Will Seattle Genetics Have a Happy New Year?

Seattle Genetics (NASDAQ: SGEN  ) is a leader in the development of antibody drug conjugates, or ADCs, used to treat cancer. Antibody drug conjugates allow for a more targeted approach by linking a cancer-killing agent with an antibody that recognizes tumor cells. Once ADCs locate the tumor cells inside the body, they attach to the cell's surface, enticing the cell to welcome them in with open arms. Upon entering the cell, however, ADCs have a nasty surprise in the form of a toxic compound that kills the tumor cell. Sounds simple enough, right?

While ADCs may have a bright future as a novel cancer therapy, they are notoriously difficult to develop and don't always produce the desired outcomes. As a result, there have only been three ADCs that have been approved by the Food and Drug Administration to date, with Pfizer's (NYSE: PFE  ) Mylotarg being pulled from the market after the drug was shown to increase the risk of death.

Despite decades of work, Seattle Genetics' Adcetris, marketed by Takeda Pharmaceuticals outside of the U.S. and Canada for relapsed Hodgkin lymphoma, and Roche's (NASDAQOTH: RHHBY  ) Kadcyla developed with ImmunoGen (NASDAQ: IMGN  ) for breast cancer are the only ADCs currently approved by the FDA. The good news is that both drugs are earning hundreds of millions in revenues for their respective companies, showing that there is interest in the medical community for these types of therapies.

Seattle Genetics' shares have started to pull back. Why?
Over the past year, Adcetris' strong sales have pushed shares of Seattle Genetics up an eye-popping 72%. However, the stock has started to falter of late, falling 11% last quarter alone. Why?

My take is that there is a valuation gap between the company's nearly $5 billion market cap and its revenues that are projected to come in around $265 million year over year. In short, Seattle Genetics is trading close to 18 times its annual pre-tax revenues. As such, I don't find this recent slide particularly surprising. Looking ahead, you should be wondering if Seattle Genetics has any value drivers that would warrant a closer look into the company.

The future looks far, far away
Because of Adcetris' unparalleled performance as a treatment for refractory Hodgkin lymphoma, I expect its sales to continue to grow at a healthy clip this year. Nonetheless, you should keep in mind that sales have been uneven from quarter to quarter since the drug's launch. So the road ahead looks like it will be a bumpy one.

Looking past Adcetris' current label, I believe the real value driver for the company is its late-stage trials to expand the drug's label. Specifically, Seattle Genetics has more than 20 ongoing clinical trials for Adcetris as a front-line treatment for advanced Hodgkin lymphoma, as well a diversity of other lymphoma types. If approved as a front-line treatment, there is a real chance Adcetris could turn into a blockbuster. The problem is that the late-stage trials for the drug's use as a front-line treatment are years away from completion, and the company's other clinical candidates have only recently begun clinical testing. In sum, Adcetris' current label will remain the primary value driver for a long, long time to come.

Foolish outlook
Although Seattle Genetics looks to be a leader in developing this potentially revolutionary new cancer therapy, the company is presently valued at a premium compared to its earnings. Without any major catalysts on the horizon, shares of Seattle Genetics have started to slip over the last quarter. That said, you should note that the company's director Felix Baker recently bought more than $16 million worth of his company's shares on the open market. That is clearly a sign of confidence in my book.

Overall, my take is that the company's ADC platform is definitely worth checking out, and the large insider buys suggest that something else entirely may be on the horizon. After all, I don't see a clear cut upcoming catalyst to warrant such a large buy. So you may want to dig deeper into this specialty oncology company.

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Editor's Note: A previous version of this article did not state that Takeda only markets Adcetris outside of the U.S. and Canada. The Fool regrets the error.


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