Compugen's (CGEN) CEO Anat Cohen-Dayag on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Compugen Ltd. (CGEN)

Compugen Ltd.(NASDAQ:CGEN)

Q2 2014 Earnings Conference Call

August 6, 2014 10:00 AM ET

Executives

Martin S. Gerstl – Chairman of the Board of Directors

Anat Cohen-Dayag – President & Cheif Executive Officer

Avihai Shen – Interim Chief Finanical Officer

John J. Hunter – Vice President of Antibody R&D and Site Head

Analysts

Mara Goldstein – Cantor Fitzgerald & Co

Michael G. King – JMP Securities

Thomas Yip – MLV & Company

Operator

Ladies and gentleman, thank you for standing by. Welcome to the Compugen Limited Second Quarter 2014 Financial Results Conference Call. All participants are at 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 August 06, 2014.

With us online today are Mr. Martin Gerstl, Chairman of the Board; Dr. Anat Cohen-Dayag, President and CEO and Mr. Avihai Shen, Interim CFO and John Hunter, Vice President of Antibody R&D and Site Head.

I would like to remind everyone that the Safe Harbor language contained in today’s press release also pertains to all contents of this conference call. If you have not received the copy of today’s release, and would like to do so, please contact Avihai Shen, at +972-3-765-8500 or 415-373-0565 extension 320.

Mr. Gerstl, would you like to begin?

Martin S. Gerstl

Yes, thank you. Welcome to Compugen’s second quarter 2014 conference call. Please note that John and I are participating from our U.S. R&D subsidiary, the new facility in South San Francisco while are not in the higher at the company's headquarters in Israel, hopefully this will not create any communication problems.

Our wholly-owned subsidiary relocated through this site in Mid-June and with a great deal of superb effort by the entire team was up in running within a few days. We've more than doubled the floor space of the prior location this facility is the site for all of Compugen’s monoclonal antibody therapeutics research and development.

This includes generation of antibodies that specifically bind to our Compugen discovered targets, screening of those antibodies for desired therapeutic properties and together with the research team in Tel Aviv testing lead candidates for our anti tumor activity in animal models, preclinical work and future clinical trial execution.

In today's prepared remarks, following me Anat will focus solely on how our broadly applicable predictive discovery capability had been utilized to create a growing and increasingly diverse world-class, but still early stage pipeline for potential first-in-class targeted therapeutics for cancer.

Anat will then provide a brief status update with respect to our disclosed corporate objective for 2014 before opening the call for questions. I will begin my prepared remarks with some brief comments on four line items in our Q2 financial statements issued today for which I think some additional information might be helpful.

These items are revenues and R&D expenses on the statement of operations and cash balances and the liability shown for R&D funding arrangement on the balance sheet. With respect revenues, looking at only the numbers which it appears a few of the media have already done with respect to this report is possible that Compugen may have one of the largest percentage increases being reported in the U.S. for revenues for the second quarter and first half of 2014.

However, of course it is important to note that these increased revenues results solely form the reported initial milestone payment that we recently received Bayer and the relevant portions of the non-refundable upfront fee being recognized each period form that agreement. These amounts total to over $4 million for the six month period.

Next, as we have previously pointed out, Compugen’s research and development expenses are divided between two different line items on the statement of operations. R&D expenses and cost of sales. For example, in today's statements only by adding these two line items for each of the respective periods can you begin to see the impact of our previously stated intent to substantially increase R&D expenses this year compared with 2013.

Moving to the balance sheet from an accounting standpoint the vast majority of our total assets are in the form of cash and cash equivalence. I said from an accounting standpoint since in fact the two keys asset that represents the overwhelming percentage of our true corporate value do not even appear on the balance sheets and thus are giving no accounting value. These are of course are predicted discovery infrastructure and our targeted therapeutics pipeline program.

Cash and cash related accounts totalled approximately $113 million at June 30, 2014 compared with $47 million at December 31, 2013, primarily reflecting the net proceeds from the company’s offering earlier this year of ordinary shares. We have previously disclosed that we have budgeted total cash uses for calendar 2014 of approximately $24 million. Note that this not our expected burn rate since it will be reduced by our actual to-date or expected cash receipts for the year, which we have not disclosed or projected.

