Compugen's (CGEN) CEO Anat Cohen-Dayag on Q2 2016 Results - Earnings Call Transcript

| About: Compugen Ltd. (CGEN)

Compugen Ltd. (NASDAQ:CGEN)

Q2 2016 Earnings Conference Call

August 2, 2016 10:00 AM ET

Executives

Martin Gerstel - Chairman

Anat Cohen-Dayag - President & CEO

Ari Krashin - CFO

Analysts

Thomas Yip - FBR

Brett Reece - Janney Montgomery Scott

Denis O'Hara - Wells Fargo Advisors

Operator

Good morning and thank you for joining us today. With us today from Compugen are, Mr. Martin Gerstel, Chairman of the Board; Dr. Anat Cohen-Dayag, President and CEO, Mr. Ari Krashin, Chief Financial Officer and John Hunter, Vice President, Antibody R&D and Site Head, Compugen USA Incorporated.

Before we begin, I would like to read the following regarding forward-looking statements. During the course of this conference call, the company may make projections or other forward-looking statements regarding future events or future business outlook, including anticipated progress on Compugen's pipeline program as well as commercialization efforts. We wish to caution you that such statements reflect only the Company's current expectations and that actual events or results may differ materially. You are kindly referred to the risk factors and cautionary language contained in the documents that the Company filed with Securities and Exchange Commission, including the Company's annual report on Form 20-F, filed March 7, 2016. The Company undertakes no obligation to update any projections or forward-looking statements in the future.

I will now turn the call over to Martin Gerstel, Chairman of the Board of Compugen. Please go ahead.

Martin Gerstel

Thank you. On behalf of all of us at Compugen, welcome to our second quarter 2016 conference call and I thank all of you for joining with us today. Please note that Anat and Ari will follow me with prepared remarks are at our headquarters in Israel, while I'm participating in the call from Compugen USA, our facility in South San Francisco. As was mentioned, with me this morning is Dr. John Hunter the Site Head here who will be available with the rest of us to answer questions during the Q&A period following our prepared remarks. Hopefully this difference in locations will not create any communication problems.

Recently, I've received questions from a few shareholders that have known me for a very long time asking how I feel about what they see a disappointing current market value for Compugen's shares and my expectations regarding this for the future. For obvious reasons, I cannot provide any predictions regarding future stock prices. However, in my prepared remarks today I would like to address these questions by briefly summarizing the reasons why I'm more optimistic now than ever regarding our future and that is with respect to both the potential for substantial financial rewards for our shareholders and important medical contributions.

The foundation for this optimism is of course our unique and broadly applicable predictive biology based research and discovery capabilities, currently focused on drug targets. As has been discussed in the past, these capabilities are the result of our very successful long-term and continuing pioneering efforts in predictive biology, whereby we attempt to replace for purposes of seeking potential discoveries of interest, the industries reliance on observations of various forms of high throughput experimentation with computer predictions based on deeper understanding and modeling of the relevant underlying science.

However, although these unique capabilities provide the foundation through my optimism regarding our corporate future. In my view our stock market value is now and for the foreseeable future will most likely continue to be largely determined by the level of recognition in the financial world of two powerful trends ongoing in the biopharma world combined with the financial world recognition of the key advantages provided by Compugen's unique research and discovery capabilities for us to commercially benefit from each of these two trends and to do so from a position of competitive advantage and leadership.

The first trend which is the most specific and the one which has already obtained significant and growing recognition and excitement in the financial community is the increasing role of immunotherapy in oncology, to-date primarily through antibodies targeting immune checkpoints. However, as is now becoming more widely appreciated only a small percentage of oncology patients respond to today's immune therapy.

In this regard, Dr. Richard Pazdur, Head of the US Food and Drug Administration's Office of Oncology products. Recently stated his concern that too many companies are focused on developing additional therapies against the same PD-1 protein target. In an interview at the recent Annual Society of Clinical Oncology or ASCO meeting. Dr. Pazdur stated "people should ask themselves would we be better off spending these resources into looking at more novel drugs". He continued "as with everything in drug development it is about reduction of risk but the number of similar drugs in development at the same time is a first in the oncology field."

