Argenx: Changing Lives with Llamas - [Business Breakdowns, EP.122]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from. and we are here to bring them to you. To find more episodes of Breakdowns, check out joincolossus .com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This is Zach Fuss, an investor at Irenic Capital. Today, we're breaking down Argenix, an immunology company founded in 2008 by its three founding partners. Today, it's a $30 billion company set to produce over a billion dollars in sales. They're known for their skill in developing antibodies for complex disease targets and know a large part of their medical breakthroughs to llamas, which have similar antibodies in their immune system to those found in humans. To break down Argenics, I'm joined by Julia Angelis, an investment manager at Bay League Effort.

1:27Throughout this conversation, we'll discuss how Argenics navigates the complex world of drug development, clinical trials, regulatory approvals, and the ultimate commercialization of autoimmune therapies. We'll also learn more about their transition from a venture capital -backed business to its 2017 IPO, and today, a meaningful revenue -generating business. We hope you enjoy this business breakdown. All right, Julia, thank you for joining us today to discuss Argenix. It's a business that works on solving a number of different autoimmune diseases. The business is doing incredible work. It's having tons of success.

2:03And so maybe just to start understanding that this is a very complex topic, a basic explainer on kind of the immune system and autoimmune diseases and how it all works and the problems that they're addressing. Thank you so much for having me. So immune system is a very complex network of cells and proteins. And I personally find it to be one of the most fascinating organs or kind of biology tools. It does protect us from infections and diseases like cancer. And a strong immune system is really fundamental to our health. Unfortunately, over our lifespan, our immune system can evolve in many different directions.

2:41For some, it gets stronger and we can maintain it through the healthy lifestyle. But for some people, unfortunately, it gets out of balance and we get a wide range of diseases. And allergy is probably one of the diseases that people are most familiar with. When basically your immune system turns against innocent particles like pollen, it starts considering them as invaders and starts attacking them. This in turn causes inflammation and all the symptoms associated with allergies like sneezing, coughing, and really feeling unwell. In the case of autoimmune diseases, actually, the mechanism is very, very similar.

3:19Instead of pollen, immune system actually attacks healthy tissue, healthy cells of human body. It's like the body turns against itself, which is quite a frightening thought. And there are really, really wide range of diseases. Again, most of the people would be familiar with type 1 diabetes. In this particular case, the immune system attacks certain cells in pancreas. that produce insulin. And therefore, actually, patients are actually not able to generate any insulin and therefore required to get insulin injections as a treatment. So in the case of Argenix, they focus exactly on a very wide range of autoimmune diseases.

4:02Some of those diseases, like CIDP, NMG, the immune system attacks nervous cells, nerve system of the body, and cause all sorts of disabilities. For example, in the case of CADB, it's a progressive disease. And at certain stage, patients actually losing ability to move and 30 % of patients end in a wheelchair. And really an unfortunate thing for patients, at the moment, there is no really proper treatment for this condition. The current way of treating it remains rather barbaric because of the various side effects. For example, if we take intravenous immunoglobulin, it takes more than eight hours to infuse the therapy in the hospital.

4:49And after that, patients might experience flu -like symptoms. They could also vomit, they could have a rash, and there is also risk of acute renal failure. So if we take Argenix technology, it actually allows entirely to think about the treatment options for patients with a wide range of autoimmune diseases. So not only their treatment is far more effective than any other existing treatments, it can be administrated just within 30 seconds and eventually patients will be able to do it themselves. They don't need any doctors or nurses to help them with medicine. So if we take it in the context of the history of the disease, it's a massive breakthrough and those patients didn't see any proper innovation over the past 30 years.

5:37So that's why this really makes this truly exciting. I think that was a very helpful and extensive background. I guess if I were to ask you to distill it into like two or three sentences, what is it that Argenix does? I would say that Argenix develops effective treatment for autoimmune diseases. It solves the problem of future med need because so far patients don't have any good treatment to help them. You mentioned things like diabetes being autoimmune. They obviously have quite a prolific impact on the broader population. But my understanding is that there's an extremely long tail of more specific autoimmune diseases that Argenix addresses.

6:23What are some of the kind of unique solutions that they are producing to address these edge cases of health? The whole area of autoimmune diseases is very poorly understood. And that's why so far we haven't been able to actually develop a treatment which is very specific for those diseases. And so the current way of approaching it is pretty much like a scattergun when we throw steroids because they just pacify the immune system in a very undifferentiated way. And by pacifying it, you know, we hope it's going to address this particular disease. But as we know, the steroids have many side effects, but it's also because of this non -specificity.

