S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 29, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ARGOS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2834   56-2110007

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

4233 Technology Drive

Durham, North Carolina 27704

(919) 287-6300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jeffrey Abbey

Chief Executive Officer

4233 Technology Drive

Durham, North Carolina 27704

(919) 287-6300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David E. Redlick

Stuart M. Falber

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, Massachusetts 02109

(617) 526-6000

 

Mitchell S. Bloom

Edward A. King

Goodwin Procter LLP

53 State Street

Boston, Massachusetts 02109

(617) 570-1000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨             

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨             

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 
    Title of Each Class of  Securities To Be Registered       Proposed Maximum Aggregate Offering Price(1)   Amount of Registration Fee(2)

Common Stock, $0.001 par value per share

  $86,250,000   $10,014
 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 29, 2011

PROSPECTUS

             Shares

LOGO

Common Stock

 

 

Argos Therapeutics, Inc. is offering              shares of its common stock. This is our initial public offering, and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $             and $             per share.

We have applied to have our common stock approved for listing on The NASDAQ Global Market under the symbol “ARGS.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to us

   $         $     

We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to                 additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions, to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock on or about                .

 

 

 

Lazard Capital Markets    Canaccord Genuity

 

 

 

Needham & Company, LLC    BMO Capital Markets

The date of this prospectus is             , 2011.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Special Note Regarding Forward-Looking Statements

     41   

Use of Proceeds

     43   

Dividend Policy

     43   

Capitalization

     44   

Dilution

     46   

Selected Consolidated Financial Data

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Business

     76   

Management

     113   

Executive Compensation

     119   

Transactions with Related Persons

     140   

Principal Stockholders

     146   

Description of Capital Stock

     152   

Shares Eligible for Future Sale

     157   

Underwriting

     160   

Legal Matters

     165   

Experts

     165   

Where You Can Find More Information

     165   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we may authorize to be delivered to you. We have not authorized anyone to provide you with different information. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until             , 2011 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section beginning on page 10 and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.

Our Business

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Using biological components obtained from each patient, our Arcelis-based immunotherapies employ a specialized white blood cell, called a dendritic cell, to activate an immune response that is specific to the patient’s disease. Our most advanced product candidate is AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC. We plan to initiate patient enrollment in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib, an oral small molecule drug marketed under the trade name Sutent® that is the current standard of care for mRCC, in the fourth quarter of 2011.

Renal cell carcinoma, or RCC, is the most common type of kidney cancer. According to the National Cancer Institute, there are approximately 61,000 new cases of kidney cancer each year in the United States. The National Comprehensive Cancer Network and the National Cancer Data Base, or NCDB, estimate that 90% of these new cases are RCC. According to the NCDB, 15% to 20% of these newly diagnosed RCC cases are mRCC. Additionally, patients initially diagnosed with early stage RCC may later present with mRCC.

We are also developing a second Arcelis-based product candidate, AGS-004 for the treatment of HIV. We are studying AGS-004 in a phase 2b clinical trial that is funded entirely by the National Institutes of Health, or NIH. In addition to our Arcelis-based product candidates, we are developing two other product candidates based on our expertise in dendritic cell biology: AGS-009, a monoclonal antibody for the treatment of lupus, which we are studying in a phase 1a clinical trial, and AGS-010, a preclinical biologic compound, which we are developing for the treatment of psoriasis and for organ transplantation.

Arcelis Technology Platform

We use our Arcelis platform to generate RNA-loaded dendritic cell immunotherapies using biological components derived from the individual patient to be treated. Specifically, we manufacture these personalized therapies using that patient’s disease sample, either tumor cells in the case of cancer or a blood sample containing virus in the case of infectious disease, and dendritic cells derived from the patient’s white blood cells. By using messenger RNA, or mRNA, from the patient’s own cancer cells or virus, our Arcelis platform yields a fully personalized immunotherapy that is designed to contain all of the patient’s disease-specific antigens and to elicit a rapid, broad and potent immune response that is specific to the patient’s own disease. Our Arcelis-based immunotherapies have been well tolerated in clinical trials in more than 100 patients with no serious adverse events attributed to our immunotherapies. We believe that our Arcelis platform can be used for a wide range of oncology and infectious disease indications.

 

 

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Our Development Programs

The following table summarizes our four development programs and their status. We currently hold all commercial rights to all four of these programs in all geographies.

 

Product

Candidate

  

Description

  

Primary Indication(s)

  

Status

AGS-003

   Arcelis-based fully personalized immunotherapy    mRCC    Planned pivotal phase 3 trial with initiation of enrollment expected in the fourth quarter of 2011

AGS-004

   Arcelis-based fully personalized immunotherapy    HIV    Ongoing phase 2b trial with completion of enrollment expected in the fourth quarter of 2011

AGS-009

   Anti-interferon-a monoclonal antibody    Lupus    Ongoing phase 1a trial with results expected in the fourth quarter of 2011

AGS-010

   CD83 recombinant protein   

Psoriasis;

Organ transplantation

   Preclinical

AGS-003.    We have tested AGS-003 in clinical trials in combination with sunitinib and as a monotherapy for the treatment of mRCC. In our phase 2 clinical trial of AGS-003 in combination with sunitinib, the combination therapy showed median progression free survival of 11.9 months in intermediate and poor risk patients that had a time from diagnosis to initiation of systemic therapeutic treatment of less than one year. This represented an approximately 50% extension over the eight month median progression free survival achieved by sunitinib alone in similar intermediate and poor risk patients in the pivotal phase 3 clinical trial of sunitinib as a monotherapy. Progression free survival is the length of time that passes after treatment begins and before the patient’s disease worsens or the patient dies, and has served as the primary endpoint in the pivotal phase 3 trials for five of the six products most recently approved by the FDA for the treatment of mRCC. We have submitted to the FDA for review a protocol for our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib plus placebo. Under this protocol, in order to achieve the primary endpoint of the trial, the data must demonstrate an increase of at least 30% in median progression free survival for the AGS-003 plus sunitinib arm compared to the sunitinib plus placebo control arm. We expect to initiate enrollment in this trial in the fourth quarter of 2011, complete enrollment in late 2013 and have data on the primary endpoint in mid-2014. In addition, under the protocol, the independent data monitoring committee will conduct two interim analyses of data from the trial to assess both safety and futility.

AGS-004.    We have completed two early stage clinical trials of AGS-004, and are currently conducting a phase 2b clinical trial that is funded entirely by the NIH. We expect to complete enrollment in this trial in the fourth quarter of 2011 and to complete primary endpoint analysis of the data from this trial in mid-2012. According to the World Health Organization, the number of people living with HIV in the world was approximately 33.3 million in 2009. The Henry J. Kaiser Family Foundation estimates that more than 1.1 million people are currently living with HIV in the United States. According to the Centers for Disease Control and Prevention, the number of new cases of HIV infection in the United States is expected to remain steady at about 55,000 cases per year for the next decade.

AGS-009 and AGS-010.    We are developing our other two product candidates based on our expertise in dendritic cell biology. We have completed enrollment in a phase 1a clinical trial of AGS-009, a monoclonal antibody for the treatment of lupus, and are planning to commence enrollment in a phase 1b clinical trial of this product candidate in the fourth quarter of 2011. We are continuing preclinical testing on AGS-010, a recombinant human soluble CD83 protein, for the treatment of psoriasis and for organ transplantation.

 

 

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Manufacturing

We currently manufacture our Arcelis-based product candidates at our single, centralized manufacturing facility located in Durham, North Carolina. To prepare for the commercial launch of AGS-003 and any other Arcelis-based products we develop, we plan to establish automated manufacturing processes based on existing functioning prototypes of automated devices and disposables and to identify, lease, build out and equip a new U.S. commercial manufacturing facility for this purpose. We have developed proprietary processes to generate Arcelis-based products that we believe will allow us to manufacture the drug product for all of North America at this one centralized facility. Our plan is to file our biologics license application, or BLA, for AGS-003 with the FDA using the automated manufacturing processes that we have developed. We rely on contract manufacturers for the production of AGS-009 and AGS-010 and do not plan to build our own manufacturing capacity for these product candidates.

Investment Highlights

We believe that the following are the key attributes of our Arcelis platform and our pipeline of product candidates:

 

   

Regulatory pathway for FDA approval of an active immunotherapy.    We believe that the FDA’s approval of Dendreon Corporation’s Provenge® for the treatment of prostate cancer, which represents the first U.S. approval of an active immunotherapy, establishes a regulatory pathway for FDA approval of additional active immunotherapies.

 

   

Proprietary technology platform designed for fully personalized immunotherapies.    Using our Arcelis platform, we believe that we have the ability to develop fully personalized active immunotherapies for treating a wide range of cancers and infectious diseases. We also believe that our Arcelis platform provides us with competitive advantages over other immunotherapies in terms of product potency, manufacturing scalability and cost of goods.

 

   

Near-term initiation of pivotal phase 3 trial of AGS-003 combination therapy.    Based on encouraging phase 2 progression free survival data in mRCC patients, we plan to commence enrollment in the fourth quarter of 2011 for our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib for the treatment of mRCC.

 

   

Planned commercial scale manufacturing of our Arcelis-based product candidates using automated manufacturing processes.    We have developed detailed plans for a single, centralized U.S. commercial manufacturing facility and automated processes to enable manufacturing with a cost of goods for our fully personalized Arcelis-based products that we expect will be comparable to other biologics.

 

   

Pipeline of additional product candidates that have the potential to be advanced using limited internal funding.    We believe that we can advance the development of our three product candidates other than AGS-003, each of which addresses a large market with significant unmet medical needs, through government or other third-party funding, including collaboration or license arrangements. Our current development work on our Arcelis-based HIV product candidate, AGS-004, is being funded entirely under a contract with the NIH.

 

   

Experienced management team.    Our four most senior executives have a combined experience of over 70 years in the biopharmaceutical industry, and each has worked at our company for at least seven years.

 

 

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Our Strategy

Our goal is to build a commercial biopharmaceutical company, founded on our extensive expertise in dendritic cell biology and immunology, primarily through the use of our Arcelis platform. Key elements of our strategy are to:

 

   

Complete development of AGS-003 for mRCC, and manufacture and commercialize AGS-003 on our own in North America and collaborate with third parties for the manufacture and commercialization of AGS-003 outside North America, or, if we determine that it is in our best interest, with third parties on a worldwide basis.

 

   

Continue development of AGS-004 for HIV through government or other third-party funding and collaborate with third parties for commercialization on a worldwide basis.

 

   

Continue to build on our Arcelis platform by developing fully personalized immunotherapies for other cancers and infectious diseases.

 

   

Establish automated manufacturing processes based on existing functioning prototypes of automated devices and disposables and, prior to the filing of our BLA for AGS-003, identify, lease, build out and equip a new U.S. facility for the commercial manufacture of products based on our Arcelis platform.

 

   

Seek partners for further development and commercialization of AGS-009 for lupus and AGS-010 for the treatment of psoriasis and for organ transplantation.

 

   

Pursue broad intellectual property protection for our Arcelis technology platform, product candidates and proprietary manufacturing processes through U.S. and international patent filings and maintenance of trade secret confidentiality.

Risks Associated with Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

   

We currently have no commercial products and have not received regulatory approval for any of our products.

 

   

We plan to use substantially all of the proceeds of this offering to fund our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib. If the trial fails to demonstrate safety and efficacy to the satisfaction of the FDA, we would incur additional costs and experience delays in completing, or ultimately be unable to complete, the development and commercialization of AGS-003.

 

   

Only one active immunotherapy has been approved by the FDA to date. Our use of our novel Arcelis technology with our active immunotherapies may raise development issues that we may not be able to resolve and may raise regulatory issues that could delay or prevent approval of our active immunotherapies.

 

   

We will need to obtain additional financing prior to the commercialization of AGS-003 or any of our other product candidates, including for the planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility, which we expect will cost approximately $25 million, and for conducting any future clinical trials of our product candidates.

 

 

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We do not have experience in manufacturing Arcelis-based products on a commercial scale or using automated processes. If we are unable to successfully manufacture these products on a commercial scale, our business may be materially harmed.

 

   

We plan to fund the clinical development of AGS-004 through government or other third-party funding, to collaborate with a third party for commercialization of AGS-004 on a worldwide basis and to seek partners for further development and commercialization of AGS-009 and AGS-010. If we are unable to obtain such funding or establish such collaborations, we may not be able to commercialize or develop these product candidates.

 

   

We have incurred significant losses since our inception and, as of March 31, 2011, we had an accumulated deficit of $111.2 million. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Our Corporate Information

We were incorporated under the laws of the State of Delaware in 1997 under the name Dendritix, Inc. We changed our name to Merix Bioscience, Inc. in 1999, and to Argos Therapeutics, Inc. in 2004. Our executive offices are located at 4233 Technology Drive, Durham, North Carolina 27704, and our telephone number is (919) 287-6300. Our website address is www.argostherapeutics.com. The information contained in, or accessible through, our website does not constitute part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

In this prospectus, unless otherwise stated or the context otherwise requires, references to “Argos,” “we,” “us,” “our” and similar references refer to Argos Therapeutics, Inc. and its subsidiaries. Argos Therapeutics®, Argos® and Arcelis, the Argos Therapeutics logo and other trademarks or service marks of Argos appearing in this prospectus are the property of Argos. The other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

 

 

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The Offering

Common stock offered by us

            shares

 

Common stock to be outstanding after this offering

            shares

 

Over-allotment option

The underwriters have an option for a period of 30 days to purchase up to             additional shares of our common stock to cover over-allotments.

 

Use of proceeds

We intend to devote approximately $         million of the net proceeds from this offering to fund the direct costs of our planned pivotal phase 3 combination therapy clinical trial of AGS-003 and to use the balance for other general corporate purposes. See “Use of Proceeds” for more information.

 

Proposed NASDAQ Global Market symbol

“ARGS”

 

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

 

The number of shares of our common stock to be outstanding after this offering is based on 12,849,491 actual shares of our common stock outstanding as of June 30, 2011 and also includes:

 

   

157,871,415 shares of our common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering;

 

   

            shares of our common stock issuable upon the automatic conversion of all principal and accrued interest on our outstanding convertible notes that we issued and sold in 2010, or the 2010 convertible notes, and our outstanding convertible notes that we issued and sold in July 2011, or the July 2011 convertible notes, upon the closing of this offering, at the initial public offering price, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurs on                     , 2011;

 

   

            shares of our common stock issuable upon the automatic exercise of outstanding warrants to purchase shares of our series C redeemable convertible preferred stock, or series C preferred stock, by net exercise at an exercise price of $0.01 per share upon the closing of this offering, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and

 

   

4,609,457 shares of our common stock issuable to specified holders of the capital stock of our 49.95% owned subsidiary, DC Bio Corp., or DC Bio, in exchange for their shares of DC Bio upon the closing of this offering, which would result in DC Bio becoming our wholly-owned subsidiary.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

24,190,022 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2011 at a weighted average exercise price of $0.09 per share;

 

 

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13,205,160 additional shares of our common stock available for future issuance as of June 30, 2011 under our 2008 stock incentive plan, or our 2008 plan;

 

   

additional shares of our common stock that will be available for future issuance upon the closing of this offering under our 2011 stock incentive plan, or our 2011 plan; and

 

   

21,617 shares of common stock issuable upon exercise of warrants outstanding as of June 30, 2011, other than the warrants to purchase shares of our series C preferred stock described above, at a weighted average exercise price of $21.49 per share.

Unless otherwise indicated, all information in this prospectus reflects and assumes:

 

   

no exercise of the outstanding options or warrants described above, other than the automatic exercise of the warrants to purchase shares of our series C preferred stock described above;

 

   

the automatic conversion of all outstanding shares of our preferred stock into 157,871,415 shares of our common stock upon the closing of this offering;

 

   

the automatic conversion of all principal and accrued interest on our outstanding convertible notes, including the 2010 convertible notes and the July 2011 convertible notes, upon the closing of this offering, into an aggregate of             shares of our common stock, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurs on                     , 2011;

 

   

the issuance of an aggregate of             shares of our common stock issuable upon the automatic exercise of warrants to purchase shares of our series C preferred stock by net exercise at an exercise price of $0.01 per share upon the closing of this offering, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

 

   

the issuance of an aggregate of 4,609,457 shares of our common stock to specified holders of the capital stock of DC Bio in exchange for their shares of DC Bio upon the closing of this offering;

 

   

the restatement of our certificate of incorporation and the amendment and restatement of our by-laws upon the closing of this offering; and

 

   

no exercise by the underwriters of their over-allotment option.

 

 

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Summary Consolidated Financial Data

You should read the following summary consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included in this prospectus. We have derived the consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 from our unaudited consolidated financial statements included in this prospectus. The unaudited consolidated financial data include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year.

The unaudited pro forma balance sheet data set forth below give effect to:

 

   

the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 157,871,415 shares of our common stock upon the closing of this offering;

 

   

the receipt in July 2011 of gross proceeds of $3.5 million upon the issuance and sale of the July 2011 convertible notes;

 

   

the automatic conversion of all principal and accrued interest on our outstanding convertible notes, including the 2010 convertible notes and the July 2011 convertible notes, upon the closing of this offering, into an aggregate of             shares of our common stock, at the initial public offering price, assuming an initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurs on                     , 2011; and

 

   

the issuance of an aggregate of             shares of our common stock upon the automatic exercise of outstanding warrants to purchase shares of our series C preferred stock by net exercise at an exercise price of $0.01 per share upon the closing of this offering, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

The unaudited pro forma as adjusted balance sheet data set forth below give further effect to:

 

   

our issuance and sale of             shares of our common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and

 

   

the expected issuance of an aggregate of 4,609,457 shares of our common stock to specified holders of the capital stock of DC Bio in exchange for their shares of DC Bio upon the closing of this offering.

 

 

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    Year Ended December 31,     Quarter
Ended
March 31,
2010
    Quarter
Ended
March 31,
2011
    Cumulative
Period from
Inception
(May 8, 1997)  to
March 31,
2011
 
    2008     2009     2010        
                      (unaudited)     (unaudited)     (unaudited)  

Statements of Operations Data:

           

Revenue

  $ 4,449,735      $ 5,367,989      $ 7,272,783      $ 1,116,716      $ 2,232,225      $ 69,955,359   
                                               

Operating expenses

           

Research and development

    22,042,597        19,543,966        13,927,662        3,843,577        3,054,488        166,035,698   

Net reimbursement under collaboration agreement

    (8,127,428     (6,626,989                          (47,179,130
                                               

Net research and development

    13,915,169        12,916,977        13,927,662        3,843,577        3,054,488        118,856,568   

General and administrative

    2,852,375        2,931,599        2,704,231        961,431        710,018        33,415,488   
                                               

Total operating expenses

    16,767,544        15,848,576        16,631,893        4,805,008        3,764,506        152,272,056   
                                               

Operating income (loss)

    (12,317,809     (10,480,587     (9,359,110     (3,688,292     (1,532,281     (82,316,697
                                               

Other income (expense), net

    (471,835     (106,122     191,758        (19,777     (909,458     (11,535,931
                                               

Net income (loss)

    (12,789,644     (10,586,709     (9,167,352     (3,708,069     (2,441,739     (93,852,628

Net income (loss) attributable to noncontrolling interest

    136,643        (654,760     (172,598     (79,366     (13,421     (710,481
                                               

Net income (loss) attributable to Argos Therapeutics, Inc.

    (12,926,287     (9,931,949     (8,994,754     (3,628,703     (2,428,318     (93,142,147

Less: Accretion of redeemable convertible preferred stock

    (395,666     (101,206     (101,206     (25,302     (25,302     (29,147,080
                                               

Net income (loss) attributable to common stockholders

  $ (13,321,953   $ (10,033,155   $ (9,095,960   $ (3,654,005   $ (2,453,620   $ (122,289,227
                                               

Basic and diluted net loss attributable to common stockholders per share

  $ (153.81   $ (62.78   $ (2.23   $ (18.55   $ (0.19  
                                         

Basic and diluted weighted average shares outstanding

    86,615        159,825        4,081,649        196,976        12,849,491     
                                         
                      As of March 31, 2011  
                      Actual     Pro Forma     Pro Forma
as Adjusted
 

Balance Sheet Data:

           

Cash, cash equivalents and short-term investments

  

  $ 3,045,585      $        $     

Working capital

  

    (2,490,073    

Total assets

  

    8,577,842       

Convertible term note including accrued interest

  

    4,579,655       

Long-term portion of notes payable

  

    —         

Redeemable convertible preferred stock

  

    79,985,714       

Total stockholders’ deficit

  

    (81,319,991    

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss, after attribution to the noncontrolling interest, was $2.4 million for the three months ended March 31, 2011, $9.0 million for the year ended December 31, 2010 and $9.9 million for the year ended December 31, 2009. As of March 31, 2011, we had an accumulated deficit of $111.2 million. As a result of our operating losses and negative cash flows from operations since inception, the report of our independent accountants on our December 31, 2010 financial statements included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. To date, we have financed our operations primarily through private placements of our preferred stock, convertible debt financings, bank debt, government contracts, grants and license and collaboration agreements. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any product candidates. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:

 

   

initiate or continue our clinical trials of AGS-003 and our other product candidates;

 

   

seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

   

lease, build out and equip a new U.S. commercial facility for the manufacture of AGS-003 and our other Arcelis-based products;

 

   

establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

continue our other research and development efforts;

 

   

hire additional clinical, quality control, scientific and management personnel; and

 

   

add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.

To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This development and commercialization will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates, leasing, building out and equipping a new U.S. commercial manufacturing facility and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may never succeed in these activities and may never generate revenues that are significant or large

 

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enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs, our plans to lease, build out and equip a new U.S. commercial manufacturing facility or our commercialization efforts.

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates and lease, build out and equip a new U.S. commercial manufacturing facility. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our product development programs, our plans for a new U.S. commercial manufacturing facility or our commercialization efforts.

We expect that the net proceeds from this offering, together with our existing cash, cash equivalents, short-term investments and anticipated funding under our NIH contract, as well as the proceeds from our issuance and sale of the July 2011 convertible notes, will enable us to fund our operating expenses and capital expenditure requirements, other than for the planned build-out and equipping of a new U.S. commercial manufacturing facility, through at least             . We intend to devote approximately $             million of the net proceeds from this offering to fund the direct costs of our planned pivotal phase 3 combination therapy clinical trial of AGS-003 and to use the balance for general corporate purposes. We will need to obtain additional financing prior to the commercialization of AGS-003 or any of our other product candidates, including for the planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility, which we expect will cost approximately $25 million, and for conducting any future clinical trials of our product candidates.

