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Compugen Ltd. (NASDAQ:CGEN)

Q3 2013 Earnings Call

October 29, 2013 10:00 AM ET

Executives

Martin Gerstl - Chairman of the Board

Anat Cohen-Dayag - President and CEO

Dikla Czaczkes Axselbrad - CFO

Analysts

Mike King - JMP Securities

Mara Goldstein - Cantor Fitzgerald

Ling Wang - Chardan Capital Markets

Operator

Ladies and gentleman, thank you for standing by. Welcome to the Compugen Limited Third Quarter 2013 Financial Results Conference Call. All participants are present in a listen only mode. Following managements’ formal presentation instructions will be given for the question and answer session. (Operator instructions). As a reminder, this conference is being recorded on October 29, 2013. With us online today are Mr. Martin Gerstl, 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 Company’s corporate presentation also pertains to all consents of this conference call. If you have not received the copy of today’s release, and would like to do so, please contact Dikla Czaczkes Axselbrad at 972-3765-8595.

Mr. Gerstl, would you like to begin.

Martin Gerstl

Yes, thank you very much. On behalf of all my associates, I want to add my welcome to Compugen’s third quarter conference call. I am very pleased to see that, before I believe it is the third or fourth consecutive quarterly call, again today we have a record number of participants. Also for those of you are interested in obtaining additional background information about our company after the call today, if you have not reviewed the updated corporate presentation on our website, I urge you to do so.

My prepared comments today will be extremely short, following me Dikla will provide further clarification regarding few of the key items in today’s reported financial results, and then

Anat will present the major portion of today’s prepared remark. Following Anat, we will open the call for any questions you might have. After the Q&A session and at my request Anat has agreed that I would be giving today closing remarks.

This year and particularly during this past quarter and after more than a decade of focused research and infrastructure building Compugen has been demonstrating the potential medical and commercial value of the first, of what we hope to be an increasing number of substantial product oriented chapters in the evolution of our company. This first chapter relates to our ongoing activities in the field of immune checkpoint proteins, a field of great promise for cancer therapy and also providing the potential for new approaches to autoimmune diseases.

As most of you know Compugen selected immune checkpoint to be the subject of our first focus discovery program with our broadly applicable predictive discovery infrastructure and the result to date has been remarkable. During this past quarter, with respect to our activities in immuno oncology and as Anat will more fully discuss in comments, we were pleased to announce the signing with Bayer of our first immune checkpoint related collaboration agreement which covers two Compugen discovered proteins and then encouraging the experimental results before a third protein.

With respect to applications in immunology for this immune checkpoint protein family, we announced that the previously disclosed CGEN-15001 fusion protein had demonstrated in the well accepted animal models both the potential, potential to induce immune tolerance and to be highly efficient and preventing the development of Type I diabetes, bone marrow graft rejection and arthritis. In addition, we announced the formation of a prestigious scientific advisory board of experts to provide insight in guidance in both our cancer immunotherapy programs and more generally in the company’s focus areas of immunology and oncology.

In addition to the obvious potential, medical and commercial values provided by our immune checkpoint candidate discoveries from our focused discovery program and that includes both those disclosed today and additional ones which will be disclosed in the future and perhaps it’s even greater importance with respect to the overall value of our company in the industry these discoveries provides substantial validation of the underlying broadly applicable predictive discovery infrastructure that has been established during the past decade and continues to be enhanced and extended by Compugen.

And with that I’m turning the call over to Dikla.

Dikla Czaczkes Axselbrad

Thank you, Martin. Our financial results for the third quarter 2013 were in line with our expectations. Although, there are few items that deserve further explanation. As previously stated, we anticipate that Compugen’s main source of future revenues and profit were likely weak from milestone payments and royalties, while in the near term, it will likely consist of upfront fees, research revenues and pre-clinical milestone payments.

Revenues reported for the third quarter nine months ending September 30, 2013 included the portion of the non-refundable upfront payment received under the August 2013 collaboration and license agreement with Bayer that was recognizable for those periods in accordance with U.S. GAAP revenue recognition accounting.

