The CEO's Blog — Garo H. Armen

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February 26, 2007

Last week we announced our 2006 year-end financial results and corporate update, in which I outlined the expected growth in cancer vaccines, the hints of potential positive regulatory change and highlights from the company’s pipeline. I welcome your comments and look forward to engaging directly in a dialogue with you.

In 2006, Antigenics solidified its position in the growth of the emerging vaccine market. The vaccine marketplace is now proclaimed as the highest growth segment of the pharmaceutical market for the next 10 years in recent reports published by several prominent brokerage houses and consulting firms.

In addition, and more specifically for cancer vaccines, there are hints of potential positive regulatory change. An indication of this was a recent two-day workshop held jointly by the US Food and Drug Administration (FDA) and the National Cancer Institute (NCI). During this workshop, the NCI director stated, “We have to make rather dramatic changes on how we are going to do drug approvals in the future” – a reference made specifically about the approval of cancer vaccines.

Among the points that emerged at the joint FDA/NCI workshop were: 1) that cancer vaccines are most appropriate for use in patients with less disease burden, as there is a strong biological rationale for activity in this patient category; 2) given this fact, current regulatory guidance translates into the need for very large and long trials for the approval of cancer vaccines, which often are not feasible. and 3) current regulatory guidance primarily accommodates the development of cancer drugs targeted for the treatment of later-stage disease.

Both of these trends are encouraging: firstly, an emphasis on the growing vaccine marketplace with the introduction of a new generation of preventive and therapeutic vaccines is likely to address major unmet needs in health care today. And secondly, the FDA/NCI initiatives for positive regulatory change to address advances in technology and science are likely to benefit patients with the introduction of this potentially important new class of medicines.

Let me now take a few moments to outline how we participate in this new era of vaccines with our two important and tangible platforms:

The first is through Oncophage, based on our heat shock protein (HSP) platform, and the second is QS-21, based on our saponin adjuvants platform.

QS-21

Let me start with the second one, our QS-21 vaccine adjuvant platform, since many of you may be unfamiliar with QS-21 and how critical it is to the success of a substantial number of high-tech vaccine candidates that are presently undergoing clinical trials by GlaxoSmithKline (GSK), the world’s largest vaccine company with the most robust vaccine pipeline, as well as many other companies and academic centers.

QS-21 is Antigenics’ vaccine adjuvant. It is a key and required component of GSK’s adjuvant arsenal. This point was made in a presentation by GSK’s head of vaccine research at the recent FDA workshop. QS-21 is used in a number of GSK’s adjuvant cocktails, and is a critical component of a very advanced adjuvant formulation called AS15, designed to generate the powerful CD4 and CD8 T-cell responses considered necessary in generating protective and therapeutic immunity.

It is important to note that:

1. QS-21 is used as an adjuvant (an immune boosting agent) in the formulation of vaccines undergoing clinical trials for the prevention and treatment of diseases. These include vaccines for cancer, infectious diseases as well as degenerative disorders.
2. We have agreements to supply QS-21 to five companies engaged in vaccine development.
3. Although our initial patents on QS-21 expire starting in 2008, generally we receive 2 percent to 4.5 percent of sales as royalties for a minimum of 10 years after product launch, depending on the company and/or product.
4. There are currently about 15 products formulated with QS-21 in clinical development and an additional 20+ products in preclinical development in which QS-21 is a required component.
5. The first set of products formulated with QS-21 is currently expected to be launched in the 2010 timeframe, with a ramp-up of launches expected in the period from 2010-2015.
6. QS-21 is a profitable business for Antigenics today because we sell product to our licensees at a profit. In addition, we receive milestone payments prior to launch, followed by royalties upon launch.

I hope this summary on QS-21 has provided you with a better understanding of the facts and opportunities regarding this very important adjuvant in the development of a new generation of vaccine product candidates by some of the world’s leading participants.

Oncophage

Let me now turn to Oncophage, our own cancer vaccine product candidate. As most of you know, last year we announced results from a very large randomized Phase 3 trial in kidney cancer – more specifically renal cell carcinoma, or RCC. Although the analysis was ultimately performed on a less than mature set of data and the trial did not meet its intended endpoint, the results from the trial provided us with very important insights into the stage of RCC patients who are most likely to benefit from Oncophage. These findings are also consistent with the biological rationale suggesting that patients with lesser disease burden are the ‘right’ population for cancer vaccine treatment. If you remember, this is also consistent with the opinion of the experts from the FDA/NCI vaccine workshop.

In our initial analysis of our large randomized trial, we observed a recurrence-free survival benefit in patients with lesser disease burden, with a nominal P value of .018 and a hazard ratio of 0.56, suggesting a reduction of 44 percent in disease recurrence in patients treated with Oncophage. These lesser-disease patients in whom a benefit was observed accounted for 60 percent of the total adjuvant population enrolled in our trial. These patients with lower disease burden are also classified as “intermediate risk patients” by the Eastern Cooperative Oncology Group, otherwise known as ECOG.

It is important to note that patients with intermediate risk of recurrence are an important and growing population of RCC patients – growing in numbers primarily because of earlier diagnosis of disease. It is also important to note that there are no treatments currently available for these patients other than surgery. Although there have been recent product approvals for RCC, these approvals have been for patients with metastatic disease only.

