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Seattle Genetics: A Cancer Niche Too Small

Seattle Genetics reported Adcretris sales of $33.2 million in the fourth quarter 2011, the drug's first full quarter on the market. Despite pent-up demand and patient rollover from an expanded drug-access program started before Adcetris' approval, fourth-quarter sales still slightly missed the most bullish investor expectations. I suspect this is the first evidence that the "on label" market for Adcetris is far smaller than the 8,000-9,000 patient estimate offered by management (and regurgitated, predictably, by bullish Wall Street analysts.)

Let's do our own math. The 1,300 people who die of HL every year are Adcetris candidates, though many may be too sick to treat (despite structural manipulation, the drug has serious side effects.) Assuming middle-of-the-road efficacy and using the SEER estimates, 1,320 HL patients will fail front line-treatment. Second-line therapy will elicit responses from roughly half of this group, leaving 660 additional Adcetris-eligible patients per year. Even if we add another 500 patients relapsing from prior years and the relapsed sLCL indication (a disease far more rare than HL), it's hard to see how this market is larger than 2,500 patients.

Adcetris costs $115,000 for a course of therapy, which suggests a total market potential of less than $290 million. Even if Seattle Genetics grabs 60% of the market, U.S. sales would peak at less than $175 million over the next few years -- well below bullish projections of nearly $260 million. Adcetris has yet to be approved in the more price-sensitive European market, but if or when it does, Seattle Genetics will receive a tiered mid-teens royalty on sales from its marketing partner Takeda.

The abrupt departure of Seattle Genetics' top sales executive Bruce Seeley last month is another datapoint that implies all might not be sanguine inside the company's commercial operations. Although executives leave for a variety of reasons, the company's SEC filings and an interview with CEO Clay Siegall suggest Seeley was pushed out of his job. Making an executive change to a critical sales position early in a drug launch is almost always a bad sign. Sudden transitions like this raise execution risks that investors should not ignore.

I expect U.S. Adcetris sales to grow modestly over the next six months and then flatline around $165 million. Given the company's $1.7 billion enterprise value (which subtracts $331 million in cash from the market capitalization), it's hard to believe Seattle Genetics shares would weather a miss of that magnitude.

Bullish investors counter that Adcetris use will expand to earlier treatment in HL and other indications long-term. For these reasons, some optimistic Wall Street analysts project U.S. Adcetris sales of more than $550 million in 2017. I'm skeptical. Despite interesting early data, Adcetris' high price makes use of the drug difficult to justify against inexpensive, effective chemotherapy regimens. Seattle Genetics also unexpectedly found new, severe side effects of Adcetris treatment late last year -- pulmonary toxicity when combined with the anti-cancer drug bleomycin and a rare, often fatal brain infection known as progressive multifocal leukencephalopathy, or PML. Although unlikely to limit late-stage use, these side effects add to my skepticism about expanding to earlier treatment.

Let's turn to the Seattle Genetics' antibody-drug conjugate (ADC) platform and drug pipeline. Although I don't have any specific gripe with Seattle Genetics' early-stage compounds, the long history of research-and-development failures -- at least seven, by my count -- for ADC and related earlier platforms suggests this technology does not reliably produce viable drugs. Seattle Genetics has also had development partnerships and technology collaborations with multiple biotech and pharma companies over the years (Genentech actually licensed and abandoned the same drug -- dacetuzumab -- twice over a ten year period). As far as I can tell, not one of these collaborations has produced a marketed drug. Finally, the science supporting CD30 overexpression in other cancers is less clear than in HL and sLCL; this reduces Adcetris' chances of success.

Now, if you will excuse me: those hidden, magical levers that control the global stock markets don't pull themselves.

Disclosure: Sadeghi-Nejad has no position in Seattle Genetics.

--Written by Nathan Sadeghi-Nejad in New York.

Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza�s Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.
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