Compugen Ltd (CGEN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen Ltd third quarter 2009 financial results conference call. All participants are present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, October 27, 2009. With us online today are Mr. Martin Gerstel, co-CEO, Ms. Anat Cohen-Dayag, President and co-CEO, Ms. Dikla Czaczkes Axselbrad, CFO, and Dov Hershberg, Chairman.

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 Dikla Czaczkes Axselbrad at telephone number 972-3765-8595. Mr. Gerstel, would you like to begin?

Yes, thank you. Greetings and thanks to all of you for joining our call today. In our last quarterly call I commented on the increasing level of recognition that we were seeing in the pharma industry with respect to our predictive discovery capabilities. This growing industry interest and the resulting commercialization opportunities exist solely due to the widely applicable proprietary drug and biomarker discovery capability that has been successfully established at Compugen during the past decade.

In today's call, Anat, our president and co-CEO, will provide an overview of how this capability is now allowing us to address product candidate discovery in the form of drugs, drug targets and biomarkers in the two broad therapeutic areas that have been Compugen's initial areas of focus, inflammation and oncology. The power and potential of our predictive approach to discovery can perhaps best be appreciated when one realizes that this exact same approach and underlying capability is just as applicable to essentially all other therapeutic areas.

And furthermore, that the majority of the specific product candidates that we have disclosed to date have resulted only from the validation runs of our discovery platforms, that is these product candidates were discovered essentially as a byproduct of developing and validating of platforms. And therefore, our primary assets today are by far the discovery platforms themselves.

It is also important to emphasize that once a discovery platform is developed and validated, all of the prediction and selection is accomplished by computer, without a single laboratory experiment. Experimentation is only required after the prediction and selection for product candidate validation and the results of every run of a platform. Both the predictions that are proven correct and those that are not, are fed back into the platform to improve its accuracy for future runs.

This is the reason why our output, in the form of product candidate discoveries of interest, is unparalleled in diversity and quantity and is accomplished with cost efficiency never before seen in our industry. With our ten existing discovery platforms and with a rapidly increasing number of product candidates that have successfully completed one or more animal disease validations, we have now reached the stage where the validity of our in-silico predictive discovery capability is clearly evident.

In view of the many high cost and well-known prior failures by other companies to create similar capabilities, this now presents us with a game-changing situation with respect to our interactions in the industry in that for the first time, our business development activities can focus on identifying areas of interest to potential collaborators to utilize these proven platforms and the underlying capabilities, what we refer to as discovery-on-demand.

However, as we increase our focus on these commercialization opportunities, we must also continue to broaden and deepen our leadership position in prediction-based discovery, which, without doubt, will become more and more accepted in drug and diagnostic research industry-wide. A reflection of this commitment is the fact that during 2009 and in our budget for 2010, almost half of our R&D efforts are allocated to further extending our capabilities and modifying or creating additional discovery platforms.

Before turning the call over to Dikla to provide some financial information, I would like to make a few general comments about our status and plans. First, Compugen's goal is to become the primary supplier of product candidates to the pharma and diagnostic industry through both the licensing out of molecules that we discover and discovery-on-demand collaborations.

Second, we have two essential requirements for all of our licensing and collaboration agreements. The first requirement is that the only licenses we provide our partners are through specific product candidates, that is not to platforms or underlying capabilities. And the other requirement is that all such product candidate licenses include development milestones and royalties.

My third general comment is that our goal for our shareholders is to provide them with a substantial and rapidly growing portfolio of drug and diagnostic products in development, in most cases at the expense and risk of our partners, but in all cases for which Compugen will receive milestones and revenue sharing payments.

Lastly, with respect to our financial situation, for which Dikla will provide more information, an important short term financial target that we are operating under is to achieve cash flow breakeven by year-end 2011 based solely on research revenues under our milestone and revenue sharing agreements. Achieving this target is of course subject to success in entering into the required collaborations during 2010, which, as mentioned earlier, is now the primary focus of our business development efforts.

