Genscript Biotech Corporation (1548) Earnings Call Transcript & Summary

Welcome to the 2022 Annual Results Conference Call. I'm [indiscernible], the Investor Relations Director at Genscript. Joining me on the call today are Mr. Robin Meng, Chairman of the Board; Ms. Weihui Shao, Rotating CEO of Genscript; Dr. Patrick Liu, [indiscernible] Rotating CEO of Genscript , Mr. Shiniu Wei, CFO of Genscript; Dr. Ying Huang, CEO of Legend Biotech, Dr. Brian Min, CEO of Genscript ProBio; Dr. Ray Chen, President of Genscript Life Science Group; Dr. Aixi Bai, General Manager of Bestzyme. Before we begin, I would like to remind everyone that on today's call, we will be making statements about future expectations, plans and perspectives as well as any other statements regarding matters that are not deferable factors, which may constitute forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important risk factors and changing market conditions. We do not undertake any obligation to publicly update any forward-looking statements. In today's conference call, Sherry, our rotating CEO, will share business highlights and future strategies with you. And our CFO will walk you through our financial performance. We also have a Q&A section for you to -- at the end of the call. Now let's start with our CEO presentation. Sherry, please.

Hi, everyone. I'm Sherry Shao, Rotating CEO of Genscript. I'm pleased to share with you our business update. 2022 was the challenging year that included in geopolitical region, volume increase, [indiscernible], currency and COVID disruption. Despite those effects, we are able to navigate in the [indiscernible] management and solid business growth. On behalf of the group, I'd like to thank these great people for their dedication and support to our business success. Now, I will start with some facts and highlights about our business for each segment. Genscript Life Science is the foundation of group's business. Revenue from life science business grew about 14.2%, demonstrating to 1 year of [indiscernible] growth. The organic growth at constant currency, excluding the COVID impact was about 23.6%. In 2022, we served about 49,000 customers, rising 6.5% Y-o-Y. In terms of provisional performance, Asia-Pacific business saw impressive growth, Europe business recovered from the COVID impact, and our U.S. business maintained steady growth. We launched innovative regions, consumables and equipment for gene and cell therapies. ProBio continued its strong growth in '22. ProBio's revenue grew 54%. Constant currency revenue growth is actually 59.3%. In terms of our regional revenue reach, we have 50-50 reach between international and Mainland China sales. Turning to our track record. We signed 36 new biologics CMC projects and 55 new GCT CMC projects. We helped customers obtain 22 China and international new IND approval. We also upgraded our antibody protein and GCT-related platforms to enhance competitiveness. Enzyme's revenue growth turned positive in second half 2022. We continue to optimize the cost of various enzyme products and developed new feed proteins, helping customers manage their rising cost of raw materials. By implementing our new business strategy, Bestzyme's gross margin grew to 43%. To ensure our future growth, we continue to invest in our expression platform and added to our offering by [indiscernible] and [indiscernible]. We licensed our [indiscernible] technology using [indiscernible] generating RMB 50 million in revenue. Turning to Legend Biotech. Cilta-cel received last line commercial approvals in the U.S., EU and Japan and generated USD 134 million in [indiscernible]. To adjust [indiscernible] frontline multiple myeloma patients. We are also conducting CARTITUDE-4, CARTITUDE-5 and CARTITUDE-6 test 3 trials. In January, 2013, CARTITUDE-4 met its primary endpoint. Results from the CARTITUDE-4 study will be presented at an upcoming medical conference and will support discussions with health authorities about potential regulatory submissions. Legend is also ramping up capacity to support market demand. [indiscernible] detailed performance of our 4 segments. Starting with life science, we have been investing in our gen-related technology platform and processes, leveraging our cutting-edge chip-based, oligo [indiscernible] knowledge, we have been able to further improve the competitiveness of our displacement service. We will launch GenTitan, ™ Gene Fragment service by Q2 this year, which will allow us to support diversified inclusive needs. As a reliable oneself product and service provider in the industry, we have also optimized our operations to meet diverse customer needs. The booming GCT and mRNA industry just request multiple high-quality genes and plasmid. For last year, we upgraded services for ALD and mRNA-related downstream applications. Turning to protein and antibody business. Empowered by our high-throughput, rushed gene therapies and through [indiscernible] high expression platform Q2, we have shortened turnaround time for protein and antibody services to 7 to 10 business days, supporting the increasing demand for biologics from early-stage R&D to preclinical stage. Moving to peptide business. We have upgraded [indiscernible] platform, which is the world's largest automated peptide workstation. We have also established a platform for complex modified peptide like non-tryptic peptides, offering innovative peptide drug solutions to our customers. Now we are building a GnT peptide facility in Zhenjiang, which could support a full range of services from antibody to clinical manufacturing for invasive peptide drugs. The nuclear acid business as the first-class supplier of critical materials in CRISPR-based Gene Editing tool. We developed one-stop solutions from [indiscernible] grade to GnT grade manufacturing and successfully increased as volume [indiscernible] shortening turnaround time. We increased our SD&A capacity to 6 KB new brand label and rollout [indiscernible] secular vector in minimum size for [indiscernible] and gene therapy. To support global customers, we implemented a global project management products. We have successfully supported the first UCAR-T IND approval in China. Our services have been cited by our customers in leading peer review journals such as natural enzymes, which validates our ability to explore life science frontier, along with our customers. In QCT related instruments and consumables, [indiscernible], our call aspiration platform for CAR-T cell preparation has received orders from cell therapy customers in China and is also on the testing among overseas customers. We have also launched [indiscernible] cell