Expert Financial Analysis and Reporting

This note is based on a presentation that was made by Bob Stein at the BIOCEO conference: he is the new chief medical officer of Agenus (AGEN). It was provided to paid subscribers in my note on BIO CEO highlights on February 14, 2014.  He spoke almost entirely about the recent acquisition of the privately held company 4-Antibody. Dr. Stein stated that its Retrocyte Display technology platform, which uses mammalian cells for discovering and optimizing human antibodies, may offer significant advantages over current antibody development technologies.

Using this antibody platform, 4-Antibody has created therapeutic antibodies to six key checkpoint targets that regulate immune response to cancers and other diseases. These target some of the most promising checkpoint targets: GITR, OX40, CTLA-4, PD-1, TIM-3 and LAG-3. Agenus now has a broad range of pre-clinical programs that will lead to numerous IND filings in the coming years.

The human body uses mechanisms to regulate the T cell response, some of which enhance and others of which turn down T-cell activity. There are certain receptors or checkpoints such as CTLA-4 and PD-1 that when activated turn down the immune response. Many cancers have found mechanisms that activate these receptors which has the effect of putting a brake on the immune system’s response to cancer. Drugs which block activation of these checkpoints (checkpoint inhibitors) can take the brake off the immune system and increase the activity of T cells against many cancers.

The first commercial checkpoint inhibitor was Bristol-Myers Yervoy which blocks the CTLA-4 receptor. This drug is compromised by side effect issues, but still has reached $1 billion of sales. Bristol-Myers Squibb (BMY), Merck (MRK) and Roche (RHBBY) are working on antibodies that target PD-1 and PDL-1, which are felt by some investors to have as much as $5 billion of sales potential by 2020. Dr. Stein said that Agenus will soon file an IND on an antibody that offers a superior reward/ risk relative to Yervoy.

You can think of the checkpoint inhibitors as taking the brake off of the immune response. There are other mechanisms that enhance the body’s immune response to cancer. This is like hitting the accelerator for the immune system. The result is increased T-cell activity against cancer. Agenus’ second IND will deal with a product that stimulates the immune system. Celldex’s (CLDX) CDX-1127 has the same therapeutic goal and has been the subject of much investor interest and added meaningful value to the shares.

I am going to be doing significantly more work on this new acquisition.

Agenus also announced that it had completed an equity offering that brought in $49 million. The stock was issued at $2.70 and with no warrants. This brings the effective basic share count to 54.6 million. There are also 3.6 million warrants exercisable at $11.53, 4.1 million options at $5.74 and 0.7 million of other shares. If all of the warrants and options were exercised, there would be 63 million shares outstanding and this would bring in $65 million more of cash. At the recent price of $3.67, the market capitalization based on 63 million shares is $231 million.

I estimate that the cash balance at the end of 1Q, 2014 will be roughly $70 to $75 million. For a Company that has been living with small cash balances over the past several years, this is a tremendous positive for the investment case.

Investment Perspective

This acquisition is transformational for Agenus in several ways. Based on presentations at BIO CEO, I detected a very interesting new investment theme developing. The hypothesis is that perhaps the frequent failures of cancer vaccines in the past have been because the cancer has hijacked the immune system to the extent that the immune system response is blunted and this inhibits the efficacy of cancer vaccines. If so, the combination of the checkpoint inhibitors and other T cell regulatory products with cancer vaccines is a natural combination that could be highly synergistic and unlock the promise of cancer vaccines.

I think that Agenus has one of the most broadly developed capabilities in their ability to combine T cell regulatory drugs and their heat shock cancer vaccines. This has enormous theoretical potential for all types of cancers. Agenus is in the valley of the giants with Bristol-Myers Squibb, Merck and Roche all aggressively advancing T reg products. However, they have no cancer vaccine expertise. I think that the most likely road to success for Agenus (from an investor’s standpoint) is that some other big drug company wanting to join the hunt acquires the Company.

The capital raise takes away the financing overhang that has plagued the Company for years. It has had to conduct small financing after small financing over the last five or so years to keep afloat. It now has cash resources that can carry it into 2016 and beyond and enable it to do some internal programs. I understand that the Company could have brought in $75 to $100 million in this equity offering but didn’t want to take the dilution. I think that big investors were motivated by the T reg/ cancer vaccine thesis.

Lastly, I think this is a reputational transformation. Agenus and its long time CEO, Garo Armen, have been harangued by hedge funds and skeptics after the failure of the Prophage trial in renal cell carcinoma and the resultant and continual financial distress of the Company. Some bloggers have been particularly vicious in their attacks accusing Dr. Armen of scamming investors among other scurrilous accusations. I think that they will be backtracking in coming years and Dr. Armen will be given credit for a great transformational move.

There is a truly binary event coming up in 1H, 2014 as Glaxo reports the results of its MAGE A-3 vaccine results in non-small cell lung cancer. There are low expectations for success in this trial following failure of the same MAGE A-3 vaccine in melanoma. If it is successful, the stock should surge (maybe up 50% to 100%) but if it fails I see a short term reaction and then a quick recovery as investors focus on the new Agenus. This is like a free option on this event. I know you are going to ask what the chances for success are and I don’t know, but my intuition is that they are small.

I have liked Agenus on the basis on the Prophage cancer vaccine program and the potential royalty stream from its QS-21 adjuvants. The transformation of the Company with the 4-Antibody transaction obviously increases my enthusiasm. I was frankly a little nervous about the cash position and I am ecstatic about the substantial strengthening of the balance sheet bringing the cash position to $70 to $75 million. The fully diluted market capitalization of $231 million seems modest for the new Agenus. I am increasing my stock position in the Company.