Compugen Ltd. — FY2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP; amounts below are U.S. dollars unless stated otherwise.
Business context
Compugen is an Israeli therapeutic-discovery company developing novel drug targets and early-stage biologic candidates, with emphasis on immuno-oncology and a smaller autoimmune-disease program. Its business model depends mainly on third-party collaborations and licensing, rather than product sales. The Bayer collaboration covers two immune-checkpoint targets; Bayer controls further development of each program after the agreed research phase.
Financial performance and liquidity
| Metric (US$ millions, except per-share data) | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | 0.712 | 9.277 | Down 92% |
| Gross profit | 0.489 | 7.644 | Down 94% |
| Operating expenses | 33.072 | 28.562 | Up 16% |
| Operating loss | (32.583) | (20.918) | Loss widened |
| Net loss | (31.506) | (20.163) | Loss widened 56% |
| Basic loss per share | (0.62) | (0.40) | — |
| Cash used in operating activities | 19.819 | 25.607 | Use declined |
Revenue fell primarily because 2016 included a $0.4 million Bayer milestone, versus $7.8 million in 2015; the remaining revenue was mainly recognized from the Bayer upfront payment and research services. One customer represented 100% of 2016 revenue, compared with 99% in 2015. The reported gross margin was approximately 69% in both years, but revenue was low and collaboration-related.
Research and development expense, net, rose 16% to $24.549 million, principally reflecting increased preclinical work on COM701 and CGEN-15137/TIGIT, staffing, and manufacturing and regulatory support. General and administrative expense increased 22% to $7.349 million; marketing and business-development expense declined 8% to $1.174 million.
At year-end, cash and cash equivalents were $9.709 million, restricted cash $0.993 million, and short-term bank deposits $50.825 million. These total $61.527 million including restricted cash; management’s liquidity measure of cash, cash equivalents and short-term deposits was approximately $60.5 million. Total assets were $71.139 million and shareholders’ equity $63.519 million. Current liabilities were $4.740 million; the balance sheet reports no borrowings or other financial debt. Operating lease commitments totaled $4.094 million, and the company disclosed $8.809 million of contingent OCS royalty obligations.
Investing activities provided $16.293 million, largely reflecting bank-deposit maturities, while financing activities provided $2.458 million, primarily from option exercises. Cash and cash equivalents declined by $1.068 million during the year. Capital expenditures were $2.599 million. The company sold its remaining Evogene marketable securities during 2016.
Material changes and developments
- Net loss increased from $20.163 million to $31.506 million as operating expenses grew while collaboration revenue contracted sharply.
- Operating cash use fell year over year, partly because the company collected the $7.8 million Bayer milestone receivable recognized in 2015.
- Compugen selected COM701, an antibody targeting PVRIG, as its lead internal immuno-oncology program and began CMC and IND-enabling activities. It targeted an IND submission in Q4 2017, subject to successful preclinical and manufacturing work and FDA acceptance.
- The company initiated a TIGIT program, CGEN-15137, and expected to select a lead antibody by the end of Q1 2017. It also initiated a program against an undisclosed myeloid target.
- Compugen deprioritized its CGEN-15027 antibody-drug-conjugate work to focus resources on immuno-oncology.
Outlook, risks and unusual items
- Management expected continued losses and believed existing cash and short-term deposits would fund the current operating level for approximately 24 months, excluding potential collaboration receipts or financing. The estimate is not a guarantee and depends on spending and development plans.
- Management expected R&D to exceed 75% of 2017 operating expenses and its R&D budget to increase by more than 9% versus 2016.
- The company had one Pipeline Program commercial collaboration, with Bayer. Bayer can terminate the agreement, including individual programs, and future milestone and royalty receipts depend on development and commercialization outcomes.
- Drug candidates remain early-stage; the company emphasized scientific, clinical, regulatory, manufacturing, intellectual-property, funding, and partnering risks. It relies on third parties for clinical and commercial manufacturing and for important research and development activities; COM701 manufacturing agreements are sole-source arrangements.
- Israel-based operating costs expose the company to NIS/U.S. dollar movements. It had $6.548 million notional of currency forward contracts at year-end; management estimated a 10% NIS appreciation would result in about $1.7 million of exchange losses, while a 10% depreciation would produce about $1.4 million of gains.
- Israeli OCS grants carry contingent royalties and restrictions on transfer of funded know-how and on certain manufacturing transfers. The company reported no material pending legal proceedings and no dividend payments or plans for the foreseeable future.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Investor verification priorities
- Confirm the composition, maturity, and availability of cash and deposits, and assess whether the stated 24-month runway remains valid under current spending plans.
- Track actual R&D spending, cash burn, and financing needs against management’s 2017 budget outlook.
- Verify COM701’s IND timing, manufacturing readiness, regulatory progress, and subsequent clinical milestones; similarly assess lead selection and progress for TIGIT and myeloid programs.
- Review Bayer program progress, termination rights, milestone conditions, royalties, and the extent to which revenue remains dependent on a single partner and customer.
- Assess dilution risk from outstanding options and the effective shelf registrations, each authorizing offerings of up to $200 million; no securities had been issued under those two shelves as of the report date.
- Review the $8.809 million contingent OCS royalty balance, lease commitments, sole-source manufacturing exposure, and the company’s patent and third-party intellectual-property position.