In our first Seeking Alpha article on Compugen (NASDAQ:CGEN), "A Wealth Creation Opportunity in the Making, published in February 2014, and our follow-up article in November 2014, we asserted that: "there is no company with a better asset position in cancer immunotherapy than Compugen" and that: "...relative to an upside opportunity that can be realistically measured in the tens of billions of dollars we believe the stock offers a uniquely compelling and highly asymmetrical risk-reward set-up." Since the time of our initial report, CGEN shares have declined by about half, yet in our minds, the investment case for Compugen has never been stronger.
Much of the stock price decline in CGEN shares over the past two and one-half years is rooted in the perception that the company has not made much progress in advancing its novel immune checkpoint target discoveries into clinically relevant products. That belief, in turn, is based on a lack of external validation events in the form of collaborations or licensing deals with Pharma, clinical data or even IND filings since its first licensing deal with Bayer Healthcare in August 2013. We believe ample evidence exists (in the form of company disclosures and recent patent filings) to show that the company has made substantial progress in developing its pipeline of oncology assets and that the long-awaited next licensing deal may be realized far sooner than the market is currently anticipating.
A quick review of the recent timeline provides context for share price action. As noted, in August 2013 the company entered into its first licensing agreement with Bayer Healthcare for two novel immune checkpoint targets, CGEN-15001T and CGEN-15022. Thereafter, in early-2014, management stated that its goal for the year was to enter into at least one more licensing agreement. Further, management indicated that investors should begin to see a more steady pace of licensing deals going forward.
In late-2014, management withdrew its guidance for having additional licensing agreements in for the year citing the steep valuation discount between licensing early-stage targets compared to fully developed monoclonal antibodies (mAbs). As well, the company had completed an equity offering which removed near-term financial constraints from the decision as to when to enter into collaborations. From the quarterly conference call…
"This allowed us to consider modifying the way we view collaborations in order to maximize the value of our growing pool of candidates. Therefore, we are now primarily focusing on exploring collaboration opportunities where we are more involved in downstream value adding activities, which would enable us to retain more value."
In early-2015, management strongly suggested that it was again involved in active licensing negotiations; and while the company did not provide a specific timetable for having a deal concluded, management was forward-leaning with its comments which raised the expectation of having a collaboration announced during the year. From the quarterly conference call…
"By combining both early stage and later stage collaborations, we expect that this strategy which we are now aggressively pursuing with a significantly expanded business development staff will both provide in the short-term meaningful external commercial validation of the type typically required by investors and at the same time maximize the long-term value to our shareholders of our competitive advantage in novel target discovery.
In late-2015 Compugen again indicated that it had pushed back from the table and was not prepared to formalize a licensing agreement. This time, the company cited a need to more fully understand the complete clinical potential of its assets across therapeutic modalities and also that a licensing agreement needed to contemplate certain complexities related to ownership of jointly developed intellectual property. From the quarterly conference call…
"…unlike traditional licensing agreements covering a specific product or products, agreements covering drug targets such as our novel checkpoints, need to address the fact that each of these targets could potentially provide multiple product opportunities, opportunities both currently known and unknown. For example, in our case, our novel checkpoint targets could potentially provide the opportunity not only for several monoclonal antibody product candidates for use in immuno-oncology but also for possible additional drug candidates in other modalities and even in other fields. Although this adds upside potential for the collaboration, it along with the relatively early and novelty of our checkpoints, also adds additional complexities that must be addressed.
However, it is important to note that, in general, reaching agreement on the basic terms and conditions insofar as they relate to this specific monoclonal antibody product or products of primary current interest to our potential partners, has not been a problem and therefore we are confident that these additional complexities will prove to only be a timing issue."
During the fourth quarter 2015 conference call, investor frustration with the lack of a licensing deal was on full display. In retrospect, much of the frustration stemmed from management's inability to more fully explain - given the level of detail the company was comfortable publicly disclosing at that time - the reasons for not closing a transaction. We believe recent disclosures by the company now provide the context with which to explain the complexity issues the company needed to navigate, and further, we believe the issues are now likely to be largely resolved.
We also believe recent patent filings by Compugen provides evidence that the company's pipeline is much more advanced than investors have come to believe and that the long-awaited "meaningful external validation of the type typically required by investors" (i.e. Pharma collaboration) could be announced far sooner than investors now expect.
