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Agios Pharmaceuticals (AGIO) made its public debut on Wednesday, July 24. The biopharmaceutical company with a mission to transform the lives of patients with cancer and inborn errors of metabolism, ended their first day with gains of 73.8% at $31.28 per share.

The Public Offering

Agios Pharmaceuticals is focused to apply its scientific knowledge as a first mover to potentially develop transformative medicines. The research and potential medication should fundamentally change the way cancer and inborn errors of metabolism are treated.

The company currently has two cancer programs in development to target mutations in enzymes isocitrate dehydrogenase. These are called IDH1 and IDH2. The promising programs and scientific publications imply that mutations are often initiating and driving many cancers. Agios' drug candidates could commence clinical trials with patients by the middle of this year or early next year.

Agios Pharmaceutical sold 5.9 million shares for $18 apiece, thereby raising $106 million in gross proceeds.

The public offering values the equity of the firm at $542 million. The offering took place above the midpoint of the preliminary $14-$16 offer range. Some 20% of the total shares outstanding were offered in the public offering. At Friday's closing price of $28.53 per share, the firm is valued around $860 million.

The major banks that brought the company public were J.P. Morgan (JPM), Goldman Sachs (GS), Cowen & Company and Leerink Swann.

Valuation

Back in 2010, Agios has entered into a collaboration agreement with Celgene (CELG) focused on cancer metabolism. The discovery phase of the collaboration expires in April 2014. Celgene has an option to extend the collaboration for another two years in anticipation of the discovery phase. Celgene furthermore holds the option to obtain exclusive rights to further develop and commercialize certain programs.

Inception to date, Agios has received $141.2 million in payments from Celgene, while the company has made a $37.5 million equity investment as well. Agios is still eligible for extension and milestone payments as well as potential royalties.

For the year of 2012, Agios has generated annual revenues of $25.1 million, up 15% on the year before. Net losses stabilized around $27.3 million as the company spend some $41 million in Research & Development efforts. Revenues for the first quarter of the year came in unchanged at $6.3 million while losses increased to $7.2 million.

The company ended its first quarter with $115.8 million in cash, equivalents and short term investments, while all preferred stock will be converted into common stock. Including the gross proceeds of $106 million in the offering, Agios will operate with a net cash position of around $200 million.

As such, operating assets of the firm are valued at $660 million. This values the company's assets at 26 times 2012's annual revenues.

Investment Thesis

As noted above, the offering of Agios Pharmaceuticals has been a huge success. Shares were offered some 20% above the midpoint of the preliminary offering range. On top of that came opening day returns of almost 74%, implying that shares currently trade at double the levels of the midpoint of the preliminary offering range.

There appear to be two main reasons behind this success. First of all, Agios most advanced candidates AG-221 and AG-120 could enter the clinical stage of development already this year. This implies that investors can already expect early news flow about the effectiveness of the potential candidates.

Second is the collaboration with Celgene. The pharmaceutical giant, with a market capitalization of some $60 billion, already owns a 17% stake in Agios. Celgene actually bought 850,000 shares in a private placement to boost its stake by some 3%. This vote of confidence, with the expiration of the agreement between the firms coming up in the spring of next year is crucial for Agios. Celgene itself has been hugely successful in recent years as shares have more than doubled in the past year alone as the powerhouse reported annual profits of $1.5 billion on $5.5 billion in revenues.

Investing in a biopharmaceutical company means even greater risks for shareholders, especially as Agios has no working product yet. At the same time, the losses are relatively low compared to the current financial position and the firm appears to have a great deal of confidence from Celgene.

Just how risky investing in biotechnology firms really is has been demonstrated by the public offering of Oncomed Pharmaceuticals (OMED) just a week ago. After witnessing opening day returns of 60% shares have given up pretty much all of those gains in the following trading week.

Therefore I make the same conclusion for Agios. While the risks are very high, the solid cash position and partnerships are providing some comfort to investors. This makes it still rally hard to attach a realistic valuation to the shares. I will await outcomes of clinical trials and clues about the true realistic market potential before considering making an investment in the firm.

Source: Agios Pharmaceuticals - Another Successful Public Offering Of A Biotech Company