Will Genscript Cash Out Of Legend Biotech In The Face Of Fat Profit Temptation?

Key Takeaways:

• Analysts expect annual sales of Carvykti, Legend Biotech’s core cancer therapy, to peak at $7.3 billion
• With about $2 billion in cash reserves, Genscript isn’t under pressure to sell its 48% holding in Legend

By Molly Wen

If you’re an aspiring innovative drug maker, is it better to cash out of your most promising asset for a big premium, or turn down potential offers and wait for bigger gains ahead? That’s the enviable question currently facing Genscript Biotech Corp. GNNSF.

Financial media outlet Street Insider recently reported that Gencript’s star asset, Legend Biotech LEGN, which mainly engages in cell therapy, has hired investment bank Centerview Partners to help its board evaluate a buyout offer for the company and other potential options. Legend’s U.S.-listed shares jumped 12% after the news came out, and Genscript’s Hong Kong-traded shares shot up by an even larger 25.4% the next trading day.

Legend is currently worth about $10.3 billion, and industry insiders estimate a potential 30% to 50% premium over that could translate to a total purchase price of $14 billion to $16 billion. Based on Genscript’s 48% shareholding, the deal could bring the company between 48.8 billion yuan ($6.72 billion) and 55.8 billion yuan. Legend said it doesn’t comment on market rumors, while Genscript also declined comment.

It’s worth noting that Centerview Partners has extensive experience in biopharmaceutical acquisitions. One of its highlights is AstraZeneca’s (AZN.L) acquisition of Chinese innovative drug maker Gracell Biotechnologies at the end of 2023 for an 86% premium to the company’s market value, in a deal worth $1.2 billion.

Legend was established by Genscript in 2014, with a focus on chimeric antigen receptor T-cell (CAR-T) therapy. Legend’s self-developed CAR-T therapy, Carvykti, is the world’s fastest-growing CAR-T therapy treatment in terms of revenue. The therapy was approved in the U.S., Europe, and Japan in 2022 to treat adults with relapsed or refractory multiple myeloma. Carvykti can reduce the risk of relapse by 74% compared to standard therapies. In April, the drug was approved for second-line treatment of patients with relapsed multiple myeloma in the U.S. and refractory multiple myeloma in the EU.

Legend licensed Carvykti’s global commercialization rights to Janssen Pharmaceuticals, a subsidiary of multinational drug giant Johnson & Johnson (JNJ.US) in 2017, for terms that included a $350 million downpayment and subsequent milestone payments. The drug recorded $133 million and $500 million in annual sales in 2022 and 2023, respectively. Janssen reported that Carvykti generated net sales of about $186 million in the second quarter of this year, up 18.5% sequentially from $157 million in the first quarter.

As Legend ramps up its production capacity, it expects to produce 10,000 doses of Carvykti by the end of 2025, generating $4 billion in annual sales. Legend is also developing Carvykti to treat other indications, with seven clinical studies underway simultaneously. BOCOM International expects sales of the drug to grow from $950 million in 2024, to $1.89 billion in 2025, and $2.64 billion in 2026, with annual sales expected to peak at $7.3 billion.

To Sell Or Not To Sell?

At the end of this year’s first quarter, Legend had $1.3 billion in cash and short-term investments, which the company said can support its business needs through 2026, by which time it should be profitable. Legend reported revenues of $94 million in the three months to March, up 158.7% year-over-year, and a net loss that narrowed 47% year-over-year to $59.79 million. Fast-growing sales of Carvykti mean the company is unlikely to feel any financial pressure in the near term.

But while Legend thrives, its parent hasn’t done as well. Genscript’s stock now hovers near a three-year low, giving the company a total value of just HK$26 billion ($3.3 billion), about a third of Legend Biotech’s.

Genscript, a gene synthesizer and developer of new drugs, reported revenue of $840 million last year, up 34.2% year-on-year. Its biggest profit generator was its life sciences services and products (CRO) business, which contributed $420 million, up 14.5% year-on-year. It lost $95.5 million for the year due to losses in the cell therapy business, narrowing by about 58% year-on-year. Still, Genscript remains well funded with about $2 billion in cash reserves, which means it doesn’t really need to sell Legend simply for the cash.

But policy risk may be an important reason for Genscript to consider selling. In June this year, the U.S. House Select Committee on Strategic Competition between the U.S. and the Chinese Communist Party asked the FBI and U.S. intelligence agencies to investigate Legend and two Genscript subsidiaries and submit a briefing to determine whether the Chinese government is behind their operations. Chinese CRO industry leader Wuxi AppTec (2359.HK; 603259.SH) has already suffered from similar U.S. policy, meaning Genscript is likely to follow down the same path.

A hit from changes in U.S. policy could deal a huge blow to Genscript’s main CRO business, casting a shadow over the company. Genscript’s price-to-sales (P/S) ratio currently stands at about 4.4 times, while Wuxi AppTec’s is even lower at just 2.7 times, showing this part of the Chinese biopharmaceutical sector is clearly undervalued due to the policy risk. A sale of Legend would provide Genscript with a big chunk of cash that it doesn’t really need right now, but may need later to weather the looming geopolitical storm.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.