Our future capital requirements will depend on many factors, including:

 

   

the progress and results of the planned pivotal phase 3 clinical trial of AGS-003;

 

   

the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;

 

   

the costs and timing of our planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility;

 

   

the costs, timing and outcome of regulatory review of our product candidates;

 

   

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

 

   

revenue, if any, received from commercial sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;

 

   

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

   

the extent to which we acquire or invest in other businesses, products and technologies;

 

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our ability to obtain government or other third-party funding; and

 

   

our ability to establish collaborations on favorable terms, if at all, particularly arrangements to market and distribute oncology product candidates outside North America and arrangements for the development and commercialization of our non-oncology product candidates on a worldwide basis.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Additional financing may not be available to us on acceptable terms, or at all.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Except for the NIH’s remaining funding commitment with respect to AGS-004, we do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

We currently intend to collaborate with third parties for the commercialization of AGS-003 outside of North America and of AGS-004 worldwide and to seek partners for the further development and commercialization of AGS-009 and AGS-010. We plan to seek government or other third-party funding for the continued development of AGS-004 following completion of the phase 2b clinical trial of AGS-004 and to seek partners or other sources of third-party funding for the further development of AGS-009 and AGS-010. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

Risks Related to the Development and Commercialization of Our Product Candidates

We depend heavily on the success of AGS-003 and our other product candidates. All of our product candidates are still in preclinical or clinical development. Clinical trials of our product candidates may not be successful. If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources in the development of AGS-003, AGS-004, AGS-009 and AGS-010. Our ability to generate product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of these product candidates, especially AGS-003, our most advanced product candidate. The success of these product candidates will depend on several factors, including the following:

 

   

successful completion of preclinical studies and clinical trials;

 

   

receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States;

 

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establishing commercial manufacturing capabilities by identifying, leasing, building out and equipping a commercial manufacturing facility for our Arcelis-based product candidates and making arrangements with third-party manufacturers for our other product candidates;

 

   

maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

 

   

launching commercial sales of the products, if and when approved, whether alone or in collaboration with others;

 

   

acceptance of the products, if and when approved, by patients, the medical community and third-party payors;

 

   

effectively competing with other therapies; and

 

   

a continued acceptable safety profile of the products following approval.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business.

If clinical trials of our product candidates, such as our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib, fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety, purity and potency, or efficacy, of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

In particular, to date, we have not conducted a clinical trial of AGS-003 against a placebo or a comparator therapy. While comparisons to results from other reported clinical trials can assist in evaluating the potential efficacy of our AGS-003 product candidate, there are many factors that affect the outcome for patients in clinical trials, some of which are not apparent in published reports, and results from two different trials often cannot be reliably compared. Our planned pivotal phase 3 clinical trial of AGS-003 is intended to compare directly the combination of AGS-003 and sunitinib to treatment with the combination of sunitinib plus placebo. Based on the design of the trial, the data from the trial will need to demonstrate an increase of at least 30% in median progression free survival for the AGS-003 plus sunitinib arm as compared to the sunitinib plus placebo arm in order to show statistical significance and achieve the primary endpoint of the trial. We will need to show this statistically significant benefit of the combined therapy as compared to treatment with the combination of sunitinib plus placebo as part of a submission for approval of AGS-003. However, demonstration of statistical significance and achievement of the primary endpoint of the trial does not assure approval by the FDA or similar regulatory authorities outside the United States.

Patients in our planned pivotal phase 3 clinical trial who receive treatment with sunitinib plus placebo may not have results similar to patients studied in other clinical trials of sunitinib. If the patients in our planned

 

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pivotal phase 3 clinical trial who receive sunitinib plus placebo have results which are better than the results that occurred in those other clinical trials, we may not demonstrate a sufficient benefit from AGS-003 in combination with sunitinib to allow the FDA to approve AGS-003 for marketing. In addition, only 21 patients received the combination of AGS-003 and sunitinib in our phase 2 clinical trial. If the patients in our planned pivotal phase 3 clinical trial who receive the combination of AGS-003 and sunitinib have results which are worse than the results that occurred in our phase 2 clinical trial, we may not demonstrate a sufficient benefit from the combination therapy to allow the FDA to approve AGS-003 for marketing.

For drug and biological products, the FDA typically requires the successful completion of two adequate and well-controlled clinical trials to support marketing approval. In the case of AGS-003, which is intended for a life-threatening disease, we intend to seek approval based upon the results of a single pivotal phase 3 trial. As a result, the trial may receive enhanced scrutiny from the FDA. If the FDA disagrees with our choice of a primary endpoint or the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other study endpoints, including overall survival, the FDA may refuse to approve our BLA based upon a single clinical trial. For example, although we are including a control arm crossover in the trial design for our pivotal phase 3 clinical trial for ethical reasons, this may well contribute to the confounding of the overall survival results, thereby reducing the chance that the overall survival results would support approval of AGS-003. In addition, because only 21 patients received the combination of AGS-003 and sunitinib in our phase 2 clinical trial, and as a result, we did not have enough evaluable patients to perform the statistical analysis to determine whether the primary endpoint of complete response rate was achieved in that trial, we expect that the data from our phase 2 trial will have only a limited impact on the FDA’s ultimate assessment of efficacy of AGS-003. Thus, there can be no guarantee that the FDA will not require additional pivotal clinical trials as a condition for approving AGS-003.

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

 

   

regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

   

we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

   

clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

   

the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

   

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

   

we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks;

 

   

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

   

the cost of clinical trials of our product candidates may be greater than we anticipate;

 

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the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and

 

   

our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminate the trials.

In addition, the patients recruited for clinical trials of our product candidates may have a disease profile or other characteristics that are different than we expect and different than the clinical trials were designed for, which could adversely impact the results of the clinical trials. For instance, our phase 2 combination therapy clinical trial of AGS-003 in combination with sunitinib was originally designed to enroll subjects with favorable disease risk profiles and intermediate disease risk profiles and with a primary endpoint of complete response rate. However, the actual trial population consisted entirely of patients with intermediate disease risk profiles and poor disease risk profiles. This is a population for which published research has shown that sunitinib alone, as well as other new therapies for mRCC, rarely if ever produce complete responses in mRCC, and in our phase 2 clinical trial in this population the combination therapy of AGS-003 and sunitinib did not show a complete response rate that met the endpoint of the trial.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

   

be delayed in obtaining marketing approval for our product candidates;

 

   

not obtain marketing approval at all;

 

   

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

   

obtain approval with labeling that includes significant use restrictions or safety warnings, including boxed warnings;

 

   

have the product removed from the market after obtaining marketing approval;

 

   

be subject to additional post-marketing testing requirements; or

 

   

be subject to restrictions on how the product is distributed or used.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. For example, in response to our submission of an IND for AGS-004, the FDA raised safety concerns regarding the analytical treatment interruption contemplated by our protocol for our phase 2a clinical trial of AGS-004, and required a one year safety follow-up after the final dose for each patient. This resulted in the need for an amendment to the trial protocol and a four month delay prior to initiating the phase 2a clinical trial in the United States. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates and may harm our business and results of operations.

If we experience delays or difficulties in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

We may not be able to initiate or continue clinical trials for our product candidates, including our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib, if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory

 

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authorities outside the United States. In addition, many of our competitors have ongoing clinical trials for product candidates that could be competitive with our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates. For example, during the phase 1/2 monotherapy clinical trial of AGS-003 that we conducted, our ability to enroll patients in the trial was adversely affected by the FDA’s approval of sorafenib and sunitinib during our phase 1/2 trial, because patients did not want to receive, and physicians were reluctant to administer, AGS-003 as a monotherapy once new therapies that showed efficacy in clinical trials were introduced to the market and became widely available.

Patient enrollment is affected by other factors including:

 

   

severity of the disease under investigation;

 

   

eligibility criteria for the study in question;

 

   

perceived risks and benefits of the product candidate under study;

 

   

efforts to facilitate timely enrollment in clinical trials;

 

   

patient referral practices of physicians;

 

   

the ability to monitor patients adequately during and after treatment; and

 

   

proximity and availability of clinical trial sites for prospective patients.

We estimate that we will require approximately two years to fully enroll patients in our planned pivotal phase 3 combination therapy clinical trial of AGS-003. However, the actual amount of time for full enrollment could be longer than planned. Enrollment delays in this planned pivotal phase 3 trial or any of our other clinical trials may result in increased development costs for our product candidates, which would cause the value of the company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for this planned pivotal phase 3 clinical trial or any of our other clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.

If serious adverse or inappropriate side effects are identified during the development of our product candidates, we may need to abandon or limit our development of some of our product candidates.

All of our product candidates are still in preclinical or clinical development and their risk of failure is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive regulatory approval. If our product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.

Our Arcelis-based product candidates are active immunotherapies that are based on a novel technology utilizing patient material. This may raise development issues that we may not be able to resolve, regulatory issues that could delay or prevent approval or personnel issues that may prevent us from further developing and commercializing our product candidates.

Our Arcelis-based product candidates, AGS-003 and AGS-004, are based on our novel Arcelis technology platform. In the course of developing this platform and these product candidates, we have encountered difficulties in the development process. For example, we terminated the development of MB-002, the predecessor to AGS-003, when the results from the initial clinical trial of MB-002 indicated that the product candidate only corrected defects in the production of one of the two critical cytokines required for effective immune response. There can be no assurance that additional development problems will not arise in the future which we may not be able to resolve or which may cause significant delays in development.

 

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In addition, regulatory approval of novel product candidates such as our Arcelis-based product candidates manufactured using novel manufacturing processes such as ours can be more expensive and take longer than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical products, due to our and regulatory agencies’ lack of experience with them. The FDA has only approved one active cellular immunotherapy product to date. This lack of experience may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these product candidates or lead to significant post-approval limitations or restrictions.

The novel nature of our product candidates also means that fewer people are trained in or experienced with product candidates of this type, which may make it difficult to find, hire and retain capable personnel for research, development and manufacturing positions.

Development of our Arcelis-based product candidates is subject to significant uncertainty because each product candidate is derived from source material that is inherently variable. This variability could reduce the effectiveness of our Arcelis-based product candidates, delay any FDA approval of our Arcelis-based product candidates, cause us to change our manufacturing methods and adversely affect the commercial success of any approved Arcelis-based products.

The disease samples from the patients to be treated with our Arcelis-based products vary from patient to patient. This inherent variability may adversely affect our ability to manufacture our products because each tumor or virus sample that we receive and process will yield a different drug. As a result, we may not be able to consistently produce a product for every patient and we may not be able to treat all patients effectively. Such inconsistency could delay FDA or other regulatory approval of our Arcelis-based product candidates or if approved, adversely affect market acceptance and use of our Arcelis-based products. If we have to change our manufacturing methods to address any inconsistency, we may have to perform additional clinical trials, which would delay FDA or other regulatory approval of our Arcelis-based product candidates and increase the costs of development of our Arcelis-based product candidates.

The inherent variability of the disease samples from the patients to be treated with our Arcelis-based products may further adversely affect our ability to manufacture our products because variability in the source material for our product candidates, such as tumor cells or viruses, may cause variability in the composition of other cells in our product candidates. Such variability in composition or purity could adversely affect our ability to establish acceptable release specifications and the development and regulatory approval processes for our product candidates may be delayed, which would increase the costs of development of our Arcelis-based product candidates.

Even if any of our product candidates, including AGS-003 and our other product candidates, receive regulatory approval, they may fail to achieve the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community necessary for commercial success.

If AGS-003 or any of our other product candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. Gaining market acceptance for our Arcelis-based products may be particularly difficult as, to date, the FDA has only approved one active immunotherapy and our Arcelis-based products are based on a novel technology. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

   

efficacy and potential advantages compared to alternative treatments;

 

   

the ability to offer our product candidates for sale at competitive prices;

 

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convenience and ease of administration compared to alternative treatments;

 

   

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

   

the strength of marketing and distribution support;

 

   

sufficient third-party coverage or reimbursement; and

 

   

the prevalence and severity of any side effects.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved.

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to market and sell AGS-003 and any future oncology product candidates for which we receive marketing approval in North America ourselves and to establish distribution or other marketing arrangements with third parties for such products in the rest of the world. We plan to establish worldwide collaborations, distribution or other marketing arrangements with third parties for AGS-004 and any of our other product candidates should such candidates receive marketing approval.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

 

   

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

   

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

 

   

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

   

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

 

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We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates, and will face competition with respect to any products that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing our product candidates. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Many marketed therapies for the indications that we are currently pursuing, or indications that we may in the future seek to address using our Arcelis platform, are widely accepted by physicians, patients and payors, which may make it difficult for us to replace them with any products that we successfully develop and are permitted to market.

There are several FDA-approved therapies for mRCC marketed and sold by large pharmaceutical companies. There are also monotherapies in clinical development for mRCC. In addition, we estimate that there are numerous cancer immunotherapy products in clinical development by many public and private biotechnology and pharmaceutical companies targeting numerous different cancer types. A number of these are in late stage development. One biotechnology company is developing a therapeutic cancer vaccine, which is a mixture of defined tumor-associated peptides, for the treatment of RCC. This company is conducting a pivotal phase 3 clinical trial comparing its vaccine in combination with sunitinib against treatment with sunitinib alone. If this clinical trial is successful, this combination therapy would be in direct competition with our AGS-003 and sunitinib combination therapy. In addition, if a standalone therapy for mRCC were developed that demonstrated improved efficacy over currently marketed therapies with a favorable safety profile and without the need for combination therapy, such a therapy might pose a significant competitive threat to AGS-003.

In addition, we are planning to conduct a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib. We elected to study AGS-003 in clinical trials in combination with sunitinib due in part to sunitinib being the current standard of care for first-line treatment of mRCC. Although we do not expect to seek FDA approval of AGS-003 solely in combination with sunitinib, if we obtain approval by the FDA, such FDA approval may be limited to the combination of AGS-003 and sunitinib. In such event, the commercial success of AGS-003 would be linked to the commercial success of sunitinib. As a result, if sunitinib ceases to be the standard of care for first-line treatment of mRCC or another event occurs that adversely affects sales of sunitinib, the commercial success of AGS-003 may be adversely affected.

There are also numerous FDA-approved treatments for HIV, primarily antiretroviral therapies marketed by large pharmaceutical companies. Generic competition has recently developed in this market as patent exclusivity periods for older drugs have expired, with more than 15 generic bioequivalents currently on the market. The presence of these generic drugs is resulting in price pressure in the HIV therapeutics market and could affect the pricing of AGS-004.

Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and

 

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marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and device industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm our business.

The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States, recently passed legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain regulatory approval.

Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from

 

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both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Our reliance on government funding adds uncertainty to our research and commercialization efforts and may impose requirements that increase the costs of commercialization and production of our government-funded product candidates.

Our phase 2b clinical trial for AGS-004 for HIV is currently being funded entirely by the NIH. We plan to seek further government funding for continued development of AGS-004. Contracts and grants from the U.S. government and its agencies include provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:

 

   

terminate agreements, in whole or in part, for any reason or no reason;

 

   

reduce or modify the government’s obligations under such agreements without the consent of the other party;

 

   

claim rights, including intellectual property rights, in products and data developed under such agreements;

 

   

impose U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;

 

   

suspend or debar the contractor or grantee from doing future business with the government or a specific government agency;

 

   

pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions specific to government agreements; and

 

   

limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal-year basis, thereby leaving some uncertainty about the future availability of funding for a program even after it has been funded for an initial period.

Government agreements normally contain additional terms and conditions that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These include, for example:

 

   

specialized accounting systems unique to government contracts and grants;

 

   

mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent;

 

   

public disclosures of certain contract and grant information, which may enable competitors to gain insights into our research program; and

 

   

mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs and environmental compliance requirements.

 

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Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. These risks may be even greater with respect to our Arcelis-based products which are manufactured using a novel technology. None of our product candidates has been widely used over an extended period of time, and therefore our safety data are limited. We derive the raw materials for manufacturing of our Arcelis-based product candidates from human cell sources, and therefore the manufacturing process and handling requirements are extensive and stringent, which increases the risk of quality failures and subsequent product liability claims.

If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any product candidates or products that we may develop;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial participants;

 

   

significant costs to defend the related litigation;

 

   

substantial monetary awards to trial participants or patients;

 

   

loss of revenue; and

 

   

the inability to commercialize any products that we may develop.

We currently hold $5.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. We will need to increase our insurance coverage when we begin commercializing our product candidates, if ever. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

 

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In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products.

We have based our research and development efforts on our Arcelis platform. Notwithstanding our large investment to date and anticipated future expenditures in our Arcelis platform, we have not yet developed, and may never successfully develop, any marketed drugs using this approach. As a result of pursuing the development of product candidates using our Arcelis platform, we may fail to develop product candidates or address indications based on other scientific approaches that may offer greater commercial potential or for which there is a greater likelihood of success.

Our long-term business plan is to develop Arcelis-based products for the treatment of various cancers and infectious diseases. We may not be successful in our efforts to identify or discover additional product candidates that may be manufactured using our Arcelis platform. Research programs to identify new product candidates require substantial technical, financial and human resources. These research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development.

If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

Risks Related to Our Dependence on Third Parties

We expect to depend on collaborations with third parties for the development and commercialization of our product candidates. If those collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.

Although we currently intend to commercialize AGS-003 ourselves in North America, we intend to seek to collaborate with third parties to commercialize AGS-003 and any future oncology product candidates outside North America or, if we decide that it is in our best interest, we may seek to collaborate with third parties to commercialize AGS-003 or any future oncology product candidate on a worldwide basis. We also plan to seek government or other third-party funding for continued development of AGS-004 and to collaborate with third parties to commercialize AGS-004 worldwide. In addition, we plan to seek partners for further development and commercialization of AGS-009 and AGS-010.

Our likely collaborators for any development, distribution, marketing, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. If we do enter into any such arrangements with any third parties, we

 

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will likely have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

Collaborations involving our product candidates would pose the following risks to us:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

   

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

   

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

   

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

   

collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

 

   

disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates. For example, our collaborations with Kyowa Hakko Kirin Co., Ltd., or Kirin, with respect to AGS-003 and AGS-004 and with Novo Nordisk A/S, or Novo, with respect to AGS-009 were each terminated by our collaborator for convenience.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

If we are not able to establish collaborations, we may have to alter our development and commercialization plans.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we plan to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those

 

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product candidates. For example, we currently intend to seek to collaborate with third parties to commercialize AGS-003 and any future oncology product candidates in Europe and other parts of the world and to collaborate with third parties to commercialize AGS-004 worldwide. In addition, we plan to seek partners for the further development and commercialization of AGS-009 and AGS-010.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under existing license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all.

We do not currently plan to develop AGS-004 beyond the ongoing phase 2b clinical trial, AGS-009 beyond the planned phase 1b clinical trial or AGS-010 unless we obtain government or other third-party funding to support such development, including through collaboration agreements. If we are not able to obtain such funding or enter into collaborations for any such product candidate, we may have to curtail the development of such product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop these product candidates or bring these product candidates to market and generate product revenue.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

 

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We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our existing or future distributors could delay clinical development or regulatory approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

Risks Related to the Manufacturing of Our Product Candidates

We plan to identify, lease, build out and equip a new U.S. facility to manufacture our Arcelis-based drug products on a commercial scale using automated processes. We do not have experience in manufacturing Arcelis-based drug products on a commercial scale or using automated processes. If, due to our lack of manufacturing experience, we cannot manufacture our Arcelis-based drug products on a commercial scale successfully or manufacture sufficient drug product to meet our expected commercial requirements, our business may be materially harmed.

We currently have manufacturing suites in our facility located at our corporate headquarters in Durham, North Carolina. We manufacture our Arcelis-based product candidates for research and development purposes and for clinical trials at this facility. We plan to identify, lease, build out and equip a new U.S. facility to manufacture our Arcelis-based drug products on a commercial scale using automated processes. We may be unable to find a suitable space to lease for our new commercial manufacturing facility. Even if we are able to find such a space, in light of our limited financial resources, a landlord may not be willing to lease the space to us on terms acceptable to us, or at all.

We do not have experience in manufacturing products on a commercial scale or using automated processes. In addition, because we are aware of only one company that has manufactured an active immunotherapy product for commercial sale, there are limited precedents from which we can learn. We may encounter difficulties in the manufacture of our Arcelis-based drug products due to our limited manufacturing experience. These difficulties could delay the build-out and equipping of the new facility and regulatory approval of the manufacture of our Arcelis-based drug products using the new facility and the automated processes, increase our costs or cause production delays or result in us not manufacturing sufficient drug product to meet our expected commercial requirements, any of which could damage our reputation and hurt our profitability. If we are unable to successfully increase our manufacturing capacity to commercial scale, our business may be materially adversely affected.

We plan to build out and equip a new U.S. commercial manufacturing facility based on automated manufacturing processes and augment our manufacturing personnel in advance of any regulatory submission for approval of AGS-003. If we fail to build out and equip a new U.S. commercial manufacturing facility in compliance with regulatory requirements, implement our automated processes or augment our manufacturing personnel, we may not be able to initiate commercial operations or produce sufficient drug product to meet our expected commercial requirements.

In order to meet our business plan, which contemplates our manufacturing drug product internally using automated processes for the commercial requirements of AGS-003 and any other Arcelis-based product candidates that might be approved, we will need to lease, build out and equip a new U.S. commercial manufacturing facility and add manufacturing personnel in advance of any regulatory submission for approval of AGS-003. The leasing, build-out and equipping of our facilities will require substantial capital expenditures and additional regulatory approvals. In addition, it will be costly and time consuming to recruit necessary additional personnel.

Prior to implementing the automated manufacturing processes for Arcelis-based products and filing a BLA for approval of AGS-003, we will be required to:

 

   

demonstrate that the disposable components and sterilization and packaging methods used in the manufacturing process are suitable for use in manufacturing in accordance with current good manufacturing practice, or cGMP, and current Good Tissue Practices, or cGTP;

 

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build and validate processing equipment that complies with cGMP and cGTP;

 

   

identify, lease, build out and equip a suitable manufacturing facility to accommodate the automated manufacturing process;

 

   

perform process testing with final equipment, disposable components and reagents to demonstrate that the methods are suitable for use in cGMP and cGTP manufacturing;

 

   

demonstrate consistency and repeatability of the automated manufacturing processes in the production of AGS-003 in our new facility to fully validate the manufacturing and control process using the actual automated cGMP processing equipment; and

 

   

demonstrate comparability between AGS-003 that we produce using existing processes in our current facility and AGS-003 produced using the automated processes in our new facility.

We expect that this implementation will require approximately two years to complete, but such implementation could take longer, particularly if we are unable to achieve any of the required tasks on a timely basis, or at all.

