Thanks to the rapid growth of Legend Biotech, Genscript Bio's mid-term performance growth rate is outstanding, and the CXO business is also about to turn around. However, Legend Biotech may be sold, which will have a significant impact on Genscript Bio's future.
On August 9th, Genscript Biotech (01548) released its mid-year performance. The data shows that in the first half of 2024, Genscript had a total revenue of $0.561 billion, a year-on-year increase of 43.5%. Among them, non-cell therapy external revenue was $0.281 billion, a decrease of 0.2% year-on-year; cell therapy external revenue was $0.28 billion, an increase of 156.0% year-on-year. In the first half of the year, gross profit was $0.307 billion, a year-on-year increase of 75.4%; net loss narrowed to $0.216 billion, with an adjusted net loss of $69 million.
Specifically, Legend Biotech and Bocai Gene's performance in H1 was outstanding. In the first half of the year, Legend Biotech's revenue exceeded $0.28 billion, a year-on-year increase of 156%, and Q2 CARVYKTI revenue was $0.186 billion, a year-on-year increase of 60%, and an increase of 18% month-on-month. Bocai Gene achieved revenue of $26.1 million, a year-on-year increase of 43.3%. The life sciences business grew steadily, with revenue of $0.22 billion, a year-on-year increase of 9.6%. CDMO business revenue fell sharply by 37.9%, with revenue of $40.4 million.
It is easy to see that Legend Biotech is crucial to Genscript Bio, and from the mid-year report, Legend Biotech's future growth prospects are very promising.
Subsidiary Legend Biotech enters a period of rapid growth.
According to the Zhongtong Finance APP, Legend Biotech was established by Genscript in 2014 and focuses on CAR-T therapy. Its independently developed innovative product Carvykti (Sildalis orenta) was approved in the US, Europe, and Japan in 2022 for the treatment of relapsed or refractory multiple myeloma in adults. In April 2024, it was approved for second-line treatment of relapsed multiple myeloma in the United States and for refractory multiple myeloma in the European Union. In addition, Legend Biotech has multiple CAR-T therapies under development for the treatment of hematological malignancies, solid tumors, and other difficult diseases.
Looking at the H1 2024 performance, Legend Biotech's total Q2 revenue was $0.187 billion, up 155.01% year-on-year. Among them, authorization and licensing revenue was $90.846 million (about $75 million from Johnson & Johnson and $16 million from Novartis), and cooperative revenue was $93.254 million (Carvykti sales revenue sharing). It is worth mentioning that Carvykti's sales in the first half of the year reached $0.343 billion, with Q2 sales of $0.186 billion, a year-on-year increase of 60% and a month-on-month increase of 18%. The month-on-month increase in sales was not only due to a 9% price increase but also due to capacity expansion and efficiency improvements.
Multiple myeloma (MM) is the second most common malignant blood tumor in the world, after diffuse large B-cell lymphoma (DLBCL). MM is a type of malignant tumor characterized by the accumulation of plasma cells in the bone marrow, which can lead to bone destruction and bone marrow failure and is more common in elderly patients. According to the Kogi pharmaceutical prospectus data, the number of MM patients worldwide in 2019 was 0.4409 million; it is expected to increase to 0.5478 million and 663,400 in 2025 and 2030, respectively.
Although a small number of MM patients may be cured or achieve indefinite disease remission after first-line treatment under the current therapy, about two-thirds of patients will progress to relapse and difficult-to-treat disease, and 5%-20% of patients have failed to receive at least three lines of standard therapy. The multiple myeloma market is huge, and there is still a lot of unmet demand. Sales revenue of the star drug lenalidomide reached as high as $12.821 billion in 2021, but later declined significantly due to the patent cliff.
Carvykti is particularly effective in treating relapsed or refractory multiple myeloma after multiple treatments. Clinical research results show that (1) LEGEND-2 is the first phase I clinical trial of Carvykti in humans conducted in China, which included 74 patients who had previously received a median of three-line treatment, with a median follow-up of 65.4 months. The median progression-free survival (mPFS) was 18.0 months, and the median overall survival (mOS) was 55.8 months. (2) The phase Ib/II clinical trial CARTITUDE 1 included 97 patients who had previously received a median of six-line treatment. After a median follow-up of 33.4 months, the mPFS of patients receiving Carvykti was 34.9 months; the mOS had not yet been reached, and the 36-month OS rate was about 62.9%.
The huge number of patients means that demand for Carvykti is also continuously increasing. In order to meet this demand, Legend Biotech expects to increase CARVYKTI production capacity by more than double on the basis of 2023. In July of this year, it launched CMO clinical production at the Novartis plant to release production capacity at the Raritan facility, and is expected to begin commercial production in 25H1; the physical expansion of the Raritan facility in New Jersey will be completed by the end of 2024, and the new expansion part is expected to be approved for production in the second half of 2025; Obelisc factory in Ghent, Belgium, will begin commercial production in 24H2; and the TechLane factory in Belgium is expected to complete construction at the end of 2024, begin clinical production in 25H1, and begin commercial production in 25H2.
