Compugen Ltd (CGEN) 2007 Q3 法說會逐字稿

Welcome to the Compugen Ltd. third-quarter 2007 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 23, 2007.

With us online today are Martin Gerstel, Chairman; Alex Kotzer, President and CEO; and Ronit Lerner, CFO. I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all content of this conference call. If you have not received a copy of today's release and would like to do so, please contact Ronit Lerner at telephone number 972-3-765-8560. Mr. Kotzer, would you like to begin?

Yes, thank you. Greetings and thank you all for joining our third-quarter 2007 conference call today. In my comments I would like to update you on our main activities, the achievements of the last quarter and how they are demonstrating progress according to our business model. After my talk I will turn the call over to Ronit Lerner, our CFO, who will follow with an overview of our financial results. Martin Gerstel, our Chairman, will then elaborate on our financial situation and plans and will provide closing remarks after which we will all be available to answer any questions you may have.

Our continuing implementation of our business model is targeted at positioning Compugen as the leading discovery company, fitting pipelines of the top therapeutic and diagnostic companies under revenue sharing agreements. The infrastructure for a life science company to have such an ambitious business objective requires solid discovery platforms and innovative technologies which are used for carrying out the discoveries themselves.

During the last decade hundreds of millions have been invested in Compugen to build our discovery platforms and technologies which are in place and which we continuously improve and strengthen. The next layer required to implement such a business model consists of several (inaudible) discovery engines able to predict drug and therapeutic candidates based on a deep understanding of biological phenomena and analysis of specific disease information.

The strength of this layer necessary to support our business model was first demonstrated with our discovery engines based on our world leading understanding of alternative splicing. These engines have led to the discovery of many therapeutic and diagnostic candidates. One of them is CGEN-54, a splice variant of MCP-1 which is known for its potential activity in modulating disease progression in a number of chronic inflammatory diseases. CGEN-54 was discovered and validated by us and is the subject of a collaboration agreement signed during the past quarter with Teva.

The strength of this layer is also demonstrated by the three new discovery engines announced during the last 12 months, namely genetic variation of discovery engines for genetic markers, ligands for GPCR, a discovery engine for therapeutic candidates activating the attractive GPCR target, and new indications for known drugs, a discovery engine that predicts potential activity of known drugs in other previously unrelated indications.

This second layer, which is (inaudible) to achieve our business objectives and which consists of most powerful discovery engines and resulting therapeutic and diagnostic candidates was the main focus of our activities until recently. As they evolved a third layer was added with the primary focus on commercialization of our discoveries, mainly via licensing agreements and on the progress in the development projects under the established collaborations.

Since the beginning of 2007 we have announced five new agreements, all of which are based on our discovery capabilities and predictive candidates. Antibodies as drug candidates is Medarex, toxicity markers with Teva, second (inaudible) assay diagnostic market agreement with Biosite, markets for unstable atherosclerosis plaque with the Mayo Clinic, and recently, as mentioned before, a collaboration agreement of a therapeutic candidate discovered and validated by us with Teva.

Looking at the achievements in each one of these layers, in particular the new agreements, adding the fact that this quarter we have received the first milestone payment for one of our previous immunoassay diagnostic agreements, I will assume that everyone could easily understand and agree that our activities are clearly in line with our business model and in fact we are moving forward towards achieving our business objectives.

I would like to conclude my talk today by assuring you that in the next quarters we will continue to strengthen all three layers, expecting to see additional evidence of the commercial progress which will be mainly based on our latest discovery engines. And now I would like to turn the call to Ronit.

Thank you, Alex. Revenues for the third quarter of 2007 were $90,000 compared to no revenues for the comparable period in 2006. This number reflects the initial milestone payment for one of our existing immunoassay agreements mentioned by Alex. Total operating expenses for the nine months of the year were $9.1 million including non-cash items compared with approximately the same amount for the first nine months of 2006.

Research and development expenses of $2.3 million for the most recent quarter compared to $2.5 million for the third quarter of 2006 remain our largest expense representing more than 75% of total operating expenses for both quarters. This amount before the deduction of governmental and other work which totals approximately $380,000 for the third quarter compared with approximately $820,000 for the corresponding quarter in 2006.

