Seattle Genetics – And Now The Hard Bit

By Stephen D. Simpson, CFA | August 23, 2011 AAA

This has been a tough year for biotechs. Compounding a lull in clinical news, the FDA continues to play a "catch me if you can" game of changing standards for approval. On top of that, pharmaceutical companies like Pfizer (NYSE:PFE) and Merck (NYSE:MRK) have shown relatively little interest in making major acquisitions without approved products in hand. In addition, independents like Dendreon (Nasdaq:DNDN) have shown that FDA approval is only one battle in the larger war.
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With all of that in mind, then, how excited should investors be over word last last week that the FDA has approved Seattle Genetics' (Nasdaq:SGEN) Adcetris? Clearly this is good news (far better than a rejection, at least), and the FDA was rather lenient with the labeling. Still, investors should be cautious as post-approval can be a challenging time to own biotechnology stocks.

The FDA Roars, but Ultimately Says Yes
The FDA gave a thorough work-over to Seattle Genetics during the company's panel meeting, seeming to make it abundantly clear that the agency had issues with the company's application to sell Adcetris for relapsed/refractory Hodgkin's lymphoma, let alone another indication for anaplastic large cell lymphoma.

And yet, not only did the FDA approve Adcetris for both indications, it did so ahead of the company's PDUFA (Prescription Drug User Fee Act) date. Perhaps even better still, the approval was clean and lacking in surprises - the drug is indicated for both post-transplant and transplant ineligible patients, but Seattle Genetics will have to perform some additional confirmatory and safety studies.

Now What?
Now comes the trickier part - setting a price for the drug, getting it on the market and getting doctors to use it. As of this writing, company management has not made any definitive statements about pricing, but estimates seem to cluster between $100,000 and $150,000 for a nine-cycle treatment course. Clearly, that is not cheap. In a time when soaring drug costs still grab headlines and political attention, that is perhaps not the safest approach - particularly in the wake of disappointing sales of Dendreon's Provenge and the thought in some circles that the drug's high price is partly to blame.

Price is just one issue, though. Like Provenge, Adcetris has a fairly small eligible patient population. That puts a premium on sales execution. What's more, although the basic mechanism of action of Adcetris is not that novel, it is the first in a new class of monoclonal antibodies, and some doctors take a "wait-and-see" approach with new treatments.

It is also worth noting that tolerability issues are likely to limit Seattle Genetics' ability to expand the drug into new indications. Don't forget, too, that rivals like Novartis (NYSE:NVS) and Amgen (Nasdaq:AMGN) have licensed technology that should allow them to develop rival compounds.

Is Past Prologue?
Investors should also understand that the recent record of new hematological oncology drugs has not been so great. Rituxan, initially developed by Biogen Idec (Nasdaq:BIIB), is the only name in recent years to reach over $100 million in sales within two years and has been a real winner. Other drugs, though, like Allos Therapeutics' (Nasdaq:ALTH) Folotyn, have had a more modest uptake.

Now, to be sure, these are different drugs with different data, different mechanisms of action and different labels. But the point remains that these are relatively small markets, and shareholders need to keep some perspective on the likely revenue trajectory.

The Bottom Line
Shareholders should have two primary concerns when approaching Seattle Genetics. First, there is the risk of a Dendreon-like disappointment in initial uptake and sales revenue. Second is the risk present in the fact that the company's pipeline is thin behind Adcetris. Some compounds are in Phase 1 testing, but it will be many years before Seattle Genetics has another drug to market (barring acquisition or in-licensing).

Seattle Genetics is an interesting emerging name in biotech, but investors need to use some caution right now. For reasons psychological and fundamental, biotech stocks often underperform after FDA approval decisions. Given the current mood of the Street, investors can likely afford to wait. Seattle Genetics is a good name to own in biotech, but these are trying times and the post-launch concerns just add to the risk. (Dividend capture strategies provide an alternative investment approach to income-seeking investors. See How To Use The Dividend Capture Strategy.)

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