Legend Biotech Corp

NASDAQ:LEGN

Earnings Call Analysis

Legend Biotech Achieves 60% Growth in CARVYKTI Sales

In the second quarter of 2024, Legend Biotech reported significant progress and financial growth. CARVYKTI sales increased by 60% year-over-year, reaching $186 million, and 18.5% quarter-over-quarter. The company secured FDA and EMA approval for label expansions and demonstrated improved overall survival in CARVYKTI's latest studies. With a $1.3 billion cash balance, they plan to ramp up production and achieve profitability by 2026. A new research center in Philadelphia will advance their cell therapy portfolio. Legend Biotech remains focused on expanding treatment centers and is poised for continued growth with promising new studies on the horizon.

Impressive Growth and Expansion

Legend Biotech has reported significant achievements in the second quarter of 2024. Notably, CARVYKTI sales grew by 18.5% sequentially, bolstered by the FDA and EMA label expansion approvals. This reinforces the company's dedication to extending the lives of multiple myeloma patients. A published study in Nature highlighted CAR-T's superior efficacy, further validating CARVYKTI's performance and market potential.

Financial Health and Strategic Investments

The company maintains a robust financial position with a cash balance of $1.3 billion, securing a financial runway into 2026. Legend Biotech is strategically investing in expanding its production capabilities and authorized treatment centers. The company now has 77 certified hospitals in the U.S., with outpatient treatment accounting for approximately 40% of the volume. Additionally, the completion of CARTITUDE-5 enrollment marks a significant milestone, projecting potential approval to serve an additional 52,000 patients annually【7:0†source】【7:1†source】【7:2†source】.

Solid Financial Performance

Legend Biotech generated $186 million in total net sales for CARVYKTI during the second quarter, marking a 60% year-over-year increase. Total revenues for the quarter reached $187 million, resulting in a reduced net loss of $18 million or $0.05 per share compared to the previous year's $199 million loss. Research and development expenses rose to $113 million, reflecting continued investment in cilta-cel and solid tumor programs, while administrative and selling expenses also saw increases related to commercial expansion activities【7:1†source】【7:2†source】.

Production and Capacity Expansion

Legend Biotech is focused on scaling its production capabilities, with ongoing efforts to increase CARVYKTI availability. The company has significantly improved its production efficiency, expecting commercial production at several new facilities in the coming years. By the end of 2025, the company anticipates full commercial production from expanded sites in both the U.S. and Belgium, ensuring it can meet growing patient demand【7:4†source】【7:5†source】.

Strong Market Demand and Future Prospects

Demand for CARVYKTI continues to rise, particularly in second-line treatments, with a pronounced growth expected through the second half of the year. Additionally, Legend Biotech’s strategic planning indicates potential expansion into frontline treatments. The company’s focus on innovation is evident through its recently established state-of-the-art research center in Philadelphia aimed at advancing next-generation cell therapies【7:0†source】【7:1†source】.

Guidance and Strategic Outlook

Legend Biotech remains optimistic about its future, with plans to achieve an operating profit by 2026. The company’s strategic partnerships, particularly with Janssen, play a crucial role in its expansion plans. Continuous investment in production capabilities and innovative therapies underscores the company's commitment to maintaining its market leadership and enhancing shareholder value【7:2†source】【7:3†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Legend Biotech's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to Jessie Yeung, Vice President of Investor Relations and Finance. Please go ahead.

[Jessie Yeung, executive]

Good morning. This is Jessie Yeung, VP of Investor Relations and Finance at Legend Biotech. Thank you for joining our conference call today to review our second quarter of 2024 performance. The second quarter has been an eventful one. We are pleased to report 18.5% sequential growth in CARVYKTI sales. More importantly, we received label expansion approvals from both FDA and EMA. Lastly, we are most excited about the survival benefit demonstrated by CARVYKTI in the second analysis of CARTITUDE-4.

Nothing gives us more joy than helping patients with multiple myeloma live longer. Joining me on today's call are Ying Huang, the company's Chief Executive Officer; and Lori Macomber, the company's Chief Financial Officer.

Following the prepared remarks, we will open up the call for a Q&A. We have Guowei Fang, Chief Scientific Officer; and Steve Gavel, Head of Commercial Development for the U.S. and Europe, joining the Q&A session.

During today's call, we will be making forward-looking statements, which are subject to risks and uncertainties that may cause our actual results to differ materially from those expressed or implied therewithin. These forward-looking statements are discussed in greater detail in our SEC filings, which we encourage you to read and can be found under the Investors section of our company website. Thank you.

[Ying Huang, executive]

Hello, and welcome to our second quarter earnings call. I am pleased that you could join us. Since our last earnings call, we have made progress on multiple fronts, which you can see in our earnings presentation on Slide 5. First, we announced positive top line results from CARTITUDE-4. In the prespecified second interim analysis, CARVYKTI demonstrated statistically significant and clinically meaningful improvement in overall survival compared to standard therapies.

We look forward to presenting this important data set at major medical meetings in the coming months. Additionally, at ASCO and EHA, we provided new data from the Phase II CARTITUDE-2 study and new and updated data from the Phase III CARTITUDE-4 study. We would like to bring to your attention a recent paper published in Nature. As you will see on Slide 6, data were reviewed from 339 multiple myeloma patients treated at Mayo Clinic with antibody drug conjugate, CAR-T and T-cell engagers targeting BCMA in the period of 2018 through 2023, with a median follow-up of 21 months.

The study found that CAR-T and T cell engagers demonstrates superior efficacy in both PFS and OS to that of ADCs. The authors also concluded that where feasible, CAR-T should be the initial BCMA directive therapy. We're encouraged by the real-world clinical evidence of CAR-T efficacy, particularly the insight it provides into the strong efficacy of CARVYKTI.