And with this, I will turn the mic over to Dikla, who will be followed by Anat's discussion of our activities in inflammation and oncology, and then we will all be available to answer any questions you might have.

Thank you, Martin. With respect to our current cash status, we ended the third quarter 2009 with $5.7 million in cash and cash related accounts. The decrease of only approximately $1.5 million for the first nine months of 2009 is the net result of cash expenditure. This includes working capital changes totaling $5.1 million, which are consistent with our previous guidance and which are offset by net proceeds of $3.6 million from the sale of portion of our Evogene shareholders in the second quarter of 2009. The net proceeds of $3.6 million from the Evogene sale are included in other income for the first nine months of 2009.

Furthermore, the $5.7 million in cash and cash related accounts as of September 30, 2009, does not include the market value of the just under 1.2 million Evogene shares still held by the Company. These shares currently have a market value of approximately $4.8 million. With inclusion of this amount but assuming no receipts of any other cash from other potential sources, such as milestone or sales of equity or other Compugen securities, we estimate that we will have sufficient cash to go into the second quarter of 2011.

Before turning the call over to Anat, I would like to comment on three other items in our financial statement. First, research and development expenses were $1.4 million for the most recent quarter compared to $2.3 million for the third quarter of 2008. It remain our largest expense, representing approximately 70% of total operating expenses for both quarters. As mentioned by Martin, approximately half of this amount is allocated to further extending our capabilities and modifying or creating additional discovery platforms.

Second, as noted on the balance sheet, the Company has no long term debt of any type. Also, the amount shown as accrued severance pay on the balance sheet of $1.3 million relates to requirement of all Israeli companies and is almost entirely offset by the $1.2 million asset titled severance pay fund.

Lastly, the third item that perhaps needs more explanation is the amount shown as investment in Evogene on our balance sheet. This amount at September 30, 2009 is shown as $4.0 million. This represents a slight increase compared with the $3.9 million shown as of December 31, 2008, even though we sold almost 50% of our holdings in the second quarter of 2009.

This increase and the amount of the proceeds received from our Evogene share sale resulted from the substantial increase in the market price of the Evogene shares during 2009. And with this, I will turn the call over to Anat.

Thank you, Dikla. As Martin mentioned, in my remarks today I would like to provide an overview of how our proprietary drug and biomarker discovery capability allows us to address product candidate discovery in two prototypic areas that have been Compugen's initial areas of focus, inflammation and oncology.

The inflammatory response protects the body against infection and injury but can itself become dysregulated, with deleterious consequences to the body. Common inflammatory diseases include, for example, asthma, inflammatory bowel disease, rheumatoid arthritis and autoimmune diseases.

In order to find novel product candidates, whether drugs, drug targets or diagnostic biomarkers in any specific field of interest, such as inflammatory diseases, we combine our comprehensive biological understanding with our computational capability into a well defined therapeutic program, which, in most of the cases, includes more than one of our existing discovery platforms.

In the field of inflammation, an area of intense current interest in the pharmaceutical industry, are [hitch-protein]. Hitch proteins are class of functionally related proteins whose expression is markedly increased upon exposure to various stress stimuli. Earlier this year we were examining a few different approaches to predict markers that could modulate this protein family. One important observation was the sudden conformational changes occurred during the activation, thus making them optimal targets for our DAC blocker platform.

This platform designs peptides that are predicted to block target proteins from attaining their disease associated conformation. We therefore conducted a hitch protein oriented run of the DAC blocker platform, which resulted in the in-silico prediction of a few dozen novel peptides targeting various hitch proteins. Several of these peptides are currently undergoing experimental validation.

In the last few years, a new area in the field of inflammation has emerged. It's called resolution of inflammation. It was found that resolution is an active rather than a passive process, as once believed. This piece of information opened the way for a novel approach -- for novel approaches for the treatment of inflammation associated diseases based on agonist of resolution.

FPRL1 is a member of the GPCR family of proteins and it is known that the activation of these protein targets promotes resolution of inflammation, leading to prominent anti-inflammatory activity. We were therefore looking for a novel agonist for FPRL1 that may have a beneficial effect in acute inflammation conditions such as ischemia profusion injury as well as in chronic inflammatory diseases such as inflammatory bowel disease and asthma.

