Seattle Genetics' Big Deal

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Besides releasing positive clinical trial results, the best way for a small drug developer to make the day's top-performing stocks list is to sign a lucrative collaboration deal with a large pharmaceutical partner. This is exactly what biopharmaceutical firm Seattle Genetics (Nasdaq: SGEN) did yesterday with biopharma powerhouse Genentech (NYSE: DNA) and shares were up 24% as a result.

The deal Seattle Genetics signed with Genentech calls for it to receive $60 million in guaranteed upfront payments, as well as potential milestone payments of at least $800 million in return for out-licensing an early stage drug candidate, SGN-40, in testing for various cancers.

A deal being signed for a compound this early in development is at least some validation of the drug's potential. While the size of the upfront payment is not extraordinarily large, neither has SGN-40 been through extensive clinical testing, with the drug candidate only just starting a phase 2 trial for non-Hodgkin's lymphoma after showing a 16% objective response rate in a small phase 1 trial.

SGN-40 is also being tested in phase 1 trials for multiple myeloma and leukemia, and the drug may be effective in other tumors as well, which accounts for the large amount of potential milestone payments. Besides SGN-40, the rest of Seattle Genetics' compounds are in preclinical or early stage testing, except for one other compound in phase 2 trials.

With roughly $85 million in cash and investments and a $10 million quarterly burn rate prior to this deal, Seattle Genetics' balance sheet will now be stocked with enough cash for at least the next two years, since Genentech will also take over all research and development costs for SGN-40.

Seattle Genetics isn't giving away the house for the cash in this deal, since it will still retain co-promotion rights and a double-digit royalty rate on SGN-40 if it gets approved. It's interesting to see the stock up only 24% and the market cap of Seattle Genetics rising barely more than the $60 million in cash received from the deal. This is either a signal that shares were overvalued before the deal was struck and are now trading closer to fair value, or else the market isn't fully valuing the deal considering that the upfront cash payment wasn't the only benefit from this agreement with Genentech. Whether it's the former or latter will depend on the future data to come from Seattle Genetics' clinical trials.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.