As many of you know, our expansive CARVYKTI data set enables us to continue building a strong foundation for our market penetration. On this note, we recently added 2 regulatory approvals to global market opportunity you see on Slide 7. The United Kingdom's Medicines and the Healthcare Products Regulatory Agency approved CARVYKTI for second-line multiple myeloma and Health Canada approved CARVYKTI as well.

Our effort to bring CARVYKTI to more patients globally translated into net trade sales for the second quarter of $186 million, which is a 60% increase year-over-year, an 18.5% increase quarter-over-quarter, as you will see on Slide 9.

The increase in our second quarter performance versus the first quarter was a result of the ongoing launch of CARVYKTI and shared gains from capacity expansion and manufacturing efficiencies. Importantly, we continue to see growth in patient demand, and we are reiterating our expectation for pronounced growth for CARVYKTI in the second half of the year as we continue to add more slots and expand our capacity.

We remain laser focused on making more supply available to the market and reducing van-to-van time.

Turning to Slide 11. Our CMO, Novartis, has begun clinical production of CARVYKTI in the U.S. This frees up production capacity for commercial production at our facility in Raritan, New Jersey. We're on track to complete physical expansion of the Raritan site and anticipate approval of the new section of Raritan in the second half of 2025.

We continue to expect that our Obelisc facility in Ghent, Belgium will be approved for commercial production later this year. We more than doubled our CARVYKTI production capacity in 2023 and are on track for continued expansion. The increases to our production capacity will help us keep up with growing patient demand. Our cash balance now stands at $1.3 billion, which we believe provides us the resources needed to increase production, as I just mentioned, and gives us financial runway into 2026 when we expect to begin to achieve an operating profit.

In other developments, we continue to bring more hospitals online as authorized treatment centers. We now have a total of 77 U.S. hospitals certified to treat CARVYKTI patients. Outpatient treatment now comprises approximately 40% of our volume and remains an important medium for us as we expand our marketing efforts in the community setting for the second line and beyond.

Finally, turning to our pipeline on Slide 13. I am pleased to share that we recently completed CARTITUDE-5 enrollment. As you might recall, this randomized Phase III study evaluates patients with newly diagnosed multiple myeloma for whom stem cell transplant is not planned as initial therapy. If we were to receive approvals based on CARTITUDE-5 and CARTITUDE-6, it would translate into an additional 52,000 patients annually.

I'm also pleased to share that we recently broke ground on the new state-of-the-art research center in Philadelphia to advance our portfolio of next-generation cell therapies. We are excited to expand our research presence in the U.S. and attract top talent from the growing biotechnology innovation hub of Philadelphia, the birthplace of gene and cell therapy.

In summary, we are executing against the substantial opportunity ahead of us as we expand our manufacturing capabilities and increase our earlier line commercial activities with an eye towards investment in future transformative cell therapies.

Now I would like to turn the call over to Lori to walk you through the financials for the second quarter. Lori?

[Lori Macomber, executive]

Thank you, Ying, and good morning, everyone. As Ying mentioned, we generated approximately $186 million in total net sales for CARVYKTI during the second quarter, an increase of 60% year-over-year, driven by the progress we have made with ongoing market launches, expanding market share and capacity improvements. As a reminder, we share equally in all profits and losses of CARVYKTI ex China with our partner, Janssen.

Turning to our revenue. As you'll see on Slide 14, total revenues for the second quarter were $187 million, consisting of $93 million of collaboration revenue from the sale of CARVYKTI and license revenue of $91 million, driven by $75 million revenue recognized in connection with milestones achieved under the Janssen agreement for cilta-cel, and $16 million in recognition of deferred revenue in connection with our agreement with Novartis to develop, manufacture and commercialize LB2102 and other potential CAR-T therapy selectively targeting DLL3.

Net loss for the quarter ended June 30, 2024, was $18 million or a loss of $0.05 per share compared to a net loss of $199 million or a loss of $0.57 per share for the same period last year.

Moving on to expenses on Slide 15. Collaboration cost of revenue for the second quarter 2024 was $45 million, compared to $33 million for the same period last year. These are Legend's portion of collaboration cost of sales in connection with the collaboration revenue under the Janssen agreement along with expenditures to support the manufacturing capacity expansion.

Additionally, cost of license and other revenue for the second quarter of 2024 was $5 million compared to no cost of license or other revenue for the second quarter of 2023. These costs are in connection with our agreement with Novartis to develop, manufacture and commercialize LB2102 and other potential CAR-T therapies selectively targeting DLL3.

Research and development expenses for the second quarter 2024 were $113 million compared to $96 million for the same period last year. The increase of $17 million for the 3 months ended June 30, 2024, compared to 3 months ended June 30, 2023, was due primarily to research and development activities in cilta-cel, including start-up costs for clinical production in Belgium and continued investment in our solid tumor programs.

Administrative expenses for the 3 months ended June 30, 2024, were $35 million compared to $28 million for the same period last year. The increase of $8 million year-over-year is primarily due to the expansion of administrative functions and infrastructure to support the increased manufacturing capacity.

Selling and distribution expense for 3 months ended June 30, 2024, was $30 million compared to $21 million for the same period last year. The increase of $9 million year-over-year due to costs associated with the commercialization of CARVYKTI, including the expansion of Salesforce and second-line indication launch preparation.

To summarize, our spending remains on track, and we continue to maintain a strong balance sheet. As of June 30, we have $1.3 billion in cash equivalents, deposits and investments. Thus, we believe we have sufficient capital to fund our operating and capital expenditures into 2026, when we expect to begin to achieve an operating profit.

