EUR 850.00 For Business Accounts Only

Morningstar | One-Off Items Shake Up Seattle Genetics' 4Q; Maintaining $65 FVE

We don't anticipate a material change to our fair value estimate for no-moat Seattle Genetics following fourth-quarter results. Fourth-quarter revenue of over $174 million was slightly higher than our expectations, mostly due to better-than-expected Adcetris sales by partner Takeda, resulting in $83 million in royalty revenue, up 26% from last year. However, bottom-line results were lower than our expectations and analyst consensus. An $18 million inventory write-off bumped up cost of sales to over $30 million, compared with $10 million a year ago, due to in-process product that didn’t meet the company's release specifications. On the basis of management's commentary on the call, we don't believe this will affect first-quarter supply or revenue. Selling, general, and administrative spending in the fourth quarter was slightly higher than expected due to the November launch of Adcetris in frontline peripheral T-cell lymphomas (PTCL), so we've adjusted near-term spending assumptions accordingly. Further, losses from investments (mostly Seattle Genetics' stake in Immunomedics) were over $53 million. This resulted in a $120 million net loss for fourth quarter, a larger loss than we had projected.

Management guidance for fiscal 2019 included Adcetris revenue of $610 million-$640 million, below our previous estimate of at least $660 million, and total revenue guidance of $790 million-$840 million, which missed analyst consensus of $860 million. On a positive note, the 2019 outlook includes much lower cost of sales, with costs at 5%-6% of Adcetris sales compared with 10%-plus historically, due to significantly decreased royalty obligations on in-licensed technology on Adcetris sales. We adjusted the cost assumptions in our model to reflect the higher gross margin moving forward.

Fourth-quarter Adcetris sales of $132 million were in line with our expectations, with some contribution from the November approval in combination with chemotherapy in PTCL, the sixth Food and Drug Administration-approved indication for Adcetris. The label expansion was reviewed under the Real-Time Oncology Review pilot program by the FDA, resulting in a speedy two-week approval. We expect the company to read out pivotal trial results for enfortumab vedotin for urothelial cancer in the first quarter of 2019, as well as top-line pivotal trial data for tucatinib in HER-2-positive breast cancer in 2019. With label expansion for Adcetris and progress in its pipeline, we believe Seattle Genetics could achieve full-year profitability in 2020.