In her prepared remarks today, Anat the following comments by Ari regarding our second quarter financial statements will focus on why we believe that our multiple immuno-oncology programs all based on novel Compugen discovered targets and representing one of the broadest novel immuno-oncology target efforts in the industry have the potential to be a key component of the next wave of products in this exciting field and provide therapies either as monotherapy or in combination with other drugs for many more patients and as the focus of the financial community continues to move towards what's next in immuno-oncology, I believe it will be very difficult to ignore Compugen.

The second related but much more general and far reaching trend is the increasing use of antibodies fusion proteins and other biological's as drug. This should not be news to any of you, since currently biologics are one of the fastest growing segments in the drug industry. In calendar 2014, they accounted for seven of the top 10 selling drugs. Also from their perspective of Compugen it is worth noting that all seven were in the fields of oncology and immunology Compugen's two current medical areas of focus.

Often called large molecule drugs to distinguish them from the chemist synthesized small molecule drugs that the industry primarily relied on in the past [ph]. Developers of such biological's do not face the immense hurdle faced by the industry expect to small molecule drug, that is the extremely difficult very costly and usually unsuccessful outcome when attempting to discover for a target of interest, a small molecule drug that has both sufficient therapeutic activity and also specificity.

In contrast, biological drugs or at least the most difficult aspects of them are not synthesized by chemist. They're made by harnessing an aspect of nature, for example utilizing today's methodologies a mouse can make a monoclonal antibody, whereas the world's best chemist cannot. In my opinion, this key difference with respect to biologicals has largely been ignored by the financial world. Although, we're now seeing an increasing number of technologies harnessing properties of nature in order to create biological drugs as earlier indicated almost all companies pursuing each new technology are going after the same few targets since currently very few validated targets are available.

Therefore, I'm confident that the availability of novel targets will soon be recognized as the key unmet need with respect to the future growth for biological and I have no doubt that when looking around to see, who has the proven capability of systematically discovering such targets again it will difficult probably impossible to ignore Compugen. Of course these two accelerating trends, the growing impact of immunotherapy in oncology and the increasing share of the pharma world represented by biological's would happen with our without Compugen.

However, as far as I know Compugen is the only company that has focused more than a decade on the successful establishment of the unique type of research and discovery infrastructure designed to the meet the resulting major unmet need for a novel targets and by doing so, provide us multiple potential opportunities for commercial success, while at the same time making important contributions to medicine.

I'll now turn the call over to Ari.

Ari Krashin

Thank you, Martin. Our financial results for the second quarter of 2016 release today are in line with our expectations. Revenue for the second quarter of 2016 were $0.5 million compared with $0.2 million for the second quarter of 2016 reflecting primarily the milestone payments in the amount of $0.4 million received in the second quarter of 2016 and the non-cash amortization during this period of the upfront payment in both cases related to the August 2013 collaboration and license agreement with Bayer.

R&D expenses for the second quarter of 2016 totaled $5.5 million compared with $5.2 million in the second quarter of 2016 continuing to reflect our increase internal and external activities during the period primarily with respect to our leading immuno-oncology programs including pre-clinical activities towards our projected IND filing next year for COM701.

Our next loss for the second quarter of 2016 was $6.6 million or $0.13 per diluted share compared with the net loss of $6.8 million or $0.14 per diluted share in the comparable period of 2016. As of June 30, 2016 we had approximately $74.1 million in cash and cash related accounts with no debt. Going into the second half of 2016 and consistent with our prior estimates total cash expenditures for the second half of 2016 are expected to be in the range of $14 million to $15 million, with an estimated cash balance of approximately $60 million at the end of 2016, without taking into consideration any additional cash received from existing or new collaboration during the remainder of the year.

With that, I would turn the call over to Anat. Anat?

Anat Cohen-Dayag

Thank you, Ari. As we've stated in the past, we believe that based on our first focus discovery efforts utilizing our predictive discovery infrastructure, we've established a pipeline program that is positioned to play a key role in the very existing area of immuno-oncology. In my prepared remarks today, I would like to provide you with some additional insights into a few of the ongoing activities being undertaken by Compugen not only to advance our lease program, but also to ensure that we have a continuing and expanding role in this key medical area.

