Expert Financial Analysis and Reporting

Investment Thesis

Glaxo (GSK) announced today that the trial of their MAGE A-3 cancer vaccine in the DERMA trial in stage IIIb/c melanoma did not meet its endpoint of progression free survival. Agenus' QS-21 adjuvant is a component of this vaccine and Agenus would be entitled to a royalty upon commercialization.

Agenus' stock traded down significantly on the opening. I think that this is not a surprising reaction when a primary endpoint on a key product is not reached. However, I think that as investors have time to think through the implications of the announcement that the stock could recover a good part of its losses. This is a setback, but not the death knell for MAGE A-3 as I explain in this report. Moreover, there are significant other assets in development.

There soon will be data on the phase II trial of Prophage in recurrent glioblastoma that will almost certainly be positive as a phase IIb trial that could be the basis for registration was started after this data was known. There will also be proof of concept data for HerpV in genital herpes which if positive could be a major catalyst for the stock. Additionally, there will be an update on the malaria vaccine, which most investors have written off; there is limited downside for poor or equivocal results and moderate upside if results are positive. However, this is not a substantial economic opportunity.

The opportunity for Prophage in recurrent glioblastoma seems the most important driver of value in the stock with the cloud hanging over MAGE A-3. However, this is not insignificant. There are 2000 or so recurrent cases of glioblastoma in the US and the only approved product for this indication is Avastin which has modest efficacy. An effective product in this area could command a price of $100,000 per treatment so that the market opportunity is about $200 million in the US and perhaps the same abroad. This opportunity could be exploited in the US with a small sales force. Celldex (CLDX) is also developing a cancer vaccine for recurrent glioblastoma but with its mechanism of action it is only potentially effective in 30% of the patient population.

It seems to me that Agenus at a market capitalization of $85 million is attractive based on the potential for Prophage in recurrent glioblastoma. Also, success in that indication would be likely followed by use in newly diagnosed glioblastoma which would expand the addressable market fivefold. This failure to hit the primary endpoint of progression free survival is a setback, but not a death knell for the MAGE A-3 cancer vaccine as I will explain shortly. The prospects for the malaria vaccine and HerpV are uncertain at present but could provide upside. Finally, the QS-21 adjuvant is now being used in clinical trials involving 15 other Glaxo vaccines and promises a meaningful royalty stream in the future.

Investors are concerned that although Agenus has gone through a financial restructuring that has cleaned up the balance sheet, it is still in an uncomfortable cash position. It had $13 million at the end of the 2Q, 2013 and at the current burn rate of $4 to $5 million per quarter will be down to $2 million at year end. Agenus does not burn much cash as the Prophage and Glaxo vaccines require little capital. Most of its spending is on the HerpV Phase II program for genital herpes.

I think that Agenus continues to be an asymmetric investment opportunity. I certainly intend to maintain my current position in the stock and with this setback, I will add to that position. The remainder of this report gives more discussion of the MAGE A-3 vaccine and other products in development.

Is This the End of MAGE A-3 Cancer Vaccine in Stage III B/C Melanoma?

The failure of the MAGE A-3 vaccine to hit the endpoint of progression free survival is a serious blow and I don't want to attempt to minimize it. However, this is not the same situation as the failure of Vical's (VICL) cancer vaccine Allovectin in melanoma which led to the abandonment of that product.

The Independent Data Monitoring Committee in this trial unanimously recommended that the trial continue at least to the second co-primary endpoint. Glaxo has prospectively identified a sub-population in the trial that has a unique gene signature or profile. Glaxo believes that the FDA would approve the MAGE A-3 vaccine in this sub-population if the progression free survival data is positive in that group but negative for the trial as a whole. This data will be available in 2015.

The data on the secondary endpoint of overall survival will be available in 2014, probably after mid-year. Investors may recall that Dendreon's (DNDN) Provenge did not achieve its primary endpoint of progression free survival but did reach the secondary endpoint of overall survival and was approved on this basis. The argument explaining such drug behavior is that immunotherapy is very slow acting relative to chemotherapy. In the case of Provenge and also in the case of Bristol-Myers Squibb's (BMY) checkpoint inhibitor Yervoy, tumors were observed to first grow before the patients went on to achieve benefit from the drug. If this is the case with MAGE A-3 there is some hope that the overall survival endpoint can be reached even though progression free survival was not.

A very interesting aspect of this situation is that the Independent Data Monitoring Committee unanimously recommended continuation of the trial. There are two possibilities for this decision. The first is that they are seeing evidence that the progression free survival endpoint in the sub-population with the unique genetic profile can yet be achieved and/or that the secondary endpoint of overall survival can be reached. Either result would likely lead to approval of the product. The second explanation is that this is a landmark study that will give an unprecedented view into the progression of stage III b/c melanoma so that even though there is no hope for MAGE-A3, the trial data will be invaluable to future drug development. I am more inclined toward the explanation that the IDMC sees the potential for benefit. There is an ethical question in continuing the trial if there is no hope for benefit.