Johns Hopkins University Collaboration. In late-2014 Compugen entered into a research collaboration with Johns Hopkins University. In the most recent quarterly conference call (July 2016) Compugen disclosed that as part of this collaboration, starting in early-2015, Johns Hopkins began developing knock-out (KO) mice evidence to show the clinical relevance of the novel drug targets discovered by Compugen as either stand-alone monotherapies or as combination therapies with other immuno-oncology therapies.
In simple terms, KO mice enable researchers to assess the possible roles of targets of interest in the immune responses through gene-targeting. Knocking out the activity of a gene provides valuable clues about what that gene normally does. And since humans share many genes with mice, observing the characteristics of knockout mice gives researchers information that can be used to better understand how a similar gene may cause or contribute to disease in humans. KO mice have been used to study and model different kinds of cancer, obesity, heart disease, diabetes, arthritis, substance abuse, anxiety, aging and Parkinson disease. What is of particular note is that KO mice evidence was used to predict the clinical relevance of both PD-1 and CTLA-4 in cancer immunotherapy. From the quarterly conference call…
"…we're pleased to disclose that since early 2015 we've invested in generating a comprehensive in vivo-validation system based on multiple knockout mice each unique to a specific selected target in our pipeline to assess mechanisms of actions, identify effective drug combinations and robustly differentiate our novel pipeline candidate.
The knockout mice for the majority of our novel targets are now available at Compugen as well as under our collaboration with Professor Drew Pardoll of John Hopkins University, who's the Chairman of our Scientific Advisory Board and Compugen's key partner in the detailed assessment of our drug target program. In view of the past success of similar module systems in pre-clinical efficacy of the currently approved PD-1 and CTLA-4 inhibitors, we believe these studies will provide substantial evidence of the potential clinical utility for many of our target candidates including both our high priority targets now undergoing therapeutic antibody development activities and our earlier stage targets now undergoing in-house and external validation activities."
With a better understanding of the nature of research collaboration between Compugen and Johns Hopkins, and this collaboration as context for management's business development decisions over the past 18 months, the reason offered by Compugen for deciding to delay additional collaborations makes perfectly prudent sense.
Take, as an example, the prospect of licensing a mAb for a novel myeloid target discovered by Compugen. This product is expected to be used in combination with T-cell immune checkpoint mAbs (such as a PD-1 or CTLA-4 blockers, the two commercially approved classes of immune checkpoint therapies). In addition to these two commercially available immune checkpoint blockers, there is a host of additional immune checkpoints currently under development by Pharma. More importantly, Compugen has discovered 11 novel immune checkpoints itself which are currently undergoing validation and development, including its lead program (COM-701) for which an IND is expected to be filed in 2017.
A myeloid-targeted mAb may be synergistic with some or all of these immune checkpoints. Had the company entered into a collaboration for this myeloid drug candidate in late-2014 or early-2015 - in other words, prematurely - it would have done so without understanding its full clinical potential and synergistic potential with all non-novel checkpoints and its own pipeline of novel immune checkpoints. This type of one-off licensing agreement could have left substantial long-term shareholder value on the table if the licensee only had an interest in developing PD-1 based combination therapies, or if in the future the myeloid mAb showed synergistic potential with one or more of Compugen's own checkpoints.
With the KO mice research provided by Johns Hopkins now available, the company can now determine and show potential Pharma collaborators the clinical relevance of the asset in various combination therapy approaches. Rather than entering into a one-off licensing arrangement for the myeloid product, Compugen can license it to Pharma in a way that ensures it is fully developed and valued. This would include a licensing agreement for PD-1 combination therapy, another agreement for CTLA-4 combination therapy etc., while Compugen would retain the rights to license it for other future modalities or not yet commercial checkpoints including those in its own pipeline.
Recent Patent Applications Shows Pipeline Development More Advanced then Assumed. Researchers on Domino Analytics discovered a recent Compugen patent for an antibody targeting the VSTM5 protein. This patent was filed in September 2014 (published September 2016). Whether this is, in fact, the program that Compugen has been discussing with potential Pharma collaborators over the past two years, we can't be sure. It does, however, fit the timeline, and the nature of this antibody (i.e. its synergies in combination therapy with various immune checkpoints) dovetails specifically with the licensing complexities management discussed.
At a minimum, however, we believe this patent conclusively demonstrates that the company has made huge development strides with respect to its pipeline over the past few years. The company has acknowledged receiving criticism for being somewhat secretive with respect to discussing the specifics of its novel discoveries and providing updates on the development status of its programs. This posture is due to the urgent demand and competition in Pharma to discover new immuno-modulatory targets as there are significant advantages to being first to market with new therapies. The longer Compugen keeps its discoveries proprietary the more attractive its assets are to potential collaborators and the stronger and more unassailable its intellectual property rights will be.
