1. Company and platform overview
Agenus (NASDAQ:AGEN) is a discovery-stage biotechnology company specializing in vaccines and cancer checkpoint inhibitors. Combining checkpoint inhibitors with other immune therapies for cancer is a hot trend right now. The key question for potential investors is: what is the likelihood this micro-cap can deliver?
Major pharmaceutical partners tend to have more insight into what is possible and what is valuable than individual investors. Agenus has 3 major partners: GlaxoSmithKline (NYSE:GSK), Johnson & Johnson (NYSE:JNJ), and announced on April 29, Merck (NYSE:MRK).
So far, however, Agenus, including the collaborations with partners, has not obtained an FDA approval for a therapy. Nor does it yet have Phase III results that are likely to lead to FDA approval. It (or its partners) has conducted successful Phase II studies of therapies, which then failed in Phase III, which is not that unusual. In the forefront at this point, based on a successful Phase II trial, Agenus is discussing the design of a Phase III trial for its Prophage vaccine for glioblastoma multiform (GBM).
After the news of the Merck deal, Agenus closed on April 29 at $3.06, up $0.50 or 19.5% for the day, which gave it a market capitalization of $190 million. Since then, price has sunk back to $2.65, with a 52-week low of $2.27 on April 15, after the GSK Phase III trial failure was announced.
While the deals with GSK and Merck are plusses for Agenus, the potential blockbuster would be a combination therapy that showed good safety and efficacy against a cancer. That would require a vaccine that stimulated the immune system to attack the cancer, plus a checkpoint inhibitor that prevented the cancer from protecting itself against the vaccine. It is also a race with competing companies that are working on cancer immunotherapies and developing the checkpoint inhibitors. This would take years, given the necessity of conducting the full scope of clinical trials needed for approval.
When dealing with biotechnology companies and their drug candidates, I tend to favor platforms over individual therapy candidates. With a platform, a company can generate multiple candidates for the same indication or multiple indications. One failure is not necessarily the end of a company. Caution is always indicated, however: just because a company has a platform that can generate multiple candidates does not mean that it will eventually generate a commercially successful therapy.
Agenus, though a tiny company, now has three platforms: the HSP (heat shock protein), or Prophage series of vaccines; the adjuvant vaccine-enhancer, QS-21 Stimulon; and the checkpoint cancer modulator antibody series recently acquired with 4-Antibody in February.
2. Legacy HSP and QS-21 platforms
The Phase III data from GSK for an NSCLC (non-small cell lung cancer) vaccine that includes an Agenus component, QS-21, reported missing the first co-primary endpoint in April; the study was stopped. This followed the prior announcement that GSK's similar melanoma vaccine also missed its first co-primary endpoint.
However, the GSK malaria vaccine (RTS,S) containing QS-21 had positive results in a Phase III trial involving over 15,000 children. The trial showed it helped protect young children from malaria for up to 18 months after vaccination, reducing infections by 46%. GSK plans to submit a filing for commercialization to the EMA (European Medicines Agency) in 2014. Agenus is entitled to receive a milestone payment on launch (likely 2015) and royalties.
Although the QS-21 platform has mixed results so far, note that it is a vaccine enhancer, so it is highly dependent on the activity of the vaccine. It will likely continue to be tried with various vaccine candidates, and so, could produce more milestone or royalty revenue, or enhance an Agenus product. For more details, see A Closer Look At Agenus' QS-21 Stimulon Vaccine Adjuvant.
The Prophage vaccines are based on Agenus's HSP (heat-shock protein) platform. HSP expression increases when cells are subjected to stress, including high temperatures. HSPs produced by cancer cells differ from normal tissue HSPs, and can be made to produce an immune response against a patient's (specific) cancer. So each patient gets a vaccine that is specific to his or her cancer. If ever commercialized, that would imply a high cost of goods sold, as we saw with Dendreon's (NASDAQ:DNDN) Provenge.
HSP-based vaccine clinical trial results to-date have been mixed. The latest effort is an NCI (National Cancer Institute) large (222 patient) Phase II trial of HSPPC-96 plus bevacizumab (Avastin) for recurrent GBM (glioblastoma multiforme, a type of brain cancer), which started in May 2013. This follows up positive results on a smaller Phase II trial of G-200 as a single agent for recurrent GBM following surgery.
We also have the preliminary results of an earlier Phase II trial of G-100 (HSPPC-96) plus standard of care for newly-diagnosed GBM showing a 146% increase in progression-free survival to 17 months and a 60% increase in overall survival to 23.3 months over the standard of care. However, that was a small, single arm (no placebo arm) trial [See Prophage Positive Phase II GBM data]. Based on the results, Agenus announced it plans to meet with the FDA to discuss a definitive, randomized Phase III trial. While there is blockbuster potential in Prophage for GBM and other cancers, with a Phase III trial not yet underway, it will be years before FDA approval could make revenue possible.
HSP technology appears to work against viruses as well as cancers, as the viruses cause cells to produce an HSP. Agenus's HerpV vaccine (which includes SQ-21) for genital herpes is in a Phase II trial, which completed enrollment in February, 2013. Preliminary topline results reported in November showed that HerpV patients had a statistically significant 15% reduction in viral shedding after the initial three injections, with a 34% reduction in viral load vs. patients in the placebo arm. That met the primary endpoint. In addition, patients will receive a booster injection. Data from that should be available before the end of this quarter. The results are interesting, good enough to plan a Phase III trial, but I would like to see more detailed data on whether any patients became virus-free, and I'm sure the FDA would, as well.