The fourth and last line items that I would like to comment on is the $13.1 million shown as a liability on the balance sheet. As we previously explained this is a non-cash liability resulting from the rather complex accounting required for our funding agreement with base. Compugen continues to have no cash debt.

Moving to my remarks as Chairman of Compugen, I would like to comment very briefly on our strategic positioning in the biopharma industry. To state it very simply our strategy and business model are based on the belief that are proprietary science based predictive discovery infrastructure will systematically yield better targets in our therapeutic areas are focus, such as our current focus areas of immunology and oncology. Anat in here prepared remarks today will further clarify the statement using the focusing of this infrastructure for the establishment of oncology arm of our pipeline program as an example.

From a business standpoint considering the many and very costly fail past attempt at computer predicted novel molecules by the industry, it is not surprising that when we first begin to talk with potential collaboration partners. It was very hard to convince them of the value and usefulness of our evolving predictive platform without strong experimental proof, but now with a high percentage of our in silico predicted molecules having shown initial positive validation results and continuing to show positive data. This situation is changing.

Before turning the call over to Anat I would like to point out some other important commercial opportunities provided by our business model and our predictive discovery capability for novel targets. These will not to be discussed by Anat in here prepared remarks since as I mentioned she will be focusing solely on our oncology therapy pipeline, but these additional items represent substantial potential value for our shareholders.

First of course, is that in certain cases the target candidates in the field of oncology can provide the basis for a therapeutic in a different field, this is the case with respect to the novel checkpoint targets for cancer we have discover. The extracellular domain of these membrane bound checkpoint protein may service the basis of fusion protein therapeutics for autoimmune diseases as we have disclose with respect to CGEN-15001. We recently announce that additional data regarding this candidate will be presented at a conference next month.

Next but longer term there is the ability to focus on additional fields of therapies since are predictive infrastructure itself is not limited in anyway to only oncology and immunology. Third, beyond therapeutics we also can apply our discovery infrastructure to diagnostics and biomarkers. As illustrated by our joint venture with Merck Serono for the discovery of drug related toxicity biomarkers. We hope to share some results for this collaboration later this year.

Lastly, and also with respect to biomarkers as essentially everyone familiar with the issue recognizes, biomarkers to identify patients likely to benefit from a given therapy will be essential for purposes of patient selection for treatment such as in cancer immunotherapy. This is the reason for our previously discloses program for biomarker discovery for our selected checkpoint candidates.

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

Anat Cohen-Dayag

Thank you, Martin. As we have often stated our competitive advantage and uniqueness largely results from our predictive ability to discover novel targets candidates for therapeutic development. In comparison the pharmaceutical industry generally focuses on the development of drugs targeting non-protein previously discovered primarily in academia and research for years.

Usually large amounts of scientific literature can be found in such targets supporting their underlying biology. If a protein is a promising drug target particularly with clinical validation, you will generally find multiple companies developing therapeutic agents it. This is the case with the promising immune checkpoints PD-1 and PDL-1 thus our targets for multiple biologics in various stages of development representing a very busy competitive landscape.

In contracts, a novel drug target offers an opportunity for broader proprietary position generating the potential for lower direct competition and therefore a greater commercial opportunity for first-in-class therapeutic. However to successfully develop potential therapy for such a novel target, you need to heavily study biology, which by definition is not to be found in the scientific literature.

Our investment of time and resources in biological validation of our novel discovered target is intended to enable us to make informed decision on the development pathways for each such candidate. Throughout the first half of the year we were busy establishing sophisticated experimental efficient system to allow us to test an advance many product candidate in parallel.

We have also continued with our target characterization activities supporting the potential of these candidates to service B-7328 slide checkpoints including expression process in cancer and immune tests derived from patients and emerging immunomodulatory profile.

Since the establishment of our pipeline the number of tested candidate showing such positive results what we like to call our hit rates is very encouraging. This is not only we will respect to the promise of our pipeline, but also will respect to what such hit rates indicated regarding our predicted capabilities.