We also discovered a second patent filed by Compugen in February 2016 (published August 2016) for anti-PVIRG antibodies. This patent appears to be for Compugen's COM701 program as details of the patent are consistent with disclosures Compugen has made regarding COM701. Specifically, the patent refers to the anti-PVIRG antibody being correlated with PD-1 and TGIT and it also refers to the binding partner for PVIRG being discovered, the ligand PVRL2.
This patent filing is additional evidence that the company has advanced programs in its pipeline far more aggressively than its public disclosures would suggest. As noted, the patent for this product was filed in February 2016, only one-year after CGEN-15029, the target for COM701, was identified as a high priority program for internal advancement to clinical trials.
The Significance of the VSTM5 Patent and Combination Therapies: Unleashing the Full Promise of Cancer Immunotherapy. Cancer immunotherapy has quickly emerged as a fourth modality in cancer treatment - after radiation, chemotherapy, and surgery - with the promise of eventually becoming a first-line treatment. The success of the first generation of PD-1 based immune checkpoint therapies (led by Bristol-Myer's (NYSE:BMY) Opdivo and Merck's (NYSE:MRK) Keytruda) is well-documented. While these treatments have produced unprecedented results in a subset of patients - complete tumor remissions in some instances - the vast majority of patients (70-80%) are non-responsive with some cancers refractory to current checkpoint blockers.
As such, there is an intense research and discovery effort across the industry to find new novel targets to serve as the basis for new mono-therapies and as combination therapies with current PD-1 drugs and Compugen has been at the forefront of this discovery effort.
In 2014, the company disclosed that it had utilized its discovery infrastructure to identify four novel immuno-modulatory proteins that could serve as the basis for new cancer immunotherapies in combination with immune checkpoints. In its most recent conference call (July), without quantifying its success, the company indicated that it had a second successful discovery run for targets in this same area. Interestingly, aside from disclosures regarding the actual discovery runs, the company has not provided investors with any updates on the development or progress of any of these programs. As such, we were highly surprised to come across the patent filing for the VSTM5 antibody.
This patent filing suggests to us that Compugen's pipeline is clearly being developed at a much faster pace than otherwise believed. It also suggests that the long-awaited second licensing deal could be announced in the short-term. Since the VSTM5 patent shows that this antibody is intended to be used in combination therapy with other checkpoint blockers, it is clearly a candidate for licensing and not to be advanced internally for clinical trials.
As well, as previously noted, Compugen had indicated 18 months ago that it had put licensing discussions on hold until it fully understood the clinical relevance of its drug candidates as well as their potential synergies in combination therapies with existing non-novel immune checkpoint blockers and with their own pipeline of novel immune checkpoints. The availability of the KO mice research provided by Johns Hopkins would seemingly provide the company with the data it requires to move forward with a collaboration.
Compugen's novel VSTM5 antibody could have substantial value to Pharma as companies look to enhance and protect their PD-1 franchises. There are currently three commercially approved PD-1 immune checkpoint therapies - Bristol-Myer's Opdivo, Merck's Keytruda, and Roche's (NYSE:ROG) Tecentriq - with dozens of additional PD-1 programs estimated to be in development worldwide. PD-1 blockers are clearly the biggest focus of drug development in history; however, in order to enhance their effectiveness it is now widely understood that they will need to be administered in combination with other therapies targeting the tumor microenvironment.
Since Compugen's discovery efforts have been focused on identifying novel targets for cancer immunotherapy, this VSTM5-based drug candidate should be of high interest to Pharma. If a subset of patients who do not respond to PD-1 mono-therapy do respond to a PD-1 combination therapy that includes a VSTM5 antibody, then PD-1 franchises can be greatly enhanced by licensing this drug. Conversely, a Pharma that fails to license a drug that proves vital to effective combination therapies would likely see their PD-1 franchise damaged.
It should be noted that Compugen's patent strategy is not to simply patent the lead antibody it has developed for clinical trials, but to license all of the high-affinity binding antibodies it has developed for its novel targets. As such, Compugen should have extremely strong and broad IP protection around its discoveries and products. Given the potential that novel immunotherapies are likely to have in combination with PD-1 and other non-novel checkpoints, we believe the collaboration terms Compugen will be able to drive on this VSTM5 antibody and the other drugs candidates in its pipeline are substantial.
Disclosure: I am/we are long CGEN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.