Business Context and Reporting Period
Company: Compugen Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: Compugen is an early-stage drug and diagnostic discovery company based in Israel. Its business model focuses on developing predictive computer-based discovery platforms to identify therapeutic drug candidates and diagnostic biomarkers. The company seeks to generate revenue through licensing and collaboration agreements with third parties for the development and commercialization of these candidates. In 2007, the company suspended operations of its subsidiary, Keddem Bioscience Ltd., which is now reported as a discontinued operation.
Key Financial Metrics
| Metric (in thousands USD) | 2007 | 2006 | 2005 |
|---|---|---|---|
| Revenues | $180 | $215 | $646 |
| Cost of Revenues | $0 | $6 | $148 |
| Research & Development Expenses (Net) | $8,386 | $9,117 | $9,563 |
| Total Operating Expenses | $12,640 | $13,213 | $14,229 |
| Operating Loss | $(12,460) | $(13,004) | $(13,731) |
| Net Loss (Continuing Operations) | $(11,490) | $(12,049) | $(12,831) |
| Net Loss (Discontinued Operations) | $(624) | $(971) | $(1,147) |
| Total Net Loss | $(12,114) | $(13,020) | $(13,978) |
| Cash and Cash Equivalents | $1,298 | $6,251 | $8,492 |
| Total Liquid Assets (Cash, Short-term & Long-term) | $17,162 | $26,403 | $36,804 |
| Accumulated Deficit | $(144,926) | $(132,754) | $(119,734) |
| Total Shareholders' Equity | $17,285 | $25,738 | $36,248 |
Note: All figures are in thousands of U.S. dollars. R&D expenses are net of governmental grants.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by approximately 16% to $180,000 in 2007 from $215,000 in 2006. This decline is attributed to the cessation of commercializing legacy software products (Genecarta) and the transition to a new business model based on licensing product candidates. Only $10,000 of 2006 revenue was from the new model, whereas all 2007 revenue was derived from it.
- Expense Reduction: Total operating expenses decreased by 4.3% to $12.64 million. Research and Development (R&D) expenses (net) decreased by 8% to $8.39 million, primarily due to personnel reductions following a 2005 reorganization and a decrease in governmental grants. Selling and marketing expenses dropped 23% due to staff reductions.
- General & Administrative Increase: G&A expenses increased by 23% to $2.93 million, driven by a $294,000 increase in stock-based compensation and higher corporate communication costs.
- Liquidity Reduction: Total liquid assets (cash, short-term, and long-term deposits/securities) decreased by approximately $9.2 million from 2006 to 2007. The company reported a net cash outflow from operating activities of $8.4 million in 2007.
- Discontinued Operations: Operations of the Keddem Bioscience subsidiary were suspended in Q2 2007 due to a lack of financing assurances. Results are now classified as discontinued operations.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to continue incurring net losses in the foreseeable future. The company anticipates needing additional capital to fund operations beyond the next 12 months. R&D expenses are expected to remain the largest operating expense, accounting for over 60% of total expenses in 2008.
- Capital Needs: The company explicitly states it will need to raise additional capital. Failure to do so may require curtailing or ceasing operations. Equity financing would result in shareholder dilution.
- Key Risks:
- Business Model Validation: The new revenue model (licensing fees, milestones, royalties) remains largely untested, with minimal revenue recognized to date.
- Currency Risk: The company holds cash in U.S. dollars but incurs significant expenses in New Israeli Shekels (NIS). A 14% depreciation of the dollar against the NIS in 2007 negatively impacted the company; further depreciation poses a material risk.
- Grant Dependency: The company relies on R&D grants from the Israeli Office of the Chief Scientist, BIRD, and the EU. Grant amounts decreased from $2.0 million in 2005 to $1.4 million in 2007.
- Collaboration Risks: Success depends on third-party collaborators (e.g., Merck, Roche, Teva, Biosite) to develop and commercialize candidates. There is no assurance these partners will succeed or that new agreements will be secured.
- Unusual Items:
- Stock-Based Compensation: Recognized $2.33 million in stock-based compensation expense in 2007 (up from $1.93 million in 2006). Future amortization is estimated at $2.0 million for 2008.
- Investment in Evogene: Following Evogene's IPO in June 2007, Compugen's investment was reclassified to available-for-sale marketable securities. An unrealized gain of $976,000 was recorded in accumulated other comprehensive income.
Important Facts for Investor Verification
- Cash Runway: Verify the sufficiency of the $17.2 million in total liquid assets to fund operations for the projected 12-month period and the timeline for required capital raises.
- Revenue Sustainability: Assess the progress of the seven new license/collaboration agreements signed since the beginning of 2007 and the likelihood of generating significant milestone or royalty revenue.
- Currency Exposure: Monitor the USD/NIS exchange rate, as a significant portion of operating expenses is in NIS while assets are in USD.
- Grant Obligations: Review the contingent royalty obligations to the Israeli Office of the Chief Scientist ($5.2 million) and BIRD ($500,000) payable from future net sales.
- Discontinued Operations: Confirm the status of the Keddem Bioscience subsidiary and any potential value recovery from its intellectual property.