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Key Value Drivers for Agenus Through 2015

I am initiating coverage of Agenus (AGEN) with a Buy. I have just published a basic report on my website, which goes into detail on the company's two core technology platforms: (1) the heat shock protein technology that is the basis of therapeutic and preventive vaccines for cancer and infectious disease, and (2) the QS-21 Stimulon adjuvant that is being used by Agenus and other vaccine developers to enhance the effectiveness of their vaccines. This report is a summary of that more detailed report.

Glaxo (GSK) is Agenus' primary partner for QS-21 and currently has 19 vaccines in development that use QS-21, four of which are in late stage Phase III development and are critical to my investment thesis. They are:

1. The MAGE A-3 cancer vaccine that is being used as adjunctive therapy in surgically resected stage IIIb and IIIc melanoma. Topline data on this Phase III trial will be reported in 2H, 2013. If the trial is successful, I think the product could be launched in the US and Europe in early 2015.

2. The same MAGE A-3 vaccine is also being developed for surgically resected stages Ib, II or IIIa non-small cell lung cancer. Topline data on this trial will be available in 4Q 2013 or early 2014. If the trial is successful, I think the product could be launched in the US and Europe in early 2015 at the same time as the melanoma indication.

3. RTS,S is a vaccine for malaria. Interim results on the Phase III trial of this vaccine have been unclear, with some positive and some not so positive data. More definitive data will be reported in 4Q 2013 and in 2014. If this upcoming data is positive, this vaccine could become part of the normal vaccination program in sub-Saharan Africa, with this process beginning in 2015.

4. A vaccine is in development 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. Topline data for this trial will be available in late 2014 and if the results are positive, marketing could begin in early 2016.

The following table shows my estimates for the sales potential of these four Glaxo vaccines and the royalties that Agenus will receive.

Table 1: SmithOnStocks Estimates of Glaxo Vaccine Sales and Resultant Agenus Royalties
$ millions201520162017201820192024
Glaxo Vaccine Revenues
MAGE A-3 in Non Small Cell Lung Cancer1373638671,2261,6262,181
MAGE A-3 in Melanoma42113268380503675
RTS,S in Malaria11314381199699
Herpes Zoster Vaccine0502005007501,126
Total Glaxo Revenues1915571,3782,1873,0784,681
Agenus Royalties
MAGE A-3 in Non Small Cell Lung Cancer51331445979
MAGE A-3 in Melanoma2410141824
RTS,S in Malaria0111311
Herpes Zoster Vaccine01381218
Total Agenus Royalties719456792132
Source: SmithOnStocks Estimates

Moving on to the heat shock protein vaccine programs, initial clinical results have been quite encouraging for the use of Prophage vaccine technology in recurrent and newly diagnosed glioblastoma. This has resulted in the May 2013 start of a Phase II trial in 222 recurrent glioblastoma patients. With strong results, this trial might be sufficient for regulatory approval. Topline results will probably be available in 2015 and in the best case; Prophage could be approved for recurrent glioblastoma in 2016. A Phase II trial in newly diagnosed glioblastoma patients could begin in early 2014. Agenus has full rights to Prophage in these indications. Results of a 65 patient Phase II trial of HerpV, the company's vaccine for genital herpes, will read out in 4Q 2013. If the trial is successful, this program would likely be partnered in 2014.

Price Target Thinking

The potential for the stock in 2013 rests primarily on the outcome of the MAGE A-3 cancer vaccine trials. We will see the melanoma results in 3Q 2013 and the results in non-small cell lung cancer in 4Q 2013 or 1Q 2014. I estimate in my basic report that the net present value of the MAGE A-3 vaccine in melanoma is $55 million or roughly $1.09 per share after tax, if the results support regulatory approval. I estimate that the net present value in non-small cell lung cancer is $177 million or $3.50 per share after tax. Application of a tax loss carry forward could add another $1.50 or so to net present value.

The net present value estimates are based on discounting the projected royalty stream of Agenus at a 15% discount rate, applying a 30% tax rate and dividing by fully diluted shares of 35 million. The assumption of a discount rate is somewhat arbitrary. I have chosen to use 15% in this report, but some investors might apply a lower or higher rate. I show the effect of using a 10%, 15% and 20% discount rate in the following table.

