Genmab may not be as well-known as another Danish biopharma company, Novo Nordisk, but it could be an intriguing investment for long-term investors. Genmab collaborates with some of the largest biopharma companies in the world, which often license Genmab's technology, resulting in stable recurring income that can be reinvested in developing new therapies. This can be a highly profitable business model. The question is whether now is the right time to invest in Genmab. This is what I am going to investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do own shares in Genmab. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. Thus, I do have a personal stake in Genmab. If you want to purchase shares (or fractional shares) of Genmab, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Genmab is a biotechnology company that was founded in Copenhagen, Denmark, in 1999. Genmab specializes in discovering and developing antibody-based therapies for the treatment of cancer and other diseases. The company frequently collaborates with pharmaceutical and biotechnology firms to co-develop and commercialize their drug candidates. They may license their proprietary antibodies or technology to partners in exchange for upfront payments, milestone payments, and royalties on future product sales. In total, Genmab has six royalty-generating products, which are marketed by pharmaceutical and biotech giants such as Johnson & Johnson (Janssen), Novartis, and Amgen. Additionally, two therapies are proprietary products co-marketed with AbbVie and Pfizer (who acquired Seagen). Genmab generates most of its revenue from royalties, with 83% of the revenue in 2023 coming from this source. Their most important collaboration is with Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, for the development and commercialization of Darzalex (daratumumab), an effective treatment for multiple myeloma. Darzalex contributed 72% of the total revenue in 2023. Like all other biopharmaceutical companies, Genmab has a significant moat due to its patents. This means that once you invest in biopharmaceuticals, you need to stay updated on their therapies and patents. Genmab is listed on both the Danish and U.S. stock exchanges. One U.S.-listed ADR equals one-tenth of an ordinary Danish-listed share, meaning that there are 10 ADRs for each ordinary share.
Management
The CEO of Genmab is Jan van de Winkel, who is also the co-founder of the company. He served as President, Research & Development, and Chief Scientific Officer of Genmab until his appointment as President & Chief Executive Officer in 2010. Jan van de Winkel has more than 25 years of experience in the therapeutic antibody field and served as Vice President and Scientific Director of Medarex Europe prior to Genmab. He is the author of over 300 scientific publications and has been responsible for over 150 patents and pending patent applications. Jan van de Winkel holds a professorship of immunotherapy at Utrecht University. He is also the chairman of the board of directors of Hookipa Pharma and a member of the board of directors of LEO Pharma. He holds M.S. and Ph.D. degrees from the University of Nijmegen. Under Jan van de Winkel's leadership, Genmab has shifted towards proprietary products, where the company contributes 50 percent of the expenses but also receives 50 percent of the profits, significantly more than what is obtained through royalties. Jan van de Winkel has emphasized that Genmab is not solely focused on the present but is aligned with a vision of long-term value creation. While it may not always be popular to make decisions that affect the company in the short term to create long-term value, the courage to make these decisions is what defines strong management. I also appreciate when founders or co-founders serve as CEOs, as they are usually interested in growing the business rather than just their personal wealth. Thus, I believe that Jan van de Winkel is the right person to lead Genmab moving forward.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. Genmab has consistently delivered a ROIC above 10% over the past decade, demonstrating the company's quality and operational efficiency. ROIC has usually been relatively stable between 15% and 20% with a few outliers. ROIC decreased in 2023 and reached its second-lowest level in the past ten years, which some might find concerning. However, the reason for this decline is that operating expenses increased significantly in 2023 due to the launch of Epkinly (one of their therapies) in the United States and Japan. Management expects that operating expenses will decrease in 2024, which should lead to a higher ROIC.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 to 2014 as Finbox only provides data for the past ten years. Genmab is a textbook example of how one would like to see equity grow over a decade. Not only has equity increased every year, but it has also increased by more than 10% annually. It is rare to see such consistency in a company's performance, and I am very impressed by these numbers.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Genmab has managed to deliver positive free cash flow every year over the past decade. Although there have been years where free cash flow has decreased, it is very encouraging that free cash flow reached an all-time high in 2023. The levered free cash flow margin has also consistently been high, and while it hasn't reached 60% since 2020, a levered free cash flow margin of more than 42% is still impressive. This is especially noteworthy considering that the 42% margin Genmab delivered in 2023 is almost double the figures from the two previous years. The free cash flow yield is higher than the ten-year average, indicating that Genmab shares are trading at a good valuation. However, we will revisit this aspect later in the analysis.
