As we reported in our Alert last week, shares of Argos Therapeutics took a hit after the company announced terms of an upcoming secondary stock offering that took the market by surprise. The company is raising another $50 million with this offering, in addition to the $60 raised from a consortium of institutional investors earlier this year.

That’s a lot of cash for a company with a market capitalization of less than $200 million, so it is fair to ask why Argos would elect to dilute its equity with a secondary offering?  And the second – and potentially more compelling – question is, what are they not telling us? In order to answer those questions it’s important to understand what Argos is trying to accomplish, which is to use specialized cells in the body’s immune system to combat very advanced renal cancer with and without the aid of very selective chemotherapy. 

By the time a patient becomes eligible for the type of treatment being developed by Argos, they have no other hope for long term survival. Argos is performing specialized research that requires high levels of capital, especially for a clinical trial that has been ongoing since 2013. There is a great deal of trial and error involved in this type of research, with a number of setbacks along the way. During a period in which venture capital and private equity investors are focusing on surer bets, it’s not surprising that the company is raising capital via a new public offering.

The ADAPT Phase III clinical trial, featuring Argos’ “alpha cell” drug candidate AGS-003, has enrolled over 450 patients in North America. The trial has produced encouraging results and recently received the go ahead for continuation from the company’s Independent Data Monitoring Committee.   In its June 16 press release the company stated:  “Based upon our internal projections, we believe that at this point we have reached more than half of the targeted number of events for our survival endpoint, and we anticipate having a sufficient number of events to permit the primary analysis and assessment of overall survival to occur in the first half of 2017. The focus of our clinical development group is now on the careful oversight of the ADAPT trial execution to ensure study data quality, and we have initiated cross functional activities to begin building the AGS-003 Biologics License Application (BLA).” 

The next progress report is scheduled to be delivered on February 2017 at the Genitourinary Cancers Symposium, and could be a very positive event if the company’s expectations are confirmed. The ADAPT Phase II trial of AGS-003, in combination with Sunitibib, produced a median survival extension of 30 months for the otherwise terminally patients in the study.  The five-year survival rate for advanced cancer with current treatments is 30% according to the Cleveland Clinic.  If AGS-003 can beat those numbers, the odds of a success for the company are fairly good.

A second significant factor, and one that could easily require increased capital spending, is Argos’ recent agreement with Adaptive Biotechnologies, a company that specializes in data analysis and sequencing of immune system related data. This is the type of company that gets hired toward the end of a major transition point by a research stage company such as Argos.

In research stage biotech, you can’t ever have too much money. Our conclusion at this point is that Argos is raising enough capital while it can to ensure it has sufficient funds to complete this critical Phase III trial, and to finance its BLA and other upcoming costs. In that context it seems reasonable to infer that the newly installed CFO, Richard D. Katz MD, is shoring up the company’s balance sheet while the equity markets are near record highs and receptive to this type of offering. If it turns out the company does not need the extra cash then it will remain on its books as an asset, but if it does need that money later on then it won’t be forced into the position of trying to raise it under potentially more difficult (and expensive) circumstances.  

Looking over everything that has happened with Argos over the past six months, it is clear the company is driving forward to a major pivot towards profitability in 2017 once the ADAPT Phase III clinical trial has been completed. If all goes according to plan (of which there is no guarantee), the financial moves the company is making now should pay off. Based on the very high stakes involved, clinically and financially, we believe the risk/reward ratio is reasonably tilted toward a positive outcome for investors at this point.

Argos Therapeutics remains a buy, but its limit price is reduced to $8 given recent dilution of the stock.