Biotech on the Blockchain?

Bloomberg: In a novel approach for the biotechnology industry, small-cap company Agenus Inc. is aiming to raise $50 million to $100 million by issuing digital securities backed by future sales of an experimental cancer drug.

The digital securities will allow investors to bet on future sales of single products and will have a limited impact on shareholders’ equity, the company said. Agenus plans to offer at least 25 million of what it calls biotech electronic security tokens, or BESTs, to certain high-net-worth individuals and institutional investors starting Feb. 15.

I find this puzzling. First, why break out one drug from the rest of the firm? Investors generally want diversification and this is the opposite. Agenus is basically saying the rest of the firm is a value suck. Second, one of the virtues of the blockchain is that it allows for easy trade but the SEC requires that to buy these securities you must be an accredited investor and as such there are typically encumbrances on transfer. Thus, putting the securities on the blockchain doesn’t lower transaction costs, the way it could for other assets.

A lot of assets will be tokenized (i.e. securitized on the blockchain) in the future so this is an area to watch but to succeed tokenization must increase diversification and reduce transaction costs and this tokenization does neither.


I think this is likely to make big companies more performance driven. Lots of large corporations are inefficient and less innovative than small companies. This is largely because they are big and bloated and driven by inertia. Investors can only make single decision to invest or not invest in the overall entity, so there isn't a good lever to disincentivize their unproductive activities.

If investors could pick and choose individual activities to invest in, it would protect against this.

Also, this doesn't harm investors' ability to diversify at all. They have more ability to choose how they diversify, by picking multiple individual things, rather than investing in a pre-grouped set of things within a large corporation.

Like most blockchain applications, I don't see the point in using blockchain for this. There is no need for a decentralized source of truth. However, the idea itself makes sense to me.

This is a strong analysis, and I think likely right. Outside of what it offers to investors, think of what it offers to employees, who will be motivated to make 'their' products winners even if the rest of the firm is being sucked down - think someone at Wells Fargo during their scandal, or the electronic division at VW.

I politely disagree that this will make big companies more performance-driven. The question to ask oneself is "Why was this not done before?", and if one's answer is "Because there was no blockchain." (yours is not, obviously), then fine, expect it to catch on. If your answer is "Because nobody thought about it." - erm, I have bad news - yes, people did, and used versions of it in limited specific cases (see contingent value rights: ). But more broadly, there is just no demand for it. Companies are bloated and driven by inertia, true enough, but investors are hampered by asymmetric information and just plain old laziness. Basically, big companies' management has little incentive to offer these instruments, and investors have little demand for them.

The costs of corporate bloat and inertia are quite high, I think. If this model really did help with that, it would make the companies that used it more competitive, providing a strong incentive to adopt the model. However, the bloat and inertia themselves might be quite a barrier to this model before it is demonstrated to be effective.

Technology, in general, is certainly an enabler of the idea, even if blockchain is superfluous. Internet banking and investing have been widespread and mature for 15-20 years, which is not so long.

I was going to point out any of the things you mentioned. The company could be using this as a source of information by breaking its operations into smaller components and this doesn't discourage diversification, it just changes the composition of that diversification.

One *possible* reason for blockchain over the market may be that traditional exchanges don't allow for the securitization of individual components of a firm.

Don't they, how is this different then a tracking stock?

"Investors generally want diversification". This is true, but investors can achieve diversification very easily by buying different assets for their portfolio; they do not need companies to diversify for them. This was a lesson of the fall of the diversified conglomerates during the 1980s in the USA (only a few remain). Thus, I think it makes sense to issue securities on a single asset, which will be easier for investor to assess.

On the other hand, I also do not see the point in using blockchain for this.

Yes this is taught in introductory finance courses. Efficient capital markets do not create much incentive for firms to diversify. It is investors who diversify among many risky firms.

Rather than being "puzzled" and speculating, you could call the company and ask.

From the linked article: "Most importantly, Agenus says the securities are “SEC-compliant” but they have not been approved by regulators yet. (CEO Garo) Armen expects full registration to happen in “a matter of months.”' Full registration? If these are to be registered (with the SEC) securities, then their sale won't be limited to accredited investors. I suspect that Armen is confused. What's likely contemplated is an unregistered Reg D (Rule 506) private placement that would be limited to accredited investors because to include non-accredited investors would require an extensive disclosure document (essentially a prospectus). By the way, one of the requirements for a Rule 506 offering is no general solicitation or advertising to market the securities. Has Agenus already violated that restriction? [Why would an offering of a digital token be subject to the securities laws? Here's the definition of a "security": an investment of money in a common enterprise with the expectation of profits to be derived from the efforts of others". That's the Howey test (from the Supreme Court case SEC v. W.J. Howey Co.]

Last month Agenus pulled a registration filing for an offering of securities without selling any. Also, its stock fell 27% last year. Something ain't right in Denmark.

Reminds me of Prodeum

Interesting -- lots of sides to view from. I don't particularly see why they care about blockchain here for any IPO type funding. However, if they think the drug could be huge, then those investments may well become a very active market -- at which point the blockchain may be of value in supporting the trading of those claims.

Could also be a trial run for more direct issuance type structure that starts taking the banking middlemen out of the equation. Perhaps wall street in general as the blockchain could sever many of the same functions as the financial claims management those banking institutions perform.

Of course, Sears was an early retail broker innovation which pretty much lost out but help lead the way to the lower transaction costs in equity trading we have now.

On the blockchain side, who knows? Maybe it's just a tool to drum up interest, which it has.
As for investing in individual assets, within a drug developer the various assets are at different stages and small companies often go years between pushing the next candidate drug into clinical trials. So maybe they see some value in making 1 candidate available for investing so at least the time line of when it should generate some value is more clear. The rest of the company may not be a value suck, it may just create value (or fail to) much further in the future.

How is this different from a tracking stock?

Isn't this about taking away the leverage Big Pharma companies have in negotiating with smaller cash starved small biotechs? It costs a lot to do trials. Big Pharma knows this and is able to cut good deals for themselves. Also, this is a way around short manipulation. The small biotech doesn't have to dilute by offering more stock.

Something isnt wrong with Agenus. Something is right. Gilead just cut a deal with them for $150 million and potential of almost $2 billion in milestone payments. So they are actually offering these tokens from a position of strength, not desperation.

Though I have no special insight into why Agneus is pursuing this strategy I believe it is because of abuse market manipulation of the stocks of many small medical companies in the form of naked short selling by hedge funds. Though not limited to medical companies they are easy targets given their high cash needs to fund drug trials. As most have little or no revenue they mostly try and rely on the public market place for funding. The hedge funds, abetted by many Wall St. firms, sell stock they don't own and drive the price down. Don't believe me? As an example look at the short-selling antics of Martin Shkreli. This market abuse is known to the SEC and FINRA but they choose to due little about it.

I just published an article in response to your post. Looking forward to the discussion.

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