Genmab's Star Falls Amid Setbacks, Cuts And Manufacturing Fire-Sale

What a difference a year makes. In October 2008, Genmab's leaders were being applauded for their prudent strategic review as they cut 101 staff and axed the development of Phase III HuMax-CD4 (zanulimumab) plus a handful of earlier-stage programs, to concentrate instead on the potentially far larger Arzerra (ofatumumab) and zalutumumab, a late-stage EGFR-inhibitor. But now management credibility is being questioned, following the Nov. 5 announcement of a further 300 headcount reduction, setbacks to both remaining key programs, plus the fire-sale of its U.S. manufacturing unit acquired only 18 months earlier.

Genmab was becoming that rare beast in European biotech - a company with home-grown, innovative, late-stage antibody drugs, and significant cash ($333 million at the end of 2008).

As well as securing significant Big Pharma partnerships with GlaxoSmithKline (which paid over $100 million upfront for global rights to ofatumumab in 2006) and Roche (which signed an antibody discovery partnership back in 2001), Genmab had manufacturing capability and, back then, the real possibility of co-promoting its own products in some markets (¹ (Also see "Genmab/GSK: An Impressive Display of Biotech's Increased Leverage" - In Vivo, 1 Jan, 2007.)).

On Oct. 27, 2009, the company earned yet another star when FDA approved CD-20 targeting antibody Arzerra for chronic lymphocytic leukaemia (CLL) under an accelerated process (² (Also see "Back From The Brink: Genmab's Arzerra Win's CLL Approval And Cash From Partner GSK" - Pink Sheet, 27 Oct, 2009.)).

A Series of Setbacks

But the full significance of that landmark event was lost in discussions about what has gone wrong at Genmab. Some analysts are even questioning the sustainability of this one-time biotech star.

Granted, Arzerra's approval was anticipated following a positive FDA advisory committee meeting in June and the fact that few treatments are available in this setting. As such, the share price had little movement. And although Arzerra's development and approval path hasn't been smooth, that's hardly unique to Genmab. It's as likely a sign of tougher regulatory hurdles across the board.

Still, Genmab appears - whether through mismanagement, or just bad luck - to have driven itself into a tight corner at a time when investors have minimal appetite for risk.

First, FDA now wants more data from an ongoing CLL study to show that the drug does indeed slow disease progression. And the compound has already stumbled in other indications such as non-Hodgkin's Lymphoma and autoimmune diseases (such as rheumatoid arthritis), both key to the drug's achieving its full potential, yet both highly competitive fields. Some analysts were forecasting peak sales for Arzerra (across all indications) at over $1 billion, although most have cut these forecasts significantly since.

Phase III data in NHL patients refractory to Roche/Genentech's Rituxan (rituximab), released over the summer, showed a disappointingly low response rate - 10 percent versus company expectations of around 20 percent. Thus Genmab was denied the milestone payment from partner GSK and the share price plummeted to a three-year low (³ (Also see "Arzerra Disappoints In NHL, Putting Genmab On Shaky Ground" - Pink Sheet, 24 Aug, 2009.)).

In RA, a market where Arzerra aims to compete against the anti-TNFa drugs (such as Abbott's Humira (adalimumab), neither Genmab nor GSK are clear about which formulation will move forward in trials -intravenous or subcutaneous.

Strategic Errors?

Analysts had been expecting Genmab to react to the Arzerra NHL setback, possibly with a fundraising, but not with a fire-sale. The acquisition of the Brooklyn Park manufacturing site in March 2008 for $240 million now looks to some like a strategic error, which, coupled with the additional headcount reduction, is making many question why Genmab management didn't adequately foresee, during the October 2008 review, the need for these further cuts so soon afterwards. Many point to poor contingency planning and over-optimism.

