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Taking a Gamble on its Discovery Engines, Compugen Plans to Phase out LEADS Deals

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Taking another step away from its tool-provider roots, Compugen last week confirmed that it is curbing efforts to market its LEADS bioinformatics platform as it redirects its resources toward the discovery of therapeutic proteins.

“We are not actively pursuing any further LEADS agreements,” Compugen chairman Martin Gerstel told BioInform last week. He added that the company would not rule out any partnership opportunities based on the platform, but “we realize that the best use of our people is now in pursuing our discovery capabilities and our own internal pipeline.”

Gerstel said that the company’s previous model of selling its technology made sense “while we were building our capability,” but pointed to its recent discoveries — including the potential therapeutic proteins VEGF114 and CGEN-40 — as proof that the platform is now “working.” Therefore, he said, “we would prefer to no longer utilize our resources on tools and services, but to focus on our discovery capabilities — both by ourselves and with partner companies, and to develop our own pipeline.”

Gerstel reaffirmed Compugen’s previously stated plans to divest some of its product lines and shape a new business model around the “discovery engine” predictive technology that it has built on top of LEADS. Gerstel did not provide details on what tools the company plans to divest beyond the Bioccelerator product line that it turned over to Biocceleration Ltd. last summer — the first hint that the company planned to move beyond its tools platform. Compugen confirmed this strategy in February when it announced that tools and databases were “no longer the focus” of the company and introduced its discovery engine initiative [BioInform 02-09-04]. But until now, the details of its plans for migrating away from its tool-provider past have been unclear, and the future of its flagship LEADS platform has been especially murky.

LEADS, Gerstel said, “served a purpose in that it got us recognized within the industry as having a unique capability.” Now, as it moves away from the platform, Compugen is counting on the reputation it built with LEADS to attract the royalty-based deals that it hopes will propel its drug discovery efforts forward.

Revenues Taking a Hit

The repercussions of Compugen’s evolution were evident in its first-quarter 2004 financial results. Quarterly revenues dwindled to $1.5 million, from $2.6 million in the year-ago period, while net losses widened to $3 million from $2.3 million in the first quarter of 2003.

Gerstel confirmed that the majority of the company’s prior-year revenues were due to LEADS sales, and that the drop in revenues reflected the phase-out of its marketing efforts in that area. Backing this up, the company’s sales and marketing expenses dropped year-over-year to $678,000 from $1.0 million in the first quarter of 2003. Compugen’s R&D expenses also decreased, to $2.9 million from $3.1 million in the prior-year period.

The company reported a cash position of $58.1 million as of March 24, 2004 — a decrease of $2.4 million from Dec. 31, 2004. This number, however, includes $38 million in long-term marketable securities. The company’s cash, cash equivalents, and short-term cash deposits and securities totaled $20.1 million at the end of the first quarter 2003.

Compugen predicts a burn rate of $15 million to $17 million for 2004, leaving it with around $45 million at year-end, including long-term securities. Gerstel said that this is enough to support the company for two years without raising additional cash. The company did not provide any revenue guidance for the remainder of 2004.

The Clock is Ticking

Gerstel acknowledged that the pressure is on for Compugen to pull off its new, higher-risk business model. “We have two years, maximum, to prove ourselves,” he said. Admitting that the company’s current strategy is based on “just a belief” that its discoveries will have a higher likelihood of success than those of its many competitors, Gerstel said that both the financial community and potential pharmaceutical and biotech partners “are waiting to see external validation” of its discoveries before “writing the check.”

Nevertheless, Gerstel is optimistic that the company will deliver on its new strategy. For one thing, he noted, Compugen estimates that it can usher its therapeutic protein leads through the pre-clinical and clinical development pipeline in a much shorter time (around two years instead of four or five), and at much lower costs (around $2 million), than would be possible with proteins discovered via traditional methods. This is due to Compugen’s predictive approach, Gerstel said, which provides biological context around the proteins that it discovers, giving a bit of a head start in development.

Gerstel said he is confident that the company will move these compounds quickly through development or find a suitable development partner in time to secure its financial footing. If things haven’t fallen into place within two years, he hasn’t ruled out selling the company, “although that’s something I really don’t want to have to do,” he said.

Gerstel added that he’s been in similar straits before, as one of the founders of drug-delivery firm Alza, “where we couldn’t convince a single pharmaceutical company to license our technology for 10 years.” By the time J&J acquired Alza in 2001, the company was worth $10.5 billion.

— BT

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