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SGEN > SEC Filings for SGEN > Form 10-Q on 4-Nov-2011All Recent SEC Filings

Show all filings for SEATTLE GENETICS INC /WA

Form 10-Q for SEATTLE GENETICS INC /WA


4-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "will," "should," "expect," "plan," "anticipate," "project," "believe," "estimate," "predict," "potential," "intend" or "continue," the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption "Risk Factors" set forth in Item 1A of Part II of this quarterly report on Form 10-Q, as well as those contained from time to time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

Seattle Genetics is a biotechnology company focused on the development and commercialization of monoclonal antibody-based therapies for cancer. On August 19, 2011, the U.S. Food and Drug Administration, or FDA, granted accelerated approval of ADCETRISTM, or brentuximab vedotin, for the treatment of patients with Hodgkin lymphoma after failure of autologous stem cell transplant, or ASCT, or after failure of at least two prior multi-agent chemotherapy regimens in patients who are not ASCT candidates, and for the treatment of patients with systemic anaplastic large cell lymphoma, or sALCL, after failure of at least one prior multi-agent chemotherapy regimen. There are no data available demonstrating improvement in patient-reported outcomes or survival with ADCETRIS. Following accelerated approval of ADCETRIS by the FDA, we began to recognize product sales and cost of sales during the third quarter of 2011.


Table of Contents

ADCETRIS is an antibody-drug conjugate, or ADC, comprising an anti-CD30 monoclonal antibody attached by a protease-cleavable linker to a microtubule disrupting agent, monomethyl auristatin E (MMAE), utilizing our proprietary technology. In addition, we have three clinical-stage ADC programs, which consist of SGN-75, ASG-5ME, and ASG-22ME, as well as several preclinical product candidates, including SGN-CD19A.

In December 2009, we entered into a collaboration agreement with Millennium: The Takeda Oncology Company, or Millennium, to develop and commercialize ADCETRIS. Under this collaboration, Seattle Genetics has retained commercial rights for ADCETRIS in the United States and its territories and in Canada, and Millennium has commercial rights in the rest of the world. In June 2011, Millennium's Marketing Authorization Application, or MAA, submission seeking regulatory approval to market ADCETRIS for the treatment of relapsed or refractory Hodgkin lymphoma and relapsed or refractory sALCL in the European Union was accepted by the European Medicines Agency, or EMA, which is currently reviewing the application. We also have collaborations for our ADC technology with a number of biotechnology and pharmaceutical companies, including Abbott Biotechnology Ltd., or Abbott; Bayer Pharmaceuticals Corporation, or Bayer; Celldex Therapeutics, Inc., or Celldex; Daiichi Sankyo Co., Ltd., or Daiichi Sankyo; Genentech, Inc., a member of the Roche Group, or Genentech; GlaxoSmithKline LLC, or GSK; Millennium, Pfizer, Inc., or Pfizer, and PSMA Development Company LLC, a subsidiary of Progenics Pharmaceuticals Inc., or Progenics; as well as ADC co-development agreements with Agensys, Inc., an affiliate of Astellas Pharma, Inc., or Agensys, Genmab A/S, or Genmab, and Oxford BioTherapeutics Ltd., or
OBT.

We began commercializing ADCETRIS in August 2011 and the commercial potential of and our ability to successfully commercialize ADCETRIS is unproven. Our success in commercializing ADCETRIS will require, among other things, effective sales, marketing, manufacturing, distribution, information systems and pricing strategies, as well as compliance with applicable laws and regulations. The FDA granted accelerated approval of ADCETRIS which means that we are, among other things, obligated to conduct specific post-approval clinical studies to confirm patient benefit as a condition of that approval. In addition, we intend to explore the use of ADCETRIS earlier in the treatment of Hodgkin lymphoma and sALCL and in other CD30-positive malignancies. In order to do this, we will be required to conduct additional extensive clinical studies and, if successful, we intend to seek additional regulatory approvals. These activities will require substantial amounts of capital and may not ultimately prove successful. Further, our other product candidates are in relatively early stages of development. These product candidates will require significant further development, financial resources and personnel to obtain regulatory approval and develop into commercially viable products, if at all. Accordingly, over the next several years, we expect that we will incur substantial expenses, primarily as a result of activities related to the commercialization and continued development of ADCETRIS. We will also continue to invest in research, development and manufacturing of our other product candidates. Our commitment of resources to the continuing development, regulatory and commercialization activities for ADCETRIS and the research, continued development and manufacturing of our other product candidates may require us to raise substantial amounts of additional capital and our operating expenses will fluctuate as a result of such activities. In addition, we may incur significant milestone payment obligations as our product candidates progress through clinical trials towards potential commercialization.

