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AGEN > SEC Filings for AGEN > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for AGENUS INC


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
This Quarterly Report on Form 10-Q and other written and oral statements the Company makes from time to time contain certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). You can identify these forward-looking statements by the fact they use words such as "could," "expect," "anticipate," "estimate," "target," "may," "project," "guidance," "intend," "plan," "believe," "will," "potential," "opportunity," "future" and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, our business strategy, our research and development, our product development efforts, our ability to commercialize our product candidates, the activities of our licensees, our prospects for initiating partnerships or collaborations, the timing of the introduction of products, the effect of new accounting pronouncements, uncertainty regarding our future operating results and our profitability, anticipated sources of funds as well as our plans, objectives, expectations, and intentions.
We have included more detailed descriptions of these risks and uncertainties and other risks and uncertainties applicable to our business that the Company believes could cause actual results to differ materially from any forward-looking statements in Part II-Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q. We encourage you to read those descriptions carefully. Although we believe we have been prudent in our plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved. We caution investors not to place significant reliance on forward-looking statements contained in this document; such statements need to be evaluated in light of all the information contained in this document. Furthermore, the statements speak only as of the date of this document, and we undertake no obligation to update or revise these statements. OncophageŽ and StimulonŽ are registered trademarks of Agenus Inc. and its subsidiaries. All rights reserved.


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Overview
Our current research and development activities are focused on developing technologies and product candidates to treat cancers and infectious diseases. Our core technology portfolio consists of our Saponin Platform (based on our saponin adjuvant based technologies) and our Heat Shock Protein ("HSP") Platform (based on our HSP based technologies). Some of our key candidates from these technology platforms are QS-21 StimulonŽ adjuvant ("QS-21 Stimulon"), HerpV, and the Prophage Series vaccines.
QS-21 Stimulon is an adjuvant, or a substance added to a vaccine or other immunotherapy that is intended to enhance immune response. The key licensees of QS-21 Stimulon are GlaxoSmithKline ("GSK") and JANSSEN Alzheimer Immunotherapy ("JANSSEN AI"). There are approximately 20 vaccines containing QS-21 Stimulon in clinical development by our licensees, including a total of four in Phase 3 testing for malaria, melanoma, non-small cell lung cancer and shingles. We anticipate that data from one or more trials being conducted by our licensees using QS-21 Stimulon will be reported by the end of 2013. If those data are positive and if applications for marketing approval of those vaccines that are submitted by our licensees are approved by the U.S. Food and Drug Administration ("FDA"), the first products containing QS-21 Stimulon are anticipated to be launched in 2015. We are generally entitled to royalties on sales by our licensees of vaccines using QS-21 Stimulon for at least 10 years after commercial launch, with some exceptions.
HerpV is derived from our HSP Platform technologies, and is a recombinant, synthetic, non-patient specific therapeutic vaccine candidate which includes QS-21 Stimulon for the treatment of genital herpes. It has completed Phase 1 testing, where it was shown to elicit both CD4 and CD8 positive T cell responses
- a first of its kind finding in genital herpes treatment. Because the product contains multiple antigens derived from the herpes simplex 2 virus (HSV-2), it may be applicable to a broader patient population and may have potential in managing outbreaks and disease transmission. We consider this to be a platform technology, since we could potentially create therapeutic vaccines for various infectious diseases with the integration of heat shock proteins with antigenic peptides. We completed screening for enrollment in a Phase 2 randomized, double blind, multicenter trial of HerpV in HSV-2 positive genital herpes patients in February 2013, and data from this study are expected in the fourth quarter of 2013. The Prophage Series vaccines are a patient specific application of our HSP Platform. The Prophage Series vaccine R-100 is referred to as OncophageŽ vaccine and is approved in Russia for the treatment of renal cell carcinoma ("RCC", or kidney cancer) in patients at intermediate risk of recurrence. In December 2011, we granted NewVac LLC (a subsidiary of ChemRar Ventures LLC) an exclusive license to manufacture, market and sell Oncophage as well as pursue a development program in the Russian Federation and certain other CIS countries. A Phase 2 trial testing the Prophage Series vaccine candidate G-100 in newly diagnosed glioma has been fully enrolled and patient follow up is underway. Preliminary data from this trial, which were presented at the American Association of Neurological Surgeons Annual Scientific Meeting in May 2013, showed a 146% increase in progression free survival and a 60% increase in overall survival as compared to the standard of care alone. Separately, a Phase 2 trial with G-200 in recurrent glioma has been completed and final data are in the process of being prepared for publication in a peer reviewed medical journal. The G-100 and G-200 studies are solely based in the United States. The Cancer Therapy Evaluation Program of the National Cancer Institute (NCI) approved a study of the Prophage Series G-200 vaccine in a randomized Phase 2 trial in combination with AvastinŽ (bevacizumab) in patients with surgically resectable recurrent glioma and opened patient enrollment in May 2013. The study is sponsored by the Alliance for Clinical Trials in Oncology, an NCI cooperative group. In addition to our internal development efforts, we continue to pursue partnering opportunities. We are seeking partners for select products in our portfolio, which include the Prophage G-Series vaccines, G-100 and G-200, QS-21 Stimulon, and HerpV. We are also exploring in-licensing, acquisitions and sponsored research opportunities. Our business activities have included product research and development, intellectual property prosecution, manufacturing, regulatory and clinical affairs, corporate finance and development, market development, business development, and support of our collaborations. Research and development expenses for the six months ended June 30, 2013 and the years ended December 31, 2012, 2011, and 2010, were $5.9 million, $10.6 million, $11.0 million, and $12.9 million, respectively. We have incurred significant losses since our inception. As of June 30, 2013, we had an accumulated deficit of $636.0 million. We have financed our operations primarily through the sale of equity and debt securities. We believe that, based on our current plans and activities, our working capital resources at June 30, 2013, plus anticipated proceeds from equity offerings and potential proceeds from license, supply, and collaborative agreements will be sufficient to satisfy our liquidity requirements into 2014 based on our expected annual use of cash of $18-21 million during 2013. We expect to attempt to raise additional funds in advance of depleting our funds. We may attempt to raise additional funds by: (1) out-licensing technologies or products to one or more third parties, (2) renegotiating third party agreements,
(3) selling assets, (4) securing additional debt financing and/or (5) selling equity securities, including, without limitation, in at the market offerings. Satisfying long-term liquidity needs may require the successful commercialization and/or one or more partnering arrangements for (1) vaccines