Table 2: Estimated Net Present Value of Royalties Using Different Discount Rates
Discount rates
Pretax net present value ($ millions)10%15%20%
MAGE A-3 Vaccine
Non-small cell lung cancer$244$177$132
RTS,S malaria vaccine231611
Herpes zoster vaccine513626
After tax, per share net present value
MAGE A-3 Vaccine
Non-small cell lung cancer$4.82$3.50$2.61
RTS,S malaria vaccine$0.45$0.32$0.22
Herpes zoster vaccine$1.01$0.71$0.51
Assumes 30% tax rate and 35.4 million shares outstanding

Using my assumptions, the common of Agenus might be worth about $7.00 per share in early 2014 based on the royalties from the Glaxo vaccines and the net operating loss carry forward even if every other asset in the company were valued at zero. However, there may be substantial value in Agenus' internal vaccine programs in recurrent and newly diagnosed glioblastoma and the genital herpes vaccine. Based on a comparison to peer companies like Northwest Biotherapeutics (NWBO) and ImmunoCellular Therapeutics (IMUC), I believe that the internal programs at Agenus currently may be worth $150 million or $4.45 per share. Adding this to the value of the MAGE A-3 vaccine could produce a stock price of $11.00 in early 2014.

I think that success with the MAGE A-3 vaccine could have a profound, additional effect on the stock price of Agenus from a psychological standpoint. First of all, there are 19 other clinical development programs and 13 pre-clinical development programs underway in which QS-21 is being used as an adjuvant. Investors might attribute considerable value to these programs. Perhaps more importantly, success in the MAGE A-3 trial would bring credibility to the field of cancer vaccines and might lead investors to value the potential for Agenus' heat shock protein cancer and infectious disease vaccines. Currently, these are being largely ignored by biotechnology investors. Agenus could be the subject of speculative fervor if investors rush to determine what other companies are in late stage development of cancer vaccines.

I think that Agenus might decide to issue more equity if one or both of the MAGE A-3 trials are successful. By my calculations, the year-end cash position will be about $9 million, which is less than a year of cash burn. I think that an offering following positive MAGE A-3 results would be well received and would not have much of an impact on the stock price.

Biotechnology investors know that nothing is for sure in clinical trials, so what happens if the MAGE A-3 trials fail in melanoma and non-small cell lung cancer? I think the immediate effect of a failure in melanoma might be to knock the stock down to around $2.50 per share. If then MAGE A-3 failed in non-small cell lung cancer, I think the stock might trail off some more, bringing the stock to around $2.00 in early 2014. Investors would then be looking at the need for a significant financing in mid-2014, and the anticipation and execution of an offering might drive the stock to the $1.25 to $1.50 range, which is my estimate of downside risk if both MAGE A-3 trials fail.

In thinking about price targets so far, I have ignored the potential for positive results in HerpV Phase II trial in genital herpes. Success could lead to a partnering deal later in 2014 that could significantly enhance the value of the company. For the time being, I am not going to try to factor in what success or failure of this trial might mean to the stock. Similarly, I am not attributing value to potential Agenus royalties from use with other vaccines. This adds some conservatism to my outlook.

I think that there will be some very important clinical data on the Prophage cancer vaccine trials in recurrent glioblastoma in 2015 and newly diagnosed glioblastoma in 2016. Based on looking at valuations awarded oncology companies with successful Phase II randomized trials, I could see the valuation put on Agenus' heat shock cancer and infectious disease technology as being $500 million to $1 billion per year. The company currently has about 35 million shares outstanding, but there is the strong probability that share issuance will increase this significantly. I am "guesstimating" that there will be 55 million shares outstanding in 2015, so that success in the Prophage program could potentially create $9.00 to $18.00 in stockholder value.

My estimated upside potential for the stock in early 2014 is $11.00+ if the MAGE A-3 trial is successful and the downside could be as low as $1.25 if all of the Glaxo vaccines fail, the Phase II HerpV trial also fails and Agenus is forced to finance at depressed prices. Even in this event, there would remain some hope that the Prophage trials in glioblastoma would succeed and result in some strong price appreciation in the 2015-2016 period. Based on this line of reasoning, I think that the risk reward is favorable for buying Agenus at this level. In order to gage the potential for success in the MAGE A-3 trials, I suggest that readers review the discussion on MAGE A-3 later in this report.

