Wachovia pt 2: Competition
Other companies are developing toxin-linked antibodies based on chemistries distinct from those employed
by SGEN. With one product on the market based on its own technology, Wyeth markets Mylotarg, a
humanized anti-CD33 antibody linked to calicheamycin that is designed to recognize and kill malignant cells
in patients with acute myelogenous leukemia (AML). ImmunoGen’s tumor-activated prodrug technology
employs maytansine, a highly toxic compound on its own, that is linked to an antibody via its proprietary
chemistry. No significant clinical data have been released demonstrating the efficacy or safety related to this
approach, which is currently testing in solid tumor and hematologic indications. Finally, Medarex owns
intellectual property for another technology linking small molecule toxins onto monoclonal antibodies,
although to our knowledge, no related product has yet entered the clinic.
As shown in Table 5, other novel agents for the treatment of various NSCLC indications are in mid- to latestage
clinical development. We believe that SGN-15, indicated as an adjuvant to second- and third-line
treatment, will be positioned most competitively, given the few biologics in development for treatment in this
setting.
Table 4: Novel agents in development for NSCLC
Drug Company Stage Clinical setting
Iressa Astra-Zeneca Marketed Late-stage single-agent
Tarceva OSI Pharma/Genentech NDA Late-stage single agent
Targretin Ligand Pharma Phase III Front-line combination
TELCYTA Telik (NNM: TELK) Phase III Late-stage single-agent
Genasense Genta/Aventis Phase III Second-line combination
XYOTAX Cell Therapeutics Phase III Front- and second-line combination
SGN-15 Seattle Genetics Phase II Second-line combination
ABX-EGF Abgenix/Amgen Phase II Front- and second-line combination
Source: Wachovia Capital Markets, LLC
Our revenue estimates for SGN-15 assume that the product will command a $40,000 per patient per year
price tag and that SGEN will enter a 50/50 co-promotion arrangement with a large biotech/pharma partner
before the drug hits the market in 2009 (Table 6). Based on the clinical data available and its stage of
development, we believe SGN-15 has a 40% chance of winning FDA approval.
SGN-30: An anti-CD30 antibody for treatment of Hodgkin’s disease and ALCL
Raised against the CD30 antigen expressed on the surface of malignant B cells associated with Hodgkin’s
disease (HD) and T cells associated with anaplastic large cell lymphoma (ALCL), SGN-30, a chimeric
monoclonal antibody, is one of several agents in the clinic for treatment of these diseases. Unlike SGN-15,
SGN-30 does contain a linked cytotoxic agent. SGN-30 is one of the few antibodies designed to treat HD
that actually induces cell death in culture, which may provide an advantage over other anti-CD30 antibodies
in the clinic. This distinction may be particularly important since historically, unlike approaches for the
treatment of other hematologic malignancies such as non-Hodgkin’s lymphoma (NHL) and chronic
lymphocytic leukemia (CLL), immunotherapy for the treatment of HD and ALCL has not been very
successful. According to published sources, about 40 other monoclonal antibodies directed against
corresponding targets in these tumor types, including CD30, have failed to demonstrate cytotoxic activity in
culture.
No significant toxicity was observed in a Phase I dose-escalation trial completed in 2002, which is consistent
with the relatively tight CD30 expression profile confined to malignant cells. Of the 13 patients treated, two
achieved partial responses. In a separate 24-patient Phase I study completed in 2003, one complete
response lasting for greater than 4 months and six stable disease responses were observed. No significant
toxicities attributed to SGN-30 were observed (Table 7).
SGEN recently began a Phase II study testing SGN-30 in both HD and ALCL indications. From lessons
learned in the Phase I trials, Phase II is designed to enroll 80 patients at multiple U.S. sites, evaluating SGN-
30 after six weekly doses of 6 mg/kg. Rate of response is the primary endpoint of this trial.
