How High Can Seattle Genetics Fly?


Editor's note:An earlier version of this article incorrectly stated that Roche terminated its ADC collaboration with Seattle Genetics in 2009. The Fool regrets the error.

Shares of Seattle Genetics (NAS: SGEN) hit a 52-week high on Friday. Let's take a look at how it got there and see whether clear skies are still in the forecast.

How it got here
If you're looking for one particular sector that's largely ignored the recent correction, biotechnology would be it.

Seattle Genetics is one of many cancer-focused biotechs tipping the scales at a new high. But it isn't just Seattle Genetics' drugs that have investors excited; it's the pathway by which they work that has both patients and Wall Street abuzz.

Seattle Genetics is one of a handful of biotechs focused on researching antibody-drug conjugates. These ADC's will have a toxin attached to them that only releases when it comes in contact with a very specific protein. For Seattle Genetics' lead drug, Adcetris, which is used to treat Hodgkin's lymphoma, this protein is CD30. When the ADCs come in contact with this protein, the cancer cell is destroyed with minimal side effects and considerably better efficiency (i.e., healthy cells remain predominantly unaffected).

Another firm that's had success with ADCs is ImmunoGen (NAS: IMGN) , whose targeted antibody payload technology supplies the toxin and linker currently used in Genentech's advanced breast cancer treatment, T-DM1 (owned by Roche), which is currently in late-stage trials.

As always, the biggest concern with a company like Seattle Genetics is whether it can turn these aspirations into actual results. Too often we see drug hopefuls fizzle out as constant innovation in the sector and poor product launches doom a stock. Three years ago, Dendreon's (NAS: DNDN) Provenge treatment was supposed to completely change the way we looked at late-stage prostate cancer and become a blockbuster treatment. Three years later, the treatment's $93,000 price tag and a pitiful product launch have Dendreon losing money hand over fist. At a price tag in excess of $100,000, Adcetris, and any future compounds, risks the same fate.

How it stacks up
Let's see how Seattle Genetics stacks up next to its peers.

SGEN Chart
SGEN Chart

SGEN data by YCharts

In theory, there are only two companies utilizing ADC drug-combining technology: Seattle Genetics and ImmunoGen. I chose to include Pfizer (NYS: PFE) here as well because it developed an ADC in 2010 called Mylotarg that it pulled from the market because the toxin would not stay linked to the antibody long enough to hit the target cancer cells.

At this point, we would usually compare the financial metrics of each company -- but I'm not going to do that, as Seattle Genetics and ImmunoGen are largely still clinical-stage companies. Instead, I'm going to focus on the partnerships they've built with big-name pharmaceutical giants.

Seattle Genetics had a marvelous 2011 in which it formed ADC collaborations with Pfizer and Abbott Laboratories (NYSE: ABT). Both deals netted the company $8 million up front and gave it the possibility of achieving $200 million (in each case) in milestone payments from Pfizer and Abbott. Current partners listed by ImmunoGen include Amgen, Novartis, and Sanofi, to name a few.

What's next
Now for the $64,000 question: What's next for Seattle Genetics? As primitive as the answer might appear, that's really going to depend on how successful it is at developing its ADCs with multiple collaborative projects going on at once, while also managing its expenses prudently.

Our very own CAPS community gives the company a three-star rating (out of five), with 91.6% of members who've rated it expecting it to outperform. Although I have yet to make a CAPScall on Seattle Genetics in either direction, I'm ready to place a limit order of outperform on the stock at $21 -- about 10% below its closing price on Friday.

Although not without clinical failure risk, as is associated with all biotechs, Seattle Genetics has a lot going for it. Collaborative revenue has given the company ample cash to conduct its research without constantly needing to dilute shareholders, and it's simply the best ADC-producing pipeline, period! ImmunoGen isn't too far behind and there's definitely a huge market for a No. 2 ADC producer, but Seattle Genetics' first-in-line status of getting an ADC approved by the Food and Drug Administration is enough evidence to me that it's the best of breed in this space. Tack on encouraging phase 1 results last week regarding its experimental prostate cancer treatment ASG-5ME, developed in collaboration with Agensys, at ASCO, and I'm pretty much convinced that Seattle Genetics is a strong buy on any dips.

Seattle Genetics clearly has a pipeline that's changing lives. If you'd like the inside scoop on a stock our Motley Fool Rule Breakers team feels could offer the next revolutionary product, then click here for your free access to our latest report.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Dendreon and Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of ImmunoGen and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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