Thank you. I will now pass it back to Ying for closing remarks.

[Ying Huang, executive]

Thanks, Lori. To sum up, our team remains dedicated to our strategic priorities. I am pleased to share that we recently served our 3,000 CARVYKTI patients treated to date, reflecting our deep commitment to multiple myeloma patients and their families. I would like to thank each of our employees for their dedication to the patients we serve as we steadfastly execute on capacity expansion and also our commercial launch in second line.

Before we open it up for Q&A, I would like to assure you that our Board and management team have been taking a close look at our business to ensure we are in best position to continue our growth and momentum as we advance our mission to help multiple myeloma patients.

We know there has been recent speculation about potential political risk, particularly given this being an election year. Our Board is active and engaged and continue to assess the potential impact of those risks. We're not going to speculate on hypotheticals on this call. But rest assured, we are focused on driving shareholder value as we consider our path forward.

If and when we have updates to share, we will provide them at the right time. In the meantime, we appreciate if you can keep your questions focused on our earnings results. And with that, I would like to take your questions. Operator, we're ready for the first question.

[Operator]

[Operator Instructions] Our first question comes from the line of Gena Wang from Barclays.

[Huidong Wang, analyst]

Ying, I know you said we should not ask anything about speculative comments. I know you also cannot comment too much, but I do wanted to ask because this is the #1 major overhang on the stock regarding potential political country risk and BIOSECURE Act impact to the stock. I know you cannot comment too much, but I don't know how much -- can you share some -- a little bit more color rather than very high level comments, a little bit more color on what you could do or the company is in the process to prepare to address this potential questions?

And the second is regarding the New Jersey Raritan site. Since now, Novartis already has a clinical production in July 2024. Is it fair to say now the Raritan site is a 100% commercial production?

[Ying Huang, executive]

Sure. Gena, thank you for your questions. Maybe I can address the second question first. So you're right. Since July, Novartis site in Morris Plains, New Jersey has initiated clinical production. The first patient was coming from CARTITUDE-6, and that follows the IND clearance by the FDA. So right now, we are in the process of shifting more clinical trial patients to the production site in Novartis Morris Plains site. However, we do still have certain production for clinical trials in the Raritan site.

Over the next few months with the Ghent site going commercial and Novartis ramping up clinical trial production, I think you should expect that the percentage of clinical production will go lower in Raritan. So that's about Raritan.

And then on your first question, I mean, first of all, I can say that we have carefully evaluated the [ draft ] bill and also, we have been engaging with certain stakeholders in Washington, D.C., including committee and Housepeaker's office. So at this point, we do not believe there will be any direct impact to Legend given how our operation model is and how in terms of data and also IP flow, we conduct the business. So suffice to say that, we're not too concerned that we're the target of the BIOSECURE bill.

[Operator]

Our next question comes from the line of Jessica Fye from JPMorgan.

[Jessica Fye, analyst]

With outpatient use now up at 40%, can you just remind us where that was last quarter and is the increase kind of coming across the Board, like as that proportion edges up? Or is this more a dynamic where new institutions coming on are, say, 100% outpatient, and that's what's driving the change?

And then I also wanted to follow up on Gena's question, recognizing that it doesn't look like you're directly impacted by BIOSECURE, but the stock really did come under pressure in the first half of the year as a result. Can you just talk about what you see as the best path forward for shareholder value creation? And does it make sense for Legend to be a stand-alone company heading into a potentially contentious political period in the U.S.? Or should the Board be considering other alternatives?

[Steven Gavel, executive]

Why don't I take -- it's Steve, why don't I take the first one, Jessica. Your question has to do with outpatient, outpatient trends where those patients are coming from. So you asked also quarter-over-quarter. So last quarter, we reported that we were at 35% outpatient. Actually, we're trending closer right now to 45% as opposed to 40%, so there's a significant jump up in outpatient use in the U.S.

In terms of where is that coming from, if you look at the U.S. volume in the sites that we serve, it is largely top [ 20% ], so you see largely about the top 15% to 20% of these hospitals driving the majority of the volume. So the majority of the outpatient volume you see is in our large academic centers as opposed to evenly spread throughout our 77 sites right now.

Typically, the rate limiter to get a site on board or at least using, I should say, CARVYKTI in the outpatient setting, it's just reps, patient repetitions and as we bring new sites on board, the key thing that they are looking for is just trying to understand in the real-world setting is a toxicity profile similar to what we've seen in a registration study. So that's how it's spread out right now, but I just wanted to make sure we have the corrected percentage. We're trending right at 45% right now for the quarter.

I'll turn it back over to Ying.

[Ying Huang, executive]

Jess. So we've been a public company for about 4 years. And I think in that period, as a company, Legend has made tremendous progress delivering for patients. We also have achieved numerous milestones. And if you look at our recent second line approval in both the U.S. and Europe and also the preliminary feedback from the field. And what we can see from the ordering book and production data, clearly, there's a lot of potential in the new indication.

And we just announced that we completed enrollment for CARTITUDE-5, that's another entry into the frontline. So we certainly believe that there's a lot of growth ahead of us. And we remain confident in our current long-term strategy to realize the full potential of CARVYKTI and also advance our pipeline as we continue to develop innovative treatment options.

So I think it's not a one answer or one way to create or maximize shareholder value. Although, as I mentioned, at this point, our Board is engaged with investors and other stakeholders. And Obviously, we have the fiduciary responsibility of maximizing our shareholder value. So that's pretty much what I can say about this.

[Operator]

Our next question comes from the line of Kelly Shi from Jefferies.