separation [indiscernible] T-cell activation and calling for cell separation. To support future demand for CMC grade in manufacturing, we will compete to GnT grade with manufacturing facilities in mid transition 3. We also launched MF auto automated systems for fully automated plasmid preparation in second half 2022. By the end of 2022, we have served over 49,000 global customers, rising 7% versus 2021. We saw an increase in industrial costings, which met up 54% of our global sales. This drove the increase in average sales from each customer as we provide a skill and more complex services. Both our Mainland China and international business continued the momentum. We have a rated [indiscernible] business over the years. In '22, over 10,000 [indiscernible] articles cited our product [indiscernible]. Our life science capacity expansion plan is aligned with our strategy. First, to renovate traditional business lines for higher throughput and automation; second, to build up capacity for emerging business, third, to support localized production for global customers. New facilities could support our business growth in the new next 3 to 5 years. Turning to [indiscernible]. We delivered strong growth in addition to a solid track record, we spoke on upgrading our technology platforms, boosting production efficiency and improving services for therapeutic drug modality. In protein and antibody drug CDMO business, our discovery business has been the foundation of [indiscernible]. We shortened the timeline for [indiscernible] to 1 week and improved our success rate to over 90% by leveraging these generation technologies, [indiscernible], we can both deliver traditional biologic projects and novel drug modality such as [indiscernible], cell therapy, ADC and AOC. On large-scale protein and antibody production, our new vectors could post year to 15 grams liter with automation of experience from our CMC orders. We have shortened turnaround time to 6 months. We launched our first acceptive POM finish line for liquid products and [indiscernible] filing. In gene and cell therapy business, our focus is to improve our processes and accumulate track record. We announced the #1 GMT plasmid supplier in China. Also, we are expanding our partner applications and GMP-grade manufacturing capabilities. In viral vector business, our proprietary suspension cell line PowerS 293T level efficient viral-vector packaging and higher [indiscernible]. We delivered over 70 batches and several 50-liter GMP batch manufacturing. We also launched our AAV platform, which allows us to offer a wide range of services. mRNA technology has been increasingly used for areas beyond COVID vaccines as the critical material for the mRNA platform, plasmid play a critical role in manufacturing. To better address market needs, we launched one-stop mRNA service. Turning to our track record in biologics CDMO business, we saw an increase in CMC projects, reflecting our improved CMO capabilities. The GPB CDMO business, despite a decline in CMC projects, our projects in R&D filing process increased significantly. Moving to [indiscernible]. Our focus is on 3 areas. On production, we aim to optimize production processing and continuously reduce manufacturing costs. We achieved over 10% efficiency improvement in permutation, extraction and formulation processes. On sales, we just set by enriching our product portfolios and strengthening overseas market penetration. Our feed enzyme product line covers more than 20 single enzyme and multiple compound enzymes. On industrial enzyme, we gained market share through our competitive products and new launch, improving our industrial product line. In 2022, our overseas sales efforts brought us about 43% overseas sales growth on industrial enzyme. On R&D, we have been upgrading our co-products. We optimized the formulation of 2D products to improve cost structure. We also optimized strength for this product. We define our products for downstream applications and launch China's first protein for liquid [indiscernible]. Synthetic Biologic is one of the major areas of our future investments. Our synthetic biologic pipeline looks on substitution for traditional chemically e-sized products and nutritional additives. [indiscernible] technology using [indiscernible] is at the forefront of our pipeline, which has been licensed to our partner and generated about RMB 50 million in revenue in 2022. Going forward, we will cooperate with our partner on manufacturing and commercialization of this product. In addition, we are also exploring opportunities in sweeteners from growing and organic assets. Legend Biotech is our cell therapy segment. Throughout 2022, along with our partner, Janssen, Legend received commercial approvals for its [indiscernible] in the U.S., EU and Japan, making a new treatment of [indiscernible] available to last-line multiple myeloma patients. Currently, Legend is actively ramping up capacity to meet patients' needs for self-cell. With respect to [indiscernible] program is our first Phase III study for multiple myeloma, evaluating self-call for the treatment of patients who have received 1 to 3 [indiscernible] and also refractory to [indiscernible]. The study enrolled over 400 patients with the last patient enrolled in October 2021. In January, CARTITUDE-4 met its primary endpoint. Results from the CARTITUDE-4 study will be presented at an upcoming medical conference and support potential revenue to submissions for frontline indications. We also started our first Phase III trial in first-line multiple myeloma called CARTITUDE-5, and this is a Phase III open-label study of self-cell. We plan to treat 650 patients. We are comparing to an active control arm, where the patients are being treated with standard of care VRd followed by Rd maintenance. This is the -- actually the first Phase III trial for [indiscernible] targeting [indiscernible] in the first-line setting of multiple myeloma. CARTITUDE-6 was initiated early this year, another Phase III trial in frontline setting aiming to compare the efficacy of DVRd followed by self-cell versus DVRd followed by [indiscernible] multiple myeloma patients who are [indiscernible] eligible. We plan to enroll roughly 750 patients. Looking at other programs, the U.S. FDA approval IND application for solid tumor CAR-T LB1908 targeting last or refractory factory esophageal and pancreatic hampers. In November 2022, the U.S. FDA also approved IND application for LB2102 and investigational CAR-T therapy for the treatment of adult patients with extensive stage small-cell lung cancer. Now I will turn to Shiniu to recap the financials.