Other Value Drivers for Agenus

There are a number of other value drivers that are harder to analyze. AGEN has a net operating loss carry-forward of $624 million. Some part of this could be applied to operating profits that might arise from the Glaxo vaccines and Prophage. Not all of the net operating loss can be applied and there are complex calculations beyond my current ability to calculate to determine how much can be applied. However, every 10% of the operating loss carry-forward that can be used amounts to $1.90 per share. If only 25% can be used, the potential value is $4.75 per share

There are a large number of other potentials for creating value for which I have made no estimates. The MAGE A-3 vaccine is applicable to a number of cancers other than melanoma and non-small cell lung cancer. It is currently in Phase II trials for bladder cancer, head and neck, gastric, hepatocarcinoma, and multiple myeloma. Moreover, Glaxo is only enrolling patients in its Phase III trials that are high expressors of MAGE A-3 in order to maximize the chances for success. In clinical practice, MAGE A-3 use might expand to a much broader population of patients with lesser MAGE A-3 expression.

Glaxo has 15 other vaccines in clinical development in addition to the MAGE A-3, malaria and herpes zoster vaccines. I have not tried to calculate the net present value of those vaccines.

Also, Agenus is developing a vaccine for herpes simplex, or genital herpes, that uses Prophage heat shock technology and the QS-21 adjuvant. This disease affects 60 million Americans and is the fastest growing sexually transmitted disease. Agenus' HerpV vaccine will report topline data from a Phase II trial in 4Q 2013. There are no vaccines approved for treatment of this disease and success in the trial could trigger a lucrative partnering deal for Agenus, and also validate the potential of Prophage technology to treat many other types of infectious diseases such as malaria, tuberculosis and HIV.

Historical Perspective

Agenus was founded in 1994; it was a pioneer in immunotherapy and bears the battle scars that are inevitable with the development of paradigm changing technologies. Its core technology was based on an understanding of the biological role of heat shock proteins in the adaptive and innate immune response to cancer and infectious disease. The company initially applied this technology to the development of autologous therapeutic cancer vaccines, which are complexes of heat shock proteins with cancer antigens derived from a patient's own tumor tissue.

In 2000, Agenus acquired Aquillo, which had developed an adjuvant for vaccines called QS-21. Adjuvants are used in almost all vaccines to rev up the immune response and in doing so, they enhance the efficacy of vaccines. Agenus has an extensive collaboration with Glaxo, which has incorporated QS-21 as an integral part of adjuvant systems used in 19 separate vaccines in clinical development. QS-21 is also a key component of a heat shock protein therapeutics vaccine for genital herpes in Phase II that Agenus is developing. In total, QS-21 is currently being used in 21 clinical development programs and 13 preclinical studies.

The heat shock protein cancer program resulted in the development of Oncophage (since renamed Prophage), one of the first therapeutic cancer vaccines. It was progressed into phase III trials in renal cell carcinoma and melanoma. Both trials failed to meet their primary endpoints, causing many investors to give up on the product and the company. The stock suffered and Agenus was left in a financial conundrum, forcing a series of financings at depressed stock prices.

A retrospective analysis of the Oncophage Phase III trials showed very encouraging data for certain patient subsets. I mentioned earlier that pioneers get battle scars, and this has certainly been the case with cancer vaccine developers. Many of the pioneers in this space -- CancerVax, Favrille, Genitope, Cell Genesis -- failed in their trials and went out of business. With the experience of Oncophage and these other pioneer companies, there was a common thread underlying their failures. The conventional way of developing cancer drugs when cancer vaccines first entered clinical development was to add new drugs to standard of care in advanced cases of cancer. If the drugs were shown to be effective in this setting, they could then be tested in earlier and less severe cases of cancer. With perfect hindsight, this has proven to be exactly the wrong way to develop cancer vaccines and other drugs based on immune therapy. The clinical experience with two approved immunotherapies, Dendreon's (DNDN) Provenge and Bristol-Myers Squibb's (BMY) Yervoy, and other work has produced a new consensus view that immunotherapies work best for early stage cancers with small tumor masses.

As a pioneer in cancer vaccines, Agenus was unfortunately locked into this exactly wrong development scheme. Upon analyzing patient subsets, Agenus was able to suggest that the drug seemed to be quite effective in earlier stage cancers. From a scientific point of view, this was an important observation and suggested that Oncophage was effective when used in earlier stages of cancer. However, regulatory agencies, for very legitimate reasons, will not accept retrospective analysis of patient sub-groups. From a regulatory standpoint, the trials were and remain a failure. A large company would have taken the experience gained in these trials to launch new Phase III trials of Oncophage in earlier stage renal cell carcinoma and melanoma patients. However, as a small developmental stage biotechnology company, this was not an option for Agenus. New trials would have taken several years to perform and Agenus was severely cash constrained; indeed, the Oncophage failure threatened its existence.

