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Morningstar | Genmab Remains Dependent on Darzalex Gains; Maintaining Fair Value Estimate of DKK 1,160

We are maintaining our fair value estimate of DKK 1,160 per share for Genmab. The no-moat company posted solid top-line growth, but development expenses weighed on the second quarter's bottom line, slightly offset by positive foreign exchange effects. Royalties for Darzalex for multiple myeloma grew 59% year over year, contributing over 75% of total revenue and more than offsetting an expected decline in royalties from Arzerra for chronic lymphocytic leukemia, which contributes just over 1% to total revenue. Our full-year outlook remains unchanged and in line with management's maintained guidance.

As anticipated, the FDA's approval of Darzalex in combination with Velcade, melphalan, and prednisone (VMP) in front-line multiple myeloma did not move the needle much as U.S. doctors rarely utilize the combination regimen. However, we expect significant contribution from the VMP regimen outside of the U.S., and with the CHMP's positive opinion in July, Genmab is well on its way to approval in Europe. We anticipate contributions from this label expansion in Europe as early as the end of this year. Near-term catalysts include readouts from Phase 3 trials in front-line multiple myeloma for Darzalex in combination with Revlimid and in combination with Velcade and thalidomide, expected in the third and fourth quarters, respectively. We believe the approval of Darzalex in combination with Revlimid will be a key growth driver in the U.S. starting in 2019.

Operating expenses outpaced revenue this quarter, with increases in project costs and headcount. We believe this is a necessary expense as the firm's pipeline progresses into costlier late-stage trials. Pipeline studies include tisotumab vedotin for cervical cancer and solid tumors (currently in Phase 2 trials), in addition to therapies utilizing the firm's novel antibody technologies, HexaBody and DuoBody, both of which saw first patients dosed in the last few months. Although these pipeline candidates move forward, Genmab saw some failures in development as well. In late May, trials examining the efficacy of Darzalex and Roche's Tecentriq in non-small cell lung cancer were terminated, closing a door to a significant opportunity in the PD-1/PD-L1 market. While this opportunity was not material to our valuation, the setback highlights the need for diversification from pipeline candidates.