[Dingding Shi, analyst]

Since the approval in second line for CARVYKTI, how do you see the demand and the use in second line patients change over time? And also when early on patient received CARVYKTI treatment, what is the typical patient baseline characteristics regarding prior therapies, refractoriness and the performance status [indiscernible].

[Steven Gavel, executive]

Yes. So Kelly, it's Steve. Why don't I take the question in terms of how the launch is going, where we're seeing the use, et cetera. So just to remind folks, we launched early part of the quarter. So you really didn't start to see the impact from a revenue perspective until late in the quarter. We're starting to see it more pronouncedly now in the third quarter. So that's the first thing. A lot of the performance we saw in the second quarter was off of CARTITUDE-1 indication as opposed to CARTITUDE-4. However, we did see, again, some uptick at the end of the quarter.

What we are seeing in terms of some of the leading indicators, and we're measuring this through the data that we are analyzing through our ordering portal, we're seeing right now on average about -- between 50% to 60% of new patient orders coming into our portal is related to the CARTITUDE-4 indication. So that's -- it's a very big demonstration, good leading indicator of hopefully what we see moving forward.

Now again, these are not treated patients. These are patients that are entering the portal for scheduling purposes, but I did want to provide that data point on to you. In terms of actual data, we won't be able to see the data coming through the claims channels until -- towards the end of this month is when we'll start to see that, and that will give us more objective evidence in terms of exactly what line of therapy these patients are seeing the use. But we're very, very excited by the fact that we're seeing over 50% of all inbound patients, at least in our ordering portal coming through the CARTITUDE-4 indication.

[Operator]

Our next question comes from the line of Ash Verma from UBS.

[Ashwani Verma, analyst]

So maybe like first one, so you saw the Galapagos paused their BCMA CAR-T study on finding Parkinsonism. Can you comment on how CARVYKTI binder compares to the Galapagos compound? And does this make you believe that MNTs could be something that is more specific to camelid-derived antibodies like yours? And then just secondly, on the 2Q to 3Q dynamics, so the 9% price increase that you took, like, is that benefit mostly realized in 2Q sales already? Or could that also be an additional tailwind for 3Q?

[Ying Huang, executive]

Ash, this is Ying. Thanks for the questions. So on the first one, yes, we did see what happened at the Galapagos program. And I think obviously, MNT or the movement and neurological toxicity, it's not coming from just BCMA. It's not just coming from CAR-T either, although the mechanism of that action has not been well elucidated with science experiment to date. We think obviously, you have to watch this in the clinic. And if you look at the data from our commercial launch of CARVYKTI, I'm sure everyone follows the same FDA [ AR ] database.

In the first quarter, we saw 21 cases reported for CARVYKTI patients, and that went down to 7 cases in the second quarter while we dramatically increased the population of treated patients by CARVYKTI. So we feel really confident about the safety profile demonstrated by CARVYKTI in the real world here. And then secondly, we also believe that our risk mitigation strategy is working very well in the clinic and also in the trials. So that's what I can say about the MNT and neurotox here.

On the second question, I believe in the second quarter, the last ramp up was mostly reflected, although it's not fully 100% reflected in the second quarter. So we continue to reap that benefit in the third quarter. Thank you.

[Operator]

Our next question comes from the line of Leonid Timashev from RBC Capital Markets.

[Leonid Timashev, analyst]

I just want to ask on you mentioned that you recently hit overall survival and CARTITUDE-4. And obviously, there was some discussion of the overall survival endpoint at the advisory committee. So I guess, I'm just curious on that. I guess what are you hearing from physicians about the importance of this data? Did you sense that there were perhaps any physicians who are waiting to continue to use CARVYKTI in earlier lines to see more overall survival data? You have a expectation for and you might see this on the label and sort of how this is going to impact your overall marketing strategy?

[Steven Gavel, executive]

Yes, maybe I'll take that. The -- I mean physicians are very excited with this data. We're actually -- we have a pretty large study right now, fielded tested to look at different hazard ratios to see what perspective the market has on that. But generally speaking, at all of our advisory board, as you can imagine, it's very positive. The question we have, and I'm sure it may be that you have is does this data start to open up more of the standard risk population in earlier lines.

So we'll see. We just don't have an answer for you yet. But we'll have that once we get this data to read out. But generally speaking, as you can imagine, we're very enthusiastic by it.

I mean, Ying, you take the next question.

[Ying Huang, executive]

Yes, I'll talk about the other part of the question, which is we and JNJ teams are working on cleaning up the data and we do have plans to submit to the agencies, including FDA and EMA on survival label expansion. So hopefully, the data will be published at a major medical meeting soon, and you will see the magnitude of benefit for which you already had a preview at ODAC. And we see a strategically significant and also clinically meaningful separation here on survival benefit, which is very, very important.

As you know, given that myeloma is still incurable, many patients cycle through different therapies. So it's been very difficult to show a meaningful and also significant survival benefit in the clinical trials. And I think CARVYKTI is one of the few drugs out there, which will have a survival benefit on the label. So we think it's going to be a very powerful tool in the promotion and also when we explain the benefit to physicians and patients. This is in the second line, by the way, not even the late line.

So if you look at competition or upcoming competition, we think we might be the only one with that kind of benefit potentially on the label. And again, that's a huge differentiation factor. And obviously, if you talk to physicians in the field, right, they care about certain things, but survival is one of the top considerations compared to also PFS and CR rate. So we feel really, really good about the strong benefit demonstrated in such a global randomized active control trial with survival benefit.

[Operator]

Our next question comes from the line of Jonathan Miller from Evercore ISI.

