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Leveraging on sustainable royalty income stream

  • 23 Dec 16

Recommendation and upside We are initiating coverage of Genmab (market cap. of DKK68.6bn/€9.2bn and a float of 100%) with an ‘Add’ recommendation and a target price of DKK1,238 (c.9% upside). Our upside is driven by the company’s multi-blockbuster potential drug ‘Darzalex’, strict cost management and a cash surplus business model. Darzalex’s approval as a fourth line of therapy for multiple myeloma ‘MM’ in November 2015 triggered a spectacular rally in the stock, with the share price surging c.70% in the subsequent seven months. However, the stock has remained range-bound since then and is currently trading c.15% below its all-time high. Moreover, Darzalex’s recent approval as a second line of treatment for MM (in November 2016) has triggered the next growth phase for the stock. Given the clinical profile, we also expect Darzalex to get approval in the frontline setting as well (by 2019/20) and thus further propel growth in the long run. While we acknowledge Genmab’s upside potential, we restrict our recommendation to an ‘Add’, as we await the ‘on the ground’ performance of the drug in the second line setting and interim data from the frontline studies. Business and Trends Genmab is a Denmark-based biotech company with two approved antibodies for cancer treatment – Darzalex (c.79% of 9M 16 revenue) and Arzerra (c.5% of 9M 16 revenue). The remainder of the revenue is attributed to deferred/reimbursement income from the pipeline drugs. Darzalex was approved by the FDA in November 2015 (Europe in May 2016), as a monotherapy for the fourth line of treatment for MM. Based on superior clinical efficacy data vs rival drugs, Darzalex was also approved in the second line setting (Europe approval expected by H1 17). The second line approval has significantly expanded the target population of the antibody, more than doubling the number of patients eligible to use Darzalex. Moreover, patients tend to stay on therapy for a long time (patients are less sick when the treatment starts in second line vs third line), resulting in higher revenue per patient and, in turn, higher royalties for Genmab. The company is also conducting trials for the third line and frontline setting, and, once approved, Darzalex has the potential to change the current landscape of the MM industry further. The global market for MM is valued at $8.9bn and is dominated by Revlimid/Celgene (c.43% share) and Velcade/Takeda/Janssen (c.33% share), with Darzalex holding an insignificant market share (<5%; it was used in the third line-plus setting until late 2016). The MM market size is expected to more than double to $22.4bn by 2023 and, given the better clinical profile of Darzalex, it is expected to grab a significant slice of the market in the mid/long term. Genmab’s other antibody ‘Arzerra’ was approved in 2009 in the US (Europe in 2010); however, it has not been a commercial success due to its narrow label approval and the lack of differentiation vs the market leader ‘Rituxan/Roche’. Genmab is now working to revive its Arzerra franchise by making inroads in the multiple sclerosis ‘MS’ market. Although the $14.9bn MS market offers larger market opportunities, it would not be easy for Genmab to compete with Roche in this domain. Need to know Genmab has relied on strategic partnerships with pharmaceutical companies to fund its R&D activities and bring the products to the market (Darzalex is out-licensed to Janssen/J&J and Arzerra is out-licensed to Novartis). Genmab is entitled to milestone payments (c.52% of 9M 16 revenue) and royalties (c.39% of 9M 16 revenue) under these collaboration agreements, which are also the primary FCF drivers as the operating expenses have been kept under control over the last five years. However, the royalty income is expected to contribute the lion’s share in the top-line post Darzalex’s approval in the second line setting. Genmab is also building a pre-clinical pipeline of c.25 programmes to identify the ‘next big winner’ and ensure sustainable long-term value creation. The company plans to bring the next product to the market by 2025 with complete/significant ownership (plans to hold on to at least 50% of the rights) and is focusing on next-gen antibody technologies (duobody, hexabody and antibody drug conjugate). The diversity of antibodies in the clinical pipeline reaffirms our belief in Genmab’s long-term growth potential. Upcoming triggers We expect the next triggers for the company to be the second line approval of Darzalex in Europe (expected by H1 17) and third line approval (in combination with pomalyst and dexamethasone) in the US (expected to come before the PDUFA date of June 2017). Moreover, the interim data from one of the studies in the frontline setting (expected in H2 17) is also highly awaited.