As much as it is vexing when analysts downgrade stocks without bothering explaining the reasons for their decisions, it is refreshing when analysts or investors explain the reasons that led them to bet against some firms. Our eyes have finally fallen on a couple of articles citing the reasoning that motivates short analysts to bet against stocks many other investors believe offer excellent investment opportunities. These authors offer an opportunity for positive investors to dispute their views, while stressing their own.
Wildly shorted among what otherwise are perceived by many as promising biotech’s firms is Seattle Genetics (SGEN), a firm that spent a dozen years struggling toward developing proprietary antibody-drug conjugate (ADCs) therapeutics. These conjugated antibodies have been the dream of many biotech and pharmaceutical companies as they are supposed to add extremely toxic power to the silver bullets i.e., targeted monoclonal antibodies to greatly improve their cancer killing capability without harming healthy cells. Developing these conjugated ADC therapeutics required designing a linker that attaches the targeted antibody to extremely toxic drugs, which is capable to set free the toxic load only inside the malignant cells.
Except for a very few successful attempts, ADCs have proven difficult to create. Many biotech and pharmaceutical companies tried, but failed to develop safe and effective versions of conjugated monoclonal antibodies. Currently, only Seattle Genetics and ImmunoGen (IMGN) have succeeded in designing and developing ADC drugs that demonstrated safety and superior efficacy in clinical trials, using various targeted antibodies for many cancers. Seattle Genetics' success is attributed to its success in developing linker systems that are stable in the bloodstream and release the potent cytotoxic payload once inside targeted cancer cells. Additionally, the firm’s toxic payload is a synthetic, highly potent class of the antimicrotubule agents auristatins, which are 100 to 1,000 fold more potent than traditional chemotherapy drugs.
Recently, the FDA granted accelerated approval for Seattle Genetics’ ADC drug Adcetris (brentuximab vedotin) for Hodgkin’s lymphoma patients who relapse after autologous stem cell transplant (ASCT) and for anaplastic large cell lymphoma (ALCL) patients whohave relapsed or are refractory systemic cancers. Instead of rallying on the accelerated approval news, SGEN took a dive, probably, as many investors decided to follow a new pattern based on a rule of thumb that dictates selling stocks before the companies launch their newly approved products. Advocates of this novel practice try to convince investors that the drugs are either ineffective or that the markets are too small. In the Seattle Genetics case, the weak point used by negative analysts to advocate shorting the stock was the small market.
The author of one of the articles that meant to explain the reasons for shorting SGEN stated that the relapsed and refractory Hodgkin's lymphoma market is smaller than what Seattle Genetics' and bullish analysts tried to portray. The article rebuffed claims by lymphoma doctors that there are enough eligible patients for a successful Adcetris launch, stating that these claims were not true. His reference was a Hedge-fund shorts’ survey, demonstrating that the number of Hodgkin's patients is too low and even if the drug penetration comes strong, it will be more likely due to inventory stocking and a backlog of advanced Hodgkin's patients who were waiting for treatment. Once those patients are treated, Adcetris sales will decline, he believes.
Negative investors also believe that moving Adcetris into first line treatment for earlier-stage Hodgkin's lymphoma will be very difficult because the current first line therapeutics are highly effective.
On the other side of the coin, bullish investors believe that:
The FDA approval of Adcetris has provided a strong proof of concept for the ADC therapeutics’ safety and efficacy. This is clearly obvious from the fact that the Oncologic Drugs Advisory Committee (ODAC) appointed by the FDA has voted 10-0 in favor of accelerated approval of Adcetris for the treatment of the two cancers. It is also confirmed by the fact that the FDA has followed all the committees’ recommendations without exception, including the accelerated approval. This strong proof of concept erases any doubt about the ADC drug’s superior efficacy, not only for Adcetris, but for all the ADC drugs in the Seattle Genetics’ pipeline. It also indicates that the drug was urgently needed for the relapsed Hodgkin’s lymphoma patients and for anaplastic large cell lymphoma (ALCL) patients with relapsed or refractory cancers.
According to The American Cancer Society and the Leukemia and Lymphoma Society, 8,800 cases of Hodgkin lymphoma will be diagnosed in the United States during 2011 and approximately 1,300 people are expected to die from the disease. The number of patients who are living with the disease, though, is over 150 million and although front-line combination chemotherapy has offered durable response rates, up to 30% of these patients relapse and have few therapeutic options beyond autologous stem cell transplantation (ASCT) that they might be refractory to the procedure. ACTL, the approved second indication for Adcetris, is an aggressive type of T-cell non-Hodgkin lymphoma. In the United States, 50%, i.e., 1,000 of the 2,000 systemic ALCL patients diagnosed annually, relapse or are refractory to front-line treatment. These patients could not be helped by the front-line transplant procedures or other treatments.
Knowing that Seattle Genetics is the sole marketer of Adcetris in the US and that the drug is priced at $4500 per vial, or $94,000 to around $115,000 per course of treatment, Ascentris can be estimated to generate more or less $300 - $400 million/year, which is not a negligible amount for a development-stage firm that has yet to generate revenues from drug sales.
Also, loyal shareholders do not agree that moving Adcetris into earlier-stage Hodgkin's is a dilemma. A drug approved for advanced cancer, is expected to be more effective and to have more durable effects in earlier stage cancer.
Having said that, one has to realize that investors in SGEN do not bet on Adcentris sales alone whether large or small. They bet on expectations that the firm will be putting many other ADC therapeutics on small as well as large markets. For them, the FDA approval of Adcentris is a priceless proof of concept, which confirms the breakthrough nature of the ADC drugs, some of them will turn into blockbusters. Clinical trials that led to the approval have, indeed, confirmed that the ADC drug has spared healthy non-targeted cells, reducing many of the toxic effects of traditional chemotherapy while enhancing the anti-tumor activity. Attaching Seattle Genetics’ highly potent cell-killing agents through the firm’s proprietary stable linkers could improve the safety and efficacy of many targeted antibody therapeutics that are already approved and marketed around the world.
A case in point is Roche’s flagship HER2 breast cancer drug Herceptin. When Herceptin was developed into the ADC drug T-DM1 whose technology is developed by ImmunoGen, the drug demonstrated efficacy that stunned Roche and its wholly owned subsidiary firm Genentech.
Investors are expecting to see a large number of ADC drugs, having more potent effects on cancer than conventional drugs and targeted antibody therapeutics, fill the cancer market.
That’s what we expect too. That’s why we are long on SGEN.