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Seattle Genetics: A Short Thesis That's Been Right And Wrong

The phase II retreatment data presented in June look good in sALCL (88% overall response rate) and decent in HL (56% response rate.) Unfortunately, the study included only 8 patients in sALCL and 16 patients in HL. The more compelling results are in the far smaller sALCL treatment market.

At next month's American Society of Hematology (ASH) conference, investigators will present long-term data on the use of Adcetris in relapsed HL and sALCL, a phase I study of the drug in front-line sALCL, and a single arm phase II trial in several subtypes of relapsed non-Hodgkin's lymphoma (NHL), including diffuse large B-cell lymphoma (DLBCL). Although these data may provide justification for further exploratory studies, none of the abstracts seem likely to meaningfully alter oncology practice patterns near-term.

Seattle Genetics' executives believe Adcetris will eventually become a billion-dollar drug. I doubt it, but let's consider that possibility. To reach this level, the company will surely need positive results from ongoing phase III trials. I don't have a strong opinion on those studies yet, but let's generously imagine Adcetris sales peak at $1.5 billion in 2022. Even if we apply a five-times multiple to those sales, discounting for time reduces the present value of Adcetris to $2.4 billion, roughly in-line with the company's current enterprise value.

Bulls contend Seattle Genetics has other partnered drugs in early clinical development that could unlock additional value. I'm sure they believe my sales estimates are too low, too. I have yet to read or hear an argument that would change my mind. The ASH conference seems to me the last positive catalyst for awhile. (Yes, I know Adcetris will likely receive European approval within the next few months, but that's widely expected and the drug's commercial potential ex-US remains highly uncertain.)

Basically, I don't really see a compelling investment thesis for Seattle Genetics long or short. Feuerstein was on point with his tweet: I've been right about Adcetris but wrong on the stock. Even though sales will continue to drag and could even decline slightly over the next few quarters, I'm not sure there will be enough bad news to make Seattle Genetics shares decline further.

If Seattle Genetics shares do move meaningfully downward, it will likely be due to either a broader market correction (hard to predict) or because some of the company's shareholders lose patience and bail. That doesn't make for a very interesting investment thesis, so I'm moving to the sidelines.

Sometimes, even when you're right, you're wrong.

Sadeghi has no position in Seattle Genetics.
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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