Some of these targets and respective results have already been disclose by us and more will be disclose later this year. As mentioned by Martin the focus of my prepared remarks to-date is the oncology arm of our pipeline program and how our predicted discovery capability for novel targets has been utilized to create potential first-in-class cancer therapeutic with a variety of therapeutic approach. However, I will conclude with a brief status overview for our 2014 objective and then open the call for questions.

In the past, in addition to often causing serious side effects most anti-cancer drugs mainly for solid cancer where ineffective and generating a long lasting therapeutic effect on the cancer particularly in patients with advanced diseases. The great excitement seen now in the field of cancer therapy due to several new processes designed to target immune cells in the tumor microenvironment. These novel approaches are demonstrating durable clinical responses even in patients with a very prognostic although for now only for a small fraction of cancer patient.

These new targeted therapies are affecting the cross up cost of the tumor cells with immune system in tumor microenvironment and that thus harness the immune system to eradicate the cancer. The potential efforts are now underway to address unresponsive patient population within the limited types of cancers now being treated and to expanded therapeutic benefit to the many remaining types of cancers.

It is anticipated this – the use of multiple therapeutic approaches in a synergistic manner it will possible to expand the responsive patient population and the types of cancer being treated. Of course, the key to success in such targeted activities is the identification of their appropriate target proteins that play a key role in invasion by cancer of the immune response and its [indiscernible] with a tumor microenvironment and one that can be affected by therapeutic.

This relates to target such as checkpoint proteins and other proteins having an immunomodulatory function. It is precisely here that Compugen’s predicted biology infrastructure provides us with a powerful competitive advantage utilizing our understandings of basic biological phenomena and our [indiscernible] capabilities. We first identify those characteristic that are shared by the class of target of interests, we always focus on identifying those characteristic that are not already known to be common demonstrator of such a class of target.

With this critical understanding we then focus our broadly applicable predictive infrastructure to identify protein that consistent such characteristic that are not known to belong to that class of target. With our tool kit of capabilities in place, we can usually quickly identify potential target candidate largely for each application of interest. Obviously these approaches provide an excellent test to evaluate whether our predictions are correct. If accurate it should rediscover some publically known targets that we did not use in building our predictive models.

Based on this competitive advantage in novel target discoveries Compugen is pursuing a comprehensive approach for cancer therapy which has already resulted in a broad early stage pipeline consisting of three groups of candidates with each group based on a different approach to cancer therapy. Combinations within and between these approaches to cancer therapy and possibly other are expected to synergistically address major unmet needs in cancer treatment.

The first test approach is in the field of immuno oncology based on B7328 direct protein predicted to function as immune checkpoints. B7328 target attracts an enormous amount of current industry and clinical attention along with most drug industry research analysts in the financial world. This approach is currently the main focus of our company’s pipeline and where we invest the largest percentage of our R&D budget. We recently disclose the predictive discovery of two additional B7328 like protein bringing the total number discovered by us to 11.

Data for a few of these 11 proteins has been disclosed including the two targets that are the basic for our antibody therapeutics collaboration with Bayer. Included in these two recently disclose B7328 like proteins is CGEN-15049 and our continued validation efforts are demonstrating that this is also potentially very effective candidate. We recently demonstrated its expression on cancer cells and on immune cells within the tumor similarly to PDL-1 a well known immune checkpoint protein implicated in tumor associated immune suppression.

As would be expected from a checkpoint protein, our data show that the binding partner of CGEN-15049 is present on immune cells mainly activated features similar to PD-1. The counter part immune checkpoint receptor of PDL-1 and the engagement of this binding partner modulate T-cell function providing further support for CGEN-15019 potential to serve as a target for cancer and immunotherapy.

The antibody development program for this target is well underway at our South San Francisco site and we’re advancing as a priority program. We expect to provide further update for CGEN-15049 within the next few months. With respect to the other recently disclose B7328 like protein, CGEN-15052 we have shown that is expressed on cancer cells derived from tumor samples having particularly high expression in lung cancer. The body of data on this candidates target continues to grow and suggests a potentially very attractive target profile for cancer and immunotherapy.

