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Hutchison China MediTech (Chi-Med) has achieved several significant milestones recently, with the early halt for efficacy of surufatinib in the SANET-p study being the latest. Surufatinib will be the first wholly owned asset to be approved and planning for the required commercial infrastructure is well advanced. The other clinical pipeline assets are also progressing well. Notably, savolitinib, partnered with AstraZeneca, is seemingly set to carve out a valuable role in managing Tagrisso’s lifecycle. Chi-Med has raised up to c $126m in equity to help advance the multiple clinical opportunities. We have yet to update our estimates and valuation for these recent developments; our existing pre-money valuation is $4.74bn ($35.57/ADS) or £3.65bn (£5.47/share).
| Year-end: December 31 | 2017 | 2018 | 2019E | 2020E |
| Sales (US$m) | 241.2 | 214.1 | 183.1 | 206.9 |
| Adj. PBT (US$m) | (53.5) | (86.7) | (172.1) | (190.5) |
| Net Income (US$m) | (23.0) | (71.3) | (135.9) | (153.3) |
| Earnings per ADS (US$) | (0.22) | (0.57) | (1.05) | (1.13) |
| Cash (US$m) | 358.3 | 301.0 | 179.3 | 131.5 |
| Adj. EBITDA (US$m) | (17.2) | (69.7) | (128.8) | (146.9) |
Update
27 January 2020
| Price (US ADS) (UK share) | $23.48 382p |
| Market Cap | $3.13bn £2.26bn |
| Enterprise Value | $3.24bn £2.64bn |
| Shares in issue (ADS) (shares) | 133.3m 666.6m |
| 12-month range | $16.47-$32.55 261p-487p |
| Free float | 36% |
| Exchanges | NASDAQ AIM |
| Sector | Healthcare |
| Company Code | HCM HCM.L |
| Corporate client | Yes |
Company description
Hutchison China MediTech is a Hong Kong headquartered biopharma focused on discovering, developing and commercializing innovative targeted therapeutics and immunotherapies to treat cancer and autoimmune diseases. It has a diverse pipeline of first-in-class/best-in-class selective oral tyrosine kinase inhibitors in development for the China and global markets.
Analysts
Franc Gregori
fgregori@trinitydelta.org
+44 (0) 20 3637 5041
Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043
Mick Cooper
mcooper@trinitydelta.org
+44 (0) 20 3637 5042
Table of Contents
Hutchison China MediTech (Chi-Med) is a success story on so many levels, with a phenomenal journey since its inception twenty years ago. Chi-Med has exploited its early-mover advantage in China to generate a pipeline of innovative oncology programmes and establish a credible domestic presence. The goal is to address both China and global opportunities; initially this was done through partnerships, but increasingly the next wave of clinical assets will be wholly self-developed and commercialised. The recent equity raise has strengthened the balance sheet and removes any foreseeable funding concerns as the pipeline is progressed and the commercial infrastructure established. A raft of news flow is expected over the coming 12 months. Our current pre-money valuation is $35.57 per ADS ($4.74bn) or £5.47 per share (£3.65bn), but this has yet to be updated for the early positive surufatinib SANET-p trial data and the effect of the fund raise.
Chi-Med has achieved a great deal in the 20 years since its creation. A key aim was to exploit the huge opportunities that existed, and still do, in healthcare in China. Demand was set to explode not only due to economic growth, driven by the rapidly growing middle- and upper-classes, but also by a myriad of supportive Government initiatives to improve access to healthcare. These factors have driven the growth in the domestic market such that it is now the second largest globally. Interestingly, the evolution in clinical demand is well suited to Chi-Med’s product portfolio, with specialist oncology products being particularly attractive.
The timing was also ideal to exploit the then emergent scientific environment to create a world-class drug discovery company, with cost and time advantages over its US and European counterparts. The result is a genuinely top-quality research platform with over 500 scientists across multiple sites. The impressive success of its discovery programmes has generated a substantial pipeline of highly selective tyrosine kinase inhibitors (TKIs), purposefully designed to be first- or best-in-class. The clinical, and commercial, relevance of this approach is borne out by the quality of the trial data generated so far. The pipeline has over 30 studies underway worldwide, with eight oncology programmes being developed for the Chinese market (China Oncology) and five programmes being progressed for global markets (Global Innovation).
