Compugen Ltd (CGEN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen Ltd. fourth-quarter and year-end 2010 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. (Operator Instructions). As a reminder, this conference is being recorded February 15, 2011.

With us on the line today are Mr. Martin Gerstel, Chairman of the Board; Dr. Anat Cohen-Dayag, President and CEO; and Ms. Dikla Czaczkes Axselbrad, CFO. I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all of the 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 very much. On behalf of my associates, all of the employees of Compugen, welcome to our year-end 2010 conference call. Following some brief introductory remarks by me, Dikla will highlight a few financial items and then Anat will provide you with some update information regarding our discovery capabilities in the field of drug targets for monoclonal antibody therapy, our pipeline program, and CGEN-15001. We will then conclude the call with a Q&A session.

In my brief remarks, I would like to clarify a few possible misunderstandings about Compugen that I frequently hear even unfortunately from some of our shareholders. First, I want to emphasize again that the only products of Compugen are early-stage drug and diagnostic candidates for licensing to the industry. We do not provide any tools or services, nor do we enter into industrial collaborations unless we are to receive a share of the profits of the drug or diagnostic products resulting from the collaboration.

This is true even for discovery on demand collaborations where our discovery efforts are directed to product characteristics provided by our partners, but we in such case undertake all of the discovery efforts.

Secondly, all of our discovery efforts are based on prediction and selection totally by computer, followed by wet lab experimentation for validation of the in silico predicted molecules. This science-based prediction of the sequences of novel molecules and their biological functions is very different from traditional experimentally based hit or miss discovery methods in that it requires deeper and proprietary understandings of the underlying science.

The result is a systematic and constantly improving discovery infrastructure as our science-based predictive models and algorithms are improved over time with data and insights from both successes and failures. Although many other companies have failed in attempting to accomplish this, our continuing disclosures of multiple discoveries in areas of high industry interest are clearly demonstrating this unique and powerful capability.

With respect to our science-based infrastructure, which is without doubt the core of our Company, comments such as how come Compugen has been doing pharma R&D for more than a dozen years and still does not have a product in clinical trials show a critical misunderstanding of our Company.

As mentioned, our discovery capabilities are based on proprietary scientific understandings and it took almost a decade of pioneering research as demonstrated by the numerous peer-reviewed papers by our scientists to establish enough of a predictive not descriptive base of such understandings specifically with respect to how genes translate to transcripts, transcripts become proteins, proteins cleave into peptides, etc. to build our predictive models and begin our actual discovery efforts.

But once begun, the record is clear that the capability we have established is unique, powerful, and widely applicable in addressing the key problem for our industry. That is the availability of a systematic, constantly improving, and cost-effective product candidate discovery capability.

And it is of course this unique capability that allows us to pursue our business model whereby we will rely on others to incur the substantial development and clinical costs for our candidates while continuing to benefit from milestone payments and royalties, thus creating for our Company and shareholders a much more attractive investment risk reward profile than is typical in the biopharma industry.

Before turning the call over to Dikla, I would like to make one further comment. As I mentioned, one of the subjects that will be covered by Anat in her talk today following Dikla will be an update on CGEN-15001. We are doing this in view of the many questions that we have received regarding this very promising molecule.

However, I hope by updating CGEN-15001 we do not add to another misunderstanding. That is that Compugen's success depends on CGEN-15001 or any other single molecule. To put this in perspective, CGEN-15001 was discovered in our first market-based discovery effort utilizing our integrated predictive capabilities as opposed to our past validation and use of field-focused platforms.

As previously announced, we are now moving forward with a number of additional market-based discovery programs in areas of high industry interest and unmet medical need. Furthermore, CGEN-15001 is one of nine previously unknown members of the B7/CD28 co-stimulatory protein family which was the market focus of this specific discovery effort and is the first of the nine molecules to undergo substantial validation, including multiple animal models.

We are extremely enthusiastic about the potential for this molecule but from an overall corporate standpoint, it is only an example of the types of discoveries that Compugen can now make.

