“The most important thing for Compugen (Nasdaq: CGEN) in the next 4-5 years will be to develop products for the short term while preserving the company’s real value,” says Compugen chairman and CFO Martin Gerstel. “The products we’re currently selling are only fringe benefits of our discoveries. They are being sold under pressure from the business community, which has a short-term perspective.”
Gerstel may have a high estimate for Compugen’s “real value”, but according to the company’s latest results, investors are still sitting on the fence. The share has plummeted 30% in the past year, reflecting a market value of just over $70 million. In the first quarter, Compugen posted a per share loss of $0.12, bettering analysts’ estimates of a $0.17.
Robertson Stephens believes Compugen will continue to narrow its losses this year, predicting a cumulative per share loss of $0.72. But the joy will be short-lived, as a per share loss of $0.82 is forecast for 2003. With $2.35 million in revenue in the last quarter, one can understand Gerstel’s dissatisfaction.
“I am very disappointed,” says Gerstel. “I bought $4 million of Compugen shares at $5, using my own money. The share is now at $3. We are certainly undervalued. I was disappointed that we issued at $10 a share. We originally talked about $30-40, but set a price of $10-12 after the market weakened, and held the IPO at the lower limit. That was disappointing. The share is now at $3, even though we met or exceeded all our targets.”
“Globes”: Are you close to profits?
Gerstel: “That will be a problem, because we’re expanding our R&D. I hope we’ll get close to profits in 2004. Our business is in two parts. One is developing products for today’s market, which is the most important matter for the financial market, and the least important matter for us. I would have preferred not to launch any products in the short term, and to focus on the technology. But I’m convinced we’ll have a healthy cash flow from these products, and the business will be profitable very soon.
“As for the second part, the question is how much money can we comfortably invest in it, and what we’ll do with all the intellectual property we have built up. We’re not alone; there are 20 other companies with raw genome information, but this information is not worth much today, because each company uses its private data. Ten years ago, it was worth billions. Companies then paid millions for a single gene. But the market doesn’t talk like that any more, because nothing came of it.
“We’ll definitely find more valuable information later, but what will we do with it? Will we direct it to R&D at a cost of millions of dollars? It is possible to do research in cooperation with other companies, but that will detract from its value, which is a pity. This is because a $500,000 expenditure can generate a $200 million return. It is related to the question how much can we spend on our core technology and intellectual property. The market also plays a role, and I hope that in the next two years the world will begin identifying the value we’re generating, and reflect it in the share price. If that happens, we’ll feel more comfortable investing in R&D and intellectual property. Otherwise, we’ll have to continue giving the shareholders what they want, and invest less in intellectual property rights. I think that is mistaken, but we’ll have no choice. What is certain is that we’ll still lead the field. We have no competitors at this stage. We’re the number one company in predictive biology.”
Things suddenly look solid
Such optimism could be mistaken for the perspective of someone too close to the subject, but this may not be true in Gerstel’s case. Gerstel has already founded and run a multi-billion dollar company, ALZA Corporation. ALZA, founded in 1968 by Gerstel and Dr. Alejandro Zaffaroni, was a pioneer in monitored drug delivery systems.
ALZA was sold in 2001 to Johnson & Johnson (NYSE:JNJ) for $10.5 billion. Gerstel had already left the company in 1993, when its value was $3 billion, to settle in Jerusalem with his Israeli wife. He had planned to retire from business, when a new technological challenge appeared. He helped found start-up Itamar Medical, and joined Compugen as chairman of the board.
Compugen’s story is well-known. Dr. Liat Mintz, the biologist wife of former Compugen CEO Eli Mintz, was participating in the global Human Genome Project at Institut Pasteur. Computers of the time had trouble handling the amount of biological data. Dr. Mintz complained, so her husband and some colleagues founded Compugen. The company’s first product was a computer program that sped up the data analysis. Since it was necessary to analyze the results, it was decided to concentrate on the biological aspects.
This is where Gerstel entered the picture. “I was an advisor to several funds while on the West Coast, one of which had invested in Compugen. The company was going through a rough time then. It had started out as a computer company before moving into the life sciences. The fund was sending me panic messages, because they didn’t understand what was happening. Compugen had doubled its sales within a year, but then sales suddenly slumped. The computer market was too small and saturated. I came to see what was going on, and found a real contribution to the life sciences. It touched me personally, because the same thing had happened at ALZA. Just as ALZA brought engineering to chemistry, Compugen was the first to bring real science to the R&D pipeline.”
From no data to a flood
The issue of scientific perspective again comes into play here. Gerstel enthuses, “The new life sciences are unique. Nothing like it has ever existed in history. In science, you usually first have theories, with the technological developments capable of proving them coming decades or centuries later. The direction was always from theory to practice, with a long time-lag.”