The global ambitions should not be underestimated. Chi-Med has always planned to develop products that would initially be self-commercialised in China but, in parallel, the most highly differentiated compounds would also be developed in Western clinical trials for global registrations. The pipeline is well positioned for the emerging immuno-oncology standards in Western markets, where treatment regimes increasingly consist of combination therapies. Chi-Med’s highly specific TKIs offer not only advantages in terms of targeted efficacy but, because of limited toxicities, can be readily added to existing treatment regimens. The clinical pipeline, summarised in Exhibit 1, is maturing nicely and should generate several value inflection points over the near- and medium-term.
The launch of Elunate (fruquintinib) in September 2018 was an important milestone. It not only marked Chi-Med’s maiden approval, but also the first unconditional approval in China of a novel oncology product that was both discovered and developed domestically. Elunate is currently marketed by Eli Lilly, with Chi-Med receiving manufacturing payments and royalties on sales, although renegotiation of the licensing agreement in December 2018 provides Chi-Med with possible future co-promotion rights for 30-40% of China. However, in our view, its importance lies in the establishment of the regulatory, production and distribution infrastructure that will support further wholly self-commercialised oncology products. Additionally, critical market know-how is being gained as exemplified by the fact that Elunate was one of only eight oncology products added to the National Reimbursement Drug List (NRDL) in November 2019.
Savolitinib, a first-in-class c-Met inhibitor, is the leading compound in the Global Innovation programme. It is partnered with AstraZeneca and is being evaluated in fourteen late-stage studies in six cancer indications, covering both monotherapy and combinations in a variety of indications, patient populations, and geographies. It is an important strategic asset for both Chi-Med and AstraZeneca; the latter having licensed global co-development/commercialisation rights in 2011. The major commercial opportunity for savolitinib globally is non-small cell lung cancer (NSCLC); this forms the strategic cornerstone of the collaboration as it could provide a useful life-cycle management opportunity in combination with AstraZeneca’s third-generation EGFR TKI Tagrisso (osimertinib).
We view the AstraZeneca collaboration positively as, much as with Eli Lilly and fruquintinib in China, Chi-Med has not only gained valuable credibility and validation of its scientific expertise within the oncology community, it has also gained the necessary experience and expertise required for dealing with European and US regulators. The global infrastructure is being fleshed out, notably with a 30-person strong facility in New Jersey, and will be employed in progressing surufatinib, which appears set to be the first unpartnered drug that Chi-Med will launch. We intend to detail the status of surufatinib and its likely timelines in a forthcoming Update note.
We believe we are entering a particularly interesting period as numerous projects are at key points in the development process, where continuing success should result in material value creation. The expected news flow for 2020 is outlined in Exhibit 2. The key events management is guiding to watch out for include:
In January 2020, Chi-Med raised c $110m through the issue of 4.44m American Depositary Shares (ADSs), listed on Nasdaq, at a price of $25.00 per ADS. An additional 660k ADSs, at the same price, have been granted to the underwriters for a 30-day option period, which could raise a further $16.5m.
Following close, 22m new ordinary shares will be issued on AIM (each ADS represents five shares); after which Chi-Med’s issued share capital will be 688,906,450 ordinary shares. (137,781,290 ADS equivalent). Chi-Med will receive all the proceeds, net of expenses, and will use the monies to progress its extensive clinical pipeline and build up its commercialisation infrastructure.
CK Hutchison, Chi-Med’s largest shareholder (49.85%) through its subsidiary of Hutchison Healthcare Holdings (HHHL), will not take part in the offer and has agreed a 90-day lock up. We estimate that its holding will be 48.3% after the raise is closed.
The original plan outlined in April 2019 for an additional listing in Hong Kong to raise equity finance and sell down CK Hutchison’s stake (held through its HHHL subsidiary), to below the strategically important 50%, was one of several future funding options open to Chi-Med. These also included the prospect of enhanced revenues from Elunate following NRDL inclusion and from near-term China approvals/launches, plus possible non-dilutive finance from non-core asset divestment. The subsequent ADS placings by CK Hutchison in June and September 2019 removed a known overhang and allowed Chi-Med to time this offer to suit its needs.
We have yet to adjust our forecasts for the effect of the raise. Similarly, we have yet to adjust our valuation for both the impact of the raise, and more importantly, the impressive outcome of surufatinib in the SANET-p trial. This could, on our preliminary assessment, result in a probable benefit of c 12 months improvement in approval timelines compared to our existing expectations. We aim to do so as soon as practicable, but in the meantime our current pre-money valuation, based on a rNPV model for the China Oncology and Global Innovation platforms and a multiple-based approach for the existing China commercial business (valuation methodology is detailed in our Initiation note February 2019), is $35.57/ADS ($4.74bn) or £5.47/share (£3.65bn).
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