The obvious approach was to synthesize and test ligands predicted by our GPCR ligand platform to modulate GPCR with FPRL1. This effort was very successful and a peptide ligand was identified that was soon shown by in vitro and in vivo studies to have the potential to treat inflammatory and other diseases.

Based on these results, Compugen entered into a collaboration agreement with Merck Serono covering additional research to be conducted by Compugen and providing Merck Serono with an option to exclusively license the novel peptide for worldwide development and commercialization.

These examples demonstrate the value of approaching broad therapeutic areas with completely different science-based pathways and also the value of being able to call upon our large and growing inventory of platforms, algorithms, machine learning systems and other computational biology tools when approaching a new area of interest. Furthermore, in the field of inflammatory diseases, one of our undisclosed discovery platforms now under development is expected to provide an entirely new pathway for potential anti-inflammatory product candidates.

With respect to oncology, the second therapeutic area which we have focused on to date, biological therapies, sometimes called immunotherapy, is a relatively new addition to the family of cancer treatment that also includes surgery, chemotherapy and radiation therapy. Biological therapies use body's immune system either directly or indirectly to fight cancer or to lessen the side effects that may be caused by some cancer treatments.

These therapies include, among others, peptides, proteins and monoclonal antibodies. Compugen's discovery platform suits well to identify biological therapies like novel peptides, novel drug targets and novel diagnostic biomarkers in the field of oncology. Compugen's monoclonal antibody therapeutic target platform has the ability to predict novel membrane proteins that can serve as targets for antibody therapeutics.

Using this platform, in the last two years we were discovering multiple novel targets of antibody therapy for various types of solid and (inaudible) cancer. The newly identified targets were initially predictive and selective in-silico and were subsequently validated experimentally. One of these candidates served as the basis of a recently disclosed collaboration agreement with Bayer Schering Pharma. The agreement covers the further evaluation of the tumor target and its slight variant and provide Bayer with an option for an exclusive worldwide royalty bearing license for development of monoclonal antibodies and other therapeutic agents addressing these novel target molecules.

Angiogenesis, the growth of new capillary blood vessels, is an important natural process for healing and reproduction. However, abnormal blood vessel growth is now recognized as a common denominator underlying cancer. Angiopoietins are naturally occurring proteins that have a critical role in angiogenesis. Therefore, various inhibitory strategies have been employed to therapeutically target the angiopoietins pathways.

In order to identify a novel peptide that would block the activity of angiopoietins, we employed our DAC blocker platform, the same one we used for the inflammation program. With this platform, we were able to design a novel peptide which was later shown to have a positive therapeutic effect in an animal model of retinopathy, a very serious eye condition characterized by overgrowth of blood vessels. In addition to its effect in retinopathy, this molecule has a potential therapeutic utility for other diseases involving pathological angiogenesis, both in cancer and inflammatory conditions.

In this field of oncology, I would also like to share with you an example of our diagnostic biomarker activity. This is an excellent example of Compugen's unique discovery-on-demand capabilities. In this case, we were approached by a leading company developing and commercializing immunoassay diagnostic tests. Their specific interest was to determine whether unknown splice variants exist for known biomarker for ovarian cancer, an objective with a high level of industry interest and past research activity.

Utilizing proprietary algorithms for (inaudible) alignment as well as proprietary datasets, gene structure prediction and gene product prediction, the probable structure of a previously unknown potential splice variant expressed by this gene was predicted and then verified experimentally. This finding was the basis of a collaboration agreement with a diagnostic partner covering an option to obtain worldwide royalty bearing commercialization rights.

With this example, you could see that not only multiple discovery platforms can be used for the discovery of product candidates in the same area of interest, but also one platform could simultaneously be used for the discovery of novel product candidates in two different therapeutic indications. Also, in this case, one of our additional discovery platforms now under development will fit for the discovery of new product candidates for oncology. We will now be available to answer any questions that you might have.

Thank you.

