Compugen's metamorphosis

The company has changed its business model, and its CEO is resigning.

Drug and diagnostic discovery company Compugen (Nasdaq:CGEN; TASE:CGEN) announced yesterday that Dr. Mor Amitai is resigning after seven years in the post. Amitai, who holds a doctorate in mathematics and was formerly with Comverse Technology (Nasdaq:CMVT), will remain at Compugen until the end of 2005, or until a new CEO is appointed.

Compugen, under Amitai, has burned more than $35 million cash, made sales of $45 million, and accumulated losses of $70 million.

"The company has undergone many changes in the past three years, the main one being the transition from a software and hardware company that developed computing tools, to a drug discovery company that sells diagnostic tools to large drug companies," says Amitai, "I'm not leaving Compugen. This is a company I very much believe in, and I intend to remain in it, working in research and development.. But at this point, the company needs a CEO with knowledge and experience in biotechnology, a CEO with a stronger business orientation, and specific abilities in medical biology. The company can certainly succeed, and what will raise its chances is a CEO who is not me. We now need a CEO with a different background."

Three senior managers have left Compugen recently. "There is no connection between their resignations and mine," Amitai says, "They went on to other businesses, while I intend to stay." Amitai said his resignation was his own initiative, and that he had informed the company's board of his intentions. "I am the CEO, and I have to take care that the most appropriate people are in al positions. I came to the conclusion that what will help the company is the recruitment of another CEO," he says candidly.

Compugen chairman Martin Gerstel said, "Although the board has full confidence in the ability of Dr. Amitai to continue to lead the company, it has reluctantly accepted his recommendation to initiate a search for a new president and CEO. We are publicly announcing this action now in order that the search activity can proceed in the most transparent manner. Furthermore, the board looks forward to having the benefit of Mor's active involvement in guiding the Company's development for the long term."

Many investors are not fully aware of the change in Compugen's business to which Amitai refers. Compugen model 2004 deals in potential drugs and diagnostic markers, which it sells to drug companies to raise their chances of developing new drugs and diagnostic products. It incorporates ideas and methods from mathematics, computer science, and physics into biology, chemistry, and medicine. Among Compugen's customers and partners are Abbott Laboratories, Diagnostic Products Corporation, Novartis, and Pfizer. The company has decided to fous on commercializing diagnostic and therapeutic discoveries, and has stopped selling some of the software tools and other products it developed. Diagnostic Products Corporation is the first customer under the new model, and the agreement with it, according to Amitai, signals the transition to another era. The agreement includes the development and commercialization of new diagnostic products, with focus on cancer, blood vessels, and the heart. "This first deal proves the validity of our business model. One of the world's largest diagnostics companies takes from us diagnostic markers we have discovered. We will receive high royalties in the future from the drugs it develops. This is the essence of the change we have undergone.

"The advantage of deals of this type lies in the huge potential. The average drug generates sales of about $400 million a year, and the royalties could bring Compugen enormous revenue that would be hard to obtain in any other way. Diagnostic products take about four years to develop, and drugs take even longer. One disadvantage is the risk, because most of the products don't succeed at all."

Compugen asks that we shouldn't judge them by the criteria of revenue and losses, because the company has stopped selling its traditional products and "there isn't much significance to what's happening now,"Amitai adds, "The revenue will come only in another few years." Nevertheless, since Compugen is traded both on Wall Street and in Tel Aviv, it's impossible no to mention results.

Revenue for the third quarter of 2004 was $1.0 million (including $326,000 from research and development grants), compared with $2.0 million (including $728,000 from research and development grants) for the third quarter of 2003. The net loss for the quarter was $3.6 million (including a non-cash charge of $231,000 for amortization of deferred compensation), or $0.13 per share, compared with a net loss of $3.2 million (including $612,000 of deferred compensation), or $0.12 per share, for the corresponding quarter of 2003.

Revenue for the nine months ended September 30, 2004 was $3.5 million (including $1 million from research and development grants), compared with $7.5 million for the same period in 2003 (including $1.6 million from research and development grants). Net loss for the first nine months of 2004 was $10 million (including a non-cash charge of $600,000 for amortization of deferred compensation), or $0.36 per share, compared with a net loss of $7.9 million (including $800,000 of deferred compensation), or $0.30 per share, for the same period in 2003.

At the end of the third quarter, Compugen had $51.9 million in cash, cash equivalents, and marketable securities, a decrease of $2.9 million from the end of June.

Published by Globes [online] - - on November 1, 2004

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