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Expert Financial Analysis and Reporting

Agenus (AGEN: Buy, $6.61) Royalty Deal for QS-21 Adjuvant Use in Two Glaxo Vaccines

Terms of the Royalty Deal

Agenus announced on September 9th that it had signed a royalty transaction with Oberlan Capital from which they will immediately receive $100 million. In return, Oberlan will receive (for a period) 100% of royalties stemming from the use of Agenus’ QS-21 adjuvant in Glaxo’s shingles and malaria prophylactic vaccines. This agreement lasts until all of the principal and interest on the $100 million commitment is paid off. Thereafter, all royalties accrue to Agenus. Also at its option, Agenus has the right to buy back the loan at any time under pre-specified terms. Agenus will receive an additional $15 million in cash after approval of the shingles vaccine by the Food and Drug Administration (FDA), provided such approval does not occur later than June 30, 2018.

Agenus has billed this transaction as non-dilutive presumably because it does not involve the issuance of shares. However, there is really no such thing as a non-dilutive transaction. Let me show you why I say this. Let’s just for the sake of discussion assume that the market would capitalize net income resulting from royalties at 20 times earnings. This means that each $1 million of net income from royalties would add $20 million to market capitalization and of course $10 million would add $200 million. Agenus would be assuming that this $100 million invested in its checkpoint modulator and (possibly) heat shock treatment vaccine core technologies would add more than $200 million of market capitalization. That said, I do view this as a very favorable deal for Agenus.

Kudos to CEO Garo Armen

Being a biotechnology executive can be one of the most demanding jobs on earth and I want to give a tip of the hat to Garo Armen who has struggled long and hard to make Agenus a success. In September of 2013 the stock was selling at $2.85 following one of his typically vicious attacks  by Adam Feuerstein that stated that the Company’s technology (then focused on heat shock vaccines and QS-21) was tired old technology with no value and took his usual hard swipe at Dr. Armen. The stock was at $2.85, there was only $13 million of cash on the balance sheet and was under pressure from short sellers; it looked bleak.

Now here we are two years later and with the brilliant acquisition of 4-Antibody, Agenus has become the leading small company biotech player in checkpoint modulation. The QS-21 program is being monetized as per this royalty agreement. And finally, the Prophage program will likely proceed into phase 3 in glioblastoma either through a partnering deal or by Agenus alone. This deal certainly gives them the option to develop Prophage for glioblastoma on its own.

Balance Sheet is Strong

With this $100 million added to the $140 million of cash on the balance sheet at June 30, 2015, it brings the cash balance to $240 million. The quarterly cash burn has been about $16 million which at this rate means that the Company has enough cash to last for three and one-half years. Pretty amazing as compared to the $13 million in September of 2013. With any degree of success in its checkpoint modulator program we should see significant licensing agreements and milestone payments bolster the cash balance in coming years. Agenus has an exceptionally strong balance sheet in the context of an emerging biotechnology company.

Investment Thesis

I think that Agenus has put together a cutting edge model for an immuno-oncology focused company and of course, immuno-oncology is one of the most dynamic areas of research in the world pharmaceutical industry. It has a leading edge antibody drug development capability with its 4-Antibody subsidiary that makes it a leading player in developing checkpoint modulators. It also has over 20 years’ experience in cancer vaccines. It is also building strong bioinformatics capabilities that will be important for effective use of its immuno-oncology drugs.

The one thing that investors should consider is that many large biotechnology and pharmaceutical firms are far behind in the checkpoint modulator and cancer vaccine space. If they were to acquire Agenus, they could vault to a leadership position. I see a parallel with the Bristol-Myers Squibb decision to acquire Medarex in 2009 for $2.1 billion which led to Bristol becoming the leading factor in the development of checkpoint modulators. My most likely scenario for Agenus is that it is acquired within the next three years and potentially at a Medarex type of valuation or more. The current valuation is about $600 million.

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  1. With the 15% drop in stock price today, at $5.04 AGEN’s market cap is about $425m or only $185m more than its cash.

  2. I would appreciate a recent report on this stock. At current price levels, and with immuno-oncology drugs becoming an increasing focus for large pharmas (the next big thing), any hints of clinical success would make this company a likely and obvious buyout target. Updates on pending news and the timing thereof would be appreciated. The big question, as always, is at what price would management sell?


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