[Jonathan Miller, analyst]

Congrats on all the progress here. Lots of manufacturing news and expansion expected in second half as you went through. But could you walk us through what the delta is between all of that stuff that's coming on in the second half and the guidance for end of '25? What is left to be done in '25 that's going to take you from end of this year to end of that year?

And then secondly, you mentioned the enormous market potential for a newly diagnosed setting. Obviously, there are a lot of patients there, but there's already so many more patients than even your manufacturing guidance covers. Is manufacturing ever going to be sufficient to cover the extensible market here, even if you look out 5 or more years?

[Ying Huang, executive]

Jonathan, thank you for the questions. On the first one, I can lay out what we expect to have between the end of this year and end of '25. So between end of this year, by which time we should have commercial production in our first facility in Ghent, Belgium called Obelisc. Right now, we're expecting commercial approval by end of next month in September. And then we can start our first commercial production in Europe.

And then by end of this year, also, we expect the construction activities to complete in the other facility in Belgium called TechLane. So by early next year in the first half, first, we do expect the clinical production to come from the TechLane facility in Ghent, Belgium to start. And then after that, sometime in the first half of '25, we expect Novartis Morris Plains, New Jersey site to also start commercial production pending FDA approval.

And then after that, in the second half of 2025, we have 2 major milestones here. First, we expect the expansion of Raritan site to gain FDA approval to start commercial production in the second half of '25. And the other upcoming milestone is in the second half of 2025, we also expect the TechLane facility in Ghent, Belgium to start commercial production. So this is the cadence of all the different nodes that could happen between end of this year and end of next year.

Now in terms of the ongoing launch in second line and also future opportunities in first line, you're right, we and our partner, JNJ, have already been having a lot of productive discussions about how we can satisfy the demand, especially given the very encouraging uptake in the second line, only 3 months after launch.

I know there are many skeptics saying that, well, where is the second line demand. We have 2 in Raritan, we have 2 in all the major hospital centers today for second line. And we are being creative here, and we and JNJ are trying to think out the box in terms of finding the future supply. That includes internal notes, construction of greenfield or brownfield or alternative other routes.

I can assure you that, that is one of the highest priority for the partnership, and we have been engaging with our partners at JNJ to discuss this, and you should stay tuned. Thank you.

[Jonathan Miller, analyst]

Makes sense. And then maybe can I ask just one question on the pipeline since I know nobody has asked about that yet. When do you anticipate beginning to show data from some of those early pipeline assets that are currently in Phase I, especially on those dual CARs? Where are they relative to single targets? And do you have expectations for the IND timing for autoimmune?

[Guowei Fang, executive]

Thanks, Jonathan. Yes, this is Guowei. We are having multiple trials and [ IP ] and we also have U.S. Phase I trial. Next year, we expect to see initial safety and efficacy result for Claudin 18.2 on top of CAR-T, which is a U.S. Phase I trial. Currently, we have an [ IP ] trial in China in autoimmune indications. This is a triple targeting CD19, CD20, CD22 tumor targeting autologous CAR-T being tested in a broad spectrum of different hematological and neurological autoimmune indication. The first patient where we dosed towards Q4 this year, we expect to see clinical readout in 2025.

As you point out that we also have multiple allogeneic product, some of those are [ dual ] targeting. In oncology indication, we expect to read out data in 2025. In terms of allogeneic product for U.S. IND filing, we are actively initiating IND-enabling studies this year, and we are projecting the IND filing in the U.S. around 2026. Thank you.

[Operator]

Our next question comes from the line of Yaron Werber from TD Cowen.

[Yaron Werber, analyst]

Great. And nice growth this quarter. Maybe just a couple of questions. As you think about supply ramping in Q4 over Q3, can you give us a little bit of a sense, it looks like Q3 is going to have a meaningful jump over Q2? Is Q4 the same meaningful jump or maybe smaller? And then as you think about -- you've said that you can double capacity next year, but not all of that is obviously commercial capacity, right? Some of it is going to be for qualification lots and still some clinical. Can you give us maybe a little bit of that sort of doubling, how much can be commercial?

[Ying Huang, executive]

Yaron, thanks for the questions. So on the first one, I can tell you that we expect next ramp-up to happen probably around end of this year or early next year. It's a little bit difficult for me to give you the exact timing now because, obviously, we need to run experiments, we need to collect the data, analyze data and then submit to the FDA. And then, there's the FDA review process, as you can imagine.

So it's going to be around that time, like I mentioned, end of this year, beginning of next year. We cannot comment specifically on Q4. But in general, I think we have said at the beginning of the year that throughout 2024, we do expect sequential growth every quarter. So you have seen that 18.5% sequential growth from Q1. And now we do expect much higher growth in Q3 and hopefully follow up with sequential growth again in Q4. So that's where we stand on production.

And then on the capacity, I would say, in general, going forward, right, given that our volume continues to increase higher, the percentage of the clinical production and also the percentage of what we call nonrevenue-generating rounds will decline as a relative percentage. So I wouldn't go into too much detail, but if you look at that commercial production capacity, if we say overall capacity is doubling, then that means roughly the commercial production will double as well because next year, we're looking at a much larger batch number compared to 2024.

[Operator]

Our next question comes from the line of James Shin from Deutsche Bank.

[James Shin, analyst]

When the C4 data is unveiled later this year, is it possible that you will have a post-hoc crossover OS analysis? And my second question, as it relates to doubling of capacity, should we expect a gross margin benefit as well in '25?

[Lori Macomber, executive]

I'll answer your -- this is Lori. I'll answer your second question, and then I'll turn it over to Ying to answer your first question. As you can imagine, as we're bringing on the different nodes, you're going to see variability in your gross margins. Because as you're ramping up in each of those locations, you have to get to a certain level of volume to really keep the consistency in your gross margins. But we do anticipate once all of our nodes are online, that our gross margins will be in line with the industry standards.