If we are unable to successfully build out and equip our commercial manufacturing facility in compliance with regulatory requirements, implement the automated processes required, demonstrate comparability between the AGS-003 used in our pivotal trial and the AGS-003 produced using the automated processes in the new facility, or hire additional necessary manufacturing personnel appropriately, our filing for regulatory approval of AGS-003 may be delayed or denied and we may not be able to initiate commercial operations even if any of our product candidates are approved for marketing.

Lack of coordination internally among our employees and externally with physicians, hospitals and third-party suppliers and carriers, could cause manufacturing difficulties, disruptions or delays and cause us to not have sufficient drug product to meet our expected clinical trial requirements or potential commercial requirements.

Manufacturing our Arcelis-based product candidates requires coordination internally among our employees and externally with physicians, hospitals and third-party suppliers and carriers. For example, a patient’s physician or clinical site will need to coordinate with us for the shipping of a patient’s disease sample and leukapheresis product to our manufacturing facility, and we will need to coordinate with them for the shipping of the manufactured drug product to them. Such coordination involves a number of risks that may lead to failures or delays in manufacturing our Arcelis-based product candidates, including:

 

   

failure to obtain a sufficient supply of key raw materials of suitable quality;

 

   

difficulties in manufacturing our product candidates for multiple patients simultaneously;

 

   

difficulties in obtaining adequate patient-specific material, such as tumor samples, virus samples or leukapheresis product, from physicians;

 

   

difficulties in completing the development and validation of the specialized assays required to ensure the consistency of our product candidates;

 

   

failure to ensure adequate quality control and assurances in the manufacturing process as we increase production quantities;

 

 

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difficulties in the timely shipping of patient-specific materials to us or in the shipping of our product candidates to the treating physicians due to errors by third-party carriers, transportation restrictions or other reasons;

 

   

destruction of, or damage to, patient-specific materials or our product candidates during the shipping process due to improper handling by third-party carriers, hospitals, physicians or us;

 

   

destruction of, or damage to, patient-specific materials or our product candidates during storage at our facilities; and

 

   

destruction of, or damage to, patient-specific materials or our product candidates stored at clinical and future commercial sites due to improper handling or holding by clinicians, hospitals or physicians.

If we are unable to coordinate appropriately, we may encounter delays or additional costs in achieving our clinical and commercialization objectives, including in obtaining regulatory approvals of our product candidates and supplying product, which could materially damage our business and financial position.

If our existing manufacturing facility or the new U.S. commercial manufacturing facility that we plan to lease, build out and equip are damaged or destroyed, or production at one of these facilities is otherwise interrupted, our business and prospects would be negatively affected.

If our existing manufacturing facility or the new U.S. commercial manufacturing facility that we plan to lease, build out and equip, or the equipment in either of these facilities, is damaged or destroyed, we likely would not be able to quickly or inexpensively replace our manufacturing capacity and possibly would not be able to replace it at all. Any new facility needed to replace either our existing manufacturing facility or the planned new U.S. commercial manufacturing facility would need to comply with the necessary regulatory requirements, need to be tailored to our specialized automated manufacturing requirements and require specialized equipment. We would need FDA approval before selling any products manufactured at a new facility. Such an event could delay our clinical trials or, if any of our product candidates are approved by the FDA, reduce or eliminate our product sales.

We maintain insurance coverage to cover damage to our property and equipment and to cover business interruption and research and development restoration expenses. If we have underestimated our insurance needs with respect to an interruption in our clinical manufacturing of our product candidates, we may not be able to adequately cover our losses.

We expect to contract with third parties for the manufacture of our non-Arcelis-based product candidates for clinical trials and for commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We currently rely on third-party manufacturers for the production of our non-Arcelis-based product candidates for preclinical testing and clinical trials and expect to rely on third-party manufacturers or third-party collaborators for the manufacture of these product candidates for later stage clinical trials and for commercial supply of any of these product candidates for which we or our collaborators obtain marketing approval.

We do not have any agreements with third-party manufacturers for the clinical or commercial supply of any of our product candidates, and purchase our required drug supply on a purchase order basis. We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

   

reliance on the third party for regulatory compliance and quality assurance;

 

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the possible breach of the manufacturing agreement by the third party; and

 

   

the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.

Third-party manufacturers may not be able to comply with cGMP, cGTP or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.

Any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.

We currently rely on a single manufacturer for the production of AGS-009 and AGS-010. We do not have agreements in place for redundant supply or a second source for the production of these product candidates. Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. If our current contract manufacturer cannot perform as agreed, we may be required to replace that manufacturer. Although we believe that there are a number of potential alternative manufacturers who could manufacture AGS-009 and AGS-010, we may incur added costs and delays in identifying and qualifying any such replacement.

Our potential future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive regulatory approval on a timely and competitive basis.

Risks Related to Our Intellectual Property

If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to a number of intellectual property license agreements with third parties, including with respect to each of AGS-003, AGS-004, AGS-009 and AGS-010, and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, under our license agreement with Duke University which relates to patents and patent applications directed towards the composition of matter of Arcelis-based products, dendritic cells loaded with RNA from tumors or pathogens, methods of manufacture of these products and methods of using these products to treat tumors and pathogen infections, we are required to use commercially reasonable efforts to research, develop and market license products and to satisfy other specified obligations. If we fail to comply with our obligations under these licenses, our licensors may have the right to terminate these license agreements, in which event we might not be able to market any product that is covered by these agreements, or to convert the license to a non-exclusive license, which could materially adversely affect the value of the product candidate being developed under the license agreement. Termination of these license agreements or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms.

 

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If we are unable to obtain and maintain patent protection for our technology and products, or if our licensors are unable to obtain and maintain patent protection for the technology or products that we license from them, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our success depends in large part on our and our licensors’ ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. We and our licensors have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties and are reliant on our licensors. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. If such licensors fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our licensors’ patent rights are highly uncertain. Our and our licensors’ pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

Assuming the other requirements for patentability are met, in the United States, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. We may become involved in opposition or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to or stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or

 

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shortly after such candidates are commercialized. For example, certain of the patents we exclusively license from Duke University expire in 2016. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we are reliant on them.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

We have research licenses to certain reagents and their use in the development of our product candidates. However, if our product candidates are approved for sale in the United States, we believe that commercial licenses to these reagents will be available. If we are unable to obtain any such commercial licenses, we may be unable to commercialize our product candidates until the patents in question have expired.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these

 

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claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. The types of protections available for trade secrets are particularly important with respect to our Arcelis platform’s manufacturing capabilities, which involve significant unpatented know-how. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

Our product candidates, including AGS-003, AGS-004, AGS-009 and AGS-010, and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third-party contract research organizations to assist

 

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us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

The process of obtaining regulatory approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. To date, the FDA has only approved one active cellular immunotherapy product. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.

Failure to obtain regulatory approval in international jurisdictions would prevent our product candidates from being marketed abroad.

We intend to enter into arrangements with third parties under which they would market our products outside the United States. In order to market and sell our products in the European Union and many other jurisdictions, we or such third parties must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.

Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, cGTP requirements, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product candidate is granted, the approval may be subject to

 

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limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved label. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing.

In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

   

restrictions on such products, manufacturers or manufacturing processes;

 

   

restrictions on the marketing of a product;

 

   

restrictions on product distribution;

 

   

requirements to conduct post-marketing clinical trials;

 

   

warning or untitled letters;

 

   

withdrawal of the products from the market;

 

   

refusal to approve pending applications or supplements to approved applications that we submit;

 

   

recall of products;

 

   

fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of regulatory approvals;

 

   

refusal to permit the import or export of our products;

 

   

product seizure; or

 

   

injunctions or the imposition of civil or criminal penalties.

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

   

the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

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the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

   

the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

   

the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

   

analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction

 

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initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with health care practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

With the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCIA, as part of the Health Care Reform Law, an abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The new abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be submitted to the FDA until four years, or approved by the FDA until 12 years, after the original brand product identified as the reference product was approved under a BLA. The new law is complex and is only beginning to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning is subject to uncertainty. While it is uncertain when any such processes may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

We believe that if any of our product candidates were to be approved as biological products under a BLA, such approved products should qualify for the four-year and 12-year periods of exclusivity. However, there is a risk that the U.S. Congress could amend the BPCIA to significantly shorten these exclusivity periods as proposed by President Obama, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

 

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Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on Jeffrey Abbey, our President and Chief Executive Officer, Charles Nicolette, our Vice President of Research and Development and Chief Scientific Officer, and Fred Miesowicz, our Vice President of Manufacturing and Chief Operating Officer, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with each of our executive officers, these agreements do not prevent our executives from terminating their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our research, development and commercialization objectives.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

We expect to expand our development, regulatory, manufacturing and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs, manufacturing and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to Our Common Stock and This Offering

After this offering, our executive officers, directors and principal stockholders will maintain the ability to control all matters submitted to stockholders for approval.

Upon the closing of this offering, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately    % of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

 

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Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

   

establish a classified board of directors such that not all members of the board are elected at one time;

 

   

allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

   

limit the manner in which stockholders can remove directors from the board;

 

   

establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

 

   

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

   

limit who may call stockholder meetings;

 

   

authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

   

require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, you will experience immediate dilution of $            per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately    % of the aggregate price paid by all purchasers of our stock but will own only approximately    % of our common stock outstanding after this offering.

 

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An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock listed on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

   

the success of competitive products or technologies;

 

   

results of clinical trials of our product candidates or those of our competitors;

 

   

regulatory or legal developments in the United States and other countries;

 

   

developments or disputes concerning patents or other proprietary rights;

 

   

the recruitment or departure of key personnel;

 

   

the level of expenses related to any of our product candidates or clinical development programs;

 

   

the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;

 

   

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

   

variations in our financial results or those of companies that are perceived to be similar to us;

 

   

changes in the structure of healthcare payment systems;

 

   

market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

 

   

general economic, industry and market conditions; and

 

   

the other factors described in this “Risk Factors” section.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

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Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding              shares of common stock based on the number of shares outstanding as of June 30, 2011. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares,              shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of              shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this prospectus include, among other things, statements about:

 

   

our expectations related to the use of proceeds from this offering;

 

   

the progress and timing of our development and commercialization activities;

 

   

the timing and conduct of our planned pivotal phase 3 combination therapy clinical trial of AGS-003 and sunitinib and of our clinical trials of our other product candidates, including statements regarding the timing of commencement and completion of enrollment in our pivotal phase 3 combination therapy clinical trial of AGS-003 and sunitinib, our phase 2b clinical trial of AGS-004 for the treatment of HIV and our potential phase 1b clinical trial of AGS-009, the timing of completion of our pivotal phase 3 clinical trial of AGS-003 and the clinical trials of our other product candidates and the period during which the results of such trials will become available;

 

   

our ability to obtain U.S. and foreign marketing approval for AGS-003 and our other product candidates and the ability of these product candidates to meet existing or future regulatory standards;

 

   

the potential benefits of our Arcelis platform, our Arcelis-based product candidates and our other product candidates;

 

   

our ability to identify, lease, build out and equip a new U.S. commercial manufacturing facility and supply on a commercial scale our Arcelis-based products;

 

   

our intellectual property position;

 

   

the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our product candidates;

 

   

our ability to establish and maintain partnerships for development and commercialization of our product candidates; and

 

   

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing, including the costs of our planned pivotal phase 3 combination therapy clinical trial of AGS-003 and sunitinib, the costs of leasing, building out and equipping a new U.S. commercial manufacturing facility and the costs of producing Arcelis-based products at such facility.

We have based these forward-looking statements largely on our current plans, intentions, expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included

 

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in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data. This prospectus also includes data based on our own internal estimates. While we believe that our internal company research is reliable and that our internal estimates are reasonable, no independent source has verified such research or estimates.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of             shares of our common stock in this offering will be approximately $             million, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $             million.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds from this offering by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to devote approximately $             of the net proceeds from this offering to fund the direct costs of our planned pivotal phase 3 combination therapy clinical trial of AGS-003 and to use the balance for other general corporate purposes. We will also plan to use $200,000 of the net proceeds to pay a success fee to a former lender under a loan agreement that we have previously repaid in full.

This expected use of the net proceeds from this offering and our existing cash and cash equivalents represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development and commercialization efforts, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties for our product candidates, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We have no current understandings, agreements or commitments for any material acquisitions or licenses of any products, businesses or technologies.

We expect that the net proceeds from this offering will be sufficient to enable us to substantially complete the planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib. However, it is possible that we will not achieve the progress that we expect because the actual costs and timing of development, particularly clinical trials, are difficult to predict and subject to substantial risks and delays. We do not expect that the net proceeds from this offering will be sufficient to enable us to fund our planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility, which we will need to have completed in order to submit to the FDA a BLA for AGS-003 and to manufacture AGS-003 or any of our Arcelis-based products on a commercial scale. Although we do not expect the net proceeds from this offering to be sufficient to enable us to fund any clinical trials of any of our other product candidates, we are planning to commence enrollment in a phase 1b clinical trial of AGS-009 in the fourth quarter of 2011 if the results of our phase 1a clinical trial justify proceeding with the trial. We plan to seek a partner for funding the trial and for the further development and commercialization of AGS-009, but would initiate this trial even if we have not secured a partner at the time this trial is scheduled to begin.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends to holders of our common stock in the foreseeable future.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of March 31, 2011, as follows:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect:

 

   

the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 157,871,415 shares of our common stock upon the closing of this offering;

 

   

the receipt in July 2011 of gross proceeds of $3.5 million upon the issuance and sale of the July 2011 convertible notes;

 

   

the automatic conversion of all principal and accrued interest on our outstanding convertible notes, including the 2010 convertible notes and the July 2011 convertible notes, upon the closing of this offering, into an aggregate of             shares of our common stock, at the initial public offering price, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurs on                     , 2011;

 

   

the issuance of an aggregate of             shares of our common stock upon the automatic exercise of outstanding warrants to purchase shares of our series C preferred stock by net exercise at an exercise price of $0.01 per share upon the closing of this offering, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

 

   

the restatement of our certificate of incorporation upon the closing of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to:

 

   

our issuance and sale of             shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and

 

   

the expected issuance of an aggregate of 4,609,457 shares of our common stock to specified holders of the capital stock of DC Bio in exchange for their shares of DC Bio upon the closing of this offering.

 

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Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

 

     March 31, 2011  
     Actual     Pro Forma      Pro Forma
As Adjusted
 
           (Unaudited)         
     (In thousands, except share data)  

Cash, cash equivalents and short-term investments

   $ 3,046      $         $            
                         

Convertible term note including accrued interest

     4,580        

Warrant liability

     3,198        

Redeemable convertible preferred stock

     79,986        

Stockholders’ deficit

       

Common stock, $0.001 par value, 250,760,000 shares authorized; and 12,849,491 shares issued and outstanding, actual;          shares authorized and          shares issued and outstanding, pro forma;          shares issued and outstanding, pro forma as adjusted

     13        

Equity attributable to noncontrolling interest

     3,017        

Additional paid-in capital

     26,739        

Accumulated other comprehensive income

     91        

Deficit accumulated during the development stage

     (111,180     
                         

Total stockholders’ deficit

     (81,320     
                         

Total capitalization

   $ 6,444      $                $     
                         

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The table above does not include:

 

   

24,444,612 shares of our common stock issuable upon the exercise of stock options outstanding as of March 31, 2011 at a weighted average exercise price of $0.09 per share;

 

   

12,952,490 additional shares of our common stock available for future issuance as of March 31, 2011 under our 2008 plan;

 

   

additional shares of our common stock that will be available for future issuance, upon the closing of this offering, under our 2011 plan; and

 

   

42,117 shares of common stock issuable upon exercise of warrants outstanding as of March 31, 2011, other than the warrants to purchase shares of our series C preferred stock described above, at a weighted average exercise price of $19.60 per share.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book value as of March 31, 2011 was $            million, or $            per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding.

Our pro forma net tangible book value as of March 31, 2011 was $             million, or $             per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding after giving effect to:

 

   

the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 157,871,415 shares of our common stock upon the closing of this offering;

 

   

the automatic conversion of all principal and accrued interest on our outstanding convertible notes, including the 2010 convertible notes and the July 2011 convertible notes, upon the closing of this offering, into an aggregate of            shares of our common stock, at the initial public offering price, assuming an initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurs on                 , 2011; and

 

   

the issuance of an aggregate of            shares of our common stock upon the automatic exercise of outstanding warrants to purchase shares of our series C preferred stock by net exercise at an exercise price of $0.01 per share upon the closing of this offering, assuming an initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

After giving effect to our issuance and sale of            shares of our common stock in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and to the expected issuance of an aggregate of 4,609,457 shares of our common stock to specified holders of the capital stock of DC Bio in exchange for their shares of DC Bio upon the closing of this offering, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been $            million, or $            per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $            to existing stockholders and immediate dilution of $            per share in pro forma as adjusted net tangible book value to new investors purchasing shares of common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $     

Historical net tangible book value per share as of March 31, 2011

   $        

Increase per share attributable to the assumed conversion of outstanding preferred stock and convertible notes and exercise of warrants to purchase our series C preferred stock

     
           

Pro forma net tangible book value per share as of March 31, 2011

     
           

Increase in net tangible book value per share attributable to new investors

     
           

Pro forma as adjusted net tangible book value per share after giving effect to this offering and the expected issuance of shares of our common stock to shareholders of DC Bio

      $     
           

Dilution per share to new investors

      $     
           

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) our pro forma as adjusted net tangible book value by approximately $            , our pro forma as adjusted net tangible book value per share by approximately $            and dilution per share to new investors by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option or if any additional shares are issued in connection with outstanding options or warrants, you will experience further dilution.

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2011, the total number of shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by new investors in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number    Percentage     Amount      Percentage    

Existing stockholders

                       $                          $                

New investors

            
                                

Total

        100   $                      100  
                                

A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the total consideration paid by new investors by $            million and increase (decrease) the percentage of total consideration paid by new investors by approximately            %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The table and calculations set forth above are based on actual shares outstanding as of March 31, 2011 and include:

 

   

157,871,415 shares of our common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering;

 

   

            shares of our common stock issuable upon the automatic conversion of all principal and accrued interest on our outstanding convertible notes, including the 2010 convertible notes and the July 2011 convertible notes, upon the closing of this offering, at the initial public offering price, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurs on                      , 2011;

 

   

            shares of our common stock upon the automatic exercise of outstanding warrants to purchase shares of our series C preferred stock by net exercise at an exercise price of $0.01 per share upon the closing of this offering, assuming an initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and

 

   

4,609,457 shares of our common stock issuable to specified holders of the capital stock of DC Bio in exchange for their shares of DC Bio upon the closing of this offering.

The table above excludes:

 

   

24,444,612 shares of our common stock issuable upon the exercise of stock options outstanding as of March 31, 2011 at a weighted average exercise price of $0.09 per share;

 

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12,952,490 additional shares of our common stock available for future issuance as of March 31, 2011 under our 2008 plan;

 

   

additional shares of our common stock that will be available for future issuance, upon the closing of this offering, under our 2011 plan; and

 

   

42,117 shares of common stock issuable upon exercise of warrants outstanding as of March 31, 2011, other than the warrants to purchase shares of our series C preferred stock described above, at a weighted average exercise price of $19.60 per share.

If the underwriters exercise their over-allotment option in full, the following will occur:

 

   

the percentage of shares of our common stock held by existing stockholders will decrease to approximately    % of the total number of shares of our common stock outstanding after this offering; and

 

   

the number of shares of our common stock held by new investors will increase to            , or approximately     % of the total number of shares of our common stock outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 from our audited consolidated financial statements included in this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 from our audited consolidated financial statements not included in this prospectus. We have derived the consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 from our unaudited consolidated financial statements included in this prospectus. The unaudited consolidated financial data include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year.

 

    Year Ended December 31,     Quarter
Ended

March 31,
2010
    Quarter
Ended
March 31,
2011
    Cumulative
Period from
Inception
(May 8, 1997) to

March 31,
2011
 
    2006     2007     2008     2009     2010        
                                  (unaudited)     (unaudited)     (unaudited)  

Statements of Operations Data:

               

Revenue

  $ 19,281,301      $ 5,158,789      $ 4,449,735      $ 5,367,989      $ 7,272,783      $ 1,116,716      $ 2,232,225      $ 69,955,359   
                                                               

Operating expenses

               

Research and development

    18,659,920        18,378,771        22,042,597        19,543,966        13,927,662        3,843,577        3,054,488        166,035,698   

Net reimbursement under collaboration agreement

    (8,254,848     (7,615,181     (8,127,428     (6,626,989                          (47,179,130
                                                               

Net research and development

    10,405,072        10,763,590        13,915,169        12,916,977        13,927,662        3,843,577        3,054,488        118,856,568   

General and administrative

    2,118,071        3,001,774        2,852,375        2,931,599        2,704,231        961,431        710,018        33,415,488   
                                                               

Total operating expenses

    12,523,143        13,765,364        16,767,544        15,848,576        16,631,893        4,805,008        3,764,506        152,272,056   
                                                               

Operating income (loss)

    6,758,158        (8,606,575     (12,317,809     (10,480,587     (9,359,110     (3,688,292     (1,532,281     (82,316,697
                                                               

Other income (expense)

               

Interest income

    826,747        586,829        250,698        73,746        4,976        2,861        443        4,092,534   

Interest expense

    (419,680     (920,265     (632,677     (283,417     (904,233     (22,638     (909,901     (6,472,253

Derivative financing expense

    46,919        2,489,108        (756,789            298,009                      (981,185

Investment tax credits

           503,737        666,933        103,549        793,006                      2,067,225   

Loss on sale of marketable securities

                                                     (10,242,252
                                                               

Other income (expense), net

    453,986        2,659,409        (471,835     (106,122     191,758        (19,777     (909,458     (11,535,931
                                                               

Net income (loss)

    7,212,144        (5,947,166     (12,789,644     (10,586,709     (9,167,352     (3,708,069     (2,441,739     (93,852,628

Net income (loss) attributable to noncontrolling interest

    628,188        333,744        136,643        (654,760     (172,598     (79,366     (13,421     (710,481
                                                               

Net income (loss) attributable to Argos Therapeutics, Inc.