Legend Biotech predicts that its commercial production capacity will significantly increase in the second half of this year, and its production capacity is expected to achieve continuous month-on-month growth in the third and fourth quarters. The goal of achieving a production capacity of 0.01 million people will remain unchanged until the end of 2025. In the following two to three years, the company plans to gradually increase production capacity to 0.02 million people by increasing investment.
On the clinical progress, the CARTITUDE-5 clinical trial recruitment has been completed smoothly, and the second interim analysis results of the CARTITUDE-4 trial showed positive data on overall survival (OS), further validating the clinical efficacy and safety of CARVYKTI. If Cartitude-5 and 6 are approved, an additional potential 0.052 million patients will be brought in, expanding the potential beneficiary population of Carvykti to 0.154 million (including only the countries and regions that have been approved for the 2nd to 4th lines so far) in terms of product structure, 10-30 billion yuan products have operating revenues of 401/1288/60 million yuan, respectively.
Despite the current losses, Legend Biotech is expected to turn a profit by 2026. As of June 30, 2024, Legend Biotech had about 1.3 billion US dollars in cash and cash equivalents, time deposits and short-term investments, with abundant funding.
It can be seen that Legend Biotech has entered a period of rapid growth, and the future growth of Janssen is also very optimistic. However, just a month ago, there were rumors in the market that Legend Biotech was about to be acquired.
Increase in geopolitical risk, will Legend Biotech be acquired?
For Janssen, Legend Biotech is undoubtedly the company's most core asset, and it has entered a stage of rapid growth. So why does Janssen want to sell Legend Biotech?
The industry generally believes that geopolitical factors may be one of the key driving factors for Legend Biotech to consider selling its business.
In a letter submitted to the Federal Bureau of Investigation (FBI) on May 30, the chairman of the US House of Representatives China Commission, John Moolenaar, and senior member Raja Krishnamoorthi expressed concerns about the intellectual property risks that Janssen Biotech's cooperation with US companies and governments may bring.
As the largest shareholder of Legend Biotech, Janssen Biotech holds 48% of the shares. This inquiry has also raised concerns about the restrictions that the Biosecurity Act may impose.
Subsequently, foreign media reported that Legend Biotech had hired investment bank Centerview Partners to assist its board of directors in evaluating tender offers and other potential strategic choices.
It is worth mentioning that Centerview Partners has extensive experience in the field of mergers and acquisitions in the biopharmaceutical industry. One of its successful cases is the acquisition of China's innovative drug company Genor Biopharma by AstraZeneca at the end of 2023 at a premium of 86% higher than the target company's market capitalization, with a transaction amount of up to 1.2 billion US dollars.
Regarding the acquisition rumor, Huang Ying, CEO of Legend Biotech, said at the financial report conference: Legendary Biology and Janssen are trying to think outside the box for future supply, including internal nodes, new or expanded factories, and other alternative routes. It can be guaranteed that this is one of the highest priorities for the two parties to cooperate. Currently, the board of directors of Legend Biotech is communicating with investors and all stakeholders to maximize shareholder value, not limited to a single path.
That is to say, due to geopolitical factors, the possibility of Legend Biotech being acquired does exist. If Legend Biotech is sold, what are the prospects for Janssen's future?
The CXO business may reach a turning point.
According to the financial information of Zhitongcaijing app, Janssen's main business segments include life science service and product platforms, biopharmaceutical contract research and production (CDMO) platforms, industrial synthetic product platforms, and comprehensive global cell therapy platforms. If Legend Biotech is sold, Janssen will become a "pure" CXO company.
In recent years, the rapid rise of domestic innovative drugs has spurred the prosperity of the CXO industry. From the perspective of the application and listing of domestic innovative drugs, the number of newly accepted IND varieties of Class 1 new drugs by CDE has continued to rise since 2018, reaching 1,241 in 2023, a year-on-year increase of 31.7%; the overall number of Class 1 innovative drugs in China has steadily increased, from 9 varieties in 2018 to 35 in 2023, with a CAGR of 31.2% from 2018 to 2023.
From the perspective of the overseas development of domestic innovative drugs, a total of 75 licenses for domestic innovative drugs were outlicensed in 2023, with a total transaction amount of US$39 billion, which set a new historical record. The wave of innovative drugs has spurred the rise of the CXO industry, and the rapid development of the CXO industry has also empowered the innovative drug industry, and the two have grown together.
