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On Eve of Earnings, Compugen Extends Deal with Novartis to Cover Systems Bio

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Last Tuesday, the day before it reported its first-quarter financial results, Compugen announced that it had extended its existing relationship with Novartis into the realm of systems biology.

The timing of the disclosure was no coincidence. Martin Gerstel, Compugen's chairman, opened an analyst conference call on Wednesday with an explanation of how the company has been practicing systems biology "for almost a decade," even if the term is only now catching on in the broader life science community.

But the company — which reported a 43-percent drop in revenues and a widening net loss for the quarter ended March 31 — seems to think it can't hurt to jump on the buzzword bandwagon if it helps generate investor interest.

More to the point, Gerstel told analysts that if Compugen can't start generating revenue in the next year or so from either its nascent drug pipeline or from collaborations, "we're going to have problems as a company."

For the past few years, "there's been an increasing use of the term 'systems biology' in the life science research community to the point where it may well now be the key buzzword in the field, displacing the earlier favorites of genomics or proteomics," Gerstel said in the call. "Furthermore, I have no doubt that this term will soon become a very hot topic in the financial community for pharmaceutical and biotech companies, with all the claims and attention that implies."

For a company that has taken great pains over the last few years to distance itself from another once-promising buzzword — bioinformatics — this enthusiastic embrace of a new one may appear surprising. In addition, early signs of a systems biology backlash are already on the horizon: Beyond Genomics' recent name change to BG Medicine, and its shift in focus from systems biology to "systems pharmacology," is only the latest example of the ever-shortening lifespan of catchphrases in this market.

But according to Gerstel and other company officials, systems biology is still in its infancy, and Compugen's expanded deal with Novartis — in which the company will analyze gene expression data in order to reconstruct transcriptional networks — is an opportunity to strengthen its position in the still-nascent field.

Both Gerstel and Mor Amitai, Compugen's CEO, said the company would have developed the technology it is building for Novartis anyway, to accelerate its own internal discovery pipeline, but that access to the pharmaceutical company's data and other resources will only speed the development process.

"The key goal," Amitai said during the call, is to "further develop our capabilities in this area as quickly as we can, and in order to do that we need access to resources and data that we lack and that other companies have."

Avi Rosenberg, executive director of strategic collaborations for computational life sciences R&D at Compugen, told BioInform that even though the deal is a platform-development agreement, it is still in line with the company's new focus on in-house discovery. "Our objective is to develop and utilize tools in our internal discovery of biomarkers and therapeutic proteins," he said. "The systems biology project is one of those tools that can assist in the identification of suitable targets, so we are continuing to develop tools — it's just that we're not in the business of commercializing those tools, rather using them for our internal discovery."

Compugen will have the rights to all the technology it develops as part of the collaboration, while Novartis will have the rights to specific research results. Compugen stands to gain a one-time fee from Novartis for the project, but Gerstel told analysts that it is a "modest payment."

A Scientific Collaboration

Dalia Cohen, global head of functional genomics at the Novartis Institute for Biomedical Research, said that the deal builds on a "very successful" three-year partnership between Novartis and Compugen to create the "Novartis transcriptome" using Compugen's LEADS platform.

The network-analysis project is a "natural continuation" of that work, she said, since Compugen's scientists and Novartis' scientists have proven that they can work very closely with one another. "It's a scientific collaboration," she said. "Each party brings their own expertise to the table."

Cohen said the focus of the project will be on modeling signal transduction pathways, using transcription factor binding information, expression profiles, and other data. Novartis plans to extend these networks to protein-protein interactions "or any other data types that will eventually be integrated in this network," she said.

"This is not an easy task. It is a very highly computational task," she noted. However, the payoff from a pharmaceutical development perspective is considerable. The scientific community "has made huge advancements in approaches in technology to understand drug effects, but there is a lot ahead of us," she said. "We believe that if we are able to integrate different data types in a comprehensive way, we will start to understand what's really happening when a cell, when an organism, is being treated with a compound."

Investor Concerns

As promising as the Novartis deal may be from a long-term technical and scientific standpoint, investors and analysts expressed concern that the agreement did not offer any short-term financial benefits for Compugen, whose revenues have dried up over the last several years as it has discontinued sales of its LEADS bioinformatics platform and other tools.

The company's first-quarter results clearly reflected the effects of this strategy. Compugen posted total revenue for the quarter of $865,000 — of which nearly half, $384,000, came from governmental and other grants — compared to $1.5 million for the first quarter of 2004, of which $401,000 came from grants.

Compugen's net loss widened for the quarter to $3.7 million from $3.0 million in the year-ago period.

As of March 31, Compugen had $43.5 million in cash, cash equivalents, and marketable securities, of which $23.78 million are long-term marketable securities.

Several investors noted during the call that none of the six compounds in Compugen's pipeline is advancing quickly enough to start generating income before the company's existing licensing agreements expire and forces it to start eating into its cash. The company said that the first of these compounds should be entering animal studies before the end of the year, but did not provide any information on out-licensing agreements or possible partnerships for any of its therapeutic or diagnostic candidates.

Compugen doesn't stand to gain a large payment — or any IP — from its agreement with Novartis, leading analysts to ask when and how the company intends to generate commercial value from its scientific discoveries. One investor, admitting that he found the company's business model "puzzling," questioned Compugen's strategy of "advancing the science … as opposed to how do [you] monetize in a more dramatic way the fruits of [your] scientific progress."

Gerstel responded that for Compugen, the science and the commercialization are "of equal value and we must not sacrifice one for the other."

He said that the company is entering a stage "where we can now start turning the crank and capturing the revenues from this stuff." However, he added, "the next year or so will tell the tale. … If we're not able to capture value from what we've put in place to date, then we're going to have problems as a company."

While Compugen has proven over the last few years that "we can make discoveries that other people cannot," Gerstel conceded that "the question that people have followed us are asking is, 'OK, so you can do that, now how are you going to make money out of it?' That's the next thing that we have to prove, and I believe the last thing that we have to prove."

Investors may not have been convinced, however. Compugen's stock, which closed at $3.80 on the day it announced the Novartis deal — a 3-percent boost over the prior day's close of $3.70 — dropped down slightly to $3.77 on the day it released its earnings.

— BT

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