CGEN-15052 was shown to inhibit activated immune cells, these immune cells play a critical role in the engagement of the immune system in tumor distraction and the present data suggests that CGEN-15052 expression by the cancer cells is one mechanism that helps the tumor restrain the activity of those cells.

Blocking the molecular mechanism underlying the suppression of these immune cells by the tumor may serves as an effective therapeutic approach as evidenced by other immune checkpoint in clinical development. Before moving to the second group of candidates in our pipeline program, I would like to say a few words about antibody discovery and development activities at our South San Francisco site.

As Martin mentioned, this group move to a new larger facility in June allowing us to help personnel and technology to more quickly prosecute our therapeutic oncology program. Currently the team consists of 18 employees and by year end the number of employees is expected to reach 24. This will allow us to prosecute in full force and in parallel the programs at this site.

There are currently five active antibody discovery and development programs most of which are based on our novel immune checkpoint cancer discovery. The research teams in Tel Aviv and South San Francisco continue to work closely together on these programs to combine their expertise and capabilities, which has benefited both the antibody discovery efforts and our understanding of the target biology.

The second group of oncology candidates in Compugen’s pipeline is in the field of antibody drug conjugate therapy termed ADC a form of highly potent targeted cancer therapy. Momentum is now building around antibody drug conjugate with recent drug approval and technology advancement geared towards making ADC drugs more effective and broadly applicable.

Our efforts here are currently focused on further validation of the five new disclosed ADC targets that we have identified. Both of these groups the B7328 to checkpoint protein and the targets for ADC therapy have been describe by us in prior calls and have been the subject for various press releases. Further information is expected to be disclosed about and during the reminder of this year.

The third group which is the new newest in our pipeline is also in the broad area of immunomodulatory base therapy, but in this case base on potential checkpoint protein distinct from the B-7328 family. Immune modulation of anticancer activity by the immune system involves different and often overlapping mechanisms and it has been suggested that the B-7328 family is only the tip of the iceberg.

We recently disclosed the discovery of four such proteins for potential use of immune oncology target having a potential role in making the cancer cells more vulnerable to the immune system. Our ability to predict these types of potential immune regulators that could services target potential immuno therapy resulted from being corporation into our predictive infrastructure of two new computational discovery methodologies base upon our past studies of key mechanisms underlying the immune system.

I would like to describe more details these two computational as discovery methodologies in order to provide you with some insights into how we can focus our predicted infrastructure towards specific areas of interest resulting in this case in the identification of these four recently disclosed potential targets.

The first computational discovery methodology in the identification of proteins that is present on Tumor-Associated Microphages otherwise known as TAMs. TAMs are present within the microenvironment of many tumor types and have an important role in suppressing the local immune system and promoting growth of cancer cells. Some pharmaceutical and biotechnology companies have begun to development such microphage targeting therapies, but clinical trials are still in early stages.

As this stage emerges, we intend to be ready with validation novel discovery. This discover methodology first used component of our predictive infrastructure to study the characteristic of protein known to be typically expressed on the surface of TAMs within the tumor microenvironment. We then incorporated our findings into a predictive model which we established based on these characteristic and identified proteins that fix the model.

In addition, to the expect rediscovering of proteins that are known as TAM proteins, the resulting output of this methodology included proteins that were not used in our learning tests, but were already known to be involved in some biology that’s providing us with confidence regarding the accuracy of our prediction, but in addition to these we also found several potential novel TAM proteins.

I would like to remind you again that all of these efforts were carried out entirely by means of our computational based in silco approach. Those proteins passing further prioritization criteria, we are selected to enter our pipeline for further experimental validation and characterization.

The second competition as methodology is based on the premise that the immune system is in a constant struggle with surrounding pathogen. As a consequence, both the immune system and pathogens continually co-evolving through genetic mutation. Compugen have been studying co-evolving processes for several years and based on this knowledge developed a set of proof to identified fugitive immune regulators.

Those proteins passing future prioritization criteria and that are predicted to play a role in immuno oncology were selected to enter our pipeline to further undergo experimental validation and characterization. In summary, by focusing our predictive infrastructure with two discovery methodologies deigned to specifically identify such protein, we've selected four proteins to enter our pipeline program and we are currently evaluating the function and therapeutic potential of these candidates in various experimental system.