In recent years, with the help of the trend of outsourcing in the global manufacturing industry and other factors such as the dividend of domestic engineers, domestic CXO companies have accelerated their expansion, undertaken a large number of overseas orders, and rapidly expanded their capacity, especially in the small molecule CDMO sector. Representing the construction of CXO industry capacity, the fixed assets of the CRO industry index have increased from 12.365 billion yuan in 2019 to 59.352 billion yuan in 2023, with a CAGR of 48.02% from 2019 to 2023.
In terms of biopharmaceutical production capacity, the internal production capacity of global pharmaceutical companies has reached 4.47 million liters in 2023, with a large base. It is expected that the production capacity from 2023 to 2027 will only grow at a CAGR of 2.2%. The main source of production capacity is from the expansion of biopharmaceutical CDMO. The current biopharmaceutical CDMO production capacity is 2 million liters, and the production capacity utilization rate is about 48%. It is expected that it will reach 3.57 million liters by 2027, with a CAGR of 15.6%. From the perspective of overall industry capacity and demand, the industry capacity utilization rate will increase from 48% in 2023 to 65% in 2027.
Due to the domestic industry introspection and US sanctions, domestic CXO enterprises have to explore the development potential of other domestic and foreign markets. Many CXO enterprises have turned their attention to Southeast Asia, the Middle East, and other regions to create new growth points.
In addition, the development scale of CXO is affected by innovative drug research and development projects. In recent years, the continuous increase in interest rates in the United States has led to an increase in the cost of using funds, resulting in a decrease in investment in biopharmaceuticals, a reduction in innovative drug research and development projects, and a decrease in the number of CXO enterprise orders. According to the analysis report sorted out by Arteries Net, the total financing scale of the global medical and health field in 2023 fell back to the level of 2019, with a cumulative financing of US$57.4 billion, a year-on-year decrease of more than 20%. In terms of domestic investment and financing activities, there were a total of 1,647 cases in 2023, with a cumulative financing amount of 8.293 billion yuan. Compared with 1,980 financing events and a financing amount of 126.43 billion yuan in 2022, the number of investment and financing events and the total financing amount decreased by 16.82% and 34.41%, respectively.
Although the current industry downturn has not reached its end, with the end of the US interest rate hike cycle, the situation of innovation drug investment and financing has improved. According to Crunchbase data, in H1 2024, the VC&PE investment and financing amount of innovation drugs in the world and the United States decreased by 2.35% and increased by 15.51% year-on-year, respectively, which improved by 27.73 and 54.88 percentage points, respectively, compared with the same period last year.
With the improvement of innovation drug investment and financing data, CXO enterprises are expected to improve their orders, and Kingsley Bio is also expected to benefit from it.
In the entire CXO process, the life science business is the second largest source of revenue for Kingsley. As a global core gene synthesis supplier relying on advanced independent synthesis technology, Kingsley's market share is about 30%, and its business covers China, North America, Europe, and the Asia-Pacific region. The company's life science services and product range cover gene synthesis, oligonucleotide synthesis, peptide synthesis, protein production, antibody development, and catalog product equipment and consumables.
It is worth mentioning that the innovative drug research and development directions covered by Kingsley's life science business are currently quite popular, such as Semaglutide of Novo Nordisk in 2023, with a sales revenue of 4.557 billion US dollars for the indication of weight reduction. Unlike small-molecule drugs, the structure of peptide drugs is more complex, and the control of impurities is a major difficulty. The amplification of production process is also more difficult, so the R&D process and large-scale production of peptide drugs have higher barriers. Peptide drugs such as GLP-1 require CDMO companies to provide sample synthesis in the preclinical research stage, and rely on CDMO companies' experience in industrialization of process development and quality control in later stages of new drug launch. Therefore, the dependence of peptide CDMO customers on services is often stronger. And Kingsley just happens to have CDMO business, so its life science business customers are expected to be transformed into CDMO business customers, and the CDMO business is expected to grow.
Overall, Kingsley's growth currently depends more on Legend Biotech. At present, Legend Biotech has entered a period of rapid growth, and Kingsley is expected to benefit from it; but Legend Biotech may be acquired, if it is acquired, Kingsley will become a "pure" CXO enterprise. In terms of valuation, CXO enterprises are difficult to compare with innovative drug enterprises; In terms of performance, since CXO enterprises are currently under pressure and the US rate cut has begun, their performance is expected to improve. However, domestic CXO enterprise competition is also very fierce and production capacity is still greater than demand, so the focus is mainly on overseas.
Taking into account the above factors, Kingsley's business is still promising. Despite the current industry downturn, the potential demand for innovative drug research and development is still huge, and seaweed and other innovative drugs continue to receive approval in China and the United States. With the gradual release of the supply-side reform dividend, China's biopharmaceutical industry will usher in development opportunities.