Why Seattle Genetics, Inc. Shares Soured

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Seattle Genetics (NASDAQ: SGEN  ) , a biotechnology company engaged in the discovery of proprietary antibody-drug conjugates for the treatment of cancer, sank as much as 12% after reporting its first-quarter earnings results after the closing bell last night.

So what: For the quarter, Seattle Genetics delivered a 19% increase in sales to $68.3 million including $38.7 million in Adcetris product sales, $16.9 million in Adcetris collaborative revenue, and a $5 million milestone payment from Adcetris development partner Takeda Pharmaceuticals. Net loss, however, was steady year over year at $16.3 million, although a greater number of shares outstanding did push its EPS loss lower by $0.01 to $0.13 for the quarter. By comparison, Wall Street anticipated a wider loss of $0.20 per share on just $64.6 million in revenue, so Seattle Genetics actually beat on both fronts.

Now what: "So why the dip?" you're probably wondering. The answer is high investor expectations. Seattle Genetics shares have just about doubled over the past two years yet its net loss isn't shrinking and Adcetris growth of only 19% is disappointing to investors who expect its revolutionary ADC technology to take off. In the company's conference call, it guided full-year Adcetris sales (keep in mind this figure excludes collaborative revenue and milestone payments) to $155 million-$165 million. While a modest improvement over the $144.7 million in sales reported in 2013, a drop in its milestone revenue year over year may create a situation where Seattle Genetics' top line doesn't grow in 2014 -- and shareholders clearly aren't happy with that today.

As for me, I remain optimistic on ADC drug developers in general, although I, too, would like to see some of these quarterly losses shrink a bit before I throw an abundance of optimism behind these companies. Until I see definitive progress being made on improving cash flow and abating losses, I would probably suggest adding Seattle Genetics to your watchlist but keeping to the sidelines in the interim.

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