Tuesday, February 11, 2014

Persistence Personified: Argos Therapeutics

Persistence Personified: Argos Therapeutics

In 1997 a small group of Duke researchers started a company called Dendritrix, which had licensed technology from the university in order to develop certain immunotherapies for the treatment of cancer.  Seventeen years later that company went public as Argos Therapeutics (ARGS).  Anyone who thinks the IPO is a big payoff for Argos’s investors should think again.  I’ve spent the day reading the prospectus[1] for the offering along with the news articles and previous regulatory filings that document the long history of Argos Therapeutics.  In fact, I remember Argos from its days as Merix Biosciences (its second name) because it was a promising company when I conducted due diligence on two local venture capital managers as CIO at North Carolina.
Sketchbook #6 (2001)
While the company has been through several rounds of management, numerous strategic partners, many breakthroughs, and several brushes with financial oblivion, InterSouth Partners and Aurora Funds have been investors since 2000, when they participated in the first round of financing.  At this stage, you’d probably expect the original investors to be sitting on the sidelines or even offering some of their shares for sale.  Actually, InterSouth and Aurora-Harbiner (an affiliate) are buying shares at the $8.00 IPO price to help support the deal.[2]  While their additional stakes are small in comparison to other investors, it is a testament to the monumental effort to build Argos Therapeutics.  By the way, we’re still not talking about a company that’s manufacturing a product.  Argos is still funding clinical trials.

Argos is perhaps one of the best examples about how difficult investing can be and how persistent venture capitalists and entrepreneurs can be.  I don’t know the first thing about the company’s intellectual property.  However, it has to be extremely promising, because a series of major strategic partners and the National Institute of Health have invested a couple of hundred million in the company since 2004.  Moreover, the company has gone through more than a half dozen rounds of financings, a failed attempt to go public in 2012, the appalling fundraising conditions after the Internet bubble and the credit crisis, and more than one round of executive upheaval.

The last couple of weeks must have been nerve wracking.  Early indications were that Argo would price its shares at $13 to $15 per share.  I’m sure the recent turmoil in the financial markets hurt demand for the deal, and it was only priced at $8.00.  Unlike most newly minted public companies, existing investors actually have on average paid more for their shares ($10.13)[3] than new investors. Eventually the exercise of some outstanding warrants by the largest investor may change this calculation[4], but this offering defies the usual pattern where the company is sold to the public at a higher valuation.

It’s impossible to figure out how much the original investors stand to make if they can eventually sell their shares.  Given the long passage of time since the first rounds of investment and the dilution created by subsequent financings, I can’t determine the exact size of their respective investments.   Moreover, they are subject to a lockup on their shares.  However, I doubt they’ll achieve a return that is commensurate with the risk and time they put into this deal.  Although the IPO is another step in the company’s journey, there are still major operational and financial hurdles before the investors know if their venture investment finally pays off.

I’m often disparaging of money managers.  However, I’ve got to salute the original investors, especially at InterSouth and Aurora, for sticking with this investment.

[4] According to the prospectus, “499,788 shares of our common stock issuable upon exercise of warrants, at an exercise price of $5.82 per share, that we agreed to issue to Pharmstandard upon our entry into a manufacturing rights agreement with Pharmstandard” are not included in the current calculation of hares outstanding. Ibid, page 54.

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