Genmab is going back to its knitting. In an announcement yesterday the Danish biotechnology group said that it would be refocusing its energies on what it did best, innovation. Unfortunately for 300 of the Danish group’s employees this refocusing involves them being given their pink slips, as part of the group’s efforts to slash costs that will also see it sell its US manufacturing business.
The measures are expected to save Genmab, which was facing pressing questions about funding, DKr240m ($47m) per annum, but at a cost of DKr105m ($21m) as well as a non-cash impairment of $84m. But the other price that Genmab could pay with the decision to sell the manufacturing facility is the admission that its plans to achieve the biotech holy grail of becoming a fully integrated company have been shelved.
Yesterday, Lisa Drakeman, Genmab chief executive, said the measures were a reflection on how the group’s development workload had reduced following the approval of Arzerra and the recognition that the group’s partners would be taking greater responsibility for future studies.
Genmab had been expected to take some action given the cash squeeze it was facing after it was left without a valuable milestone payment this year from partner GlaxoSmithKline following disappointing data for its lead candidate Azerra in refractory Rituxan patients suffering from non-Hodgkin’s Lymphoma (NHL) (Genmab punished as Arzerra stumbles in crucial pivotal trial, August 18, 2009), although the timing of the announcement has taken many in the market by surprise
But rather than taking an axe to its operations and selling the manufacturing business, many had been predicting that the group might have to turn to the market and do a dilutive fund raising (Genmab’s Arzerra approval does little to calm cash concerns, October 27, 2009).
When Genmab announced it was going to buy the US bioreactor 18 months ago, it was a move that surprised and divided observers, who thought that it might either be a huge success or a huge mistake.
The more bullish speculated that the group might be trying to emulate Abgenix and have a full compliment of both products and manufacturing capabilities that would make it more attractive to any potential buyers, or give itself a real chance of standing on its own two feet.
It now looks as if those more sceptical about the acquisition were right, especially given the difference between what the group paid for the asset, $240m, and what they are now hoping to get when they sell it, $145m. The discrepancy caused one analyst to unflatteringly describe it as "huge destruction of value".
Genmab has yet to identify a buyer for the business and this is concerning, because if as the company states there is more capacity in the contract manufacturing industry - a factor Genmab is using to justify the review - they themselves could struggle to find a willing acquirer.
In a research note today Samir Devani, analyst with Nomura Code, expressed his concern that the group may not be able to get its projected price of $145m and that this could result in more impairment charges in 2010.
He also expressed disappointment at the planning of the latest cuts arguing that they could have been considered as part of Genmab’s October 2008 business and portfolio review that resulted in them culling 101 staff and taking the decision to stop development on HuMax-CD4. Mr Devani said that the company “should have had good visibility on the business requirements post the portfolio review”.
But if Genmab does get the asking price of $145m for the manufacturing business then it should give the group money for another two years. Current cash reserves of $282m are expected to run out in 2011, so even without the addition of any more milestone payments or sales revenue from Azerra it should have enough money to get it to 2013.
What investors should be hoping is that with this latest round of restructuring Genmab is indeed trying to cut its cloth to suit the changing market, rather than admitting that it is not expecting the sales of its two most promising drugs, Arzerra and zalutumumab, to be disappointing.