Seattle Genetics: Now Is A Good Time To Buy

Trace the publication on Seeking Alpha: here


Allocating a proportion of investment capital into risky assets is necessary strategy in a comprehensive life financial plan. Seattle Genetics, Inc. (NASDAQ: SGEN) is one of these good bets.

Unmet medical needs are heavily relying on targeted biotechnology treatments . SGEN offers enormous upside potential because of its core competency and leading status in ADC.

A possible spike is the horizon triggered by phase 3 outcome of the new indication of Adcertrics.

Seattle Genetics, Inc. (NASDAQ: SGEN) is an ideal target company to buy at what I believe is a currently undervalued price of $35.48 per share.

As I stated in another article – “Roadmap to Financial Freedom”, it is necessary to include a portion of risky assets in your portfolio. These risky bets in the past might have been stocks like Amgen, Google, Apple or Berkshire Hathaway in their early stage. You may lose your investment entirely, but if you win, you win large. SGEN, from my perspective, is one of these good bets.

The core competency of SGEN boils down to one technology – Antibody Drug Conjugate (ADC), which allows a cell-killing agent to be linked to an antibody. This allows the ADC to be able to kill the targeted antigen expressing cells, usually cancer cells. Starting from 1997, this firm has been focusing on the ADC niche vertical and developed an array of ADC drug candidates. The first, Adcetrics was approved by FDA to treat Hodgkin lymphoma (HL) and a rare lymphoma known as systemic anaplastic large cell lymphoma (ALCL) in 2011. SGEN has other ADC candidates in the program, including SGN-CD19A, SGN-CD33A, SGN-LIV1A, SGN-CD70A, ASG-22ME and ASG-15ME. What’s worth highlighting is CD33A, which is moving into phase 3 for treating acute myeloid leukemia.

Sell side analysts employ rigid methodologies by comparing SGEN to ACAD, AGIO, ALNY, ANAC, CBPO, GLPG, ICPT, XON, JUNO, KITE, OPHT, OPK, PMCB etc. for valuation. It’s simply based on the GICS subindustry category. Knowing that biotech companies are not producing commodity like goods/services, their products are innovative, intellectually intense, and once successful, they reap monopoly profits protected by patent law. It is off base or meaningless to compare SGEN to those “peers”.

Except for two- ImmunoGen, Inc. (NASDAQ: IMGN) and Lonza Group AG (VTX: LONN). IMGN set itself as a leader in ADC by developing Kadcyla, now sold to Roche for the treatment of breast cancer based on its blockbuster drug Herceptin. In this pipeline Roche has Mirvetuximab soratansine/IMGN853 an ADC targeting tumors that overexpress folate receptor alpha in ovarian cancer. SAR3419, another ADC for B-cell malignancies. Lonza, based in Switzerland, seems to be dominating the market out of the US., claiming to offer customized ADC services. (source)

Deemed as the next-generation solution to conquer unmet needs in cancer and other immunological diseases, ADC has seen heavy investment by big pharmaceutical players such asAstrZeneca’s purchase of Spirogen. Merck acquiring small firms with ADC products On average, each month, more than one new ADC is entering a clinical trial, according to Laurent Ducry, head of ADC R&D at Lonza.

However, only two ADC drugs are approved as of now, and SGEN’s Adcetrics is one of them, setting itself apart from its competitors in this arena. Since its approval, Adcertrics’ sales keep growing. From 2014 to 2015, sales jumped by 27%. Note that the indication for Adcertrics is limited to relapsed/refractory patient populations only. If a broader indication – front-line Hodgkin lymphoma-, is approved by FDA, we can anticipate blockbuster sales increases from Adcetrics in coming years.

What’s worth noting is that ADC involves much larger and complex molecules, and live cell culture, humanized infusion, scaled bio manufacturing… This is massively more demanding than developing new chemical compound drugs as was the traditional pharmaceutical industry practice. As a result, it sets an extremely high threshold for new entrants, especially competition from generic product manufacturers.

Some other attractive aspects of this company include the CEO. Clay B. Siegall, PhD, joined the company when it was founded in 1997. His track record puts no doubt on his ability to run the company. At present, there is $250 million in cash and securities and no debt in balance sheet. However, there are two potentially strong negative aspects. One is the enterprise risk, stating that equity turnover is deteriorating. , Another is the lofty price tag relative to Adcetris, citing Dendreon’s pricey strategy causing its downturn will be followed by SGEN. These concerns, even though legitimate, are nevertheless trivial in terms of valuating a biotech firm pioneering in the most frontier space.

What’s worth worrying about is the risk of possible negative clinical developments, toxicity for conjugates failing the safety criteria, or loss of partners to gain milestone, reimbursement fees, or new advances from competitors, rendering its technology outdated…

Above cons are significant negative risk factors that we need think through while assessing fully both the company profile and our risk tolerance before putting money into SGEN. These concerns are similar if not greater than those an investor would have faced when Amgen and Gilead were small. Reference the gigantic revenue gains brought on by those entering monoclonal antibody (MAB) products – Avastin, Herceptin, Humira, Remicade, and Rituxan, the ADC therapeutics could be very close followers in the near future.

Lastly, with such a solid and clear strength in ADC niche, SGEN certainly is a charming acquisition target currently under the radar of larger players in the market. Buying shares at current lay-low time period is a good opportunity for this future play.

Disclosure: I am/we are long SGEN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.