Compugen Ltd (CGEN) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Compugen Ltd. second-quarter 2011 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 August 2, 2011. With us online today are Mr. Martin Gerstel, Chairman of the Board; Dr. Anat Cohen-Dayag, President and CEO; 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 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 972-376-58595. Mr. Gerstel, would you like to begin?

Yes, thank you very much. On behalf of my associates and all the employees of Compugen, welcome to our Q2 2011 conference call. I am now in California, while Anat and Dikla are at our corporate offices in Israel. Hopefully this will not create any problems; but if it does, I am apologizing in advance.

In our conference call last quarter, one point that I emphasized was that the only products of Compugen are early-stage drug candidates for licensing to or early-stage co-developments with the industry. We do not provide any tools or services, nor do we enter into collaborations unless the target of the collaboration is a product for which we will receive a share of the profits if successfully developed.

This is true even for discovery-on-demand type collaborations, where our discovery efforts are directed to product characteristics provided by our partners. And in our previous calls, in one way or another, the main themes we focused on related to how our discovery efforts were different, or providing evidence that we could in fact discover important product candidates in a wide range of therapeutic areas through this new approach.

Today's call will have a different focus, with the main portion being a discussion by Anat of our ongoing commercialization efforts and activities, with respect to both our current and future products and our discovery capabilities. Before doing so I would like to explain why we believe it is appropriate to focus on commercialization in today's conference call.

Compugen's goal has been to establish a highly profitable, rapidly growing, and long-lived Company through pioneering the paradigm shift which must and will happen in the underlying methodology of drug discovery from technology-based experimentation to science-based prediction and validation.

This shift does not mean just using more sophisticated technology to make an improvement in the methodology by which discovery is done. In fact, today's experimental base discovery efforts by the industry utilize some of the most advanced technologies in the world to push this methodology to the limit. Instead, we mean a shift to a new underlying methodology, which relies on science-based prediction, and then you use experimentation not to discover but to validate your computer predictions.

Expressing this in a different way, the traditional use of experimentation, now often done in high and ultrahigh throughput mode, is to hopefully observe a discovery through the experimentation -- a process which has to get more and more difficult over time as the easier discoveries, the so-called low-hanging fruit, are observed first.

In contrast, Compugen uses its scientific models of key biological phenomena to predict its discoveries totally by computer, and then use experimentation not to discover but to both validate the existence and biological function of our discoveries and improve our predictive models, a process that by definition should yield better and better results over time as the predictive models continue to improve.

In this regard it is important to note that only after actually demonstrating the accuracy of your predictions more than one time -- anyone can be lucky once -- will you likely be able to convince anyone to rely on your predictive models, no matter how much you describe how talented your people are or how sophisticated the models are. Up until not much more than a year ago, this was the situation Compugen faced as we approached the pharma world with our predictive discovery message and our initial discoveries that resulted from our capabilities' validation efforts.

In addition, since many earlier tries to accomplish predictive discovery since the beginning of the genomic revolution, by both the traditional industry and numerous biotech companies, resulted in the expenditure of many hundreds of millions if not billions of dollars with little to show for these efforts, the skepticism of the industry regarding Compugen's ability to accomplish this can be easily understood. However, we are now clearly demonstrating our ongoing success in pioneering this paradigm shift from technology-based experimentation to science-based prediction and validation.

More specifically, using our recently discovered product candidates, such as the B7/CD28-like molecules as examples, we can convincingly demonstrate our ability to predict -- entirely by computer -- models that will perform as predicted in living systems and to direct our discovery efforts to therapeutic areas of high industry interest.

Although to date our validation of these product candidates has not gone beyond the animal model stage, this stage is sufficient to demonstrate that the discovery methodology works, in that the molecules we are now predicting and validating are clearly the type of molecules that industry is attempting to discover, in many cases with orders of magnitude greater expenditures and very limited success.

When relying on predictive methodology in any field, until the methodology shows some level of truth in its predictions, it is totally useless. For example, someone could build a computer model trying to predict the winning numbers from the New York State Lottery. Most likely, no matter how long they try and how smart they are, their efforts will lead to nothing.