And with that, I would like to turn the call over to Dikla for a few comments about our financial situation to be followed by Anat's update presentation.

Thank you, Martin. As previously stated, these current revenues result primarily from fees and milestones. Our results are and will continue to be subject to substantial fluctuations due to timing.

Revenues for the fourth quarter of 2010 were $180,000 compared with $25,000 for the comparable period of 2009. And revenues for calendar 2010 were $1.1 million compared with $250,000 for calendar 2009. Also it should be noted that reported revenues for all periods do not include amounts received from governmental and other grants which are accounted for as a reduction of research and development expenses and not as revenue.

Research and development expenses were $6.2 million for 2010 compared with $6 million for 2009 and remain our largest expense, representing over 70% of total operating expense for both years. These R&D amounts are before the reduction of governmental and other grants which totaled approximately $1 million for 2010 compared with approximately $944,000 for

With respect to our current cash status, we ended 2010 with approximately $22 million in cash and cash-related accounts. This amount does not include $5 million received early this year from a research and development funding arrangement signed in late December of last year or the market value of the averaging shares we own. Including these amounts, we ended the year with more than $30 million of valuable resources to fund our future operations.

The research and development funding arrangement signed late last year was in support of our pipeline program which had been announced a few months earlier. Under the terms of this arrangement, the investor obtains a financial interest in five of the approximately 30 Compugen-discovered molecules currently in the pipeline program and has been issued a warrant to purchase 500,000 Compugen shares at an exercise price of $6 per share expiring June 30, 2013.

In addition, the investor has a right until June 30, 2013 to waive his right to receive any such future payments relating to the five molecules in exchange for 833,334 Compugen ordinary shares. For reporting purposes, the existence of this right of exchange requires us to account for the funding arrangement as a liability on our financial statement which as of year-end 2010 was estimated to be approximately $4 million.

The amount of this liability will be remeasured to its estimated value each reporting period until June 2013 or in the event that the investor actually elects to exercise his anticipation rights for the 833,334 Compugen shares the date of such election.

After either such date, this liability will no longer appear at its estimated fair value in our statements. As stated in the release announcing this arrangement, this is an excellent example of how we can financially leverage our unique predictive product candidate discovery infrastructure to provide an increasing number of novel and attractive product candidates to feed our pipeline program and all potential licenses.

Compugen continues to have no long-term debt other than the liabilities that I just discussed resulting from the research and development funding arrangement.

As mentioned above, Compugen began 2011 with more than $30 million of valuable resources to fund our future operations. For 2011, we are anticipating a gross cash utility outlay of approximately $10 million. This amount would be reduced by any research revenues, initial fees, or milestone payments received during the year.

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

Thank you, Dikla. As we have often noted in the past, there are two important competitive advantages that distinguish Compugen's discovery efforts and business model from others in the industry.

First, the number of attractive candidates that we can discover in multiple fields of therapy is both unmatched and continually increasing that we do not depend on the success of any one or even several candidates.

Secondly, Compugen learned from both success and failure [tests] resulting in an infrastructure for discovery that becomes more successful and efficient with the passage of time.

During 2010, we announced the development of three additional discovery platforms, the Protein Family Members Discovery Platform, the Protein-Protein Interaction Blockers Discovery Platform, and the Intracellular Drug Delivery Discovery Platform.

As we continue to aggressively expand our predicted discovery infrastructure, these capabilities have started to provide a growing flow of new product candidates that address significant unmet medical needs as evidenced by the number of molecules that were recently discovered and validated and by the potential of those that have entered our pipeline program in recent months.

In addition and perhaps more importantly, the uniqueness and power of our discovery capability is now beginning to be recognized by many in the industry particularly as we now focus our capabilities on market-driven discovery.

As Martin mentioned, in the remainder of my remarks today, I would like to update you with respect to our pipeline program, some important enhancements to our mAb target discovery capabilities, and CGEN-15001.