Before opening the call for questions I would like to briefly comments on our previously disclosed 2014 corporate objective. I'm please to report these all our advancing in a positive manner although none of them have been fully achieved yet. These include objective related to collaboration at both existing and future expansion and acceleration of our activities to advance multiple checkpoint candidates, target validation of our ADC program and initiation of the biomarker discovery program for certain of our product candidates. In our next quarterly call we will provide specific update and more detail with respect these disclosed corporate objectives.

And with that we will please to answer any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from our Goldstein of Cantor Fitzgerald. Please go ahead.

Mara Goldstein – Cantor Fitzgerald & Co.

Anat can you hear me?

Anat Cohen-Dayag

Yes.

Mara Goldstein – Cantor Fitzgerald & Co

Oh great. Actually I was very – Martin’s comments about some information about the diagnostic collaboration and you discussed may be disclosing from information, can you talk about whether that will be clinical data presented at a conference or is it something just between the partners will be disclosed.

Anat Cohen-Dayag

Yes, sure thank Mara. And so with respect to the diagnostics, I guess all of you aware of the fact that we are having a joint venture with Merck Serono and joint ventures mainly in the economics and the business of this joint venture is to identify biomarkers that can predict drug-induced toxicity and we are very pleased with the progress of this joint venture and we expect just in later this year to share more information with respect to this.

And as for your second question about for clinical data we are expecting to present in two different conferences one in Boston that is going to be held next week and John is going to present in the field of oncology and another one in September, we are going to give a presentation one of our scientist on CGEN-15001in the field of autoimmune diseases and it is also going to be presented at the same conference by a poster from laboratory of Professor Stephen Miller from Northwestern University and we anticipate we have additional presentations close to the end of the year.

Mara Goldstein – Cantor Fitzgerald & Co

Okay and just one quick question on the financial of the revenue recorded this quarter how much of that was non or differed tax sorry or differed revenue?

Avihai Shen

Non of it was differed revenue

Mara Goldstein – Cantor Fitzgerald & Co

Okay

Avihai Shen

From the standpoint of the traditional sense but we are accounting for the upfront payment under the buyer agreement of the approximately of the $10 million that is being accounted for over the research period even though it is a non-refundable fee.

Mara Goldstein – Cantor Fitzgerald & Co

Right. Okay thank you for the clarification.

Operator

The next question is from Mike King of JMP Securities. Please go ahead.

Michael G. King – JMP Securities

Hey, guys sorry I got on the call little late so you may addressed this in the formal remarks, but I'm just curious about when you guys think about opportunity set that you have that’s been generated by the proprietary discovery. Where do you think or how do you think about what Compugen might develop for itself versus what am I partner – I'm thinking about immune check point versus antibody drug conjugates down the road five or ten year would it be reasonable to think that Compugen may have proprietary molecules from both in its pipeline or would it come down to really immune oncology for your own proprietary count and ADCs for partnering opportunities?

Anat Cohen-Dayag

Thank you Mike, it’s a very good question and as of now we have made the decision and you can see it is stated in our 2014 objectives that we are going to select one or more of the checkpoints to be taken by us through future clinical trials and we will share more information about this later in the year.

So clearly for now with respect to internal programs, we will focused on the checkpoint, it doesn’t mean that this will not – we have 11 check point in hand only two were license to bear for antibody therapeutics. So we have additional nine and it doesn’t mean that some of them would not be the subject of collaboration, but we have made the decision to focus that internally for checkpoints for our future clinical trials.

With respect to ADC think in these area it is also required except of having a good target which is a key need in this field, one would also need the technology to support the linker and toxin then at this stage this is aimed by the company to server for future collaborations, but that we are not ruling out the situation where we will gain an access in a certain way to this technology and for later, for the future to be able to advance also such candidate forward by ourselves.

Michael G. King – JMP Securities

Then how should we think about validation of the ADC targets in the context of not having your own internal linker and warhead so to speak?

