GenScript’s Results Suggest Slowdown in Some Businesses

No-moat GenScript’s 01548 full-year results were in line with our expectations. Companywide revenue for the year was within 2% of our expectations. However, revenue growth from the non-cell therapy businesses for the second half was only 15.7% year on year, suggesting that NCT growth will be slower than the last three years as COVID-19-related business fades. This is within our expectations, but we suspect it may have caught some investors by surprise, given the price action.

We have lowered our fair value estimate to HKD 18.50 from HKD 20.50. This 10% adjustment reflects slower backlog growth in the ProBio segment, as well as a slower and more expensive ramp-up for Legend Biotech’s Carvykti over the next few years. Despite this, we remain bullish on the company’s prospects and would recommend the stock at a slightly wider margin of safety. GenScript has demonstrated excellence across its life science services business and Carvykti remains best-in-class and is generating strong data in earlier lines of multiple myeloma treatment. Moreover, its NCT operating profit margins have been stable despite the challenges of fading COVID revenue and elevated shipping costs, which gives us comfort that management can keep costs under control.

NCT revenue was USD 261 million in the second half, which is 15.7% year-on-year growth but only 5.5% sequential growth. We think this is largely due to the high base in 2021, which benefited tremendously from two years of COVID-related projects. We estimate operating profit margin for the NCT businesses (calculated with cost of sales and expenses associated with sales, general expenses, administration, and research and development) was 4.2%, which we view as basically in line with 2021.

Finally, Legend booked USD 66.7 million of collaboration revenue in 2022. Due to constraints in supply as well as higher ramp-up costs, we now model breakeven in 2025 as per management guidance. Our peak revenue forecast remains unchanged at USD 3.4 billion.