4 Reasons Agios' Oncology Deal Should Please Investors

Agios Pharmaceuticals (AGIO +12.89%) threw investors a curveball recently. Instead of being a commercial-stage business, Agios will sell Tibsovo and the rest of its oncology pipeline to Servier Laboratories.

This will give Agios more resources to develop mitapivat, a potential new treatment for rare blood-based diseases that's still in mid-stage clinical trials. This isn't the big buyout offer that investors had hoped for, but it's still a pretty good deal that will get the company out of a tight spot.

Image source: Getty Images.

Here are four of the biggest reasons investors should be thrilled with Servier's offer.

1. Agios isn't up to this challenge

It's been more than two years since Tibsovo tablets earned approval from the Food and Drug Administration to treat patients with acute myeloid leukemia driven by specific mutations in the IDH1 gene. Tibsovo has been clinically effective at stopping mutated IDH1 from running amok.

Putting together a sales team that can execute a commercial drug launch is a challenge that Agios isn't equipped to handle. Tibsovo sales reached just $82 million in the first nine months of 2020, which wasn't even enough to cover sales, general, and administrative expenses of $109 million. Tibsovo hasn't been approved in the EU yet, but Agios' operating budget is already stretched past the limit. The company lost a whopping $230 million during the first nine months of 2020.

As a global pharmaceutical giant, Servier can fold Agios' U.S. oncology department into its existing operations, which is exactly what the privately held company intends to do. Once Tibsovo's ready to launch in the EU, the Paris-headquartered company should also be able to hit the ground running much faster than Agios can on its own.

2. The numbers work for Agios

Servier will give Agios $1.8 billion upfront, plus a potential $200 million milestone payment for vorasidenib. This is an experimental pan-IDH inhibitor in development as a brain cancer treatment.

In the U.S., Agios remains eligible to receive a 5% royalty on Tibsovo sales and 15% of vorasidenib sales if it earns approval. Royalty revenue that tends to flow directly to the bottom line has a much better chance of ending up in the pockets of Agios shareholders than Tibsovo sales do now.

These numbers work out well enough that Agios plans to distribute $1.2 billion to investors when the transaction closes. The company hasn't been specific, but this will most likely occur in the form of buybacks that significantly lower the company's outstanding share count.

3. Mitapivat's going places

Since its public debut in 2013, Agios has been an oncology-focused company. The Servier deal will leave it without any cancer drugs in development.

The new lead candidate in Agios' pipeline, mitapivat, is an experimental tablet that activates mutated pyruvate kinase enzymes. It appears to work as intended. During a pivotal study, two out of five PK deficient patients treated with mitapivat showed hemoglobin concentration improvements, compared to zero patients who were randomized to receive a placebo.

Image source: Getty Images.

4. Resources to run with

Flush with cash from the sales of its oncology assets, Agios will have a lot more resources to develop mitapivat. Pyruvate kinase enzymes play a key role in metabolism, which means multiple diseases affecting humans could be treatable with mitapivat. For example, six out of 11 patients with sickle cell disease (SCD) treated with mitapivat in a phase 1 study achieved meaningful improvements to their hemoglobin levels.

Agios plans to launch a phase 3 trial with a lot more SCD patients in early 2021. That's not the only use it will find for Servier's incoming cash injection. In the first quarter, Agios plans to present results from a single-arm trial with PK-deficient patients. Hopefully these results will demonstrate mitapivat's ability to significantly reduce patients' reliance on bothersome blood transfusions.

Still a great stock to buy

Agios sold royalties owed from Bristol Myers Squibb (BMY +2.70%) for Idhifa to Royalty Pharma (RPRX +1.71%) earlier this year, which allowed Agios to finish September with a big $605 million cash cushion. Even after returning the bulk of Servier's payment to investors, Agios will have plenty of resources left to shepherd mitapivat through the late-stage development process.

The dust this deal will kick up won't settle overnight, but once it does, Agios investors will see they're much better off. Despite the recent run-up, further success for the company's new lead candidate could pave the way for future market-beating gains.