kinds of situations can you get paid for that service you provide --

Oh, I'm sorry. Yes, I think we would only do -- well, again, here it depends on what we went to get out of it. If what we want to get out of it are codevelopment and co-commercialization rights, then chances are we would participate with them in what the expenses are. If on the other hand, and I think during the early years it's going to be largely these kinds of agreements, that the end result is a product that they are going to own and they are going to market paying us a royalty, then they would pay -- if it is the question of us doing new sort of discovery runs for them or creating discovery engines for them, we would look to them to pay the expenses.

Now I don't want to make it sound like we have 10 of those things because as of right now what we are doing largely we've been creating our initial engines, using them for discovery, talking with the players out there about what we've already discovered to largely convince them of our capabilities. And as you know we've been very successful on the immunoassay. I assume we're going to do the same thing on that Met and I'm hopeful that we will very soon find out that in the therapeutic protein area we will likewise have success.

Does that answer your question?

I'll think about it.

Sorry? Ronald Urvater, Capital Partners.

Yes, Marty, just coming back to your closing remarks before the prepared remarks, I guess I still never quite gotten this. In other words you made the statement now that the science and productivity (inaudible) more and more and is an accepted fact. Where is the leverage in this process? In other words, for many years you've been stating that this as an alternative to the group force discovery methodology of big pharma. This is a much more efficient elegant targeted approach and so one.

So, given the fact that for the moment the company is not able to get a lot of partnership money for the use of its discovery engines but the candidates are sort of one-off candidates and the timelines are such that it has taken quite a bit of time to get there. If you look back or you look forward whatever, however you want to answer the question, I'm trying to get a sense of where it is the leverage in the company financially given what you are trying to do vis-à-vis the group force approach?

First you have to -- if you look at just look basically what does -- let's stay with drugs first diagnostic is not that different. What do they do? What they do is they try to discover a starting point, a biomarker or a drug candidate and then when they have a good one they go through all of the clinical testing and they ultimately sell it. A very substantial portion of all of the dollars spent in research and a very substantial portion of the time that is spent in the research of large pharmaceutical companies is on that first point, trying to come up with a discovery that when they look at it they say you know what, this is worth starting the process of development.

What we can do is we can get to that stage of having something to start development much quicker from the standpoint because we do it as I said predictively, we do it in Silico, the models say go through our predictive models of either the transcriptome or the proteome and now we have a predictive model of the [testerone], that you go -- it goes through them and it just picks off ones that look like they might be interesting for the use that you are interested in. And then the engine with both human interaction and IP issues and market issues and everything else goes through and continues to analyze all these things and then in the end, you have three, four, five candidates that we believe have a very high level of capability.

Here maybe I just came back from a meeting an Evogene meeting with a very major company in the agri -- utilizing the same technology in the agri world. And we showed them the -- they were interested in a certain trait and so our people went and did the in Silico run. We had the meeting at a point in time where we weren't able to -- we didn't have any time to even do any of the implant stuff. It was in Silico results. And we showed it to them and they essentially it was clear they actually said it - and the way they were saying they thought we were lying. They could not believe that these kinds of result had come out of a computer. And basically what they said we spent three, four years literally tens of millions of dollars out in the fields and we're lucky at the end of midday hopefully we will have what you guys are getting out of your computer. We can't even believe it.

Now again I -- don't make a jump from there to I mean -- there is some analogy there with respect to human stuff but believe me the human stuff is a lot more difficult, whatever. But it's the same process. Pharma companies, Ag bio companies, diagnostic companies, the process is find something that looks interesting to enter into our pipeline and that finding something that looks interesting to enter into our pipeline is not something that is cheap or takes a short period of time. It's a very, very long process and for many areas it sails. I mean they never find anything.

So why is it then that even today given what you have already accomplished a large pharmaceutical company in might not enter into your lines today to license part of that technology with some really good upfront money? Given the shortcuts, given the functionality and the efficiency that you can already provide --?

I don't know whether they would or not. I can tell you, as of right now we haven't approached any to do that. We have not had any as I'm aware. Are you aware of any?

No, because we believe and we know that we have first to prove what we say it is a reality. This is exactly the value as we discussed today. This is another venue of these three molecules. The biggest value is --

Validation, exactly --

(multiple speakers) I can't believe that -- we believe then it will be very quick and very easy because if somebody considers that a company like Compugen is (indiscernible), that cost $12 million a year can deliver (indiscernible) much more than a big pharmaceutical research group which costs tenfold or twentyfold or even more a year can deliver as many [combinations], as many more and maybe better, it will show.

You think a year from now would be a time when that that proof of concept could be established?

You know, this is a type of thing that it's an evolution. It's moving forward. We're much further along now than we were six months ago and six months from now we will be much further along again. This in a way goes back to the question I think it was Jim was sort of focusing on, an important part of our business development strategy is when do you go after a big pharmaceutical company with respect to some type of a fairly large type of an arrangement?

Because the facts are -- I mean you don't get two or three chances. I mean you don't do it once and then they say no and six months later you call them and say hey we've got a lot more stuff. They will meet with you again but it won't be the top people in the company that you might get the first time because of the interest and whatever. So --

First strategy is your best strategy.

It is very important for us to -- we're not under any pressure, we're doing things I believe -- I think we're doing things the right way. I know it is very frustrating but -- and that is why I was very pleased to see Alex put out this roadmap because whether you like to roadmap or not, it sort of says, hey, here is how we are developing the company. You can watch our progress.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Before I ask Mr. Gerstel to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours time for a period of 48 hours.

In Israel please call 03-925-5901; internationally please call 972 3 925-5901 and in the U.S. please call 1-866-276-1485. Mr. Gerstel, would you like to make your concluding statement?

Well, I've probably spoken enough on this conference call so let me just say thank you very much from the people that asked the questions. I know there are a number of the believers who are on the phone who have been hanging in there. We appreciate it. So, once again thank you and we look forward to speaking with you next quarter.

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