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As with all emerging biotechnology companies, there are divergent views on the promise of Agenus' (NASDAQ:AGEN) technology and the prospects for success in its clinical trials. The purpose of this report is to address some negative issues about Prophage raised by Adam Feuerstein in a recent blog.

Before doing this, I want to make clear my strategy for investing in emerging biotechnology. Drug development is a very high risk game. There is a high failure rate in going from what appears to be encouraging phase II exploratory trials (as in the case of Prophage) to larger phase IIb and phase III trials that are necessary for approval. I have not seen any reliable numbers, but as a guess I would think that results seen in more than half of such phase II trials are not replicated in larger studies.

Large and small companies face the same issue. Earlier this year Roche/Genentech (OTCQX:RHHBY) reported that its key drug Avastin, which has annual sales of about $6 billion in other cancer indications, failed to show any survival benefit two phase III trials of 921 and 637 patient trials in glioblastoma. This is of course the disease target for Agenus' Prophage. When a trial fails for large companies like Roche, investors just shrug their shoulders and move on; the stock is modestly or not at all impacted. However, trial failures for an emerging biotechnology company can cause 30% to 50% or even greater instantaneous price drops.

So the question arises why anyone would buy an emerging biotechnology stock. The answer is that this high rate of failure is usually priced into the stocks. This then creates the investment opportunity because with success, the upside can be extraordinary and asymmetric relative to the downside that occurs with failure. Let me give some insight, I recommended Trius in at a price of $5.05 in May 2012 and it was recently taken over by Cubist (NASDAQ:CBST) at $13.50. For every $1.00 invested in Trius when I recommended the stock, the investor wound up with $2.67.

But you will point out that there are more failures than successes. Here is the key to my strategy. Let's say that you also invested $1.00 in two other companies whose trials failed and their prices decreased 50% so that the two dollars invested in those companies is worth $1.00. Altogether you have invested $3.00 and you wind up with $3.67. Even being wrong two out of three times can produce acceptable returns. My hope is to do better than one out of three.

The next point that you might raise is how unique is the Trius situation? In the last two years I have had four other recommendations taken over at prices double or triple the price at the time of my recommendation. These were Adolor, Anadys, Inhibitex and MAP Pharmaceuticals. However, I am not really shooting for doubles or triples in stock prices. While I was not covering or recommending Celldex (NASDAQ:CLDX) and Pharmacyclics (NASDAQ:PCYC), they are examples of much more spectacular moves that I am looking for. On October 8, 2008 Pharmacyclics closed at $1.18 and two years later on October 10, 2010 it closed at $7.65. Its recent price was $121. The price of Celldex increased from $2.60 at year-end 2011 to a recent price of $29. I note that these moves were based on investor enthusiasm for drugs that are not yet approved.

It is returns like that of Celldex and Pharmacyclics that I am aiming for in many of my recommendations. This forms the basis for my asymmetric investing strategy in emerging biotechnology. I try to identify companies that I believe have this type of potential. I know that there will be unexpected failures and unexpected successes so I diversify my portfolio taking small positions relative to my money under management. However, I am currently invested in a large number of emerging biotechnology companies so that in the aggregate, my emerging biotechnology portfolio is a very significant part of my overall portfolio.

I sometimes hear from inexperienced investors who have the expectation that every phase II or III trial will work. If you don't understand my investment strategy for emerging biotechnology companies, you should not be reading my articles. I am recommending Agenus among other reasons (it has several other high risk/high return drug development projects in its portfolio) on the basis that Prophage has a reasonable chance for success in its phase II trial in recurrent glioblastoma and a potential phase III in newly diagnosed glioblastoma. I am not guaranteeing that the trials will work, but if they do Agenus could be a very big winner.

Because of the high failure rate in clinical trials for emerging biotechnology, many hedge funds are very active in shorting most emerging biotechnology stocks. There are also a number of bloggers who also take the same approach. Adam Feuerstein has established himself as the foremost skeptic on emerging biotechnology.

But I digress. Feuerstein launched a withering attack on Agenus in a recent column. I really don't want to get into a back and forth with him. I acknowledge that his blog addresses legitimate issues and risks. Look, he could be right. No one can predict with high certainty the outcome of most (ALL) clinical trials. However, I view these risks as acceptable within my asymmetric investing strategy. He believes that the data we have seen on Prophage is meaningless because of the small size of the trial and issues related to the degree of surgical resection in the trials and that the data does not justify doing larger confirmatory studies. In this report I have addressed these issues and offer my views.

