Seattle Genetic Inc. (SGEN)

Take a look at the brilliant revenue performance in the ­­recent 5 years as shown in the figure below, the revenue of Seattle has been increasing steadily from $10 million in 2006 to $107.5 million in 2010.

Then let’s look into the detail of this company to see what the major driver is behind?

It’s crystal clear from the chart above that the drivers are the license fee from Genentech and Millennium. What’s the collaboration and license agreement between Seattle and these two companies? Why they are willing to throw huge money into Seattle?

Because Seattle has its core competitive advantage – monoclonal antibody technologies, particularly on antibody-drug conjugate (ADC), which can be directed to defining marker of oncology tissue and kill the target cancer cells with conjugated toxic agents. It’s been verified to be effective in treating cancer. The critical part is the linker that attaches the drug to the monoclonal antibody, and scale for manufacturing also is a technology hard part. There are only a few companies that have the ADC technology. Genentech, now is the subsidiary of Roche Holding Ltd. (ADR) (RHHBY) gained FDA approval of (Herceptin) trastuzumab in September 1998 and already reaped prodigious profit based on monoclonal antibody technology targeted to early stage breast cancer marker – HER2. The figure below shows performance of this blockbuster:

I also listed the revenue performances of three other monoclonal antibody drugs that turn out to be blockbusters. Seattle’s ADC technology secures itself advanced edge in the biopharmaceutical market, where every company is competing intensely on coming up potential blockbusters.

In January 2007, Genentech (now subsidiary since acquired by Roche Holding Ltd.(ADR)) entered cooperation with Seattle on Deccetuzumab (SGN-40), which is a humanized monoclonal antibody for the potential treatment of non-Hodgkin lymphoma and multiple myeloma. Decaetuzuma targets the CD40 antigen, which is expressed on B-cell lineage hematologic malignancies, as well as solid tumor, the application of the drug if successful would be very attractive. However, in October 2009, a phase IIb combination clinical trial was discontinued. The development of Decetuzumab halted on the agreement termination notification from Genentech.

The joint program with Millennium (The Takeda Oncology Company) to develop and commercialize Adcertris went on well. On August 19, 2011, the FDA granted accelerated approval of Adcertris, or brentuximab vedotin for the treatment of patients with Hodgkin lymphoma after failure of autologous stem cell transplant. Seattle keeps the commercial rights of Adcertris in the U.S. and Canada, while Millennium has the commercial rights in the rest of the world. In June 2011, Millennium’s Marketing Authorization Application (MAA), submission for the treatment of relapsed or refractory Hodgkin lymphoma and relapsed or refractory sALCL in the European Union was accepted by the European Medicines Agency (EMA) which is currently reviewing the application. Revenues increased 27% to $6.0 million in the third quarter and 84% to $20.5 million for the first nine months of 2011 compared to the comparable periods in 2010.

So the total revenue in 2011 would be dropped by around 50%. However, investors shall take a thorough look into the commercial potential of Adertris and other product candidates in the pipeline to have a fair valuation of this company going forward. The graph from the third quarter report (2011) provided the ground data.

Here is the market potential estimate cited from its latest annual report  “According to the American Cancer Society, approximately 8,500 cases of Hodgkin lymphoma were diagnosed in the United States during 2010, and an estimated 1,300 people died of the disease. Approximately 2,000 additional patients per year in the United States are diagnosed with sALCL, a T-cell lymphoma that expresses the CD30 antigen. The use of combination chemotherapy as front-line therapy for malignant lymphomas has resulted in high remission rates. However, a significant number of these patients relapse and require additional treatments including other chemotherapy regimens and ASCT. We believe there is a strong need for new therapies for these patients. According to a recognized cancer database and based on primary market research we conducted with physicians, we believe that there are several thousand newly relapsed or refractory Hodgkin lymphoma and sALCL patients in the United States each year who would potentially be eligible for treatment with brentuximab vedotin and that the United States’ prevalence population of these patients is approximately 8,000 to 9,000 individuals.”

Seattle is strong on research and development, but obviously, it’s not good at marketing and sales. By now, among around 390 employee, only about 10 are working in sales/marketing. I doubt whether they can successfully bring in revenue even the market potential is considerable.

On the other hand, if we consider other product candidates in Seattle’s pipeline, which consist of SGN-75, SGN-70, ASG-5ME, and ASG-22ME, as well as several preclinical product candidates, including SGN-CD19A and SGN-33.

SGN-75 is an ADC composed of an anti-CD70 monoclonal antibody linked to a potent auristatin compound its proprietary ADC technology. CD70-positive relapsed or refractory non-Hodgkin lymphoma and metastatic renal cell carcinoma (RCC).The phase 1 clinical trial was initiated in November 2009. SGN-70 is a humanized anti-CD70 monoclonal antibody that may have potential application of immunological diseases.

ASG-5ME, is an ADC composed of an anti-SLC44A4 monoclonal antibody linked to a potent auristatin compound using its proprietary ADC technology. SLC44A4 is a novel target expressed on more than 80 percent of pancreatic, prostate and gastric cancer tumors and is also expressed in more than 50 percent of breast cancer tumors, based on preclinical data.

Based on these strong pipeline and verified achievement of Adcertris, I believe this company can bring in good amount of license fee in the next year so I am pretty bullish on this company.

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