Seattle Genetics (Nasdaq: SGEN) was a company I followed off-wire as an analyst, and kept on my radar for potential initiation into coverage. That was when the stock traded at $5, and before I left my Senior Equity Analyst position at Standard & Poor's. It was on a short list, and unfortunately my followers never learned of it. The company is now on the cusp of gaining FDA approval for a novel and effective cancer drug, but it was downgraded by two analysts this week, and slipped to $14. So we thought we would take a look for you.
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Seattle Genetics (Nasdaq: SGEN) is a company I had on my prospects list when I was an analyst, and a firm my old employer might have benefited from had I stayed put. When I followed the stock, it traded in the $5 range. Admittedly, it was one of those companies I heard about from an unsophisticated though still savvy investor, my Uncle Tom, who I use to love to chat stocks with over the holidays. This was a company though that checked out after Uncle T's mention. SGEN now has collaborations with medicine mainstays like Bayer (OTC: BAYRY.PK), Genentech (NYSE: DNA), Millennium, GlaxoSmithKline (NYSE: GSK) and is held by major investment managers like Fidelity, T. Rowe Price (Nasdaq: TROW), Oppenheimer, Federated Investors (NYSE: FII), Wellington, etc. I kept it on the radar for other reasons...
In particular, I liked the idea behind its drug development. Seattle Genetics genetically engineers monoclonal antibodies to fight disease. I found it novel, and the approach to treating disease made sense to me as well. Inspiring and employing the body's immune system to win the battle just makes sense. Why do some people get cancer and others do not, and some overcome it and others do not? The factors that come to play within individual immune systems seem to obviously play important role in answering those questions. Seattle Genetics goes a step further by loading its antibodies with potent cell killing chemicals that release after the bomb has embedded itself inside the disease. Meanwhile, the company is also adding some extra punch to its drug development line, creating some antibodies that kill foreign bodies on their own, and in some cases juicing up that talent through more genetic engineering.
Back in the earlier part of this decade the company also seemed a sure beneficiary of terrorism tied tensions, given its pill delivered drug that targets and is effective against Small Pox. However, Seattle Genetics has since moved into larger less speculative markets. It currently has several cancer drugs in clinical stage development that have the investment community excited. Well, at least it was mostly that way until Monday.
SGEN has been downgraded to sell by two analysts (Canaccord Genuity and Brean Murray) over the last few days. One held a buy rating and the other a hold before the cuts. The stock dropped 4.8% Monday, which was also the day it reported its earnings results. It fell another 9% Tuesday, but was still quite higher than when it was on my radar screen as an analyst (at $14+ today). So, we thought we would take a look at it for you here, since an opportunity might exist now or when the stock eventually settles.
The company has made significant gains in the progress of its lead drug, Brentuximab Vedotin (SGN-35) or B-Vedotin, as the company's CEO calls it. Management's goal remains to gain FDA approval in 2011 for use treating cases of relapsed refractory Hodgkin Lymphoma and also relapsed and refractory systemic anaplastic large cell lymphoma, or sALCL. About 8K to 9K individuals in the US are diagnosed with Hodgkin lymphoma yearly, and would be treatable nearly immediately. SGEN sees potential for frontline use as well, in conjunction with chemotherapies and also other novel drugs, as tests prove out. Finally, the company hopes the drug can be effective against other cancers that exhibit similar characteristics (CD-30 positive hematologic malignancies), and it is testing drugs for pancreatic and prostate cancer among a few.
Seattle Genetics is in solid financial position, as it prepares for submission of B-Vedotin to the FDA in the first part of 2011. Revenues of $16 million were up 38% from the prior year, and were driven by amounts earned under ADC collaborations, especially via the expansion of its collaboration with Genentech. It also reflects amounts earned under the company's collaboration with Millennium, who will market the B-Vedotin product in Europe and will seek EU approval in 2011. The company's operating expenses increased as planned, and were driven by its investments in B-Vidoten to drive clinical programs forward, to prepare for drug manufacturing and prepare for Biologics License Application (BLA) submission.
The company ended the quarter in strong financial position with $315 million in cash and investments, up $28 million year-to-date. This, and its revenue, reflect payments received from Millennium on milestones reached and its expanded Genentech collaboration. The company's managers say revenues will exceed the top end of guidance and expect to end the year with more cash than previously forecast. 2011 expenses will increase as they initiate additional clinical trials and build the commercial infrastructure with anticipation of product launch in the second half of 2011.
The company reports unprecedented success rates in its trials, and fully expects to receive FDA approvals, at least for use treating Hodgkins lymphoma (75% objective response rate in trial) in some manner. It has, thus, gotten to work in setting up production capacity in order to have a significant launch next year. SGEN's CEO says, and I believe in his tone, that it is first and foremost, in order to provide these drugs to people who need them.
What I have gathered from my review of the conference call was that there was some trepidation with the progress of SGN-35 for use in sALCL treatment (86% objective response in trial). These concerns may prove unwarranted given the reported success by management, but I sensed some risk as well. Given the high expectations of FDA approvals, any delay in that process comes to play in cash flow forecasts. Perhaps there are also some concerns about the potential to even attain early approval for the ALCL usage, as testing is thus far inadequate (though precedent exists for passage). These things impact forecasts which impact valuation, and uncertainty is never good for stocks.
Given that I have given all but a day to my latest review of this company (relearning it even), I cannot say what cash flow forecasts look like, and I cannot even say I have seen another analyst's outlook. I required 3 to 5 days to put together thorough analysis as an analyst, while negligent and poor managers sought a one day turnaround. I would not budge then, nor will I now, especially on this complicated business that requires industry insight or otherwise special smarts. Therefore, for now, I will refrain from making a formal call.
However, I can say that an unscientific view of the company's progress and this setback would lead me to lean toward seeking opportunity to buy versus to sell the stock in the short-term, if I were an analyst or investor here. Without making a guarantee, I hope to take an even deeper look into the analyses produced by the analyst community here and speak with management, and to sift the data carefully to give a buysider's view on the stock in the near-term. Remember, I was a sell-side analyst, doing all the ground work myself in the past and producing formal reports; entertaining calls of portfolio managers; and generally getting on the horn behind my picks. So, for now, let's just say SGEN looks interesting. Drugs like Seattle Genetics' SGN-35 already have established a market near $2 billion in size, and the drug looks disruptive.
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