(Operator Instructions)

The first question is from [Ronald Orvator] of Capital Partners. Please go ahead.

Yes, good afternoon and thanks for all that cogent information. My question, really a two-part question. You indicated in your press release, or earlier perhaps, that you'd break even by 2011. And given the cash resources, including Evogene, which gets you through the end of 2010, that would imply that you have a deficit -- remaining deficit of about $10 million to $12 million in 2011 in total cash flow breakeven. Is that approximately correct?

Approximately.

Yes, approximately.

Well, let me say that the current cash plus the Evogene at its current market value would take us into the second quarter of 2011.

Oh, okay, so you're pretty close to --

-- also I want to correct that we didn't say that we would break even sort of by 2011. It's sort of by year-end 2011. And it's --

Okay.

-- under the circumstances, it's really impossible to be more -- obviously more precise. But we're doing our planning as if it took through the end of the year -- through the -- that we begin 2012 --

Understood.

-- with breakeven operations.

Understood. So here's really the thrust of my question. What I -- what's never been clear to me, you've had a tremendous amount of discoveries here with a relatively modest capital investment. So my question to you is if, by some means, the Company had an additional $20 million to $30 million to $40 million a year to spend, for example, could that be deployed adequately? Or what, in fact, is the rate limiting step here in terms of increased discoveries? Is it capital? Is it the science itself? Is it the nature of the discovery platforms? Can you speak to that a little bit?

If we had substantially additional funds, we have to face a question as to whether or not we wanted to utilize them to actually take products further in development. As of now, our -- sort of our guiding principle is to license things out as early as we possibly can.

Now, you could argue that maybe we should take some of our discoveries and pursue them further in-house before licensing them out. I mentioned that if we were to do that, that would, one, we don't really have the in-house capabilities to do that. But we -- but those are capabilities that can easily -- they're generic capabilities. They can be acquired. And that could utilize -- you could basically use almost an unlimited amount of one's -- in that area, depending on what type -- how many products you wanted to take into preclinical and clinical work, et cetera.

With respect to the area where we have a competitive advantage, that is the discovery process itself, I think we could easily absorb maybe -- probably Anat should really address this, but my judgment, we could easily absorb perhaps 50%, maybe a doubling of our current effort. But beyond that, it probably would be -- would you agree on that.

I agree, Martin. I think that up to doubling our FTEs in order to come up with many additional discoveries, but not more than that.

I think the only -- sort of then there's the middle area of validation. We do this discovery. In some cases, we're beginning to see situations where the client companies have enough confidence in our ability that they're actually prepared to just take our in-silico predictions and start to work -- they do the synthesis and they do the -- they do all the validation. I have to say that's not the majority. That's the exception at this point in time. We would love to see that become more general in the future as more and more companies become confident that these predictions are real. But the --

You know -- I'm sorry, go ahead.

Well, I was just going to say that in the meantime, I think if we had -- I think if we had more money available, perhaps the first thing we would use it for is more early validation of a lot of our compounds. Anat, why don't --

I think that there is additional thing that we would use it. Currently we are developing new platforms and part of that development process is doing some selecting molecules out of the platform and do high throughput screening for potential products to move through with.

Right, but what I'm --

So definitely -- would definitely increase big part of our ability to screen more product candidates and get additional potential product candidates for collaboration. Would definitely do that.

Now what we do is we select only small number of product candidates to move forward with. So this would definitely be one of the things that we would do.

What I'm really trying to get to is if you took sort of, let's say, a satellite view of combining what your partners are doing and what you're supplying to them in terms of the output, it doesn't sound like, in terms of time savings, there's that much benefit for the moment given the longitudinal nature of what you're doing. It sounds like probably it's more on the more efficacious outcome of better either biomarkers or therapeutic candidates at the end that is where the value proposition comes in.