At the time of the Brooklyn Park purchase, Genmab stated the need to secure "significant manufacturing capacity." Yet Arzerra manufacturing is GSK's responsibility, according to the 2006 deal terms, so Brooklyn Park was in any case used only for producing zalutumumab and the now-shelved HuMax-CD4. To make things worse, antibody manufacturing has since very rapidly shifted from a state of under-capacity to overcapacity, reducing the need for a proprietary facility and, more crucially, making any manufacturing asset hard to sell. Genmab says it hopes to get $145 million for the unit (after $5 million in selling costs) and will take an $83 million impairment charge this quarter.

Chairman and CEO Lisa Drakeman argues that the drastic changes affecting both the financial markets and biologics manufacturing capacity could not have been foreseen.

"We made the best decision we could with all the information we had at the time," she said. "Things changed in a way no one could have predicted and I think that none of us are to be blamed for the world economic climate that has resulted in the kind of actions companies such as Genmab are taking. What we have to do is manage for the world that we live in."

She also acknowledges, however, that most of the company's resources and attention over the past 12 months have been - quite reasonably - focused on Arzerra. "We had a significant role to play in the filing and approval of Arzerra. We had the heaviest workload of any period, especially in terms of the importance of the work. Now that workload has changed dramatically and we are now looking forward, hence the reorganization. This is a major shift, a transformation."

Development Costs Still Significant

Whether or not that's the case, Genmab's about-face on the manufacturing site will at least help it pay what will continue to be hefty development costs, including for its 50 percent share of an Arzerra-Rituxan head-to-head trial in diffuse large B-cell lymphoma (DLBCL), the most common form of NHL, announced Nov. 9. Piper Jaffray analysts estimate that the sale will buy Genmab another two years of operations.

The randomized NHL trial, whose primary endpoint will be progression-free survival, is highly risky. But Arzerra needs to show superiority to Rituxan in order to get any kind of foothold in this indication. The study will also take several years to complete: recruitment alone of 380 patients who are refractory to or have relapsed following first-line treatment with Rituxan plus chemotherapy could take up to two years.

Meanwhile, Genmab's other key drug, zalutumumab, has been hit by a delay in pivotal data on head and neck cancer. Expected before year-end, this will now be released in Q1 2010 - pushing out further partnering revenues. And securing the right partner will be crucial to expand the range of indications (which Genmab narrowed down during its 2008 strategic review) and establish zalutumumab in the already crowded anti-EGFr market, where it will be up against the likes of AstraZeneca's Iressa (gefitinib), Amgen's Vectibix (panitumumab), Roche's Tarceva (erlotinib) and Bristol's Erbitux (cetuximab). Given the relatively small refractory head and neck cancer market and lack of data in any of the larger indications, Piper Jaffray analysts recently slashed their peak sales forecast for this candidate to $150 million from $500 million.

Drakeman, who has been at the company's helm since inception, is putting on a brave face. Perhaps she has some justification: after all, GSK has not returned Arzerra, as no Big Pharma would hesitate to do these days, but is instead pushing ahead with the lengthy and costly Rituxan head-to-head trial.

Yet Genmab's ambition to share in both the costs, and thus more fully in the rewards, of its drug assets worries some investors. "I would rather see GSK take the product in-house, [and] assume all costs in a return for a reduced royalty rate to Genmab. That would make me happier," declares one analyst.

And that's the rub: in this economic environment, risk-taking is being punished, not rewarded. Indeed, Europe's investors have a reputation for being risk-averse at the best of times. Most investors would now much rather Genmab had settled for less upside from its drugs, and faced less financial exposure along the way, whatever their views may have been at the time the GSK deal was signed.

Genmab may yet come through the latest round of setbacks; it has further assets in its pipeline, including three Roche-partnered development-stage programs and a handful of antibodies available for licensing. And Drakeman's right: it's impossible for any biotech CEO to predict the future economic context and thus tailor its deal-terms accordingly.

But deal-terms can be changed, and biotech leaders need big contingencies - they can go for the stars, but need to acknowledge that failures and delays are more likely, and thus plan for those eventualities. [Editor's note: To follow key business developments involving European companies and markets, sign up for free e-mail alerts at ⁴ www.europharmatoday.com .]

- Lucy Clarke ( ⁵ [email protected] )