Reality Check on Prophage, Does Current Data Justify Larger Trials

It is not of great import for me or Feuerstein to have an opinion on the prospects for Prophage. However the really important consideration is what experts in the field think. One of the most encouraging things for me about Prophage is the degree of clinical institutional interest in the drug. The overwhelmingly most important vote of confidence in the drug comes from the National Cancer Institute that is funding almost all of the expense in an ongoing phase II trial of Prophage in recurrent glioblastoma. Let's look at how this came about.

The data that led to this phase II study in recurrent glioblastoma was based on investigator led studies conducted by Dr. Andrew Parsa and not by Agenus. Dr. Parsa, MD, PhD is the Lead Clinical Investigator and Chair of Neurosurgery at Northwestern Memorial Hospital and Northwestern University Feinberg School of Medicine. His earlier studies were not funded by Agenus. They were primarily supported through funding from the American Brain Tumor Association, Accelerated Brain Cancer Cure, National Brain Tumor Society and National Cancer Institute Special Programs of Research Excellence. Dr. Parsa has not received any financial support or expense reimbursement for this work or for consulting activities on behalf of Agenus.

The phase II recurrent glioblastoma trial now underway is only supported by Agenus by manufacturing the product used in the clinical trial. The study is being sponsored by the Alliance for Clinical Trials in Oncology (ALLIANCE), a cooperative group of the NCI. ALLIANCE is actually comprised of three legacy NCI funded cooperative groups: American College of Surgeons Oncology Group, Cancer and Leukemia Group B, and North Central Cancer Treatment Groups. These three groups have been integrated in an effort to develop and conduct more efficient clinical research studies to bring clinical trial results to patients more quickly.

This trial is the largest brain tumor vaccine trial ever funded by the NCI and in order to begin the trial the Prophage data was examined in a rigorous review process. Based on the size and scope of the trial, I estimate that if Agenus were conducting this trial it would cost on the order of $25 million. NCI can do the trial somewhat more cheaply, but doesn't provide estimates of trial costs. In any event, it is a pretty big and pretty expensive trial.

I take some comfort in knowing that all of these prestigious institutions support my point of view that the data so far obtained with Prophage justifies progressing to larger phase IIb and possibly phase III trials.

Is The OS Data For Prophage in Newly Diagnosed Glioblastoma Meaningful?

Feuerstein's principal argument against Prophage was centered on the data that will be the basis for beginning a phase III trial in newly diagnosed glioblastoma. He focused on the issue that this was a 46 patient trial that was non-randomized and of course had no control arm. In interpreting the results of open label trials it is common practice to look at results obtained from different trials that have one arm treated with standard of care to judge how the current standard of care performs in the same disease setting. This is the only way to judge if a new drug studies in a non-randomized trial might be better than standard of care.

There is nothing nefarious about this approach, it is common industry practice. However, Feuerstein is quite right in pointing out that there is the potential that the characteristics of the patients in the Prophage trial could be different from that of patients treated with standard of care in different trials. His central argument is that the 23.3 months of overall survival seen this far in the Prophage phase II trial in newly diagnosed glioblastoma patients is not encouraging when viewed against the results obtained with standard of care in other trials. His thesis draws heavily on the premise that the patients in the Prophage trial had their tumors more fully resected than those in the control groups against which it was compared. He concludes that Prophage treated patients are more resected so that the survival results are significantly overstated. This is a valid concern, but let's takes a look at trying to judge the validity of this argument.

His position appears to be that the degree of resection is the relevant factor in determining median overall survival. I think that all would agree that complete resection is almost certainly going to improve median overall survival if all other things are equal. However, all other factors are never equal and there are other factors such as age, health of the patient as measured by the Karnofsky performance score (KPS) and other issues that can also be very important. It is the balance of these factors that is key to the outcome. Let me take a crack at how important the degree of surgical resection is to median overall survival.

I rely importantly on a phase III trial that prospectively looks at the effect of complete resection, Stummer et al. (Neurosurgery 2008). It looked at the outcomes of patients with complete resections versus those with less complete resection. This showed that median overall survival was 16.7 months for the completely resected group versus 11.8 months for the control group of patients with less than complete resection. Clearly, there is a survival benefit based on complete resection. However, the Prophage data showed 23.3 months of survival in a patient group that was greater than 90% resected; they were not completely resected. If complete resection were the only factor, we might have expected less than 16.7 months of median overall survival.

Let's try to get some insight into the importance of other factors. There was a subset of 100 patients in the Stummer trial that had complete resection and KPS >90 (they were relatively healthy). In this group, the median overall survival was 17.6 months. Another subset of 45 patients had even better variables that affect outcome. They were completely resected, had KPS>90 and were relatively young with age < 60. The median overall survival in this group was 19.9 months.

