Continued on Seattle Genetics Inc (SGEN) and Immunogen Inc (IMGN)

I had identified Seattle Genetics as a stellar company in 2011 with fundamental analysis on its product lines and cooperating partners. My following decisive investment in this company has returned for me more than a 50% profit. I bought it at $19 per share and it kept rising until recently almost hitting $30 on September 6, 2012. The price declined since then to $27.15 today (September 17, 2012).

Monitoring this stock, I noticed that there are two significant events. First, the executives of SGEN, mainly CFO and CEO, began to exercise their options and sell their own stocks from September 04 on. Over the last 12 Months there have been 1,093,660 insider shares Sold. Second, Oppenheimer cut its rating from “outperform” to “perform”, claiming $27 per share is a true valuation of this stock.

I sold the stock promptly upon the bad inside trading news. A firm, whose executive managers, particularly the top two stewards are selling shares in significant quantity apparently needs further explanation before continuing to retain in one’s protofio.

There are two explanations in terms of why insiders are shorting their own stocks. It could be that there are profound issues in the firm such as critical defect on drug’s side effects, which could negatively impact stock value.  It also could be as simple as that the staff wants to cash out, rewarding themsleves on driving SGEN from a $3 to $30 .

So I investigated into the fundamental aspect of SGEN again and also did some work on IMGN, which has similar antibody conjugate (ADC) technology as that SGEN has. For SGEN, there are two major drivers in my perspective. First, Adcetris was approved by the FDA August last year to treat patients with Hodgkin lymphoma after failure of autologous stem cell transplant (ASCT) or after failure of at least two prior multi-agent chemotherapy regimens in patients who are not ASCT candidates. Adcetris is also indicated for the treatment of patients with systemic anaplastic large cell lymphoma (ALCL) after failure of at least one prior multi-agent chemotherapy regimen.

I compared it to Herceptin in my previous blog, which targeted to a specific antigen expressed in breast cancer, gleaning $5 to $6 billion dollars annual sales for Roche in the recent years. The postulation is that if Adcetris could mimic the performance of Herceptin, even in part, the capital return would be tremendous. Since Adcetris has been in the market for a little more than a year, I was able to collect some data to test whether my comparing Adcetris to Herceptin is legitimate. According to the SEC filing of SGEN, the trailing annual revenue generated from Adcetris so far is $100 million or so, not a bad one. However, I am concerned with the latest quarter sales was $34 million, less than the previous quarter number of $35 million. For a drug to become blockbuster, I expect that at very least the revenue keeps growing, even if not in an exponential manner.

Meanwhile, SGEN has filed for permission to sell in the Canadian market. As per the CEO’s statement, the Canadian regulatory could possibly give them a decision early next year. For a drug that has been through rigorous procedure of the FDA in the US, I would expect there is no question that SGEN can gain the marketing right of Adcetris in Canada too.

My second perspective on SGEN is its robust pipeline. Antibody-Drug Conjugate (ADC) is an extremely state of the art technology. Gigantic firm – Pfizer had tried to develop its own ADC product but ostensibly failed. Before the successful approval from the FDA for Adcetris, SEGN has been focused in this area for about 20 years, building a competitive advantage or industry know-how in this specific area with a bunch of biological candidates under its portfolio umbrella. I am quite optimistic about SGEN because even Adcetris didn’t turn out to be a blockbuster; there is a large likelihood that one of the candidates in its pipeline could be in the future. During the developmental period, SGEN has partnered with other big pharmaceutical companies to develop new biological based on its ADC technology. There are about 18 ADC drugs under research globally, of which,  majority are conducted by cooperating with SGEN. For an investor, sheer licensing fee and potential royalties from SGEN are quite lucrative.

SGEN has strong financial status with zero debt and sufficient cash – another spectacular scoring point.

Overall, I still think the fundamental side of SGEN is solid and hence it’s worth buying.

Immunogen Inc (IMGN), a peer to SGEN displayed similar stock performance to SGEN as is shown below:

The second share offering plunged stock price in early July 2012, however, positive result coming out in Aug27 caused the stock to shoot up significantly. Now they sit with over $160 million cash on the balance sheet, and are devoted to developing more drugs in their arsenal.

The most advanced drug of IMGN is Trastuzumab Emtansine , which has been developed by the ADC technology too. It was filed NDA/BLA in July 2010 to treat Second-Line HER2+ Metastatic Breast Cancer (EMILIA Trial). Meanwhile phase 3 of indication First-Line HER2+ Metastatic Breast Cancer has just announced the result in August. As per the press release, the result of phase 3 is very positive- trastuzumab emtansine (T-DM1) significantly extended the lives (improved overall survival) of people with HER2-positive metastatic breast cancer (mBC) compared to the combination of lapatinib and Xeloda (capecitabine).

As a second line option for patients going through Herceptin therapy, durability or tolerability of T-DM1 is a feature I would look at. The outcome presented by the CEO in the latest UBS conference is quite satisfying on this aspect. Combined with the sound result of phase 3 program conducted together with Roche, I was persuaded by the ADC technique this company has and thus, would like to weigh in in early stage of this promising firm.

Based on the conceptive and qualitative analysis above, I would include both SEGN and IMGN in my own equity portfolio.

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