7:05Other types of treatments like immunoglobulins, which I mentioned before too, is exactly the same problem. We're giving a cocktail of antibodies to a patient and we don't really understand what mechanism at the play to actually help patients, but we know it works. And what Argenix does, it's the first time we have actually a very specific type of approach when we truly understand the mechanism of action and why this particular drug leads to the patient outcome to a clinical benefit. And it's because they target a certain pathway in biology, which is responsible for recycling those pathogenic antibodies, those antibodies that attack healthy cells.

7:48And when we block that passage of recycling, then those antibodies just get out of the system. And that's why there is nothing to attack the healthy cell. So what I'm saying is the first time we actually have a type of treatment, which is very specific, we truly understand the biology, how it works, and how that biology actually is connected to the disease. And why by doing that, we can actually lead to differentiated clinical outcomes for patients. And so if I kind of look across the broader biotech and biopharma space, generally we see extremely promising therapies in regards to cancer, Alzheimer's.

8:30But to me, at least, it feels like autoimmune diseases don't receive the same level of attention. And maybe I'm wrong about that. what are kind of some of the key differences as to why research organizations are looking to address these autoimmune diseases versus the broader ecosystem of cancer, Alzheimer, diabetes, drugs, et cetera? This is a very good observation. As we know, cancer is probably the most well -funded and research area. And that's why we actually are very well advanced in getting closer to cure cancer. But I would say really advances in all other areas following cancer is a product of that.

9:08There is so much exciting things happening on the technology side that allow us to start making shifts in understanding diseases which were very hard to address in the past. And this is connected to genomics, our ability to sequence genomes at scale, and also data science, that interrogating biology, really learning from the blueprint actually what the possible causes of diseases. So all that is actually shifting profoundly our understanding of the biology of diseases. And cancer always been kind of the front runner, but everything else is not starting picking up. And in the case of autoimmune diseases, it's a bit even more complicated.

9:47I wouldn't compare it with Alzheimer's. I still think brain is probably the most complicated thing. But autoimmune is probably not far from complexity because the complexity of the immune system with many different ingredients which interact within each other, but also with the body, which then causes diseases. And that understanding is not here. So that's kind of the result of lacking tools to really study the biology of immune system. And this is changing now. Argenix is just one of those companies that have been really good at exploring and getting good understanding of the deep biology of those diseases.

10:23And then if I kind of take a step back and try to, I guess, frame how big of an opportunity this is, do they think about their market in regards to the addressable market or the dollar amount? How do they attack it? The opportunity actually is untapped in certain ways. At the moment, the company has 13 programs in clinical trials just based on one mechanism of the immune system. So this is the most advanced programs and we have most understanding in terms of mechanism how it works. But the opportunity to scale it by another dose is there because what we are learning that actually autoantibodies It is exactly the mechanism that Argenix targeting is present in many, many different diseases.

11:11So at the moment, they have 13 and they can expand it over the next few years, potentially to another two or five. But I wouldn't be surprised. And in five, 10 years, you can probably see 30, 40 for that particular target. So there is immense scalability in it. And if you think about in terms of dollar terms, if you just take the US in the case of one of their diseases where Argenics already have a product on the market, there's 60 ,000 patients. In Europe is the same number. So when you start adding all those diseases together, you can easily get to over the million. So if you think about the addressable market and the pricing that the company managed to negotiate with pairs, you can easily see how it can become one of the best selling drug in history.

11:57And I'm not saying it lightly. I truly believe it can because, as I say, the power and the strong biology this drug addresses. If you don't mind, when you say it could be one of the biggest drugs in history, what is the simple math of that? Do you think about it from the number of patients times the number of treatments times cost of reimbursement? When we look at the valuation and trying to set the opportunity, we are modeling most what you can see, but still we invest on the basis of the invisible part. Because we know there are more drugs coming into the pipeline. But if you just take what you can see, you know, the first four most advanced diseases.

12:37So the first one is already generating $400 million on the first year of lunch and growing very, very strongly. And when you just take the number of patients, the pricing that the company managed to negotiate in the US, and we know that conversations in Europe, Japan also advancing very healthy. so just based on that you can see how it can become seven eight billion dollar opportunity within next five seven years with the launches and everything so um and that's just for the first four programs and then we are not talking about another nine and anything that hasn't been actually introduced to the clinical and all of those are really big diseases so therefore you can see how it can get to more than $20 billion and the only few drugs that actually deliver that.

13:25Now that we've done a great job providing the context for this business, the problem they're addressing, the opportunity, I'd be curious how you guys came across the business. In some ways, it's one of the largest pharmaceutical companies that I've never heard of. So clearly I've been living under a rock, but you guys have been invested and involved for a long time. I'd love to learn more about the origin story of that investment. Again, just to remind that Argenix focuses on technology called antibodies. So antibodies are produced by immune system, but what Argenix does, they produce antibodies outside the human immune system.

