Introduction
Genmab AS (GMAB, Financial) (OCSE:GMAB, Financial) is a Danish biotechnology company founded in Copenhagen in 1999. The company is a leader in the development of antibody therapeutics aimed at curing cancer and other diseases.
I became interested in Genmab mainly because of its outstanding financial metrics. The company has a strong balance sheet, outstanding profitability and almost no debt. Of course, as any other biotechnology company, it does have risks, which are mainly related to the future acceptance of the therapeutics currently present in its pipeline.
Let's first have a look at how the company is generating its profits today, before turning to the future developments.
Please note that revenue and profits are expressed in the Danish kroner. As of today, $1 is equivalent to 6,24 kroner.
Already approved and future antibody therapeutics
Genmab usually partners with other biotech companies for the development of antibody therapeutics, and collects revenue mostly in the form of royalties or licenses.
As of 2020, Genmab's already approved antibodies are:
- Darzalex, which is used for the treatment of multiple myeloma and marketed by Janssen Biotech.
- Kesimpta, which is aimed at curing relapsing multiple sclerosis and marketed by Novartis (NVS, Financial).
- Tepezza is designed to treat thyroid eye disease and is marketed by Horizon Therapeutics (HZNP, Financial).
Darzalex, whose scientific name is daratumumab, was developed under a global license and has a commercialization agreement with Janssen, a Johnson & Johnson (JNJ, Financial) subsidiary, that began in 2012. The latter is responsible for the development and commercialization of the drug and is supposed to pay tiered royalty payments to Genmab ranging between 12% and 20% depending on annual net product sales. The royalties are limited in time, and expire 13 years after the first commercialization of the product in a specific country.
The drug is a real blockbuster as its worldwide sales in 2020 reached $4.2 billion. Last year, Genmab received from Janssen a total amount of 4.7 billion kroner ($750 million).
Kesimpta, also known as ofatumumab, was recently approved by U.S. Food and Drug Administration for the treatment of RMS in adults. The drug was initially part of a 2006 co-development agreement between Genmab and GlaxoSmithKline (GSK, Financial), which was subsequently transferred to Novartis. Genmab is entitled to a 10% royalty payment on net sales of Kesimpta. The royalties in 2020 were not meaningful (they only accounted for $32 million last year as they started to be recognized only in the third quarter), but they should start to make a bigger impact this year.
Tepezza, approved by the FDA in January 2020, is the commercial name of teprotumumab, which was first co-developed with Roche (XSWX:ROG, Financial) in 2001 for the treatment of thyroid eye disease. Horizon Therapeutics was subsequently granted a license from Roche for product commercialization. Genmab is entitled to receive milestones and mid-single-digit royalty payments on sales of Tepezza.
The closest-to-approval therapeutics are epcoritamab, developed with AbbVie (ABBV, Financial), targeting different types of hematological malignancies, and tisotumab vedotin, co-developed with Seagen (SGEN), to treat cervical and ovarian cancer and solid tumors in general.
The last (but very promising) part of Genmab's revenue is tied to the licensing of its antibodies development technologies: DuoBody, HexaBody, DuoHexaBody and HexElect (the same technologies are also used for single or co-development trials).
In this scenario, Genmab is not developing the drug directly, but offers its development platforms to customers and receives license payments related to their commercialization achievements.
Genmab financial situation
Let's now have a look at Genmab's financials. As we can see, the company has a solid (and growing) cash position of 16 billion kroner and debt amounting to 319 million kroner.
Here are Genmab's 2020 profitability metrics:
- Return on invested capital: 148% (71% in 2019)
- Return on equity: 29.83% (19.46% in 2019)
- Return on assets: 27.25% (18.19% in 2019)
Please note that last year's metrics are greatly inflated by the one-time upfront 4.4 billion kroner payment received from AbbVie in the second quarter of 2020 related to the co-development of epcoritamab.
Looking at 2019 metrics, they look less impressive but are still outstanding. For the past several years, ROIC has always been higher than 50%. The company clearly knows how to generate high returns on its investments.
The free cash flow margin for 2020 stands at 60.59%, again influenced by the big upfront payment. If we look at the past five years, free cash flow margins are at least ranging in the high teens.
Let's now look at Genmab's price and valuation with a conservative eye.
First of all, please note that Genmab is listed both on the Nasdaq and on the Copenhagen Stock Exchange. In the U.S., is possible to invest in Genmab's American depositary receipts, which have a conversion ratio of 10 ADRs for each (Danish) ordinary share. This is important to avoid confusion when converting items or metrics taken from the original company financial statements to the U.S. stock-related ones.
Free cash flow grew to 6.13 billion kroner in 2020, up from 1.2 billion kroner in 2019. If we exclude AbbVie's upfront payment, and also take into account the operating income range of 1,000 kroner to 2,000 kroner from 2021 guidance, we can reasonably and conservatively estimate a 2021 free cash flow of 1.35 billion kroner.
Please note that 2021 guidance already takes into account the potentially reduced profits linked to an ongoing arbitration arising under its license agreement with Janssen relating to daratumumab (Darzalex).
If we consider a weighted average cost of capital of 3.13% (the cost of debt here is practically negligible), a total amount of 658.8 million outstanding ADRs (65.88 million shares) and no free cash flow growth from this year onward, as well as no terminal growth, we get a value per share of $14.61.
If I conversely take the free cash flow growth rate for the past five years (an impressive annual rate of 79.5%) and project it for the next 10 years, the result is almost a 100-bagger (Genmab's current price per share is $31.75)
As both these extreme scenarios look quite unlikely, we could project an honest (but still very high) 30% growth rate for the next 10 years. In that case, the intrinsic value of Genmab would be $124.71.
We could also invert the reasoning and ask ourselves which FCF growth rate would justify the current price. The answer is 11.3%, a minimum hurdle rate that looks easily within Genmab's reach.
The GF Value tool rates Genmab as a possible value trap. While not 100% sure about its valuation, I would be inclined to rate it as a severely undervalued company (and a consequently big opportunity).
Conclusion
Genmab is a Danish biotechnology company involved in the development of antibody therapeutics aimed at curing different forms of cancer and other illnesses.
It has several approved and marketed products and a good pipeline of co-developed antibodies which can potentially unlock billions of dollars in future profits.
The company looks extremely solid from a financial persective and has high profitability and almost no debt. The price does not, in my opinion, incorporate the high growth potential underlined by the company's impressive track record.
Disclosure: The author owns shares of Genmab.
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