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containing QS-21 Stimulon under development by our licensees, (2) HerpV, Oncophage and/or our other Prophage Series vaccines, and/or (3) potential other product candidates, each of which will require additional capital. Historical Results of Operations
Quarter ended June 30, 2013 Compared to the Quarter Ended June 30, 2012 Revenue: We generated revenue of approximately $807,000 and approximately $627,000 during the three months ended June 30, 2013 and 2012, respectively. Revenue includes license fees and service revenue. During the three months ended June 30, 2013 and 2012, we recorded revenue of approximately $487,000 and approximately $388,000, respectively, from the amortization of deferred revenue. Research and Development: Research and development expenses include the costs associated with our internal research and development activities, including compensation and benefits, occupancy costs, clinical manufacturing costs, costs of consultants, and administrative costs. Research and development expense increased 13.9% to $3.3 million for the three months ended June 30, 2013 from $2.9 million for the three months ended June 30, 2012. Increased expenses primarily relate to the increased activity in our HerpV program as well as increased compensation expense related to bonuses paid to research and development personnel partially offset by decreased amortization expense. General and Administrative: General and administrative expenses consist primarily of personnel costs, facility expenses, and professional fees. General and administrative expenses increased 38.2% to $4.6 million for the three months ended June 30, 2013 from $3.4 million for the three months ended June 30, 2012. Increased expenses related to increased compensation expense related to bonuses paid to general and administrative personnel and increased professional fees related to our corporate activities, partially offset by decreased amortization expense.
Interest Expense, net: Interest expense, net decreased to approximately $491,000 for the three months ended June 30, 2013 from $1.2 million for the three months ended June 30, 2012 due to the extinguishment of our 2006 Notes during the three months ended June 30, 2013.
Non-operating loss: Non-operating loss of $3.3 million for the three months ended June 30, 2013 consists of a loss on the extinguishment of our 2006 Notes. Dividends on Series A and A-1 convertible preferred stock: Dividends decreased to approximately $51,000 for the three months ended June 30, 2013 from approximately $198,000 for the three months ended June 30, 2012 due to the exchange of Series A for Series A-1 convertible preferred stock during the quarter ended March 31, 2013 and the related reduced dividend obligation. Six months ended June 30, 2013 Compared to the Six months ended June 30, 2012 Revenue: We generated revenue of $1.9 million and $14.0 million during the six months ended June 30, 2013 and 2012, respectively. Revenue includes license fees and service revenue, and in 2012, royalties earned. For the six months ended June 30, 2012, we recognized revenue of $6.5 million through an expanded license agreement with GSK, which provided GSK with a license to use QS-21 Stimulon in an undisclosed indication, and $6.25 million through a license of non-core technologies with an existing licensee that resulted in a buy-out of the current royalty stream related to the license. During the six months ended June 30, 2013 and 2012, we recorded revenue of approximately $869,000 and approximately $778,000, respectively, from the amortization of deferred revenue. Our revenue for the six months ended June 30, 2012 primarily resulted from one-time payments received under amended license agreements, and, therefore is not indicative of future results.
Research and Development: Research and development expenses include the costs associated with our internal research and development activities, including compensation and benefits, occupancy costs, clinical manufacturing costs, costs of consultants, and administrative costs. Research and development expenses increased 5.1% to $5.9 million for the six months ended June 30, 2013 from $5.6 million the same period ended June 30, 2012. This increase is primarily related to increased activity in our HerpV program.
General and Administrative: General and administrative expenses consist primarily of personnel costs, facility expenses, and professional fees. General and administrative expenses increased 20.9% to $7.5 million for the six months ended June 30, 2013 from $6.2 million for the six months ended June 30, 2012. Increased expenses related to increased compensation expense and increased professional fees related to our corporate activities.
Interest Expense, net: Interest expense, net decreased to $1.7 million for the six months ended June 30, 2013 from $2.3 million for the six months ended June 30, 2012 due to the extinguishment of our 2006 Notes during the three months ended June 30, 2013.