    6,583,956        (5,613,422     (12,926,287     (9,931,949     (8,994,754     (3,628,703     (2,428,318     (93,142,147

Less: Accretion of redeemable convertible preferred stock

    36,865        (141,768     (395,666     (101,206     (101,206     (25,302     (25,302     (29,147,080
                                                               

Net income (loss) attributable to common stockholders

  $ 6,620,821      $ (5,760,190   $ (13,321,953   $ (10,033,155   $ (9,095,960   $ (3,654,005   $ (2,453,620   $ (122,289,227
                                                               

Basic and diluted net loss attributable to common stockholders per share

  $ 176.00      $ (1,433.60   $ (153.81   $ (62.78   $ (2.23   $ (18.55   $ (0.19  
                                                         

Basic and diluted weighted average shares outstanding

    4,013        4,018        86,615        159,825        4,081,649        196,976        12,849,491     
                                                         

 

 

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     December 31,     March 31,
2011
 
     2006     2007     2008     2009     2010    
                                   (unaudited)  

Balance Sheet Data:

            

Cash, cash equivalents, and short-term investments

   $ 15,611,833      $ 7,623,969      $ 23,654,667      $ 10,585,433      $ 5,141,965      $ 3,045,585   

Total assets

     20,105,425        13,216,426        28,631,528        14,262,994        10,641,781        8,577,842   

Convertible term note including accrued interest

     4,145,115        4,387,101                      3,669,858        4,579,655   

Warrant liability

                                 3,197,626        3,197,626   

Long-term portion of notes payable

     1,996,716        3,938,697        1,214,780        4,317                 

Redeemable convertible preferred stock

     71,023,862        71,223,218        88,779,980        88,881,186        79,640,412        79,985,714   

Deficit accumulated during the development stage

     (70,119,487     (76,564,573     (89,824,604     (99,756,553     (108,751,307     (111,179,625

Total stockholders’ deficit

   $ (70,489,214   $ (73,797,553   $ (69,040,663   $ (79,034,936   $ (78,936,784   $ (81,319,991

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this prospectus. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Using biological components obtained from each patient, our Arcelis-based immunotherapies employ a specialized white blood cell, called a dendritic cell, to activate an immune response that is specific to the patient’s disease. Our most advanced product candidate is AGS-003 for the treatment of mRCC. We plan to initiate patient enrollment in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib, an oral small molecule drug marketed under the trade name Sutent that is the current standard of care for mRCC, in the fourth quarter of 2011. We are also developing a second Arcelis-based product candidate, AGS-004 for the treatment of HIV. We are studying AGS-004 in a phase 2b clinical trial that is funded entirely by the NIH. In addition to our Arcelis-based product candidates, we are also developing two other product candidates based on our expertise in dendritic cell biology: AGS-009, a monoclonal antibody for the treatment of lupus, which we are studying in a phase 1a clinical trial, and AGS-010, a preclinical biologic compound, which we are developing for the treatment of psoriasis and for organ transplantation.

We have tested AGS-003 in clinical trials as a monotherapy and in combination with sunitinib for the treatment of mRCC. We have submitted to the FDA for review a protocol for our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib plus placebo. We expect to complete enrollment of this trial in late 2013 and have data on the primary endpoint in mid-2014. To prepare for the commercial launch of AGS-003 and any other Arcelis-based products we develop, we plan to establish automated manufacturing processes based on existing functioning prototypes of automated devices and disposables and to identify, lease, build out and equip a new U.S. commercial manufacturing facility for this purpose. Our plan is to file our BLA for AGS-003 with the FDA using the automated manufacturing processes that we have developed.

We have devoted substantially all of our resources to our drug development efforts, including advancing our Arcelis platform, conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue from product sales and, to date, have funded our operations primarily through the private placement of convertible preferred stock and convertible debt, bank debt, government contracts, grants and license and collaboration agreements. From inception in May 1997 through March 31, 2011, we raised a total of $193.3 million, including:

 

   

$88.9 million from the sale of common stock, convertible debt, warrants and convertible preferred stock, including the convertible preferred stock sold by our 49.95% owned subsidiary, DC Bio. A description of DC Bio and the put right held by shareholders of DC Bio is set forth under “— Financial Overview-Derivative Financing Income (Expense);”

 

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$32.9 million from the licensing of our technology; and

 

   

$71.5 million from government contracts, grants and license and collaboration agreements.

We have incurred losses in each year since our inception in May 1997. Our net losses, after attribution to the noncontrolling interest in DC Bio, were approximately $12.9 million, $9.9 million and $9.0 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $3.6 million and $2.4 million for the three months ended March 31, 2010 and 2011, respectively. As of March 31, 2011, we had an accumulated deficit of approximately $111.2 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

 

   

initiate or continue our clinical trials of AGS-003 and our other product candidates;

 

   

seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

   

lease, build out and equip a new U.S. commercial facility for the manufacture of AGS-003 and our other Arcelis-based products;

 

   

establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

continue our other research and development efforts;

 

   

hire additional clinical, quality control, scientific and management personnel; and

 

   

add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.

We do not expect to generate significant funds or product revenue, other than under our contract with the NIH as described below, unless and until we successfully complete development and obtain marketing approval for our product candidates, either alone or in collaboration with third parties, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of any of AGS-003 or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through a combination of equity offerings, debt financings, government funding, grant funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds through equity offerings, debt financings, government funding, grant funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements when needed, on favorable terms or at all.

In September 2006, we entered into a multi-year research contract with the NIH and the National Institute of Allergy and Infectious Diseases, or NIAID, to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We are developing AGS-004 under this contract. Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $29.9 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $28.5 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This commitment extends until May 2013. In September 2010, the NIH agreed to make a $2.0 million one-time payment to us as a true-up in connection with an

 

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agreement as to our indirect cost rates for allocated overhead and general and administrative expenses. The true-up reflects the difference between the provisional indirect cost rates originally provided for in the NIH contract and the negotiated indirect cost rates agreed upon in September 2010 for the years 2006 through 2009 and the eight-month period ended August 31, 2010. The $2.0 million true-up is included in the $29.9 million commitment. We have recorded revenue of $18.0 million through March 31, 2011 under the NIH contract. This contract is the only arrangement under which we currently generate revenue. As of March 31, 2011, there was up to approximately $11.9 million of potential revenue remaining to be earned under the agreement with the NIH.

In July 2011, we issued and sold convertible notes in the aggregate original principal amount of $3.5 million. We refer to these notes as the July 2011 convertible notes. As of March 31, 2011, we had $6.3 million of principal and interest outstanding under convertible notes that we issued in 2010 and that we refer to as the 2010 convertible notes. We expect that the principal and accrued interest under both issues of these convertible notes will convert into common stock upon the closing of this offering.

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products. All of our revenue has been derived from government contracts, grants and payments from license and collaboration agreements. These government contract payments, grants and payments from license and collaboration agreements have provided us $70.0 million in revenue from inception to March 31, 2011. We may generate revenue in the future from government contracts, grants, payments from future license or collaboration agreements and product sales. We expect that any revenue we generate will fluctuate from quarter to quarter.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

   

salaries and related expenses for personnel in research and development functions;

 

   

fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

 

   

allocation of facility lease and maintenance costs;

 

   

depreciation of leasehold improvements, laboratory equipment and computers;

 

   

costs related to production of product candidates for clinical trials;

 

   

costs related to compliance with regulatory requirements;

 

   

consulting fees paid to third parties related to non-clinical research and development;

 

   

costs related to stock options or other stock-based compensation granted to personnel in research and development functions; and

 

   

acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies.

 

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From inception through March 31, 2011, we have incurred $166.0 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of AGS-003 and to further advance our other product candidates.

The table below summarizes our direct research and development expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs, including in connection with our clinical trials, and related clinical trial fees. We have been developing AGS-003, AGS-004, AGS-009 and AGS-010 in parallel, and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate salaries, stock-based compensation, employee benefit or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table.

 

     Years Ended December 31,      Three
Months
Ended
March 31,
2010
     Three
Months
Ended
March 31,
2011
 
     2008      2009      2010        
     (in thousands)  

Direct research and development expense by program:

              

AGS-003

   $ 2,531       $ 1,890       $ 908       $ 241       $ 232   

AGS-004

     4,060         3,624         3,117         194         636   

AGS-009

                     516         3         191   

AGS-010

     1,785         3,309         1,117         631         36   
                                            

Total direct research and development expense

     8,376         8,823         5,658         1,069         1,095   

Indirect research and development expense

     13,667         10,721         8,270         2,775         1,959   
                                            

Total research and development expense

   $ 22,043       $ 19,544       $ 13,928       $ 3,844       $ 3,054   
                                            

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

   

the scope, rate of progress and expense of our ongoing, as well as any additional clinical trials and other research and development activities;

 

   

future clinical trial results; and

 

   

the timing of regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

AGS-003.    We plan to initiate patient enrollment in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib in the fourth quarter of 2011. We estimate that the direct costs that we will incur in connection with conducting the planned pivotal phase 3 clinical trial will total approximately $             million.

 

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AGS-004.    We are currently conducting a phase 2b clinical trial of AGS-004 that is funded entirely by the NIH. We initiated enrollment in this trial in July 2010. We expect to complete enrollment in this trial in the fourth quarter of 2011 and to complete primary endpoint analysis of the data from this trial in mid-2012. We plan to proceed with further clinical development of AGS-004 following completion of the phase 2b clinical trial if the results of our ongoing phase 2b clinical trial justify proceeding and we are able to obtain government or other third-party funding for such efforts.

AGS-009.    In July 2011, we completed enrollment in a phase 1a trial of AGS-009, a monoclonal antibody for the treatment of lupus. We initiated enrollment in this trial in the fourth quarter of 2009. We are planning to commence enrollment in a phase 1b clinical trial of this product candidate in the fourth quarter of 2011 if the results of our phase 1a clinical trial justify proceeding with the trial. We plan to seek a partner for funding this trial and for the further development and commercialization of AGS-009, but would initiate this trial even if we have not secured a partner at the time this trial is scheduled to begin.

AGS-010.    We are continuing preclinical testing on AGS-010, a recombinant human soluble CD83 protein. We plan to seek a partner for the continued development and commercialization of AGS-010.

Net Reimbursement Under Collaboration Agreement

We have recorded reimbursements of certain research and development costs as a reduction of expense in a separate line item within the statement of operations. We record these reimbursements when received. We received these reimbursements under a collaboration and licensing agreement with Kirin. Under our agreement with Kirin, which we entered into in 2004 and was terminated effective December 31, 2009, we and Kirin had agreed to share all related worldwide research and development costs and profits relating to the development of AGS-003 and AGS-004. Under the Kirin agreement, Kirin had agreed to reimburse us on a quarterly basis for our direct costs and services related to specified development and manufacturing activities and for allocated internal time at a designated full time equivalent rate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, operational and finance, information technology and human resources functions. Other significant general and administrative expenses include allocation of facilities costs, professional fees for accounting and legal services and expenses associated with obtaining and maintaining patents.

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash and cash equivalents. We expect our interest income to increase following this offering as we invest the net proceeds from this offering pending their use in our operations.

Interest expense consists primarily of cash and non-cash interest costs related to our debt.

 

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As of March 31, 2011, we had $6.3 million in principal and accrued interest outstanding under the 2010 convertible notes that we issued in the original aggregate principal amount of $6.0 million in September and December 2010. These notes bear interest at a rate of 10.0% per annum. These notes had an original maturity date of September 15, 2011. The maturity date was extended to December 31, 2011 in connection with the issuance of the July 2011 convertible notes. We issued warrants to purchase a total of 20,759,953 shares of series C preferred stock at an exercise price of $0.01 per share in connection with the issuance of the 2010 convertible notes. We allocated $3.2 million of the proceeds from the issuance and sale of the convertible notes to the warrants based on the warrants’ fair value and recorded this amount on the balance sheet as warrant liability. We recorded the remaining $2.8 million in proceeds on the balance sheet as the convertible note liability. At March 31, 2011, the 2010 convertible notes are valued at $4.6 million, and the remaining $1.4 million in principal and $0.6 million in interest will be recorded as interest expense such that the value will equal $6.6 million at maturity. We expect that the principal and accrued interest on the 2010 convertible notes and the July 2011 convertible notes will convert to common stock upon the closing of this offering. At such time, the convertible note liability will be converted to additional paid in capital and common stock.

We entered into a loan agreement with a lending institution in December 2000, which we subsequently amended in November 2002, November 2004 and November 2005. We borrowed an aggregate of $5.1 million under the loan agreement at interest rates between 9.76% and 11.00%. We repaid all amounts outstanding under this agreement in April 2011.

We entered into a loan agreement in April 2007 with two lending institutions under which we borrowed $5.0 million at an interest rate of 11.25%. We repaid all amounts outstanding under this agreement in full in April 2010.

Accretion of Preferred Stock

Our convertible preferred stock is reflected on our balance sheet at its cost, less associated issuance costs. The convertible preferred stock is redeemable at the option of the holders beginning in March 2013 for an aggregate price equal to $33.1 million. The amount reflected on the balance sheet for our convertible preferred stock is increased by periodic accretions of the issuance costs so that the original amount reflected on the balance sheet will equal the aggregate redemption price.

Derivative Financing Income (Expense)

We own 49.95% of the capital of DC Bio. We consolidate the results of DC Bio in our financial statements. The other shareholders’ ownership in DC Bio is reflected in our financial statements by reference to the equity attributable to noncontrolling interest.

Under an amended and restated put agreement with the other shareholders of DC Bio, holders of Common, Class A preferred and Class B preferred shares of DC Bio have the right to put those shares to us in exchange for shares of our common stock, series B preferred stock and series C preferred stock at any time on or after March 31, 2011. We recorded a liability of $0.9 million on our balance sheet at March 31, 2011 reflecting the fair value of the put, which we calculated based on the estimated fair market value of the shares of our common stock, series B preferred stock and series C preferred stock issuable in exchange for shares of DC Bio.

We expect that the shares of DC Bio will be exchanged for shares of our common stock upon the closing of this offering. Upon such conversion, DC Bio would become a wholly-owned subsidiary of our company.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these consolidated financial statements

 

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requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing at the end of this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification 605, Revenue Recognition, or ASC 605. We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

We have previously entered into license agreements with collaborators. The terms of these agreements have included nonrefundable signing and licensing fees, as well as milestone payments and royalties on any future product sales developed by the collaborators under our licenses. We assess these multiple elements in accordance with ASC 605, in order to determine whether particular components of the arrangement represent separate units of accounting.

We recognize upfront license payments as revenue upon delivery of the license only if the license has stand-alone value and the fair value of the undelivered performance obligations can be determined. If the fair value of the undelivered performance obligations can be determined, such obligations are accounted for separately as the obligations are fulfilled. If the license is considered to either not have stand-alone value or have stand-alone value but the fair value of any of the undelivered performance obligations cannot be determined, the arrangement is accounted for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed.

Whenever we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized. If we cannot reasonably estimate the timing and the level of effort to complete our performance obligations under the arrangement, then we recognize revenue under the arrangement on a straight-line basis over the period that we expect to complete our performance obligations.

Our collaboration agreements may also contain milestone payments. Revenues from milestones, if they are non-refundable and considered substantive, are recognized upon successful accomplishment of the milestones. If not considered substantive, milestones are initially deferred and recognized over the remaining performance obligation.

To date, we have not received any royalty payments and accordingly have not recognized any related revenue. We will recognize royalty revenue upon the sale of the related products, provided we have no remaining performance obligations under the arrangement.

We record deferred revenue when payments are received in advance of the culmination of the earnings process. This revenue is recognized in future periods when the applicable revenue recognition criteria have been met.

 

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Under our NIH contract, we receive reimbursement of our direct expenses and allocated overhead and general and administrative expenses and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. We recognize revenue from reimbursements earned in connection with the NIH contract as reimbursable costs are incurred. We recognize revenues from the achievement of milestones under the NIH contract upon the accomplishment of any such milestone.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

 

   

fees paid to CROs in connection with clinical trials;

 

   

fees paid to investigative sites in connection with clinical trials;

 

   

professional service fees; and

 

   

unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not anticipate the future settlement of existing accruals to differ materially from our estimates.

Valuation of Financial Instruments

Preferred Stock Warrant Liability

We account for our preferred stock warrants in accordance with ASC Topic 480-10, Distinguishing Liabilities from Equity, which requires that a financial instrument, other than an outstanding share, that, at inception, includes an obligation to repurchase the issuer’s equity shares regardless of the timing or likelihood of the redemption, shall be classified as a liability. We measure the fair value of the warrant liability using an option-pricing model. We record changes in fair value of the warrants as interest income or expense.

The significant assumptions we use in estimating the fair value of the warrant liability include the strike price, estimate for volatility, risk free interest rate, estimated fair value of the preferred stock, and the estimated life of the warrant. Changes to these assumptions will impact the value of the warrant liability and earnings.

 

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Upon the closing of this offering, our warrants to purchase preferred stock will automatically be exercised for shares of our common stock. At such time, the warrant liability will be converted to additional paid in capital and common stock.

Stock-Based Compensation

In accordance with ASC 718, Stock Compensation, we record the fair value of stock options, restricted stock awards and other stock-based compensation issued to employees as of the grant date as compensation expense. We typically recognize compensation expense over the requisite service period, which is the vesting period. For non-employees, we also record stock options, restricted stock awards and other stock-based compensation issued to these non-employees at their fair value as of the grant date. We then periodically remeasure the awards to reflect the current fair value at each reporting period and recognize expense over the related service period.

Stock-based compensation expense includes stock options granted to employees and non-employees and has been reported in our statements of operations as follows:

 

     Years Ended December 31,      Three
Months
Ended
March 31,
2010
     Three
Months
Ended
March 31,
2011
 
          
          
          
         2008              2009              2010            
     (in thousands)  

Research and development

   $ 409       $ 286       $ 109       $ 70       $ 27   

General and administrative

     265         207         215         60         55   
                                            

Total

   $ 674       $ 493       $ 324       $ 130       $ 82   
                                            

We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions, including stock price volatility, the expected life of stock options, risk free interest rate and the fair value of the underlying common stock on the date of grant.

 

   

We do not have sufficient history to estimate the volatility of our common stock price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, we consider characteristics such as industry, length of trading history, similar vesting terms and in-the-money option status. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants.

 

   

The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future.

 

   

We determine the average expected life of stock options based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future behavior.

 

   

We determine the risk-free interest rate by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant.

 

   

We estimate forfeitures based on our historical analysis of actual stock option forfeitures.

 

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The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2008, 2009, and 2010, and for the three months ended March 31, 2011, are set forth below:

 

     Years Ended December 31,     Three
Months
Ended
March 31,
2011
 
      
      
      
         2008             2009             2010        

Volatility

     70.00     81.00     82.00     82.00

Expected term (in years)

     7        7        7        7   

Risk-free interest rate

     3.32     3.21     2.64     2.92

Dividend yield

     0.00     0.00     0.00     0.00

The following table presents the grant dates, number of underlying shares and related exercise prices of stock options granted to employees from January 1, 2010 through March 31, 2011, as well as the estimated fair value of the stock options and the underlying common stock on the grant date.

 

Date of Grant

   Number of
Shares
Subject
To Options
Granted
     Exercise
Price
Per Share
     Estimated
Fair
Value of
Common
Stock at
Grant
Date
 

July 1, 2010

     188,326       $ 0.07       $ 0.07   

December 10, 2010

     9,808,681       $ 0.08       $ 0.15 (1) 

February 28, 2011

     1,670,399       $ 0.08       $ 0.15 (2) 

March 30, 2011

     53,547       $ 0.08       $ 0.15 (2) 

 

(1) Fair value of common stock at grant date was adjusted in connection with our reassessment of fair value for financial reporting purposes. See “— Stock Option Grants on December 10, 2010.”
(2) Fair value of common stock at grant date was adjusted in connection with our reassessment of fair value for financial reporting purposes. See “—Stock Option Grants on February 28, 2011 and March 30, 2011.”

The intrinsic value of all outstanding vested and unvested options as of March 31, 2011 is $             based on a per share price of $             for our common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, based on 24,444,612 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011 and a weighted average exercise price of $0.09 per share.

The estimated fair value of common stock per share in the table above represents the determination by our board of directors of the fair value of our common stock as of the date of grant, taking into consideration various objective and subjective factors, including the conclusions of valuations of our common stock, as discussed below.

Due to the absence of an active market for our common stock, the fair value of our common stock for purposes of determining the exercise price for stock option grants was determined by our board of directors, with the assistance and upon the recommendation of management, in good faith based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, including:

 

   

the prices at which we most recently sold our convertible preferred stock and the rights, preferences and privileges of the convertible preferred stock as compared to those of our common stock, including the liquidation preferences of the convertible preferred stock;

 

   

our results of operations, financial position and the status of our research and development efforts, including the status of clinical trials for our product candidates under development;

 

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the composition of, and changes to, our management team and board of directors;

 

   

the material risks related to our business;

 

   

achievement of enterprise milestones, including the results of clinical trials and our entry into or termination of collaboration and license agreements;

 

   

the market performance of publicly traded companies in the life sciences and biotechnology sectors, and recently completed mergers and acquisitions of companies comparable to us;

 

   

external market conditions affecting the life sciences and biotechnology industry sectors;

 

   

the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering, or IPO, given prevailing market conditions; and

 

   

valuations prepared by independent third party consultants.

Stock Option Grants on July 1, 2010

Our board of directors granted stock options on July 1, 2010, with each option having an exercise price of $0.07 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management, as well as a valuation as of December 31, 2009 performed by an independent third-party consultant, which valued our common stock at $0.07 per share.

In the December 31, 2009 valuation, we used the probability-weighted expected return method, or PWERM, to value our common stock. Although we did not rely on the market approach to determine our enterprise value, we did review the performance of a set of guideline comparable companies. Under the PWERM approach, share value is derived from the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. We calculated the implied enterprise value using the PWERM approach. The fair value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to common stockholders under several future stockholder exit or liquidity event scenarios:

 

   

an IPO;

 

   

a strategic merger or sale of our company at a high valuation;

 

   

a strategic merger or sale of our company at a lower valuation; or

 

   

the failure or dissolution of our company with no value to common stockholders.

In the December 31, 2009 valuation, probability weightings of 10.0% were used for the IPO scenario, 15.0% for a strategic merger or sale of our company at a high valuation, 15.0% for a strategic merger or sale of our company at a lower valuation and 60.0% for the failure or dissolution of our company with no value to common stockholders. The probability weightings assigned to the respective exit scenarios were primarily based on consideration of our various drug development programs, industry clinical success rates, our expected near-term and long-term funding requirements, and an assessment of the current financing and biotechnology industry environments at the time of the valuation. A discount for lack of marketability of 20.2% was applied.

 

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The board of directors then determined that the events and circumstances that occurred between December 31, 2009 and July 1, 2010 did not indicate a significant change in the fair value of our common stock during that period. The specific facts and circumstances considered by our board of directors for the July 1, 2010 valuation included the following:

 

   

Jeffrey Abbey was named chief executive officer in February 2010.

 

   

We completed dosing in our phase 2a trial of AGS-004 in the first half of 2010 and obtained trial results that justified proceeding with a phase 2b trial of this product candidate.

