Seattle Genetics Looks Attractive on Fundamentals, Pipeline

Dec.30.10 | About: Seattle Genetics, (SGEN)
We always need to find new drugs to treat the nearly endless introductions of new diseases. In cancer, this becomes a bigger challenge. The problem: to kill an infectious cell, other normal cells are also killed in the process. That is where Seattle Genetics (NASDAQ:SGEN), which makes monoclonal antibodies for cancer, comes in. Its unique technology gives it an edge over the competition and larger players. This valuable asset could not only help it to succeed, but could make it an attractive acquisition target.
The Bothell, Washington small biotech startup founded in 1997 is valued at $1.59 billion. Through it is still in the red, its year over year revenue growth is 37.30% according to Yahoo Finance. The company has no debt and a clean balance sheet. Plus, as shown in the table below from MSN Money, the total revenue grew each year. The total earnings loss shrank each year, too. So the company does not seem to be in any trouble of running out of cash.
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It is important to analyze a drug or biotech company’s pipeline to find future value. From the company website, below is the company’s pipeline of drugs, its treatment, and phase.
Brentuximab Vedotin
Relapsed/refractory Hodgkin lymphoma (HL)
Pivotal/phase III
Post-transplant HL relapse prevention (AETHERA trial)
Pivotal/phase III
Relapsed/refractory systemic anaplastic large cell lymphoma (sALCL)
Phase II
Retreatment of Hodgkin lymphoma, systemic ALCL
Phase II
Front-line HL (+chemotherapy)
Phase I
Front-line sALCL (+chemotherapy) (planned)
Phase I
Non-Hodgkin lymphoma
Phase I
Renal cell carcinoma
Phase I
Pancreatic cancer
Phase I
Prostate cancer
Phase I
Combination trials for non-Hodgkin lymphoma
Phase I
Combination trials for multiple myeloma
Phase I
Autoimmune diseases
Phase I
CD19+ hematologic malignancies
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SGN-35 is jointly developed in collaboration with Millennium Pharmaceuticals, the wholly owned subsidiary of Japanese-based Takeda Pharmaceuticals (OTCPK:TKPHF). Under agreement, Seattle Genetics has commercializing rights in the United States and Canada. Millennium has exclusive rights to commercialize the drug in the rest of the world. But Millennium must pay $60 million upfront and double-digit royalties on annual net sales of SGN-35.
In the first quarter of 2011, the company plans to submit a Biologics License Application (BLA) for Brentuximab Vedotin (SGN-35) to the FDA for approval for both relapsed/refractory Hodgkin lymphoma and relapsed/refractory systemic anaplastic large cell lymphoma (ALCL). The latter has only gone through phase II trials, which could pose a problem in getting FDA approval. However, high performance of the drug in trials may overcome this.
The 52nd American Society of Hematology (ASH) Annual Meeting reported that for relapsed/refractory HL, 75% of the 102 patients achieved the primary endpoint of the trial. Out of the 94% of patients who had reductions in tumors, 34% achieved a complete remission. Side effects were mild compared to current chemotherapy and included sensory neuropathy, fatigue, nausea, upper respiratory tract infection, and diarrhea. For ALCL, 86% of the 58 patients achieved the primary endpoint of the trial. Complete remission was 53%, and tumor reductions were 97%. Side effects were also mild and included nausea, peripheral sensory neuropathy, fatigue, fever and diarrhea.
HL, a cancer originating from white blood cells in the immune system, usually affects young adults ages 15–35 and those over 55. The Leukemia & Lymphona Society estimates that there would be 8,490 cases of HL in the U.S. in 2010. Worldwide, there are over 62,000 cases reported annually. The drug, if approved, will be the best product on the market. No current drug has better response rates. Therefore, SGN-35 will very likely capture a large pie of the market. If it grabs 50% of the market, that would be $212.25 million in annual U.S. sales, assuming the price is $50,000. Plus, the royalties will be at least $100,000 for sales outside the U.S. Worldwide sales should top $1.55 billion, assuming it takes 50% of the market and the drug cost $50,000. That makes a total of about $312 million annually. That is a lot for a $1.59 billion company.
But this is just one drug. It has other drugs in its pipeline that could have potential.
Finally, for short-term moves, it is wise to check the chart for market sentiment. The chart below, provided by MSN Money, shows for the year, the stock had a general uptrend. This is positive for a stock, since it gives it momentum and less chance that it will suddenly reverse its uptrend. But notice that the 14-Period MFI (Money Flow Index) appears to be nearing a trough and poise to go back up again. Although there is not great price correlation with the MFI, the price seemed to go higher as the MFI goes higher.
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Thus, the fundamentals and value of its pipeline and technology make Seattle Genetics appear to be a great buy. And the chart helps to affirm this opinion. Plus at least one drug seems very likely to get approval in the first quarter, bumping up the stock price. On top of that, since its technology seems to be superior to those of its competitors, there is speculation that the company could be an acquisition target. But even if it doesn’t get bought, it may still have a lot of fruit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.