Business Context and Reporting Period
Company: Compugen Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Jurisdiction: Israel (Incorporated), listed on Nasdaq Global Market and Tel Aviv Stock Exchange.
Compugen is a biotechnology discovery company focused on identifying therapeutic and diagnostic product candidates using proprietary computational platforms ("discovery engines"). The company shifted its business model in 2004 from selling computational software tools to discovering and licensing product candidates. As of December 31, 2006, the company had 28,162,202 ordinary shares outstanding.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 (USD '000s) | 2005 (USD '000s) |
|---|---|---|
| Revenues | $215 | $646 |
| Cost of Revenues | $6 | $148 |
| Research & Development Expenses (Net of Grants) | $9,810 | $10,471 |
| Total Operating Expenses | $14,208 | $15,524 |
| Operating Loss | $(13,993) | $(14,878) |
| Financial Income, Net | $884 | $682 |
| Net Loss | $(13,020) | $(13,978) |
| Cash and Cash Equivalents (Short-term) | $25,403 | $31,821 |
| Long-term Deposits/Securities | $1,000 | $4,983 |
| Total Assets | $30,856 | $42,106 |
| Accumulated Deficit | $(132,754) | $(119,734) |
| Shareholders' Equity | $25,738 | $36,248 |
Liquidity: The company held approximately $26.4 million in liquid assets (cash, short-term deposits, and marketable securities) as of December 31, 2006. Management believes these funds are sufficient to support operations for at least the next two years.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by 67% to $215,000 in 2006 from $646,000 in 2005. This decline was anticipated and primarily due to the cessation of sales of legacy computational products (LEADS, OligoLibraries). Revenue from Novartis represented 93% of 2006 revenues; the agreement expired in 2006.
- Expense Reduction: Total operating expenses decreased by 8.5% to $14.2 million. This was driven by a re-organization in December 2005 that reduced personnel by approximately 25% and a decrease in governmental grants received ($1.75 million in 2006 vs. $2.25 million in 2005).
- Stock-Based Compensation: The adoption of SFAS 123(R) in 2006 resulted in a significant increase in recognized stock-based compensation expenses (approximately $1.9 million in 2006 vs. negligible amounts in 2005 under the previous standard).
- Financial Income: Net financial income increased by 30% to $884,000, primarily due to higher interest rates on deposits and marketable securities.
Outlook, Risks, and Contingencies
Guidance and Outlook
Compugen expects to continue incurring net losses in the foreseeable future due to R&D costs. The company anticipates needing additional capital within the next two years to fund discovery and development activities. If additional capital is raised via equity, existing shareholders will experience dilution.
Key Risks
- Business Model Uncertainty: The current model of licensing early-stage product candidates is untested and may not generate profitable revenue streams.
- Subsidiary Going Concern: The wholly-owned subsidiary, Keddem Bioscience Ltd., has accumulated a deficit of $2.9 million. External auditors have raised substantial doubt about Keddem's ability to continue as a going concern without additional funding. If Keddem ceases operations, Compugen's investment will be lost.
- Grant Dependency: The company relies on R&D grants from the Israeli government (OCS) and BIRD. Failure to comply with grant terms or a reduction in available grants could materially harm operations.
- Collaboration Risks: Success depends on entering into licensing agreements with third parties. The licensing cycle is complex and lengthy (12+ months), and there is no assurance of success.
- Intellectual Property: Risks include the inability to obtain patents for gene-based products and potential infringement of third-party IP.
Unusual Items
The filing notes that the company is not a party to any material pending legal proceedings. However, the company has contingent obligations to repay royalties to the OCS and BIRD based on future net sales of products developed under funded projects, totaling approximately $4 million and $460,000 respectively, though these are not currently payable as no commercial sales have occurred.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $25.4 million cash balance against the projected burn rate, given the expectation to raise capital within two years.
- Keddem Bioscience Status: Monitor the subsidiary's ability to secure third-party funding to avoid cessation of operations and total loss of the $2.9 million investment.
- Revenue Pipeline: Assess the progress of new collaborations (e.g., Medarex, Teva, Biosite) announced in early 2007 to replace the expired Novartis revenue stream.
- Grant Compliance: Confirm continued eligibility for Israeli government grants (OCS, BIRD) and the impact of potential reductions in grant availability.
- Stock-Based Compensation: Review future amortization of stock options (estimated at $1.5 million for 2007 and $1.3 million for 2008) and its impact on operating losses.