GenScript Losses Widen, But Investors Focus on Newly Approved Cancer Treatment

Company expects to lose up to $519 million last year, but its fortunes may improve after its Legend Biotech unit received FDA approval this week for a new CAR-T cell therapy product

Key takeaways:

• GenScript Biotech said it lost up to $519 million last year, with its Legend Biotech unit accounting for nearly 70% of that
• Legend Biotech’s Cilta-cel CAR-T cell therapy product was approved by the FDA on Monday, and could become a major cash cow for GenScript Biotech

By Molly Wen

A treatment called CAR T-cell therapy, which precisely targets cancerous tumors using genetic modification techniques, is fast becoming a popular and highly effective treatment for certain forms of the lethal disease. Legend Biotech Corp. (LEGN.US), a cell therapy subsidiary of Genscript Biotech Corp. (1548.HK), is an expert in the field. It’s developing a CAR-T cell-therapy product called Cilta-cel with Janssen Pharmaceuticals, which was just approved by the U.S. Food and Drug Administration on Monday.

News of the highly anticipated approval lifted both companies’ shares. Legend Biotech closed up 3% in the U.S. on Monday, and gained another 12.1% in after-hours trade to reach a one-and-a-half month high of $44.38; GenScript Biotech also opened up 7% in Hong Kong on Tuesday, but then moved downward, closing at HK$30.7 at noon, down 0.5%. The stock is 30% lower than its one-year high of HK$43.40 from July last year.

The newly approved Cilta-cel could become an eventual gold mine for GenScript – someday. But for now, at least, Legend Biotech has been burning through cash at lighting speed to support its R&D, incurring substantial losses that were a major factor behind a recent GenScript profit warning. In that warning on Feb. 18, GenScript said its net losses would continue to expand from $281 million in 2020 to between $470 million and $519 million in last year.

GenScript was established in 2002 and went public in Hong Kong in 2015. It bills itself as a platform biotech company with many sub-brands, spread over four major business operations. Those include Legend Biotech, which specializes in cell therapy; Bestzyme Biotech, a maker of industrially synthesized biological products; and Probio Cayman, a biomedical contract drug manufacturing organization (CDMO). GenScript’s other core business operation engages in the development of life science products and services.

GenScript said its non-cell therapy businesses have seen big improvements in profitability, according to the Feb. 18 announcement. Their combined adjusted net profit in 2021 is expected to total between $48 million and $51.6 million, an increase of 21.4% from 2020.

The company’s life-science products and services, industrially-synthesized biological products and biomedical CDMO contributed $152 million, $18.01 million and $31.50 million, respectively, to its revenue in the first half of 2021. The life-science services reported year-on-year revenue growth of 32.2%, and provides the company with a stable source of cash flow. The unit accounts for around 28% of the global market in the field of genetic modification, an underlying life-science technology. The other two businesses are newer and have so far yielded limited returns. But their rapidly-growing revenue is an important contributor to the company’s vitality.

Leading Loser

But its cell-therapy operation has some of the biggest potential as a future growth driver. Legend Biotech, the subsidiary responsible for that part of the business, did not make any revenue last year and its losses increased as a result of rising R&D spending to between $297 million and $322 million, a year-on-year increase of as much as 39%. The company’s efforts to commercialize Cilta-cel also incurred up to another $106 million in sales and marketing expenses.

As a result, GenScript estimates that Legend Biotech logged an adjusted net loss of $336 million to $365 million last year. Accordingly, Legend Biotech alone accounts for about 70% of GenScrip’s $470 million to $519 million loss last year given in the profit warning.

But Legend Biotech is hardly a money pit. It is using its parent’s bio-medicine development technologies to pursue breakthroughs in CAR-T cell therapies, and already has 11 products under development that focus on neoplastic hematologic disorder, solid carcinoma and AIDS.

In 2017, the company attracted investor attention when it published strong clinical data related to Cilta-cel. Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson (JNJ.US), signed a global cooperation and licensing deal with the company late the same year, providing $350 million in initial and milestone payments – the biggest payday ever for a Chinese pharmaceutical company licensing its technologies to others.

Cilta-cel is a CAR-T cell therapy designed to treat multiple myeloma, and has registered impressive results borne out by multiple registered clinical trials in the U.S. It is believed to be more effective than another CAR-T cell-therapy called Abecma already on the market. Cilta-cel has been FDA-certified as a breakthrough treatment in the U.S., and has also received priority medicine status in Europe from the European Medicines Agency (EMA). It is expected to file for approval for sale in China this year.

Launched in March 2021 and in the same product category as Cilta-cel, Abecma has been priced as high as $438,000 per shot and raked in $95 million in the first three quarters of 2021. Cilta-cel could perform even better, contributing around $300 million in revenue in 2023 once it hits all three markets in the U.S., Europe and China, according to Minsheng Securities.

Hillhouse Capital injection

The rosy prospects for GenScript and its subsidiaries attracted big-name Chinese investor Hillhouse Capital, which paid over HK$8 billion ($1 billion) to acquire holdings in GenScript, Probio Cayman and Legend Biotech. The capital infusion is being used to support development and production capacity expansion in the areas of life science, cell therapy and bio-medicine CDMO. Hillhouse Capital’s abundant resources in bio-medicine could also provide an additional booster to GenScript.

GenScript has a current price-to-sales (P/S) ratio of around 20 times, higher than the 12 times for WuXi AppTec (2359.HK), which also focuses on CDMO and CAR-T therapies. That suggests investors are upbeat on its future, giving it a premium valuation. The company’s market value of around HK$62.7 billion is still far below WuXi AppTec’s HK$316.8 billion, also indicating room for growth.

Brokerages also continue to hold a positive view of GenScript, with China Securities International, Guotai Junan Securities and Minsheng Securities all giving it an “overweight” rating. China Securities International even estimated the company’s value at HK$108.2 billion, implying it could rise by a further 70% from current levels.

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