CGEN

Business Context and Reporting Period

Company: Compugen Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Compugen is an early-stage drug and diagnostic discovery company based in Israel. Its business model relies on using proprietary computational biology platforms to predict and select therapeutic and diagnostic product candidates, which are then validated experimentally. The company seeks to generate revenue through early-stage licensing, "discovery on demand" collaborations, and milestone payments from third-party partners. The company has a history of losses and has not yet achieved profitability.

Key Financial Metrics (Year Ended Dec 31, 2009)

Note: The significant improvement in net loss in 2009 was primarily driven by a one-time realized gain of approximately $3.7 million from the sale of shares in Evogene Ltd., a related investment.

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 26% to $250,000 from $338,000 in 2008. The decrease was attributed to the absence of license fees from the extension of the LEADS license agreement with Evogene, which were recognized in full in 2008.
• Expense Reduction: Total operating expenses decreased significantly by 40% to $7.9 million from $13.2 million. This reduction was the result of a restructuring completed in early 2009, which reduced headcount from 57 to 37 employees, and a suspension of operations in the U.S. subsidiary.
• Liquidity Improvement: Cash and cash equivalents increased from $4.7 million to $15.1 million. Total liquid assets rose from $7.5 million to $23.6 million. This was driven by a $20 million "at-the-market" equity offering completed in late 2009 and proceeds from the sale of Evogene shares.
• Investment in Evogene: The company sold 1,000,000 shares of Evogene in June 2009 for approximately $3.6 million, resulting in a realized gain of $3.7 million. The remaining investment is valued at $3.9 million.

Guidance, Outlook, and Risks

Outlook and Guidance: Compugen does not provide specific financial guidance. Management expects to continue incurring net losses in the foreseeable future due to ongoing research and development (R&D) costs. R&D expenses are expected to account for more than 65% of total operating expenses in 2010. The company believes its current cash position is sufficient to fund operations for at least the next twelve months but may need to raise additional funds in the future.

Management Commentary: The company is refocusing its efforts on therapeutic peptides, proteins, and monoclonal antibody targets. It is prioritizing "discovery on demand" collaborations, such as a new agreement announced in December 2009 with Pfizer. Management emphasizes that its business model relies on licensing discoveries at early stages rather than internal commercialization.

Risks and Contingencies:

• Profitability Risk: The company has an accumulated deficit of $161 million and may never achieve profitability.
• Capital Needs: Future funding requirements may necessitate equity dilution or debt financing, which may not be available on favorable terms.
• Grant Repayment: The company has contingent liabilities to repay Israeli government grants (OCS and BIRD) totaling approximately $6.6 million if future products developed with these funds generate revenue.
• Collaboration Dependence: Success depends on third-party collaborators advancing product candidates, which is uncertain. No product candidates covered by collaborations have advanced beyond the validation stage.
• Geopolitical Risk: Operations are based in Israel, exposing the company to regional political and military instability.
• PFIC Status: There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for U.S. tax purposes, which could have adverse tax consequences for U.S. shareholders.

Key Facts for Investor Verification

• Cash Runway: Verify the sufficiency of the $23.6 million in liquid assets to cover the projected burn rate, given the history of significant operating losses.
• Revenue Sustainability: Assess the likelihood of recurring revenue, as 2009 revenue was minimal ($250k) and heavily dependent on non-recurring license fees in prior years.
• One-Time Gains: Note that the 2009 net loss improvement was largely due to a non-operating gain from the sale of Evogene shares; core operations remain loss-making.
• Grant Obligations: Review the terms of the $6.6 million contingent liability related to government grants and the potential impact on future net sales.
• Collaboration Pipeline: Investigate the status of the Pfizer collaboration and other "discovery on demand" agreements to gauge future revenue potential.
• Equity Dilution: Monitor future capital raising activities, as the company explicitly states it may need to issue equity, leading to shareholder dilution.