With respect to our pipeline program, newly discovered molecules enter the program when they begin experimental evaluation following their in silico prediction and selections. The Pipeline Program consists of in vitro and in vivo experimental validation including animal disease model or equivalent testing and then selected molecules continue for up to an additional 18 months with various preclinical activities.

In October 2010, Compugen announced that approximately 20 novel molecules had entered the pipeline program in addition to eight molecules including CGEN-15001 that had already successfully completed animal disease model or similar therapeutic proof of concept validation studies.

Today we announce that we have added an additional five molecules, all of which are recently discovered novel targets from monoclonal antibody therapeutics, bringing the current total number of molecules in the program to more than 30 at various stages of evaluation.

As of today, these molecules consist of candidates for protein and peptide therapeutics, and drug target candidates for monoclonal antibody therapy with a focus primarily in the field of oncology and immunology, including autoimmune and inflammatory conditions. Although impossible to predict with confidence, we expect that one-third or more of the molecules selected for the Pipeline Program will successfully complete these activities.

Furthermore, it is our intent in general to out license or to enter into other collaborations with our product candidates towards the end of their Pipeline Program activities, although in specific cases, we may choose to either take some molecules for further development or enter into collaboration at an earlier stage as we have done in the past.

We are extremely pleased by our progress to date and expect to announce further developments for several pipeline molecules during the coming months.

Moving to our activities in mAb target discovery, as noted in today's press release, antibody therapeutics comprise the fastest-growing drug field for yielding improved therapeutics to treat many life-threatening and debilitating diseases particularly in cancer and immunology. Although significant progress has been made in recent years, one of the key challenges in the mAb therapeutics field remains the identification and validation of novel targets that are overexpressing a particular disease state or involved in the modulation of the disease.

Such targets allow the development of antibody-based therapeutic molecules which can either specifically destroy these cells while sparing the normal and healthy tissues or modulate the course of the disease.

The addition of five monoclonal antibody therapeutic targets to our pipeline program stems from the recent addition to our monoclonal antibody target discovery capability of new field expansion module enabling the predictive discovery of drug targets involved in drug response and modulation of metastatic and the development of new algorithms for the expansion of our discovery, stemming from this platform into additional cancer fields such as melanoma, liver cancer, kidney cancer, and pancreatic cancer beyond the initial capability for lung, ovarian, breast, colorectal, and hematological cancers.

This enhancement of our discovery capability allows us to discover new types of novel targets. For example, proteins involved in spreading of cancer cells to other tissues and thus is targeted by antibodies may inhibit the formation of metastatic tumors. Another example, are proteins that are predominantly found in patients that do not respond to current treatments and can therefore serve as alternative drug targets to be modulated by mAb therapy.

These recent enhancements also improve the speed with which we can discover new and mAb targets and the quality of our discoveries.

Lastly, I would like to take this opportunity to provide you with a brief overview of our ongoing efforts for CGEN-15001, one of our protein therapeutic product candidates that since its disclosure has continued to generate substantial industry interest. This molecule is one of the most advanced of our pipeline program candidates; however, as Martin mentioned, it is important to remember that although very attractive, CGEN-15001 is just one of many product candidates in our Pipeline Program and we will continue to discover additional molecules in the future.

Currently, our efforts involving CGEN-15001 are targeted to three different directions. First, we are conducting additional in vivo and in vitro experimentation involving the frequency of this candidate in multiple sclerosis and rheumatoid arthritis and are considering testing it in models for other autoimmune diseases.

Second, we are performing research aimed at further understanding of the mechanism of action and biology responsible for the molecule therapeutic effect.

And third, we have mapped and begun to pursue the development tasks required to prepare an IND enabling package for this candidate involved in preclinical safety as well as manufacturing issues and regulatory issues.

As mentioned earlier with respect to both CGEN-15001 and the overall Pipeline Program, we are very pleased by our progress to date and look forward to disclosing additional information regarding specific molecules during the coming months along with other corporate development.

And with that, I will open the call for any questions that you might have.

