Genmab AS (GMAB, Financial) is one of the largest Danish pharmaceutical companies focused on developing medicines to treat patients with cancer, multiple sclerosis, thyroid eye disease and various autoimmune diseases.
Investment thesis
Genmab has an extensive portfolio of both Food and Drug Administration-approved and experimental drugs, which allows it to diversify its sources of operating income, as well as increase research and development spending, with the ultimate goal of more effectively adapting to changing market conditions and entering into multibillion-dollar partnerships with Big Pharma.
Source: Genmab presentation
Reported on Nov. 7, financial results for the third quarter of 2023 were excellent, even as competition in the global cancer and neuroscience therapeutics markets increased. Its non-GAAP earnings came in at 46 cents per share, an increase of 53.30% from the previous quarter. More importantly, it beat the analysts' consensus estimate by 17 cents.
In addition, Genmab management increased its 2023 revenue guidance from 15.5 billion Danish krone ($2.23 billion) to 16.5 billion krone to a range of 15.9 billion krone to 16.5 billion krone, mainly due to growing demand for Darzalex (daratumumab), developed in partnership with Johnson & Johnson (JNJ, Financial). Under the agreement, the company will receive royalties on net sales of daratumumab, a monoclonal antibody that targets CD38 to fight multiple myeloma effectively.
Source: Author's elaboration, based on quarterly securities reports.
According to the Global Cancer Observatory, the number of new cases of multiple myeloma will be 294,5000 by 2045, an increase of 56.80% compared to 2022, thereby helping to maintain the upward trend in Darzalex sales.
Source: International Agency for Research on Cancer
Darzalex sales were approximately $2.55 billion in the fourth quarter of 2023, up 22.4% year over year, driven by increased demand for its subcutaneous version as well as its growing share of the global multiple myeloma market.
Source: Author's elaboration, based on quarterly securities reports.
In addition to its strong portfolio of product candidates, another investment thesis is its high operating income margin, which was 36.19% for the three months ended Sept. 30, outperforming health care peers Pfizer (PFE, Financial), Bristol-Myers Squibb (BMY, Financial) and BeiGene (BGNE, Financial).
Source: Author's elaboration, based on GuruFocus data.
As such, we initiate our coverage of Genmab with an "outperform" rating for the next 12 months.
The current financial position and outlook of Genmab
Genmab's revenue for the third quarter of 2023 was about $680.25 million, exceeding our expectations by approximately $35 million and, more importantly, growing 23.70% year over year.
Moreover, the company's actual revenue beat analysts' consensus estimates in the last 10 quarters despite continued conservative sentiment among financial market participants regarding its business development.
So sales of Kesimpta (ofatumumab), a medicine developed in partnership with Novartis (NVS, Financial) and used to treat patients with relapsing forms of multiple sclerosis, amounted to $1.53 billion in the first nine months of 2023, an increase of 111.60% compared to the previous year.
Source: Author's elaboration, based on quarterly securities reports.
We believe the main drivers of growth in demand for Kesimpta are its high efficacy in combating one of the most common autoimmune disorders and expanding the geography of its use.
The company is expected to report fourth-quarter 2023 financial results on Feb. 14. Genmab's revenue for the quarter is anticipated to range from $627.40 million to $709.60 million, up 6.10% from analysts' expectations for the previous quarter.
Source: Author's elaboration, based on GuruFocus data.
On the other hand, we expect the company's total revenue to reach $685 million for the three months ended Dec. 31, which is about $13 million above the median of the above range, mainly due to growth in sales of its key products such as Darzalex, Tepezza, Epkinly and Kesimta.
Source: Created by author
The company's operating income margin was 36.19% for the third quarter, continuing to recover since the beginning of 2023. We estimate this financial metric will reach 32.50% in 2023 and increase to 36.20% by 2024, primarily driven by expanded indications for its key blockbusters and increased sales of Epkinly and Talvey following their launches last year.
These factors partially offset the expected increase in Genmab's research and development spending, driven by the significant expansion of its research pipeline and the ongoing execution of costly pivotal clinical trials.
Source: Genmab presentation
Nevertheless, the company's fourth-quarter earnings are expected to be between 28 cents and 33 cents per share, up 139.50% from the prior-year quarter. While we expect its earnings to be above this range due in part to stronger sales of its cancer blockbusters, it will reach 36 cents, up 24% from a year ago.
Souce: Author's elaboration, based on GuruFocus data.
However, the company's trailing 12-month non-GAAP price-earnings ratio is 29.50, indicating it is trading at a significant premium to the sector. However, Genmab is a growth stock with solid revenue growth and the potential to become a key player in the global oncology drugs market and, as a result, we believe it is worth trading at high multiples.
On a more global scale, its price-earnings ratio is expected to decline to 11.37 by 2027, which we estimate is an attractive value for long-term investors.
Source: Author's elaboration, based on Seeking Alpha data.
At the end of September, Genmab's total debt was about $112.4 million, an increase of only $26.4 million from the end of 2022.
Source: Author's elaboration, based on GuruFocus data.
However, given the company's growing free cash flow in recent years, its total debt/Ebitda ratio remains extremely low at 0.12, which, in our opinion, indicates the absence of any financial risks associated with debt servicing.
Conclusion
Key risks that could negatively impact Genmab's financial position include the negative impact of President Joe Biden's Inflation Reduction Act on the health care sector, as well as its ability to continue to develop "breakthrough" experimental drugs that have the potential to become the most effective treatments for such widespread diseases as lung cancer, cervical cancer and solid tumors.
On the other hand, Genmab continues to become a key player in the global cancer market, with an extensive pipeline of product candidates and multiple partnerships with health care giants such as BioNTech (BNTX, Financial), Novartis, Pfizer, Horizon Therapeutics and Johnson & Johnson. These factors, coupled with its extremely high gross margins, growing revenue, low debt and Tivdak's expected label expansion in early May 2024, are the key investment thesis we highlight.
We initiate our coverage of Genmab with an outperform rating for the next 12 months.
