Seattle Genetics Defies Gravity With Biotech’s First Underwritten Stock Sale in Six Months
The recession will surely kill off some biotech companies that lack hard cash and the hard data that shows their experimental drugs can improve patients’ lives. But after I heard Seattle Genetics CEO Clay Siegall tell the story of how his company raised $55.8 million last week, I had to conclude it’s still possible to raise money in biotech as long as you have a drug that represents a big advance against a deadly disease.
Seattle Genetics (NASDAQ: SGEN) pulled off this small miracle on Jan. 27. How unusual is it for a money-losing development-stage biotech company to sell 5.74 million shares to raise $55.8 million? It was the first underwritten stock offering in the biotech industry since Aug. 7, according to data from Deloitte Recap. (Although Portland, OR-based AVI Biopharma was able to raise $16.5 million a couple days later as well.)
Siegall gave me this account of how the improbable deal went down. Seattle Genetics was in a strong position after having released stellar clinical trial results for SGN-35, the “empowered antibody” it is developing against Hodgkin’s disease and related lymphomas. It had just agreed with the FDA on the final-stage clinical trial design, which provides a clear path so Seattle Genetics bring it to the market in 2012. But the company was bound to burn significant cash over the next three years, and it was sitting on a thinning stockpile of only about 20 to 22 months of cash reserves, Siegall said.
Siegall, who had just gone through a marathon of 50 meetings during the JP Morgan Healthcare Conference in San Francisco, sensed there was demand for his company’s shares. He also felt a secondary offering wouldn’t flood the market and drive down the price. So without even bothering to go on a traditional road show, UBS Investment Bank “made a very reasonable offer” Siegall says, to buy all the shares in a single block purchase, at 4:01 pm Eastern time on Jan. 27. The deal was struck. After about two hours of putting UBS traders to work on the phones, they made a slight profit for their firm by selling all of the shares at a 7 percent discount to the $10.46 market closing price that day. The press release announcing the deal crossed the wire the next morning.
“I was thrilled,” Siegall says.
Seattle Genetics could still pocket another $11.5 million by May if shareholders approve a related transaction that allows Baker Brothers Life Sciences, one of the company’s largest shareholders, to buy another 1.18 million shares at the same price.
The company plans to discuss its fourth-quarter financial report after markets close today, and it will provide guidance to investors on how this financing changes its outlook, Siegall says. But essentially, it adds another eight months of cash to its bank account, assuming shareholders approve the Baker Brothers deal.
But what’s even more interesting is what has happened to Seattle Genetics’ stock since this deal was done. Since secondary offerings increase the supply of available shares, they usually dilute the value of existing ones, and depress the price. Instead, Seattle Genetics stock has actually climbed a bit since the deal was announced to $10.35 at yesterday’s close. Siegall credits this with the type of investors who bought in to this deal. He wouldn’t name names, but he says the firms who bought aren’t quick-flipping hedge funds. Fewer investors than expected have chosen to pocket a quick profit, choosing to hold for better days, Siegall says. The company already had a respectable roster of investors, with Baker Brothers, Fidelity, JP Morgan Chase, Oppenheimer Funds, Barclays Global Investors, and the Bill & Melinda Gates Foundation among its largest shareholders before the deal, according to SEC filings compiled by Yahoo Finance.
“Most of it was ‘sticky’ money, from real blue blood funds,” Siegall says. “They are investing for the long haul.”
So how on earth did Seattle Genetics do this? For one thing, the last time it sold stock a year ago it was $9, and this time it was well over $9, so investors are still in positive territory as opposed to what the rest of their portfolio probably looks like. For another thing, everybody is scouring through the SGN-35 clinical trial data that was reported last December at the American Society of Hematology.
“Data speaks louder than words,” Siegall says. “There is investor demand for strong data.”
One other thing that investors liked is that Seattle Genetics doesn’t have any complex derivatives in its balance sheet, or booby traps like convertible debt deals that could suffocate the company in debt if it stumbles in later clinical trials.
What this means to Seattle Genetics is it has the resources to move full throttle ahead on multiple fronts this year. It already gets Genentech to pick up the full tab for its SGN-40 drug development program. Seattle Genetics still owns the full commercial rights to SGN-35. The company also has a large mid-stage clinical trial of SGN-33 ongoing, which will give the biotech a strong sense of whether that drug prolongs lives of patients with acute myeloid leukemia, a deadly blood cancer. The company will also be able to advance a fourth candidate, SGN-70 through an early clinical trial for autoimmune disease, and introduce a fifth clinical candidate, SGN-75 this year.
Plenty could still derail the company—it is only now embarking on its first Phase III clinical trial after more than a decade in business—and Siegall concedes the company is not yet successful but is “aspiring to be successful.” But he has big dreams. More than a year ago, he told me he can envision changing the company name to Seagen, kind of like Amgen, as an enduring biotech powerhouse in the Northwest. That’s still possible someday, he says, as Seattle Genetics matures from the R&D phase to a more integrated commercial company in the mold of a Celgene, Genzyme, or Gilead Sciences.
“Our goal is to be a profitable, strong biotech company with products on the market that help people who are dying of cancer,” Siegall says. “For us to do that, it’s imperative that we become a commercial organization. The really successful ones in this industry are commercial organizations.”