(Operator Instructions) Ronald Urvater, Ormed Capital.

Thanks and first, congratulations. One comment and then two questions. It's really fantastic to see the way this pipeline is expanding and it seems to be expanding at maybe a geometric rate. I also want to comment that you seem to have the wind at your back. Just in the last two weeks alone, there was the Pfizer announcement of downsizing their research facilities in the UK at Sheffield and now more than two days ago, Eli Lilly outlicensing through three VC firms, some of their research capabilities. So you seem to be really benefiting from that trend.

I just had two questions. One was I don't know if you can answer this or not, but the $5 million research program, and the five molecules that were -- sorry, the number of molecules that were selected, I'm just curious, what was the process by which that decision -- the selection process was made given the fact that the investor is not a pharmaceutical company, how would he know or how would you come to agree as to which of the molecules would be specifically funded by the research program? What was the selection process? That's my first question.

Do you mind if I comment on a part of that with respect to around the $5 million is not committed to those five molecules. The $5 million is in support of the overall Pipeline Program and we can spend it in anyway that we wish.

The return -- the five molecules are meaningful only with respect to that is where the investor has a financial interest in those five molecules. Anat, do you want to answer the first part of this?

Yes, sure. With respect to the selection process, first, we were selecting these molecules for this investment. So it was our decision which molecules will enter this investment program and we were selecting molecules that are in various stages of validation in the pipeline.

So we selected molecules that just entered the validation pipeline, they were just predicted and entered to lab work. And also candidates that have more -- that are supported with more experimental validation. We also selected molecules that are both in the field of oncology and immunology, so this was the process for selection.

I see, so it came from you. That's very helpful, thank you. My second question is -- and again, I congratulate you with going back to the Eli Lilly announcement of several days ago, they are talking about 20 molecules, 10 of which are their own, 10 of which they want others to discover for them. You have 30 already that you plan to validate.

So my question goes to the rate-limiting step in the future. If you had more money for example on the balance sheets, I don't know the answer to this, but given the rate at which you are generating these predictive molecules, these predictive targets, could you have a greater pipeline? Because obviously you have to support this through the validation process or is it really the science that it is still a rate-limiting process?

In other words, what is the rate-limiting process of even further growth of the number of molecules that are being validated? Is it the science part or is it the financial ability to support the validation?

If you were asking this question two or three years ago, my answer would be different. It would be that definitely we have to build -- continue building the capability then actually two years ago probably the answer would be validating the capabilities. But at this stage where we are today, it's a matter of investment, of how much do we want to invest in discovering?

I do remind you that the stage of the 20 molecules that we disclosed in October and the five molecules that were incorporated through the pipeline are very early stage candidates. Most of them were candidates that were predicted and selected during 2010 or just the recent months and they were incorporated to the pipeline for additional -- for validation. So this is just to complete the answer.

Thank you. At one more last question and I will step out. I'm just curious going back to 15001, given the different immunological applications, in addition to the predictive process by working with this molecule, is it fair to say that you are actually generating some additional insight into the immunological process working with these antibodies? Does your knowledge of sort of the immune process itself get enhanced through the validation of this molecule given its multiplicity of possibilities?

Actually it's not the understanding of immunology that is getting better, but it's the understanding of how to discover additional novel molecules in the field of immunology that is getting better. So we are not reinventing immunology, but we do discover how -- we do discover biological rules to finally say that we may apply in order to come up with novel discoveries in this field.

So -- and actually I would want to relate to that we are not -- and this was usually in all the last decade or so what we were doing, we were not finding new biological phenomena. We were modeling biological phenomena. We were understanding the rules behind the assurance of the biological phenomena and we could then apply to multiple areas of discovery and come up with new discoveries that should happen because this phenomenon occurred.

So we don't come up with identifying novel biological phenomena. We are understanding the underlying science behind the phenomena which have us to predict what would be the outcome of this phenomenon, whether it would create a new transcript, whether it would create a new protein or a new peptide and what would this new product -- gene product would be working for?