14:00Antibodies can be derived from many different types of animals. So we can use mice, goats, rabbits, sharks, and llamas. And in terms of the nature of antibodies from each animal, each of those would have its own advantages and disadvantages. Before encountering Argenix, I came across another Belgian -based company called Ablinx. Ablinx was developing antibodies based on llamas' immune system. And what I found out that llamas actually have really differentiated type of antibodies that allow us to do new things that we couldn't do with any other types from other animal models. But unfortunately, very shortly after I came across Ablinks, it got acquired by Sanofi.

14:45And then a few months later, I have been asked whether I was interested to meet with Argenix. And then when I heard the word Lammas, that was a very strong hook for me because I already knew that there was something special there about the source of antibodies and potential differentiated factors. Interestingly, so I went also back and tried to understand why Lammas, why Belgium, because it was such a coincidence that two companies coming from Belgium and they're both focusing on their antibodies derived from llamas. And it was a really fascinating story about how actually students entirely serendipitously have discovered those antibodies.

15:22And it was done in the Belgium Research Institute. And this became a hub for llamas and studying the property of their antibodies. So this is the history of it. And just to kind of highlight what is a major advantage of using llamas antibodies, one is diversity and it matters. So the broader range of antibodies, the better choice we can make. But also they're similar to human antibodies. And this matter for the quality of the final product. Arginx, of course, wouldn't be that successful if we just use pure llamas antibodies because there is also a lot of technologies that go on top of it. So the company actually, after deriving them from the animal, there is a lot of modifications need to take place to make it to a drug.

16:08And what the company has, it has a stack of different technologies to really make it very specific and safe for patients and also convenient in the way it's administered to the patient. So there's several technologies that the company has patent on that actually differentiate beyond just being sourced from llamas. So if I'm understanding this correctly, this company takes biomaterials from other mammals that are similar but have differentiated characteristics to what we have in our own immune system, and then they can create therapies leveraging kind of the unique nature of those antibodies and then ministering them to humans.

16:47It sounds like science fiction, is that correct? Yeah, it's not the science fiction anymore. We've been doing it for like four decades or even longer. So this is a field of antibodies. It's been pioneered by companies like Genentech. In the biology space, it's not a science fiction anymore. What other animals have they been deriving antibodies from? Most companies working with mice, and it's also quite a successful model, but they are experiments with sharks. The sharks' antibodies, they have some commonality with llamas. And yeah, only a few companies like Argenix working with llamas. And so this company has been around now for 15 years.

17:24In 2008, the founders had an idea. They've created a massive business and commercial operation around it. Can you just kind of take us through the evolution of how this business came to exist and then where we are in its evolution today? It's a hard journey for any biotech company, especially in the European context. In general, as we know, it could take more than a decade to develop a drug and also takes billions of dollars and success rate for the industry around 10%. It's actually a very tough industry to be in. And because of the risk profile, it's very hard to attract investors into this industry.

18:01And the European investors tend to be even more risk averse than, for example, investors in the US. So being a biotech startup in Europe is really, very difficult. Argenics have been in that very difficult situation. They've been really raising here and there not more than $60 million before PropAround for many, many years and had to really survive on a very low funding. But they did a fantastic job. They developed the science and only with a bigger investor joining, and it was a US -based investor and introduced, first gave more capital, but also aligned the interest with the company with a more long -term ambition of building the business rather than develop one asset and sell it to the large pharma company.

18:46And when you change that mindset, the strategy also changes. And that, I would say, was quite pivotal in the company history when they actually realized they don't need to be one asset company, but actually they're platform -based and they can think about multiple drugs in the future and remaining independent company. So this has been one of the crucial comments and that investor is called Orbimet. So they played a very significant role in the evolution and success of the company. But then what happened as a company was making more progress and actually normally progress in biotech associated with a more demand for capital, because as you move to the late stage trials, they're much more expensive as you recruit more patients.

19:28And company was still not very well capitalized to do that. And this is actually was the moment where our roads crossed back in 2018. We spent a lot of time, actually, after the first time we met, we spent at least a year really trying to understand the technology, the management, how aligned we are, what is ambition level, what is really actually different about the company. And when we decided to invest in the company, instead of taking a position through the secondary market, we actually did a round with the company. And also we did it in such a way we were anchor investors, support the company to raise more money.

20:03and the first round we've done, we invested more than $200 million in the company. And after that, we've done another three rounds. And actually the most recent one is as fresh as from yesterday. So we gave exactly the same amount again, and the company raised another billion dollars on the market yesterday. So I would say the history of the biotech is really very much connected to the capital cycle. And what the company has done particularly well is their ability to attract long -term investors who are interested to supporting the company over the long term and making sure that whatever progress they made is not going to be sacrificed.