I'm just trying to situate the value of the Company from a macro point of view to understand in the end how the -- how the discovery platforms get monetized in a way that's a little bit more time sensitive than is the case today, where it's been -- it's been quite a long period of time before we'll see the results of the discoveries if you'd monetize the NPV value of the royalties. So just speak, to that a little bit more. In other words, the utility, the value proposition of Compugen as it relates to the industry in general and in terms of your timelines and when the inflection point really begins to take shape --

First, let me say that's an excellent observation and question because the -- when we license out individual product candidates, which most of the licensing agreements that we've done to date involve that, that we're licensing out specific molecules, that is a tremendous validation of the unbelievable predictive capability that has been created here, that in one day it's an -- in the field of angiogenesis, the next day it's something totally different, then it's a biomarker, then it's a therapy. I mean this is an amazing validation of the uniqueness of what we have created.

On the other hand, we have -- with respect to that molecule itself being looked at, that molecule by a pharma company licensing it in, we have no competitive advantage, zero. That at the same time they're looking at our molecule, they're looking at a couple from the University of San Francisco and maybe one from here or there, some small company that's got two that they've been working on. So there are many compounds out there and ours is just one of many.

Now, we believe, because of the way we discover it based on science and whatever, ultimately they'll be shown to have higher probability of success, whatever. But that isn't the competitive advantage of the Company. The competitive advantage of the Company is the capability, as you pointed out, the capability that we have created here of having systematic, constantly improving discovery capabilities that they -- that we've proven that they work, they're science-based, and what that means is now -- and they're hypothesis-driven.

What that means is they're just going to get better and better. Discoveries are going to be easier and easier over time for us. Every discovery we make, every run we do makes it easier for us to make the next discovery or the next platform, which, of course, is entirely the opposite in the traditional way of doing things, trying to find things experimentally. I mean we're all familiar with this famous curve showing R&D expenses going sky-high in the industry and new drug discoveries coming down, down, down.

People shouldn't be surprised by that curve. That is the curve that you have to have when you base something on experimentation. When you base your attempt at getting new information or discovery by experimentation, you have to get the low-hanging fruit first. You have to get the easy things first, find the big gold nuggets in the stream, then the little gold nuggets. Pretty soon the streams are empty and you have to start trying to figure out where else to look. Well, the industry, of course, has hit that wall now and that curve isn't going to turn around. I mean experimentation, that curve has to continue to go down.

What we are offering the industry now is a totally -- a true paradigm shift in how to do discovery. And our competitive advantage in that area is beyond question. All right? There is no other organization in the world that has the diversity, accuracy, this portfolio now that we have of systematic, constantly improving discovery platforms. That's our competitive advantage.

Now, your question to me, I don't -- is something that we are now -- it's a major program -- discussion point in the Company and with outside consultants to really focus on the best way of monetizing that discovery capability, that --

In and of itself.

Well, of course. Because your point is right. The discoveries that we have, as I said, it's amazing when you look at them from this tiny -- if the only thing we had -- if we had no discovery platforms at all and the only things that we had today were the discoveries that we've already made, I think you would -- personally, I think we're way undervalued in the marketplace just based on that.

And if you look at it, you have to -- it's really an amazing output. When you then recognize that this isn't what we've been -- this is just a byproduct of what we have created here. This is not the output of what we've been doing over the years; this is a byproduct. What we've been doing over the years is creating this discovery capability, which now is being absolutely proven with these disease model -- animal disease model systems in different fields, that the entire industry relies on, that it's proven that for the first time this really works.

You can have computers that predict novel sequences, sequences of molecules that no one has ever seen, no one knows whether they exist or not. And you go and you make those molecules and you find out that they actually do what you predicted them to do. In field after field after field. This is -- this is -- as I said, this is a paradigm shift. I've mentioned many times, the problem is that so many other people have tried in the past with far greater resources and completely failed that it's taken us a while to get people to listen and to believe.

That fight is over largely in the pharmaceutical industry given the results that we now have. They pretty much have no choice but to understand and appreciate what we can do. And now the name of the game is what can we do together. And that's what we're working on now with the hope, the expectation that out of these discussions will come the collaborations that will lead to the research revenues, in addition of course to milestones and royalties, but will lead to the research revenues that will put us in a sustainable, viable position by the end of 2011. And then we just continue to increase the portfolio of product.