Assessment and Competition
From our due diligence, it is apparent that CD30 expression is, for the most part, confined to malignant B
cells associated with HD, T cells associated with ALCL, and other B cell lymphomas. While previous
attempts to design cytotoxic anti-CD30 antibodies have not been successful, it would seem clear, based on
published literature, that SGN-30 does in fact elicit this desired effect. Therefore, we believe SGN-30 should
have an excellent chance in succeeding as an eventual treatment for HD and ALCL.
Medarex’s MDX-060 fully human monoclonal has also been raised against CD30 and has demonstrated
clinical activity similar to SGN-30 in a 21-patient, late-stage HD/ALCL Phase I/II trial reported at ASH last
year. In our opinion, this further validates using anti-CD30 monoclonal antibodies for the treatment of CD30-
positive malignancies. However, it raises the question as to which company will bring its respective product
to market first and whether either company can claim prior art. To our knowledge, while SGN-30 has been
granted orphan drug status for HD and ALCL, MDX-060 has not, thereby guaranteeing SGEN seven years of
marketing exclusivity for these indications.
Our revenue estimates for SGN-30 assume that the product will cost $40,000 per patient per year and that
SGEN will retain all U.S. rights to market this drug for its small indications (Table 8). Based on the clinical
data available and the stage of development, we believe SGN-30 has a 30% chance of winning FDA
approval.
SGN-40
SGN-40 is a humanized monoclonal antibody that targets cancer cells expressing the CD40 antigen on cell
surfaces. To this end, the antibody is being tested as a treatment for multiple myeloma in Phase I clinical
trials and could eventually be used to treat non-Hodgkin’s lymphoma as well. While CD40 is expressed on
both malignant and normal B cells, CD40 antibodies appear to preferentially kill diseased cells only.
Our revenue estimates for SGN-40 assume that the product will cost $40,000 per patient per year and that
SGEN will retain all U.S. rights to market SGN-40 for the treatment of multiple myeloma (Table 9). At this
stage of development, we estimate SGN-40 has a 10% chance of winning FDA approval. SGN-40 was
recently granted orphan drug status.
Valuation
Our breakdown of SGEN’s equity value is determined by deriving the net present value of each product
revenue stream assuming each drug is marketed in 2011.
From this illustration, approval of SGN-15 offers the most likely chance of return to investors, primarily due to
this program’s later stage of development and highest likelihood success relative to the other programs.
We believe SGEN shares should trade between $5 to $7 based on a 35x multiple assigned to a revenueweighted
handicapped 2011 fully-diluted EPS estimate of $1.20 discounted back at rate reflecting our overall
risk assessment of the company. This multiple is consistent with earnings growth. Our weighted handicap
is derived from the sum of SGEN’s potential revenue streams in a given year based on a relative chance of
success.
The blended discount rate reflects the risk attributed to a profitable pharmaceutical company plus added risk
associated with investing in a young biotechnology company. This risk is derived from values subjectively
assigned to six criteria: quality of management, technology, financial health, quality of partnerships,
progress of clinical development and overall company maturity (Figure 3).
Figure 2: Breakdown of SGEN equity value
Indication Handicap factor
SGN-15 40%
SGN-30 30%
SGN-40 10%
Source: Wachovia Capital Markets, LLC
SGN-15 23%
Cash 71%
SGN-40 0.3%
SGN-30 6%
Based on our assessment, we have assigned SGEN a 24% discount rate. For perspective, a mature
pharmaceutical company would carry a discount rate of 10%.
Investment Risks
Investment in all biotechnology carries significant risk. Despite attempts to handicap this risk accordingly,
failure of the company to meet important milestones for unforeseen reasons can have major negative
implications on the stock price. Specific risks related to SGEN are the following:
• Top-line data, to be reported at ASH in Q4 ’04, may not be positive and if so, would probably result
in a near-term depreciation in stock price
• Other clinical trials expected to mature in ’05 and ’06 may not succeed.
• Since SGEN is highly dependent on the capital markets as a source of operating funds, the
company may not have the ability to execute its development plans should investor enthusiasm
diminish. |
