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What Agenus’s blockchain bet means for drug development financing

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Agenus’s plan to offer digital security tokens could represent an important new means for development-stage drugmakers to raise capital, experts said, but there are some potential risks involved as well.

The Lexington, Massachusetts-based company said Tuesday that it would begin offering its “Biotech Electronic Security Token,” or BEST, in mid-February, saying it was the first healthcare company to do so and expects others to follow. The token would be tied to potential future sales of the most advanced product candidate in its pipeline, the PD-1 inhibitor AGEN2034, currently in pivotal Phase I/II studies for solid tumors, mainly cervical cancer.

In a phone interview, Agenus CEO Garo Armen explained that the tokens would only be sold to accredited investors, with priority given to existing Agenus shareholders. The selling price has not been disclosed, but Armen said it would be based on an arbitrary price determined in the next few weeks. As an investment instrument, it will be driven by an annualized return on capital, which he said one can reasonably assume will be greater than the 25 percent usually required by royalty companies in biotech. The company anticipates it’ll raise more than $50 million. The offering differs from an initial coin offering in that, while they are based on blockchain technology, the tokens are asset-backed securities rather than cryptocurrency, Armen added.

Agenus and its investors have the biggest advantage, said Wulf Kaal, director of the Private Investment Fund Institute at the University of St. Thomas in Minneapolis, in a phone interview. “The issuer gets capital very inexpensively, and the investor gets liquidity as early as possible,” he said.

A risk, Kaal said, is to secondary investors. Similar to an initial public offering, the investors who get in early stand to make the most money, while those who buy the tokens later take on more risk. “They buy, and as soon as they buy, the price starts falling,” he said. However, Armen pointed out that one feature of BEST is that in the “unlikely event” that AGEN2034 never makes it to market, the tokens can be converted into equity in the company.

Of course, as with any biotechnology or pharmaceutical clinical trial, failure – from too little efficacy or too much toxicity – is always a possibility. Even if a drug succeeds in clinical trials and wins Food and Drug Administration approval, it may have difficulty gaining traction among physicians or securing reimbursement from payers.

Agenus anticipates filing for FDA approval of the drugs as early as next year. The Phase I/II studies – one of AGEN2034 alone and another in combination with AGEN1884, a CTLA-4 inhibitor – respectively started in April 2017 and December 2017 and have estimated completion dates of March 1, 2019 and March 4, 2022.

Should it reach the market, AGEN2034 already faces potential competition in the form of an approved PD-1 inhibitor for cervical cancer, Merck & Co.’s Keytruda (pembrolizumab). While acknowledging the competitive environment, Armen emphasized that the PD-1 inhibitor market maintains substantial opportunity for expansion, and the company has the advantage of an in-house CTLA-4 inhibitor. Another approved PD-1 inhibitor, Bristol-Myers Squibb’s Opdivo (nivolumab), is combined in some cases with BMS’s own CTLA-4 inhibitor, Yervoy (ipilimumab). AstraZeneca is also developing a CTLA-4 inhibitor, tremelimumab, for combination with its PD-L1 inhibitor, Imfinzi (durvalumab).

Early data from the Phase I/II studies presented at the European Society for Medical Oncology showed hints of efficacy from both single-agent AGEN2034 and the two-drug combination. These included three partial responses and more than a dozen patients with stable disease, along with “early clinical benefit” in seven of 16 evaluable patients who got the combination.

Another potential risk is regulatory, Kaal said, adding that he had advised a couple of biotech companies on similar plans, which were shut down because of regulatory compliance issues. However, Armen noted that Agenus is offering BEST under Regulation D of the Securities Act of 1933 – which governs private transactions – though downstream the company plans to list them on an exchange. He emphasized that they are a regulated instrument, and the company said the tokens are being issued in accordance with the regulation.

Like Agenus, PCG Advisory Group CEO Jeff Ramson foresees other companies using token offerings as a way to attract investment for drug development. In the more distant future, token offerings may partially replace other forms of equity investment in development-stage drug companies because they allow for customization of securities and represent a less cumbersome process than IPOs. “I do think you’ll see a lot more of it, and it will change the nature of how companies are financed,” he said, adding that Agenus showed “incredible vision” with the move. He noted that company is not a client of PCG, a strategic communications advisory firm based in New York.

But it is still early days, and as yet there is no public market for trading tokens like the ones Agenus is offering. Consequently, Ramson said, their restriction to accredited investors is a kind of safeguard for people buying into them. When the market for them becomes more widespread, it is quite possible that more unscrupulous players could find their way into it or take advantage of the novelty the way some did with blockchain and cryptocurrency, he said. “Anytime you see something new or novel or potentially exciting, I’d be on the lookout for that,” he said.

Photo: a-image, Getty Images

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