Legend Biotech

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Legend Biotech Corporation is a global biotechnology company focused on the discovery, development, manufacturing and commercialization of novel cell therapies for oncology and other indications.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Legend Biotech is pioneering the development of CAR-T cell therapies, a novel type of immunotherapy, primarily for multiple myeloma (MM). Their lead product, Carvykti, a BCMA-directed CAR-T cell therapy for the treatment of relapsed or refractory MM, has been approved in the US, EU, and Japan.

Business Overview

Legend Biotech is primarily focused on the discovery and development of CAR-T cell therapies for the treatment of cancer. Their lead product candidate, Carvykti, has been granted approval for the treatment of multiple myeloma in the US, Europe, and Japan. Here’s a breakdown of their business:

Revenue Streams:

License and Collaboration Revenue: A significant portion of the revenue, especially in the recent periods, comes from upfront payments, milestone payments, and royalties related to licensing and collaboration agreements with pharmaceutical companies for the development and commercialization of Legend’s cell therapies, most notably, the Janssen Biotech Agreement (for Carvykti). These agreements can include upfront payments and payments related to milestones for the successful development and commercialization of Carvykti, among others.

In general, the company recognizes revenue from a performance obligation by calculating an amount that reflects the transaction price, for such obligations met for a specified period.

Manufacturing and Services: Legend Biotech generates a smaller amount of revenue from manufacturing its proprietary products and selling them to pharmaceutical companies.

For instance, the collaboration revenue was $349.4 million in the latest report, while sales revenue was $71.6 million.

Other revenue: Includes royalties for prior sales of licensed products, and in one-time and or incidental gains.

In their recent Q3 2022 report, they recognized over $6m in other income and gains due to the impact from collaborations and other ventures.

Industry Trends:

Cell therapy advancement: The CAR-T cell therapy sector is rapidly growing, attracting substantial investment and attention from pharmaceutical and biotechnology companies.
Increased competition in oncology: While the field is still developing, competition is fierce. Many companies are trying to secure a position in this market which is rapidly expanding.
Personalized medicine: As this is an individualized treatment, the focus is on getting patient-specific treatments right and on improving patient outcomes.
Regulatory scrutiny: The path to getting a cell-therapy approved is long and complex. This involves years of testing, numerous clinical trials, and stringent regulatory approvals.

Competitive Landscape:

CAR-T Competitors: Legend Biotech is in a competitive landscape for CAR-T therapies, facing competition from companies like Bristol Myers Squibb and Novartis which have approved CAR-T products for some blood cancers. Other competitors are working in the same space to develop or improve upon their own treatments.
Other Immuno-Oncology Treatments: There are other types of immunotherapies, including checkpoint inhibitors and bispecific antibodies which may compete directly or indirectly with CAR-T therapies. These therapies could be more effective than or as effective as CAR-T while having better attributes (such as being administered to more people more easily), while costing less.

What Makes Legend Biotech Different?

Focus on Multiple Myeloma: Legend Biotech has been a pioneer in developing therapies for multiple myeloma, one of the most common forms of blood cancer. Although, they are starting trials in other areas.
Rapid Development and Regulatory Approvals: Carvykti secured approvals from major regulatory authorities in less than five years, suggesting their ability to take product development and commercialization, very seriously.
Strong Collaboration Network: Legend’s partnership with Janssen Biotech, a major pharmaceutical company, allows them to leverage Janssen’s expertise, financial resources, and international experience in getting their drugs out to market.
Proprietary Technology Platform: They have built their pipeline on their own platform, which can help them create other drug candidates in the future.

Financial Overview

Legend Biotech is still largely pre-profitability as they push for the market and for scale. While they have secured the approval for Carvykti in the US, Europe, and Japan, as a recent development, they are spending heavily on R&D to expand the product line.