We entered the third quarter with $19.1 million in cash and cash related accounts, a usage $7.3 million for the nine months of this year and consistent with our estimation. Net cash usage for 2007 is projected to be less than $10 million which could result in an estimated $16.5 million in cash and related accounts as of the end of 2007. And with this I will turn the call over to Martin.

Thanks, Ronit. I would like to focus my comments today on providing further information about our financial status and plans and our underlying reasoning. As Ronit mentioned, we currently have approximately $19 million in cash and our net burn rate is approximately $10 million per year, meaning that we have cash into the second half of 2009. We currently estimate that approximately $10 million, in addition to the $19 million we now have, would be sufficient to continue our progress through at least the second half of -- through at least into at least the second half of 2010.

In the press release issued today I am quoted as saying, "By that time we anticipate that the Company will be in a very different strategic and financial position. And based on this belief and our expectation that continuing validation of our capabilities and product candidates will support a strengthening of our share price, any equity offering based on our current share price would likely be limited to $10 million."

I would like to more fully address two aspects of this quote. First, it is important to emphasize that we are not saying that we will or will not seek additional financing based on our equity. As most of you can appreciate, there are a number of alternatives whereby a company such as Compugen can obtain additional cash resources. The quote only states that if we decide to do an equity financing and at that time our stock price is similar to its current price the offering would likely not exceed $10 million.

The second aspect of the quote that I would like to address is our expectation regarding the Company's future financial and strategic situation and its stock price. As discussed by Alex, we have invested more than a decade in building the infrastructure that is now resulting in a growing inventory of validated discovery engines. As those of you familiar with our company know, Compugen's future revenues and profits are expected to be based almost exclusively on the commercialization of discoveries resulting from the use of these and additional engines to be developed by us.

In his remarks today Alex referred to a few of our discovery engines. However, in order to emphasize the overall value of our current inventory of a validated engines and the diversity of important applications that they represent, I would like to briefly describe them in the approximate order that they were developed.

Our first engine was focused on splice variants of known therapeutic proteins and we recently announced the first licensing agreement covering one of the potential protein therapeutics discovered and validated by us through use of this engine.

The second engine was for discovering protein based diagnostic markers for immunoassay testing. Currently we have multi product agreements with three of the leading companies in the world in this field, and as previously mentioned, this past quarter the first milestone payments under these agreements was received.

An additional engine is targeted at discovering nucleic acid diagnostic markers, a newer but rapidly growing field of diagnostics. To date we have identified over 30 potential diagnostic markers through the use of this engine. Although we have not entered into any licensing arrangements yet for these markers, this engine has served as a basis for both our preclinical toxicity engine, which I will mention in a minute, and our program with the Mayo Clinic for the identification of biomarkers for unstable plaque that was mentioned by Alex.

Next is our engine to discover targets for monoclonal antibody therapeutics which is the fastest-growing area of therapeutics. Based on this engine we have a multiproduct co development agreement with Medarex, one of the leading companies in the field. An additional engine is for preclinical toxicity biomarkers which, as I previously mentioned, was built on the nucleic acid diagnostic engine. Our first agreement based on this engine is with Teva for drug induced nephrotoxicity.

One of our newer engines is targeted at discovering genetic variations linked to drug response and disease predisposition. These variations of from 10 to thousands of base pairs are believed to have more relevance with respect to individual variations than SNPs and our engine has already resulted in the discovery of more than 200,000 such variations, which we are confident is by far the largest such collection in the world.

Another recently announced engine is with the discovery of therapeutic GPCR peptide ligands. GPCRs are the most important family of targets for drugs; almost half of all known drugs modulate GPCRs. As far as we know, essentially all other discovery efforts used in the industry rely on high throughput screening, whereas our discovery engine is based on machine learning algorithms, providing a predictive methodology that is then experimentally validated.

The first run of this engine resulted in the prediction of hundreds of potential GPCR ligands from which a sample of 33 was selected for validation and eight of these 33, close to 25%, were demonstrated to be true GPCR ligands. This is an extremely powerful and impressive result. Furthermore, the synergistic value of our approach to research is clearly demonstrated by the fact that one of the machine learning technologies that was developed for this GPCR ligand discovery engine creates an in silico model of the human peptidome. And we now have in advanced development two nondisclosed engines that utilize this in silico peptidome as the basis for identifying novel peptides for two additional important therapeutic areas.