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Non-operating loss: Non-operating loss of $3.3 million for the six months ended June 30, 2013 consists primarily of a loss on the extinguishment of our 2006 Notes.
Dividends on Series A and A-1 convertible preferred stock: Dividends increased to $3.1 million for the six months ended June 30, 2013 from approximately $395,000 for the six months ended June 30, 2012 due to the deemed dividend of 666,666 shares of our common stock issued to the Series A convertible preferred stock holder during the quarter ended March 31, 2013 in exchange for a reduced dividend obligation.
Research and Development Programs
Prior to 2002, we did not track costs on a per project basis, and therefore have estimated the allocation of our total research and development costs to our largest research and development programs for that time period. During the six months ended June 30, 2013, these research and development programs consisted largely of our Prophage Series vaccines and HerpV, as indicated in the following table (in thousands).

                                       Six Months
                                       Ended June
Research and                               30,            Year Ended December 31,          Prior to
Development Program        Product        2013         2012         2011         2010        2010           Total
Heat shock proteins for    Prophage
cancer                      Series
                           Vaccines   $     2,714   $  5,613     $ 10,182     $ 10,960     $ 270,891     $ 300,360
Heat shock proteins for     HerpV
infectious diseases                         2,787      4,862          734          644        17,710        26,737
Vaccine adjuvant *          QS-21
                           Stimulon           366         85           94        1,185        11,219        12,949
Other research and
development programs                            4          4           13           89        33,438        33,548
Total research and
development expenses                  $     5,871   $ 10,564     $ 11,023     $ 12,878     $ 333,258     $ 373,594


