GMAB - Genmab Is Down To Attractive Levels

2023-08-30 11:17:45 ET

Summary

• Genmab's stock is down 15% since late 2022 highs but the company and its partners continue to execute well.
• The approval and launch of Epkinly for the treatment of DLBCL is a significant milestone for Genmab and Epkinly has the potential to become one of the company's largest products.
• Genmab's dependence on Darzalex will decrease considerably in the following years due to the recent and expected new launches and continued pipeline expansion.

Genmab ( GMAB ) and its partners are executing well this year, but the stock is still down 15% since late 2022 highs (the time of my previous article ) and trading at levels that I believe are attractive if one has a long-term view. The company reported second quarter results in early August and raised the full-year revenue guidance range due to the strength of Darzalex, but that was not enough to push the stock higher at the time. Part of the reason is that market conditions have been generally poor lately and that is especially the case for the biotech industry which has significantly underperformed the major indices so far in 2023.

Epkinly approved, Darzalex continues to shine

Genmab achieved an important milestone this year – Epkinly (epcoritamab) was approved for the treatment of relapsed/refractory diffuse large B-cell lymphoma, or DLBCL, and was launched together with partner AbbVie ( ABBV ).

Epkinly generated $5.7 million in net sales in its first month on the market, though it is not clear how much of that is demand versus initial inventory buildup at wholesalers. We should not expect miracles from Epkinly as its label is limited to a relatively small population, but it should become one of Genmab’s most important products in a few years considering the expansion opportunities in first-line DLBCL, follicular lymphoma (‘FL’), and potentially chronic lymphocytic leukemia (‘CLL’) and Richter’s syndrome. It is also one of the partnered programs with the best economics for Genmab – a 50:50 profit/loss split with AbbVie in the U.S. and Japan, and 22% to 26% royalties on net sales in other territories.

The CHMP has provided a positive opinion on Tepkinly (the brand name in Europe) in July and we should see it approved by the EMA in September.

Darzalex should remain the largest partnered product for Genmab for quite some time and the royalties from partner Johnson & Johnson ( JNJ ) should continue to fund the company’s expanding pipeline but also the commercial efforts around Tivdak, Epkinly, and other products that will reach the market in the following years.

Net sales of Darzalex grew 22% in Q2 to $2.43 billion and Genmab tightened the full-year net sales guidance range from $9.4-$10 billion to $9.8-$10 billion. Royalties to Genmab rose 22% to $433 million and full-year royalties will likely approach $1.7 billion as I expect this year’s net sales to come at the very top of the guidance range or even slightly above it as there are no signs of Darzalex slowing down.

Kesimpta continues to perform very well in the hands of Novartis ( NVS ) and as I covered in my recent article on Horizon Therapeutics ( HZNP ) and Amgen ( AMGN ), Tepezza is finally showing signs of life after several tough quarters. Royalties on Kesimpta, and especially Tepezza are not really that significant for a company of Genmab’s size ($74 million combined in Q2 versus $433 million from Darzalex), but still good to see that performance is strong and improving, respectively.

Tivdak remains a small contributor with $22 million in net sales generated in the second quarter, up from $17 million in the same quarter last year. Partner Seagen ( SGEN ) leads the commercialization and the two companies have a profit/loss split of 50:50 in the United States, Japan, Europe, and China and mid-teens to mid-20s royalties on net sales in other territories. Similar to Epkinly, Tivdak is starting in a smaller market (second line+ recurring or metastatic cervical cancer) but with opportunities for label expansion in the following years – first-line treatment in the same population, and potentially head and neck cancer.

J&J recently received approval for Tecvayli (teclistamab) for the treatment of late-line multiple myeloma patients and Genmab started collecting mid-single-digit royalties on net sales. This too will be a nice-to-have royalty stream but unlikely to move the needle for Genmab.

Increased spending may be weighing on investor sentiment

Perhaps a part of the reason for the stock trading lower this year is Genmab’s increased spending and lower margins. Based on the mid-point of the full-year guidance ranges for total revenues and operating profit, it looks like the operating margin will compress by 11 percentage points compared to 2022. This is something the investor base was not accustomed to, but it is necessary due to the expanding commercial efforts to support the new partnership structures with companies like Seagen for Tivdak and AbbVie for Epkinly.

I would expect these increased investments to pay off in the long run in the form of significantly higher revenues and profits that come from the improved economics of these deals. And long term, we should see significant operating leverage as the existing commercial infrastructure will be used to launch new products.

And it also seems that the growth in spending will decelerate quite a bit based on the full-year expense guidance and the Y/Y increases in spending should drop from the mid-40s in the last few quarters to low double-digits in the fourth quarter.

The continued growth of Darzalex, Kesimpta, and the potential revival of Tepezza, the increasing royalty contribution from the recently approved Tecvayli along with the increasing quarterly net sales contribution from Tivdak and Epkinly, should bring back some operating leverage in 2024.

Other developments

On the legal side, Genmab lost another arbitration to J&J related to Darzalex in April. The arbitral tribunal dismissed Genmab’s claims on the basis that they should have been brought in the first arbitration – the milestone payments claims related to the subcutaneous formulation of Darzalex and a claim for a new 13-year royalty term from the date of the first approval of the subcutaneous formulation of Darzalex. Genmab is not giving up and has filed a request for a review of the award dismissing its claims.

Also in April, Genmab and argenx ( ARGX ) announced a collaboration agreement to develop and commercialize novel antibodies with applications in immunology and oncology. This is just the beginning and we are unlikely to see the fruits of this collaboration in the next 2-3 years, but it provides considerable upside optionality in the late 2020s and early 2030s based on the combined expertise of the two companies.

In late June, Genmab and AbbVie announced topline results of Epkinly from the follicular lymphoma cohort of the phase 1/2 EPCORE NHL-1 trial. These patients received at least two prior lines of systemic therapy and the overall response rate was 82% which exceeded the protocol prespecified threshold for efficacy. The step-up dosing regimen also resulted in improved cytokine release syndrome (‘CRS’) adverse event rates with 66% of patients experiencing CRS but only 1.6% had grade 2 or higher.

Detailed results will be presented at an upcoming medical congress and the two companies plan to engage regulators to determine the next steps in this population.

Conclusion

Genmab is down to attractive levels. The company and its partners are executing well and its dependence on Darzalex royalties will decrease considerably in the following years due to the recent and expected new launches and continued pipeline expansion. The increases in spending should moderate in the following quarters and the continued strong revenue growth should result in renewed margin expansion in 2024. This along with pipeline progress and expansion should improve investor sentiment and drive shareholder gains.

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