Gerstel says little happened in biology from the time the structure of DNA was discovered in the 1950s to the 1970s, when the gene sequencer was developed. This device can isolate a random piece of DNA and read its genetic code. “Companies like Insight Biotechnology and Human Genome Sciences, Inc. (Nasdaq:NGSI) were stuffed with these machines. The world suddenly moved from a situation of no data to one of vast data creation, but without a theory. When biologists began working with the information, they got lost, because they never had it before. Biology was traditionally a refuge for haters of mathematics and physics. Biologists never had a theory, because they had nothing to work with.
“I don’t mean to detract from the value of drug development companies, but what they did was never science. There was no theory followed by testing. All medical research, even now, is based on trial and error, and no one really understands the principles behind the research. Pharmaceutical companies are proud of their recombination chemistry departments, but what they do is to put materials on chips, scan millions of materials and see what comes up. It’s like going to Intel and asking what their most advanced department does, and being told they take millions of transistors and scan them to see what happens. Telecommunications is not developed through trial and error.”
That’s precisely the problem, says Gerstel. Biology has no alternative. “Today, when it’s impossible to make predictions, toxicity tests can take 5-6 years. It must be remembered that no drug ever cured any disease, only its symptoms, because life science was until now based on trial and error. Among all the chemicals injected into lab rats in the past 40 years was undoubtedly one chemical that immunized the rats from cancer, but we’ll never know which one.”
There are now methods to build theoretical models of molecules by computer.
“Building molecules by computer still doesn’t work, because we don’t yet understand the theoretical basis. It’s like an alien trying to dismantle and rebuild a television.”
Gerstel’s perspective about life science developments implies changes in the discipline itself. Not everything created in the past decade will last forever. The main change he predicts is that bioinformatics will not survive independently in the long term. “Bioinformators are mathematicians helping biologists. They won’t be around within five years. They are solving a short-term problem, like Y2K. In physics, for example, you don't see mathematicians aiding physicists.”
Will the graduates of all new departments in this field be unemployed?
“I hope the sector will develop to the point of biological theory. There is no place for bioinformatics in and of itself. Computers in biology have two uses: organizing and arranging masses of data, which is critical but not biology; and applied science, using computers as a research tool as in physics. Companies that only handle outsourcing the computerization of biological data are in trouble. Computer language is not an end, but a means. In ten years, no one will learn physics, but a combination of physics and chemistry."
Discovery isn’t translated into fame
Gerstel predicts another change: the companies that control life sciences information in the future will not be the pharmaceuticals giants. “To preserve their status, they will have to undergo major changes. No CEO wants to dismantle his company, but sometimes small companies conduct better research,” he says.
Guess to which company Gerstel is referring. His bullish attitude toward Compugen is unsurprising, but well anchored. “In 1997, the company began building predictive models for genetic expression. At the time, Celera Genomics and the US Human Genome Project were trying to map the human genome, while hundreds of companies like Myriad Genetics were randomly trying to clarify relevant data. It was a gold rush. However, in the long term, it is necessary to understand why gold exists in one place but not another, and Celera did not do that.
“In contrast, Compugen never tried to find data, but tried to figure out how genes transcribe proteins. We have no data; we only use the data from the Human Genome Project. We began helping to speed up genome analysis, realized the accepted analysis was wrong and chose another path. We weren’t smarter than the others; we just didn’t have the resources to set up an independent database.
“Most companies also have to compete daily in the marketplace. It’s hard for them to step back and understand what’s happening. If you lack a predictive model, you continue looking for gold, but if you can build a model, you can win much more than the prospectors panning the rivers. Current research looks quite primitive, even though the technology is very complex. What kind of research takes thousands of molecules and throws them at proteins to see what works and what doesn’t? It’s better to understand what’s happening than to have access to all the data in the world.”
The eternal example of Gerstel’s theory is the genetic Holy Grail: the Human Genome Project itself. “In 1997, Compugen discovered that each gene can transcribe several proteins (alternative splicing). This does not occur in a few genes, as previously thought, but in half of them,” says Gerstel. “That sounded incredible in 1997; it contradicted the textbooks. But biological tests confirmed 90% of the predictions. We tried at the time to sign deals with pharmaceutical companies in the field, but failed. They weren’t interested in investing in this, preferring to spend money on recombinant chemistry and rats. Moreover, they simply didn’t believe us. That was a basic mistake. In 2001, when Celera and the Human Genome Project completed mapping the human genome, they announced there were fewer genes than expected, due to alternative splicing. Four years and a lot of money later, it turns out the world was wrong and Compugen was right.”
A wasted fame?
“We wasted the discovery a little. We never got the true value for it.”
Some people asset Compugen lacks a business focus.
“That’s why we split the company into two divisions. But the mistake was derived from the confusion between pure research and its applications. Our research is applicable to all life-related topics, not just any single field. It’s like the early days of electricity, when everything was tried, before radio, sonar and television were invented. We are at the stage of creating the electrical current.”
Published by Globes [online] - www.globes.co.il - on May 13, 2002