However, if the model gets to the point where it is accurately predicting the winning numbers even in only 1 out of 100 or even 1 out of 1,000 attempts, you know that this success ratio will almost certainly get better with time as the model is improved, based on both correct and incorrect predictions. Another good example is the continuing improvement in weather forecasting.

Now, moving from betting on the New York Lottery to investing in Compugen -- a move that some might want to argument is not very far, but I of course totally disagree -- as stated previously an accurate way to describe Compugen is a company whose goal is to establish a highly profitable, rapidly growing, and long-lived company through pioneering this paradigm shift.

Now, with proof in hand of our predictive discovery capabilities, the challenge for us is the second part of our goal. That is, establishing a highly profitable, rapidly growing, and long-lived company based on the unique and powerful discovery capability that has been established and continues to improve with time.

Thus, with this in mind we thought it would be very appropriate in today's call for Anat to discuss our current commercialization efforts. Prior to her doing so, Dikla will make a few comments regarding our financial results and status. After Anat's discussion, we will open the call to questions and answers. Dikla?

Thank you, Martin. As previously stated, since current revenues result primarily from research fees and milestones, our results are and will continue to be subject to substantial fluctuation due to (technical difficulty). Accordingly, and as previously projected, we had no revenues for the second quarter of 2011 compared with $800,000 for the corresponding period of 2010.

Our financial statements for this quarter may be somewhat difficult to understand due to the effect of two substantial noncash items which do not affect our cash position or tangible assets in any way.

The first such item is a noncash expense of $1.7 million related to stock-based compensation, representing an increase of $1.3 million over $412,000 of such for the second quarter of 2010. However, included in the noncash charge of $1.7 million for the second quarter of 2011 was a $1.3 million one-time charge to general and administrative expenses which relates solely to an extension of the time to exercise certain previously outstanding invested options.

These second such item is noncash income of $909,000 dollars related to the remeasurement to fair value of the liability related to the base research and development funding agreement signed in late 2010 in support of our Pipeline Program. As described in previous conference calls, these remeasurements to fair value are required under the relatively complex accounting for this agreement until the earlier of June 2013 or in the event that the investor elects to exchange his participation rights for Compugen shares the date of such election.

After adjusting for these two noncash items there is nothing unusual or unexpected in our financial results for the quarter.

Research and development expense for the second quarter of 2011 were $1.6 million, compared with $1.3 million for the second quarter of 2010. This continues as our largest category of expense, not including the $1.3 million noncash charge this quarter to general and administrative expenses that were just discussed.

These R&D amounts are before the reduction of governmental grants, which totaled approximately $500,000 for the second quarter of both 2010 and 2011. The approximately 20% increase in R&D expenses for the second quarter largely reflect additional activities under our Pipeline Program. Compugen continues to have no long-term debt other than the book liability related to the base arrangement as discussed earlier.

We ended the second quarter of 2011 with approximately $24 million in cash and cash-related accounts. This amount does not include the Evogene share we still own. Including the market value of this share, we ended the quarter with approximately $29 million plus valuable resources to fund future operations.

With respect to our planned level of expenditure, we previously gave guidance of $10 million for expected net cash usage for calendar year 2011. For the first six months, such net cash usage was $3.1 million. And with this I will turn the call over to Anat.

Thank you, Dikla. As noted in today's press release and as further explained by Martin, Compugen can now demonstrate without question that its predictive methodology for the discovery of new drug worthy candidates not only can identify previously unknown product candidates, but can do so for unmet medical needs in areas of high industry interest. Therefore, in this conference call, we would like to provide an overview of our current commercialization efforts which can be grouped into three general areas -- efforts related to our Pipeline Program; efforts related to discovery-on-demand type arrangements in our focus areas of oncology and immunology; and to a lesser degree, efforts with respect to past discoveries in non-focus areas.

Please note that in parallel with this commercialization effort for our existing early-stage therapeutics pipeline and discovery capabilities, we continue to undertake additional candidate discovery programs to both increase the number of candidates in the pipeline and replace those that fail, as well as research efforts to maintain and enhance our leadership position in predictive discovery. However, I will not be addressing these R&D activities in my remarks today.