Debt
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years, which is determined by dividing the total long-term debt by earnings. Upon analyzing Genmab's financials, it is evident that the company has no debt. Therefore, debt is not a concern when considering an investment in Genmab.
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Risks
Based on my findings so far, I believe that Genmab is an intriguing company. However, no investment is without risk, and Genmab also faces its fair share of challenges. One significant risk is the current reliance on Darzalex. Genmab has a dispute with Janssen regarding the Darzalex collaboration. Janssen believes that the IV-administered Darzalex and the subcutaneously injected Darzalex Faspro are two different products, resulting in lower royalty payments to Genmab, while Genmab contends that the products are the same and, as such, it is entitled to higher royalty payments. Consequently, in 2020, Genmab commenced arbitration against Janssen, which they lost. In 2023, Genmab lost its second arbitration to Janssen regarding the royalty disputes on the grounds that it should have been brought in the first arbitration. Genmab had sought a new 13-year royalty term related to the subcutaneous formulation of Darzalex. Furthermore, the tribunal ruled that Janssen is allowed to reduce its royalty payments to Genmab. The dismissal was affirmed by an appellate arbitrator in 2024. This means that Genmab's royalties for Darzalex will be affected in the future, which could hurt the business as Darzalex contributes 72% of the total revenue for Genmab.
Patent losses pose another significant risk for Genmab. Patents covering Genmab's products typically provide market exclusivity, which is essential for the profitability of many of Genmab's offerings. As patents for certain products expire, Genmab could face competition from lower-priced generic or biosimilar products. The expiration or loss of patent protection for a product is usually followed promptly by substitutes that may significantly reduce sales for that product in a short period of time. Furthermore, Genmab is dependent on protecting its intellectual property rights to recoup its investments and maintain its competitive position. The company may become involved in lawsuits to protect or enforce its patents or other intellectual property, which could result in costly litigation and potentially unfavorable outcomes.
Laws and regulations present another challenge for Genmab. The U.S. healthcare industry is the largest in the world and is particularly highly regulated, subject to frequent and substantial regulatory changes. It is expected that the U.S. healthcare industry will continue to experience increasing regulation, political, and legal actions as future proposals to reform the healthcare system are considered by the executive branch, Congress, and state legislatures. According to Fitch Ratings, biopharmaceutical companies operating in the United States are facing increasing legislative and regulatory challenges that could elevate their business and financial risk profiles. Fitch Ratings believes that sector margins will face pressure from lower negotiated prices, while regulatory challenges to mergers and acquisitions (M&A) will make it more difficult for companies to address patent cliffs for existing products.
Reasons to invest
There are numerous reasons to consider investing in Genmab, one of which is its recurring revenue. Genmab receives licensing fees and royalties from its partners for the use of its proprietary antibody technologies, providing the company with a stable source of recurring income. In 2023, Genmab's recurring revenue increased by 22%. This recurring revenue is reinvested into the business, particularly in research and development, to explore and develop innovative antibody-based therapies. With Genmab's proven track record, their investment in research and development is expected to facilitate the development of new drugs, ultimately leading to higher recurring revenue. This revenue can then be used to develop new therapies, creating a continuous cycle of revenue growth. While there are some disputes regarding Darzalex, Genmab still receives between 12% and 20% of sales in royalties from Darzalex. Management anticipates that Darzalex will continue to account for a substantial portion of their revenue in the near future. Darzalex sales have grown significantly over the past few years, increasing from $6 billion in 2021 to $8 billion in 2022, and to $10 billion in 2023. Management expects that this growth will continue in the future.