The last few years have been ones of struggles for the company financially as it moved from one financing to another and yet never had the financial resources to run the clinical trials needed to test the promise of its cancer vaccines. For a company that was not long on its luck, it found some when a neurosurgeon at the University of California in San Francisco, Dr. Andrew Parsa, became interested in the use of Prophage (previously called Oncophage), to treat both newly diagnosed and recurrent glioblastoma. Dr. Parsa ran investigator led trials in glioblastoma that created data that has led to the start of a 222 patient randomized Phase II study in recurrent glioblastoma that has the potential to be a registrational trial. Both Avastin and Gliadel, which are only modestly effective, were approved for recurrent glioblastoma with studies of similar size so that this trial might be sufficient for registration if successful.

The National Cancer Institute has decided to fund most of the estimated $21+ million needed to run the recurrent glioblastoma study. From a shareholder standpoint, the funding for this trial requires minimal cash commitment from Agenus as it is only required to manufacture the product needed for the trial. Without Dr. Parsa, Prophage/Oncophage would be an historical footnote in cancer drug development. Importantly and interestingly, Dr. Parsa receives no compensation from Agenus, nor does he own stock. Now, Agenus has the hope that Phase II trials in glioblastoma will lead to success and a potential filing of an NDA for recurrent glioblastoma in the 2015-2016 time frame. Agenus will be meeting with the FDA later this year in order to plan for a Phase III trial in newly diagnosed glioblastoma. This could start in early 2014 and would take about two years to create topline data in 2016. Funding for this trial has not yet been put in place.

Financial Considerations

Agenus executed a restructuring of its debt in the first quarter of 2013 that significantly improved balance sheet strength. At that time, it had $39 million of senior subordinated debt that was due in August of 2014. The company had $17 million of cash on its balance sheet and relative to the recent quarterly cash burn rate of about $3.5 million per quarter, it was on track to end 2013 with $7 million of cash. Investors were looking at the bleak prospect that Agenus needed to raise nearly $50-60 million of cash in the next year or so, which is roughly equivalent to half of its market capitalization. However, raising this amount of money would no doubt have been done at a sharp discount and with substantial (probably 50%) warrant coverage. Shareholders could have seen the share count potentially double, causing very substantial dilution.

The company might have been able to retire the $39 million of debt with a new, extended debt package, but this would have left the substantial debt overhang in place. Agenus took a different tack by offering the debt holders $10 million, 20% of the royalties received from QS-21 partnered programs and 2.5 million shares of stock as a swap for the $39 million of debt. It then separately entered into a senior secured debt transaction with Silicon Bank for $5 million and a separate senior subordinated debt offering with investors for $5 million. This new debt matures in 24 months and can be prepaid at any time without fees or penalties. Also in the second quarter, the company received $2.3 million of sales from an ATM agreement.

Adjusting for all of the above transactions, the company now has $10 million of debt and on a pro forma basis, about $19 million of cash at the end of 1Q 2013. The fully diluted share count was increased by about 3.6 million shares to approximately 35.4 million shares. At the current price of $4.00, the fully diluted market capitalization is about $140 million.

The current operating cash burn is about $3.5 million, so at this rate, by the end of 2013, the cash position might decline to $9 million. Using a comparable rate of quarterly burn ($3.5 million per quarter) in 2014 would result in the company running out of cash in 3Q 2014 without additional cash inflows. Remember also that the company also has to retire or refinance the $10 million of newly acquired senior subordinated debt that it has just incurred before April of 2015.

From a cash standpoint, Agenus probably will elect to raise cash in 2013 if market conditions are favorable. I think that if one or both of the MAGE A-3 vaccine trials are successful and the price increases substantially, it would be prudent to bring in more cash. This could be done with a conventional equity offering in combination with its ATM facility. To provide for the repayment of debt and keep the company in a reasonably strong cash position. I think that the company might elect to raise cash of $25 million or more through stock sales. Another possibility for bringing in more cash is a partnering deal on the HerpV vaccine for genital herpes if the phase II data expected in 4Q 2013 is positive. With good data, I think that Agenus might be able to negotiate a $25 million upfront milestone payment for HerpV in 2014.

