2023-11-20 21:13:40 ET
Summary
- Legend Biotech's financials show strong revenue growth from CAR-T therapy Carvykti, balanced by operational inefficiencies.
- Carvykti's market success hinges on its efficacy in multiple myeloma and competition with therapies like Abecma and CART-ddBCMA.
- Strong liquidity position and substantial cash reserves, but heavy reliance on Carvykti in a competitive market.
- Recommendation: "Hold" with 40/100 confidence, citing market and operational risks, despite strong prospects.
At a Glance
Legend Biotech's ( LEGN ) recent financials reveal a dichotomy between robust revenue growth, primarily driven by their CAR-T therapy Carvykti, and ongoing challenges in operational efficiency. The company's financial health is underscored by a substantial increase in collaboration revenue, alongside a commendable improvement in net loss figures. However, escalating administrative and collaboration costs signal potential inefficiencies. Clinically, Carvykti stands as a pivotal asset in Legend Biotech's portfolio, demonstrating significant efficacy in treating multiple myeloma [MM]. Its competitive positioning against rivals like Bristol-Myers Squibb’s ( BMY ) Abecma and emerging therapies such as Arcellx’s ( ACLX ) CART-ddBCMA is crucial for its market success. The clinical landscape is dynamic, with Carvykti's expansion into earlier treatment stages and outcomes from ongoing studies like CARTITUDE-4 poised to influence its market traction. Financially, the company's strong liquidity position offers resilience against short-term operational volatilities, but its heavy reliance on a single product in a competitive market segment warrants caution. This backdrop forms a complex tapestry for investors, intertwining promising clinical advances with financial and operational challenges.
Q3 Earnings
To begin my analysis, focusing on the three-month period ending September 30, 2023, for Legend Biotech, the company showed a notable increase in collaboration revenue to $75.9M compared to $27.3M YOY. However, this was offset by increased collaboration cost of revenue, rising to $43.5M from $25.5M YOY. Research and development expenses decreased slightly to $95.9M from $104.5M, while administrative expenses rose to $28.1M from $23.2M. Despite these mixed movements in expenses, the net loss for the period improved to $62.2M, or $0.17 per share, from a net loss of $85.0M, or $0.26 per share YOY. This suggests that while Legend Biotech is growing its top line effectively, cost management and operational efficiency are key areas of focus to mitigate financial losses.
Financial Health
Turning to Legend Biotech's balance sheet , their liquid assets as of September 30, 2023, include cash and cash equivalents of $963.5M, marketable securities (financial assets at fair value through profit or loss) of $185.8M, and time deposits of $274.6M, summing up to approximately $1.42B. The current ratio, a measure of liquidity, is calculated by dividing total current assets ($1.51B) by total current liabilities ($175.2M), resulting in a ratio of approximately 8.6, indicating a strong short-term financial position. When comparing assets to debts, their current assets significantly outweigh current liabilities, including trade payables, lease liabilities, and tax payable. However, their non-current liabilities, primarily collaboration interest-bearing advanced funding and long-term lease liabilities, total $324.5M.
The net cash used in operating activities for the nine months ended September 30, 2023, was $297.6M. This leads to an estimated monthly cash burn of approximately $33.1M. Given their liquid assets of $1.42B, the cash runway is estimated at around 43 months. Looking into the future, the company anticipates their cash lasting "through 2025."
Based on these figures, the odds of Legend Biotech requiring additional financing within the next twelve months seem low, considering their substantial cash reserves and long cash runway. However, it's important to note that these values and estimates are based on past data and may not fully predict future performance, especially in the dynamic biotechnology sector.
Market Sentiment
According to Seeking Alpha data, Legend Biotech exhibits a complex financial and operational landscape. The company's market capitalization of $11.77B, with solid revenue growth reflected in its latest earnings report, signals market confidence. This is bolstered by significant collaboration revenue growth, although operational efficiency remains a challenge. The growth prospects are strong, as evidenced by projected sales reaching $1.14B by 2025, indicating robust market demand for their products, notably Carvykti.
In terms of stock momentum, LEGN has shown a mixed performance compared to SPY, with a -3.50% change over 3 months but a +26.34% change over a year. This suggests a volatile but generally positive market sentiment around the stock.
The short interest of 10.19% with 8.13M shares short indicates a notable level of skepticism or speculative interest in the stock, which could lead to increased volatility.