[Ying Huang, executive]

James, on a survival question, I'm not going to be able to [indiscernible] from the medical meeting presentation. But I'm sure you guys are in the survival curve from the ODAC panel back in March. So overall, the shape really did not change. I mean in general, we're encouraged by 2 things. Number one, yes, there was a very small early imbalance of overall survival in the very beginning of the curve, as you guys saw. But that never crossed over again after that initial period, right?

And secondly, I think when you see the overall survival curve, you will see it's a wide separation between the 2 curves. Not only that, we're also very encouraged by the so-called tail, which is the flattening trend of survival after certain periods. Again, we have consistently showed this in every single trial we conduct for CARVYKTI and in every setting. So clearly, there's a portion of patients who benefit this in the long run in terms of PFS, CR and also overall survival. And that is a very, very consistent trend. I think it's going to be hard for competition to beat.

[Operator]

Our next question comes from the line of Vikram Purohit from Morgan Stanley.

[Vikram Purohit, analyst]

We had 2, both on CARVYKTI. First, I think last quarter, you mentioned that there were 70 hospitals certified to treat patients with CARVYKTI. I think this morning you reported 77. I was just curious where you think that footprint could go by end of this year and also by end of 2025. And then secondly, I had a question on timing updates for earlier-line data sets. So data from cohorts ENF from CARTITUDE-2 and now that CARTITUDE-5 has completed enrollment, when you think you might be realistic to expect initial data there? And then in the same vein, CARTITUDE-6, could you just give us an update on how enrollment is progressing versus your expectations?

[Steven Gavel, executive]

Let's take the clinical questions. Okay. So why don't I take -- it's Steve, why don't I take the questions around site activation. So for Q1, we had reported 71 sites, and you're right, we're at 77 sites. By year-end, we are forecasting to be right around 100 sites. Again, I keep reminding during these calls, something to keep in mind is on a per site basis because of the percentage of patients that we treat now in the outpatient setting, our throughput is very efficient versus competition in the sites that we sell into. So please keep that in mind. It's not so much of a site race. It's really how many patients per site that we treat.

I'm going to turn it over some of the clinical questions around some of the data releases.

[Ying Huang, executive]

Yes, sure. So on [ CAR-T 4 ] survival, yes. We and also JNJ are very excited about the survival benefit. We also have consolidated with certain physicians, again, for physicians who have seen the data, they're very encouraged by the survival benefit. Remember, this is actually our first interim survival analysis, and we already hit the prespecified [ pie bar ] for statistical significance at this interim analysis. So clearly, that tells you the magnitude of the benefit.

In terms of early lines, I guess you would have to wait until a later date for any medical meeting to see if we are planning to publish those data or not. But given what we're seeing in the CAR-T 6 trial, I can tell you the enrollment is tracking way ahead of our expectation at this point. Even though we only enrolled our first patient in October of last year, right now, we fully expect that the enrollment of CAR-T 6 will complete in the year 2026. So I think that's also a reflection of the clinical benefit the patients and physicians are seeing. That clearly, I think, helps the enrollment.

[Operator]

Our next question comes from the line of Justin Zelin from BTIG.

[Justin Zelin, analyst]

Just on out-of-spec rates, now that the threshold has been relaxed a bit, can you comment on how rates have decreased?

[Ying Huang, executive]

Justin, thank you for the question. So it's still very early because as you recall, we received a wider release back by FDA on April 6, along with the second-line label. So at this point, if you compare the quarterly data, the quarterly out-of-spec rate in second quarter was slightly lower than the OS rate in the first quarter. And it might take a little bit more time before we can start to see a more pronounced OS because as you can imagine, we're in a very early launch of second line, so you shouldn't be surprised to see that it is probably the sickest or high-risk cytogenetics mutation patients who come online for a second line at this point.

And therefore, we shouldn't expect to see the full benefit of second line or the wide release back anytime soon, but we should expect to continue to see that trend over time. And I think eventually, it will settle down to a point that is 5 to 10 percentage lower than what we had before.

[Operator]

Our next question comes from the line of Mitchell Kapoor from H.C. Wainwright.

[Mitchell Kapoor, analyst]

Wanted to ask on the mention earlier of the queue at major medical centers for second-line demand. Are you able to provide a little bit more color on the magnitude of demand that is in the queue. And then also on treating initially the patients in second line with the highest risk cytogenetics and who are the sickest, in your discussions with physicians on who they'd like to treat, can you tell me a little bit about would they like to transition all of their patients at this point? It's just a function of supply? Or is it where they want to test it out in their highest risk cytogenetics patients before migrating into, I guess, more mild risk patients?

[Steven Gavel, executive]

It's Steve. Why don't I take that question. I'll take the last question maybe first in terms of the patient characteristics. And this is true what we saw during the CARTITUDE-1 launch, and we're seeing it as well in Europe. What we're seeing for all these indications is the sickest of the sick are treated first, right? So you're seeing the high riskers right out of the gate gets filled to sell. And we expect that to also happen with the CARTITUDE-4 launch, so to Ying's point earlier.

In earlier lines, and again, our research was bearing out on that before we launch. We'll see how it goes once we actually see the true data. But all the data was pointing in high-risk earlier lines that they would be the first candidates out that would be receiving cell-to-cell under the new indication. I'm trying to think what was the other question here.

Physicians. Yes, in terms of their -- how they plan on treating. So that's generally speaking, academic centers, how they're looking at this. The way I look at the market, though, is try to bifurcate it by the academics within our sites. But as you know, there's a large referring dynamic for these patients now. So this is where we are deployed with our partner now in the outpatient clinics to work on the referral side of the equation.

