Speculation Arises from Genscript's Financial Changes: Is Legend Biotech About to Be Sold?

On October 21, Genscript Biotech announced that according to the newly revised deposit agreement, Genscript would deconsolidate Legend Biotech and its subsidiaries, treating it as an investment in an associate company.

After this change, Legend Biotech's assets and liabilities will no longer be consolidated into Genscript's financial statements. At the same time, Genscript stated that due to a significant difference between the market value of Legend Biotech's shares and their book value of assets and liabilities at the time of deconsolidation, the company expects to recognize substantial gains from the deconsolidation.

Currently, Genscript holds 174 million shares of Legend Biotech, approximately 47.56% of its issued share capital. This move by Genscript is similar to the transition from the "cost method" to the "equity method" under domestic accounting standards. As of June 30 this year, Legend Biotech's total assets reached $1.798 billion, with total liabilities at $639 million, while its market value stood at around $8 billion. The accounting change does indeed reflect this gap.

The subtle accounting change quickly led to speculation regarding the long-rumored "Legend Biotech's potential acquisition." According to the new rules, if an institution were to acquire Legend Biotech, the financial impact on Genscript would be significantly reduced. On October 22, Genscript's stock price surged nearly 10% by the market close.

Making the Books Look Better

Legend Biotech has long been seen as an inseparable part of Genscript Biotech. In 2017, Genscript Biotech invested in the establishment of Legend Biotech. In 2020, Legend Biotech went public on the U.S. stock market, becoming one of the few domestic biotech companies listed in the U.S.

Since its launch, Legend Biotech's CAR-T therapy, Cilta-cel (Cilta-Cel), has made waves in the U.S., generating substantial sales, which brought a lot of attention to Genscript. In the first three quarters of this year, Legend Biotech's CAR-T sales reached $629 million, an 84.3% year-on-year growth.

However, behind these impressive figures, Legend Biotech has been struggling with substantial losses, which have impacted Genscript Biotech's performance following the consolidation of their financial statements. In the first half of this year, Genscript Biotech recorded a loss of $216 million, with its "Cell Therapy Segment" posting an adjusted operating loss of $119 million. In contrast, Genscript’s core CXO businesses—Life Science Services and Industrial Synthetic Biology—posted a combined operating profit of about $50 million.

The high operational costs of Legend Biotech's CAR-T therapy mean that losses are unlikely to improve significantly in the short term. By deconsolidating Legend Biotech's losses, Genscript may, in fact, rescue its own financial statements.

Genscript's decision to treat Legend Biotech as a holding company stems from external expectations for Legend Biotech's high potential. Thus, on October 18, Legend Biotech entered into an agreement with its depository, JPMorgan Chase Bank, to amend the previous deposit agreement and certificates, gradually initiating the deconsolidation plan.

Genscript Biotech stated that the board believes that, since the company no longer holds a majority voting power at Legend Biotech's shareholder meetings, it effectively lacks unilateral control over Legend Biotech's financial and operational policies. After deconsolidation, Legend Biotech will be classified as an associate company, and Genscript will adopt the equity method to account for its investment in Legend Biotech.

Since Genscript holds approximately 47% of Legend Biotech, under the equity method, Genscript can only share 47% of Legend Biotech's profits or losses. Given Legend Biotech's ongoing losses, Genscript may actually breathe a sigh of relief.

However, this shift to the equity method may have certain implications for Genscript, such as its eligibility for government subsidies that encourage innovation. According to Genscript's 2024 interim report, the company received $3 million in government subsidies in the first half of this year. Many government subsidies are tied to R&D expenditures, and Legend Biotech accounts for a substantial portion of Genscript's R&D investment. Without consolidating Legend Biotech, a reduction in R&D expenditure may affect Genscript's future performance.

Laying the Groundwork

Following the announcement of the deconsolidation, the biggest speculation is that it may be related to the rumored acquisition of Legend Biotech this year.

In July, a foreign media outlet reported that Legend Biotech had received an acquisition offer and hired investment bank Centerview Partners to assist with evaluation. At that time, speculation ran wild, as Centerview Partners had previously acted as the exclusive financial advisor for Wuxi Biologics, facilitating AstraZeneca's $1.2 billion acquisition of Wuxi Biologics at the end of last year. That deal carried a premium of 86% based on Wuxi Biologics' stock price at the time.

Industry insiders speculate that if a deal were struck at a premium of 30% to 50% over Legend Biotech’s market value, the acquisition price would be between $13 billion and $15 billion, potentially making it the largest biotech acquisition in China. There were even rumors that this offer might be an olive branch from Johnson & Johnson to Legend Biotech.

However, three months have passed, and no good news has surfaced. Instead, reports emerged that the acquisition negotiations had stalled due to disagreements over price. Some media outlets suggested that "major shareholders were dissatisfied with the offer, believing the buyer was attempting to undervalue the company." As a result, speculation arose that the acquisition deal might have failed.

Even if the acquisition does not proceed, Legend Biotech is seeking change this year. In April, the company handed over production of its CAR-T therapy to Novartis, which supplements its production capacity while reducing costs. Nevertheless, Genscript still requires a satisfactory performance from Legend Biotech to reassure its own shareholders.

To this day, neither Genscript Biotech nor Legend Biotech has made a clear statement on the rumors' authenticity. However, with Genscript stepping back, Legend Biotech has gained greater autonomy in decision-making. Especially as overseas market risks intensify, the independence of Legend Biotech might not necessarily be a bad thing.