Shares of Compugen Ltd. jumped 44.5 percent Monday on news of a potential $540 million deal with Bayer Healthcare to develop antibody drugs for cancer immunotherapy, marking the Israeli firm's first substantial revenue-sharing drug development collaboration.

Shares (NASDAQ:CGEN) gained $2.43, to close at $7.89.

Compugen, which originally began operations in the 1990s as a technology firm with capabilities for analyzing biological data before becoming a dedicated life sciences tools firm – boasting predictive models, algorithms and other computational biology methodologies for the predictive discovery of targets, drugs and biomarkers – has made the jump in the past few years into a fully fledged drug development company with its own drug pipeline. The Tel Aviv, Israel-based firm "spent over a decade building capabilities for predicting novel drugs," said President and CEO Anat Cohen-Dayag. "It took a long time. That was the first phase."

The second phase involved validating those discovery capabilities, testing targets, drugs and biomarkers. Compugen inked a handful of target deals with pharma, including a 2009 discovery-on-demand partnership with New York-based Pfizer Inc. which called for Compugen to use its platform to discover drugs against a Pfizer target. (See BioWorld Today, Dec. 31, 2009.)

Then when Cohen-Dayag was appointed CEO in 2010 – she previously headed up R&D before being named co-CEO in mid-2009 – Compugen began making the transition into drug development. "We decided [to focus] on oncology and immunology, select fields of high industry interest," she told BioWorld Today.

Those also were fields that could attract lucrative deals with big pharma, like the one with Bayer Healthcare, a unit of Leverkusen, Germany-based Bayer AG.

Under the terms, Compugen gets $10 million up front, with another $30 million due for preclinical milestones in exchange for rights to two antibody-based therapeutics targeting immune checkpoint regulators. The companies will collaborate on preclinical programs, with Bayer retaining full control over further development and commercialization. Compugen could earn up to an additional $500 million in milestones for both programs and is eligible for mid to high single-digit royalties on product sales.

The specific targets pursued under the collaboration were not disclosed, but Cohen-Dayag said they are part of nine different proteins discovered by Compugen.

Checkpoint regulators are believed to play roles in immunosuppression. Antibodies targeting those checkpoint regulators are designed to work by blocking the immunosuppressive function, thereby reactivating the patient's own immune response against the cancer.

Compugen has disclosed early data from at least two of its oncology programs, including membrane proteins CGEN-15001T and CGEN-15022, both of which showed robust inhibitory activity in different assays of T-cell activation and demonstrated potential in various solid cancers.

Its nine proteins discovered to date each have yielded two types of products, Cohen-Dayag said. In addition to antibody-based immunotherapeutics for cancer, Compugen has created fusion proteins for autoimmune diseases. The latter are more advanced, having moved well into preclinical testing, she added.

Among those candidates is CGEN-15001, which is designed to inhibit T-cell activation and Th1 and Th17 differentiation while promoting Th2 differentiation. In animal models of multiple sclerosis, the drug given at onset of remission demonstrated promising long-term inhibition of the disease. It also showed promise in an animal model of rheumatoid arthritis.

And in April, the company initiated a second focused discovery program to identify targets for antibody-drug conjugates for cancer therapy, with a specific focus on cancers with poor survival rates and recurrent disease. It's an area of "great interest to pharma," Cohen-Dayag pointed out, and also one "with a shortage of new targets."

Compugen has no plans to head to the market on its own, aiming instead to partner programs, most of them early in development as with the Bayer alliance. "But we're able to select one or two that we will not license early," she added. For those, Compugen will take on the responsibility of getting through preclinical and early clinical trials before seeking a partner, "to get the maximum value we can for the product candidates. So, if you're following Compugen and its history, you can see now, from our perspective, this is only the start," she said of the Bayer deal.

The company's technology also lends itself to other types of deals as well. For example, last year Compugen and Merck Serono SA, a unit of Darmstadt, Germany-based Merck KGaA, agreed to collaborate on a joint venture, Neviah Genomics, which is focusing on biomarkers for the prediction of drug-induced toxicity. Compugen holds equity in the joint venture, which was established through Merck Serono's Israel Bioincubator program.

Compugen operates mainly out of its Tel Aviv headquarters, which is staffed with 40 employees. In March 2012, it opened a research facility in South San Francisco to develop its oncology and immunology monoclonal antibody candidates. That facility operated with about 10 employees.