3. Checkpoint Modulator Platform
Finally, we have the newest addition, the CPMs (checkpoint modulators or inhibitors). This is an exciting field. The science is promising, and has been commercially proven in the case of Bristol-Myer's Yervoy. Merck has signed a deal for Agenus to "discover and optimize fully human antibodies against two undisclosed Merck checkpoint targets using the 4-Antibody." If successful, there could be milestone payments of up to $100 million, as well as royalties from product sales. But this is likely to be a long process, and is highly speculative. The compounds have not been discovered yet. If they can be created, they then have a long gauntlet of pre-clinical and clinical trials. On the plus side for Agenus, earning on early milestones does not require success at later milestones.
In acquiring 4-Antibody, Agenus agreed to milestone payments of up to $40 million. There may be no direct relation between Merck's milestones and Agenus payment to the original owners of 4-Antibody, but there is symmetry in the speculative nature of the deals. All of the checkpoint antibodies Agenus now owns are pre-clinical. They are all a long way from commercialization. They could be invaluable, or they could be duds. They might work with a Prophage therapy, or they might work better in combination with a therapy from another company. In other words, checkpoint therapies are promising, but there are a lot of "ifs" between the current situation and commercial success.
In addition to working with Merck, Agenus plans to bring at least one antibody to clinical trial by 2015. Successful early-stage clinical trials typically mean that better deals with higher milestone payments can be made with major pharma companies.
4. Q4 Financials
As a small-cap, development-stage biotechnology company, in most quarters, the key data is cash burn rate. Agenus had revue of $0.7 million in Q1 2014. Net loss was only $0.4 million, but this was due to the effect of a non-cash $9.9 million gain on termination of the GSK NSCLC trial. Cash burn was about $10 million in the quarter, but Agenus raised $56 million by selling stock on the strength of its 4-Antibody acquisition. Agenus ended with $73.5 million in cash and equivalents. [See also Agenus Q1 Earnings Call Transcript]
In a situation like this, I look closely at market capitalization. At close of Monday, May 12, 2014, Agenus had a price of $2.65 and a resulting market capitalization of $165 million, making it a micro cap. Some analysts would subtract out the cash on hand of $73.5 million to get an enterprise value number, but figure much of that cash will be burned through before milestone payments or royalties kick in.
I think that market cap is low for a company that has three differing platforms, many shots on goal, and substantial interest from GSK, J&J, and Merck.
Agenus has been fairly successful at keeping expenses low by letting partners and public agencies do much of the clinical R&D, as will be the case once the checkpoint candidates are handed over to Merck.
Given the limited success of the QS-21 GSK vaccines, the high hurdles still ahead of the Prophage vaccines, and the very preliminary nature of the checkpoint modulator molecules, it is not surprising that investors have been cautious about Agenus so far. Risks abound.
Given the cash available, the likelihood that a GBM therapy will graduate to pivotal Phase III trials, and the possibility that checkpoint inhibitors will be the crucial 21st-century breakthrough in treating cancer (when combined with other therapies), I think the upside overbalances the downside. I am surprised that market cap is not higher. The likelihood of milestone payments and royalties from the malaria vaccine is also a major plus. Milestone payments from various partners seem likely to carry Agenus until royalties kick in.
Since, like almost all micro-caps, Agenus is thinly traded, news can have an exaggerated impact on the stock price. With many trials underway that can fail or succeed, I think the important thing to keep in mind, if you are a long-term investor, is that a single failure is not as important as a single success. It only would take one strong Phase III Prophage trial result to give Agenus (with or without a partner) a commercial product, substantial revenue, and proof of the viability of one of its three platforms. Even strong Phase II data would likely push up investor perceptions.
Based on data readouts to-date and my past experience with analyzing early-stage therapies, I would assign, conservatively, a 50% to 75% likelihood to the event that Agenus (including partnerships) will produce a commercially viable therapy (in addition to the malaria vaccine) within the next five years. That means investors who cannot stand up to a 50% chance of failure should wait until more data is available (which could be soon in the cases of HerpV and GBM).
The hundred-million dollar plus royalties potential upside from the Merck deal can be used as a rule-of-thumb indicator of the value of collaboration agreements, at least for the CPMs. There should be a couple of those. The value of a successful treatment for GBM would be much higher. Depending on pricing and the exact label, even though GBM is relatively rare, revenues generated should be some fraction of a billion per year. A point of comparison is Yervoy revenue in Q1 2014, which was $271 million, up 18% y/y.
For now, I would value the malaria vaccine and other SQ-21 potential vaccines at a market cap of $100 million; the potential GBM treatment at a market cap of $250 million; and the checkpoint franchise at a market cap of $400 million. That would bring the total market cap to $750 million, or $12.06 per share. But I would emphasize that this is an assigned number, purely an opinion, and subject to change. If the GBM Phase III trial fails to materialize or fails to reach its endpoints, and the CPM franchise does not attract partners, we would be back to the market cap we have today. On the upside, if there are multiple breakthroughs, Agenus could be another Biogen (NASDAQ:BIIB) or Celgene (NASDAQ:CELG) a decade from now.
Disclosure: I am long AGEN, DNDN, BIIB, CELG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.