Pfizer Inc. (PFE): Is Seattle Genetics (SGEN) an Acquisition Target?

In late August, Amgen agreed to buy Onyx Pharmaceuticals in one of the worst-kept M&A secrets of the year. Amgen paid 50% more than Onyx’s pre-rumor trading price, suggesting there may be other biotech companies similarly undervalued. Seattle Genetics, Inc. (NASDAQ:SGEN), a biotech collaborating with some of the largest drug companies on cancer research, may be on that list.

Seattle Genetics, Inc. (NASDAQ:SGEN)Biotechnology is one of the most M&A-friendly industries
The cost to develop and the failure rate of new drugs are high. Because of this, fledgling biotechs often turn to venture capital and partner with major drug companies to finance development

Seattle Genetics, Inc. (NASDAQ:SGEN) currently has just one drug on the market, Adcetris, which was approved in 2011 to treat Hodgkin’s lymphoma and anaplastic large-cell lymphoma. The drug serves as a showcase for the company’s antibody-drug conjugates, or ADCs — complex molecules delivering payloads directly to cancerous cells without the collateral damage associated with traditional chemotherapy.

As a result of Adcetris winning 70% of the market share for its approved indications, major drug companies including Bayer, Roche‘s Genentech, Takeda‘s Millennium, AbbVie , and Pfizer Inc. (NYSE:PFE) have inked lucrative deals with Seattle Genetics, Inc. (NASDAQ:SGEN) to gain access to its ADC portfolio.

Those deals mean big money for Seattle Genetics, Inc. (NASDAQ:SGEN), totaling as much as $3.5 billion in future milestone payments plus royalties from any drugs that become commercialized.

Seattle Genetics‘ big plans for Adcetris
Adcetris was the first new Hodgkin’s treatment approved in 30 years when it got the nod from the FDA in 2011. The drug has generated nearly $70 million in revenue in the first half of this year , and the company hopes it can build a billion-dollar franchise around the drug by expanding its label.

As part of that goal, Seattle Genetics, Inc. (NASDAQ:SGEN) is in phase 2 trials for Adcetris as a front line treatment for large B-cell lymphoma and is currently in phase 3 trials studying Adcetris as a replacement for Bleomycin in the most common chemotherapy cocktail used in lymphoma patients. The company is also studying Adcetris as a stand-alone first line treatment for Hodgkin’s as well. If successful, an expanding patient pool could move Adcetris closer to $1 billion blockbuster status and that could prove intriguing to many of Seattle Genetics’ big pharma partners.

Catching the eye of the biggest drugmakers
Seattle is currently working with cancer research powerhouse Genentech on nine different programs. Those programs include ADC research targeting ovarian and prostate cancer, from which positive early stage data was presented at ASCO this past summer. If those early successes continue, Seattle Genetics, Inc. (NASDAQ:SGEN) could earn up to $900 million in milestones from Genentech, as well as future royalties.

Seattle Genetics also has two ADC trials ongoing with AbbVie — the drug company spun off from Abbott Labs earlier this year. AbbVie expanded its relationship with Seattle Genetics last fall in order to gain access to its auristatins, paying $25 million in upfront fees, offering milestone payments of up to $220 million per target, and royalties equal to mid-to-high single-digit percentages of commercialized drugs.