The remaining portion of the Bayer upfront payment is shown on the balance sheet as short-term and long-term deferred revenue. Revenues for the third quarter and nine months ending September 30, 2013 also included [indiscernible] revenues related to recent activities performed by us under our joint venture with Merck-Serono.

The reported increase in the cost of revenues for the third quarter 2013 largely reflects research and development activities performed by Compugen as part of the pre-clinical research program under the Bayer agreement and other deduction from the Bayer cash payment including required repayments to these Israeli Office of the Chief Sciences and to the Baize pursuant to our research and development funding agreement.

The reported increase of about 2.2 million in R&D expected for the first nine months ending September 30, 2013 was largely due to the establishment and negotiation of R&D activities at the South San Francisco in 2012. As well as, increasing level of R&D activities involving the Company’s pipeline program, higher pipeline cost reflected the increased use of independent investigators, increased use of applied material as well as an increase in intellectual property protection related expenses.

Moving now to our overall cash position, as of September 30, 2013 we had approximately $44 million in cash and cash related account that include as reported in today release net profit from our extra market sales during the third quarter of 2013 of approximately 585,000 confidential at an average price of $9.23 per share; this total of $44 million does not include approximately 4 million market value of our available for sale Evogene’s share held by Compugen.

We previously stated that our expectation was an approximately total gross cash expenditure of $16 million during calendar 2013 without taking into account and cash receipts and our expenditures for the year are in line with these expectations. The reported net loss for the third quarter 2013 of $4.7 million included two major non-cash items. The 1 million non-cash expense related to stock-based compensation and a non-cash financial loss of $2.1 million related to the accounting of the Baize Research and Development funding arrangement.

Compugen continues to have no long term debt other than the book liability associated with the research and development funding arrangements.

And with that I will turn the call over to our Anat.

Anat Cohen-Dayag

Thank you, Dikla. As Martin mentioned, Compugen has now begun a new and exciting chapter in composing our ongoing activities in the area of immunology and oncology. Activities that holds great potential and promise for cancer immunotherapy one of the hottest [indiscernible] in therapeutics with over the intent we’re still growing into it from Pharma industry, the medical community and patients.

Cancer immunotherapy harnesses the power of the immune system to fight cancer and is rapidly emerging as the future of cancer therapy. Currently, it focus on targeting a family of proteins called Immune Checkpoint Regulatory that prevent the immune system from attacking and destroying the tumor. New drugs that inhibit immune checkpoint woke by unleashing the body’s own immune system t enable it to recognize and attack tumor cells. Today, there is one drug on the market based on an immune checkpoint this is BMS antibody drug called Yervoy which was approved for the treatment of melanoma. Additional drug programs in clinical development by BMS, Merck, Roche and others are now exceeding an enormous amount of medical interest and media coverage and were listed by FierceBiotech as among the 10 most promising late stage drugs in the industry.

However, despite impressive clinical success reported recently for antibody drugs against immune checkpoint target showing [indiscernible] responses many patients do not respond. This suggests that additional checkpoint proteins may suppress the immune system and therapeutic agents inhibiting these checkpoints are needed. Moreover, it is now generally believed that combining checkpoint inhibitors is a way to increase the percentage of responders, provide long-term benefits for patients and extend treatment to additional cancer types. When Compugen decided to enter the immune checkpoint fields about a dozen proteins were known to belong to these family of proteins. This resulted from worldwide research efforts over a period of about 20 years. In comparison, Compugen predicted nine potential immune checkpoints and this was accomplished in a few mark of harnessing our predictive capabilities to these fields of interest.