 

   

We had ceased enrollment in our phase 2 clinical trial of AGS-003 in combination with sunitinib in October 2009 in anticipation of Kirin’s termination of our collaboration agreement in December 2009.

 

   

We assumed sponsorship of the phase 1a clinical trial of AGS-009 from our then partner Novo following the termination of our agreement with Novo in June 2010.

 

   

In April 2010, the FDA approved the first active immunotherapy for the treatment of cancer — Dendreon Corporation’s Provenge (sipuleucel-T) for metastatic castrate-resistant prostate cancer.

Based on all of these factors, the board determined that the fair value of our common stock at July 1, 2010 was $0.07 per share.

Stock Option Grants on December 10, 2010

Our board of directors granted stock options on December 10, 2010, with each option having an exercise price of $0.08 per share. In connection with the preparation of our consolidated financial statements included in this prospectus, we determined that the fair value of the common stock subject to the option awards granted on December 10, 2010, as determined by our board of directors at the time of grant, was less than the valuations that prospective underwriters in this offering estimated could be obtained in an initial public offering in the later half of 2011, based on market and other conditions at the time. As a result, we determined in July 2011, subsequent to the date of these option grants and prior to filing the registration statement of which this prospectus is a part, that the awards granted on December 10, 2010 had a compensatory element. Accordingly, we reassessed the fair value of our common stock at December 10, 2010 for financial reporting purposes. In reassessing the fair value of our common stock, the board of directors considered the factors used in determining the July 1, 2010 fair value of our common stock, as well as the following facts and circumstances:

 

   

In July 2010, we commenced enrollment of patients in a phase 2b clinical trial of AGS-004.

 

   

In July 2010, the NIH and NIAID extended our contract to May 2013, with a total contract value of up to $27.9 million.

 

   

We re-started clinical testing of AGS-009 in a phase 1a trial in adult patients with mild to moderate lupus in the fourth quarter of 2010.

 

   

We sold convertible notes in the aggregate original principal amount of $6.0 million in September and December 2010.

 

   

We obtained final median progression free survival data from our phase 2 clinical trial of AGS-003 in combination with sunitinib.

Based on all of these factors, the board determined that the fair value of our common stock for financial reporting purposes at December 10, 2010 was $0.15 per share.

 

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Stock Option Grants on February 28, 2011 and March 30, 2011

Our board of directors granted stock options on February 28, 2011 and March 30, 2011, with each option having an exercise price of $0.08 per share. In connection with the preparation of our consolidated financial statements included in this prospectus, we determined that the fair value of the common stock subject to the option awards granted on February 28, 2011 and March 30, 2011, as determined by our board of directors at their respective times of grant, was less than the valuations that prospective underwriters in this offering estimated could be obtained in an initial public offering in the later half of 2011, based on market and other conditions at the time. As a result, we determined in July 2011, subsequent to the date of these option grants and prior to filing the registration statement of which this prospectus is a part, that the awards granted on these dates had a compensatory element. Accordingly, we reassessed the fair value of our common stock at February 28, 2011 and March 30, 2011 for financial reporting purposes. In reassessing the fair value of our common stock, the board of directors considered the factors used in determining the December 10, 2010 fair value of our common stock and determined that, overall, no significant events or other circumstances had occurred between December 10, 2010 and March 30, 2011 that would indicate that there was a significant change in the fair value of our common stock during that period.

Based on all of these factors, the board determined that the fair value of our common stock for financial reporting purposes at each of February 28, 2011 and March 30, 2011 was $0.15 per share.

The compensation charges reflected in our consolidated financial statements included in this prospectus reflect the reassessments of fair value that we conducted with respect to the December 10, 2010, February 28, 2011 and March 30, 2011 option grants.

There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance; the time to completing an IPO, a strategic merger or sale, or other liquidity event; and the timing and probability of continuing to successfully progress our various product candidates toward commercialization, as well as determinations of the appropriate valuation methods. If different assumptions had been applied in the valuations, our stock-based compensation expense, net loss and net loss per share could have been significantly different. While the assumptions used to calculate and account for stock-based compensation awards represents management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to the underlying assumptions and estimates, our stock-based compensation expense could vary significantly from period to period.

 

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Results of Operations

Comparison of the Three Months Ended March 31, 2011 and the Three Months Ended March 31, 2010

The following table summarizes the results of our operations for each of the three months ended March 31, 2010 and 2011, together with the changes in those items in dollars and as a percentage:

 

     Three Months
Ended March 31,
    Increase/
(decrease)
    %
Change
 
     2010     2011      
     (in thousands)  

Revenue

   $ 1,117      $ 2,232      $ 1,115        99.8 %

Operating expenses:

        

Research and development

     3,844        3,054        (790     (20.1 )%

General and administrative

     961        710        (251     (26.1 )%
                                

Total operating expenses

     4,805        3,764        (1,041     (21.7 )%
                                

Income (loss) from operations

     (3,688     (1,532     2,156        (58.5 )%

Interest income

     3               (3     (100.0 )%

Interest expense

     (23     (910     (887     3,856.5 %
                                

Net income (loss)

   $ (3,708   $ (2,442   $ 1,266        (34.1 )%
                                

Revenue

Revenue was $2.2 million for the three months ended March 31, 2011, compared to $1.1 million for the three months ended March 31, 2010, an increase of approximately $1.1 million, or 99.8%. The $1.1 million increase for the three months ended March 31, 2011 reflects increased reimbursement under our NIH contract associated with increased activity with respect to our phase 2b clinical trial of AGS-004 as we commenced patient enrollment in the trial in the third quarter of 2010 and an increase in the rates paid to us for allocated overhead and general and administrative costs under the NIH contract that was agreed to in September 2010. The increase also reflected our recognition of milestone revenue under the NIH contract totaling $0.5 million in the three months ended March 31, 2011. We did not recognize any milestone revenue in the three months ended March 31, 2010.

Research and Development Expenses

Research and development expenses were $3.1 million for the three months ended March 31, 2011, compared to $3.8 million for the three months ended March 31, 2010, a decrease of 20.1%. This decrease in research and development expense reflects a $0.8 million decrease in indirect research and development expense. The decrease in indirect research and development expense was due to a reduction in force that we conducted in February 2010 involving seven of our employees, including three members of management. Direct research and development expense remained constant over the periods.

 

   

Direct research and development expense for AGS-003 equaled $0.2 million in both the 2010 and 2011 periods. In the three months ended March 31, 2010, our research and development expense was related to the completion of our phase 2 combination therapy trial. In the three months ended March 31, 2011 we incurred clinical expenses in connection with the preparation and submission to the FDA of a protocol for our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib.

 

   

Direct research and development expense with respect to AGS-004 increased from $0.2 million in the three months ended March 31, 2010 to $0.6 million in the three months ended March 31, 2011 due to the continued enrollment in our phase 2b clinical trial of AGS-004 that we commenced in the third quarter of 2010.

 

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Direct research and development expense with respect to AGS-009 increased from $3,000 in the three months ended March 31, 2010 to $0.2 million in the three months ended March 31, 2011, reflecting the continued enrollment in our phase 1a clinical trial of AGS-009 that we commenced in the third quarter of 2010.

 

   

Direct research and development expense with respect to AGS-010 decreased from $0.6 million in the three months ended March 31, 2010 to $36,000 in the three months ended March 31, 2011, reflecting our determination to seek a partner for the further development and commercialization of AGS-010.

General and Administrative Expenses

General and administrative expenses were $0.7 million for the three months ended March 31, 2011, compared to $1.0 million for the three months ended March 31, 2010, a decrease of 26.1%. This decrease reflects $0.3 million of severance expense in the three months ended March 31, 2010 related to our 2010 reduction in force. This decrease was partially offset by an increase in legal patent expense in the three months ended March 31, 2011.

Interest Expense

Interest expense was $0.9 million for the three months ended March 31, 2011, compared to $23,000 for the three months ended March 31, 2010. This increase was due to the amortization of a warrant liability recorded to represent the fair market value of warrants and accrual of interest on the 2010 convertible notes issued in September and December 2010. We expect to incur an additional $2.0 million in interest expense in respect of the 2010 convertible notes from March 31, 2011 through December 31, 2011, the maturity date of the 2010 convertible notes. We also expect to incur additional interest expense in 2011 in respect of the July 2011 notes and the associated warrants.

Comparison of the Year Ended December 31, 2010 and the Year Ended December 31, 2009

The following table summarizes the results of our operations for the years ended December 31, 2009 and 2010, together with the changes in those items in dollars and as a percentage:

 

     Year Ended
December 31,
    Increase/
(decrease)
    %
Change
 
     2009     2010      
     (in thousands)  

Revenue

   $ 5,368      $ 7,273      $ 1,905        35.5 %

Operating expenses:

        

Research and development

     19,544        13,928        (5,616     (28.7 )%

Net reimbursement under collaboration

     (6,627            6,627        (100.0 )% 

General and administrative

     2,932        2,704        (228     (7.8 )%
                                

Total operating expenses

     15,849        16,632        783        4.9 %
                                

Income (loss) from operations

     (10,481     (9,359     1,122        (10.7 )%

Interest income

     74        5        (69     (93.2 )% 

Interest expense

     (283     (904     (621     219.4 %

Derivative financing income

            298        298        100.0 %

Investment tax credits

     103        793        690        669.9 %
                                

Net income (loss)

   $ (10,587 )   $ (9,167   $ 1,420        (13.4 )%

 

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Revenue

Revenue was $7.3 million for the year ended December 31, 2010, compared to $5.4 million for the year ended December 31, 2009. The $1.9 million, or 35.5%, increase for 2010, as compared to 2009 reflects an increase in the revenue we received under our NIH contract from $3.3 million in 2009, to $7.2 million in 2010. This increased NIH revenue reflects the increased reimbursement associated with increased activity with respect to our phase 2b clinical trial of AGS-004 in 2010 and the $2.0 million true-up of our indirect cost rates for overhead and general and administrative costs that we recognized in 2010. The increase in revenue in 2010 as compared to 2009 was offset by a decrease in milestone revenue reflecting a 2009 milestone payment of $2.0 million that we received under the license agreement to which we were a party with Novo. Under this license agreement, which we and Novo entered into in February 2006 and terminated in June 2010, we licensed Novo rights to technologies for use in the development and commercialization of human antibodies against interferon-a, including AGS-009. We received no milestone revenue in 2010.

Research and Development Expenses

Research and development expenses were $13.9 million for the year ended December 31, 2010, compared to $19.5 million for the year ended December 31, 2009. Research and development expenses in 2009 were offset by reimbursements of $6.6 million that we received in 2009 under our collaboration and licensing agreement with Kirin.

Research and development expense for 2010 was $5.6 million, or 28.7%, lower than for 2009. The decrease in research and development expense was due primarily to less research and clinical trial activity in 2010 as compared to 2009.

 

   

Direct research and development expense relating to AGS-003 decreased from $1.9 million in 2009 to $0.9 million in 2010, reflecting that we ceased enrollment in our phase 2 clinical trial of AGS-003 in combination with sunitinib in October 2009.

 

   

Direct research and development expense relating to AGS-004 decreased from $3.6 million in 2009 to $3.1 million in 2010, reflecting the completion of the enrollment of the AGS-004 phase 2a clinical trial in June 2009 and that we did not begin enrolling patients in the AGS-004 phase 2b clinical trial until the third quarter of 2010.

 

   

Direct research and development expense with respect to AGS-009 increased from $0 in 2009 to $0.5 million in 2010, reflecting the commencement of enrollment in our phase 1a clinical trial of AGS-009 late in the third quarter 2010. Prior to June 30, 2010, Novo was responsible for conducting research and development activities for AGS-009 under our agreement with Novo. During that period, we did not incur any direct costs for AGS-009.

 

   

Direct research and development expense with respect to AGS-010 decreased from $3.3 million in 2009 to $1.1 million in 2010 due to a decrease in preclinical testing and our determination to seek a partner for further development and commercialization of AGS-010.

In addition, indirect research and development expense decreased by $2.4 million from 2009 to 2010. Lower personnel costs, including stock-based compensation expense, accounted for $1.4 million of the decrease as our average headcount during 2010 decreased from 67 to 57. The lower headcount was in part due to our 2010 reduction in force. The lower headcount also contributed to a $0.1 million decrease in miscellaneous other expenses. Costs related to the development of our automated manufacturing processes decreased by $0.2 million from 2009 to 2010 as we completed the final stages of development of our automated manufacturing devices and disposables in 2009. Costs for laboratory supplies that were not allocated to any of our product candidates decreased by $0.7 million from 2009 to 2010 due to lower levels of research activity in 2010.

 

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General and Administrative Expenses

General and administrative expenses were $2.7 million for the year ended December 31, 2010, compared to $2.9 million for the year ended December 31, 2009. General and administrative expenses were $0.2 million, or 7.8%, lower in 2010 as compared to 2009 due to a decrease in consulting costs.

Interest Income

Interest income was $5,000 for the year ended December 31, 2010, compared to $74,000 for the year ended December 31, 2009. The $69,000 decrease in interest income for 2010 as compared to 2009 reflected lower cash balances in 2010.

Interest Expense

Interest expense was $0.4 million for the year ended December 31, 2010, compared to $0.3 million for the year ended December 31, 2009. The $0.1 million increase in interest expense for 2010 as compared to 2009 was due to the amortization of warrant liability recorded to represent the fair market value of warrants and accrual of interest on the 2010 convertible notes issued in September and December 2010.

Derivative Financing Income

Derivative financing income was $0.3 million for the year ended December 31, 2010. We recorded no derivative financing income or expense in the year ended December 31, 2009. Derivative financing income in 2010 reflected the decrease in the fair market value of the shares of our stock issuable upon the put held by shareholders of DC Bio. This decrease reflected a decrease in the fair market value of our series B preferred stock and series C preferred stock in 2010 as compared to 2009. In addition, during 2010 certain shareholders of DC Bio elected not to purchase their pro rata share of the 2010 convertible notes. As a result, 50% of the shares of DC Bio held by such shareholders became exchangeable for shares of our common stock rather than our preferred stock.

Investment Tax Credits

Investment tax credits were $0.1 million for the year ended December 31, 2010 and for the year ended December 31, 2009. Under Canadian and Ontario law, DC Bio is entitled to refunds on scientific research and experimental development, or SR&ED investment tax credits. Because the investment tax credits are subject to a claim review and audit by the Canada Revenue Agency, we recognize these tax credits when they are received. In addition, we recorded $0.7 million in other income awarded under the Qualifying Therapeutic Discovery Project Program in 2010.

 

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Comparison of the Year Ended December 31, 2009 and the Year Ended December 31, 2008

The following table summarizes the results of our operations for each the years ended December 31, 2008 and 2009, together with the changes in those items in dollars and as a percentage:

 

     Year Ended
December 31,
    Increase/
(decrease)
    %
Change
 
     2008     2009      
     (in thousands)  

Revenue

   $ 4,450      $ 5,368      $ 918        20.6 %

Operating expenses:

        

Research and development

     22,043        19,544        (2,499     (11.3 )%

Net reimbursement under collaboration

     (8,128     (6,627     1,501        (18.5 )% 

General and administrative

     2,853        2,932        79        2.8 %
                                

Total operating expenses

     16,768        15,849        (919     (5.5 )%
                                

Income (loss) from operations

     (12,318     (10,481     1,837        (14.9 )%

Interest income

     251        74        (177     (70.5 )% 

Interest expense

     (633     (283     350        (55.3 )%

Derivative financing expense

     (756            (756     (100.0 )%

Investment tax credits

     667        103        (564     (84.6 )%
                                

Net income (loss)

   $ (12,789   $ (10,587   $ 2,202        (17.2 )%

Revenue

Revenue was $5.4 million for the year ended December 31, 2009, compared to $4.4 million for the year ended December 31, 2008. The $1.0 million, or 20.6%, increase in revenue for 2009, as compared to 2008 primarily results from an increase in milestone revenue, reflecting a milestone payment of $2.0 million under our agreement with Novo in 2009 as compared to a milestone payment under our agreement with Novo of $1.0 million in 2008. The increase in revenue in 2009, as compared to 2008, was partially offset by a slight decrease in revenue under our NIH contract from $3.4 million in 2008 to $3.3 million in 2009.

Research and Development Expense

Research and development expenses were $19.5 million for the year ended December 31, 2009, compared to $22.0 million for the year ended December 31, 2008. Research and development expenses were offset by reimbursements under the Kirin agreement of $6.6 million in 2009 and $8.1 million in 2008.

Research and development expense for 2009 was $2.5 million, or 11.3%, lower than for 2008. The decrease in research and development expense in 2009 reflects a $2.9 million decrease in indirect research and development expense partially offset by a $0.4 million increase in direct research and development costs.

The decrease in indirect research and development expense in 2009, as compared to 2008, was due to a $1.3 million decrease in costs for laboratory supplies that were not allocated to any of our product candidates, reflecting lower levels of research activity in 2009. Also, personnel expense, including stock-based compensation expense, in 2009 decreased by $0.9 million reflecting severance pay in 2008 in connection with a small reduction of our workforce at the beginning of 2008. The decrease in personnel also contributed to lower miscellaneous other expenses of $0.3 million in 2009. Costs related to the development of our automated processes decreased $0.4 million in connection with the anticipated termination of the Kirin agreement.

 

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The increase in direct research and development expense was due primarily to a higher level of research and clinical trial activity in 2009 as compared to 2008.

 

   

Direct research and development expense relating to AGS-003 decreased from $2.5 million in 2008 to $1.9 million in 2009, reflecting that in September 2009 we ceased enrollment in our phase 2 combination therapy trial of AGS-003 after accruing six patients. In comparison, during 2008, we completed the phase 1/2 clinical trial of AGS-003 and initiated and enrolled 15 patients in the phase 2 combination therapy trial of AGS-003.

 

   

Direct research and development expense relating to AGS-004 decreased from $4.0 million in 2008 to $3.6 million in 2009 due to the completion of the phase 2a trial in 2009.

 

   

Direct research and development expense with respect to AGS-010 increased from $1.8 million in 2008 to $3.3 million in 2009, reflecting costs of preclinical animal testing of AGS-010 in 2009.

General and Administrative Expenses

General and administrative expenses were $2.9 million for the year ended December 31, 2009 and for the year ended December 31, 2008. There was no change in general and administrative expenses between 2008 and 2009, although consulting expense was $0.3 million higher in 2009 and personnel and patent expenses were $0.1 million and $0.2 million higher, respectively, in 2008.

Interest Income

Interest income was $74,000 for the year ended December 31, 2009, compared to $0.3 million for the year ended December 31, 2008. The $0.2 million decrease in interest income for 2009 as compared to 2008 reflected lower cash balances in 2009.

Interest Expense

Interest expense was $0.3 million for the year ended December 31, 2009, compared to $0.6 million for the year ended December 31, 2008. The $0.3 million decrease in interest expense for 2009 as compared to 2008 was due to the repayment of loans in 2008 under loan agreements we had with lending institutions.

Derivative Financing Expense

Derivative financing expense was $0.8 million for the year ended December 31, 2008. There was no derivative financing income or expense in the year ended December 31, 2009. No derivative financing expense was recognized in 2009 as the fair market value of the shares of our series B preferred stock and series C preferred stock did not change from 2008 to 2009. Derivative financing expense in 2008 reflected the increase in the fair market value of the shares of our stock issuable upon the put held by shareholders of DC Bio. This increase reflected an increase in the fair market value of our series B preferred stock and series C preferred stock in 2008.

Investment Tax Credits

SR&ED investment tax credits were $0.1 million for the year ended December 31, 2009, compared to $0.7 million for the year ended December 31, 2008.

 

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Liquidity and Capital Resources

Sources of Liquidity

Since our inception in May 1997 through March 31, 2011, we have funded our operations principally with $88.9 million from the sale of common stock, convertible debt, warrants and convertible preferred stock, including the convertible preferred stock sold by DC Bio, $32.9 million from the licensing of our technology, and $71.5 million from government contracts, grants and license and collaboration agreements.

The gross proceeds we have received from the issuance and sale of our convertible preferred stock are as follows:

 

Issue

   Year      Number of
Shares
     Gross
Proceeds
 
                   (in thousands)  

Series A

     2000         2,408,749       $ 1,594   

Series B

     2001         22,511,556         39,382   

Series B-1

     2004         2,840,909         5,000   

Series C

     2008         123,099,041         33,362   

As of March 31, 2011, we had cash and cash equivalents of approximately $3.0 million. In July 2011, we raised an additional $3.5 million through the issuance of the July 2011 convertible notes. The July 2011 convertible notes bear interest at the rate of 10.00% per annum and mature on December 31, 2011.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below:

 

     Years Ended December 31,     Three
Months
Ended
March 31,
2010
    Three
Months
Ended
March 31,
2011
 
        
        
        
        
     2008     2009     2010      
    

(in thousands)

 

Net cash provided by (used in):

          

Operating activities

   $ (10,920   $ (10,407   $ (10,147   $ (3,131   $ (2,071

Investing activities

     3,788        (1,956     3,154        2,724          

Financing activities

     27,442        (2,718     4,802        (692     (27

Effect of exchange rate changes

     (254     141        18        11        2   
                                        

Net increase (decrease) in cash and cash equivalents

   $ 20,056      $ (14,940   $ (2,173   $ (1,088   $ (2,096
                                        

Operating Activities.    Cash used in operating activities of $10.9 million during the year ended December 31, 2008 was primarily a result of our $12.8 million net loss coupled with changes in operating assets and liabilities of $0.5 million, partially offset by non-cash items of $2.4 million. Cash used in operating activities of $10.4 million during the year ended December 31, 2009 was primarily a result of our $10.6 million net loss, coupled with changes in operating assets and liabilities of $1.2 million, partially offset by non-cash items of $1.4 million. Cash used in operating activities of $10.1 million during the year ended December 31, 2010 was primarily a result of our $9.2 million net loss, coupled with changes in operating assets and liabilities of $1.8 million, partially offset by non-cash items of $0.9 million. Cash used in operating activities of $3.1 million during the three month period ended March 31, 2010 was primarily a result of our net loss of $3.7 million, partially offset by changes in operating assets and liabilities of $0.2 million and by non-cash items of

 

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$0.3 million. Cash used in operating activities of $2.1 million during the three month period ended March 31, 2011 was primarily a result of our $2.4 million net loss, coupled with changes in operating assets and liabilities of $0.1 million, partially offset by non-cash items of $0.2 million.