___________________________


* Prior to 2000, costs were incurred by Aquila Biopharmaceuticals, Inc., a company we acquired in November 2000. Research and development program costs include compensation and other direct costs plus an allocation of indirect costs, based on certain assumptions and our review of the status of each program. Our product candidates are in various stages of development and significant additional expenditures will be required if we start new clinical trials, encounter delays in our programs, apply for regulatory approvals, continue development of our technologies, expand our operations, and/or bring our product candidates to market. The eventual total cost of each clinical trial is dependent on a number of factors such as trial design, length of the trial, number of clinical sites, number of patients, and trial sponsorship. The process of obtaining and maintaining regulatory approvals for new therapeutic products is lengthy, expensive, and uncertain. Because HerpV is now in a Phase 2 trial and the further development of our Prophage Series vaccines is subject to evaluation and uncertainty, we are unable to reliably estimate the cost of completing our research and development programs, the timing for bringing such programs to various markets, and, therefore, when, if ever, material cash inflows are likely to commence. Programs involving QS-21 Stimulon, other than our HerpV program, depend on our collaborative partners or licensees successfully completing clinical trials, successfully manufacturing QS-21 Stimulon to meet demand, obtaining regulatory approvals and successfully commercializing product candidates containing QS-21 Stimulon. Liquidity and Capital Resources

We have incurred annual operating losses since inception, and we had an accumulated deficit of $636.0 million as of June 30, 2013. We expect to incur significant losses over the next several years as we continue clinical trials, manage our regulatory processes, prepare for potential commercialization of products, and continue development of our technologies. We have financed our operations primarily through the sale of equity and debt, and interest income earned on cash, cash equivalents, and short-term investment balances. From our inception through June 30, 2013, we have raised aggregate net proceeds of $537.0 million through the sale of common and preferred stock, the exercise of stock options and warrants, proceeds from our employee stock purchase plan, and the issuance of convertible notes and other notes. In addition, during the quarter ended March 31, 2012, we received $9.0 million from GSK for a First Right to Negotiate and an expanded license agreement and $6.25 million through a license of non-core technologies with an existing licensee. We granted GSK the first


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right to negotiate for the purchase of the Company or certain of our assets which will expire in March 2017. The expanded license agreement provides GSK with a license to use QS-21 Stimulon in an undisclosed indication and also provides for additional royalty payments for this indication upon commercialization of a vaccine product. The license of non-core technologies converted a license grant from non-exclusive to exclusive and enabled the licensee to buy-out the current royalty stream structure.
We also maintain an effective registration statement to sell an aggregate of up to ten million shares of our common stock from time to time pursuant to an At the Market Issuance Sales Agreement with MLV & Co. LLC, as sales agent. We currently have 8.3 million shares available for sale under this agreement. As of June 30, 2013, we had debt outstanding of $10.2 million in principal. On April 15, 2013, we entered into a Securities Exchange Agreement (the "Exchange") with the holders of our 2006 Notes whereby we exchanged all of the 2006 Notes, including accrued and unpaid interest, for $10.0 million in cash, 2,500,000 shares of our common stock, and a contractual right to the proceeds of 20% of our revenue interests from certain QS-21 Stimulon partnered programs and a 0.5% royalty on net sales of HerpV. To finance the cash portion of this exchange we entered into two new debt arrangements. On April 15, 2013, we entered into a Loan and Security Agreement (the "Loan Agreement") with Silicon Valley Bank for senior secured debt in the aggregate principal amount of $5.0 million (the "Loan"). The Loan will bear interest at a rate of 6.75% per annum, payable in cash on the first day of each month with principal payments beginning November 2013. In addition, in connection with the Exchange, we also entered into a Note Purchase Agreement, dated as of April 15, 2013 (the "Purchase Agreement") with various investors for senior subordinated notes (the "Subordinated Notes") in the aggregate principal amount of $5.0 million bearing interest at a rate of 10% per annum, payable in cash on the first day of each month in arrears and 500,000 four year warrants to purchase unregistered shares of our common stock at an exercise price of $4.41 per share. The Loan and the Subordinated Notes are due April 2015.
Our cash and cash equivalents at June 30, 2013 were $13.4 million, a decrease of $8.0 million from December 31, 2012. We believe that, based on our current plans and activities, our cash balance of $13.4 million as of June 30, 2013, plus anticipated proceeds from equity offerings and potential proceeds from license, supply, and collaborative agreements will be sufficient to satisfy our liquidity requirements into 2014 based on our estimated annual use of cash of $18-21 million during 2013. We continue to monitor the likelihood of success of our key initiatives and are prepared to discontinue funding of such activities if they do not prove to be feasible, restrict capital expenditures and/or reduce the scale of our operations.