Income Statement Analysis:

Revenue Growth: Legend’s revenues have been increasing significantly, mainly thanks to Carvykti’s launch. Most of these revenues are collaboration revenues, which are non-cash payments.
R&D Expenses: Expenses are very high as the company has been investing in clinical trials and the further development of their technology.
Net Losses: Because of the high expenses in R&D, commercialization, and G&A, Legend is still posting net losses.
Margins: Gross margins are high (north of 70%), as the company is not involved in major production and focuses on licensing and development.

Balance Sheet Health: 4 / 5

Strong Cash Position: Legend maintains a robust cash position, with around $1 billion in cash and cash equivalents. However, cash levels will reduce as the commercialization of Carvykti and other drugs expands.
Debt: Legend Biotech has some convertible debt, but these do not seem like a heavy liability for the company at this point. They may be convertible into equity as well.
Equity: The company’s equity is strong, although is being reduced by quarterly losses, is still substantial and can support its ongoing research.

In their last earning call, they highlighted an agreement with Janssen where all clinical-trial and commercialization costs for Carvykti will be split, which will lead to substantial savings on their cost structure, and a better outlook on cash-burn.

Moat Analysis: 2 / 5

While Legend Biotech shows potential, their moat is not strong yet and needs to be proven. Here’s why a rating of 2 is being given out of 5:

Intangible Asset (1/3): They have some proprietary technology related to CAR-T and BCMA-targeting, which can provide a barrier for other players in the short term, but are not permanent and can be quickly eroded. However, they have acquired and hold multiple patents in different regions (US and EU), which does provide a level of protection, particularly in those regions.

In the last 10 years, there are an average of 3 applications per year that are filled out for patent approval. This suggests they are pushing out newer products in the long term.

Switching Costs (0/3): As most of their business comes through B2B sales, switching costs are not relevant, as such. Although, treatment is highly specialized, once doctors are used to a particular method, it may be difficult for them to switch to other treatments.
Network Effect (0/3): No current network effect moat has been found in the business model.
Cost Advantage (1/3): There are some minor cost advantages in their supply chain, however, these are not significant in nature.

Overall, Legend Biotech is a growing company with limited moats. They are focusing on a growing segment, and with their first-to-market advantage, they may have established a narrow moat. But this moat can quickly change, and become weaker due to competitors developing better treatments. The company is primarily dependent on the success of their drugs, a key risk that threatens the moat.

Risks to the Moat and Business Resilience:

Regulatory Approval Delays: Clinical trials and the associated regulatory approvals are notoriously unpredictable and can be significantly delayed or rejected by authorities, creating problems for future growth.
Clinical Trial Failures: A key risk for biotechnology companies is that clinical trials for drug candidates might fail, resulting in the loss of money. The value of Legend is wholly dependent on the approval and subsequent sales of their drugs.
Patent and Intellectual Property Challenges: Patent protection may not be long-lasting and could be challenged by others, causing damage to future potential returns from the company.
Manufacturing and Commercialization Challenges: The company needs to scale up manufacturing and sales very quickly in order to become profitable. Issues in scalability and commercialization of products could create big hurdles in creating future value.
Competition: There are multiple biotech and pharmaceutical companies trying to develop a cure for multiple myeloma. As these treatments enter the market, it could be difficult to stay ahead of the competition, which is key in maintaining a sustainable economic moat.
Reliance on Partners: As their main income at the moment is derived from licensing and collaboration partners, they will be reliant on them for the foreseeable future. Failure to meet partner requirements would have significant negative consequences.

Overall, Legend Biotech’s resilience as of now depends largely on the success of their pipeline, and also how effectively they can keep the competition out of the market.

Understandability: 3 / 5

Complexity of Biotech: The fundamental science of biotechnology and the complexities of drug development and commercialization are significant.
Reliance on Partnerships: Much of their finances are dependent on collaborations that may be hard for some investors to grasp.
Emerging market dynamics: Since the treatment is newly introduced, it is difficult to project long-term growth and market opportunity.

Justification for Understandability:

Although the company’s core strategy can be understood, how exactly they will be successful in a very competitive space, along with complex financing and regulatory mechanisms, makes the company quite hard to analyze and understand.