Thank you, Sherry. For those who are listening online, I'm on Page 17 of our slide deck. Genscript continues to deliver steady growth in 2022. Group revenue grew 27.7% year-over-year to about $625.7 million. Group's gross profit reached about $304.1 million, an increase of 7.6% year-over-year. Group gross margin was about 48.6%. Group consolidated net loss was about $428 million and adjusted net loss was about $359.4 million. Non-Cell Therapy business saw continued growth in 2022. External revenue grew 19.8% to about $509 million, driven by new product launch, stronger business development capabilities and ramp-up of capacity in our 3 business segments. Our non-cell therapy business reported adjusted gross profit of about $268.1 million, 17.4% higher year-over-year and adjusted net profit of about $62.4 million, 31.4% higher year-over-year. Our cell therapy business generated revenue of $117 million, up 70% year-over-year, reflecting continued revenue recognition of upfront and milestone payments from collaboration with Janssen and also our share of the product sales of cilta-cel. The adjusted net loss for Cell Therapy business was about $422 million, mainly due to increased clinical trials of cilta-cel and other R&D activities. Please also note cell therapy profit loss figures reported at the group level may slightly different from Legend's own reported numbers due to intercompany elimination. On Page 18, we continue to invest in R&D under our long-term strategy. Excluding share-based compensation expenses, our total R&D expense was $368 million, up about 7% year-over-year. In 2022, R&D expenses of our non-cell therapy business grew 17%, which is in line with our strategic planning. R&D was -- as a percentage of our non-cell therapy revenue is expected to be -- remain about 10% of R&D expenses for our cell therapy business grew 5% due to R&D investment in cilta-cel and other pipeline activities. We expect R&D expenses related to cilta-cel to increase in 2023. Our capital expenditure was about $218 million. Major areas of CapEx included capacity expansion for life science business, CDMO business and commercial manufacturing of cilta-cel. The group has a strong balance sheet. As of the end of 2022, our cash position stood at roughly $1.5 billion. Cell therapy business has a cash position of about $1 billion, while non-cell therapy business cash stood at about $463 million. In early 2023, mobile also announced another round of financing for about $200 million, further adding to our cash position. Now I will turn to Page 19 to provide details about our segment financials. Starting with our life science business, which maintained rapid growth. Reported revenue was about $361 million, up 14.2% year-over-year. The organic growth at constant currency, excluding COVID-related product decline was about 22.6%. Adjusted gross profit grew 8% year-over-year to about $201 million. Adjusted gross margin was 55.8%, decreased slightly from the 59% level last year for the same. The decline was mainly due to several factors. First, our capacity ramp up in Singapore and the U.S. initially produced lower gross margin. Second, shipping costs continue to rise in 2022 due to COVID, but we expect shipping costs to grow slower in the coming years. Third, decrease in high-margin COVID-related revenue expense. However, we think all these factors are short term. Also, I would like to let you know that ProBio has established an independent legal entity, therefore, group's non-cell therapy operating expenses have been allocated to the 3 business segments within this year. Now due to allocation of back office expenses, R&D, selling and administrative expenses and operating profits cannot be directly compared year-over-year. As we can see, life science business reported adjusted operating profit of about $66.1 