Compugen Ltd. — 2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone 2017 Q4 report. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context
Compugen is an Israeli therapeutic discovery and development company using computational discovery platforms to identify drug targets and develop biologic candidates, primarily for immuno-oncology, with one autoimmune-disease program. Its strategy relies on advancing selected candidates and partnering with pharmaceutical or biotechnology companies for development and commercialization. At year-end it reported four preclinical-stage programs; most of its broader pipeline remained earlier-stage.
Financial performance and liquidity
| Metric (US$ millions, except per-share data) | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | 0.0 | 0.7 | Down 100% |
| Operating expenses | 37.4 | 33.1 | Up 13% |
| Operating loss | (37.4) | (32.6) | Loss widened |
| Net loss | (37.1) | (31.5) | Loss widened 18% |
| Net loss per share | $(0.72) | $(0.62) | Loss per share widened |
| Net cash used in operations | (30.7) | (19.8) | Cash use increased |
| Cash, cash equivalents, restricted cash and short-term deposits | 30.4 | 61.5 | Down 50% |
| Total assets | 38.7 | 71.1 | Down 46% |
| Shareholders’ equity | 29.3 | 63.5 | Down 54% |
There was no 2017 revenue or gross profit, so a 2017 gross margin is not meaningful. For comparison, 2016 gross profit was $0.5 million on $0.7 million revenue. Financial and other income fell to $0.3 million from $1.1 million, mainly reflecting lower interest income and the absence of the prior-year gain on Evogene shares.
Cash provided by investing activities was $46.3 million in 2017, chiefly reflecting the net effect of bank-deposit maturities and investments; financing activities provided $0.2 million, principally from option exercises. The balance sheet reports no borrowings. Current liabilities were $6.2 million, versus current assets of $31.2 million. Contractual obligations included $5.4 million of operating leases and $0.4 million of accrued severance pay; contingent IIA royalty obligations were approximately $9.1 million.
Material changes and developments
- Revenue declined to zero as the company recognized no collaboration milestone or other revenue in 2017; 2016 revenue included a $0.4 million Bayer milestone and recognition of the remaining upfront-payment portion.
- Research and development expense rose 16% to $28.6 million, primarily due to increased preclinical work, manufacturing, toxicology and regulatory support for COM701 and COM902. R&D represented 76% of operating expenses.
- Operating cash use increased by $10.8 million to $30.7 million, and year-end liquid resources declined substantially.
- In July 2017, the Bayer collaboration was narrowed to CGEN-15001T/ILDR2; rights to CGEN-15022 returned to Compugen. Bayer retained control of the ILDR2 program.
- The company reported a $37.1 million annual loss and an accumulated deficit of $308.2 million. Auditors issued an unqualified opinion on the financial statements with an explanatory paragraph expressing substantial doubt about the company’s ability to continue as a going concern.
Outlook, risks and unusual items
- Management said existing resources would not fund the operating plan for the 12 months after filing; excluding potential Bayer milestones, it expected to maintain current operations into the third quarter of 2018. Additional capital, strategic partnerships or collaborations would be needed to continue beyond then. No assurance was given that funding would be available on acceptable terms.
- Management expected continued losses and negative operating cash flows. It budgeted 2018 R&D expense to increase by more than 10% versus 2017 and to remain more than 75% of operating expenses; another discussion estimates over 78%.
- As of the March 27, 2018 filing, Compugen said it had filed the COM701 IND in March 2018 and expected clinical trials later in 2018; it anticipated a COM902 IND submission in 2019. These are forward-looking statements, not 2017 results. Bayer expected to advance ILDR2 into the clinic in 2018.
- The Bayer agreement provides eligibility for more than $250 million in potential milestone payments on the remaining program, plus mid- to high-single-digit royalties on global net sales of approved products; payments are contingent and not assured.
- A contract manufacturer reported contamination in a COM701 batch in May 2017. The batch was not used in studies, but replacement production delayed the IND submission by several months. The company disclosed sole-source manufacturing arrangements for COM701 and COM902 and no alternate suppliers.
- Other principal risks include early-stage drug-development and regulatory failure, dependence on partners and contractors, competition, intellectual-property uncertainty, financing and potential dilution, Israeli geopolitical and currency exposure, and potential PFIC tax treatment for U.S. investors. The company believed it was a PFIC in 2017.
Important facts for investors to verify
- Current cash runway, financing plans and the status of any subsequent equity raise, partnership or collaboration.
- Progress, timing and costs of COM701 and COM902 clinical development, including manufacturing capacity and any further supply issues.
- Bayer’s continued commitment to ILDR2, the terms and status of remaining milestones, and the return and development status of CGEN-15022.
- Whether the company’s early-stage pipeline can produce validated, partnerable or clinically successful candidates and meaningful revenue.
- Potential dilution from future financing and the accuracy of cash-burn assumptions underlying management’s runway statements.
- Current PFIC status and related U.S. tax consequences; the filing’s PFIC conclusion is based on annual tests and may change.