These activities focused on what we believe is one of the broadest novel immuno-oncology target efforts in the industry composed of two key immune checkpoint target categories. T cell-based and myeloid cell-based with both identified within the tumor microenvironment of multiple cancer types. In addition, I would provide some further information regarding our CGEN-15029 program.

As pointed out by Martin, most biopharma companies are focusing their development efforts on known T cell checkpoint inhibitors primarily PD1 and CTLA-4. Although certain patients are responsive to current anti-PD1 or CTLA-4 treatment with the portion showing durable clinical responses. The majority of cancer patients sometimes even within a responsive cancer type are not responding to available cancer immunotherapy.

As mentioned in the New York Times newspaper of a couple of days ago, similar to other statements made recently. It is believed that additional checkpoints not yet discovered may play a role and the hunt is on to find them, and then make new drugs to act on them. We together with our highly involved and committed SAB and strategic advisor believe that in some of the cases in which patients are not responding the novel process that we discover could be inhibiting the immune response. Therefore, in addition to the potential to service monotherapies for these patients antibodies against our targets such as COM701, the lead antibody we generated against CGN-15029 also could have the potential to serve in combination with checkpoint inhibitors or other drugs to enhance the response rate amongst such patients.

In the ongoing evolution of the field of immuno-oncology, which has resulted in the development of several very successful cancer immunotherapy drugs? The analysis of knockout mice in which the target of interest has been genetically removed has played a major role. This allows the evaluation of the targets role in the function of the immune system in normal conditions as well as in tumor settings.

These in vivo system were instrumental in driving the development of approved immuno-oncology therapies such as the PD1 and CTLA-4 inhibitors and most importantly have been shown to be predicted of the ultimate clinical relevance of their respective target proteins. Therefore, we're pleased to disclose that since early 2015 we've invested in generating a comprehensive in vivo validation system based on multiple knockout mice each unique to a specific selected target in our pipeline to assess mechanisms of actions identify effective drug combinations and robustly differentiate our novel pipeline candidate.

As previously mentioned, our goal is not only to successfully develop our initial immuno-oncology program, but also to ensure that additional novel but validated programs enter our pipeline on an ongoing basis thus providing continued and expanding role for us in this key medical areas. Therefore, we're applying this in vivo validation system to our leading candidates and also to the majority of our immuno-oncology portfolio of target candidates. Both our T cell and myeloid cell target candidates each of which potentially offers a new and different cancer immunotherapy solution.

The knockout mice for the majority of our novel target are now available at Compugen as well as under our collaboration with Professor Drew Pardoll of John Hopkins University, who's the Chairman of our SAB and Compugen's key partner in the detailed assessment of our drug target program. In view of the past success of similar module systems in pre-clinical efficacy of the currently approved PD-1 and CTLA-4 inhibitors, we believe these studies will provide substantial evidence of the potential clinical utility for many of our target candidates including both our high priority targets now undergoing therapeutic antibody development activities and our earlier stage targets now undergoing in-house and external validation activities.

The segment of our immuno-oncology program related to T cell immune checkpoint is meant to address cancer in which the immune T cells have already infiltrated the tumor such as melanoma and non-small cell lung cancer. Of course as I mentioned, many pharma companies are also focusing on T cell checkpoint inhibitors in almost all cases known checkpoints and consequently, we together with our SAB and strategic advisors are aggressively focused on differentiating our novel programs from those of other companies.

With respect to CGEN-15029 our promising high priority T cell-based immune checkpoint during the past quarter, we selected the lead therapeutic antibody named COM701. COM701 is now undergoing pre-clinical development activities in preparation for advancement into clinical trials with an anticipated IND filing next year. COM701 was selected from among multiple higher affinity candidate antibodies demonstrating the ability to block CGEN-15029 from binding to its ligand.

The selected lead antibody demonstrated potent reproducible assessment enhancement of T cell activation consistent with a desired mechanism of action of activating T cells in the tumor microenvironment to generate anti-tumor immune responses because COM701 originated from a mild hybridoma antibody, it had to go undergo a humanization process of approximately four months prior to advancement into pre-clinical development.

