Investment case

HUTCHMED (previously Hutchison China MediTech) is a China-based, globally focused, biopharmaceutical company, active in discovery, development, manufacturing, and commercialisation. The investment case centres on the continued success of its Oncology/Immunology platform (formerly China Oncology and Global Innovation), which has multiple near-term clinical and regulatory catalysts from the novel highly selective small molecule TKI (tyrosine kinase inhibitor) pipeline. Prospects remain compelling, as the Chinese healthcare market is still one of the fastest growing in the world. Continued R&D and commercial success within China, and pipeline progress globally has opened the opportunity for management to create a global direct marketing presence. This would see HUTCHMED becoming a world-class biopharmaceutical innovator that, while continuing to have China-based discovery operations, sells its products directly in China and major Western markets.

Valuation

We use a sum-of-the-parts approach to value HUTCHMED. The Oncology/ Immunology pipeline is a classic drug discovery, development, commercialisation play, and a DCF-based model is particularly suitable. We calculate an rNPV of the various clinical projects (adjusted for success probabilities), sum them, and net this against costs, adopting conservative assumptions throughout. Other Ventures generate meaningful sales and profits, so earnings-based metrics are appropriate. Our valuation is $6.27bn or £4.83bn, equivalent to $43.10/ADS or 663p/share (1 ADS = 5 shares).

Financials

HUTCHMED’s cash resources at end-December 2020 were $435m, with another $69m in unused bank facilities, and $89m at non-consolidated JVs. During FY20, $318m was raised via a NASDAQ follow on offering and two PIPEs. Current cash will support investment into both China/global registration studies, small molecule manufacturing, and the China commercial infrastructure. FY21 guidance is focused on consolidated Oncology/ Immunology revenues which are expected to reach $110m-$130m (up from $30.2m) as Elunate growth continues to accelerate, with a similar trajectory for Sulanda, and potential China launch of savolitinib coupled with a $25m first sales milestone.

Sensitivities

As a fully integrated biopharma company, typical industry risks (clinical, regulatory, funding, partnering, competition, commercialisation, pricing and reimbursement) apply. However, the TKI pipeline’s breadth and scope reduces technical risk, covering various mechanisms of action, with potential across a range of cancers. Investor concerns about China (economic, political, regulatory) are mitigated by regulatory reforms that favour innovation, strong domestic management, and increasingly global operations. CK Hutchison remains supportive despite reducing its holding from c 60% to c 46% (with no intention of further secondary offerings in the foreseeable future). Key sensitivities are detailed later, but in summary we believe the issues are well known and containable, with a strong investment case more than offsetting any investor concerns.

HUTCHMED: building momentum, going global

HUTCHMED (formerly Hutchison China MediTech) will see the first tangible signs of the value of its R&D organisation as the commercial operations are expected to generate $110m-$130m in revenues this year. The progress of this first wave of assets demonstrates their global applicability and therapeutic relevance. These three compounds have broad clinical appeal, including when used in combination with other well-established oncology regimens. The leading candidate from the second wave of programmes is on the cusp of registrational studies; whilst the first of the third wave is set to start human trials. These successive waves underpin our view that HUTCHMED’s now proven discovery and development expertise will result in a sustainable new product flow that will support the creation of a global biopharma business. Our valuation is $6.27bn ($43.10/ADS) or £4.83bn (663p/share), based on conservative assumptions.

HUTCHMED is a world-class innovator and developer of novel compounds, which are either best- or first-in-class small molecule tyrosine kinase inhibitors (TKIs). The first wave of compounds are completing China and global registration studies or are already approved in China and poised for global submissions. The second wave is progressing through late clinical development, with a third wave set to enter the clinic or finalising preclinical studies. The impressive clinical data reported to date highlights the quality and depth of the pipeline and underpins the prospects of the China commercial operations and, increasingly, the importance of establishing a US and European infrastructure. Whilst continued clinical and regulatory success will create several value-inflection points, the next couple of years should also see material progress in the execution of the global direct marketing organisation.