Investing Activities.    Net cash provided by (used in) investing activities amounted to $3.8 million for the year ended December 31, 2008, $(2.0) million for the year ended December 31, 2009 and $3.2 million for the year ended December 31, 2010. Investing activities provided cash of $2.7 million for the three month period ended March 31, 2010 and $0 for the three month period ended March 31, 2011. Cash used in investing activities during all of these periods primarily reflected our purchases of equipment or our purchases of short-term investments. Cash provided by investment activities during each of these periods, if applicable, was primarily due to sales of short-term investments.

Financing Activities.    Net cash provided by (used in) financing activities amounted to $27.4 million for the year ended December 31, 2008, $(2.7) million for the year ended December 31, 2009, $4.8 million for the year ended December 31, 2010, $(0.7) million for the three months ended March 31, 2010 and $(27,000) for the three months ended March 31, 2011. The cash provided by financing activities in 2008 consisted primarily of $30.7 million of net proceeds associated with the issuance of series C preferred stock, including the sale of Class B preferred shares of DC Bio which may be put to us in exchange for shares of our common stock, series B preferred stock and series C preferred stock, partially offset by payments of $2.8 million on certain of our notes payable. The cash used in financing activities in 2009 consisted primarily of payments on certain of our notes payable of $2.7 million. Cash provided by financing activities for the year ended December 31, 2010 consisted primarily of $6.0 million of proceeds from the issuance and sale of the 2010 convertible notes, partially offset by payments on certain of our notes payable of $1.2 million. The cash used in financing activities for the three months ended March 31, 2010 and 2011 consisted primarily of payments on certain of our notes payable.

Funding Requirements

To date, we have not generated any product revenue from our development stage product candidates. We do not know when, or if, we will generate any product revenue. We do not expect to generate significant product revenue unless or until we obtain marketing approval of, and commercialize, AGS-003 or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates and lease, build out and equip our new U.S. commercial manufacturing facility. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We will need substantial additional funding in connection with our continuing operations.

We expect that the net proceeds from this offering, together with our existing cash, cash equivalents, short-term investments and anticipated funding under our NIH contract, as well as the proceeds from our issuance and sale of the July 2011 convertible notes, will enable us to fund our operating expenses and capital expenditure requirements, other than for the planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility, through at least             . We intend to devote approximately $             million of the net proceeds from this offering to fund the direct costs of our planned pivotal phase 3 combination therapy clinical trial of AGS-003 and to use the balance for general corporate purposes. We will need to obtain additional financing prior to the commercialization of AGS-003 or any of our other product candidates, including for the planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility, which we expect will cost approximately $25 million, and for conducting any future clinical trials of our product candidates. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the

 

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development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

Our future capital requirements will depend on many factors, including:

 

   

the progress and results of the planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib;

 

   

the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;

 

   

the costs and timing of our planned leasing, build-out and equipping of a new U.S. commercial manufacturing facility;

 

   

the costs, timing and outcome of regulatory review of our product candidates;

 

   

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

 

   

revenue received from sales of our product candidates, if approved by the FDA;

 

   

the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

 

   

the extent to which we acquire or invest in businesses, products and technologies;

 

   

our ability to obtain government or other third-party funding; and

 

   

our ability to establish collaborations on favorable terms, particularly marketing and distribution arrangements for oncology product candidates outside North America and for the development and commercialization of our non-oncology product candidates on a worldwide basis.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Except for the NIH’s remaining funding commitment with respect to AGS-004, we do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

We plan to seek government or other third-party funding for the continued development of AGS-004 following completion of the phase 2b clinical trial of AGS-004 and to seek partners or other sources of third- party funding for the further development of AGS-009 and AGS-010. We will also need to raise funds to pay for the proposed leasing, build-out and equipping of a new U.S. commercial manufacturing facility. If we are unable to raise additional funds through equity or debt financings, government or other third-party funding when needed,

 

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we may be required to delay, limit, reduce or terminate our development of our product candidates, our planned leasing, build-out and equipping of our new U.S. commercial manufacturing facility or our commercialization efforts, or to grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2010 with respect to this uncertainty. We have no current source of revenue to sustain our present activities, and we do not expect to generate product revenue until, and unless, the FDA or other regulatory authorities approve AGS-003 or another one of our product candidates and we successfully commercialize such product candidate. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations.

Contractual Obligations and Commitments

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2010 and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

     Total      Less than
1 year
     1 - 3
years
     3 - 5
years
     More than
5 years
 

Operating lease

   $ 214       $ 211       $ 3                   

Convertible notes

     6,100         6,100            
                                            

Total

   $ 6,314       $ 6,311       $ 3                   
                                            

In July 2011, we renewed our operating lease agreement for office space in Durham, North Carolina to extend the term of the lease to November 2016. As part of the lease renewal, we retained an option to terminate the lease in December 2014. Under this lease renewal, we are obligated to pay $1.7 million in total over the remaining term of the lease, $0.3 million in 2011, a total of $0.9 million in 2012, 2013 and 2014 and a total of $0.5 million in 2015 and 2016.

In September and December 2010 we issued and sold our 2010 convertible notes in the original aggregate principal amount of $6.0 million. These notes bear interest at a rate of 10.00% per year, and have an original maturity date of December 31, 2011. At December 31, 2010, our accrued interest on the 2010 convertible notes totaled approximately $0.1 million. In July 2011, we issued and sold our July 2011 convertible notes in the aggregate original principal amount of $3.5 million. The July 2011 convertible notes accrue interest at a rate equal to 10.00% per year, and have a maturity date of December 31, 2011. The July 2011 convertible notes are not reflected in the table. We expect that the principal and accrued interest on the 2010 convertible notes and the July 2011 convertible notes will convert to common stock upon the closing of this offering.

In addition, we plan to lease a new U.S. commercial manufacturing facility for the manufacture of our Arcelis-based products. We expect that we will incur a significant long term financial commitment in connection with the lease of such facility.

We are a party to license agreements with universities and other third parties, as well as patent assignment agreements, under which we have obtained rights to patents, patent applications and know-how. Under these agreements, we have agreed to pay the other parties milestone payments upon the achievement of specified clinical, regulatory and commercialization events and royalties based on future sales of products. We have not included these payments in the table as we cannot estimate if, when or in what amounts such payments will become due under these agreements.

 

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Net Operating Losses

As of December 31, 2010, we had U.S. Federal and state, and Canadian federal and provincial net operating loss carryforwards of approximately $63.7 million, $83.6 million, $4.2 million, and $4.2 million, respectively. These net operating loss carryforwards begin to expire in 2012, 2017, 2014 and 2014, respectively. As of December 31, 2010, we had U.S. Federal and state tax credit carryforwards of approximately $2.8 million and $340,000, respectively. These credit carryforwards begin to expire in 2020 and 2019, respectively. The Tax Reform Act of 1986 provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.

As of December 31, 2010, we have received $1.3 million in refunds through scientific research and experimental development tax credits through our consolidated subsidiary in Canada.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under Securities and Exchange Commission, or SEC, rules.

Recent Accounting Pronouncements

On January 1, 2010, we adopted new accounting and disclosure guidance for the consolidation of variable interest entities, or VIE’s, which required enhanced disclosures intended to provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. We performed an assessment of our VIE, DC Bio, and determined that continued consolidation under the new guidance is appropriate. Accordingly, there was no impact on our financial position and results of operations. The impact of this pronouncement on future transactions will be evaluated under the new criteria when and if encountered.

In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables, which is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. After adoption, this guidance will also require expanded qualitative and quantitative disclosures. We will evaluate the impact of adoption on future transactions and material modifications of existing agreements when and if encountered.

In April 2010, the FASB issued authoritative guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and non substantive milestones, and each milestone should be evaluated individually to determine if it is substantive. The guidance is effective on a prospective basis for

 

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milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted. We adopted this guidance on January 1, 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption of the provisions effective January 1, 2010 did not, and for the provisions effective in 2011 will not, impact our financial position or results of operations.

In June 2011, the FASB issued authoritative guidance related to the Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The new U.S. GAAP requirements are effective for public entities for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter, with early adoption permitted. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact our financial position or results of operations.

In May 2011, the FASB issued amended guidance on fair value measurements. This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This accounting standard is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. We do not expect that adoption of this standard will have a material impact on our financial position or results of operations.

Quantitative and Qualitative Disclosure about Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates.

Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10.0% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

We do not believe that our cash, cash equivalents and available-for-sale investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and available-for-sale investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during 2008, 2009, 2010 or through March 31, 2011.

 

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BUSINESS

Overview

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Using biological components obtained from each patient, our Arcelis-based immunotherapies employ a specialized white blood cell, called a dendritic cell, to activate an immune response that is specific to the patient’s disease. Our most advanced product candidate is AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC. We plan to initiate patient enrollment in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib, an oral small molecule drug marketed under the trade name Sutent that is the current standard of care for mRCC, in the fourth quarter of 2011. We are also developing a second Arcelis-based product candidate, AGS-004 for the treatment of HIV. We are studying AGS-004 in a phase 2b clinical trial that is funded entirely by the National Institutes of Health, or NIH. In addition to our Arcelis-based product candidates, we are developing two other product candidates based on our expertise in dendritic cell biology: AGS-009, a monoclonal antibody for the treatment of lupus, which we are studying in a phase 1a clinical trial, and AGS-010, a preclinical biologic compound, which we are developing for the treatment of psoriasis and for organ transplantation.

We use our Arcelis platform to generate RNA-loaded dendritic cell immunotherapies using biological components derived from the individual patient to be treated. Specifically, we manufacture these fully personalized therapies using that patient’s disease sample, either tumor cells in the case of cancer or a blood sample containing virus in the case of infectious disease, and dendritic cells derived from the patient’s white blood cells. By using messenger RNA, or mRNA, from the patient’s own cancer cells or virus, our Arcelis platform yields a fully personalized immunotherapy that is designed to contain all of the patient’s disease-specific antigens, which are foreign or mutated proteins associated with the cancer cells or virus, and to elicit a rapid, broad and potent immune response that is specific to the patient’s own disease. Our Arcelis-based immunotherapies have been well tolerated in clinical trials in more than 100 patients with no serious adverse events attributed to our immunotherapies. We believe that our Arcelis platform can be used for a wide range of oncology and infectious disease indications.

We have tested AGS-003 in clinical trials in combination with sunitinib and as a monotherapy for the treatment of mRCC. In our phase 2 clinical trial of AGS-003 in combination with sunitinib, the combination therapy showed median progression free survival of 11.9 months in intermediate and poor risk patients that had a time from diagnosis to initiation of systemic therapeutic treatment of less than one year. This represented an approximately 50% extension over the eight month median progression free survival achieved by sunitinib alone in similar intermediate and poor risk patients in the pivotal phase 3 clinical trial of sunitinib as a monotherapy. Progression free survival is the length of time that passes after treatment begins and before the patient’s disease worsens or the patient dies. We have submitted to the FDA for review a protocol for our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib plus placebo. Under this protocol, in order to achieve the primary endpoint of the trial, the data must demonstrate an increase of at least 30% in median progression free survival for the AGS-003 plus sunitinib arm compared to the sunitinib plus placebo control arm. We expect to complete enrollment of this trial in late 2013 and have data on the primary endpoint in mid-2014. In addition, under the protocol, the independent data monitoring committee will conduct two interim analyses of data from the trial to assess both safety and futility.

Renal cell carcinoma, or RCC, is the most common type of kidney cancer. According to the National Cancer Institute, or NCI, there are approximately 61,000 new cases of kidney cancer each year in the United States. The National Comprehensive Cancer Network, or NCCN, and the National Cancer Data Base, or NCDB, estimate that 90% of these new cases are RCC. According to the NCDB, 15% to 20% of these newly diagnosed RCC cases are mRCC. Additionally, patients initially diagnosed with early stage RCC may later present with mRCC.

 

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We have completed two early stage clinical trials of AGS-004 for the treatment of HIV, and are currently conducting a phase 2b clinical trial that is funded entirely by the NIH. We expect to complete enrollment in this trial in the fourth quarter of 2011 and to complete primary endpoint analysis of the data from this trial in mid-2012. According to the World Health Organization, the number of people living with HIV in the world was approximately 33.3 million in 2009. The Henry J. Kaiser Family Foundation estimates that more than 1.1 million people are currently living with HIV in the United States. According to the Centers for Disease Control and Prevention, the number of new cases of HIV infection in the United States is expected to remain steady at about 55,000 cases per year for the next decade.

We are developing our other two product candidates based on our expertise in dendritic cell biology. We have completed enrollment in a phase 1a clinical trial of AGS-009, a monoclonal antibody for the treatment of lupus, and are planning to commence enrollment in a phase 1b clinical trial of this product candidate in the fourth quarter of 2011. We are continuing preclinical testing on AGS-010, a recombinant human soluble CD83 protein, for the treatment of psoriasis and for organ transplantation.

We currently manufacture our Arcelis-based product candidates at our single, centralized manufacturing facility located in Durham, North Carolina. To prepare for the commercial launch of AGS-003 and any other Arcelis-based products we develop, we plan to establish automated manufacturing processes based on existing functioning prototypes of automated devices and disposables, to identify and lease suitable space for a new U.S. commercial manufacturing facility and to build out and equip the new facility for this purpose. We have developed proprietary processes to generate Arcelis-based products that we believe will allow us to manufacture the drug product for all of North America at this one centralized facility. Our plan is to file our biologics license application, or BLA, for AGS-003 with the FDA using the automated manufacturing processes that we have developed. We rely on contract manufacturers for the production of AGS-009 and AGS-010 and do not plan to build our own manufacturing capacity for those product candidates.

Immunotherapy to Treat Cancer and Infectious Diseases

According to the NCI, cancer is the second leading cause of death in the United States and is responsible for nearly one quarter of all deaths in the United States each year. Cancer is characterized by aberrant cells that multiply uncontrollably, resulting in tumors that may invade other tissues throughout the body and producing additional tumors, called metastases. Cancer growth can cause tissue damage, organ failure and, ultimately, death.

Many immunologists believe that cancer cells occur frequently in the human body, yet are effectively controlled by the immune system because the cancer cells, or the antigens that are associated with the cancer cells, are recognized by the immune system as abnormal and then killed. Specifically, the cancer cells or antigens are recognized by cytotoxic T lymphocytes, or T-cells, which are the cells responsible for killing the cancer cells.

Cancer cells utilize several strategies to escape detection by the immune system and T-cells. Typically, cancer cells secrete factors that act systemically to prevent T-cells from responding to activation signals, resulting in the T-cells not acting and remaining quiescent. In addition, large tumor masses are associated with a greater level of suppression of immune responses.

Chronic viral infections such as HIV or hepatitis C present the same challenges to the immune system as cancer in terms of the immune system needing to overcome disease-induced immune dysfunction to recognize and respond to virus-infected cells.

Immunotherapy Approaches

Immunotherapy is intended to stimulate and enhance the body’s natural mechanism for killing cancer cells and virus-infected cells. Immunotherapeutic approaches to treat disease can be separated into two broad classes, passive and active, based on their mechanism of action.

 

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Passive Immunotherapy.    Passive immunotherapies do not rely on or actively stimulate the body’s immune system to initiate the attack on the disease. Instead, the attack is made by the therapy which is manufactured ex vivo, or outside of the body. These therapies are not considered to be personalized and consist mainly of monoclonal antibodies directed at a single disease-specific enzyme or protein on the surface of targeted cells. The goal of these passive immunotherapies is to prevent targeted cells from dividing or to cause their death.

Passive immunotherapy is well established in cancer and infectious disease therapy. In 1997, Rituxan was the first passive immunotherapy to receive FDA approval when it was approved for the treatment of non-Hodgkin lymphoma. Since then, numerous other monoclonal antibody-based products have been approved for use in a variety of different cancer types. These products are typically positioned for use as second-line or third-line therapies in advanced disease settings at a time when the patient’s immune system has been weakened by prior therapy and by the disease. Most recently, in March 2011, the FDA approved Bristol-Myers Squibb’s passive immunotherapy Yervoy™ (ipilimumab), a monoclonal antibody, for the treatment of patients with unresectable or metastatic melanoma. Passive immunotherapies have also been approved for the treatment of infectious diseases, including the use of immunoglobulins to both prevent and treat viral infections such as hepatitis A and B.

Active Immunotherapy.    Active immunotherapies, on the other hand, are designed to trigger or stimulate the body’s own immune system to fight the disease. Active immunotherapy is a more specific approach to immunotherapy than passive immunotherapy because active immunotherapies contain a particular tumor-associated antigen or set of antigens that are designed to activate the patient’s own immune system to seek out and kill cells that carry the same antigen. Active immunotherapies have no direct therapeutic action, but rather rely on the patient’s immune system to recognize and kill the intended target. Most active immunotherapies utilize off-the-shelf, also referred to as defined, antigens, rather than antigens that are patient specific, and are frequently paired with adjuvants, which are agents that non-specifically activate the cells of the immune system to enhance tumor-specific immune responses.

In April 2010, the FDA approved the first active immunotherapy for the treatment of cancer – Dendreon Corporation’s Provenge (sipuleucel-T) for metastatic castrate-resistant prostate cancer. Sipuleucel-T is a partially personalized cellular immunotherapy that consists of white blood cells obtained from the patient combined with a fusion protein consisting of two parts: the antigen prostatic acid phosphatase, which is present in many prostate cancer cells, and an adjuvant, granulocyte-macrophage colony stimulating factor (GM-CSF).

A number of active cancer immunotherapies are currently being tested in late stage clinical development. For example, GlaxoSmithKline plc is conducting the largest ever phase 3 clinical trial in lung cancer with its investigational active cancer immunotherapy, MAGE-3. In addition, Amgen, Inc., through its March 2011 acquisition of Biovex, is conducting a multinational phase 3 clinical trial in metastatic melanoma of an active cancer immunotherapy that utilizes a virus to stimulate anti-tumor immunity and kill cancer cells.

Shortcomings of Immunotherapies.    Although passive and active immunotherapies have been proven to be incrementally effective in malignant and infectious diseases, both approaches have shortcomings, which include:

 

   

Due to tumor-induced or virus-induced immunosuppression, even with the administration of immunotherapies, many patients may not be able to mount effective immune responses against the intended target antigens due to the reliance of the immunotherapy on accessory cells such as CD4+ helper T-cells, which are functionally impaired by the patient’s disease.

 

   

Most passive and active immunotherapies target one or only a few antigens, which increases the probability that the cancer or virus-infected cells will escape detection by the immune system. The antigens used in most active immunotherapies are normal, non-mutated, self-antigens which are generally poor at stimulating immune responses, even from healthy immune systems, as the natural protection against autoimmune disease is that the human immune system generally does not generate immune responses against self-antigens.

 

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Most active immunotherapies employing defined antigens are not directly applicable to multiple types of cancer and require significant preclinical development work to identify relevant antigens that address the targeted cancer.

 

   

We believe that most active immunotherapies do not impact early clinical endpoints, such as progression free survival, but rather manifest their clinical effects after a protracted period of time, with benefit generally seen only in overall survival.

 

   

Toxicity is frequently associated with these therapies as the presence of the target antigen on some normal cells can result in collateral damage to healthy tissues.

 

   

Therapies involving cells derived from the patient’s own cells present challenges to commercialization due to the difficulty of producing such therapies at commercial scale using manual processes, producing multiple doses from a limited amount of patient material, storing and shipping individual doses and keeping costs as low as possible.

Another shortcoming of these immunotherapies is highlighted by a study recently published in Nature Medicine, which provides evidence that, even in the same type of cancer, the genetic makeup of the tumor is dramatically different from patient to patient. In the study, scientists sequenced the whole genomes of 50 patients’ breast cancer tumors alongside matching DNA from the same patients’ healthy cells in order to identify genomic alterations present only in the cancerous cells. The results revealed that the genetic makeup of each of the tumors was highly diverse. Of the approximately 1,700 gene mutations found in total, most were unique to individual patients’ tumors, and only three occurred in 10% or more of the patients. These results demonstrate that, even within the same indication, each patient’s tumor contains distinct antigens and suggests that immunotherapies that rely on defined, off-the-shelf antigens or a single targeted antigen may have limited effectiveness.

Although many of the immunotherapies currently in clinical development have shown promising results, we do not believe that any of them utilizes a technology that employs the patient’s own cancer or virus-infected cells to create a fully personalized immunotherapy that is directly targeted to the patient’s unique genetic disease.

Arcelis Technology Platform

Arcelis is our proprietary active immunotherapy technology platform for generating fully personalized RNA-loaded dendritic cell immunotherapies. We use our Arcelis platform to manufacture AGS-003, which we are developing for the treatment of mRCC, and AGS-004, which we are developing for the treatment of HIV. We believe that Arcelis is potentially applicable to a wide range of cancers and infectious diseases.

Our Arcelis platform is focused on dendritic cells that present antigens to the attention of the immune system and are critical to the human immune system’s recognition of the presence of proteins derived from cancer cells or virus-infected cells. Dendritic cells are capable of internalizing cancer protein antigens or virus protein antigens and displaying fragments of these protein antigens on their surface as small peptides. The dendritic cells then present these peptide antigens to T-cells capable of binding to these peptide antigens and producing a large complement of molecular factors that, in the case of cancer, lead to direct cancer cell death and, in the case of infectious disease, kill virus-infected cells to control the spread of infectious pathogens.

 

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The following graphic illustrates the processes comprising our Arcelis platform:

LOGO

As shown in the graphic above, our Arcelis platform requires two components derived from the particular patient to be treated, specifically:

 

   

a disease sample from the patient — tumor cells in the case of cancer or a blood sample containing virus in the case of infectious disease — which is generally collected at the time of diagnosis or initial treatment, and

 

   

dendritic cells derived from the patient’s monocytes, a particular type of white blood cell, which are obtained from the patient through a laboratory procedure called leukapheresis that occurs after diagnosis and at least four weeks prior to the initiation of our immunotherapy.

The tumor cells, or the blood sample containing the virus, and the leukapheresis product are shipped separately following collection from the clinical site to our single, centralized manufacturing facility in Durham, North Carolina.

At our facility, we use standard methods to isolate the patient’s mRNA, which is a key component of the genetic code, from the disease sample and amplify the mRNA. In parallel, we take the monocytes from the leukapheresis product and culture them using a proprietary process to create matured dendritic cells. We then immerse the matured dendritic cells in a solution of the patient’s isolated mRNA and a synthetic RNA that encodes a protein known as CD40 ligand, or CD40L, and apply a brief electric pulse to the solution, in a process referred to as electroporation. This process enables the patient’s isolated mRNA and the CD40L protein to pass into, or load, the dendritic cells. We then further culture the mRNA-loaded dendritic cells so that these cells allow for antigen expression from the patient’s mRNA and presentation in the form of peptides on the surface of the dendritic cells. These mature, loaded dendritic cells are formulated into the patient’s plasma that was collected during the leukapheresis to become the Arcelis-based drug product. We then vial, freeze and ship the drug product to the clinic, which thaws the drug product and administers it to the patient by intradermal injection.