Using the assumptions I have outlined for royalties that may arise from the four late stage Glaxo vaccines, I estimate royalty revenues of $7 million in 2015, $18 million in 2016, $45 million in 2017 and $67 million in 2018. If so, the company could reach profitability in 2017. The royalties would also fund a significant part of the burn rate in 2015 and 2016.

More on the Glaxo Vaccines

The key to the Agenus investment story in 2013 and 2014 is driven primarily by the outcome of the four phase III vaccine trials being conducted by Glaxo. Agenus will receive a royalty of 4.5% on sales of the MAGE A-3 vaccine for melanoma and non-small cell lung cancer, and 2% on the malaria and herpes zoster vaccines. As a condition of a debt re-financing, Agenus will pay 20% of these royalties to the financial firm Ingalls and Snyder. Agenus will receive royalties for ten years following commercial introduction. The commercial prospects for each of these vaccines is quite different. In my basic report, I go into considerable detail on these four products, but in this abbreviated form of that report, I only go over my conclusions. Let's start with the MAGE A-3 vaccine in development for melanoma and non-small cell lung cancer.

MAGE A-3 is a very interesting and cancer specific antigen that is meaningfully expressed in up to 66% of melanomas and 35% of non-small cell lung cancers. The Glaxo trials are being conducted only in patients who express high levels of MAGE A-3. These were very large trials as there were 1,350 patients in the melanoma trial and 2,300 patients in the non-small cell lung cancer trial; the latter is the largest trial ever done in this stage of NSCLC. These trials are very different from previously conducted cancer vaccine trials in that they are being done in early stage patients (recall my earlier discussion on why immunotherapies should be tested in early stage and not late stage patients). They are also very large trials that are well powered to achieve statistical significance in their primary endpoint of median progression free survival and secondary endpoint of median overall survival. The trials are targeted at a specific population of high MAGE A-3 expressors who can benefit as opposed to a broader, non-specific patient population; this has been a mistake often made in prior cancer trials.

There is reason to hope that this approach will lead to success in the trials because of the designs of the trials, but what are the chances for success? It has been my experience that a significant percentage of clinical trials fail not because the drug doesn't work, but because the trials are too small or there are flaws in the trial design. Small biotechnology companies often don't have enough money to conduct large trials and may not have the skills to design and execute the trials. This is not the case with the MAGE A-3 vaccine as the Glaxo trials are very large and hopefully the considerable experience of Glaxo in conducting clinical trials will mitigate the design and execution risk.

I do want to take a moment to consider why these trials might fail. When I listen to pessimistic investors, the most often cited reason is the large number of cancer vaccine failures that have gone before. I believe that this was due in part to an inappropriate focus on late stage patients instead of earlier stage patients. However, this is just a hypothesis and there may be other reasons that we have yet to discover that account for these failures. Another potentially negative issue is that the MAGE A-3 vaccine targets a single antigen. It is known that when cancer treatments, which target particular cancer antigens in a cancer cell, over time, cancer cells displaying these antigens are depleted. This leads to the selection or emergence of cells that are resistant to treatment; a process that is known as antigen drift. For this reason, most cancer vaccine products -- Provenge is an exception -- are targeted at multiple antigens.

The risk of failure in these trials is significant and if they do fail, it is likely to be due to some unanticipated biological or clinical trial event. This seems to happen over and over again in the pursuit of new cutting edge products. Biology is very complex and it often takes decades to refine new therapeutic approaches as has been the case with cancer in the use of chemotherapy, monoclonal antibodies and targeted therapies. Unexpected things inevitably arise. However, I think that the Glaxo trials in melanoma and non-small cell lung cancer are well planned and conducted and have a reasonable chance for success.

Glaxo has reported two interim results from a Phase III trial of its malaria vaccine. This disease is estimated to kill 650,000 humans each year, primarily infants, young children and pregnant women. It is primarily a disease that affects less developed countries and is especially prevalent in sub-Saharan Africa. Perhaps no drug under development has the potential to save as many lives as an effective vaccine for malaria. Initial results reported in 2011 for children aged 6 to 18 months were very encouraging as they showed that Glaxo's malaria vaccine RTS,S was able to reduce the incidence of severe cases of malaria by 51%. However, a subsequent interim look at younger infants aged six weeks to five months showed only a 31% reduction in severe cases of malaria. The results in this younger age bracket are particularly important as they are the group that is at high risk and who routinely receive a program of childhood vaccines that RTS,S could become a part of.