As we have discussed in the past, during 2010 Compugen began training and initiating its Pipeline Program to substantially increase the number of product candidates in its validation pipeline and to advance selected molecules beyond their proof-of-concept stage. Under this Pipeline Program, newly discovered molecules enter the program when they begin experimental evaluation, following their in silico prediction and selection.

The Pipeline Program consists of in vitro and in vivo experimental validations, including animal disease model or other testing, followed by various preclinical activities for selected molecules. These molecules consist of candidates for protein therapeutics and antibody therapeutics, primarily in our focus areas of oncology and immunology, including autoimmune and inflammatory conditions.

Regarding therapeutic protein candidates in our Pipeline Program, we are primarily interested in codevelopment partnerships in which Compugen will be responsible for advancing its discoveries through funded preclinical activities towards IND. Such arrangements will allow Compugen to actively participate in the development of these molecules, thereby helping to ensure that our candidates receive appropriate attention and priority to maximize their development success. This will also provide our Company with an ongoing learning opportunity that will benefit our future work involving other candidates and increase the ultimate licensing deal value.

By way of example we have entered such discussions with a number of potential partners concerning our protein therapeutic candidate CGEN-15001, which has shown exciting potential for the treatment of both multiple sclerosis and rheumatoid arthritis. Although our current intent is for our partners to handle advanced development aspects and assume worldwide marketing rights, we aim to push forward under the collaboration with a partner the early research and development work that needs to be carried out.

The research and development work that Compugen has initiated or is currently planning to initiate under the Pipeline Program for CGEN-15001 includes defining and optimizing the specific form of the drug candidate in order to maximize its potential for clinical success. It also includes the evaluation of the candidate's biological mechanism of action; manufacturing activities; preclinical studies; and other activities related to preparation of an IND-enabling package.

CGEN-15001 is a novel fusion protein consisting of the extracellular region of the membrane protein previously not identified as a member of the B7/CD28 family. An important part of our ongoing pipeline activity for this candidate has been to define and select the optimal structure of the different parts of this fusion protein which may impact the efficacy and safety of this molecule.

Although this work is primarily technical and time-consuming, due to a predefined set of activities that are done sequentially, it is of critical importance for future clinical success and may save us unnecessary complications in later development work. It is important to complete the optimization studies prior to advancing certain other development activities because any later-stage revision of the drug candidate would likely require us to repeat much of the development work up to that stage, resulting in delays and added cost.

In addition to protein therapeutics, the other major class of molecules that we are moving forward in our Pipeline Program is antibody therapeutics, primarily in one of our focus areas, oncology. In antibody therapeutics, the most rapidly growing field of therapeutics, Compugen's competitive advantage rests upon its ability to predict promising antibody targets, which is a major hurdle in successful mAb drug development.

Although Compugen could continue to enter into arrangement for the commercialization of its drug targets, we have decided that in selected cases, in order to create a higher value from this unique discovery capability, we will extend our target validation program through the generation of the therapeutic drug itself, meaning the therapeutic antibody, before entering into arrangements for its commercialization.

In view of this, we are now in discussions with a number of companies owning proprietary technologies for the generation of humanized therapeutic monoclonal antibodies, or fully human antibodies, with the aim to create partnerships where the mAb company generates the therapeutic antibody for Compugen novel targets, and both companies advance these therapeutic antibody product candidates to early-stage preclinical trials prior to outlicensing.

The second general area for our current commercialization effort concerns various forms of discovery-on-demand arrangements. As mentioned earlier, the uniqueness and power of our discovery capabilities are now being recognized by a growing number of large pharma and biotech companies. This is particularly true as we focus our capabilities and demonstrate positive results in terms of protein therapeutics and mAb therapy for applications in oncology and immunology, areas of substantial unmet need and potential.

Furthermore, as our research team continues to enhance our predictive discovery infrastructure, through the development of additional algorithms and approaches, and as our discoveries continue to be advanced in our Pipeline Program, this recognition appreciation can only increase. Of course, we read every day of the growing focus of pharma industry management and the financial community on the extremely low level of productivity of traditional experimentally based discovery methodologies and the need for new approaches.

