The Good News of a Drug Approval - Right?
On friday, one of my portfolio holdings, Seattle Genetics, achieved that vaunted milestone of a first drug approval.
Seattle Genetics, Inc. (Nasdaq: SGEN) today announced that the U.S. Food and Drug Administration (FDA) has granted accelerated approval of ADCETRISTM (brentuximab vedotin) for two indications: (1) the treatment of patients with Hodgkin lymphoma after failure of autologous stem cell transplant (ASCT) or after failure of at least two prior multi-agent chemotherapy regimens in patients who are not ASCT candidates, and (2) the treatment of patients with systemic anaplastic large cell lymphoma (ALCL) after failure of at least one prior multi-agent chemotherapy regimen. The indications for ADCETRIS are based on response rate. There are no data available demonstrating improvement in patient-reported outcomes or survival with ADCETRIS. ADCETRIS is the first drug approved by the FDA for Hodgkin lymphoma in more than 30 years, and provides a new therapeutic alternative for Hodgkin lymphoma and systemic ALCL in these settings. Seattle Genetics expects to make ADCETRIS available to patients next week. ADCETRIS is an antibody-drug conjugate (ADC) directed to CD30.
There is and will be much rejoicing, after all this is the first approval of an antibody-drug conjuate (first in class), a platform technology that has held much promise over the last decade (biotech is loaded with promise after all). The view of an investor though is always through their own lens, so this is a good time to review the holding. First, of course approval is a good thing, if for no other reason than failure to obtain approval would have certainly sent the stock down, either for a short, long, or indeterminant time. I bought Seattle in December of 2010, after the results of their key trial were available, and when one could certainly argue that a reasonably near term approval of some form was priced in. Trading around clinical trail results is often where the bigger moves, up and down, occur and a game I don't care to try to play.
Here is what I originally said about SGEN. "The riskiest positions are Seattle Genetics and Exelixis. I intend to ignore these for the long term, but may take some profits with SGEN if they actually get an approval this year." That latter point won't happen since as it stands now, SGEN is still below my basis price (~$15.73) and there are no profits to take. We'll see if it can get back there in short order, as the news of the FDA review on the drug application was a couple weeks early and may have been missed by some momentum junkies. I'm not inclined to sell as this was a longer term intentioned buy, and the platform was just validated by the FDA (not the market yet though). Niether do I think now is the time to invest more. Two related things nag at me about biotech companies that get their first drug approval.
First is a study (it kills me I can't find or link the study, published by lobby group BIO as I recall) I read a few years back. It showed the stock of biotech companies in the first year after their first approval significantly lagged a biotech index. While this seems contrary, it makes sense in a behavioral framework of expectations investing, where the patience for revenue and earnings growth bumps heads with the excitement of an approval announcement. Real results take time, but news moves markets, even if just temporarily. One issue I recall with the study, is it only looked at companies that were still independant 1 year after their first approval. Factoring in M&A activity could show an altered result, and I think SGEN could very well indeed be an attractive candidate for acquisition, enough to justify a hold.
Second, and related to the first but with much more recency, is what is coming to be called 'The Dendreon Effect'. Developing promising drugs is a different skill-set from clinically evaluating drugs, and differenter still from manufacturing, marketing, and selling these same drugs. Companies often add (and subtract) these skill sets as need be. This new SGEN drug, ADCETRIS, will be crazy expensive for patients and is not a simple manufacturing effort. It takes a very expeirence marketing team to appreciate how to sell such a drug, navigate the reimbursement landscape (which will be a challenge) and effectively grow the market (or take share). A company that is doing this very well is Novartis, but their recently approved Hep-C drug is not their first drug to get to market (and is partially partnered with JNJ). Dendreon has fallen flat, seemingly surprised that physicians are balking at the high cost regardless of medicare acceptance, due to issues like delays in getting reimbursed. Seattle Genetics could well have similar issues, as their's too will be a high priced drug and will require marketing savvy to both get Medicare (NICE?) acceptance and an effective sales effort.
In other words, approval is a nice and necesary step, but hardly the end of the yellow brick road these days. Investors need to beward of the poppy fields still in front on the company's path.
I'll be holding this, as the long term potential and acquisition attractiveness, part of the reasons for buying, are still in place. I may have a floor though, perhaps even set a stop loss (awkward to do with disclosure rules), moving forward to mitigate stumbles or investors distraction & loss of patience. So 'YAY Seattle Genetics', but this isn't the realization of the investment thesis nor the end of the investment risk.
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