Although one could argue that multiple novel discoveries in the field of immune checkpoints are promising enough on their own to provide the basis for establishing a successful company, it is important to note that in addition to our intention to extract the full potential of our discoveries in this field, our mission is to ultimately serve as the provider to the Pharma and biotech industry of novel and superior targeted medicines in a systematic manner and in various fields of therapy with high industry unmet need. We expect that our ability to discover multiple product opportunities combined with our business model to selectively partner these discoveries at various stages of drug development process will provide Compugen with the sustainable and growing pipeline of product candidates and a diversified portfolio of partnership leading to various forms of future revenue.

I wish to emphasize that our ability to pursue this objective rest entirely on our unique and broadly applicable discovery capabilities that facilitate the systematic discovery of novel product candidates, which are further advanced by our company prior to commercialization. As Martin mentioned, our science-driven predictive discovery capabilities were not established specifically for immune checkpoints or any other specific product class or therapy field, these discovery capabilities are based on the integration of multiple proprietary predictive models of key biological phenomena which in general are relevant for multiple areas of drug therapy and diagnostics. Of course, for each new area of focus, additional layers of area specific data and modeling are required. However, because of the unmet need opportunities available in immunology and oncology we expect to continue focusing on these fields aiming to maximize benefits to the company and to its shareholders.

A significant portion of our efforts will be directed to immune checkpoint related products all based on our discovery. Our initial steps in this field have resulted in growing recognition of our company and our early stage discoveries. For example, we’ve been invited to present at some of the most prestigious conferences in the field of immune oncology and recently have been invited to participate in future panel sessions in this field such as the Immunotherapy Panel in the Cancer Progress Conference in March 2014.

The surge of interest from the in between immune checkpoint target and related cancer immunotherapy drugs support the decision we made to expand efforts in this area by opening our therapeutic antibody discovery unit in South San Francisco that focuses on this area. In addition, we’ve already taken the initiative to extend our oncology portfolio with the second focused discovery effort aimed at the discovery of target for antibody drug conjugate and products candidates and other promising area of targeted anticancer therapy.

As mentioned earlier, the reason that new immune checkpoint discoveries are so exciting is that they hold the potential to expand both the size of the responding patient population and the scope of the cancers treated by this therapeutic approach. The first two of our nine predicted immune checkpoint target candidates to be disclosed by the company in the field of immuno oncology with CGEN-15001T and CGEN-15022, and these were the two licensed bearer for anti-body based cancer immunotherapy. A third immune checkpoint candidate CGEN-15049 for cancer immunotherapy was disclosed in September. This immune checkpoint candidate has demonstrated the ability to regulate an impressive array of different types of new cells and those are expressed on a wide variety of cancers without high clinical unmet needs. With this profile, CGEN-15049 may serve as a unique target for monoclonal antibodies therapy for many types of cancers and further contribute to the diversity of Compugen's pipeline program candidate.

Compugen is currently in initial stages of developing first in class therapeutics antibodies against some of its disclosed and undisclosed immune checkpoints. An additional set of opportunities arise from applying or discovering immune checkpoint protein for the development of therapeutic to treat autoimmune diseases such as Fc-fusion therapeutics.

This approach is similar to the BMS drug Orencia that consists of the extra cellular portion of the CTLA4 immune checkpoint protein fusion FC. In this respect, the specs mark Compugen announced zero results for CGEN-15001, it's most advanced Fc-fusion therapeutic candidate which is based on the extra cellular portion of the Compugen discovery and immune checkpoint candidate CGEN-15001T.

We've previously shown in an experimental model that CGEN-15001 has the potential to serve as a efficacious disease modifying therapy for multiple sclerosis and rheumatoid arthritis. We have very recently shown that CGEN-15001 is also highly efficient in preventing the development of type 1 diabetes and psoriasis in well accepted animal models, further expanding the scope of autoimmune conditions potentially treatable by CGEN-15001.

In addition CGEN-15001 was highly effective in preventing rejection of transplanted bone marrow cells in animal models, suggesting the deep drug candidates [indiscernible] induction of immune tolerance, a key goal in the treatment of autoimmune diseases.