And this is where in the standard risk population, that's the one that we have probably our greatest work quite frankly, in the earlier lines, these are patients to the point that have a lot of different options. But this is the area that we're currently deployed against to meet with these physicians and educate them and identifying the patients at who would benefit the most for cell to cell.

[Ying Huang, executive]

Maybe, Mitchell, I'll add that in terms of how they use this, right? Again, this is the feedback -- early feedback from the field. So yes, they are focusing on the roughly 25% of patients in second line who harbor a high-risk strategy in that mutation, but that's not the only population. For example, I'm sure you have seen our data presentation at ASCO, right? There's a portion of patients, what we call the functional high risk, which means they may not harbor cytogenetic mutation, but they actually do progress within 18 months of the first-line treatment.

So those patients are definitely needing another treatment option. So that's also another population. And then lastly, there's a population who is relatively young and these folks are still working. They would like to get the once and done benefits from the CAR-T administration. So that they can go back to their normal daily living activities. So those are probably those 3 buckets of patients that likely will get a CAR-T in the second line at this point. So that's -- if you look at the numbers, it's roughly probably 35% of our second line population, if you add those 3 buckets here.

[Operator]

Our next question comes from the line of George Farmer from Scotiabank.

[George Farmer, analyst]

A couple from me. Let's see, getting back to the 52,000 patient number you threw out there, Ying, about market potential and heavily focused on manufacturing expansion, what kind of costs are we looking at? And how should we think about putting those numbers in our model in out years? That's number one. Number two, I was wondering if you could comment on the belantamab results that were published in the New England Journal of Medicine, that's the BCMA ADC that looks like you had some pretty good activity in front line. It would be great to get your perspective on how that data compares to what you've seen with CARVYKTI?

And then finally, this overall survival imbalance that FDA was pounding on at ODAC in the early phases of follow-up, does that ever come up with physicians in the real world? That would be helpful to get your comments on that.

[Ying Huang, executive]

Yes, George, thanks for your 3-part questions. So on the first one, in terms of capital investments here. So if you look at our capital plans, we have decided with our partner, JNJ. It's roughly $1 billion in total in this round. And that will first get us to the 10,000 dose capacity by end of next year. And then in the next about 2 years after -- 2 to 3 years after that, with somewhat very incremental investment, we can get to about 20,000 dose capacity.

And then in terms of the additional investment, so we think that it really depends on which mode we choose, right? Is it going to be a greenfield facility, we break ground from scratch? Or is it going to be a brownfield with existing structure or there's some other models? So it's a little bit hard to say that at this point. But obviously, we don't want to leave those market on the table here.

So we are having a very thoughtful discussion with our partner here in terms of how we actually unlock the potential and then tap into the frontline market or maybe even more penetration in the second line market with additional capacity.

And then on ADC, I think there was a session, right, at ASCO, George, if you recall. There were a couple of KOLs who discussed the data from T cell engagers, CAR-T and also ADC. And I think the consensus view from that panel and also -- and our recent channel checking from doctors in [indiscernible] is that really CAR-T is considered to be the first option given the once-and-done benefit and also the durability of the response we see, including now survival benefit. So I do think there is a position in the market for ADC, but we're not thinking that it will really change the dynamic or the landscape today.

And again, we just saw this publication from Nature that's coming from a large real-world patient study at Mayo Clinic. Clearly, based on both PFS and overall survival, CAR-T is better than T-cell engagers and T-cell engagers are better than ADC. I think that's a very indisputable result from a large cohort study at Mayo Clinic. I think that speaks volume -- the benefit of CAR-T versus the other 2 [ methods of ] actions. So we feel really good about the long-term prospects of CARVYKTI here based on the benefits we have seen in PFS, OS.

And then maybe the last question on the OS imbalance. No, we haven't encountered too many questions in the field given that data because clearly, that's actually before CAR-T was even administered, right? And you saw some similar phenomenon in some other CAR-T experiments. That's -- that is, I guess, the phenomenon you see in the CAR-T experiments in the clinic.

On the other hand, we are doing a lot of work in terms of shrinking the van-to-van time. And also today, there is an increase in our momentum of bridging therapies available to the physicians so that could also address that issue as well. But in short, no, we're not really encountering a lot of questions or skeptics about that early imbalance.

[Operator]

Our next question comes from the line of Rick Bienkowski from Cantor Fitzgerald.

[Rick Bienkowski, analyst]

First, I just wanted to confirm, it sounds like the initiation of clinical production by Novartis should immediately free up capacities for commercial production. But I was hoping if you could comment on if you expect this should have an immediate effect on capacity for the third quarter?

And my second question, I also just wanted to ask about the downstream effects that an improved out-of-spec rate could have on operations. And I guess I'm specifically thinking about cost of goods and how quickly patients get drug on average, but I'd like to hear your thoughts on how a 5% to 10% improvement in out-of-spec rate could impact the P&L over time?

[Ying Huang, executive]

So I'll talk about the first and third question, Rick. On Novartis, yes, the first batch production initiated last month in the Novartis facility, but as you can imagine, in any CAR-T facility, it's not a hockey stick. It is typically a gradual up ticking curve here. So yes, if we have, for example, 10 batches that Novartis is producing for CARTITUDE-6, then that does free up 1-batch commercial capacity at Raritan, so that is the direct impact. But I wouldn't say it's a dramatic impact in third quarter, right? So yes, there's definitely some incremental positive impact on that.