We've already initiated cell lung development for manufacturing of this antibody candidate and the antibody is now advancing into IND enabling studies, which includes toxicology testing and additional pre-clinical characterization in preparation for clinical trials. In the coming months, we expect to continue to share with you additional data on CGEN-15029 program and its differentiation profile.

As described in the last quarter's call. The newest portion of our immuno-oncology pipeline consists of programs based on target expressed on myeloid cell, identified within the tumor microenvironment. In certain tumors known as cold or non-inflamed tumors such as pancreatic cancer. Immune T cells do not infiltrate the tumor due to the strong immunosuppressive nature of the tumor microenvironment.

It is believed that the immunosuppressive nature of the tumor microenvironment results impart from the myeloid cell population, which inhibit the immune system responses against the tumor. These tumors are considered non-responsive to current immuno-oncology treatments including current checkpoint treatments.

This is why myeloid biology [ph] involvement in cancer immunotherapy is of high industry interest and represents such a promising area for the development of new cancer therapy. Myeloid cell targets may provide treatment options when there is a need to turn the immunosuppressive environment of the tumor to a more permissive one for a therapeutic antibody against a myeloid target and thereby, allow the immune cells to infiltrate the tumour. Once the tumor is inflamed due to this infiltration of T cells, if necessary the therapy could be enhanced with additional treatments by T cells based immune checkpoint inhibitors.

In short, myeloid drug targets may provide powerful new mono and combination therapy treatment opportunities for patients with the diseases refractory to existing immune checkpoint inhibitors. However, there are very few known therapeutic myeloid target and this is why we decided to focus our discovery efforts also in this still undeveloped field of immuno-oncology in addition to our activities in field of T cell-based immune checkpoint target candidates, as was the case with T cell targets. Our broadly applicable predictive discovery capabilities has demonstrated that it is well suited for this purpose.

Consequently now, with our immuno-oncology target pipeline consisting of programs in both target segments, we're focusing on target candidates that have the potential to complement each other and are expected to substantially enhance the overall value of our pipeline particularly when taking into consideration the need for a combination therapies. Although all of our myeloid target candidates were discovered through the use of our predictive infrastructure, it is interesting to note, that the discoveries were made during two separate discovery efforts.

In the initial effort, we utilized the same algorithms and methodology we used to discover our T cell-based immune checkpoint program. Following this, last year we enhanced the first version of our LINKS discovery engine one of the three principal components of our discovery infrastructure with a goal of specifically identifying additional novel myeloid cells with a tumor micro environment.

The success in the prediction of additional myeloid targets in these second efforts is another demonstration of Compugen advantages of being able to continuously build on a broadly based discovery infrastructure reflecting deep understandings of the underlying science. We hope to share with you further information on our enhanced LINKS platform in the near future.

In addition to our broad and growing internal portfolio of immuno-oncology program, we are of course very pleased to see the continuing progress as previously publicly disclosed of both of the immune checkpoint targets under our collaboration agreement with Bayer. As with our other novel target, each of these two targets is demonstrating distinct differentiation profile.

Before concluding my prepared remarks, I would like again to note that Compugen targets consist of novel proteins predicted by our discovery platform, for which there is little or no relevant past research. Therefore, for each and every program we must bridge these gaps in knowledge [ph] before launching therapeutic programs.

Over the past few years, we built both in our headquarters and in our South San Francisco facility, the infrastructure required to advance novel drug target which we believe is unique in the industry. Looking ahead, we are very pleased with the diverse candidate portfolio that has resulted from our unique capabilities and we look forward to reporting advancements in our novel immuno-oncology pipeline as they occur.

Martin, Ari, John and I will now be pleased to answer any questions you may have, as earlier mentioned Martin and John are at our California facilities. So I will guide the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] the first question is from Thomas Yip of MLV and Co. Please go ahead.

Thomas Yip

Hi, everyone. This is Thomas from FBR. Just first a quick question about your new in vivo validation system based on knockout mice. So obviously as you outlined it helps internal R&D efforts, but are there - do you think there will be other potentials to events this validation as standalone system that could perhaps be license [ph] or in collaboration with the development of other drugs.