And we take this as the underlying capability of Compugen to come up with new product discoveries. I hope it was clear enough.

Very clear and very groundbreaking. I understand it's going right to the heart of scientific understanding. It's very, very exciting. Thanks, I will -- thank you so much.

(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 for a period of 72 hours. In the US, please call 1-888-295-2634. In Israel, please call 03-925-5921. Internationally, please call 972-3-925-5921.

Mr. Gerstel, would you like to make your concluding statement?

Yes, thank you very much. First, again, thanks to everyone for participating in the call, nice to see with each of our calls now the increasing number of participants and seeing some new names and some of our old friends.

I would like to conclude just by mentioning or pointing out how Compugen as we end 2010, begin 2011 is in many ways a very significantly different Company then as we ended 2009 with respect to -- particularly with respect to the core of the Company, the R&D capability. I'm not suggesting in any way that we've changed our strategy or that we are doing different things than we were before, but a number of different elements have kind of matured and come together, so that for example whereas we were looking at many, many different disease states and whatever at the end of 2009, now clearly we have a very strong focus in the areas of oncology and immunology.

And along with that, we have made the transformation from essentially seeing what our various platforms could discover and what we would find by validating those platforms. We've move towards integrating all of our research capabilities, so now we can -- we have the opportunity to look at market needs and then bring all of our various discovery capabilities together to try and solve -- to go after that specific need.

And you can see the result with the first program of that type, which was where CGEN was one of the -- one of nine product -- unique product candidates discovered.

And then thirdly, of course is the Pipeline Program whereas at the end of 2009, we were moving forward a few of our molecules towards animal model work, now we have substantially broadened it and we have a multitude of product candidates moving forward. And in addition, we will select some of these and we have selected some of these to actually go beyond the animal model 18 months. This is a very, very important decision for us because when you take -- go post 18 months, post the animal model results, you are into the normal stage where large pharmaceutical companies are comfortable licensing in products.

So when you combine all of that, it clearly is, as I said, a very different type of capability we have now. It's proven, it's enlarged, and of course, we have the resources that we need. We haven't been in this good a financial situation for many years and we are clearly looking forward to being able to report additional accomplishments through the remainder of this year and as we move forward.

So again, thank you very much for your confidence in us. For those of you that have been around for a while, it's been a long haul, but in the world of life science, this is the time to really spend -- do your homework and create things of value. There's a tremendous opportunity there and I think we are showing the types of things that can be accomplished if you take the long-term view.

So again, thank you and we look forward to talking with you next quarter.

Before we conclude, Peter Drake had an additional question. Peter Drake, Morgan Stanley Smith Barney.

Yes, asking about the sciences, about geopolitical. What is the tension like in Israel compared with the surrounding countries that are rioting?

I haven't noticed anything different in Israel. Of course there is --

We are waiting to see what is going to happen.

Yes, I mean, sooner or later it had to happen in the Arab -- the countries surrounding us. I think in today's world, people are going to put up with these kinds of leaders only for so long and hopefully it will move forward in a positive way.

Israel can take care of itself and they know what they're doing. There is concern about of course the peace treaty with Egypt, which is -- has been a fundamental building block of whatever stability we have in our part of the world. But so far, all of the statements coming out of Egypt are that they're not going to be -- I will put it in blunt terms, they are not going to be stupid enough to throw that treaty away. Everybody looks at that as something positive for Israel.

I think anyone who analyzes it, they will see it's far more positive for Egypt than it is for Israel. So I doubt if it's going -- so first, I appreciate your asking the question and how are you? I haven't seen you in years.

Well, I just trust that -- I've been an investor about 10 years, so I have followed you through ups and downs, but I know Israel can take care of itself. I've been there. I have full faith in it in the country.

Thank you, so do I.

Thank you.

Thank you. Ladies and gentlemen, this concludes the Compugen Ltd. fourth-quarter 2010 financial results conference call. Thank you for your participation. You may go ahead and disconnect.