Has Seattle Genetics Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Seattle Genetics (Nasdaq: SGEN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Seattle Genetics.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 60.7% Pass
  1-Year Revenue Growth > 12% 78.8% Pass
Margins Gross Margin > 35% (34.2%) Fail
  Net Margin > 15% (100.6%) Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 5.23 Pass
Opportunities Return on Equity > 15% (50.2%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Seattle Genetics last year, the company has picked up a point. Revenue is now back moving in the right direction, but even though the shares are up almost 30% over the past year, the biotech still isn't making a profit.

The best news any biotech company can get is to have a drug approved, and Seattle Genetics got over that hurdle with the FDA's approval of its Adcetris lymphoma treatment. With the cost of Adcetris expected to be around $108,000 per patient, the jump in the company's revenue is no surprise whatsoever.

But unfortunately, with just $33 million to $35 million in quarterly sales for the drug in the past two quarters, Adcetris isn't taking off the way Seattle Genetics had hoped. That's not an uncommon problem with high-priced treatments; Dendreon (Nasdaq: DNDN  ) missed its initial sales guidance on its Provenge prostate cancer drug due to Medicare and insurance reimbursement issues that dissuaded doctors from taking the risk of prescribing the drug.

Much of Seattle Genetics' promise, though, comes from collaborations with other companies involving its antibody drug conjugate technology. With partnerships with Pfizer (NYSE: PFE  ) , AstraZeneca (NYSE: AZN  ) , and Abbott Labs (NYSE: ABT  ) among many others, successful drugs using the technology could not only benefit those big pharma companies but also make nice surprises for Seattle Genetics in the form of milestone payments down the road.

For Seattle Genetics to improve, it needs Adcetris to reach its full potential. Unless that happens, the company will struggle even to reach profitability, let alone become a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Seattle Genetics isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Seattle Genetics to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Abbott Laboratories and Dendreon. Motley Fool newsletter services have recommended buying shares of Pfizer. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On July 12, 2012, at 8:52 PM, JTFM1 wrote:

    Biosante may be the perfect stock for the following reasons:

    Abbott has a strong informal association (or at least non-publicized) Biosante in the development of their lead drug Libigel. Everyone heard about Libigel failing to meet endpoints for efficacy in treating HSDD on Dec14 , 2011. As a result the stock has been written off or has it?

    What few realize is the safety/efficacy trial that is on going has passed the 1 year period at which point the FDA will start considering an NDA application.

    This trial has 3656 post menopausal women enrolled who are at risk of having cardiovascular events of which 2439 patients suffer from Hypertension and 2366 patients patients suffer from Dyslipidemia.

    The trials primary outcome is "The rate of adjudicated, predefined cardiovascular events in LibiGel-treated subjects compared to that of placebo-treated subjects."

    Ironically the during this trial Biosante discovered that Libigel reduces the risk of a cardiovascular event by 71%. Biosante has submitted patent applications supporting these findings. In addition they have submitted a patent for commercial production of Libigel.

    In addition Biosante has evidence showing that it restores the testosterone level to pre-menopausal levels.

    Even though Biosante has indicated they would redo the HSDD efficacy trials to neutralize the placebo effect,. What has not been publicly mentioned is that if the safety profile of the safety/efficacy trial is consistent with teh previous 8 independent safety reviews, there is a very good possibility that Biosante will be submitting an NDA for Dyslipdemia and Hypertension and Hormone (testosterone) replacement therapy by the end of the year. Note : They have an SPA in place for this trial.

    Precedence already exist for a single trial to be used to prove efficacy and Libigel appears to meet the criteria. In addition Biosante as per SPA has agreed to continue to collect safety data on Libigel for the next 4 years (post marketing),

    If Libigel is approved in 2013, the company who buys out or partners with Biosante (most likely Abbvie) will probably see sales revenue of over $5 billion by 2014 and increasing steadily afterwards if aggressively marketed. The reason for the rapid large revenue stream is that Libigel will be the first approved testosterone prescription designed for women. Presently for FSD alone there are over 4 million post menopausal women who use off label male testosterone prescription or use a compounding pharmacy. Independent survey stated that over 90 % of OB/GYNs and family physicians would switch immediately to Libigel if approved . Unlike most new drugs which take a while to become main stream, The patients are already using testosterone. They will just switch to an FDA approve prescription designed for women and tested for safety.

    Note: The figures above do not include the present replacement of off label use of testosterone for other conditions such as osteoporosis,

    It should also be noted that the patent for Libigel presently extends to 2028.

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