Anat Cohen-Dayag

So the first things to do with the target that is first in-class – that is used for first-in class for ADC is to prove that the target is an ideal target for ADC and that it does the job and these proof can be done with the commercially available research reagents that’s are the toxins and the linker that can serve for the proof-of-concept in this animal model and this is a key need in the industry. The next stage would be to test it with a proprietary specific fit ADC technology in order to be able to advance it to clinical trial. John would you like to share some more information about it?

John J. Hunter

I think you covered that pretty thoroughly on that. Essentially we are going to try our antibodies with couple of the gold standard linker and toxins, again just for proof-of-concept around the antibody and the target and then with regards to what kind of deal we would do around an additional proprietary platform that the antibodies would then have to retested with whatever the technology is that would go into the clinic.

Michael G. King – JMP Securities

Just maybe further to that if you could help us understand the nature of the ADC targets, are these typically internalizing targets, non-internalizing targets some combination thereof?

Anat Cohen-Dayag

Actually we didn’t share this type of information yet and think we do anticipate to share more information probably in the next call or I prefer not to relate it now, but of course these parameters were well told by us the discovery stage.

Michael G. King – JMP Securities

Right. Okay. Thanks very much.

Anat Cohen-Dayag

Thank you.

Operator

The next question is from Thomas Yip of MLV & Company. Please go ahead.

Thomas Yip – MLV & Company

Hello everyone and thanks very much for taking my questions and thanks for your very good pipeline overview. First I have a financial question for 2014 cash burn as projection of $24 million, does that include cost of revenue?

Anat Cohen-Dayag

Yes.

Avihai Shen

That includes all cash expenditure, all expenses and assets on a gross basis. As I said in my remarks it is not our cash burn, it’s the total amount of cash leaving the company which to calculate burn that would be reduced by the amounts of buyback that we've already received for revenues and additional amount that we could receive before the end of the year.

Thomas Yip – MLV & Company

Right so that’s cash expenditure I got it. So I am estimating in the second half 2014, so I guess cash spending will be slightly increased compared to first half of 2014?

Avihai Shen

Yes. As we mentioned in the past we are in a growth stage, we are adding people particularly here in the California site and increasing our efforts as we mentioned last year that the primary activity for our company during the first half of the year was the sort of the expansion of our R&D capabilities, so that we could do multiple programs in parallel and we are now getting the benefit of that which will be reflected in increased expenses.

Thomas Yip – MLV & Company

I see okay. Now regarding Compugen discovery engine, which as you pointed out successfully regenerated allowing candidates in very exciting area like checkpoint ADC. So ultimately what is your long-term corporate strategy, is it you grow that pipeline and to maintain a leader in computational drug discovery?

Anat Cohen-Dayag

So the competitive advantage of the company is clearly in the field of novel target discovery and the business model is to selectively partner these discoveries in various stages of development to pharma or biotech companies under revenue sharing arrangement. So some of the candidates will be advanced by us sometime only preclinical trial and sometimes the clinical trial to human of proof-of-concept and we will be licensed only at that stage and the company will have a balance between partnered and un-partnered molecules in the clinic.

Thomas Yip – MLV & Company

Okay. Thank you again for taking my question and we look forward to the next quarter call for more corporate updates.

Anat Cohen-Dayag

Thank you

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Dr. Anat Cohen to go ahead with your 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 U.S., please call 1877-456-0009. In Israel, please call 039-255-925. Internationally, please call 972-3-9255-925. Dr. Anat Cohen, would you like to make your concluding statements?

Anat Cohen-Dayag

Yes, thank you. Compugen currently has a comprehensive range of prompting early stage candidates all based on Compugen discovered target aimed at fighting cancer via three different antibodies based therapeutic approaches. However, in each of these approaches as with all targeted therapy as fundamental requirement for success is the identification of appropriate target protein. It is precisely here that Compugen long term investments in establishing its unique expertise in biology infrastructure provide us with a powerful competitive advantage.

In closing all of us at Compugen look forward to expand its research and development activities and additional collaboration for further development and commercialization of our product candidates. We very much appreciate your past and continuing support and expect to provide you and the investment community with further evidence of our continuing progress and achievement. Thank you for participating in our call today.

Operator

Thank you. This concludes the Compugen Limited’s Second Quarter 2014 Financial Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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