Seattle Genetics (SGEN), based outside of Seattle, WA, focuses on the development and commercialization of antibody-drug-conjugates, or ADCs, for the treatment of cancer. These ADC therapies are designed to combine the strength of monoclonal antibodies (selective targeting) with the toxic, cell killing strength of a small molecule. By attaching the toxic compound monomethyl auristatin E (well, approximately 4 of these toxic molecules!) to an anti-CD30 antibody, SGEN brought Adcetris to market in the US for Hodgkin's Lymphoma (HL) and systemic anaplastic large cell lymphoma (sALCL), in the refractory setting. After some large price swings in 2011, trading has been relatively tame this year with the shares steadily rising from approximately $16/share (when I first wrote about the company) to $24/share, seemingly immune to the troubles plaguing the macroeconomic landscape. Seattle Genetics has been in the news recently with data releases and ASCO presentations, as well as routine quarterly conference calls.
Adcetris Sales, Balance Sheet, and Financials
SGEN received accelerated approval for Adcetris last year based on tremendous efficacy: 73% objective response rate (ORR) in HL and an 86% ORR in sALCL. The drug was partnered in late 2009 with Millennium, a division of Takeda Pharmaceuticals, and they will continue to pay for half of all development costs. Sales of the drug reached $10 MM in the third quarter of 2011; impressive for only 6 weeks on the market. In the fourth quarter of 2011, net sales of Adcetris reached $33.2 MM, and in the first quarter of 2012, net sales reached $34.5 MM. Also during the earnings release in Q1 2012, management felt comfortable giving guidance on Adcetris sales, expecting a total of $140-150 MM in sales during 2012, with an additional $55 to $65 MM in collaboration revenues.
Seattle Genetics had approximately $309 MM in cash and cash equivalents at the end of Q1 2012, a decrease of ~$21 MM from Q4 2012. The balance sheet is clean with no debt, but a significant amount of deferred revenue is listed under liabilities. As SGEN achieves milestones under its collaborations, this will be recognized as revenue in future periods and is no real cause for concern, as this is common for biotechs with partnership agreements. Management expects a total of $245 MM to $270 MM in expenses for 2012 ($30-33MM of non cash expenses, mostly share-based compensation), and 35% of this is expected to be SG&A. SGEN will not be cash-flow positive this year, but with a strong cash balance and increasing sales of Adcetris, they are well positioned to advance the partnered and wholly-owned therapeutics without raising additional capital.
One frequent criticism of Seattle Genetics is, "they spend too much." SGEN does indeed spend a lot. But theoretically speaking, shouldn't effective R&D expenditures be capitalized and not expensed? I understand that in practice, capitalizing most pharmaceutical R&D would lead to messy, and probably inflated and/or fraudulent balance sheets and income statements since most projects are not successful. But in SGEN's case, the programs are doing well and there is significant progress, so why not give them the benefit of the doubt?
Market Potential of Adcetris
SGEN's pipeline is extremely promising with new ADC's in clinical trials, but most of the attention is centered on Adcetris and its future sales. Adcetris is approved in the refractory setting, and SGEN is attempting to move up the ladder to front-line therapy for HL and sALCL. To achieve this goal, SGEN has initiated and supported approximately a dozen new clinical trials. Here some uncertainty arises. Adcetris is fantastically active in the refractory setting, but there is no guarantee it works in other CD30+ malignancies. So far though, the drug appears synergistic with chemotherapy, and hopefully becomes part of the new standard of care. SGEN is also screening non-lymphoma malignancies to see if other CD30+ malignancies may respond (ASCO abstract can be found here). SGEN's management believes that Adcetris may eventually become a blockbuster drug (traditionally defined as sales over $1 BB), and so far preliminary results demonstrate Adcetris' efficacy in these new indications, with manageable side effects. The fact that sales may reach $140-150 MM in its first 12 months combined with the numerous clinical trial initiations is indicative of both physician and payer acceptance for Adcetris, not to mention the truly beneficial effect Adcetris provides for patients.
Validation of the Platform
Although the accelerated approval last year and impressive early sales provide significant validation of the ADC platform, Celldex's (CLDX) recent results are also positive for SGEN. As a licensee of SGEN's technology, Celldex has been developing CDX-011 for breast cancer. In a subset of patients with triple negative breast cancer, a traditionally tough indication, who also express the antigen CDX-011 targets, results were highly statistically significant and impressive. Although the data is based on a small number of patients, I would imagine Celldex will be pursuing a larger trial in the near future for this particular niche indication. Don't expect much of this to flow to SGEN's bottom line though, as SGEN only receives "royalty payments in the mid-single digits on any net product sales," per CLDX's 10k.
Conclusions and Future Directions
While some uncertainty remains with the upcoming trials with Adcetris and treatments targeting solid tumors, let's not forget SGEN already has a treatment on the market that is selling well. SGEN has a large pipeline, and although valuation is a bit tricky with the sheer volume of partnerships (12 active ADC collaborations!), the depth of the clinical and preclinical pipeline is impressive.
Seattle Genetics is at the vanguard of the hot new field of ADCs, and with clinical validation and impressive sales, Seattle Genetics is a speculative stock that investors may wish to consider in their portfolios.