– Analyst Report
) is a $4 billion biotechnology company focused on developing and commercializing innovative antibody-based therapies for the treatment of cancer. They are the industry leader in antibody-drug conjugates (ADCs), a technology designed to harness the targeting ability of monoclonal antibodies to deliver cell-killing agents directly to cancer cells.
First in a New Class of ADCs
ADCs are intended to spare non-targeted cells and thus reduce many of the toxic effects of traditional chemotherapy, while potentially enhancing antitumor activity.
Seattle Genetics’ first ADC product ADCETRIS (brentuximab vedotin) is commercially available for two indications in more than 45 countries, including the U.S., Canada, Japan and members of the European Union. The approval of ADCETRIS makes it the first in a new class of ADCs.
The company is also testing their two most advanced product candidates, SGN-15 and SGN-10, in patients with breast, colon, prostate or other cancers.
Big Brother Takeda
In the biotech world, young companies rely on larger pharmaceutical enterprises to assist with long R&D periods that require lots of funding before any FDA-approved and marketable drugs are generating net income.
Seattle Genetics is jointly developing ADCETRIS in collaboration with Takeda Pharmaceutical Company. Under the collaboration, Seattle Genetics has full commercialization rights to ADCETRIS in the United States and Canada. Takeda has exclusive rights to commercialize the product candidate in all other countries.
To expand on the ADCETRIS opportunity, the two companies are conducting a broad clinical development program to evaluate its therapeutic potential in earlier lines of its approved indications as well as in a range of other lymphoma and non-lymphoma settings.
On December 8, Seattle Genetics and Takeda presented important research at the annual American Society of Hematology (ASH) conference in San Francisco. The partners announced four-year overall survival data from a pivotal phase II study evaluating the efficacy and safety of Adcetris for the treatment of relapsed or refractory systemic anaplastic large cell lymphoma (ALCL). Adcetris showed durable, long-term responses in this treatment setting.
At a median follow-up in the study at 46.3 months, the four-year survival rate was estimated to be 64%, with median overall survival (OS) of 55.1 months and progression-free survival (PFS) of 20 months. In other words, more than 60% of patients suffering from relapsed or refractory ALCL treated with Adcetris were alive at the fourth year of follow-up. One-third of all the patients treated in this study showed complete remission with no evidence of disease after a median follow-up of 46 months.
Analyst reactions to these presentations were overwhelmingly positive as most believe that Adcetris will have a significant market opportunity outside its current indications.
Action in the Pipeline
Seattle Genetics also announced detailed results from a randomized, double-blind, placebo-controlled phase III study (named AETHERA) on Adcetris for the treatment of Hodgkin lymphoma patients with the risk of disease progression following autologous stem cell transplantation (ASCT). PFS was higher in Adcetris-treated patients compared to placebo (43 months versus 24 months).
Earlier, in Sep 2014, the company had already announced that the study met its primary endpoint with a 75% improvement in PFS. Seattle Genetics intends to submit a supplemental biologics license application to the FDA for Adcetris for the above-mentioned indication in the first half of 2015.
Additionally, Seattle Genetics reported data from two ongoing phase I studies on SGN-CD19A for the treatment of B-cell malignancies including non-Hodgkin lymphoma and acute lymphoblastic leukemia. SGN-CD19A showed multiple objective responses without significant myelosuppression or neuropathy. Based on this data, the company plans to initiate a randomized phase II study on SGN-CD19A for this indication in 2015.
William Blair analysts commented on several on-going research studies in a recent note. Here was one highlight…
“Pipeline candidate SGN-CD33A debuted with data in the acute myeloid leukemia (AML) setting. We are encouraged by the first data set in the AML setting. We believe that SGN-CD33A is an excellent validation of Seattle Genetics’ drug discovery capability, platform utility, and drug development expertise.”
A Streak of Upside Surprises
While Seattle Genetics is not yet profitable, it became a Zacks #2 Rank in November because analysts were rapidly raising earnings estimates. Full-year 2014 estimates were raised from a loss of $0.82 to a loss of $0.66.
And 2015 estimates went from a loss of $0.63 to a loss of $0.51. What’s been driving these revisions? Earnings surprises, as you can in this table for the past four quarters…
Equally impressive is the promising rise in revenues as you can see below…
SGEN is projected to produce nearly $400 million in revenues in 2015. These trends in top and bottom line progress, in addition to the pipeline “hopes and dreams” are inspiring analysts to either reaffirm or raise their price targets for the stock. Let’s hear from some of them now.
Analysts Who See Big Potential Upside
Several Wall Street analysts are positive on SGEN science and the shares, with the average price target north of $40. After the ASH conference, William Blair analysts reiterated their Outperform rating and noted…
“We reiterate our view that Seattle Genetics is well positioned, with a broad and growing pipeline, validated technology platform, and strong balance sheet ($340 million in cash). Therefore, we encourage investors to take advantage of recent share price weakness to build or add to positions.”
Jefferies analysts reiterated their $53 price target and had this to say about potential competition from Merck (MRK – Analyst Report) and Bristol-Myers (BMY – Analyst Report)…
“While investors have raised many concerns on competing PD-1 therapies in HL (MRK’s pembrolizumab and BMY’s nivolumab), which demonstrated robust response rates of 66% and 87%, respectively, we believe that the recent pressure on SGEN shares is unwarranted.”
But the most bullish investment house of all is H.C. Wainwright with a $65 price target. After reviewing the company’s ASH presentation, analyst Andrew Fein concluded “Continued quality and breadth of data should yield investor re-engagement.” They see good things ahead for SGEN in 2015.
As with most targets on emerging biotech companies, there is an element of “how much will the other guy pay for this science?” And this is especially true in the investing arena we call “biopharma” since the big pharma companies constantly face old drugs going off the “patent cliff” and having their revenue sources stolen by generics.
Their solution is to buy young companies with promising drugs in the pipeline. This doesn’t mean for certain that SGEN is on any big pharma shopping lists, but it’s definitely a probability that gets factored into the valuation models of big investors.
Baker Brothers Are Big Buyers
And finally, speaking of big investors, one of my favorite “indicators” is institutional buying. They may not be a household name yet, but the brothers Julian and Felix Baker manage $8 billion in a biopharma-focused fund for other institutional investors like the Tisch family, owners of the New York Giants football franchise.
Through their Baker Bros. Advisors fund, they bumped their stake in SGEN shares to over 20% in the days immediately following the ASH conference.
Then, in a 13D SEC filing on December 17, they revealed the purchase of another 2.88 million shares within the prior ten days. I should note that Felix Baker is on the Board of Directors of SGEN, so these are also considered “insider” purchases as well as part of their investment fund.
The Baker brothers have taken the activist investor role in many early, mid, and late-stage biotech companies, and it’s usually for a very compelling reason. You could say Felix is the Carl Icahn of biopharma.
Plus, these guys have used their science backgrounds to evaluate and invest in biotech companies successfully for over two decades. Some recent home runs include Pharmacyclics (PCYC – Analyst Report), Incyte (INCY – Analyst Report), and Agios Pharmaceuticals (AGIO – Snapshot Report).
So I follow the Baker brothers’ “money trail” often in biotech, and SGEN quickly moved to the top of my buy list this month. They see something extremely valuable in the company’s potential that the market is not currently recognizing. And they obviously believe the reward is greater than the risk at these levels.
Disclosure: I own shares of SGEN for the Zacks FTM Trader.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.