The reaction to the interim report on the six weeks to five month age group was generally disappointment. The World Health Organization has suggested a somewhat arbitrary but accepted goal of 50% or more reduction in severe cases of malaria in order to include a malaria vaccine in routine childhood vaccination programs. Bill Gates, whose foundation has poured more than $200 million into treating malaria research, called these results disappointing. Andrew Witty, the CEO of Glaxo, said the results were less than the Company had hoped for, but that Glaxo remained committed to continuing development of the vaccine.

There will be another look at the Phase III data in late 2013 and another in 2014 that will better define the role of the malaria vaccine. The key information being sought is the duration and magnitude of the immune response. There is the hope that the result of a booster shot coupled with a more mature immune system will result in improved efficacy in the six weeks to five month age group. If this does not happen, I am inclined to think that this vaccine will not become a part of the standard vaccination strategy for young African children.

The fourth Glaxo vaccine is for herpes zoster, which is more commonly referred to as shingles. Merck has the dominant vaccine in the market with Zostavax, an attenuated virus vaccine; it achieved $650 million of sales in 2012 and appears to be on a path to $1 billion of sales. The Glaxo vaccine is based on a newer technology that uses recombinantly produced antigens from the coat of the herpes zoster virus. Herpes zoster mostly affects people with compromised immune systems arising from diseases or drug treatments and the elderly. Glaxo believes that its sub-unit vaccine will be more effective than Merck's attenuated vaccine in immunocompromised patients. Glaxo's reason for developing this vaccine is that it believes it will be superior to Zostavax in both elderly and immuno-compromised patients and will largely replace Zostavax sales. If so, the Glaxo herpes zoster vaccine could have sales potential of $1 billion.

The MAGE A-3 trials if successful will define a new standard of care for the adjuvant treatment of early stage, surgically resected melanoma and non-small cell lung cancer patients with high MAGE A-3 expression. These are landmark trials and their success would mean rapid uptake of these vaccines as part of standard of care. The patient population that the MAGE A-3 vaccine addresses in non-small cell lung cancer is about 90,000 patients. However, only 60,000 of these patients are surgically resected, and of these patients, only 21,000 have sufficient MAGE A-3 expression. Hence 21,000 patients is the addressable market in the US and Europe for non-small cell lung cancer. The comparable numbers for melanoma are 9,000 patients in the US and Europe who are surgically resected, and of these, 6,500 have adequate MAGE A-3 expression. Hence the target market for melanoma is 6,500 patients.

In thinking about a price potential for these vaccines, a starting point is to look at prices for other immunotherapies. Yervoy costs about $120,000 per year and Provenge is priced at $90,000. Most new drugs for cancer fall into the $60,000 to $100,000 annual price range. Just for the sake of discussion, let's assume that the MAGE A-3 vaccine is priced at $80,000 per year. This means that the addressable market for non-small cell lung cancer for Glaxo is $1.7 billion, and for melanoma it is $500 million. However, Glaxo also has Phase II trials underway in bladder cancer, head and neck cancer, gastric cancer, liver cancer and multiple myeloma. Success in the melanoma and non-small cell lung cancer trials could lead to rapid clinical development and regulatory approval in these cancers that would further expand the potential. Finally, Glaxo has been very careful to conduct trials only in high MAGE A-3 expressors who are most likely to benefit in order to maximize chances for success in Phase III. In actual clinical practice, it is possible that lower MAGE A-3 expressors could be treated, which would also expand the market.

Agenus struck a deal with Glaxo that gives it a royalty of 4.5% of sales. However, in a debt restructuring agreement, Agenus agrees to give up 20% of this royalty to a creditor in return for debt forgiveness. This makes the effective royalty to Agenus 3.6%. The addressable market for Agenus in terms of royalties payable to Agenus is $100 million for non-small cell lung cancer, and for melanoma it is $31 million. I would expect rapid uptake of the vaccine in both indications if the trials are successful. I think that within five years of introduction, the MAGE A-3 vaccine might be used in 75% of its target population. I think that the vaccines will probably be launched in early to mid-2015 and Agenus is entitled to royalties for 10 years post commercialization.