million and adjusted operating margin was about 18.3% in 2022. For 2023, due to uncertainties in global macroeconomics, we expect life science revenue to grow about 10% to 20% and gross margin to be flat or slightly declined compared to 2023. Now turning to Biologics CDMO business. Genscript ProBio continued robust growth. Reported revenue grew 53.6% year-over-year to $125 million. Revenue at constant currency grew 59.3%. This was primarily driven by successful delivery of ongoing CDMO projects and increasing demand for gene and cell therapy CDMO. With gene ProBio, gene and cell therapy CDMO service delivered revenue growth of 129% year-over-year. antibody and protein drug CDMO grew 32% in revenue. ProBio's China-based and international business grew in parallel, reaching a roughly 50-50 revenue split. As the pandemic subsides, overseas market will be our priority in 2023. So we expect to invest more aggressively in overseas sales and marketing activities. We moved to an economy that's more challenging in 2022. As of the end of 2022, ProBio's total backlog stood at about $233 million, up 18% year-over-year, among which fee-for-service backlog has increased about 21% to $250 million. We expect to convert backlog into revenue in the next 2 years. As ProBio grew its revenue, adjusted gross profit was also grew 54.5% to $42.8 million. With higher capacity utilization, substitution with domestic materials, R&D optimization and higher labor efficiency, we believe adjusted gross profit still has room to improve. In 2022, adjusted EBITDA was about $15.2 million, and we expect our production cost and administrative expenses to further improve as we scale up. ProBio raised CRC and CRC financing in 2022 and early 2023, respectively, which will support our growth momentum. Following CRC financing before converting [indiscernible], the group owns about 70% of ProBio. We expect ProBio revenue to continue to grow at about 30% to 50% rate in 2023 and gross margin to be flat to slightly improved in 2023. Turning to Industrial systemic biology products. Bestzyme's revenue was $38.7 million and revenue growth turned positive in second half. By implementing our new business strategy, gross profit and gross margin grew fast. Revenue from key enzyme business declined about 22%, mainly due to COVID and the key enzyme market decline. However, our industrial enzyme business grew 23% year-over-year, thanks to the improvement in our existing products and launch of new products. Also in 2022, we licensed a patent to our partner and received patent royalty of RMB 15 million. Excluding this impact, our gross margin was about 40% for Bestzyme business. Adjusted operating profit reached $2.6 million up significantly year-over-year. We expect revenue to continue to grow 20% to 30% for '23 for this business and gross margin remain flat. Now turning to cell therapy. On Page 22, Legend reported revenue of about $117 million, reflecting milestone payments of $50 million and also Legend received collaborative sales revenue of $66.7 million for CARVYKTI sales, representing 15% share of the net trade sales. R&D expenses at Legend include costs for conducting clinical trials in U.S. and China for cilta-cel program, which was around $210.9 million. R&D expenses for other pipelines were about $125 million. As Legend continued to invest in R&D at the early stage of commercial launch for CARVYKTI, an adjusted net loss for the year was about $422.1 million. As of the end of 2022, Legend had cash position of about $1 billion. Through financing in the secondary market in Q3 last year, Legend raised about $400 million in gross profit. This helped Legend to accelerate cilta-cel early line clinical trials and support our investment in other pipelines. Now I will turn it back to Sherry to share our long-term planning strategy.