Although we are seeing that in most cases potential partners will want to first undertake various forms of pilot programs with us, all of these factors suggest a very positive outlook for our discovery activities. And we believe these activities could become a major resource of revenues in the near term.

Finally, we with respect to the third category of our current commercialization effort, although Compugen is now focusing its discovery and development efforts towards addressing unmet therapeutic needs in the fields of oncology and immunology, our underlying predictive discovery capabilities are broadly applicable and not field- or drug-specific. Furthermore, as part of the development and validation activities associated with establishing these capabilities, a number of very promising discoveries were made in areas of medical needs, both therapeutic and diagnostic.

Therefore, although our primary business development efforts are directed towards our oncology and immunology Pipeline Program and discovery-on-demand activities in these two therapeutic spheres, we are now in discussions with various organizations to advance certain of these earlier promising discoveries and capabilities, largely without the need for further Compugen financial resources.

With respect to timing, one can never predict with certainty either successful development stages for drug candidates or the signing of agreements. However, we continue to adhere to the timetable suggested at the end of last year when we announce the Pipeline Program, which would meaning that later this year or in the first half of 2012 we should begin to see important achievements on a continuing basis regarding the Pipeline Program portion of our commercialization efforts.

With respect to our other two areas of current commercial focus -- discovery-on-demand agreements and commercialization agreements for past discoveries outside of our focus fields of oncology and immunology -- since these rely largely on existing discoveries and capabilities, the timing relates solely to if and when we and other parties reach an agreement. We are now at various stages of negotiation for such arrangements. But as Martin has often said, no matter how advanced negotiations may seem a deal is not done until the ink is dry.

In closing, I just want to say that I hope that our shareholders -- particularly those that have been with us and supported us through the years as we were building our very unique Company -- share the excitement that we feel as we now approach the industry not only with a great story and impressive scientific credentials, but with solid proof of our predictive discovery capabilities in the form of product candidates of interest to them. I thank you for your attention, and we will now open the call for Q&A.

(Operator Instructions) Brett Reiss, Janney Montgomery Scott.

Good morning. Thank you for the opportunity to ask these questions. It is two cash flow-related questions.

On your last call, you said that you thought you would be able to get to cash flow breakeven by the end of 2011, or perhaps first part of 2012. Do you expect to be able to hit those milestones?

Then a related question. Once you become cash flow positive, do you think that you will be cash flow positive in successive quarters?

With respect to the issue of our previous statements with respect to reaching or achieving cash flow breakeven in the time frames that you mentioned, this relates to us signing discovery-on-demand or similar types of deals, or licensing out products from our Pipeline Program. As we mentioned when we talked about the timeline, when Anat spoke about the timeline for that program, it is consistent with this projection.

I mean the 12- to 18-month period -- or let me just say the end of this year, early next year is when we are anticipating that the first products in the Pipeline Program will be at that stage of development. Furthermore, we are now in discussions with a number of companies about various types of discovery-on-demand type arrangements that could provide that type of funding.

It is very important to understand that the nature of our business -- and this will address the second part of your question. The nature of our business is that we are not going to, most likely, gradually increase our revenue base until we are at breakeven. We will reach that point when we sign one or more significant agreements, either for discovery-on-demand or for a product candidate. Keep in mind, of course, that our entire burn rate in the Company is $10 million. So in the industry that we are in, it doesn't take a -- it is not an unusual agreement that would provide that or substantially more in cash.

As I said, this leads to the second part of your question, that although we expect that there will be a base of revenues for the Company from the various types of discovery-on-demand and codevelopment arrangements that we will be hopefully entering into, this will provide a base. But we probably will continue to see at least for the next couple years of very significant fluctuations based on timing of signing deals.

I am finished with that answer unless there is a follow-up question.

Keay Nakae, Chardan Capital Markets.

Thank you. With respect to CGEN-15001, how long do you think it will take you before you have come up with an optimal structure for the compound?

The different set of activities that we have to do in order to come up with this structure is very clear to us and is defined. To state exactly when is it, it is a problem. But we do expect to have that in the next few months.