The potential for the malaria vaccine will initially be in ten countries in Africa, if it is successfully developed. It would be included in the package of standard childhood vaccinations, which are generally priced at $2.00 per vaccine. There are 180 million babies born each year in these ten African countries, so the sales potential for Glaxo for this birth cohort is $360 million per year. Initially, there could be a bulge in sales as children in the age group from six to eighteen months would also be vaccinated. Agenus receives a royalty of 2.0% from Glaxo and again this royalty is reduced to 1.6% due to the debt restructuring. On $360 million of sales, the royalties received and retained by Agenus would be $6 million.

The herpes zoster or shingles vaccine is a little harder to model. Merck has first mover advantage in the market and has achieved $650 million of sales in 2012 following four years in which production issues caused sales to fall in the $250 to $275 million range. This should be a $1 billion product for Merck by 2016 when the Glaxo vaccine could come to market. The Glaxo vaccine clinical trials are intended to show superiority to Zostavax in treating elderly and immunocompromised patients who are the patients at highest risk. Phase I and II trials have indicated that it produces a stronger immune response is such patients. With superior efficacy, the Glaxo product could replace Zostavax as the dominant vaccine in the market and aspire to a billion dollars of sales.

Agenus' Prophage Vaccines for Glioblastoma

Topline results on the Phase II trial in recurrent glioblastoma could be available in 2015 and the results in newly diagnosed glioblastoma could be a little bit later in 2016. If successful, the trial in recurrent glioblastoma is potentially sufficient for registration because of the severity of the disease and lack of any effective therapy. Avastin and the Gliadel Wafer are approved for this indication but have only modest efficacy. The topline data on the Phase II trial in recurrent glioblastoma could be available in 2015 or 2016. However, if the results are not striking, there is some chance that the FDA may require a confirmatory trial for approval that could take another two years to conduct.

Data on an earlier Phase II trial in recurrent glioblastoma will be published later this year; I have not seen the results. With the decision of NCI to fund the just started Phase II trial in recurrent glioblastoma, I think that we can assume that the data was positive. Interim results in a trial of newly diagnosed glioblastoma patients was just released and indicated that median overall survival was 23.3 months versus 14.4 expected for standard of care. The data is relatively immature and I would expect the median overall survival for Prophage to improve as the patient population is followed.

Investors who have followed my work will quickly ask how I think Prophage will compare to NWBO's DC Vax-L and IMUC's ICT-107 in newly diagnosed glioblastoma; neither of these products is in a Phase II trial in recurrent glioblastoma, so potentially Prophage could be the first to gain approval in this indication. The data for DC Vax-L in Phase I trials showed median overall survival of 36.0 months in newly diagnosed glioblastoma and ICT-107 showed 38.4 months. This compares to 18.8 months for standard of care. Interim data on Prophage showed median survival of 23.3 months is less than this, but as I commented, the data is still maturing and I would expect Prophage's median overall survival to improve. By the way, this might also apply to DC Vax-L and ICT-107 as well.

Median overall survival is more than encouraging for all three products and is suggestive that each could be a major advance in glioblastoma. The question is how they might compete in the market if each is successful and approved for commercial use. It is too early to say definitively, but I think that because of HLA restrictions, ICT-107 would only be applicable in about 40% to 50% of the population, whereas DC Vax-L and Prophage can be used in most patients. There are likely to be other factors that might determine that the vaccines might be better in certain populations. However, I think that the potential in glioblastoma is less important than validation of the technology that success would bring. This would represent a significant advance in cancer and infectious disease treatment. Success in the glioblastoma indication would validate potential for immunotherapy in most types of cancer that would, in my opinion, be a significant advance over chemotherapy, monoclonal antibodies and targeted therapies that are the focus of almost all current cancer treatments and development efforts.

Agenus' HerpV vaccine for Genital Herpes

The final aspect of the near-term outlook for Agenus is a vaccine, HerpV, that it has developed for genital herpes. This uses heat shock proteins complexed with antigens from the viral coat or infected cells. Unlike Prophage, this product uses synthetic antigens and would be an "off the shelf" product.

Agenus is conducting a Phase II trial that is investigating the potential for HerpV to reduce viral shedding, which experts generally believe would reduce the spread of this sexually transmitted disease that affects 60 million Americans. This is Agenus' first clinical program using heat shock protein antigen complexes in the treatment of infectious disease. If successful, it could lead to other product development efforts in numerous other infectious diseases. Results are expected in late 2013 and if this trial is successful, could lead to a meaningful partnering program. The upfront milestone payment could meaningfully increase the financial strength of the company.

Source: Agenus: Key Clinical Events Are Imminent