Last Friday, Agenus (NASDAQ: AGEN), an immuno-oncology player, saw its shares soar by a staggering 40.8%. This remarkable rally occurred seemingly without a clear catalyst. The company is set to announce its first-quarter earnings for 2024 before the market opens on Tuesday, May 7. However, there’s no certainty that the company will release any information that justifies this significant surge in its shares.

So, what’s causing all the excitement? Investors seem to believe that the company is approaching a significant turning point. This could be due to its promising anti-cancer combination of the checkpoint inhibitors botensilimab (BOT) and balstilimab (BAL). Agenus intends to apply for approval of this combination for use in later-line metastatic microsatellite stable (MSS) colorectal cancer (CRC) without active liver metastases by mid-year.

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But the question remains: Is Agenus still a strong speculative buy after its recent rise? Let’s dig deeper to find out.

Agenus’ core value proposition

The near-term value proposition of Agenus hinges on the BOT + BAL filing in advanced CRC. Despite being a later-line setting, Agenus stands to gain from a favorable mix of a lack of effective therapies and the high average cost of cancer immunotherapy, which some studies put at $148,431 per course of treatment.

This combination, with a 50% penetration rate in this setting, could generate between $250 million to nearly $1 billion in annual sales, depending on how aggressively management prices the combination. To put this into perspective, Agenus currently has a market cap of $244 million.

So, even if BOT + BAL fail to reach these early revenue range estimates, the stock still appears undervalued at present. In essence, the market seems to be wagering that this combination will fail to surpass the $80 million-a-year sales mark, assuming a multiple of three times peak sales, which is a low hurdle to overcome given the unmet medical need represented by this particular malignancy and the combination’s fairly impressive clinical profile.

In addition, Agenus has seven ongoing collaborations with biopharma giants like Gilead Sciences and Bristol Myers Squibb. However, the market’s attention is currently focused on the company’s internal pipeline, making it the key area to monitor for both prospective and current shareholders alike.

Risk factors

Why is Agenus’ stock trading at a potentially steep discount? The simple answer is funding. The costs associated with bringing new cancer drugs to market and subsequently establishing a profitable niche are enormous. This is why the list of best-selling drugs each year is almost exclusively made up of deep-pocketed big pharmas and blue-chip biotechs.

While Agenus’ collaboration revenue has been significant in recent years, it may not be sufficient to cover the costs associated with building a salesforce, advertising, inventory, and so on.

This is a common issue among smaller drugmakers, who are primarily research and development firms in their early years. This means that Agenus is likely to continue raising capital through public offerings in the coming years, a move that dilutes current shareholders and can hinder a stock’s forward momentum on news.

The verdict

Does the reward of this small-cap growth stock outweigh its risks? This is the crucial question that investors need to ponder before buying shares. My intuition says that Agenus will finally cross the finish line with this potent anti-cancer compound, and the market will reward the drugmaker with a significantly higher market cap.

However, it’s worth noting that Agenus has been close to a commercial launch before, and things fell apart. This reflects the enormous uncertainty inherent in the regulatory review process, a factor that investors should not overlook. As such, this biotech stock is a highly aggressive growth play best suited for individuals with a long-term horizon and a high tolerance for volatility.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.