Thank you, Shiniu. The group's business growth in 2022 is aligned with our business planning and management process. On life science business, we will continue to invest in GPT services and products to tap into the rapidly evolving market. We will also upgrade automation capabilities of life science business, increase the throughput of gene oligo protein and peptide business lines and ramp up global strategy to separate delivery and support our global business growth. Turning to ProBio, we will stick to our global strategy and increase investments in overseas markets. In the GCT CDMO, we will start to maintain our CDMO leadership in China and scale up GMP capacity. We believe that the 5 challenges in the industry with our commitment to high-quality delivery and technology upgrade, we are able to expand our presence in the international market. On Bestzyme, we will synergize R&D [indiscernible] industrial-grade production and leverage our lifestyle industrial permutation capabilities accommodated over years. We will continue to optimize our product portfolio, launch more competitive products and accelerate R&D in the synthetic biology pipelines. For international business, we will strengthen our presence overseas to diversify our revenue speed. On Legend, with last-line commercial approval for our first CAR-T trial, CARVYKTI we will move CARVYKTI into earlier -- to early-line clinical trials and actively ramp up capacity expecting to make innovative products available to more patients. On other pipelines, Legend will focus on products for solid and weakest tumors, reshaping the landscape of [indiscernible].

Thanks, Sherry. This concludes today's presentation. Operator, let's open up the Q&A section, please.

[Operator Instructions] The first question, we have [indiscernible] from CICC.

Okay. I am [indiscernible] from CICC. I have 2 questions. The first one is considering the impact of pipeline adjustments and financial difficulties of customers. Is there any change we can see in the demand of CDMO? And what are the situations of domestic and overseas demand, respectively. That's the first question.

[indiscernible], thank you for your question. For your -- for comment about the CDMO environment and customer demand, we'll have Brian answer this question.

This is Brian Min. Thank you for your question. Due to softer market, there is somewhat of a decrease in the rate of our sales. However, we do see increased orders due to some pent-up demand from end of last year. And we are seeing the -- some of the growth in the overseas market, more so than China market currently starting with the U.S. market and that we do -- our current revenue split is 50-50, and we expect to see our overseas business grow faster than China business.

Okay. My next question is about what's the proportion of domestic and overseas customers or profile? And what are the domestic and overseas capacity layoff plan?

Okay. Well, thank you for the question. We -- currently, our -- as I said, our revenue split is about 50-50. Our overseas customer numbers are growing faster than China number of customers. And with that, because of increased international business, we are building our plasmid facility in United States, and that is going well currently, while our China facility projects also will be continuing. We don't have any plans to cancel any of the projects. And also, we will be looking at some opportunities for potential M&A if that is -- if we have a very good deal that can be made in the future overseas wise.

Okay. So may I conclude that the major market and focus of our strategy in the future is in the overseas market.

There will be more focus. Of course, China market is the most important and major market for us. So we will continue to expand our China market, but there will be more focus on the -- our international markets, especially our U.S. market.

Okay. So this trend is the same for the biologic CDMO and CGT CDMO, right?

That is correct.

Thank you for the questions. [Operator Instructions] Next question comes from the line of Jay Lee from Morningstar.

Congratulations on these results. I think investors should be happy to see the continued improvement in the operating margins across the life science businesses and also the -- the progress in Legend's clinical trials. I have just 2 quick questions. First is also about ProBio CDMO segment. I noticed that the backlog only grew around 18.2%, which is a little bit of a slowdown compared to previous years. So I just want to get some color. I think you gave some guidance on what growth might be for next year, but I just want to get some color on how the backlog might correlate with growth beyond 2023? And the second question is for the company as a whole across this life science and also the CDMO businesses, what is employee headcount and hiring plans look like? Can you give any guidance on whether you're looking to grow, hire more people or keep employment flat?

Thank you, Jay, and I'll take a first cut to this question and have Brian supplement, if needed. So first, in terms of backlog, you are right. Total backlog grew 18%. However, the people service backlog grew faster, 21% year-over-year. And the growth of backlog is constrained by 2 factors. Number one, we did see some softness in the market, especially in China. I think that's well understood. But secondly, as you already know, we are still building on our large commercial scale manufacturing capacity; therefore, some of the larger deals, we will have to wait until the commercial manufacturing capacity is online. So we do expect backlog growth beyond 2023 to accelerate once the capacity is online. So hope that house. And secondly, in terms of questions on headcount for CDMO business, we have roughly about 1,000 people there. But we are very aggressively increasing our efficiency, especially on labor. So we do expect headcount to grow slower than our revenue growth.

Yes, this is Brian. I think backlog growth, we recovered. It's due to the softness of the market, the growth rate is somewhat flat. But looking at the current orders that we are working on, I think we do expect our 2023 revenue growth to be in the upwards of 30%. And so we do not see that much softness, but we are -- for the year, we are on track for about 30% upwards growth. In terms of people, we are still hiring our key people, and we're going to continue to hire based on the market needs. Thank you.

Thank you for the questions. At this time, there are no further questions at the time. I would like to hand the call back to the management for closing remarks.

Thanks, Desmond. And thanks to all the shareholders, investors and analysts for your continued support and care. If you have any more questions, please feel free to contact our IR team. We will see you on the next call. Thanks.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.