SGEN Shares Could Tumble If Adcetris Sales Fall Short Again
Shares of Seattle Genetics (NASDAQ:SGEN) have traded progressively higher this year, but tonight the rubber could meet the road if reported sales of lead cancer treatment Adcetris do not support guidance. The company will report earnings after the close today, and even if sales are in-line with expectations, any caution by the company on sales in future quarters could indicate that lofty long-term expectations for Adcetris are at risk. Since May's low of $18.77, when the company first missed earnings expectations by a wide margin, SGEN has climbed 27.9% to Tuesday's $24.33 closing price. Now the company's market cap is approximately $2.85 billion, which may significantly overstate the true value of the business. The rise in SGEN over the past couple of months has been driven by reset sales expectations and the hope of future indications for Adcetris. Should expectations need to come down again post earnings, SGEN could fall sharply.
The company's only product, Adcetris, is indicated for the treatment of Hodgkin's Lymphoma and Anaplastic Large Cell Lymphoma (ALCL), and management is guiding for sales this year in the $140-$150 million range. Unimpressively, the low end of guidance suggests no growth going forward and the high end suggests just 5-6% growth on a quarterly basis. Sales in 1Q 2012 increased 4% to $34.5 million from the previous quarter (4Q 2011), but missed analysts expectations for 25% growth sequentially. The prior high growth expectations may support the kind of valuation the company has today, but the actual single digit growth from quarter to quarter that the company is estimated to deliver does not. In fact, analysts estimate that Adcetris will achieve $209 million in sales next year, implying 44% growth, which seems to be quite a stretch given the current trajectory. In the quarter to be reported this evening (2Q 2012), the Wall Street consensus estimate is $36.2 million for Adcetris, implying just a 5% increase from 1Q 2012. With the shares trading at an astounding 13.5x projected Adcetris sales for 2013, even if sales come in at the high end of the current guidance range, investors may still decide to sell the shares on the basis that they are substantially overvalued.
The long-term market opportunity for SGEN's Adcetris stirs the biggest debate among analysts. SGEN says market penetration still has a long way to go, with less than 50% penetration thus far, but analysts see a disconnect between sales growth suggested by the 2012 guidance, and management's estimate of the market (8,000-9,000 eligible patients). Unless the company begins to deliver real uptake of the product and a reacceleration of growth, investors are likely to raise their doubt that the market is as big as the company believes. The factors in determining Adcetris' market opportunity are unclear, with many more patients than expected coming off treatment and an unexpectedly short duration of treatment per patient, which led to the earnings miss in 1Q 2012. Hodgkin's patients ineligible for transplant - for whom Adcetris treatment duration is much shorter - marked a higher than expected proportion of patients treated. Continued short treatment durations and depletion of patients waiting for treatment at some centers may keep pressure on the launch ramp, as could a safety problem with the drug called progressive multifocal leukoencephalopathy (PML).
No doubt that much of SGEN's high valuation comes from hopes pinned to ongoing Adcetris trials for broader indications. SGEN has initiated a Phase III study of the drug for the treatment of cutaneous T-cell lymphoma as well as Phase II studies in other lymphomas, however data from these studies are not expected until the back half of 2013. Investors may have prematurely factored these potential catalysts into SGEN's current market cap, as the poor launch ramp of Adcetris may be the key focus of investors through mid-2013.
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