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Here's Why the Baker Bros. Are Gobbling up This Emerging Cancer Company

By George Budwell - Sep 5, 2015 at 8:07AM

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The renowned healthcare investing firm has slowly amassed a huge position in Seattle Genetics. Should investors consider riding on their coattails?

The $11.4 billion healthcare specialist investing firm co-managed by Felix and Julian Baker, known as the Baker Bros. Advisors, is regarded as one of the best when it comes to picking stocks in this volatile sector -- and for good reason. The Baker Bros., for instance, have had the rare insight to gobble up shares in former small-cap companies like Acadia Pharmaceuticals, bluebird bio, and Synageva BioPharma Corp. before they ripped higher. So when this fund starts to accumulate shares in a company, investors may want to take heed. 

On that note, the Baker Bros. have slowly been building a massive position in the antibody drug conjugate, or ADC, specialist Seattle Genetics (SGEN 2.81%) for a few years now, even adding almost 2 million more shares to their holdings in the second quarter of 2015, according to the quarterly 13Fs filed with the SEC. In total, the firm's holdings in the drugmaker are valued at around $1.5 billion, making it the largest stakeholder in the company. 

Given their significant financial interest in Seattle Genetics, and the fact that Felix Baker sits on its board of directors , I think it's worth the effort to consider if investors should add this stock to their portfolios. So let's take a look at what Seattle Genetics has to offer investors as a mid-cap biotech stock. 

Seattle Genetics is specializing in an emerging field of novel cancer treatments
Before immunotherapies stole the headlines and perhaps the show as well, ADCs were believed to be one of the most promising new classes of cancer treatments coming online. After several cases of off-site toxicity cropped up in clinical studies for some experimental ADCs, though, the investing community seemingly forgot about them overnight.

But the pharma industry has not forgotten, not by a long shot. By contrast, several pharma companies have been working vigorously on improving the technology to make it both safer and more effective across a wide variety of solid tumors and hematological malignancies.  

This work has so far spawned several regulatory approvals for Seattle Genetics' Adcetris for various forms of blood cancer and Roche's Kadcyla for HER2-positive metastatic breast cancer. 

Source: Seattle Genetics.

Commercially speaking, these two drugs have also been fairly successful as novel oncology treatments. Adcetris' second-quarter sales, for example, grew to $55 million, compared to approximately $44 million for the same period a year ago. And not to be outdone, Kadcyla posted a monstrous 65% sales growth rate in the first half of 2015, relative to the same period a year ago. Perhaps the key takeaway from these figures is that the medical community appears to be deeply interested in employing ADCs in the fight against cancer. 

Is Seattle Genetics a buy?
An easy criticism to lob at Seattle Genetics is that it's a smaller biopharma trying to compete against the big boys like Pfizer and Roche, among others. But a deeper look at the company shows that it is a central player in the ADC field, with major licensing agreements with AbbVie, GlaxoSmithKline, Pfizer, Roche, and many others, already in play. In short, big pharma and biotech appear to be rather optimistic about Seattle Genetics' drug development platform moving forward. 

So what investors need to understand is that ADCs are probably not going to be displaced by the suite of checkpoint inhibitors grabbing the headlines right now, evinced in part, by big pharma's major investment in this technology. And the real focus is to refine the ADC platform as a whole.

Turning to the question of whether Seattle Genetics' stock is a buy or not, I think the answer is a "yes." From a fundamental perspective, the drugmaker may not look like a compelling value buy -- largely because of its huge and growing clinical program that is keeping the company's ledger in the red.

But its massive core clinical program, that sports 8 clinical candidates being assessed across a whopping 17 indications, has the potential to generate multiple products with each one capable of raking in hundreds of millions in annual revenue. And then there's Seattle Genetics' wide diversity of research collaborations that also could lead to a substantial upswing in royalty payments.

All told, Seattle Genetics' wide diversity of clinical activities gives it several shots on goal in terms of turning the company into a profitable operation, which is probably one of the main reasons why the Baker Bros. are so keen on this mid-cap biotech stock. 


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