Now where do we go from here? Certainly due to financial constraints and the impracticality of the timelines associated with a second such trial, for the present we have made a strategic decision not to initiate another large RCC trial. We will close our current RCC study at the end of March and provide updated data on both recurrence-free survival and overall survival after the analysis is complete in mid-2007. After the March close, we will open a patient registry for the study. This allows us to track recurrences and survival for a number of years at a relatively modest cost to Antigenics.

The primary purpose of the analysis after the close of the study in March 2007 and the survival registry that will follow is to track the outcomes in the large patient group who has yet to recur or die. Our expectation is that more mature data will strengthen the benefit we are already seeing in this population, once again a trend that would be consistent with both the biological rationale and the consensus of the key experts at the FDA and NCI workshop I mentioned previously.

The next question is, what does all of this mean from a regulatory and commercialization perspective?

In the United States, we are encouraged by efforts by the FDA, in collaboration with NCI, to discuss the adoption of more appropriate guidelines for registering cancer vaccines. However, based on the current regulatory framework, our Phase 3 trial is unlikely to be sufficient for US marketing approval at this present time. Because of this, our near-term strategic efforts for kidney cancer will focus on exploring making Oncophage available to patients through various pathways in areas outside the US such as Canada, Japan, Russia and Europe.

Beyond kidney cancer, Oncophage is moving forward in clinical development in recurrent glioma. Enrollment is almost complete in the last cohort in the Phase 1 portion of the investigator-sponsored study and updated data from the trial will be presented at the American Association of Neurological Surgeons in April. We will move on to the Phase 2 portion of this trial soon, which, if positive, may be used as the basis for developing a registrational strategy in this indication. We are also wrapping up the preclinical evaluation of Oncophage in combination with other agents, with the goal of launching in 2007 one or more clinical trials in stage IV patients. We also continue to refine our improved process for purification of Oncophage, which may allow for vaccine manufacture from smaller tumor masses.

Phase 1 Programs

Now a very quick update on our Phase 1 programs. Completion of the dose-ranging study of Aroplatin is imminent. We will initiate a second trial, in combination with another chemotherapeutic, shortly after reaching the maximum tolerated dose (MTD) in the current trial. The lead candidate target indication is pancreatic cancer in combination with gemcitabine because of the high unmet need this indication represents. With regard to our infectious disease program, enrollment continues in our ongoing Phase 1 AG-707 study in genital herpes. To date we have enrolled about one third of the patients in the study and expect to kick off immunological testing around year-end.

Financial Progress

With regard to our cash position, we took two important steps in 2006. One was the raising of $25 million via the sale of convertible debt. This 8-percent note is convertible at $3.50, representing a 74-percent premium to our market price at the time. With this financing, our cash balance at the end of 2006 was approximately $40 million.

The second step was the significant reduction of our burn rate while allowing for the realization of value from our pipeline and programs. We have reduced our annualized net burn rate to between $30 and $35 million. We have been operating within that range for the last several months. And going forward, our goal for 2007 is to operate at the low end of this range and to continue to look for additional savings. This represents more than a 50-percent reduction in our annualized burn rate prior to the implementation of our cost-cutting initiatives.

This document contains forward-looking statements, including statements regarding the company’s ongoing commitment to reduce cash burn; the company’s anticipated sufficiency of funds and ability to bolster its cash position; the potential market for, and the growth in development of products containing QS-21 by the company’s collaborative partners and licensees; the current and future preclinical and clinical development and commercialization activities and timelines for Oncophage; and the company’s Phase 1 clinical programs involving Aroplatin and AG-707 and their potential development paths. These risks and uncertainties include, among others, the risk of the inability of the company to operate within its targeted burn rate and identify additional means of cost savings; unfavorable data resulting from the analysis of the Oncophage Phase 3 Part 1 kidney cancer trial data; retention of key employees; clinical trial enrollment; decisions by collaborative partners and licensees; decisions by regulatory agencies; timing and results of clinical and preclinical studies; timely and successful development of QS-21 manufacturing capabilities and the factors described under Factors That May Impact Future Results in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Antigenics’ Form 10-Q as filed with the Securities and Exchange Commission on November 9, 2006. Antigenics cautions investors not to place considerable reliance on the forward-looking statements contained in this call. These statements speak only as of the date of the communication, and Antigenics undertakes no obligation to update or revise the statements. All forward-looking statements are expressly qualified in their entirety by this cautionary statement. Antigenics’ business is subject to substantial risks and uncertainties, including those identified above. When evaluating Antigenics’ business and securities, investors should give careful consideration to these risks and uncertainties.

Comments

Posted by: Cary (02/27/2007)
Comment: Dear Mr. Armen, I am not sure this is the type of dialogue you are expecting. But I have been wanting to write you for some time to not only voice my support but also to let you know that there are small investors that still believe in Antigenics. I have invested a substantial amount of my entire savings into your company. ( 83,000 shares with avg.cost of $ 5.90) I also had over 700 call options expire worthless. Although I am down substantially, I believe your management skills and technology will take us through these tough times. I have been following your company for over 3 years, have listened to every conference call, and monitored the stock daily. You might say I have put all of my eggs in one basket. I know you cannot say anything or give advice but look forward to hearing from you in the near future. Thank you for your time, Cary

Posted by: Ed (03/01/2007)
Comment: Dear Mr. Armen: My wife and I (nurse and pharmacist) have been following AGEN for many years (and are shareholders), ever since the initial trials in pancreatic cancer patients with metastases showed that something good must be happening. I urge you to continue developing Oncophage and use the time to created a more potent version that will have even greater impact on patients. Developing a registration strategy for countries other than the US is absolutely the way to go. Ed

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