What Does This Mean for the MAGE A-3 Cancer Vaccine in Non-Small Cell Lung Cancer?

Glaxo is conducting a trial with the same vaccine in non-small cell lung cancer with the same co-primary endpoints for progression free survival and a secondary endpoint of overall survival. Topline data on progression free survival in the entire patient population should be reported in 1H, 2014.

The comments that I made in regard to MAGE A-3 in melanoma are applicable to this non-small cell lung cancer trial as well. There is also one other element of hope. It may be the case that the progression free survival outcome could be better in non-small cell lung cancer than in melanoma. Glaxo has gathered epidemiological data from other melanoma III b,c studies that show that the median time to progression is about 9 months. In following patients in the phase II trial of the MAGE A-3 vaccine in stage 1b to IIIa non-small cell lung cancer, the median progression free survival has not been reached at three years. This suggests that the stage 1b to IIIa non-small cell lung cancer is much slower to progress than stage III b, c melanoma. This might increase the probability of reaching the primary endpoint of progression free survival.

Upcoming Clinical Results for Agenus

There are a number of important clinical events coming up for Agenus that are as follows:

4Q, 2013 Glaxo is developing RTS,S; this is a vaccine for malaria that uses QS-21 as an adjuvant. There are no vaccines for malaria, which is the cause of more human deaths than any other infectious disease. Interim results on the Phase III trial of this vaccine have been unclear with some positive and some not so positive data; investors are neutral to negative on potential for success. More definitive data will be reported in 4Q, 2013 or possibly in early 2014. If the data is positive, this vaccine could become part of the normal vaccination program in sub-Saharan Africa with this process beginning in 2015. Assuming success, I am estimating sales of $200 million in 2019 and that Agenus would receive a royalty of $3 million at that time.

4Q, 2013 Prophage is Agenus' cancer vaccine that is based on its heat shock protein technology. Encouraging investigator sponsored studies have led to the recent initiation of a Phase II trial in 222 recurrent glioblastoma patients. The full results of an earlier trial in recurrent glioblastoma that was the basis for this trial should be published in 4Q, 2013 allowing investors to see the full data set for the first time. This could spark more serious investor attention to this program. I think that we can assume that these results will be encouraging as the National Cancer Institute, already having seen the results, decided to fund most of the estimated $21 million cost of the new Phase II trial. Agenus is only responsible for manufacturing the vaccine.

The new Phase II recurrent glioblastoma trial could report topline results in 2015 and with highly positive results could be the basis of a registrational filing in 2015 or 2016. A separate and distinct Phase II trial in newly diagnosed glioblastoma patients could begin in early 2014. Agenus has full rights to Prophage in these indications. This could be a very important asset for the Company that could potentially allow it to transform into a commercial enterprise.

I believe that the recurrent glioblastoma market is currently about 2,000 patients and could represent an addressable market of $200 million or more in the US. Northwest Biotherapeutics (NWBO), ImmunoCellular (IMUC) and Celldex (CLDX) are each in Phase III or II programs in newly diagnosed glioblastoma. Celldex is conducting phase II trial in recurrent glioblastoma and IMUC is beginning a Phase I trial in recurrent glioblastoma. Agenus is at the forefront in clinical trials for recurrent glioblastoma, but is somewhat behind in newly diagnosed glioblastoma.

4Q, 2013 Agenus has developed HerpV, a vaccine for genital herpes that is based on its heat shock protein technology. Unlike Prophage, this product uses synthetic antigens and would be an "off the shelf" product. Results of a 65 patient Phase II should read out in 4Q, 2013. The purpose of this trial is to show that HerpV can reduce viral shedding and thereby sexual transmission of the disease, which is estimated to affect 60 million Americans. Agenus is at the forefront in developing this type of vaccine and promising results could lead to a partnering deal with a meaningful upfront payment in 1H, 2014.

1Q, 2014 The MAGE A-3 vaccine is also being developed for surgically resected stages Ib, II or IIIa non-small cell lung cancer. If this trial is successful, I am projecting sales of $1.6 billion in 2019 and Agenus would receive a royalty of $59 million at that time.

2H, 2014 The results on overall survival of the MAGE A-3 vaccine in stage III b/c melanoma could be reported.

4Q, 2014 There will be data readout on a Glaxo vaccine for herpes zoster, commonly known as shingles. The vaccine is being developed under the premise that it will be superior to the current market leader Merck's Zostavax and replace much of that product's sales. In that case, I think that sales of $750 million could occur in 2019 and Agenus would receive $12 million of royalties.

2015 The results on the co-primary endpoint of progression free survival for the MAGE A-3 vaccine in stage III b/c melanoma could be reported.