Anat Cohen-Dayag

So in order to answer this question maybe I'll give some kind of background about what is it. In identifying novel target except [ph] of, I'm trying to understand a biology before you launch a therapeutic campaign, the process moving forward is generating an antibody and starting to push it forward in the development process. However, when the least specific protein from the mice you start to learn how this mice is behaving without this protein and you look at the immune system and how it reacts and you can also incorporate tumors into the same mice and understand whether these tumors without this protein, that if it is really inhibiting the immune system, whether the tumor is growing or not and how it affects it.

In general, every specific, every knockout is specific to a specific target that we identified and regenerated the knockout mice. So the first thing is to understand the function. Speaking about what to do with other drugs or that would be of interest to others, would be, when would like to test the effect of our target in combination with additional targets or specifically with additional drugs. It's a great tool to understand what is going to be the function of a combined drugs of our target and another target, maybe again ours or another one that is not Compugen's, in working together and to start to have a reason to believe, in specific drug combinations as compared to others.

As we stated in the remarks, these knockout mice that were used with the deleting PD1 or deleting CTLA-4 or deleting them together in the knockout mice, where really the basis of trying to starting to understand the clinical relevance of this drugs of these set targets as drugs.

Thomas Yip

Okay, thanks for all the background, Anat. And then just a follow-up regarding financials so with your IND preparations in mind, how should we look at the future quarter rate, burn rate from this point forward?

Ari Krashin

So, hey Thomas it's Ari. As I mentioned earlier, right now looking into the remainder of 2016, we expect to have additional expenditures of about $14 million to $15 million again, without taking into consideration any inflows of cash into the company and the current focus is, that we're probably going to end the year of approximately $60 million. Going into 2017, we obviously did not prepared the budget yet or planned it in details, but I would say that it's safe to assume that the burn rate or the cash expenditures will not increase significantly over the cash barrier that we have right now, when we have sufficient resources to develop the program further.

Thomas Yip

Okay, sounds good. Thanks again for taking the questions guys and looking forward to the next quarter.

Ari Krashin

Perfect, thanks.

Operator

The next question is from Brett Reece of Janney Montgomery Scott. Please go ahead.

Brett Reece

The Compugen-15029, which regarded the optimistic might file for an IND filing next year, is there any similarly between that and the potential with the molecule that was licensed with Celgene and Jounce?

Anat Cohen-Dayag

I'll say the following, we at Compugen discover novel target where there is almost or no scientific literature work around them and when we work on this target, we need to - as I stated to bridge the gap in order to move ahead with the program and bring it to the stage of 029. And the program that is the under the collaboration or the leading program of Jounce is also a novel target. In the sense that it doesn't have human proof of concept, but on the other hand, it's a target is known and has a years of research behind it and this is one of the differences between the two program.

On another front, this specific program of Jounce enter clinical trial later this year, this is according to their reporting CGEN-15029 is actually scheduled for IND for next year. So there is still way to go from this to, from where we are today to clinical trials and these are the main two differences that I would think of.

Brett Reece

Okay, this is a kind of layman perception of Compugen, that Jounce announcement triggered a lot of conversation with my clients and shareholders and it went something like this, Brett you got a lot of confidence and faith in Martin Gerstel. The company has got compelling science. There's been numerous news releases of key opinion leaders with resumes that would choke proverbial horse come onboard with Compugen. Your channel checking shows that the Chief Executive Officer is a hardworking, hard charging lady with all these advantages. Jounce gets invited to the prom and we're still sitting home, what do I say to my shareholders?

Anat Cohen-Dayag

It's very good question and thank you. I think that it should only set the page or generate more encouragement. This deal is for sure an indication of how much this field is of interest and how much new targets are needed for the immuno-oncology and not only new targets, new immune checkpoints. Remember that we did not disclose yet what are the checkpoints that we are working on, so what Jounce is working on is in the public domain.