So it can be half a year or something like this. In general this is what it takes in order to optimize and select the right candidate that will ensure the right efficacy and safety profile when it will get eventually to human clinical trials.

As I said in my remarks, it is very important to do that stage now and not make any shortcuts, because we may pay for that in the future, if this would not be according to the predefined set of activities that we should carry out.

Okay. With respect to Dr. Miller's lab, you talked about an expanded relationship there. How many other compounds is his lab currently working with you on to evaluate?

As we disclosed in the past when we described the expansion of the collaboration that we have with him, he is working on CGEN-15001 and other family members that we have discovered in the first one and our family members discovery platform. So this is still the case.

Well, is there a specific number of additional products beyond 15001?

We didn't disclose the number. But as I said we gave him the access to the family members that were discovered in the first round of the platform.

Okay. Then as far as the nonfocus area of products that you mentioned, that you classified in, let's say your third bucket, are those discussions with parties, third parties, that you had prior arrangements with? Or are they with completely new third parties?

Not necessarily those that we had connections in the past, but some --

Excuse me, Anat. I think actually -- excuse me on t hat. We are in active discussions with both, some from the past --

Yes, that's what I wanted to say.

-- and some new.

Right.

Yes. Sorry.

Okay. Thank you.

Geoff Gilbert, Peak Investment.

Good day. Just a question about cash usage. Given the guidance for $10 million in calendar 2011 versus the $6 million usage of 3.1, are we to expect a second-half increase in cash outflows?

Yes, in general. Currently we are -- in the first part of the year, we are working with many academic collaborators and CROs. And as we move ahead with the program -- specifically as we move ahead with 15001 -- we have to engage manufacturing facilities, different companies that are dealing with manufacturing aspects, and being prepared for making early preclinical studies. In this respect, the heavy costs associated with different manufacturing agents.

Currently we are testing a few of them. We are reviewing and auditing, and as soon as we will decide which and we will have the final version, we will get to speedy manufacturing. So this will be a heavier cost.

Saying that, we are staying with the previous guidance and we are not expecting to go beyond the $10 million, as we said.

Sounds good. Thanks for keeping a handle on cash and good luck with the discussions.

Thank you.

Thank you.

(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 1-888-782-4291. In Israel, please call 03-925-5927. Internationally, please call 972-3925-5927.

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

Yes, thank you, and I want to thank all of you for joining our call today. I am also very pleased to see the number of participants continue to increase from call to call each of our recent calls, to set a record for the number of participants.

And today, we have had a very, very substantial jump in people participating. So welcome to all of you, of our new participants.

Pioneering a true paradigm shift in a field as large as drug discovery is not easy or quick, but the potential rewards can be phenomenal if successful. In our case, with respect to utilizing predictive methodologies for drug discovery, it is interesting to note that no one doubts that if it could be done it would revolutionize this and other life science-based industries.

However, although great enthusiasm was expressed at the time of the completion of the Human Genome Project, that enthusiasm was largely converted to disappointment as numerous attempts by some excellent companies, both large and small, failed in their well-publicized and well-financed efforts. As most of you are probably aware, this disappointment has found its way onto the front pages of The New York Times, The Wall Street Journal, as well as numerous scientific publications during the past few years.

Bottom line, most in the field came to the conclusion that predictive discovery was not possible given the current state of knowledge and complexity of living organisms.

In a sense we agree, since the only reason we can now clearly demonstrate the validity of our predictive discovery, with discoveries in areas of high industry interest, is because our efforts are not based on the general state of scientific knowledge in the field. Our efforts are based on our proprietary knowledge and capabilities that we gained from our long-term commitment to furthering the predictive understanding of key biological phenomena and the creation of a unique infrastructure of algorithms, platforms, and other computational biology systems and tools.

As discussed in today's call, with this capability in hand, our task is now to maximize the returns to our shareholders by establishing a highly profitable, rapidly growing, and long-lived Company. And based on the very positive changes that we are now seeing, with respect to the industry's interactions with us and obvious recognition of our unique capabilities, we are very confident of our ability to do so.

Again, we thank all of our shareholders for their support and belief in our Company, and we look forward to reporting significant progress in the areas discussed today in the coming months. Thank you again.