More proprietary products represent another compelling reason to invest in Genmab. The company aims to transition its business model towards greater ownership of its products in the future. Management has expressed confidence in maintaining their track record of success and strengthening Genmab's position as an innovative biotech powerhouse. Consequently, Genmab has begun forming 50:50-type partnerships, where the company contributes 50 percent of the expenses but also receives 50 percent of the profits, which is significantly more than what is obtained from royalties. Currently, Genmab has two proprietary products: Epkinly (in collaboration with AbbVie) and Tivdak (in collaboration with Pfizer). Management projects that nearly 40% of future revenue growth will come from these two products, suggesting that Genmab will become more profitable in the future.
An interesting pipeline also supports the case for investing in Genmab. The company has excelled in developing therapies, with its top three already achieving blockbuster status. The remaining five therapies all have significant growth potential and the possibility of becoming blockbusters. A blockbuster is defined as a therapy or drug that generates annual sales of $1 billion or more. Thus, if Genmab can continue to develop therapies as they have in the past, the pipeline could be very promising. Management has high hopes for Acasunlimab (GEN1046), which they are co-developing with BioNTech. Management has stated that Acasunlimab, or GEN1046, has cleared a very high bar for continued investment in development, and they expect to initiate a phase 3 trial for GEN1046 against second-line non-small cell lung cancer in 2024. There are also two other pipeline programs that advanced in 2023: GEN1047 and GEN3017. The phase 1/2 trial of GEN1047 is currently in the dose expansion phase, an important step in progressing Genmab's CD3-based bispecific platform in solid tumors, while GEN3017 started recruitment for a first-in-human clinical trial in hematological malignancies. Additionally, Genmab has four other proprietary products in the pipeline.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
Remember that these calculations are based on the ordinary shares listed in Denmark and are denominated in Danish kroner. If you wish to purchase the U.S.-listed ADR, you will need to divide the price by ten and convert the currency from Danish kroner to U.S. dollars.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 98,60, which is from 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 22% in the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on Genmab's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 2.958. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Genmab at a price of DKK 1.479 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 11.022, and capital expenditures were 547. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 383 in our calculations. The tax provision was 1.919. We have 63,322 outstanding shares. Hence, the calculation will be as follows: (11.022 – 383 + 1.919) / 63,322 x 10 = DKK 1.983 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Genmab's Free Cash Flow Per Share at DKK 160,37 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 2.531.
Conclusion
I believe that Genmab is an intriguing company with strong management. The company consistently delivers a high return on invested capital (ROIC) and has recently achieved a high levered free cash flow margin. There are some concerns regarding Genmab's dependence on Darzalex, especially given the two lost arbitrations against Janssen, which could reduce future royalties. However, Darzalex is still growing, and management remains optimistic about its prospects despite the arbitration outcomes. Patent losses will always pose a risk for companies operating in the biopharmaceutical sector, as will the protection of intellectual property rights. These are challenges investors must be prepared to accept when investing in this industry. Genmab also faces various laws and regulations across different markets. While Fitch Ratings suggests that biopharmaceutical companies are facing increasing legislative and regulatory challenges that could elevate their business and financial risk profiles and pressure margins, these concerns remain speculative. Genmab benefits from a stable source of recurring revenue, allowing it to reinvest in the business, particularly in research and development, to explore and develop innovative antibody-based therapies. This reinvestment is expected to generate more revenue in the future. Genmab is also focusing on proprietary products and has been successful with the launch of Epkinly, which contributed to 20% of the revenue growth in 2023. As Genmab continues to focus on proprietary products, it is expected to become more profitable in the future. Genmab has a strong track record in developing therapies, and management is very optimistic about the therapies in the pipeline. If Genmab continues to perform as it has historically, these therapies could very well become blockbusters. Overall, I am confident in Genmab, which is why I already own shares. I believe that adding shares below the DKK 1.983 Ten Cap price could be a good long-term investment.
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