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Investors know that development-stage biopharma companies will be measured more by potential than actual performance. They often have little or no revenue, post giant operational losses, and pin their fates entirely on the success -- or failure -- of their clinical pipelines. Such is the case with Agenus (NASDAQ: AGEN).
It has no approved therapies that will contribute to its growth, although it does have a promising antibody discovery platform that is gaining traction with major pharmaceutical companies. Most of Agenus' potential is derived from a lineup of immunotherapy drug candidates. While the drugs target an alphabet soup of some of the most promising biological mechanisms for treating various cancers, the stock has encountered turbulence in recent months as investors have begun to pay more attention to reg flags on the company's balance sheet. Here are three to consider.
One year ago, at the end of the third quarter of 2015, Agenus had shareholders' equity of $77 million. That's not unreasonable for a company still deep in R&D mode, but the company had a market cap of $625 million. In other words, a lot of value -- nearly $550 million -- was being placed on the company's potential to create value. This practice, which isn't uncommon in biopharma, can cause a lot of pain when pipelines fail and investors are forced to adjust valuations to levels closer to those on the balance sheet.
Fast-forward one year, and Agenus closed the third quarter of 2016 with shareholders' equity of negative $21 million. While that's never a good sign, it's common practice for development-stage companies to have book values below zero (although I'm not sure that's consoling). It also seems likely that the figure is about to get much worse before it has any chance of improving.
At the end of the third quarter of 2016, Agenus posted a debt-to-assets ratio of 72.3%. Again, that relatively high number is not too surprising for a clinical-stage biopharma, but the trend of quarterly increases in the last year is worrisome. In the same period of 2015, the debt-to-assets ratio stood at just 45.6%. The majority of the year-over-year difference comes from a quickly deteriorating level of total assets rather than a growing level of debt.
Again, that isn't surprising for a company such as Agenus, which doesn't generate income but burns through a lot of cash in operations. So, why does it matter? The company will clearly need more funding to push its early-stage pipeline to completion -- and hopefully to market. A debt level that nearly equals the amount of assets limits financing options going forward. It could raise cash by selling debt, but the terms would not likely be very favorable (i.e. accompanied by high interest rates). The other likely option is to sell more shares of common stock and avoid adding more debt immediately, but that dilutes existing investors upfront.Simply put, red flags on the balance sheet limit financial flexibility.
One metric in particular highlights the balance sheet risks facing investors: The level of Agenus' cash and short-term investments fell $104 million from September 2015 to September 2016. At the end of the third quarter of 2016, the company had $95.4 million in cash available.
The bad news is that the company's leading drug candidates are only in phase 1 trials, so they have a long way to go before reaching pharmacy shelves. The good news is that heightened interest in immunotherapy could make it easier to find a major pharmaceutical partner to aid in clinical development. That could result in an upfront payment and significantly slash operating expenses moving forward, at the expense of equity in future sales and profits. However, given the relatively low market cap today and the disadvantages of Agenus' financial position, successful clinical outcomes could still represent major upside for investors.
What does it mean for investors?
Investors usually don't expect clinical-stage biopharma companies to have favorable balance sheets. However, it's important to consider the risks posed by red flags on Agenus' balance sheet in addition to the potential rewards for clinical success. The simple truth is that the company won't be developing much of anything without adequate funding, and right now, there are unanswered questions about how those gaps will be filled.
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