In comparison with current approaches that generally suppress that immune system, tolerance in that and has the potential to provide a substantial solution of the disease without compromising the immune system's capacity to fight infections and malignancies.

A few months ago we have announced the formation of a scientific advisory board consisting of renowned translational scientists and clinicians including KOS in the phase of immune checkpoints who will provide insights and guidance concerning the company's activities in both the field of oncology and immunology, including support and direction of our early stage pipeline of therapeutic proteins and monoclonal antibodies. We’re confident that in no, expertise and experience of our newly formed SAB will prove invaluable as we advance our research, development and commercialization efforts.

Before opening the call for questions I want to express how gratifying this is for a company such as ours to have initially chosen such an exciting area to apply our unique capabilities with our recent progress now providing the potential to establish Compugen as a significant contributor in the worldwide fight against cancer and the treatment of autoimmune diseases through therapies based on immune checkpoints, while at the same time demonstrating the value of our unique predictive discovery infrastructure.

And with that I open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question is from Mike King of JMP Securities. Please go ahead.

Mike King - JMP Securities

I just would like to hear if you could just elaborate on what you think your competitive advantage is going to be? Immune checkpoints space is gone very populated with a number of large competitors. So just curious, I know you are trying to keep a lot of your information confidential at this time. But just maybe conceptually help us understand what investors can expect to see as far as competitive differentiation your checkpoint inhibitors?

Dikla Czaczkes Axselbrad

In general the field is really hard and as we stated there are large Pharma companies that are dominating these fields but still the problem is that the percentage of responsive population is low and everybody is looking to try and increase the amount of responders and expand the number of cancers that are targeted by using in checkpoints.

So what’s Compugen and probably many others that are in this field what we’re trying to do is to come up with checkpoints that may provide this type of solution to expand the patient population of responders and to broaden the type of indications that we target and this can be by looking for differentiated mechanism of actions and will be targeted by our immune checkpoint. So this is the problem but there is the plan.

Martin Gerstl

Just want to comment, obviously, there are many, many different types of cancers and the approach here of going after the checkpoints most likely means that there will be different checkpoints for different cancers and combinations of themselves. So, I think about it like antibiotics in a way, it’s going to be such a big field, exact, there will be room for many, many major products.

Mike King - JMP Securities

Right, thank you.

Operator

The next question is from Mara Goldstein of Cantor Fitzgerald. Please go ahead.

Mara Goldstein - Cantor Fitzgerald

Thanks very much for taking the question. Maybe you can just discuss or talk for a minute about the environment or rather reception around potential partner in discussion now that you find there onto the program here?

Dikla Czaczkes

In general, you know and I think everybody else knows that Pharma companies are looking for opportunities in this field it’s not only with respect to Compugen, I’m not trying to relate typically to Compugen, but the interest is from companies that have assets (Ph) in these fields or companies that do not have assets in these fields and would like build a portfolio. There are not a lot of opportunities for early stage assets that out there, so we remain enthusiastic with the portfolio that we have.

Martin Gerstl

I also would like to add that what is perhaps a very, very major benefit of the negotiation that went on with respect to the first two molecules was that, it brought to the company almost every major company that is in this field, and for us the most important thing is to get other companies to be aware of what we’re doing and the kinds of results we’re receiving. This remains in certain areas still skepticism that what we’re doing is impossible to do. And so the more we can get these companies to visit with us and actually see the results completely different change.

And it’s you see a number different ways, obviously we see it by the contacts that we now have active contacts with a number of major companies who are coming to us, asking us what we have and by addition as not mentioned by this when people are setting up programs for industry conferences and whatever, we’re high on the list of invitees now. So the atmosphere has totally changed. Of course in the end, what will matter is the quality of our product candidates and we have a lot of confidence in that.

Mara Goldstein - Cantor Fitzgerald

Really, thanks so much, Martin.

Operator

The next question is from Ling Wang of Chardan Capital Markets. Please go ahead.