Although we have begun to recognize revenue from ADCETRIS product sales in the United States, we are very early in the product launch. We expect that our sales revenue may vary significantly from period to period as the launch progresses. We also expect that amounts earned from our collaboration agreements will continue to be an important source of our revenues. These revenues will be impacted by future development funding and the achievement of development and clinical milestones under our existing collaboration and license agreements, including, in particular, our ADCETRIS collaboration with Millennium, as well as entering into new collaboration and license agreements. Our results of operations may vary substantially from year to year and from quarter to quarter and, as a result, we believe that period to period comparisons of our operating results may not be meaningful and you should not rely on them as being indicative of our future performance.

Financial summary

Although we began commercial sales of ADCETRIS in the United States during the third quarter of 2011, our revenues to date have principally come from our collaboration and license agreements. These revenues reflect the earned amount of upfront technology access fees, milestone payments, reimbursement for support and materials supplied to our collaborators, and development cost-sharing under our product collaborations. For the nine months ended September 30, 2011, revenues decreased to $45.9 million, compared to $99.3 million for the same period in 2010. This decrease was due to approximately $70 million of revenue earned in 2010 under our former dacetuzumab collaboration with Genentech that ended in June 2010, partially offset by revenue earned from our other collaboration agreements and product sales of ADCETRIS. For the nine months ended September 30, 2011, total costs and expenses increased 29% to $171.6 million, compared to $132.6 million for the same period in 2010. This reflects increases in sales and marketing expenses and manufacturing activities in advance of the approval and launch of ADCETRIS as well as clinical development activities to explore additional potential applications of ADCETRIS and our activities to continue developing our ADC pipeline programs. As of September 30, 2011, we had $374.5 million in cash, cash equivalents and short-term and long-term investments, and $231.2 million in total stockholders' equity.


Table of Contents

Results of operations

Three months and nine months ended September 30, 2011 and 2010

Net product sales

We sell ADCETRIS through a limited number of pharmaceutical distributors. Health care providers order ADCETRIS through these distributors. We receive orders from distributors and ship product directly to the health care provider. Distributors are invoiced at wholesale acquisition cost, or WAC, and we record product sales upon delivery of the product to the health care provider at which time title and risk of loss pass. Product sales are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, product returns and other deductions. Reserves are established for these deductions and actual amounts incurred are offset against applicable reserves. We reflect these reserves as either a reduction in the related account receivable from the distributor, or as an accrued liability depending on the nature of the sales deduction. Sales reserves are based on management's estimates that consider payer mix in target markets, industry benchmarks and experience to date. These estimates are periodically reviewed and adjusted as necessary.

Government-mandated rebates and chargebacks: In late September 2011, we entered into a Medicaid Drug Rebate Agreement, or MDRA, with the Centers for Medicare & Medicaid Services. This agreement provides for rebates to participating states based on covered purchases of ADCETRIS. Medicaid rebates will be charged to us by participating states. In the fourth quarter of 2011, we also expect to provide a discount to private entities that qualify for government pricing under the Public Health Services program, or PHS, and to certain other U.S. government purchasers of ADCETRIS under the Federal Supply Schedule, or FSS. Once these agreements are effective, distributors will process a chargeback to us for the difference between WAC and the discounted price for health care providers entitled to PHS discounts and FSS pricing.

Distribution fees, product returns and other deductions: Our distributors charge a fee for distribution services that they perform on our behalf. We allow for the return of product that is within 30 days of its expiration date or that is damaged. We estimated product returns based on historical industry information of return rates for other specialty pharmaceutical products. In addition, we considered our direct-ship distribution model and our belief that product is not held in the distribution channel, and the expected rapid use of the product by healthcare providers. In addition, we provide financial assistance to qualifying patients that are underinsured or cannot cover the cost of commercial coinsurance amounts through our patient assistance program, SeaGen Secure™. SeaGen Secure is available to patients in the U.S. and its territories who meet various financial need criteria.

The following table summarizes the reductions from gross sales for the items discussed above, net of related payments and credits, for the three-month period ended September 30, 2011 (in thousands):

                Balance at June 30, 2011                   $  -
                Provision related to third quarter sales     326
                Payments/credits                              (2 )

                Balance at September 30, 2011              $ 324

We received accelerated approval from the FDA to market ADCETRIS in the United States and its territories on August 19, 2011. We entered into a MDRA in late September 2011. As a result, ADCETRIS sales were subject to government rebates under Medicaid for only a portion of the third quarter. We had not yet finalized our FSS or PHS agreements as of September 30, 2011. Once these agreements are effective, we expect deductions from gross sales to increase as the number of patients eligible for discounted pricing increases.


