SGEN's Oncology Drug Worth A Closer Look Print
By Brian Wilson, Contributor   
Thursday, 31 May 2012 06:56
Again, as investors and traders turn their attention to the upcoming annual meeting of The American Society of Clinical Oncology, we're taking a closer look at Seattle Genetics (SGEN).

SGEN is a larger biotechnology company that is focused on the development and marketing of monoclonal antibody-based therapies primarily for the treatment of cancer. The company currently has 8 separate compounds undergoing various stages of development, and has begun to enjoy revenue from their approved drug ADCETRIS (brentuximab vedotin).

ADCETRIS is used to treat patients with Hodgkin lymphoma as well as systemic ALCL (Anaplastic Large-Cell Lymphoma). More specifically, it targets the unique Reed-Sternberg cell. Reed-Sternberg cells, as well as the cancer cells in ALCL are known to express the protein CD30. ADCETRIS, using its anti-CD30 monoclonal antibody section, can pinpoint cells expressing CD-30 (in the case of ALCL and Hodgkin lymphoma, cancerous cells) and deliver potent cell-killing molecules.

Seattle has jointly developed ADCETRIS with Millennium, a subsidiary of Takeda. SGEN has retained the rights in the US and Canada, which should provide substantial revenue for quite some time. Seattle Genetics’ most recent quarterly report posted net product sales for Q1 2012 of $34.5 million, compared to zero in Q1 2011 . RBC Capital analysts claim that there is significant upside for ADCETRIS from here.

Shares of SGEN have risen a substantially in the last 6 months (about 36%), and have gathered quite a bit of short interest. As of now, there are about 31 million shares short out of the 117 million out there. This overwhelming statistic indicates that there is a lot of money betting that the hyper over ADCETRIS is overdone, and the development of the remaining 8 drugs in Seattle’s portfolio may tax the company’s revenues for more than they are worth.

Despite this, I think there is the potential for a major short squeeze. Not only is the short interest exceedingly high (to the point of danger), but the company has been on a steady uptrend for about 3 years (doubling in price since the financial crisis). In addition, we might see the penetration rate of ADCETRIS in the oncology drug market expand significantly as the drug develops reputation. This is one thig being accomplished at ASCO 2012 this year.

In their abstract, Seattle uses an analysis of CD30 expression in Hodgkin Lymphoma, ALCL, testicular embryonal carcinoma, and others to further bolster the notion that ADCETRIS’ target protein (CD30) is an extremely effective way to target these cancer cells. The conclusion of the abstract is that there are other types of cancer that express CD30 in similar ways to Reed-Sternberg and other known CD30-dependent cells. This ultimately means that ADCETRIS could have huge potential in other forms of cancer, which could be incredibly exciting news for Seattle Genetics.

Ultimately, I think that ADCETRIS’ potential revenue flows, stacked with the huge existing short interest, make SGEN a very dangerous stock to short. It may be a very good candidate to buy on dips, considering that there are 8 other drugs in development too. Watch the company closely, as news of ADCETRIS should remain the primary driver of the stock.

We see a very strong pattern on the chart (below) with shares nearing the 50-day moving average and priming for a bounce. Watch and time your trade carefully if you decide to jump in.

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