Ling Wang - Chardan Capital Markets

Thank you for taking questions. Can you share with me your thoughts on your candidate that you wanted to advance into clinical study, I mean with the Bayer’s two compounds disclosed and CGEN-15049. Am I understand it correctly that you know the 15049 would be your top list for moving forward?

Dikla Czaczkes

We did not disclose yet what our plans to take into the clinic and in fact we did not select yet, what we’re going to take clinic, and we will relate to it in the future.

Ling Wang - Chardan Capital Markets

So what might be the timing for the advancement, would it be this year or later?

Dikla Czaczkes

I think, in general, with respect to objective that we have stated in the beginning of the year, we will relate it in the next quarterly call.

Ling Wang - Chardan Capital Markets

Okay, thank you.

Operator

I'm sorry, (operator instructions). There are no further questions at this time, before I ask Mr. Gerstl to go ahead with his closing statements. 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 03-925-5921; internationally please call 972-3925-5921. Mr. Gerstl, would you like to make your concluding statements?

Martin Gerstl

As I mentioned at the beginning of our call today at my request Anat agreed that I would give today's closing remarks. The reason for this request was that I would like to describe another advantage of our discovery approach, that is cost effectiveness, an advantage that we seldom discuss. Our cost effectiveness advantage derives of course from our predictive discovery approach but existed solely due to having in place our broadly applicable discovery infrastructure. The [indiscernible] infrastructure not only provided the starting point for our immunoregulatory program but also for our biomarker joint venture with Merck-Serono, and our second focused discovery program initiated earlier this year in the field of antibody drug conjugate cancer therapy.

Furthermore he will provide the starting point for future discovery programs, whether in our current focus areas, in other therapeutic areas or even in the diagnostics field, this broad applicability is the reason for the statement in my opening remarks that with respect to the overall long-term value of our company in the industry of even greater importance than the substantial potential provided by the immunoregulatory discoveries themselves is that these discoveries provide substantial validation for these predictive discovery capabilities.

As previously mentioned we seldom point out the cost effectiveness advantage of our discovery approach since in our industry the quality of the discoveries and the time required for discovery are much more important. Therefore we do not want our investors and others to think that cost effectiveness is the key advantage that we offer since it is not. However we now have precision data to evaluate the cost effectiveness of our first focused discovery program for immune check points and our estimated cost for our second program and the results are interesting to say the least.

Please note that since as I previously described the same underlying infrastructure has been and will be the starting point for all our focused discovery programs. The substantial expenditures that we required during the past decade and are still ongoing in order to establish and continuously enhance this infrastructure are not included in this analysis. Only the direct costs beginning with the date of initiation of the program, building on the then existing infrastructure and ending with the predicted molecules.

We estimate that these direct costs of incorporating the required immune check point program specific algorithms and other components to the already existing infrastructure at that time and undertaking the actual predictive discovery effort totaled less than $1 million, furthermore unlike traditional observation based approaches, typically as was true in this case, predictive discovery yields multiple discoveries at the same time. Therefore if you divide this less than 1 million total direct cost by the nine predicted immune checkpoint molecules resulting today from this program, the result is about $100,000 per discovered molecule, a remarkably, actually unbelievably small amount, with respect to anything in pharmaceutical R&D, much less discovery of novel molecules and perhaps what is currently the hottest area of pharmaceutical research.

Again as previously stated this calculation does not include the past costs of establishing the predictive infrastructure that is essential and will be essential for all of our discovery programs, also it is important to note that the required subsequent validation and early stage development of these molecules must be done on a candidate by candidate basis and is much more costly. However as Anat described in this and prior calls Compugen is also clearly demonstrated extremely high levels of accuracy for our predictive models.

And with this, and for those of you still listening, I will end my long closing remarks. Thank you again for participating today and for your interest in our company. Lastly to those in the U.S., have a great day. Thank you.

Operator

Thank you. This concludes the Compugen Ltd. Third Quarter 2013 financial results conference call. Thank you for your participation. You may go ahead and disconnect.

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