Assuming successful completion of development we should be in a position to initiate licensing activities based on these two new therapeutic engines within the next year. The most recent engine we announced is targeted at predicting new indications for existing drugs. Rather than trying to find a new indication for one drug which is the common practice for other companies pursuing this very hot area, we have created a universal platform to rank all drugs in use or development for probable new indications based on an enormous amount of information from many different sources and in many different forms.

Compugen's world leading computational biology knowledge and tools were essential for this effort. And three such drugs with new indications resulting from the initial run of this engine are now undergoing in vivo testing. If successful these drugs could be in Phase II clinical testing by late next year.

Hopefully this brief review of our current engines and the opportunities that they represent will provide some further understanding of the basis for my quote in today's press release that, "By that time we anticipate the Company will be in a very different strategic and financial position, and also longer-term, why we believe we will be able to fulfill our corporate mission of being the world leader and the discovery and licensing of product candidates to the drug and diagnostic industry. And with that we look forward to any questions you might have.

(OPERATOR INSTRUCTIONS). [Jeffrey Grossman], [Beremberg].

Good afternoon, Martin and Alex. Query, short-term what are we looking at with respect to additional collaborations? How much excitement has been created in the industry by some of these new engines?

First, the engines directly address areas of major interest for the industry and I think our results are quite impressive. So as we begin to introduce and expose the industry to them I think it's fair to say that there is quite a level of interest. And also, you must keep in mind that in these areas just about every company that we talked with, particularly the big pharma, they will have programs of their own in exactly the same area. So there's an opportunity for them to compare what we do and the kinds of results we get with what they see, and I think that comparison is going to look very good for us.

With respect to actually signing agreements for real purposes and for legal purposes there's no way to answer the question. I've said this before and I'll say it again, that until an agreement is actually signed it's not done. There's no such thing as being almost done. In my history I've had deals that I thought were years away from signing, suddenly they're a rush through and they're done, and I've had others that I thought were completed and suddenly the Board of Directors of the other company changes its mind.

So you really can't state anything -- I think we can say that in view of the number of negotiations that are going on that we're pretty confident, as Alex said, that in the coming quarters let's say you're going to see additional agreements particularly based on our newer engines.

I would like to add, Jeffrey, you know the industry and you know that if we talk, and we talk with leading companies they are very well -- they are very experienced in negotiations. So when you have a tough negotiation you never show your excitement, it costs you money.

I understand that, but nevertheless I would just -- at least from my limited knowledge, I think the GPCR engine that you created has created some significant amount of excitement within the industry, at least what I've seen over the net. And the identification of eight novel peptides at one fell swoop, that is rather remarkable. And it would surprise me to no end if that has not created some interest from the large pharma companies.

I would just like to point out -- observe -- that I find it a little peculiar that on the homepage of the website the GPCR ligands engine does not appear as (inaudible) or, for that matter, the Geneva platform. I think these are two of the most exciting platforms, engines, that the Company has discovered or created until now and I would think that it could serve the Company well to place them prominently on the home page of the website.

Thank you for the comment. In the home page there is easy access to each one of the other pages and you can see there all these discovery engines. Usually we put in the first page collaborations once they are signed, mainly these. Thank you for the comment.

It's something that we will consider. I haven't thought about it until you raised it so let's look at it.

I would just point out that if you look at the collaborations on that first page, on the homepage, all you see is Teva, which raises many, many questions in the minds of investors what is still active and what is not active. So I would -- frankly I would redesign that entire homepage, place what is exciting there. One of the strengths of the Company is the increasing number of collaborations. Give vent to that on the homepage that the Company does have this large number of collaborations covering a large cross section of the industry. This is one of the Company's strengths and I wish you would please consider it.

It will be considered. Thank you.

Bill [Chapman], Morgan Stanley.

Good afternoon. Could you give us more information on -- last quarter you mentioned on the seven diagnostic molecules that had gone the full testing, four have been successful. Could you elaborate more how progress is going on the rest?

I mentioned -- we used to mention in the past that more than 10 had been selected by our partners. Last quarter I'd say that I mentioned that seven finished their validation. And the situation as of today that they are learned -- the results are learned, studied by our partners and I don't think we can say anything further at this point in time.

