Expert Financial Analysis and Reporting

• Incyte’s expertise in clinical development and commercialization of cancer drugs is a perfect complement to Agenus’ product development capabilities for antibodies used for checkpoint modulation.
• The combined companies present one of the most powerful development efforts in the highly promising field of checkpoint modulation.
• Agenus is the only pure play in this area, which is arguably the hottest area of cancer research.
• I would be a buyer at these levels.

Details of Incyte Collaboration

Agenus has just announced collaboration with Incyte Corporation (INCY) to develop antibodies targeted at four checkpoint modulators:  GITR, OX40, TIM-3 and LAG-3. This is a global licensing, development and commercialization agreement. For the GITR and OX40 antibodies, costs and profits will be split 50:50 between the companies. The current agreement on TIM-3 and LAG-3 is royalty based.  Incyte will bear the costs of development and Agenus will receive royalties ranging from mid-single digits (5%) to low double digits (11% to 12%). However, Agenus has the right to change the arrangement so that they would pick up 30% of costs and 30% of the profits.

Initially, Agenus will receive cash of $60 million comprised of an upfront payment of $25 million and $35 million through Incyte purchasing 7.76 million shares at $4.51. There are potential additional milestones on TIM-3 and LAG-3 that could amount to $155 million and smaller milestones for GITR and OX40.

The GITR and OX-40 compounds could begin commercial trials in 2016. In addition to these disclosed programs, Agenus and Incyte have formed a joint steering committee that will investigate additional checkpoint modulation targets and combinations of checkpoint modulators. There are likely to a good number of additional programs announced over the next few years.

This collaboration does not prevent Agenus from working with other companies on other checkpoint modulating antibodies in the field of cancer, although I think that Agenus and Incyte are pretty much joined at the hip. Importantly, this collaboration does not cover the use of checkpoint modulating antibodies for the treatment of autoimmune diseases and in transplantation. There is very significant potential in both of this fields and I expect Agenus to form collaborations down the road that could be as promising as the Incyte collaboration.

Background Information on Checkpoint Modulators

Checkpoint modulator receptors found on the cell surfaces of T-cells are the thermostats of the T-cell component of the adaptive immune system. They can control the response of T-cells to cancer both through revving up the immune response and also through dampening it. Cancer can highjack control of these receptors and block the T-cell response to cancer, which creates tolerance of the immune system to cancer.

Quite recently in terms of drug development time, it has been found that antibodies that either block or activate individual receptors can break the immune tolerance to cancer and have a very significant impact on the treatment of intractable cancers such as metastatic melanoma and metastatic non-small cell lung cancer. This led to the successful development of the first commercialized checkpoint inhibitor by Bristol-Myers Squibb (BMY). Yervoy is an antibody that blocks CTLA-4; it was introduced in 2011for the treatment of metastatic melanoma and is projected to have sales of $1.3 billion in 2014.

Bristol-Myers Squibb’s Opdivo and Merck’s Keytruda are antibodies against PD-1. Both were recently approved for the treatment of metastatic melanoma and should receive approval for metastatic non-small cell lung cancer in 2015. Some leading Street analysts are predicting around $5 billion of sales by 2020 for both products.

What This Means for Agenus

I think that we have to congratulate the CEO of Agenus, Garo Armen, on what he has accomplished this year.  I thought that the acquisition of 4-Antibody in February 2014 was transformative and I think that this collaboration with Incyte is equally transformative. It brings the financial resources to move rapidly on developing new clinical candidates and moving them effectively to the market. Incyte had $530 million of cash at the end of 3Q, 2014 and this collaboration should bring Agenus’ current cash position to about $100 million. .

As important, Incyte brings what Agenus is lacking and would have had to develop at great cost over a longer period of time. Incyte has demonstrated the ability to develop small molecules in cancer and to successfully commercialize them. The combination of Agenus’ product creation expertise with Incyte’s proven ability to develop and commercialize cancer products means that this is one of the best and possibly over the longer term the best integrated research and development effort in the checkpoint modulation field.

Checkpoint modulation is considered by many to be the most promising area of cancer research and is of intense interest to investors. There are perhaps hundreds of checkpoint targets and the thinking is that combinations of checkpoint modulators will lead to even more striking results than just one product used alone. Agenus has demonstrated with its Retrocyte technology the ability to rapidly generate antibodies against checkpoint targets giving it an advantage against almost all of its competitors to investigate combinations. I think that from a stock standpoint investors will view Agenus as the best pure play in checkpoint modulation.

Investment Thesis

With the Incyte stock purchase, Agenus will have about 70 million shares outstanding so that the current market capitalization is about $360 million. I think that it is not a stretch to contemplate that the Agenus/Incyte collaboration could have commercial potential similar to that of Kite Pharma (KITE) and Juno Therapeutics (JUNO) in the CAR-T drug development space. These companies have respective market capitalizations of $3.2 billion and $4.2 billion. This suggests that as investors look more closely at this collaboration, they might attribute significantly greater potential to it. With Agenus accounting for around half of the value, this could lead to a significant further increase in market capitalization for Agenus over time. Adding to the potential for stock price appreciation is scarcity value. Agenus offers the only pure play in checkpoint modulation antibody development.

I have been concerned about what Agenus will do with its legacy heat shock protein products, specifically Prophage for glioblastoma and HerpV for herpes simplex. Agenus has said that it will need to partner these products as it devotes all of its development efforts and financial resources to the checkpoint modulation program. These may not be easy assets to partner because the technology is controversial and the stage of development is still early. I had feared that if this is the case and the market begins to sense that these assets may have to be put on the shelf, it could cause a major perception issue. Agenus has been a target of Adam Feuerstein in the past and I could see him attacking Agenus as fiercely as he has Northwest Biotherapeutics (NWBO) if these products were shelved. Because of this issue, I have been cautious on the stock until this issue was resolved. I thought that if these programs were put on the shelf and the stock was to weaken, it would be a great buying opportunity.

In any event, I thought that Agenus had exceptional long term potential because of its position in checkpoint modulation. I thought that the end game was a takeover by a larger company to gain access to Agenus’ technology. I actually think that from a stockholder standpoint that this collaboration with Incyte offers far better long term stock appreciation than a takeover. It allows Agenus a path forward to become a commercial operation and this is much more meaningful than just selling the Company. I still think that the vaccine assets could be put on the shelf, but this collaboration makes this a much less important event. And, if these products are successfully partnered, it would create significant upside. I would be a buyer of the stock at this level.