Upon injection into the skin of the patient, the antigen-loaded dendritic cells in the drug product migrate to the lymph nodes near the site of the injection. It is at these lymph nodes that the drug product comes into contact with T-cells. We believe that through this interaction the loaded dendritic cells orchestrate the differentiation, expansion and education, of antigen-specific T-cells. A unique property of our dendritic cells is that they result in

 

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the generation of a special kind of T-cell known to be associated with good clinical outcome. These are known as CD8+ central effector and memory T-cells which are long-lived and provide durable immune responses. Once activated and expanded, these T-cells are able to seek out and kill cancer or virus-infected cells that express the identical antigens as those displayed on the surface of the dendritic cells. Because the generation of these T-cells is dependent on secretion of the cytokine interleukin 12, or IL-12, from the dendritic cells, measurement of IL-12 is a marker for potency of AGS-003 and potentially other Arcelis-based products.

We believe that our Arcelis platform addresses important shortcomings of both passive and other active immunotherapies:

 

   

We believe that the inclusion of the CD40L protein in our Arcelis platform results in Arcelis-based products not requiring CD4+ helper T-cells or adjuvants with potential adverse side effects to mount an immune response with strong anti-tumor or anti-viral reactivity. Our Arcelis-based products have demonstrated the ability to completely reverse tumor-induced immunosuppression with as few as three doses.

 

   

Our Arcelis platform, by using mRNA from the patient’s own cancer or virus, yields a fully personalized immunotherapy that is designed to contain all of the patient’s disease-specific antigens, including mutated antigens, and to elicit a broad and potent immune response that is specific to the patient’s own disease. Accordingly, we believe our Arcelis platform limits the probability that cancer or virus-infected cells will escape detection by the immune system.

 

   

Our Arcelis technology is a platform technology that can potentially be used to treat any cancer or virus with essentially the same manufacturing process and equipment.

 

   

In clinical trials, our Arcelis-based products have been shown in a majority of patients to rapidly establish anti-tumor or anti-viral immunity. We believe that this is due to the unique mechanism of action of our Arcelis-based products, which mimics the natural immune response to foreign antigens. This rapid immune response may allow achievement of early clinical endpoints, such as progression free survival.

 

   

Our Arcelis-based product candidates have been well tolerated in clinical trials in more than 100 patients with no serious adverse events attributed to our immunotherapies.

 

   

Our Arcelis technology, though fully personalized, requires only a small disease sample and a single leukapheresis to produce several years of therapy for each patient — five years of therapy in the case of AGS-003 based on our current dosing regimen. In addition, Arcelis-based products can be stored and shipped frozen, which we expect will allow the use of a single, centralized manufacturing facility for North America. We believe that this facility, when built and equipped to use the automated manufacturing processes that we have developed, will enable manufacturing with a cost of goods for our fully personalized Arcelis-based products that we expect will be comparable to other biologics.

Strategy

Our goal is to build a commercial biopharmaceutical company, founded on our extensive expertise in dendritic cell biology and immunology, primarily through the use of our Arcelis platform. Key elements of our strategy are to:

 

   

Complete development of AGS-003 for mRCC, and manufacture and commercialize AGS-003 on our own in North America and collaborate with third parties for the manufacture and commercialization of AGS-003 outside North America, or, if we determine that it is in our best interest, with third parties on a worldwide basis.

 

   

Continue development of AGS-004 for HIV through government or other third-party funding and collaborate with third parties for commercialization on a worldwide basis.

 

   

Continue to build on our Arcelis platform by developing fully personalized immunotherapies for other cancers and infectious diseases.

 

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Establish automated manufacturing processes based on existing functioning prototypes of automated devices and disposables and, prior to the filing of our BLA for AGS-003, identify, lease, build out and equip a new U.S. facility for the commercial manufacture of products based on our Arcelis platform.

 

   

Seek partners for further development and commercialization of AGS-009 for lupus and AGS-010 for the treatment of psoriasis and for organ transplantation.

 

   

Pursue broad intellectual property protection for our Arcelis technology platform, product candidates and proprietary manufacturing processes through U.S. and international patent filings and maintenance of trade secret confidentiality.

Our Development Programs

The following table summarizes our four development programs and their development status. We currently hold all commercial rights to all four of these programs in all geographies.

 

Product
Candidate

  


Description

   Primary Indication(s)   

Status

AGS-003

   Arcelis-based fully personalized immunotherapy    mRCC    Planned pivotal phase 3 with initiation of enrollment expected in the fourth quarter of 2011

AGS-004

   Arcelis-based fully personalized immunotherapy    HIV    Ongoing phase 2b with completion of enrollment expected in the fourth quarter of 2011

AGS-009

   Anti-interferon-a monoclonal antibody    Lupus    Ongoing phase 1a with results expected in the fourth quarter of 2011

AGS-010

   CD83 recombinant protein    Psoriasis;

Organ
transplantation

   Preclinical

AGS-003 for Metastatic Renal Cell Carcinoma

Our most advanced product candidate, AGS-003, is based on our Arcelis platform. We are developing AGS-003 for use in combination with sunitinib and potentially other therapies for the treatment of mRCC. Sunitinib is an oral small molecule drug sold under the trade name Sutent and is the current standard of care for first-line treatment of mRCC. First-line treatment means the initial treatment of a disease following diagnosis. We have conducted multiple clinical trials of AGS-003 for the treatment of mRCC, including a phase 2 clinical trial of AGS-003 in combination with sunitinib. We have submitted a protocol for a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib plus placebo to the FDA for review. We expect to commence patient enrollment in this pivotal phase 3 clinical trial in the fourth quarter of 2011.

Renal Cell Carcinoma.    Renal cell carcinoma is the most common type of kidney cancer. The NCI estimated that there would be approximately 61,000 new cases of kidney cancer and that approximately 13,000 people would die from this disease in the United States in 2011. According to the NCCN and the NCDB, it is estimated that 90% of new kidney cancer cases each year are RCC. Relative to the general population, the NCI estimates that the five-year survival rate from 2001 to 2007 for patients with RCC was approximately 70%; however, for patients with RCC that had metastasized by the time RCC was first diagnosed, which condition we refer to as newly diagnosed mRCC, the five-year survival rate has historically been approximately 10%.

 

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NCDB statistics indicate that from 2000 through 2008 between 15% and 20% of newly diagnosed RCC patients presented with mRCC annually in the United States. Additional patients that were initially diagnosed with earlier stage RCC may also present with mRCC as these patients suffer relapses. The NCCN estimates that between 20% to 30% of patients with early stage RCC will relapse within three years of surgical excision of the primary tumor. Although the NCI does not provide prevalence of RCC by stage, we believe that the estimated three-year relapse rate suggests that there may be an additional 10,000 to 15,000 cases of mRCC identified annually in the United States. Combining newly diagnosed mRCC patients with patients who relapse, we estimate that there may be between 20,000 to 25,000 new cases of mRCC in the United States each year.

The diagnosis of RCC is generally made by examination of a tumor biopsy under a microscope. Upon evaluation of the visual appearance of the tumor cells, the pathologist will classify the RCC into clear cell or non-clear cell types. According to NCCN, approximately 85% of all RCC diagnoses are clear cell RCC. Because clear cell types are the most common type of tumor cell and are more likely to respond favorably to treatment, most of the more recently approved therapies for mRCC have limited their clinical trials to patients with the clear cell type of tumor cell. However, approvals for these therapies have not been limited to clear cell types of RCC, and these therapies may be used for both clear cell and non-clear cell types.

Diagnosis and Current Treatment of mRCC.    The initial treatment for most patients with RCC, including mRCC, is surgical removal of the tumor, usually requiring partial or complete removal of the affected kidney, referred to as nephrectomy. In the absence of metastatic disease, the NCCN recommends observation after nephrectomy, although systemic therapies are recommended for patients who are believed to be at higher risk of relapse. Notably, patients whose tumors have metastasized to other organs beyond the primary kidney at the time of diagnosis are considered to have newly diagnosed mRCC and have the poorest overall prognosis and survival. For patients who present with mRCC upon diagnosis or as a result of a relapse from an earlier stage of RCC, the NCCN recommends systemic treatment with currently available therapies, except in the rare instances where metastatic lesions can be removed by surgery alone.

Upon diagnosis, the prognosis for patients with mRCC is classified into three overall disease risk profiles—favorable, intermediate and poor—using objective prognostic risk factors developed by researchers at Memorial Sloan-Kettering Cancer Center, or MSKCC. These risk factors have been correlated to reduced progression-free and overall survival in mRCC and include:

 

   

time from diagnosis to the initiation of systemic therapeutic treatment of less than one year, which is indicative of more aggressive disease. We refer to this risk factor as the less than one year to treatment risk factor;

 

   

low levels of hemoglobin, a protein in the blood that carries oxygen;

 

   

elevated corrected calcium levels;

 

   

diminished patient performance status or physical functioning; and

 

   

elevated levels of the enzyme lactate dehydrogenase in the blood.

Patients exhibiting zero risk factors at the time of treatment are included in the favorable risk group; patients exhibiting one or two risk factors are included in the intermediate risk group; and patients exhibiting three or more risk factors are included in the poor risk group. Patients in the intermediate and poor risk groups, even when treated with standard of care therapies such as sunitinib, generally have an expected survival of less than one to two years.

mRCC is generally resistant to conventional systemic approaches such as chemotherapy, radiation and hormonal therapies. Although mRCC has been treated with cytokine-based immunotherapies such as interferon-a and IL-2, which have demonstrated a clinical benefit in a small number of mRCC patients, these therapies have been shown to have severe toxicities which limit their use, including cardiopulmonary,

 

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neuropsychiatric, dermatologic, renal, hepatic and hematologic side effects. Although high-dose IL-2 has demonstrated durable complete mRCC remissions, its toxicity restricts its use to a small minority of patients.

In the past few years, several new agents, such as Sutent (sunitinib), Votrient™ (pazopanib), Torisel® (temsirolimus), Nexavar® (sorafenib), Avastin™ (bevacizumab) plus interferon-a, and Afinitor® (everolimus) have been approved for the treatment of mRCC. While the majority of these new agents have been evaluated in first-line treatment of mRCC, we do not believe that any of them demonstrated in their pivotal phase 3 clinical trials progression free survival or overall survival greater than the progression free survival and overall survival demonstrated in the pivotal phase 3 clinical trial of sunitinib. According to Datamonitor, in 2007 Sutent controlled a majority of the market share for systemic therapies for first-line treatment of mRCC. Although multiple other agents have been approved for first- or second-line mRCC since 2007, in 2010 Sutent continued to control a majority of the market share for first-line treatment of mRCC. Additional agents, such as axitinib and tivozanib, are in late-stage development for mRCC and could be approved by or during 2012. We estimate, based on publicly available information, including 2010 quarterly and annual reports of companies that market drugs approved for RCC, that the current worldwide RCC market for these new agents is over $1.5 billion.

Although most of these new agents have demonstrated prolonged progression free survival as compared to interferon-a, they are rarely associated with durable remissions or survival, particularly in patients who are not classified as favorable risk at the time of treatment. In addition, each of these new agents has shortcomings that limit its use in the treatment of mRCC, including significant toxicities, such as neutropenia and other hematologic toxicities, fatigue, diarrhea, hand-foot syndrome, hypertension and other cardiovascular effects. For example:

 

   

Sunitinib is limited in ability to achieve long-term disease control and overall survival in intermediate and poor risk patients, including in particular those with the less than one year to treatment risk factor. In addition, approximately 19% of patients in the pivotal phase 3 clinical trial of sunitinib discontinued treatment prior to disease progression due to the toxicities associates with the drug. These toxicities have prevented other new agents for mRCC from being readily combined with sunitinib for first-line treatment of mRCC.

 

   

In the pivotal phase 3 clinical trial of pazopanib, 16% of patients discontinued treatment prior to disease progression due to toxicities. Although pazopanib demonstrated median progression free survival of 11.1 months and median overall survival of 22.9 months in 155 first-line mRCC patients in its pivotal phase 3 trial, we do not believe that, since its approval in 2009, it has substantially reduced the use of sunitinib in first-line treatment.

 

   

Temsirolimus is administered by IV infusion, which is inconvenient for patients. Temsirolimus has been evaluated in clinical trials primarily in poor risk patients and was approved by the FDA for first-line treatment in poor risk mRCC patients. However, its benefits in this population have been shown to be short-lived. For example, in the pivotal phase 3 trial of temsirolimus, the median progression free survival in poor risk mRCC patients was 5.5 months and median overall survival was 10.9 months.

 

   

Sorafenib has shown lower efficacy in first-line therapy for mRCC than sunitinib and other new agents, as demonstrated by the median progression free survival of 5.7 months that it achieved in a randomized phase 2 trial in first-line treatment. Sorafenib is primarily used as a second-line or third-line treatment for mRCC.

 

   

Bevacizumab has been approved for use in combination with interferon-a as a first-line treatment for mRCC. However, the combined toxicities of the two therapies and the multiple weekly injections of interferon-a appear to make this a less appealing option for mRCC patients and oncologists. In two separate phase 3 studies of this combination, 23% and 28% of patients discontinued treatment due to toxicities.

 

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Everolimus has been approved for mRCC patients who have progressed after initial treatment with sunitinib, sorafenib or both. While its activity in this setting is improved over placebo, it only demonstrated an overall response rate of 2% and median progression free survival of 4.9 months in its pivotal phase 3 clinical trial.

AGS-003 Opportunity.    The overlapping and combined toxicities of the new agents described above have prevented their use in combination therapies. For instance, a phase 1 clinical trial of the combination of sunitinib and temsirolimus was discontinued due to toxicities. Furthermore, in a phase 2 clinical trial of the combination of temsirolimus with bevacizumab, 41% of patients discontinued treatment early due to toxicities. We believe that the lack of success to date in combining these therapies without significant toxicity and the lack of durable remissions and prolonged survival in subjects with intermediate and poor risk disease, suggest that there remains an unmet need for novel therapeutic approaches for mRCC that can improve efficacy without adding any appreciable toxicity. We believe that the safety profile that AGS-003 has demonstrated to date, which may enable its use in combination with other therapies with little or no additional toxicities, gives it the potential to address this unmet need.

Development Status.    The following table summarizes our clinical development of AGS-003 and its predecessor program, MB-002.

 

Clinical Trial

   Enrollment
Time Frame
  Number  of
Patients

Receiving
Therapy
  

Status

Pivotal Phase 3 Combination Therapy Clinical Trial of AGS-003 in Combination with Sunitinib (planned)

   2011 – 2013

(planned)

  325 planned
(650 planned to
be randomized)
   Planned to commence enrollment in the fourth quarter of 2011

Phase 2 Combination Therapy Clinical Trial of AGS-003 in Combination with Sunitinib

   2008 – 2009   21    Completed (4 patients ongoing as of June 30, 2011)

Phase 1/2 Monotherapy Clinical Trial of AGS-003

   2006 – 2008   22    Completed (2 patients ongoing as of June 30, 2011)*

Monotherapy Rollover Clinical Trial of AGS-003

   2006 – 2010   2    Completed

Phase 1/2 Monotherapy Clinical Trial of MB-002

   2004 – 2005   20    Completed

 

* One of these two patients is receiving AGS-003 after progression per the investigator’s discretion as allowed under the protocol for the trial.

Efficacy Endpoints.    There are a number of standard efficacy endpoints that clinicians use to measure outcomes for clinical trials for cancer therapies. The following are explanations of the meanings of the various efficacy endpoints that we have used and will be using in our clinical trials of AGS-003 and MB-002. Each is determined in accordance with Response Criteria in Solid Tumors, or RECIST, measurement guidelines.

 

   

Progression free survival (PFS): the length of time that passes after treatment begins and before the patient’s disease worsens or the patient dies.

 

   

Overall survival (OS): the time interval from treatment to death.

 

   

Overall response rate: the number of patients in the trial who achieve a partial or complete response.

 

   

Complete response: disappearance of all measurable target lesions and non-target lesions.

 

   

Partial response: overall tumor regression based on a decrease of at least 30% in the overall amount of measurable tumor mass in the body and improvement or no change in non-target lesions.

 

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Stable disease: neither sufficient decrease in tumor size to qualify as a partial response nor sufficient increase in tumor size to qualify as disease progression.

 

   

Clinical benefit rate: the number of patients in the trial who achieve stable disease or a partial or complete response.

 

   

Disease progression: growth of at least 20% in the size of the measurable tumor mass, appearance of new tumor(s) or growth of non-target lesions since beginning of treatment.

Planned Pivotal Phase 3 Combination Therapy Clinical Trial.    We have submitted a protocol for a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib for the treatment of newly diagnosed mRCC to the FDA for review. We expect to initiate patient enrollment in this trial in the fourth quarter of 2011.

We have designed this trial to be a randomized, multicenter, double-blind, placebo-controlled trial of AGS-003 in combination with sunitinib compared to sunitinib plus placebo. We plan to enroll approximately 650 patients in the trial to generate 600 evaluable patients. We plan to enroll these patients at approximately 100 to 120 clinical sites in North America and Europe. Under the protocol, these patients will be randomized between the two arms on a one-to-one basis. We anticipate that we will require approximately two years to fully enroll patients in the trial. We expect to monitor these patients for approximately 11 months following randomization, at which time we believe we will have data from at least 460 patients that reach disease progression during the trial, which would provide us with sufficient data to determine whether the primary endpoint of the trial has been achieved. If we complete enrollment as planned, we expect to have primary endpoint data in mid-2014.

We have designed this study with a primary endpoint of progression free survival, which has served as the primary endpoint in the pivotal phase 3 trials for five of the six products most recently approved by the FDA for the treatment of mRCC. Secondary endpoints will include overall survival, overall response rate and safety. In order to achieve the primary endpoint, results from the trial must demonstrate an increase of at least 30% in progression free survival for the AGS-003 plus sunitinib arm compared to the sunitinib plus placebo arm. Such a result would be statistically significant (p £ 0.05). The statistical significance of clinical trial results is determined by statistical methods that establish the p-value of the results. Typically, clinical trial results are statistically significant if they have a p-value of 0.05 or less, meaning that there is less than a one-in-20 likelihood that the observed results occurred by chance. There will be an interim analysis of data from the trial at 30% and 50% information by the independent data monitoring committee to assess both safety and futility.

Our design for this trial requires patients to be adults who have been newly diagnosed with mRCC with primary tumor intact (no prior nephrectomy) and measurable metastatic disease, who are histologically confirmed to have a component of clear cell RCC based upon the tumor collected at nephrectomy, who are suitable for sunitinib therapy and who are poor risk or intermediate risk patients with the less than one year to treatment risk factor and not more than three MSKCC risk factors in total. The protocol provides for exclusion of patients from the trial if they have brain metastases or autoimmune conditions requiring chronic immunosuppressive therapy or if they have received any prior therapies for RCC. As part of the trial design, the two arms of the trial will be balanced based upon known prognostic risk factors and enrollment location. Patients who are randomized will be stratified by overall performance status (0, 1), number of MSKCC risk factors (1, 2 or 3) and geographic region (North America, Western Europe and other).

Under the protocol we have submitted to the FDA, patients in the AGS-003-sunitinib arm would be dosed with AGS-003 once every three weeks for five doses, followed by a booster dose every three months until disease progression. Sunitinib would be dosed in six-week cycles, consisting of four weeks on drug and two weeks on drug holiday. A total of four six-week cycles of sunitinib, combined with five AGS-003 doses would comprise the 24-week induction phase. AGS-003 dosing would be initiated at the end of the initial six-week sunitinib cycle. The first dose of AGS-003 would be administered prior to the start of sunitinib dosing in the second sunitinib cycle. Patients in the placebo-sunitinib arm would receive placebo on the same dosing schedule as AGS-003 in the AGS-003-sunitinib arm and sunitinib on the same dosing schedule as sunitinib in the AGS-003-sunitinib arm. This

 

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dosing regimen is identical to the dosing regimen used in our phase 2 combination therapy clinical trial of AGS-003 and sunitinib. We also expect the patient population in the planned pivotal phase 3 clinical trial to be comparable to the patient population treated in our phase 2 combination therapy clinical trial. In addition, we have submitted to the FDA a separate protocol under which, following disease progression, patients in the placebo-sunitinib arm will be able to participate in an optional extension trial of AGS-003 in combination with other compatible second-line agents.

Phase 2 Combination Therapy Clinical Trial.    From July 2008 to October 2009, we enrolled 21 newly diagnosed mRCC patients in a single arm, multicenter, open label phase 2 trial of AGS-003 in combination with sunitinib. We conducted this clinical trial at nine clinical sites in the United States and Canada. In selecting an agent to study with AGS-003 in combination therapy, we chose to evaluate the combination of AGS-003 with sunitinib for the following reasons:

 

   

Sunitinib was quickly establishing itself as the first-line standard of care for the treatment of mRCC in our targeted patient population.

 

   

In our laboratory tests measuring the potency of the immune responses generated by the combination of AGS-003 and sunitinib as measured by CD8+ central effector and memory T-cell responses, we observed that sunitinib had not demonstrated any detrimental effect on the ability of AGS-003 to generate the desired immune response.

 

   

Due to the anti-cancer activity of sunitinib, by initiating dosing of AGS-003 following the first treatment cycle of sunitinib, patients were likely to have less metastatic tumor burden, or at least a slowing of tumor progression, at the time of initiation of AGS-003 therapy, making it more likely that AGS-003 would have the opportunity to elicit immunologic responses and an effect on the tumor.

 

   

In its pivotal phase 3 clinical trial, sunitinib had demonstrated a significant improvement in median progression free survival over interferon-a, the previous standard of care. However, because of sunitinib’s toxicity, oncologists have not been able to improve upon these results by trying to combine sunitinib with other approved targeted agents as a result of the overlapping toxicities and inability to combine full doses of these various targeted agents. Because of AGS-003’s relative lack of toxicity, we were comfortable that we could combine AGS-003 with sunitinib and administer a full dose of both compounds without added toxicity.

In addition, although we only learned this after starting the phase 2 combination therapy trial, sunitinib decreases regulatory T-cells and myeloid-derived suppressor cells, or MDSC’s, both of which are known to expand during cancer and suppress T-cell responses. As a result, we hypothesized that AGS-003 would be particularly potent in combination with sunitinib because of the ability of AGS-003 to generate T-cell responses in patients who may have experienced a reduction in these immunosuppressive regulatory T-cells and MDSC’s after the initiation of sunitinib therapy.

The original design for this trial called for the recruitment of 50 patients to generate 38 fully evaluable patients. The primary endpoint of the trial was complete response rate. Secondary endpoints included progression free survival, overall survival, safety, clinical benefit rate and immune response.