20:42I guess what I want to understand is just taking me through the process of solving an autoimmune disease or at least attacking it. How does the company work with people who have these issues? How expensive is it? How do they experiment and improve out and how long does it take to develop? I just want to better understand the process that they're going through. There are many different ways to approach it. Many companies would study the biology of disease inside a house and then find a way how to tackle that disease. What is really different about Argenix is that they're not a biology company. Actually, the entire biology know -how comes from academia.

21:25What the company is really good at is actually antibody development. So the first target of the company, it came from Academic Institute, where actually researchers spent decades really studying the biology of disease, they really understand on a very deep level how disease works, what are possible drivers for the disease, and how you can possibly target it. The strategy of Argenix is to identify those research groups, which are truly specialists in certain areas, engage with them first, learn about it, and then build partnership with those academic groups and start developing drug together. We can ask the question, like anyone can go and build partnerships with academia, how differentiated it is.

22:12Building true collaborative relationship with academia is not as straightforward. It requires certain cultures, especially from the company side. If the company behaves in a very protective way, if they don't share all the data, if they don't also give academia enough freedom to experiment, take risks, and really study the biology, then that relationship will never work. And what the RGNX doing really, really well, the way they engage with academic researchers is almost they become part of their company. And I've been told if you enter the room and there is a project group working on one particular disease or target, you wouldn't tell who is actually from the company and who is external from academia because it's such tight group work and really team spirit.

23:01Talk to a few of those academic groups just to understand actually how it works. And they told me it's very, very different from large pharma companies because in the case of large pharma, it's much more transactional. It's very much driven by milestones. There is not so much flexibility. You find something else, you have to stick to the agreement. So it's a very, very different type of agreement, but also the cultural flavor of interaction, which doesn't allow to share all the information and being truly explorative. I would say this is the key differentiation. So the way the study happening, you know, the way we study biology is actually happening in academic labs, but the company is very good in identifying those breakthroughs and engaging with these groups and then building partnerships and on the back of it, developing drugs.

23:50At any given time, how many specific autoimmune diseases are they working towards curing? At the moment, they're around 15, 16, which are kind of more visible to us, which is in a pipeline. But as I say, as a spec, because of the biology, which they really understand, and they have already the drug for, it actually could apply to so many different other diseases. So it can be expanded by another 10, 20, 30, and potentially more. And they can really also potentially go for bigger diseases. Multiple sclerosis is one of those. I would say where the company is now is really probably just the beginning because they have an early validation of their technology that it works.

24:34And now they just need to gradually build out for all these diseases which is out there. Today, this business is a 30 billion US dollar market cap. They're going to produce in excess of a billion dollars in sales and presumably that's going to continue to grow at an extremely healthy pace. What are some of the more important markers? What were their initial accomplishments that told the market and gave you guys the confidence to continue to invest in the company? The way we invest in the companies is we look at many different characteristics, but management and the company's culture plays an incredible role.

25:12One is a major ingredient in our investment process. And I would say this is a company that really stood out on the execution. And it's not just execution, but actually the way they go about and try to solve the problem. So one of the questions in our research framework we have, what is the evidence that the company cares about patient and why it sounds like a very simple question? It's actually very, very hard to answer it because on one side, you would say, okay, Any biotech companies would make that claim because they're developing a drug that should help the disease, but not every single company is truly doing it in a way that's going to make a difference for a patient.

25:52And sometimes there are more just purely economic interests rather than actually solving a problem. But in the case of Argenix, what really stood out for us, the entire strategy was aligned around making a difference for a patient. And we strongly believe When you can truly do that, if you make a difference, then that would lead to investment returns. Actually, that hypothesis has been validated so far. So I talk about the differentiated technology and the way the company develops drugs is the patient is the only focus. First of all, this drug has to be effective. But another aspect they really take seriously is safety.

26:34Safety is about minimizing off -target interaction of the drug. So off -target means when drugs are interacting with biology, which is not connected to the disease and actually start causing other diseases because the drug could also start stopping some healthy processes. Very often we take drugs and it treats one thing and then it damages another one. And by the end of it, actually many patients in many different diseases, actually they don't want to take that drug because the side effects are so horrendous. And in the case of autoimmune diseases and drugs that Argenix develops, actually, because when you stop recycling of autoantibodies, but you still need some antibodies to perform their vital function because there would be healthy antibodies that needs to be recycled.

27:21And so if you really overdo on that process, and if you not do it precisely enough, and you stop recycling of healthy antibodies, then you can start to get infections. Then actually you start weakening the immune system in a very unhelpful way. So what the company managed to achieve while they block this recycling, they still managed to maintain the healthy functioning of immune system. And then they take the third component into consideration, which is a convenience. So they also think about the patient's experience of the treatment, because of course patients would be ready to do anything, you know, to get a treatment and spending hours with infusions in a hospital.