Put Agenus, Progenics on Your Small-Cap List

 | Jun 12, 2016 | 2:00 PM EDT
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In today's Small Cap Focus Friday column, we revisit two promising biotech stocks currently selling for just less than $5 a share that have good capital appreciation potential.

One has been on the move of late as it has received its first milestone payment from a drug giant under an existing collaboration deal and has had its CEO make some significant purchases recently. The other should soon get the great light from the FDA to market the oral version of its key product, which will trigger a large milestone payment from its own distribution partner.

Let's start with Agenus (AGEN), which is a small-cap name that I have not highlighted in quite some time, but whose stock has shown strength in recent weeks. The company just received its first milestone payment from its existing collaboration deal with drug giant Merck (MRK) this week. The development deal is focused on discovering therapeutic antibodies to immune checkpoints for the treatment of cancer. Merck is responsible for all development costs and Agenus can earn up to $100 million in milestone payouts as well as royalties.

The company has a much larger collaboration deal with Incyte (INCY), also around checkpoint inhibitor technology. In addition, it has its own mid/late-stage heat shock therapy platform candidates it is developing. In short, a lot of shots on goal and two important partnerships for a company with under a $400 million market capitalization. The CEO certainly believes the company's prospects are undervalued by the market as he picked up over $500,000 in new shares in May.

Next up is Progenics (PGNX). The company has numerous compounds in development but its short- and medium-term future will be determined by the continued rollout of its compound relistor used to treat opioid induced constipation.  Its distribution partner for this product is current pariah Valeant Pharmaceuticals (VRX), which has to have been an overhang on the stock that currently has a market capitalization of just $325 million.

The injectable version of relistor is currently approved and seeing good growth with the drug booking over $16 million in overall sales last quarter. The oral version of relistor should be approved in July, which should exponentially boost sales given the easier method of treatment.  Salix Pharameuticals (SLXP), which was the original development and distribution partner before it was bought out by Valeant in 2015, believed relistor in two versions was a billion-dollar-a-year drug.

Progenics will receive a $50 million milestone payment from Valeant upon the approval of the oral version of relistor. This will push the company's cash on hand to more than $100 million. The company can also earn another $200 million in sales milestones starting with $10 million when relistor reaches $100 million in global sales in a calendar year, which could happen this year. In addition, Progenics receives 15% to 19% of total sales of relistor as a royalty stream.

I would not be surprised if Valeant put the distribution rights to relistor up for sale given its need to pay down its $30 billion debt load. This asset could well interest the likes of Allergan (AGN) and others who want to expand their footprint in the GI space. This would remove an overhang on the stock and could well put Progenics in play as a likely buyout target as well.

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