Table of Contents

Collaboration and license agreement revenues

Collaboration and license agreement revenues by collaborator are summarized as follows:

                                                                                        Three months ended                       Nine months ended
                                                                                           September 30,                           September 30,
Collaboration and license agreement revenues by collaborator ($ in thousands)     2011         2010       % Change        2011         2010       % Change
Millennium                                                                      $  5,969     $  4,705           27%     $ 20,531     $ 11,175           84%
Genentech                                                                            824        8,929         (91%)        3,705       81,744         (95%)
Pfizer                                                                             1,000           -        N/A (1)        3,000           -        N/A (1)
GSK                                                                                  759          754            1%        2,277        2,256            1%
Abbott                                                                             1,069           31        3,348%        2,100          219          859%
Other                                                                                998        1,572         (37%)        4,231        3,930            8%

Total                                                                           $ 10,619     $ 15,991         (34%)     $ 35,844     $ 99,324         (64%)

(1) No amount in comparable period.

Millennium revenues increased 27% to $6.0 million in the third quarter and 84% to $20.5 million for the first nine months of 2011 compared to the comparable periods in 2010. These revenues reflect amounts earned under our ADCETRIS collaboration agreement and our ADC collaboration agreement with Millennium. Revenues for the three and nine month periods ended September 30, 2011 increased as compared to the prior year due to revenues earned under the ADCETRIS collaboration. Revenues for the nine month period ended September 30, 2011 also increased over comparable periods in 2010 due to the earned portion of a payment received from Millennium upon its exercise of an option to take an exclusive license to a second antigen target under the ADC collaboration.

Genentech revenues decreased 91% to $0.8 million in the third quarter of 2011. Revenues in the third quarter of 2010 and 2011 reflect amounts earned under our ADC collaboration with Genentech, and in 2010 included the earned portion of a payment received from Genentech to expand the collaboration. Genentech revenue decreased during the nine months ended September 30, 2011 as a result of approximately $70 million of revenues earned in the 2010 period under the dacetuzumab collaboration that ended in June 2010.

Pfizer revenues for the three and nine month periods ended September 30, 2011 reflect the earned portion of an $8 million upfront payment under our ADC collaboration agreement that we entered into in December 2010.

GSK revenues for the three and nine month periods ended September 30, 2011 reflect the earned portion of a $12 million upfront payment and reimbursable support we provided to GSK under our ADC collaboration agreement entered into in December 2009.

Abbott revenues for the three and nine month periods ended September 30, 2011 reflect the earned portion of an $8 million upfront payment and reimbursable support we provided to Abbott under our ADC collaboration agreement that we entered into in March 2011.

Other revenues consist of amounts earned under our ADC collaborations with other companies that generated lower amounts of revenue during the periods presented. This revenue reflects the earned portion of fees and payments received under these ADC collaboration agreements, which generally include some or all of the upfront license payments, renewal fees, milestones and payments for research and development support that we may provide to our collaborators. These payments are recognized as revenue over the development period of the collaboration.

Our collaboration revenues are impacted by the term and duration of our collaboration agreements and by progress-dependent milestones, annual maintenance fees and reimbursement of materials and support services as our collaborators advance their product candidates through development. Collaboration revenues may vary substantially from year to year and quarter to quarter depending on the progress made by our collaborators with their product candidates, the timing of milestones achieved, our ability to enter into additional collaboration agreements and the level of support we provide to our collaborators. Millennium collaboration revenues to date have exceeded the 2010 full year amounts as a result of the recognition of amounts earned under the ADCETRIS collaboration agreement. However, total collaboration revenues are expected to be substantially lower in 2011 compared to 2010 as a result of revenue recognized in the first half of 2010 related to the dacetuzumab collaboration with Genentech that has ended. We have a significant balance of deferred revenue, representing prior payments from our collaborators that have not yet been recognized as revenue. This deferred revenue will be recognized as revenue in future periods using a time-based approach as we fulfill our performance obligations.


Table of Contents

Cost of Sales

ADCETRIS cost of sales includes manufacturing costs of product sold, third party royalty costs, amortization of technology license costs and distribution and other costs. We began capitalizing ADCETRIS production costs as inventory following accelerated approval by the FDA in its two approved indications on August 19, 2011. The cost of product manufactured prior to FDA approval was expensed as research and development expense as incurred. Most of this product is available for us to use commercially. We expect that our cost of sales as a percentage of sales will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is consumed.

Research and development.

Our research and development expenses are summarized as follows:

                                                     Three months ended                        Nine months ended
                                                       September 30,                             September 30,
Research and development ($ in thousands)     2011         2010        % Change        2011          2010        % Change
Research                                    $  3,942     $  8,652          (54%)     $  15,771     $  15,763            0%
Development and contract manufacturing        17,117       20,448          (16%)        50,243        47,551            6%
Clinical                                      17,431       13,097            33%        50,112        44,690           12%
Share-based compensation expense               2,590        2,090            24%         7,031         5,886           19%

Total research and development expenses     $ 41,080     $ 44,287           (7%)     $ 123,157     $ 113,890            8%

Research expenses decreased 54% to $3.9 million in the third quarter and remained relatively unchanged for the first nine months of 2011 from the comparable periods in 2010. The decrease in research expenses in the third quarter of 2011 is primarily the result of technology access fees paid in the third quarter of 2010.