The Prophage patients were about 90% resected, had KPS≥ 70 and the majority were ≥ 55 years of age. Hence the Prophage patients relative to these two sub-groups in the Stummer trial were less surgically resected, were less healthy as judged by low KPS score and were older. If Prophage had no effect on the disease, one would expect that median overall survival would be less than the 17.6 months in the first group and the 19.9 months in the second group. However, Prophage patients had median overall survival of 23.3 months and as I explain later; the median overall survival with Prophage could improve.

Stummer et al., concludes:

"Taken together, factors potentially affecting survival such as therapies after resection, KPS score, and NIHSS status were homogeneously distributed among patients with CR or IR, and the remaining factors of age and eloquent location were accounted for by subgroup analysis and multivariate analysis. Thus, the present analysis provides two highly defined cohorts of patients collected in a truly prospective setting with balanced distributions of known prognostic factors in the two resection groups. According to the Oxford Centre of Evidence based Medicine (cebm.net/levels_of_evidence.asp), such a cohort study provides Level 2b evidence and, thus, provides the highest level of evidence yet obtained for a major influence of complete resection on survival in patients with glioblastomas."

In the Stupp trial, which established the current standard of care in glioblastoma, there were many degrees of resection in the patient base. However there was a subset of patients who were completely resected (based on surgeon judgment). In this group the median overall survival was 18.8 months. This was a relatively young population in which more than 30% of the population was <50 years old. As a reminder the majority of patients in the Prophage trial were ≥ 55. The KPS in this group was not reported in this subset. Comparing Prophage to this group, the Prophage patients were less resected and were older and the relative health of the two groups is unknown. Prophage would appear to have a less favorable patient group and still showed median overall survival of 23.3 months versus 18.8 months. And again, I would point out that the data with Prophage is maturing and could increase from 23.3 months.

There are a lot of issues in interpreting these numbers. However, the argument that the degree of resection in the Prophage trials can explain all of the improvement in median overall survival is not convincing. There does appear to be a meaningful real effect of Prophage on median overall survival beyond that which we would expect with a high degree of resection.

Comments on Median Overall Survival Seen With Prophage

The current data shows median survival of 23.3 months in newly diagnosed glioblastoma patients. It is very important to understand that the 23.3 months of median overall survival is not a hard and fast number.

For those not familiar with statistics, the median is the numerical value separating the higher half of a data sample from the lower half. The median of a finite list of numbers can be found by arranging all the observations from lowest value to highest value and determining the middle number, e.g., the median of the series of five numbers 1, 4, 5, 8 and 9 is 5. In this 46 patient trial, there have been 23 deaths. The OS of 23.3 month is the median time of survival for the 23 patients who have died. Eleven have died before 23.3 months, 11 have lived beyond 23.3 months and one died at 23.3 months.

There remain 23 patients in this trial who are still alive. Of these, 9 patients have lived longer than 23.3 months and 14 have not yet reached 23.3 months. The 23.3 month figure can move up or down depending on the time of death of future patients. The recent press release of the company stated that OS in the trial was 23.3 months, which compares to the 23.3 months that was stated in a May press release. Agenus wanted to make sure that there was no deterioration in OS before seeking a meeting with the FDA to discuss a possible phase III trial in newly diagnosed glioblastoma. The constancy in OS of 23.3 months means that there have been no deaths since May 2013.

The question is when will other deaths occur and what effect will that have on OS. We can only wait for the data to mature in order to answer that question. The history of immunotherapy is that it takes a while to take effect. It also seems to be the case that patients who respond to the therapy can experience some very long survivals. This was shown in the Phase I trials of Northwest Biotherapeutics' (NASDAQ:NWBO) DC Vax-L and ImmunoCellular's (NYSEMKT:IMUC) ICT-107 in their Phase I trials. This was also seen with Bristol-Myers Squibb's (NYSE:BMY) checkpoint inhibitor Yervoy. If this holds true with Prophage, I would expect to see the OS improve as more patients in the trial die. My expectation is that OS will improve from 23.3 months.

Are Cancer Vaccines Bunk? An Historical Perspective

The conventional view on Wall Street is that cancer vaccines are bunk and have no chance of working. This is understandable given past experience with cancer vaccines. Let me give some perspective on past efforts to develop cancer vaccines and the experience of Agenus with Prophage.

Agenus was founded in 1994; it was a pioneer in immunotherapy and bears the battle scars that are inevitable with the development of potential 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.

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.

Drug development 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 test them as single agents against 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 most cancer vaccines and possibly other drugs based on immune therapy.

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 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 this trial might be sufficient for registration if successful.

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.

Source: Agenus: Some More Thoughts On The Potential For Prophage