Compugen, Evolving Case Study for Business Schools

I received the following comment to my post, "Compugen, Further Validation of Its DAC Blockers Platform":

"Another great announcement. The challenge with this company will be developing a revenue stream. We have yet to hear of any more advanced collaborations/trials and it will be many years if and until any products make their way into the market. Therefore the market will not treat the stock price that kindly unless the company is sold for the intrinsic value of the platforms. Your thoughts?"

Rather than respond in a few sentences, I prefer to answer in more detail, but with the usual caveats:

• I am not providing advice to buy or sell Compugen shares.
• As noted in a previous post, I own shares in Compugen.
• Notwithstanding my optimism, Compugen is "not yet there".

So, how does Compugen differ from other small biotech companies? Most such companies either internally develop or acquire a few product candidates and quickly gamble on clinical testing with its attendant costs. If these product candidates fail, which most do, and the biotech company is unable to raise additional capital, difficult to come by in today's economic climate, the biotech company goes under.

Compugen has taken a different path:

• It has invested heavily over the past decade in breakthrough discovery platforms, and Big Pharma can't play "catch-up".
• Compugen didn't hurry product candidates into clinical trials and instead seeks to farm its discoveries out to partners pursuant to milestone and royalty agreements.
• Compugen has no debt.
• Gross annual expenses in the foreseeable future should total no more than $7 million.
• Discovery is fueled by a cadre of geniuses capable of doing what entire R&D departments cannot achieve.
• Compugen's discovery capabilities have reached critical mass at a time when Big Pharma's pipelines have gone dry.

Assets that don't appear on Compugen's balance sheet: discovery platforms, patents and early stage therapeutic candidates with blockbuster potential. The combined value of the early stage therapeutic candidates? I would guess in excess of Compugen's current market value, but their true value lies in their validation of the company's predictive science, which Big Pharma can no longer afford to ignore.

A revenue stream? It's worth noting that the Israeli Office of the Chief Scientist has recognized the progress made by Compugen and has awarded the company grants, albeit small, but significant in terms of Compugen's annual budget.

Compugen has also stated that it expects its first toxicity marker agreement in the second half of 2009. Revenues from these agreements will be relatively small, but should be recurrent and also significant in terms of Compugen's annual budget.

Existing agreements with Merck, Merck Serono, Roche, Medarex and Biosite could also yield short-term milestone payments.

However, most important are anticipated strategic agreements with Big Pharma over the coming year. Given Compugen's size and the potential for conflicts of interest, Compugen will most likely only be able to enter into two or three such agreements, possibly covering monoclonal antibody targets and peptide therapeutics. Compugen expects that in exchange for performing R&D pursuant to these agreements, it will receive sufficient funds each year to cover all expenses. Upfronts, milestones and ultimately royalties from an expanding list of product candidates will comprise pure profit.

Will Big Pharma sign strategic agreements with Compugen? Again, given the company's most recent announcements, I believe Compugen's predictive science can only be ignored by Big Pharma at Big Pharma's peril, and as stated in an earlier post, I look forward to Compugen's announcements of future achievements, both scientific and commercial, in the months to come. And yes, I believe that Compugen's development, characterized by conservatism in a field fraught with risk, will be studied by business schools in the years to come.