Business Context and Reporting Period
Company: Compugen Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: Compugen is an Israeli drug and diagnostic discovery company utilizing proprietary computational biology platforms to predict and select novel product candidates. The company focuses on licensing these candidates to third parties for further development and commercialization. In 2010, the company initiated a "Pipeline Program" to advance selected molecules beyond proof-of-concept into preclinical activities, primarily in oncology and immunology.
Key Financial Metrics
| Metric (US$ in thousands) | 2010 | 2009 |
|---|---|---|
| Revenues | $1,115 | $250 |
| Net Loss | $(7,203) | $(3,831) |
| Operating Loss | $(7,878) | $(7,629) |
| Research & Development Expenses (Net) | $5,227 | $5,051 |
| Cash and Cash Equivalents | $7,300 | $15,139 |
| Total Assets | $36,458 | $30,185 |
| Accumulated Deficit | $(168,487) | $(161,284) |
| Shareholders' Equity | $28,285 | $27,398 |
Liquidity: As of December 31, 2010, the company held approximately $22.5 million in cash, cash equivalents, and short-term bank deposits. Additionally, $5.0 million was receivable from a funding arrangement signed in December 2010 (received in January 2011). Management believes these resources are sufficient to fund operations for at least the next twelve months.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 346% to $1.1 million in 2010 from $250,000 in 2009. This increase was driven by collaboration research services agreements where performance obligations were completed in 2010.
- Net Loss Increase: Net loss widened to $7.2 million in 2010 from $3.8 million in 2009. The increase was primarily due to a significant decrease in "Other income" (which included a $3.7 million realized gain from the sale of Evogene shares in 2009) and increased operating expenses.
- Operating Expenses: Total operating expenses rose to $8.8 million in 2010 from $7.9 million in 2009. General and administrative expenses increased 35%, largely due to higher stock-based compensation ($1.1 million in 2010 vs. $0.7 million in 2009).
- Investment in Evogene: The fair value of the investment in Evogene Ltd. increased to $6.2 million in 2010 from $3.9 million in 2009, contributing to an unrealized gain recorded in accumulated other comprehensive income.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy: The company expects to continue incurring net losses in the foreseeable future. The primary focus for 2011 is the "Pipeline Program," which aims to advance over 30 molecules into preclinical activities. The company anticipates R&D expenses will account for more than 60% of total operating expenses in 2011.
Recent Financing: On December 29, 2010, Compugen entered a $5.0 million funding agreement with Baize Investments (Israel) Ltd. In exchange, Baize received warrants for 500,000 shares and "Participation Rights" to 10% of cash consideration from the commercialization of five designated product candidates. This arrangement includes embedded derivatives accounted for as a liability.
Risks and Contingencies:
- Profitability: The company has an accumulated deficit of $168 million and no assurance it will ever achieve profitability.
- Capital Needs: Additional funding will likely be required. The company filed a shelf registration in January 2011 to raise up to $40 million, but there is no assurance of success.
- Grant Repayment: The company has a contingent liability of approximately $7.2 million to repay Israeli government grants (Office of the Chief Scientist) out of future revenues if products developed with those funds are commercialized.
- Market Volatility: The company's stock price has been volatile, and the biotechnology sector is highly competitive with a trend toward consolidation.
Key Facts for Investor Verification
- Revenue Sustainability: Verify the nature of the $1.1 million in 2010 revenue to determine if it represents a recurring stream or one-time collaboration fees.
- Baize Funding Terms: Review the specific terms of the Baize agreement, particularly the conditions under which the 10% participation rights must be paid or converted, and the potential for shareholder dilution.
- Cash Burn Rate: Assess the company's ability to fund the expanded "Pipeline Program" without immediate additional equity financing, given the $7.2 million net loss in 2010.
- Grant Obligations: Confirm the status of the $7.2 million contingent liability related to Israeli government grants and the likelihood of repayment based on future commercialization success.
- Evogene Investment: Monitor the valuation of the Evogene investment ($6.2 million), which is a significant portion of total assets and subject to market fluctuations.