Development and contract manufacturing expenses decreased 16% to $17.1 million in the third quarter and increased 6% to $50.2 million for the nine month period ended September 30, 2011 from the comparable periods in 2010. The decrease in development and contract manufacturing expenses for the third quarter of 2011 as compared to the prior year period resulted from lower contract manufacturing costs incurred for lintuzumab, the development of which has been discontinued. The increase in contract manufacturing costs for the first nine months of 2011 reflects higher manufacturing costs for ADCETRIS as we prepared for regulatory approval and for our SGN-CD19A preclinical program.

Clinical expenses increased 33% to $17.4 million in the third quarter and 12% to $50.1 million for the nine month period ended September 30, 2011 from the comparable periods in 2010. This increase reflects higher regulatory costs and staffing levels in support of our Biologics License Application submissions to the FDA for ADCETRIS, as well as higher third party clinical trial costs for ADCETRIS, offset by lower third party clinical trial costs for the lintuzumab and dacetuzumab programs, both of which have been discontinued.

Share-based compensation expense increased in both the three and nine month periods ended September 30, 2011 from the comparable periods in 2010. The increase was due to a higher average value per optioned share primarily attributable to increases in our stock price and a larger number of optioned shares subject to expense recognition as a result of increased staffing levels.


Table of Contents

The following table shows expenses incurred for research, contract manufacturing of our pre-commercial product candidates and clinical and regulatory services provided by third parties as well as payments for in-licensed technology for ADCETRIS and each of our product candidates. The table also presents other costs and overhead consisting of personnel, facilities and other indirect costs that are not directly charged to development programs:

                                                     Three months ended           Nine months ended
                                                        September 30,               September 30,            Five years ended
ADCETRIS and product candidates ($ in thousands)      2011          2010         2011          2010         September 30, 2011
ADCETRIS (brentuximab vedotin)                     $   13,439     $ 15,612     $  42,945     $  43,836     $            148,229
SGN-CD19A                                               2,869          338         4,934           368                    6,467
ASG-22ME                                                  603           -          4,712            -                     4,712
ASG-5ME                                                 1,417          248         2,750         2,241                   10,246
SGN-75                                                    457        1,738         2,101         2,696                   12,205

                                                       18,785       17,936        57,442        49,141                  181,859
Other costs and overhead                               19,705       24,261        58,684        58,863                  358,371
Share-based compensation expense                        2,590        2,090         7,031         5,886                   35,329

Total research and development                     $   41,080     $ 44,287     $ 123,157     $ 113,890     $            575,559

Our third-party costs for ADCETRIS decreased during the three and nine months ended September 30, 2011 from the comparable periods in 2010 primarily due to technology access fees paid in the third quarter of 2010, offset by increases in contract manufacturing costs as we prepared for the launch of ADCETRIS in 2011. We began capitalizing ADCETRIS production costs as inventory following accelerated approval of ADCETRIS by the FDA on August 19, 2011. Our third party costs for SGN-CD19A increased during the three and nine months ended September 30, 2011 from the comparable periods in 2010 reflecting increased contract manufacturing activities in preparation for potential clinical trials. In June 2011, we exercised an option under our agreement with Agensys to co-develop ASG-22ME. In addition to the payment of an option fee, we now co-fund fifty percent of the development costs of this program. Our third party costs for ASG-5ME increased during the three and nine months ended September 30, 2011 compared to the 2010 periods as a result of higher clinical trial costs related to ongoing phase I trials. Third party costs for SGN-75 decreased during the three and nine month periods ended September 30, 2011 compared to 2010 as a result of higher manufacturing costs in the 2010 periods.

Our expenditures on current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. In order to advance our product candidates toward commercialization, the product candidates are tested in numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical trials for those product candidates that take several years or more to complete. The length of time varies substantially based upon the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

• the number of patients who participate in the trials;

• the length of time required to enroll trial participants;

• the number and location of sites included in the trials;

• the costs of producing supplies of the product candidates needed for clinical trials and regulatory submissions;

• the safety and efficacy profile of the product candidate;

• the use of clinical research organizations to assist with the management of the trials; and

• the costs and timing of, and the ability to secure, regulatory approvals.

Furthermore, our strategy has included entering into collaborations with third parties to participate in the development and commercialization of some of our product candidates. In these situations, the preclinical development or clinical trial process for a product candidate and the estimated completion date may largely be under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

We expect that aggregate development costs for our product candidates will . . .

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