Compugen-Teva Deal: Lessons For Investors

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 |  Includes: CGEN, TEVA
by: Shlomo Greenberg

A lesson in investor behavior can learned from the stock of Compugen (Nasdaq: CGEN). It reached $3.20 in mid-November, and has since fallen 20% to $2.50. Over the last week it began a revival, which culminated in Tuesday's colossal jump after the company announced that it had signed an agreement with Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA). I will now try and explain what it’s all about.

The two companies have agreed to collaborate on a project for the discovery of biomarkers for the detection of drug toxicity in preclinical stages of the drug development process. Their research will focus initially on biomarkers for the early detection of potential nephrotoxicity (the poisonous effect of certain substances, both toxic chemicals and medications on the kidneys). “The companies may later expand the collaboration to include biomarkers for the detection of hepatotoxicity (toxic damage to the liver) and/or cardiotoxicity (damage to heart muscles caused by chemotherapy or an incorrectly administered drug),” said the announcement.

Under the agreement, Compugen has granted Teva a license to use the discovered markers for research and development activities while retaining commercialization rights for licensing to other companies. Essentially, Teva will use Compugen’s platforms to test toxicity levels in biological materials that it uses. Looking at it from the perspective of Main Street, this is without doubt, a great achievement for Compugen and all that remains to be seen now is how much revenue will this agreement will entail, and when the collaboration will begin to deliver results. That’s how things looks on Main Street.

Over on Wall Street, the announcement sent Compugen up more than 20% before the start of the session. I imagine that most of the buyers purchased the stock not because they were enthralled by the platforms that the company has developed, but rather because Teva was involved; moreover, it looks to me like most of the buyers were Israelis, or connected to Israel.

How do I know Teva is to blame? It’s quite simple. Two weeks earlier, Compugen announced that it had signed a collaboration agreement with Medarex Inc. (Nasdaq: MEDX). Under the agreement, the two companies will jointly develop monoclonal antibody-based therapeutics for oncology and autoimmune diseases. Medarex is an extremely large company and a leader in the development of therapeutics for the treatment of cancer, and autoimmune diseases.

That announcement was no less significant than the announcement of the agreement with Teva, yet what happened to the stock two weeks ago? Nothing. Those who bought Compugen stock yesterday did not consider the Medarex deal important enough to make a rush for the stock two weeks back. This would imply that nearly all of yesterday’s buyers follow Teva and they were probably Israelis too. This can only lead to one conclusion, and that is that Teva is a name that still commands a lot of respect on the market, and that in itself is a good thing, and a response to all those who, for some reason, decided that Teva was on a downward spiral.

As for Compugen and the attitude of Wall Street to the company and its stock, like Alvarion, it too was once a hit, touching the $20 mark at the beginning. It was floated in August 2000, just as the market was beginning to collapse and the bubble was bursting. It became a hit, as part of the state of mind that set off the big genome dream on Wall Street. Over time it became apparent that the dream is just as it was, but that its realization on Main Street would take a lot longer than Wall Street promised.

Investors subsequently realized that anyone who wanted to make a profit in this sector had two options open to them. They could either sit in the genomic stocks and wait a long time, or pull out and return once Main Street signaled that there was also a solid business foundation for companies like these. Most investors did indeed pull out and so the prices of genomics stocks nosedived to a level that was more appropriate from the business aspect.

Yet Compugen still represents a fantastic dream that will probably become a success business-wise sooner than was thought back in 2000. Wall Street’s attitude towards this company is clearly borne out by the fact that it has no analyst coverage. In 2000 it was covered by the top three investment houses at the time, Lehman Brothers, Piper Jaffray and Robertson Stevens. Seven years on, Robertson Stevens no longer exists, and the analysts who covered Compugen back then probably don’t even remember who it is. That’s how it is on Wall Street.

I have no doubt that Compugen has great potential, but the trouble is that it still hasn’t sold anything, it is running low on cash, and shrewd investors will continue to keep well away as long this remains the case. This is a fact of life and nothing can be done about it.

So I therefore hope that Medarex and Teva will start to forward payments to Compugen. Otherwise, we’ll soon see a serious dilution of its stock after it finds itself having to make a further offering. In the meantime, judging by the stock’s behavior yesterday, I find it hard to believe that these gains will last for long.

CGEN 1-yr chart:

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Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.