Could you give us the market size on the one that you did get the milestone payment, generally speaking? You can't give it too specifically what it's for, but could you give us the market size.

I don't think it will be appropriate and usually we -- we were requested to keep very confidential what are the areas, what are the specific markers and things like this. We have mentioned in the past that in general our markers are either in different cancers or in cardiovascular diseases. I don't think we are allowed to say more than this.

Okay. One more question. Martin, you mentioned that some of your discoveries have been quite impressive and I've seen comments also and as Jeffrey commented. And I mentioned this last quarter, there seems to be a tremendous disconnect between the scientific community giving you accolades and then Wall Street. How do you account for that?

Wall Street is just not that smart, what can I do?

One thing that we have to face is that we have a great story. But if you look back, particularly about eight or 10 years ago, you'll see an awful lot of companies that one way or another had similar stories and they all failed. But with the beginning of the genomic revolution there were so many companies that said, ah ha. And it isn't that they were fooling the world or whatever, they really believed that that was the new knowledge in genomics. They were going to completely change the research and discovery approach within the industry.

And as you're probably aware, a few of them collected literally billions of dollars from client companies based on those beliefs and they had market caps in the $10 billion, $15 billion, $20 billion dollars -- and I'm not overestimating that. This was the great hope and everybody believed it and whatever. It's not an overstatement to say they all failed, that none of them really ended up creating any discoveries that we are -- that are out there today that are very impressive and the companies themselves, most of them have changed and become drug companies. Well, some of the companies are quite successful and very well run and have a great future. But the story that they built themselves on, that they were going to completely change the way drugs were discovered it never happened.

Now we come along kind of with the same message. There is a difference here and that difference is something that our shareholders hate, and that is that we spent 10 years doing the hard work, building the science, building the capability, creating the team that now is proving that we can do it. I think that Wall Street clearly will begin to see this. I can't really blame them though because they've been fed so many stories in the past by companies that really -- they believe their stories but in the end they all fail.

We're not going to fail but we have approached this very, very differently. As I said, we've approached it on the basis of starting from the bottom, understanding the science, creating the teams, creating the technology. We had shareholders screaming at us and it's correct -- that had with three or four years ago licensed in a Phase I drug our stock would have tripled and what ever. But that's not where our strength is and so we have continued to kind of stick to our knitting and I think now we're beginning to see the payoff with the recent announcements and more to come.

It doesn't seem that a $2 stock breaking new lows. Again it's just amazing the disconnect here. It's very difficult to value your company and are you assessing ways you can change that? Like for example giving more --?

I'm going to make a really wild comment which I think I actually made once before, and that is that it would be a lot easier getting the financial community excited about Compugen today exactly with what we're doing if we had a $1 billion market cap. People would listen to us and they would listen to the story and look at the kinds of things that we're doing and say, you know, this company ought to have a $2 billion market cap.

But you used the right word, there's a disconnect. And I've got lots of friends running money and whatever and I meet with them and I think I can get them very, very excited about our company and investing in our company until at the end they say well, let's talk about the stock, what's your market cap? And I say well like $60 million and their face drops.

It's such a disconnect that you just feel there's got to be something missing here. So I don't have any magic answers to this other than, as I said, just continue to do what we do, create the engines, make the discoveries, enter into the deals with the industry and sooner or later I'm sure that we will be recognized for the value that we have. That's one of the reasons why we went out of our way this time in the press release to really explain how we see our financial situation. Because it speaks for itself.

One further question if I may. You were doing quite a few conference presentations in the past. This year I believe you haven't done any and what is your take on that?

When you say we have in the past, I don't think we ever have.

Going to these Wall Street conferences.

No, I think we've -- at most what did we do? Two or three a year at the most? One or two? It is a little bit of a chicken or an egg problem here in that most of these conferences now have parallel tracks; they run three or four tracks at the same time. And so if you're a company with a $60 million market cap and people don't know that much about you chances are you're not going to get a large turnout in your room. Again I believe that as we make further announcements, particularly as we make announcements with household names in the Pharma diagnostic world, I think that this will hopefully begin to change.

Okay. Thank you.