They've stated these are targets that are known scientific literature, this is one thing. The second thing as I said before the leading program in Jounce pipeline is more advance than 029. It is more advanced, they're going to get to clinical trials late, this year as I stated. We're not yet there we're raising our own pipeline, the targets are compelling promising diverse. We have at Compugen, the infrastructure in order to deal with such novel targets as the ones that we discover and we have both the capabilities and we have the resources in moving forward with them.

We are also very committed to advancing forward. So we're currently building the value and the interest is out there. I think that this is build [ph] is indicating that we are operating very compelling and rewarding area. So this is my answer to those that are looking at this type of build [ph] by the way not only they say Jounce, Celgene there as much as you can see, there are other developing areas, mostly focused on licensing antibodies and not the drug targets. Antibodies, the therapeutic antibodies that are moving forward and usually close to the time that they're getting to clinical trials or at the stage of clinical trials. So we have very compelling targets but they're earlier than that.

Brett Reece

Great. Thank you.

Operator

[Operator Instructions] the next question from Denis O'Hara from Wells Fargo Advisors. Please go ahead.

Denis O'Hara

Anat, I'm just wondering if you could give us a little bit a color on what something Ari said earlier about next year's anticipated burn rate, not being substantially higher than this year or the back half of this year. Am I to read into that or it would be it incorrect for me to read into that the IND filing which I assume there are relatively significant cost attached to, does that suggest that the IND filings is going to be more towards back end of the year as oppose to front end of the year. And if the answer is no, then where were you taking resources from in order to keep the burn rate flat to support the IND filing and things that go into that and then as a follow-up, there was no mention of 15027 at the ADC part of the business, is that because it's being deemphasized, is it not getting the same kind of support, can you just give me an update on that and then for that matter 1501, thank you.

Anat Cohen-Dayag

Okay, hi Denis. So with respect to expectations of the expenditure for next year. I would like you to think about it in the following ways. We are of course allocating the required resources for the therapeutic programs themselves to move forward and this is, where our resources are, our focus were [ph] not saving there. In the last few years and I already stated it in the prepared remarks, we generated an infrastructure to be able to validate novel drug targets and this infrastructure we required investments in vitro systems, in vivo systems, what you heard today, what we already did not disclose and we invested money there.

So next year, in order to be able to advance the therapeutic program, we intend to shift resources the infrastructure is ready and can address different type of early stage programs and we'll shift resources to therapeutic care development and by way every year, we are dealing with this type of shifting as we move forward in the drug development process. So this is one, with respect to ADC and also 1501, but I'll start with the ADC. Maybe I'll better say first with immuno-oncology.

Most of the resources of the organization are devoted to immuno-oncology, this is core focus of the company. We're highly committed, we're on our way to generate a stable pipeline with the programs in development and programs in target validation and we have discovery group that is in an ongoing basis, not only enhancing the capabilities but also employing the capabilities in new target discovery. This is the core focus of the company.

The ADC as well as 1501 are getting smaller amount of resources in the company, specifically the ADC the lead program, in 15027 is moving forward and when we will feel that we have the data that we can share we will share with the investors. 1501 as well, this is the situation. It gets smaller resources and specifically with 1501, we've already stated 1501 [indiscernible] immune, we've already stated that we're looking for the right business opportunity in order to push these program to clinical trials.

This program has to get to clinical trial, it is really compelling, the mechanism of fashion [ph] is novel and we do not intend to take it alone to clinical trials. We invest our resources to taking the immuno-oncology program forward. So we're focused on this front of sharing this with a business partners.

Denis O'Hara

Okay, thanks.

Operator

There are no further questions at this time. Before I turn to Cohen-Dayag to go ahead concluding statements. I would like to [indiscernible] that a replay of this call is scheduled to begin in two hours for the period of 72 hours. In the US please call 1-888-326-9310, in Israel please call 03-925-5925. Internationally please 972-3925-5925. Anat Cohen-Dayag would you like to make concluding statement?

Anat Cohen-Dayag

Thank you. I wish to thank, all of our investors. Their continued confidence in and support of Compugen and we look forward to sharing with you our future accomplishments during the remainder of 2016. Thank you.

Operator

Thank you. This concludes the Compugen's Limited second quarter 2016 financial results conference call. Thank you for your participation and you may go ahead and disconnect.

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