Right. So, in other words, in sum, in summation, in addition to the value from the products coming out of this input out machine, you've got to find a way to monetize the machine in and of itself.

Exactly. And if you say, well -- and this is not an area where, at least in our industry, you can look to, well, what have others done. Because no one has ever had such a capability. It's never existed. So you can't -- and --

Right. So you're breaking the mold.

-- it's -- yes. And so people have to actually think differently about the whole process of drug discovery. And so it's -- I don't want to -- I mean it's -- two things that I -- one positive, one negative, that I think it's important for our shareholders to understand.

The two things is, one, there is no question this is immensely valuable and it addresses the only real problem in our industry. Our industry has no problem with market size, no problem with pricing, no problem with competition, no problem with manufacturing, no problem with marketing. Our industry has one problem only; no systematic self-improving discovery capability has ever existed. And the industry, by using high throughput technology and whatever, they've been -- they've been able to push off the moment of doom, but now it has happened. It's over. They've hit the wall. Experimentation just isn't going to -- that's it.

So that's the good side. What we have is immensely valuable. And it's not an alternative. It's not, well, somebody else -- this is not technology. This is science. We don't have to worry somebody's working on some different HVC or whatever it is versus somebody else's. This is science. So there's no alternative. It's either correct or not correct and we're now proving that it is --

You're discovering what is.

-- that it is correct. And that's sort of -- I mean it's -- when Bell Labs was further understanding electricity, no one could have had an alternative program underway and found a different way to understand electricity. You either understand it or you don't understand it. And what we've been doing is understanding the electricity of life. How do genes, transcripts, proteins, peptides, how do they work in a predictive way.

Now, this is all the good thing. The negative side of that is that, as you pointed out, it's totally groundbreaking. No one -- it's -- there's no clear path forward to monetizing this based on what other people have done in the past because it's never existed in the past. And we need to be absolutely certain that we do not sort of -- I'll use the term sell out. I don't mean sell the Company, but I mean that we --

Sell short.

That we don't monetize it in a way that where we lose the long term potential. To be honest, I don't -- I'm really not that concerned. I think we have great products out there under the agreements. But believe me, if we never get a penny of royalty from any agreement we've ever signed to date, it'll be disappointing but it doesn't -- it doesn't hit -- it's not critical to the future of the Company.

What is critical to the future of the Company is how do we monetize this unique competitive advantage we have. And we're so far ahead of the rest of the industry, the rest of the world in doing this, that while we're somewhat -- it's amazing, I think, that while we're in the opposition that we are, we're still spending half of our research budget on stuff that is leading the frontier of the next platforms, the next science type of thing.

But with the leadership that we have, I think we -- if we can continue, we can dominate discovery in the life sciences. I think Evogene is on its way to do that with our technology in the ag world, which it's -- you can move a lot quicker there, obviously. And I think we are now showing that we're going to probably, hopefully do the same in the pharma world.

I'll stay tuned. Thanks, Martin.

Thanks. Thank you.

(Operator Instructions)

There are no further questions at this time. Before I ask Mr. Hershberg 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 72 hours. In the US, please call 1-877-332-1104. In Israel, please call 039255901. Internationally, please call 97239255901. Mr. Hershberg, would you like to make your concluding statement?

Sure. Thank you. I would like to thank you all for participating in today's teleconference and I would like to conclude the meeting by emphasizing two points that they were highlighted only a few minutes ago.

One is that the growing pharma industry interest and resulting commercialization opportunities in our predictive discovery capabilities due to a applicable proprietary drug and market discovery capability that has been established and validated at Compugen during the past decade.

And the other one is that we will make an effort to enter the required collaborations, which are now a focus of our business development effort, to achieve cash flow breakthrough by year-end 2011 based on research revenues. And by this I would like to thank you to end the meeting and to thank you all again and please do not hesitate to contact us. Thank you.

Thank you. This concludes the Compugen Ltd. Third quarter 2009 financial results conference call. Thank you for your participation. You may go ahead and disconnect.