We expect to attempt to raise additional funds in advance of depleting our current funds. In order to fund our operations through 2013 and beyond, we will need to contain costs and raise additional funds. We may attempt to raise additional funds by: (1) out-licensing technologies or products to one or more third parties, (2) renegotiating third party agreements, (3) selling assets,
(4) securing additional debt financing and/or (5) selling equity securities, including, without limitation, in at the market offerings. Our ability to successfully enter into any such arrangements is uncertain, and if funds are not available, or not available on terms acceptable to us, we may be required to revise our planned clinical trials, other development activities, capital expenditures, and/or the scale of our operations. While we expect to attempt to raise additional funds in advance of depleting our current funds, we may not be able to raise funds or raise amounts sufficient to meet the long-term needs of the business. Satisfying long-term liquidity needs may require the successful commercialization and/or one or more partnering arrangements for (1) HerpV and the Prophage Series vaccines, (2) vaccines containing QS-21 Stimulon under development by our licensees, and/or (3) potentially other product candidates, each of which will require additional capital. Our future cash requirements include, but are not limited to, supporting clinical trial and regulatory efforts and continuing our other research and development programs. Since inception, we have entered into various agreements with institutions and clinical research organizations to conduct and monitor our clinical studies. Under these agreements, subject to the enrollment of patients and performance by the applicable institution of certain services, we have estimated our total payments to be $51.1 million over the term of the studies. Through June 30, 2013, we have expensed $48.9 million as research and development expenses and $48.3 million has been paid related to these clinical studies. The timing of expense recognition and future payments related to these agreements is subject to the enrollment of patients and performance by the applicable institution of certain services. We have also entered into sponsored research agreements related to our product candidates that required payments of $6.6 million, all of which have been paid as of June 30, 2013. We plan to enter into additional sponsored research agreements, and we anticipate significant additional expenditures will be required to advance our clinical trials, apply for regulatory approvals, continue development of our technologies, and bring our product candidates to market. Part of our strategy is to develop and commercialize some of our product candidates by continuing our existing collaborative arrangements with academic and collaborative partners and licensees and by entering into new collaborations. As a result of our collaborative agreements, we will not completely control the efforts to attempt to bring those product candidates to market. For example, we have various agreements with collaborative partners and/or licensees that allow the use of our QS-21 Stimulon adjuvant in numerous vaccines. These agreements grant exclusive worldwide rights in some fields of use and co-exclusive or non-exclusive


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rights in others. These agreements generally call for royalties to be paid to us on future sales of licensed vaccines that include QS-21 Stimulon, which may or may not be achieved. Significant investment in manufacturing capacity could be required if we were to retain our manufacturing and supply rights.

Net cash used in operating activities for the six months ended June 30, 2013 was $9.6 million while cash provided by operating activities for six months ended June 30, 2012 was $7.9 million. This decrease in cash provided by operating activities for the six months ended June 30, 2013 primarily resulted from one-time payments received in 2012 under amended license agreements. During the six months ended June 30, 2012, we recognized revenue of $12.8 million related to expanded license agreements. We continue to support and develop our QS-21 Stimulon partnering collaborations. We anticipate that data from one or more trials being conducted by our licensees using QS-21 Stimulon will be reported by the end of 2013. If those data are positive and if applications for marketing approval of those vaccines that are submitted by our licensees are approved by the FDA, the first products containing QS-21 Stimulon are anticipated to be launched in 2015. We are generally entitled to royalties on sales by our licensees of vaccines using QS-21 Stimulon for at least 10 years after commercial launch, with some exceptions. Our future ability to generate cash from operations will depend on achieving regulatory approval and market acceptance of our product candidates, achieving benchmarks as defined in existing collaborative agreements, and our ability to enter into new collaborations.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board issued Accounting Standard Update No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, ("ASU 2013-02"). ASU 2013-02 requires entities to disclose items reclassified out of Accumulated Other Comprehensive Income ("AOCI") and into net income in their entirety, the effect of the reclassification on each affected net income line item, and, for AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures. This consolidated standard is effective for annual periods beginning after December 31, 2012 and interim periods within those years. The application of this standard did not have a material impact on our condensed consolidated financial statements.


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