Institutional ownership stands at just 26.05%, with increased positions outnumbering decreased positions (93 vs. 86), indicating a generally positive institutional sentiment. Notable institutions include FMR, PRICE T ROWE, and RA CAPITAL, with significant shareholdings.
Insider trades show no net activity over the past six months, suggesting a neutral stance from insiders.
Carvykti: A Biotech Beacon in a Sea of Numbers
Carvykti, the result of a joint venture between Legend Biotech and Johnson & Johnson ( JNJ ), is a groundbreaking BCMA-targeted, genetically modified autologous T-cell immunotherapy for advanced multiple myeloma [MM]. The collaboration , structured around a 50/50 cost-sharing and profit-split globally, except for differing terms in Greater China, has successfully launched Carvykti in the market. This innovative drug, backed strategically and financially by the partnership, has shown remarkable efficacy in the fight against this challenging disease.
Market Approvals and Effectiveness
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Regulatory Approval: The US FDA greenlit Carvykti in February 2022 for adults with relapsed or refractory MM post four or more therapy lines. Its approval stemmed from the Phase II CARTITUDE-1 trial, which showed a 97.9% overall response rate from 97 evaluated patients????.
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Global Reach: The European Commission and Japan's Ministry of Health, Labour and Welfare have also approved Carvykti for similar uses??.
Competitive Environment
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Rivalry with Abecma: Carvykti contends with Bristol-Myers Squibb’s Abecma , another CAR-T therapy, both targeting the BCMA antigen. They exhibit comparable efficacy and side effects, but Abecma has an edge with earlier market entry and broader acceptance??.
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Market Outlook: Both therapies are on track to be blockbuster drugs, though Abecma is forecast to achieve higher peak sales owing to its first-mover status and wider approval??.
Future Directions and Studies
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Broader Therapeutic Applications: Efforts are underway to extend the use of both Carvykti and Abecma to earlier MM treatment stages, potentially enhancing their market impact??.
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Insights from the CARTITUDE-4 Trial: The Phase 3 trial of Carvykti achieved its primary objective by demonstrating a notably enhanced progression-free survival compared to standard treatments. This study focused on assessing Carvykti's effectiveness in patients with MM who have relapsed and are resistant to lenalidomide.
New Competitors
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Arcellx’s CART-ddBCMA: Emerging as a strong competitor in the CAR-T MM market, Arcellx’s CART-ddBCMA has shown promising efficacy and safety data, positioning it as a viable alternative to Carvykti??.
Carvykti thus represents a significant advancement in treating MM, with its success hinging on its clinical performance, strategic market placement, and expansion into earlier therapy stages. The evolving competitive landscape, shaped by both established and new therapies, will influence its market potential, necessitating continuous innovation and collaborative strategies to maintain a competitive edge.
My Analysis & Recommendation
In conclusion, Legend Biotech's financial and operational analysis suggests a company with robust growth prospects, primarily hinged on the success of Carvykti in the MM market. Despite a strong balance sheet and impressive cash reserves, the company's heavy reliance on Carvykti and its focus on a crowded MM market pose significant risks. Investors should monitor Carvykti's market penetration and adoption relative to competitors like Abecma and upcoming therapies like Arcellx’s CART-ddBCMA. The company's ability to expand Carvykti's indications and maintain a competitive edge in technological advancements will be crucial.
In my view, given the high market valuation and the narrow focus on MM, there is a potential for overvaluation concerns. This may account for the considerable short interest. The company's current financial health, as indicated by a strong current ratio and substantial cash reserves, offers some buffer against short-term operational volatilities. However, the competitive dynamics in the MM market and the need for continuous R&D investment to stay ahead necessitate vigilant risk management.
Investors should adopt a cautious approach, balancing the potential of Carvykti against the competitive and operational risks. Diversification within the biotech sector, focusing on companies with a broader clinical pipeline or more diversified revenue streams, could mitigate sector-specific risks. Also, closely monitoring market dynamics, regulatory developments, and clinical trial outcomes will be essential in reassessing investment decisions.
Considering these factors, I assign Legend Biotech a confidence score of 40/100, with an investment recommendation of "Hold," although leaning slightly bearish. This reflects the company's strong prospects tempered by significant market and operational challenges.
For further details see:
Legend Biotech: Carvykti Is Sailing High, But Watch The Horizon