Legend Biotech Files for Hong Kong Listing Following 'Spin-off Without Break-up' Restructuring

On the morning of October 22, GenScript Biotech (hereinafter referred to as “GenScript”) announced that Legend Biotech’s financial results would no longer be consolidated into the company’s financial statements, citing “deconsolidation resulting from changes to the deposit agreement.” As of September 30, 2024, GenScript held 174 million shares of Legend Biotech, representing approximately 47.56% of Legend Biotech’s issued share capital.

On the morning of October 22, GenScript’s Hong Kong-listed shares surged by 11.86%. As of the market close on October 23, GenScript Biotech’s total market capitalization reached HK$26.95 billion (approximately RMB 24.70 billion).

On the day the announcement was released, Wei Shiniu, Chief Financial Officer and Vice President of Investor Relations at GenScript, responded to Yicai Global, stating that Legend Biotech had recently resumed discussions with its depositary bank and decided to terminate the deposit agreement. Therefore,GenScript’s voting rights in Legend Biotech decreased from over 50% to 47.56% (reflecting GenScript’s shareholding ratio as of September 30, 2024). Under Hong Kong Financial Reporting Standards, Legend Biotech’s financial data can no longer be consolidated into GenScript’s financial statements.

Specifically, when Legend Biotech initially listed on the Nasdaq, it entered into an agreement with the depositary bank holding its American Depositary Shares (ADSs). Under this arrangement, ADS holders could vote indirectly through the depositary bank during Legend Biotech’s general meetings of shareholders. Historically, approximately 3% to 4% of Legend Biotech’s shareholders failed to provide voting instructions. According to the depositary agreement, ADS holders who do not submit voting instructions grant discretionary voting authority to the Chairman of Legend Biotech’s Board of Directors, a position that has consistently been appointed by GenScript.Under the aforementioned (original) deposit agreement, GenScript could exercise more than 50% of the voting rights of Legend Biotech. Following this change, GenScript’s voting rights in Legend Biotech stand at 47.56%.

“Objectively speaking, this change will help Legend Biotech improve its corporate governance and truly achieve equal rights for shares of the same class,” said Wei Shiniu. “This adjustment is primarily an accounting change and does not alter the economic interests between GenScript and Legend Biotech. Meanwhile, Legend Biotech remains a highly significant asset for GenScript. Both GenScript and its management team maintain high expectations for the cell therapy business, and the company currently has no plans to make any strategic adjustments.”

As for the sale rumors that have drawn the most market attention, Wei Shiniu stated that the company currently has no further information to disclose.

According to the announcement, GenScript will lose the power to cast a majority of votes at Legend Biotech’s shareholders’ meetings and will effectively have no right to unilaterally manage Legend Group’s financial and operational policies.Therefore, effective October 18, 2024, GenScript deconsolidated Legend Biotech and accounted for it as an investment in an associate.

The difference between the carrying value of this investment as of the deconsolidation date and the Company’s share of Legend Biotech’s net assets will be allocated to identifiable intangible assets, such as intellectual property and trademarks, and to goodwill (if any). Accordingly, the Company expects to recognize a one-time tax-free gain, reflecting the difference between its share of the fair market value of Legend Biotech and its share of Legend Biotech’s net assets as of the deconsolidation date. In the future, the Company will recognize its share of Legend Biotech’s profits and losses and make appropriate adjustments, such as amortizing identifiable intangible assets based on their fair values as of the deconsolidation date.

Analysis indicates that changes in accounting treatment have had a positive one-time impact on profits, with GenScript potentially achieving full profitability starting in 2024:Following the reclassification of Legend Biotech as an associate, GenScript will apply the equity method for accounting purposes. Upon deconsolidating Legend Biotech, GenScript’s operating profit will more accurately reflect its non-cell therapy businesses—including its core life sciences business, ProBio’s CDMO operations, and Bestzyme’s industrial enzyme preparations business—thereby further clarifying its path to profitability.

GenScript Biotech is a widely recognized provider of life science research and application services and products, primarily comprising four business units: Life Science Services & Products, Biologics Development Services, Industrial Synthetic Biology Products, and Cell Therapy. The Cell Therapy unit, which originated from a proprietary antibody development platform, is mainly operated by the Legend Group.

Ciltacabtagene autoleucel (cilta-cel) is a BCMA-targeted CAR-T therapy independently developed by Legend Biotech. It received approval from the U.S. FDA in February 2022, becoming the first CAR-T product from China to gain FDA approval and the second globally approved BCMA-targeted CAR-T therapy.Legend Biotech’s cilta-cel, marketed under the brand name Carvykti, is reportedly priced at $465,000, slightly higher than BMS’s same-target CAR-T therapy, Abecma, which is priced at $419,500.

BCMA is primarily expressed on the surface of malignant multiple myeloma B cells, late-stage B cells, and plasma cells. The CAR protein of ciltacabtagene autoleucel features two BCMA-targeting single-domain antibodies with high affinity for BCMA-expressing cells. Upon binding to these cells, the CAR promotes T-cell activation and expansion, leading to the elimination of target cells.

In 2017, Legend Biotech entered into a licensing agreement with Janssen, a subsidiary of Johnson & Johnson, for the co-development of ciltacabtagene autoleucel (with revenue sharing from Chinese rights at a 70:30 split between the two parties, and overseas rights at a 50:50 split). According to Legend Biotech’s 2023 annual report,Cilta-cel achieved annual net trade sales of approximately $500 million (about RMB 3.6 billion), representing a year-on-year increase of approximately 273% compared to $134 million in 2022.

Furthermore, since early 2023, Legend Biotech has expanded its production capacity by 100%, including the initiation of clinical manufacturing at its new Obelisc facility in Ghent, with a target of achieving an annual production capacity of 10,000 doses by the end of 2025 to meet growing commercial demand. In February this year, ciltacabtagene autoleucel received a positive recommendation for approval from the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) for the front-line treatment of multiple myeloma.

The financial report shows that Legend Biotech achieved external revenue of $285 million in 2023, a year-on-year increase of 143.7%. As of December 31, 2023, Legend Biotech held approximately $1.3 billion in cash and cash equivalents, time deposits, and short-term investments.

Previously, GenScript Group announced its 2024 interim results, reporting sustained revenue growth in the first half of the year. Total revenue exceeded USD 560 million, representing a year-on-year increase of 43.5%. Gross profit surged by 75.4%, significantly enhancing profitability and narrowing losses. The non-cell therapy business generated over USD 280 million in revenue, while revenue from the cell therapy business soared by approximately 156% year on year to exceed USD 280 million, becoming a key driver of performance growth.

References:

Yicai: "GenScript No Longer Consolidates Legend Biotech’s Financials; Will Its Cell Therapy Business Be Adjusted? The Company Responds"

VCBeat: "Cilta-cel Sales Reach RMB 3.6 Billion, Legend Biotech’s Revenue Grows by 143.7%"

BOCOM International “GenScript Biotech: Deconsolidation of Legend Biotech Delivers Positive One-Time Profit Impact, Clarifying Profitability Path Further”