Also, most of these conferences -- we essentially have a -- this is a policy that I had in my [ALZA] days and I still really believe it's the right policy to have is that we really don't want to pay to tell our story. There are lots of conferences that you can pay and show up. We believe that we ought to be an exciting enough company that the organization putting on the conference will want us to be there. And to be honest, we're not invited to a lot of conferences at the present time. Hopefully that will change.

Okay, thank you.

Jeff [Gilbert], [Peak] Investment Partners.

My question has been answered, buys, but keep up the good work and we'll wait patiently.

Let me just make a comment with respect to the prior question that wasn't asked, at least for the organization he came from. We were invited to attend, just by coincidence, the RBC conference that is in New York in early December I believe -- December 12th and 13th I believe. But in any event, we were invited by them and we will be there.

Albert Zesiger, Zesiger Capital Group.

This is Barrie Zesiger, hello, Martin. We're both very well. Could you give a little more information about the genetic variation that you're doing, that discovery engine. And can you differentiate it from what's been done with the SNPs?

Do you want to answer? Maybe Alex should answer this one.

First of all I have to say that we have good reasons to believe that what could be predicted by SNPs could be much better predicted by genetic variation that are much bigger than the single nucleotides (inaudible). Basically we are targeted to the same areas that SNPs are used today. They are tried to be used, not with a lot of success. We believe we can bring better success in explaining why some patients are responding to a drug while others are not. This is one of the areas we are looking and this is one of the areas the industry as a whole invests a lot of money and efforts today using the SNPs technology.

We're also looking at the possibility to use these genetic variations as a disease predisposition. If there are genetic reasons or causes for a disease we might be able to discover in advance that the person has a higher tendency to develop later on in his life a specific disease. So basically these are the two areas in which we are looking. While we validated this discovery engine we were able to find a marker for diabetics, it was not statistically power enough to use it as a marker but it was validating our discovery.

We are running at the moment another study on ALS and we are negotiating other ideas. But basically we probably will use it for the same use of the SNPs, but as I said before, with potentially better results. I hope it answered your question.

In the work that you're doing is this using a lot of sequencing and a lot of the newer sequencing machines?

Not at all. We are trying to skip this work of a lot of sequencing. The way we do is we try to find genes that are expected to be related to what we are looking for, either that respond to a drug or markers for a disease. And then we are trying to focus on variations that are known to be inside those specific genes. So when we do a study today we start with a relatively very limited number of variations and this enables us to do a relatively very cheap experiment to look at many samples in several genetic variations looking for those that are appropriate and that really explain the phenomenon that we are looking at.

Have you had any discussions or done any work with Perlegen out in California?

No.

We know of them of course, but as of yet we haven't gotten involved with them. But it's a good -- it's obvious you know the field by asking the question.

Well, good luck and keep up the good work. We'll (multiple speakers)

I'm really pleased that you people have chosen to invest in our company. We appreciate it.

Well, we appreciate what you're doing. Thank you.

(OPERATOR INSTRUCTIONS). Raymond Welsh, UBS.

Martin, you closed out the last conference call on August 2nd saying that -- this is a quote, "We are approaching the time when your patience will pay off. In the next six to nine months you will see the results of all the hard work." Are we still on that schedule?

Yes, hopefully we're showing it. Yes, and there will be -- yes.

Okay, so that's now three to six months?

I love people who record my words.

I write fast.

Next time you're paying for dinner, Ray.

Okay. Sounds great. Hope you're well.

Thank you.

There are no further questions at this time. Before I ask Mr. Gerstel to go ahead with his closing statement I would like to remind participants that a replay of this call is scheduled to begin in two hours for a period of 48 hours. In the U.S. please call 1-888-782-4291; in Israel please call 03-925-5901; internationally please call 972-3-925-5901. Mr. Gerstel, would you like to make your concluding statements?

Well, after Ray's comment I'm not sure. But I'll just say -- just we're very pleased with respect to what we're accomplishing here and we expect to accomplish in the future. And we understand the courage that it has taken to be an investor in our company and we truly appreciate it. And as I said last time, we really look forward to the next couple of quarters as hopefully we can really demonstrate the kind of value that's been created here. So thank you very much.

Thank you. This concludes the Compugen Ltd. third-quarter 2007 conference call. Thank you for your participation. You may go ahead and disconnect.