Business Context and Reporting Period
Company: Compugen Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: Compugen is an early-stage drug and diagnostic discovery company based in Israel. It utilizes computational biology and predictive models to discover therapeutic and diagnostic product candidates, which it seeks to commercialize through licensing and collaboration agreements with pharmaceutical and biotechnology partners. The company has a history of losses and relies on external funding and government grants to finance its research and development (R&D) activities.
Key Financial Metrics
| Metric (in thousands USD) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Revenues | $338 | $180 | $215 |
| Total Operating Expenses | $13,243 | $12,640 | $13,213 |
| Operating Loss | $(12,912) | $(12,460) | $(13,004) |
| Net Loss | $(12,527) | $(12,114) | $(13,020) |
| Net Loss Per Share (Basic & Diluted) | $(0.44) | $(0.43) | $(0.47) |
| Cash and Cash Equivalents | $4,650 | $1,298 | $5,950 |
| Total Liquid Assets (Cash, Deposits, Securities) | $7,481 | $15,200 | $25,102 |
| Total Assets | $14,244 | $21,666 | $30,856 |
| Accumulated Deficit | $(157,453) | $(144,926) | $(132,754) |
| Shareholders' Equity | $10,003 | $17,285 | $25,738 |
Note: Liquid assets include cash, short-term deposits, and marketable securities. The company holds an investment in Evogene Ltd. valued at $3,858 thousand as of December 31, 2008.
Material Changes vs. Prior Period
- Revenue Increase: Revenues increased 88% to $338,000 in 2008 from $180,000 in 2007. This was primarily driven by license fees related to the extension of the LEADS license agreement with Evogene. However, revenue from the core "new business model" (licensing product candidates) decreased to $40,000 in 2008 from $180,000 in 2007 due to unmet recognition conditions.
- Expense Fluctuations: Total operating expenses increased 5% to $13.2 million. While gross R&D expenses decreased 4% due to payroll reductions, net R&D expenses increased 4% because government grants decreased significantly (from $1.35 million in 2007 to $544,000 in 2008). General and administrative expenses rose 20% due to stock-based compensation and executive termination costs.
- Liquidity Decline: Total liquid assets dropped 51% from $15.2 million in 2007 to $7.5 million in 2008. This was caused by the redemption of deposits and marketable securities to fund operations, as net cash used in operating activities was $10.1 million.
- Investment in Evogene: The company recognized an unrealized gain on its investment in Evogene Ltd., which is classified as an available-for-sale security. The investment value increased to $3.86 million in 2008 from $0.51 million in 2007.
Guidance, Outlook, Risks, and Contingencies
- Liquidity and Runway: Management has adopted a contingency plan with cost-reduction measures (including a 30% reduction in planned 2009 expenditures and a headcount reduction to 57 employees) to support operations through December 31, 2009, absent additional funding.
- Financing Needs: The company expects to continue incurring net losses and will require additional funds to finance discovery and validation activities. Potential sources include milestone payments, new collaborations, sale of Evogene shares, or equity offerings. The company warns that equity financing would likely dilute existing shareholders.
- Delisting Risk: The company's stock price has traded below the Nasdaq minimum bid price of $1.00 since November 2008. Additionally, shareholders' equity was exactly $10.0 million at year-end, meeting the minimum listing requirement, but is expected to decline in the next reporting period, posing a risk of delisting.
- Government Grants: The company relies on grants from the Israeli Office of the Chief Scientist (OCS) and the BIRD Foundation. There is a contingent liability of approximately $6.0 million (as of Dec 31, 2008) to repay these grants from future revenues if products are commercialized.
- Operational Risks: Risks include the unproven nature of the discovery platform, dependence on collaborators for commercialization, potential inability to obtain regulatory approvals, and the impact of the global financial crisis on capital markets.
Key Facts for Investor Verification
- Cash Burn Rate: Verify the sufficiency of the $7.5 million in liquid assets to sustain operations through 2009 given the $12.5 million net loss in 2008.
- Revenue Quality: Distinguish between the one-time license fee from Evogene and the recurring revenue potential from the core drug discovery business, which generated only $40,000 in 2008.
- Delisting Status: Monitor the stock price relative to the $1.00 Nasdaq minimum bid price and the trend in shareholders' equity to assess the risk of delisting.
- Grant Contingencies: Review the terms of the $6.0 million contingent liability to the OCS and BIRD, as repayment is triggered by future product sales.
- Evogene Investment: Assess the liquidity and valuation of the $3.86 million investment in Evogene Ltd., which is a potential source of future funding but is not immediately liquid cash.