Approval and launch hasn't quite meant Easy Street for Seattle Genetics (SGEN). Granted, the company now carries a $2 billion market cap and has doubled over the past two years, but there still seems to be a great deal of controversy about the true potential of its drug Adcetris and the subsequent fair value. Oddly enough, perhaps part of the answer is for Seattle Genetics to think a little more like a pharmaceutical company and a little less like a biotech.
Where Will Adcetris Go?
Arguing about market potential and peak sales is nothing new in biotech -- just review the debates at AEterna Zentaris (AEZS) or Vivus (VVUS) sometime -- but the spread in sell-side estimates for Adcetris still surprises me. I've seen expectations as low as $250 million to as much as $900 million. On the low end, it would assume that Seattle Genetics finds largely unmitigated failure in extending the label and usage; on the high end, it presupposes that almost everything goes right.
Certainly the early results from the launch haven't settled much of anything. Sales were a little light in the fourth quarter, as patient recruitment seemed strong, but treatment duration was a little short. So, enter the next debate - is Seattle Genetics going to quickly burn through the "pent up demand" for the drug and fail to extend treatment durations, leading to stagnant sales before additional indications, or is a physician education/marketing program going to bring treatment times more in line with management expectations?
Ultimately I come down close to the middle on that sales potential. Factoring in a 15% discount rate, the fully diluted sharecount, a revenue multiple (8x) and assorted odds and ends, I see fair value for Adcetris of around $15 per share.
Leverage The Technology
Seattle Genetics is not just a one-drug story, though. For starters, there are three other drugs in the pipeline where the company has a sizable (or sole) ownership stake. Granted, these compounds are quite a way back in development, so won't be contributors for five years or more.
One of the other things going for Seattle Genetics is its antibody drug conjugation technology portfolio. ADC basically allows drug companies to make more effective cancer-fighting drugs that tie toxic payloads to cell-specific antibodies. Unlike a lot of companies that tried for too long to make of a go of it as a technology licensing partner before adopting proprietary compounds, Seattle Genetics has had a two-pronged strategy in place for a while now.
Seattle Genetics boasts a sizable roster of ADC partners, including Roche (OTCQX:RHHBY) and GlaxoSmithKline (GSK). These projects are still overwhelmingly in early-stage studies, but the most advanced program (Celldex's (CLDX) CDX-011 for breast cancer) will be showing Phase 2 data soon at the upcoming ASCO meeting in early June.
Are these partnerships going to make Seattle Genetics and its shareholders rich? Probably not, as the royalties are modest (mid single-digit, typically), but they do represent potential cash flows with high margins that require no additional work from the company. I believe this business could be worth an incremental $4 to $5 to Seattle Genetics. Moreover, looking at ImmunoGen (IMGN) (another company that has been actively out-licensing its own engineered antibody technology), that valuation may well be conservative.
Leverage The Infrastructure
Where I think Seattle Genetics could, and should, really start to think more like a pharmaceutical company is where its business infrastructure is concerned. Management made the decision to retain U.S. market rights and build out its own sales effort.
At this point, though, the addressable market for Adcetris is relatively small. That will change to some extent if and when clinical data supports label extensions, but the early stage of Seattle Genetics' other pipeline drugs suggests some potential under-utilization.
Perhaps, then, Seattle Genetics should look for partnering or acquisition opportunities with the idea of running more product through its infrastructure. There are quite a few small oncology biotechs out there that either have not partnered their late-stage compounds or have reached agreements that allow them to opt for co-promotion.
Just to name a few, there are ArQule (ARQL) and AVEO Pharmaceuticals (AVEO) and Celldex. ArQule and AVEO have late-stage oncology drug candidates with U.S. commercialization opt-in rights with their partners. Celldex has no partner for its Phase 2 breast cancer drug CDX-011, nor its Phase 3 brain cancer drug CDX-110. Certainly Seattle Genetics would have to be judicious and careful with these decisions, but I think it would at least be worth exploring.
The Bottom Line
Summing up the parts, I see $15 per share in value from Adcetris, $5 in ADC technology value, and another $4.50 per share from the pipeline and balance sheet. Although the total fair value of $24 is not all that exciting by the high-risk/high-reward standards of biotech, I do think there is an opportunity for the company to build value through in-licensing opportunities.
What's more, I like the cost-free revenue potential that the technology platform offers (to say nothing of ongoing technology development and licensing opportunities) and I think my numbers on Adcetris may well be conservative. Consequently, although I don't think the appreciation potential is as great here as in other names, I do think it's a relatively safer play by the standards of biotech investing.