Seattle Genetics (NASDAQ:SGEN) posted solid revenue gains in the first quarter of the year, but it was guidance for the second quarter that had investors excited about how the biotech's lead drug, Adcetris, is finally reaching its potential.

Seattle Genetics results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$140.6 million

$109.1 million

29%

Income from operations

($93.8 million)

($59.3 million)

N/A

Earnings per share

($0.73)

($0.42)

N/A

Data source: Seattle Genetics.

What happened with Seattle this quarter?

  • Sales of Adcetris were up 36% year over year, thanks to the new label expansion based on the Echelon-1 trial for first-line Hodgkin lymphoma, which was approved on March 20. The year-over-year increase was also helped by the approval for patients with two subtypes of cutaneous T-cell lymphoma back in November.
  • Royalty revenue fell a tad, but that was just due to the new accounting standards for revenue recognition. Using the old standards, royalties would have been up about 35% year over year.
  • The third bucket of revenue -- the amount earned from collaborations -- was up slightly year over year. Seattle Genetics' partners -- Roche, AbbVie (NYSE:ABBV) and GlaxoSmithKline (NYSE:GSK) -- all have drugs in late-stage development using its antibody-drug conjugate technology that could result in additional milestone payments, and hopefully royalties if the drugs are approved.
  • The larger loss came from increases in spending on its late-stage clinical trials, an investment that will hopefully pay off in the years ahead.
  • In March, the company completed its acquisition of Cascadian Therapeutics, adding the late-stage breast cancer drug tucatinib to its pipeline.
Doctor showing patient a report in a hospital bed

Image source: Getty Images.

What management had to say

Clay Siegall, Seattle Genetics' president and CEO, pointed out the challenges of converting doctors from using adriamycin, bleomycin, vinblastine, and dacarbazine (ABVD) to using Adcetris plus AVD in the Echelon-1 setting: "Doctors have been using ABVD for a long time -- over four decades. And so they don't all just on day one change and say OK, we're just going to drop everything. That's not the way docs work."

But, Siegall added, the newly diagnosed Hodgkin lymphoma patients tend to be younger and more likely to do research on their own, which could help convert stogy doctors, "We really heard that from our salespeople that patients come in and say, hey, I am diagnosed with Hodgkin lymphoma. I read about this. What about this? And they talk about the options."

On the potential to become profitable, Siegall noted that Seattle Genetics could be profitable now if it wasn't funding late-stage trials for its other drugs, but he thinks "it doesn't feel like it's the right time to pull off the gas pedal and make being profitable our top priority even though we want to be profitable at the earliest possible time."

Looking forward

Seattle Genetics pulled back 2018 guidance, which wasn't unexpected since the old guidance didn't take into account the Adcetris approval for newly diagnosed patients. Rather than issue new guidance for the year, management elected to go quarter by quarter for now, which seems reasonable given the uncertainty of the new Adcertis launch. For the second quarter, management thinks Adcetris sales will fall in the range of $105 million to $110 million, which would be roaring 10% to 15% quarter-over-quarter growth.

On the clinical trial front, Seattle Genetics is expecting data this year from the Echelon-2 trial in newly diagnosed patients with peripheral T-cell lymphomas, potentially allowing for further expansion of the diseases Adcetris is approved to treat. A little further down the line, the pivotal trial for enfortumab vedotin in patients with locally advanced or metastatic urothelial cancer who have failed other treatments is expected to complete enrolment in the third quarter and readout in the first half of 2019, setting up a potential late 2019 or early 2020 approval.

Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends Seattle Genetics. The Motley Fool has a disclosure policy.