Our design for the trial required patients to be adults with previously untreated mRCC with no prior nephrectomy or at least one accessible lesion for biopsy, a histologically confirmed predominantly clear cell tumor and suitability for sunitinib therapy. Patients with brain metastases or autoimmune conditions requiring chronic immunosuppressive therapy, and those who had received prior RCC therapy, were excluded from the trial.

Patients in the trial generally received one initial six-week cycle of sunitinib, consisting of four weeks on drug and two weeks on drug holiday, prior to initiating the combined treatment with AGS-003. Patients then received a dose of AGS-003 every three weeks for a total of five doses, while also continuing three additional six-week cycles of sunitinib. This 24-week induction phase was followed by a booster phase during which patients received a dose of AGS-003 once every three months and continued to receive sunitinib in six-week cycles until disease progression.

 

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In October 2009, we terminated enrollment in this trial early in connection with the anticipated termination of our former collaboration involving AGS-003 with Kyowa Hakko Kirin Co., Ltd., or Kirin, and the resulting termination of funding for the trial by Kirin. As a result, only a total of 21 patients were enrolled and received at least one dose of AGS-003 in this trial. In addition, the trial population evaluated in the trial differed significantly from the intended population. The trial was originally designed to enroll subjects with favorable and intermediate risk disease profiles. Instead, the actual population enrolled consisted entirely of patients with intermediate or poor risk disease profiles that had the less than one year to treatment risk factor. Based on published research, the expected complete response rate, progression free survival rate and overall survival rate for patients treated with sunitinib alone with intermediate and poor risk factors is greatly diminished compared to the expectations for patients treated with sunitinib alone who present with a favorable risk disease profile at the time of diagnosis. Primarily for these reasons, we could not and did not perform the statistical analysis to determine whether the primary endpoint of complete response rate was achieved, as we did not have sufficient number of evaluable patients nor any favorable risk patients included at the time of early trial closure. For this reason, we expect the data from this trial to be considered by the FDA for the purpose of evaluating the safety and feasibility of AGS-003, but that it will only have a limited impact on the FDA’s ultimate assessment of the efficacy of AGS-003.

As a result, we concluded that the initial trial design and expectation of complete responses in patients with mRCC was inappropriate for our immunotherapy, and particularly inappropriate for the enrolled patient population of intermediate and poor risk patients with the less than one year to treatment risk factor. We also concluded that the secondary endpoints in the trial, progression free survival and overall survival, along with immunologic response, were the appropriate endpoints to consider for measuring the efficacy of AGS-003 in combination with sunitinib in patients with mRCC.

The following table summarizes certain key data from the 21 patients (15 intermediate risk; 6 poor risk) enrolled in the trial:

 

Outcome

   (N=21)

Median PFS

   11.9 months

Median OS

   Not yet reached

Complete response

   0 patients

Partial response

   6 patients

Stable disease

   7 patients

Immune response

   IL-2 and interferon-g (IFN-g) recovery

Particular observations from these data and the trial, which have informed our further clinical development of AGS-003, include:

 

   

To date, four patients have not progressed and continue to be dosed. Eleven of the 21 patients are still alive. As a result, we have not yet reached median overall survival.

 

   

Of the six patients that exhibited a partial response, one partial response was observed during the 24-week induction phase. The other five partial responses were observed after prolonged dosing with AGS-003 in combination with sunitinib during the booster phase. We do not believe that these late occurring partial responses have been routinely observed in clinical trials of sunitinib alone in intermediate and poor risk patients. As a result, we believe that these late responses may relate to the immunologic effects of AGS-003 and AGS-003’s effect on CD8+ central effector and memory T-cells.

 

   

AGS-003 was found to have positive impact on immune cell function and restoration of cellular immunity, including an increase in levels of IL-2 and IFN-g in a majority of patients.

 

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In the trial, we observed a trend towards correlation between the increase in percentage expansion or proliferation of CD8+ central effector and memory T-cells and prolonged progression-free intervals in patients who have benefited for the longest period of time on study. These results were accepted for presentation during the 2011 annual American Society of Clinical Oncology (ASCO) meeting.

 

   

The adverse events in this trial associated with AGS-003 were generally only mild injection site reactions, while the toxicities with sunitinib were consistent with those expected from treatment with sunitinib alone.

AGS-003 Phase 2 Combination Therapy Clinical Trial, as Compared to Sunitinib Pivotal Phase 3 Clinical Trial and Sunitinib EFFECT Clinical Trial.    Our phase 2 combination therapy clinical trial used similar patient inclusion and exclusion criteria as the pivotal phase 3 clinical trial of the use of sunitinib as a monotherapy in mRCC conducted between 2004 and 2006 and a more recently reported 2011 “EFFECT” clinical trial of sunitinib at two different doses and schedules as a monotherapy in mRCC. A summary comparison of the results of these two sunitinib monotherapy trials and of our phase 2 clinical trial of AGS-003 in combination with sunitinib is set forth in the graph below. The results of the sunitinib monotherapy clinical trials were presented by Dr. Robert Motzer of MSKCC in oral presentations at the 2007 ASCO annual meeting and the 2011 ASCO Genitourinary annual meeting. Although we believe this comparison is useful in evaluating the overall results of our phase 2 clinical trial, the three studies were separate trials conducted at different sites and at different times. Moreover, the patient population with mRCC is heterogeneous and the differences in patient population in the trials could have had a significant impact on the results of the trials. We have not conducted a head-to-head comparison of sunitinib and AGS-003 as a combination therapy against sunitinib as a monotherapy in a clinical trial. This is the design of the protocol for our planned pivotal phase 3 combination therapy clinical trial of AGS-003. Results of this head-to-head comparison may differ significantly from those set forth in the following graph. In addition, because the three studies were separate trials and because only 21 patients received AGS-003 in our phase 2 combination therapy clinical trial, differences between and among the results of the three trials may not be statistically meaningful.

LOGO

The results from the sunitinib phase 3 pivotal trial set forth in the graph above represent the results of sunitinib monotherapy in intermediate or poor risk patients with the less than one year to treatment risk factor. We have excluded the results for the 38% favorable risk patients in the sunitinib phase 3 pivotal trial and any intermediate and poor risk patients who did not have the less than one year to treatment risk factor, as we do not believe that these patients are comparable to the patient population that we evaluated in our phase 2 combination therapy clinical trial. The EFFECT trial results shown in the above graph show median progression free survival of 8.5 months for all three patient groups (favorable, intermediate and poor) because the results of the trial were not analyzed separately by risk

 

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group or by MSKCC risk factors. As a result, the stated EFFECT median progression free survival includes the results from the 29% favorable risk patients enrolled in the trial. In the sunitinib pivotal trial, favorable risk patients exhibited a substantially longer period of progression free survival than either intermediate or poor risk patients. We did not enroll any favorable risk patients in our phase 2 combination therapy clinical trial of AGS-003.

Phase 1/2 Monotherapy Clinical Trial.    From April 2006 through October 2008, we enrolled 22 newly diagnosed mRCC patients in a single arm, multicenter, open label phase 1/2 clinical trial of AGS-003 as a monotherapy. These patients were enrolled at six sites in the United States and Canada, including 13 at one site. The trial was designed as a two-stage trial. In stage 1, we would recruit 24 patients to generate at least 18 evaluable patients, and in stage 2, we would recruit an additional 22 patients to generate at least a total of 35 evaluable patients. In order to advance to stage 2 of the trial, we were required to achieve the primary endpoint for stage 1, which was three patients with a complete response or partial response. Secondary endpoints included progression free survival, overall survival, safety and immunogenicity.

Our design for the trial required patients to be asymptomatic or symptomatic but fully functional adults with mRCC, whether or not displaying symptoms, with no prior nephrectomy and with sufficient renal function in the remaining kidney. Patients with brain metastases, those who had received prior RCC therapy and those with active autoimmune disease were excluded from the trial. The trial was designed to enroll subjects with favorable and intermediate risk disease profiles.

In the trial, patients were administered a dose of AGS-003 every two weeks for a total of five doses, followed by a dose of AGS-003 every month for an additional four doses during the 24-week induction phase of the trial. These doses were followed by booster doses every three months until disease progression. However, due to the approval of sunitinib and sorafenib at the time we were beginning to enroll patients in the trial and the changing standard of care for mRCC as a result of the approvals, we experienced delays in enrolling patients and were unable to enroll any favorable risk patients in the trial. For these reasons, we shifted our development focus for subsequent trials to AGS-003 as a combination therapy.

To date, one patient in the trial has continued to be dosed for more than three years, and two other patients in the trial continue to be monitored for overall survival.

The following table summarizes certain key data from the 22 patients (13 intermediate risk; 9 poor risk) enrolled in the trial:

 

Outcome

   (N=22)

Median PFS

   5.6 months

Median OS

   13.6 months

Complete response

   0 patients

Partial response

   1 patient

Stable disease

   7 patients

Immune response

   IL-2 and IFN-g recovery

Particular observations from these data and the trial, which have informed our further clinical development of AGS-003, include:

 

   

Despite the intermediate and poor risk population, seven of the evaluable patients experienced some degree of tumor regression at one point during the induction phase of treatment with AGS-003.

 

   

AGS-003 was found to have positive impact on immune cell function and restoration of cellular immunity, including an increase in levels of IL-2 and IFN-g in a majority of patients.

 

   

AGS-003 was well-tolerated, with adverse events limited to mild injection site reactions, transient flu-like symptoms and tenderness in the lymph nodes.

 

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Phase 1/2 Monotherapy Clinical Trial of MB-002.    Prior to developing AGS-003, we developed a predecessor RNA-loaded dendritic cell drug product candidate, MB-002, for the treatment of mRCC. From April 2004 through March 2005, we enrolled 20 newly diagnosed mRCC patients in a single arm, multicenter, open label phase 1/2 clinical trial of MB-002 as a monotherapy. The overall endpoints for this trial included safety, feasibility of developing and supplying patient-specific product to clinical sites from a central facility, clinical benefit, progression free survival and immunologic response. In order to achieve success for this trial, we had to demonstrate the product was safe, could be readily manufactured and supplied from a central facility, generated anti-tumor activity and had the ability to induce an immunologic response capable of restoring IL-2 and IFN-g based T-cell responses in treated subjects.

This trial was designed to enroll patients with newly diagnosed mRCC, whether or not displaying symptoms, with no prior nephrectomy and with sufficient renal function in the remaining kidney. Patients with brain metastases, those who had received prior RCC therapy and those with active autoimmune disease were excluded from the trial.

In the trial, patients were administered a dose of MB-002 every two weeks for five doses, followed by a dose of MB-002 every month for four doses, during the 24-week induction phase. This dosing of MB-002 was followed by booster doses every three months until disease progression.

The following table summarizes certain key data from the 20 patients (15 intermediate risk; 5 poor risk) enrolled in the trial:

 

Outcome

   (N=20)

Median PFS

   6.3 months

Complete response

   0 patients

Partial response

   0 patients

Immune response

   IL-2 recovery only

Particular observations from these data and the trial, which informed our further development of AGS-003, include:

 

   

Four patients experienced some tumor regression at one point during the induction phase of treatment with MB-002.

 

   

MB-002 was well-tolerated, with adverse events limited to mild injection site reactions, transient flu-like symptoms and tenderness in the lymph nodes.

 

   

MB-002 was feasible to manufacture and deliver from a central facility to clinical trial sites in the United States and Canada.

 

   

The immunologic response data suggested that MB-002 was only able to partially overcome the immune suppression observed in mRCC. While IL-2 recovery was observed, IFN-g recovery was not observed in the majority of patients.

Because MB-002 corrected defects in the production of only one of the two critical cytokines - IL-2, but not IFN-g - required for an effective immune response, we conducted further laboratory research and developed an optimized product candidate, AGS-003. AGS-003 differs from MB-002 in the way we mature the dendritic cells prior to administration. Based on in vitro experiments that simulate immunization in the laboratory, we observed that AGS-003 could overcome both critical cytokine defects in RCC patient cells and fully restore immune response. We subsequently confirmed this observation in vivo in the phase 1/2 monotherapy clinical trial of AGS-003 and in the phase 2 combination therapy clinical trial of AGS-003 and sunitinib.

 

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Monotherapy Rollover Clinical Trial.    In 2006, we enrolled two intermediate risk patients who had completed dosing in the phase 1/2 monotherapy clinical trial of MB-002 and who had experienced two years of stable disease in a separate, open label rollover trial of AGS-003 monotherapy. As this trial was an extension trial and observational in nature, the endpoints for this trial consisted of continued safety assessments and immunologic assessments to denote any differences between MB-002 and AGS-003. In this trial, the two patients received an induction phase of AGS-003 doses, followed by continued booster doses, consistent with the AGS-003 dosing schedule in the phase 1/2 monotherapy clinical trial of AGS-003, and were treated with AGS-003 for an additional four and four and a quarter years, respectively, until disease progression occurred.

Other Development Activities.    We are conducting preclinical testing of AGS-003 in combination with some of the new mRCC therapies and the mRCC therapies in late-stage development with the goal of determining whether AGS-003 may be used in combination with multiple approved therapies and therapies in late-stage development in addition to sunitinib.

AGS-004 for Human Immunodeficiency Virus

We are developing AGS-004, our second Arcelis-based product candidate, for the treatment of HIV. We completed two early stage clinical trials of AGS-004 and are currently conducting a phase 2b clinical trial. Our phase 2b clinical trial of AGS-004 is currently being funded entirely by the NIH as part of a $29.9 million contract awarded to us as part of a competitive submission process in 2006. We plan to proceed with further clinical development of AGS-004 following completion of the phase 2b trial if we are able to obtain government or other third-party funding for such efforts.

Human Immunodeficiency Virus.    HIV is characterized by a chronic viral infection and an associated deterioration of immune function. Specifically, the virus disables and kills crucial human immune cells called CD4+ T-cells. Over time, this viral impact on an infected person’s immune system outpaces the body’s natural ability to replace CD4+ T-cells and immunodeficiency results. CD4+ T-cells are a sub-group of lymphocytes, a type of white blood cell. CD4+ T-cells play an important role in establishing and maximizing the capabilities of the immune system. These cells provide signals for orchestrating an immune response by activating and directing other immune cells, which ultimately leads to the cytotoxic activity.

According to the World Health Organization, the number of people living with HIV in the world was approximately 33.3 million in 2009. The Henry J. Kaiser Family Foundation estimates that more than 1.1 million people are currently living with HIV in the United States. According to the Centers for Disease Control and Prevention, the number of new cases of HIV infection in the United States is expected to remain steady at about 55,000 cases per year for the next decade. The number of new cases of HIV in Western Europe in 2009 was 30,000 according to the World Health Organization.

Existing Therapies.    In 1996, a combination of oral medications known as highly-active antiretroviral therapy, or HAART, was introduced to treat patients with HIV. Since then, the introduction of new therapeutic drug classes and combination drug treatment strategies has enhanced treatment for HIV. Datamonitor estimates 2008 global sales of HIV treatments to be $10.7 billion.

New drugs for the treatment of HIV are continually being introduced because current treatments are imperfect. The requirement of existing therapies for lifelong daily treatment has made population-wide adherence difficult. Poor compliance has led to drug resistant HIV variants that are ineffectively controlled by the available armamentarium of approved drugs. In addition, although some current drugs used for the treatment of HIV are relatively benign, few combination regimens are wholly non-toxic. The most recent U.S. guidelines on antiretroviral treatment contain a number of tables of adverse effects of combination regimens and how to manage them. Some combinations present potentially life-threatening complications and other complications that are chronic, cumulative and overlapping, and sometimes irreversible. As a result, although HAART and these new therapeutic drug classes and drug treatment strategies have saved many lives, there is a need to develop new therapies that address these shortcomings.

 

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Description and Development Status.    AGS-004 is a fully personalized immunotherapy based on our Arcelis platform. It is produced by electroporating dendritic cells with RNA encoding for patient-specific HIV antigens that have been derived from a patient’s virus-infected blood and with the CD40L protein. The process for producing AGS-004 is the same process as is used to produce AGS-003, with the one key difference being that AGS-003 contains all of the antigens from a patient’s tumor cells and AGS-004 contains all variants unique to each individual patient of four selected HIV antigens.

Phase 2b Clinical Trial.    In July 2010, we began enrolling patients in a randomized, placebo-controlled, double-blind phase 2b clinical trial of AGS-004. We plan to enroll 42 patients in the trial at approximately nine sites in the United States and Canada. These patients will be randomized between AGS-004 treatment and a placebo control on a two-to-one basis. As of June 30, 2011, we had enrolled 25 patients in this trial. We expect to complete enrollment of this trial in the fourth quarter of 2011. We expect to complete primary endpoint analysis of the data from this trial in mid-2012.

The primary endpoint of the trial is a comparison against placebo of the anti-HIV effects of AGS-004 as measured by viral load after the discontinuation of standard HIV antiretroviral drug therapy. Secondary endpoints include change in viral load from pre-antiretroviral therapy to the end of the antiretroviral treatment interruption, changes in CD4+ T-cell counts, assessment of plasma viral load kinetics and safety. In order to achieve the primary endpoint, the trial must demonstrate a 1.1 log 10 reduction in the median viral load in patients in the AGS-004 arm from the point of discontinuation of antiretroviral drug therapy to the date that is 12 weeks later as compared to the placebo control arm. Such a result would be statistically significant. A log 10 reduction means a decrease in virus concentration to 10% of the original concentration. A 1.1 log 10 reduction means a decrease to 8% of the original concentration. Viral load is reported as copies of the HIV virus in a milliliter (mL) of blood. Changes in viral load are reported as a log change.

To be included in this trial, patients must be adults with HIV-1 infection that was virally suppressed with a stable antiretroviral therapy regimen, adequate CD4+ T-cell counts and a pre-antiretroviral therapy plasma viral sample to be used to manufacture AGS-004. Patients with HIV Type 2, or HIV-2, active viral infection other than HIV Type 1, or HIV-1, active syphilis infection or a history of hepatic, renal or cardiac impairment which would increase risks associated with prolonged interruption of antiretroviral therapy are being excluded.

In this trial, patients will receive intradermal doses of AGS-004 or placebo every four weeks for a total of four doses, together with their standard antiretroviral therapy. Following the fourth dose of AGS-004 or placebo, the patient will discontinue their antiretroviral therapy but continue to receive AGS-004 or placebo every four weeks for 12 weeks. Patients in the AGS-004 arm that demonstrate control of viral replication and maintain adequate CD4+ T-cell counts can remain off their antiretroviral therapy and continue their treatment interruption past 12 weeks, which we expect will enable us to assess the durability of the clinical benefit to these patients.

Phase 2a Clinical Trial.    From 2008 to 2009, we enrolled 29 patients in a single arm, multicenter, open label phase 2a clinical trial of AGS-004. These patients were enrolled at eight clinical sites in Canada. Eight of these patients had previously participated in our phase 1/2 clinical trial of AGS-004. We are still following five patients post-treatment to evaluate safety and durability.

The primary endpoint of this trial was to measure the ability of AGS-004 to improve immune control of HIV as measured by the proportion of patients with HIV viral loads of less than 1,000 copies/mL on at least three time points during a 12-week antiretroviral treatment interruption. Secondary endpoints included safety, change in viral load from pre-antiretroviral therapy to the end of the antiretroviral treatment interruption and changes in CD4+ T-cell counts.

To be included in this trial, patients were required to be adults with HIV-1 infection that was virally suppressed with a stable antiretroviral therapy regimen, adequate CD4+ T-cell counts and a pre-antiretroviral therapy plasma viral sample to be used to manufacture AGS-004. Patients with HIV-2, active viral infection other than HIV-1, active syphilis infection or active autoimmune disease were excluded.

 

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Patients initially received four monthly doses of AGS-004, together with their standard antiretroviral therapy. After receiving those doses, antiretroviral therapy was discontinued and two additional monthly doses of AGS-004 were administered. Patients who maintained plasma viral loads under 10,000 copies/mL and CD4+ T-cell counts above 350 were eligible to remain off of their antiretroviral drugs and receive up to two additional booster doses of AGS-004 at eight and 12 weeks, respectively, after the second monthly dose administered during the period of antiretroviral treatment interruption.

In this clinical trial, eight of the 24 patients that continued the trial during the 12-week period of antiretroviral treatment interruption had HIV viral loads of less than 1,000 copies/mL on at least three time points during the 12-week period of antiretroviral treatment interruption. In addition, we observed the following other results:

 

   

AGS-004 was safe and well-tolerated, with no additional risk observed during antiretroviral treatment interruption, no subjects experienced serious adverse events that were related to treatment with AGS-004 and no subjects reported an adverse event leading to the discontinuation of AGS-004.

 

   

Sixteen patients had reduced HIV viral loads at the end of the antiretroviral treatment interruption period as compared to their pre-antiretroviral therapy viral loads.

 

   

Similar to the trend we observed in our phase 2 combination therapy trial of AGS-003, we observed a trend towards correlation between the percentage expansion or proliferation of CD8+ central effector and memory T-cells and improved virologic control.

 

   

The median CD4+ T-cell counts three months after the antiretroviral treatment interruption did not demonstrate a statistically significant decrease from the median of the last three CD4+ T-cell counts for the period during which the patients received AGS-004 and antiretroviral drug therapy.

Phase 1/2 Clinical Trial.    From 2006 to 2007, we enrolled 10 patients in a single arm, single center, open label phase 1/2 clinical trial of AGS-004. The primary endpoint of this trial was to examine the immunogenicity of AGS-004 monotherapy through CD8+ central effector and memory T-cell response. The secondary endpoint was the safety of AGS-004 in combination with antiretroviral therapy. The inclusion and exclusion criteria were substantially similar to those for the phase 2a clinical trial of AGS-004. Patients received four doses of AGS-004 one month apart.

This trial met its predefined endpoint of demonstrating multifunctional CD8+ central effector and memory T-cell response against multiple HIV antigens in four of the nine patients whose materials were available for testing. AGS-004 was well-tolerated, with adverse events limited to mild injection site reactions, transient flu-like symptoms and tenderness in the lymph nodes.

Future Clinical Development.    Our ongoing phase 2b clinical trial of AGS-004 may support a similar phase 3 trial design with viral load control as the primary endpoint. However, we are considering other potential endpoints, such as maintenance of CD4+ T-cell counts or reduction in inflammatory markers. Alternatively, we may target HIV-infected individuals who have not received any prior treatment with the goal of significantly delaying the need for antiretroviral therapy. We are working with key opinion leaders to determine the appropriate future clinical development plan for AGS-004. We expect to make this determination based, in part, on the outcome of our ongoing phase 2b clinical trial. We do not plan to conduct a phase 3 trial or other clinical trials of