And then on the third question on the van-to-van time, I can give you the latest data. So in the second quarter, our P90 or 90% of the inspect sample were shipped out within 42 days. That is [indiscernible] to deliver to a shipment. And then if you look at the median, it was about 30 to 35 days, so it's less than 6 weeks. So we'll continue to make progress in terms of our van-to-van time here. And then the second part, I'll ask Lori to comment.

[Lori Macomber, executive]

Rick. So in relation to the P&L, as you can imagine, if there is an improvement in the van-to-van time, there's an improvement in the OS, that will help to drive down your COGS. But I can't give you direct definitive guidance on how much that would improve our COGS. But yes, that would definitely be one of the influences to help bring and drive down our cost of goods sold.

[Operator]

Our next question comes from the line of Sean McCutcheon from Raymond James.

[Sean McCutcheon, analyst]

Maybe to piggy back off of that last point, can you speak to the progress in specific of any additional manufacturing efficiency efforts? And separately, any update around your thinking for MRD as an intermediate endpoint for accelerated approval in your frontline study?

[Lori Macomber, executive]

Sean, this is Lori. I'll take your first question regarding the additional manufacturing efficiencies that you're seeing, that is why you saw in our Q2 earnings, you saw that there was pretty significant improvement over Q1 in our gross margins. And as we continue to realize those manufacturing efficiencies as we turn on our different nodes as well, you'll continue to see those COGS go down and our gross margins improve.

As I mentioned before, just to be transparent, you will see variability in each of the quarters in your gross margin as we bring these additional nodes online and we'll continue to invest in capital. But we saw really good strong gross margins for our product quarter-over-quarter, and we do expect to continue to see those.

Ying, do you want to take the second question on frontline?

[Ying Huang, executive]

Yes, sure. So given the recent ODAC recommendation, we and our partner do have plans to request a meeting and sit down with the agency to talk about using MRD in activity as a potential registration endpoint. So if you look at the clinical trial product that we published on clinicaltrial.gov, you will see that in the CARTITUDE-6 trial, MRD in activity is already a co-prime endpoint.

Now could we use just MRD in activity or a 12-month MRD in activity as a registration endpoint, that remains to be discussed with the agency. If the agency agrees, certainly, we would welcome that, and that could actually significantly decrease the time to market entry for CARTITUDE-6 as a first-line indication.

[Operator]

Our next question comes from the line of Konstantinos Biliouris from BMO Capital Markets.

[Unknown Analyst]

This is [ Phil ] on for Konstantinos. Congrats on the quarter. So just one question from us regarding the CARVYKTI label. So Peter Marks recently mentioned that FDA may revisit the black box warning on secondary malignancy risk in the CAR-T labels, given that they noticed the incidence of such risk is order of magnitude lower versus the chemotherapies. And with only a few cases were being positive for the consequences in lymphomas, so we just wonder if you have any discussion with FDA on label updates that potentially can remove such warning? And also if you can provide any additional color around that topic, that was super helpful.

[Ying Huang, executive]

[ Phil, ] thanks for the question. I think last time when some of the SPM label was updated, it was a class label. So basically, FDA putting very similar, if not the same language in all 6 commercial CAR-Ts label. So we probably expect that potentially if there's any change, that might be a class label as well, but I wouldn't want to speculate on that at this point because we have not had any detailed discussion with the agency about that. I think everything will be guided by the clinical data and also in the real-world data collection as well.

But regardless, we continue to believe that given the small incidence of those SPM and also the large claim benefit we observed in both the clinical trials and also in real world, we continue to believe there's a very strong benefit over risk here. So that also has not been really a big concern from prescribing physicians either because, as you know, in the field of multiple myeloma, this SPM issue has been out there for decades and physicians know very much about this adverse events associated with some of the treatments.

And I mean just to [ recall ] one physician we have discussed this topic with. He said, oh, I am way too more focused and concerned about treating the cancer the patient has rather than worrying about what other cancer the patient may have later.

[Operator]

Our next question comes from the line of Asthika Goonewardene from Truist.

[Asthika Goonewardene, analyst]

Congrats on the progress being made here. I have a question going back to the onboarding process and your ADCs. Gilead talks about making a strong push to credit some of those larger community centers. And in the -- in your target of 100 ADCs by year-end and what do we have for 2025, I want to get your thoughts on how you're thinking about targeting some of these larger community centers? What mix there would be, obviously, you want to have the academics, but what mix would these larger community centers is in your priority list and what impact they would have on patient flow?

[Steven Gavel, executive]

Yes, thanks. It's Steve. Why don't I take that question. Thanks for bringing that up because that's an important part of the strategy for this brand. So as you said, we're basically deployed today and into the near term in our major academic centers. However, we are running pilots today as well, where our major academic centers are partnering with their community referring centers to basically offload some of the capacity constraints that they have at the site level.

So we are already engaged in some pilot activity through our academic centers where they're working very closely with their community affiliate. So that is -- that's been ongoing, and that's been ongoing for the better part of the year.

Because you're right, as we start moving into that early second line, which we are today, we'll continue to broaden out our commercial footprint to include not only the large academic centers, but also with those centers to bring on board the community affiliated to that. So it's very important that we bring on the academics with us as they -- because then it's much more coordinated. And obviously, the key thing for us is always keeping patient safety first. So we want to make sure that we do that in accordance with our large academics.

And then finally, the third leg of our strategy is at the right point in time because there was some earlier conversation around frontline is ultimately getting out into the clinic. And that's something downstream that we've had some initial conversations with some of the large retail clinic providers out there to see and better understand what is their role and then how does that dovetail with the role of the community hospitals as well as they're referring large academic centers. So that's something forthcoming. It's something that we'll be rolling out over the next couple of years as we prepare the market for our launch in frontline.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.