The first wave includes: savolitinib, a c-MET inhibitor in development for lung, renal, and bowel cancers; fruquintinib, a VEGFR inhibitor marketed as Elunate in China for 3rd line CRC (colorectal cancer) and in global development for multiple solid tumours; and surufatinib, a VEGFR/FGFR1/CSF-1R inhibitor that recently launched in China for non-pancreatic NET (neuroendocrine tumours), is awaiting approval in a second NET indication, and has an FDA rolling NDA filing. Savolitinib is partnered with AstraZeneca globally, playing a key role in lifecycle management of Tagrisso (osimertinib) and Imfinzi (durvalumab). The two marketed drugs point to early successes in commercial execution. Elunate is performing well in China, with NRDL inclusion boosting volumes and the in-house marketing driving sales; Eli Lilly retains 20-30% rights on China sales, but it is unencumbered globally. The first global launch is likely to be surufatinib, which is wholly owned worldwide.

HUTCHMED has always been an attractive investment, with acknowledged scientific expertise, focussed development pathways, and a clear strategy. Twenty years from inception, the opportunities in China are being realised and the global prospects are increasingly evident. As the first product wave matures, attention should broaden from clinical development results to commercial execution. Although marketing success in China will be financially meaningful, demonstrating traction from its developing global footprint will, in our view, mark the point that HUTCHMED begins to deliver on its true potential. The journey from a Chinese-focussed discovery platform to global biopharmaceutical player has been highly rewarding for investors, but we argue significant upside remains.

China successes with a globally competitive pipeline

HUTCHMED has established a world-class reputation for discovering, developing, and commercialising innovative either best or first-in-class small molecule tyrosine kinase inhibitors (TKIs). The potential of this broad and diverse pipeline is confirmed by the clinical data presented so far, and its internationally competitive profile has opened the opportunity to build a global oncology franchise. We believe an important inflection point has been reached in HUTCHMED’s evolution, with the prospect of several product launches in numerous indications over the coming years.

Exhibit 1: Highly differentiated China and Global pipeline

Source: HUTCHMED Note: * in planning; (1) approx estimated loss of exclusivity (LOE) in key markets; (2) most advanced clinical stage and indication; (3) investigator-initiated trials (IITs); (4) subject to meeting pre-agreed sales targets, Lilly will pay HUTCHMED an estimated total of 70-80% of Elunate sales as royalties, manufacturing costs and service payments.

Exhibit 1 highlights the 12 assets that are being progressed, all discovered in-house, with the three waves clearly visible. The three late-stage programmes are undergoing pivotal global clinical trials or regulatory filings, with the China experiences materially de-risking the success probabilities. A focus on innovation and in-house discovery, coupled with a global outlook, is a major differentiator and sets HUTCHMED apart from its domestic Chinese biopharma peers.

An element of HUTCHMED’s strategy across its TKI pipeline has been to initially develop them as monotherapies for China which, given the historical relative lack of innovation in marketed cancer therapies in China compared to the rest of the world, offers a fast path to market. Alongside this, reflecting the evolution of cancer treatment regimens, it is seeking to develop its oncology TKIs as part of combinations to improve clinical outcomes and maximise pipeline value in China and globally. The selectivity of HUTCHMED’s TKI pipeline offers advantages in terms of targeted efficacy and cleaner toxicity profiles, often the limiting factor restricting potential combinations, making them ideal candidates for various combination approaches. HUTCHMED is evaluating combinations with other TKIs (eg savolitinib + osimertinib), chemotherapies (eg fruquintinib + paclitaxel), and with various PD-1/PD-L1 checkpoint inhibitors through multiple collaborations.

Follow on indications and PD-1/PD-L1 checkpoint inhibitor are an important facet of HUTCHMED’s plans to maximise the value of its assets. Exhibit 2 outlines the development plans for the three programmes in the first product wave. Two are currently marketed in China (Elunate and Sulanda), with three NDAs under review (including the first US NDA filing), and an expectation that eight to ten China and global registrational studies will be underway by mid-2021.

Exhibit 2: Maximising the value of the first wave

Source: HUTCHMED

The progress of the second product wave is also evident in haematological indications. HMPL-689 is on the cusp of entering potential China registration studies supported by promising proof of concept data in non-Hodgkin’s lymphoma (NHL), with proof of concept also anticipated for HMPL-523 this year.

What is clear is that 2021 will be another significant year for HUTCHMED with expectations for material clinical, regulatory, and commercial progress (Exhibit 3). The defining feature will be, in our view, the magnitude of revenue growth of the recently launched products as these provide tangible evidence of the quality of HUTCHMED’s discovery platform and strength of its development organization.

Exhibit 3: Potential upcoming clinical and regulatory milestones

HUTCHMED Note: * submission to scientific conference; ** subject to regulatory interaction, *** subject to supportive data

Savolitinib underscores scale of progress

Savolitinib (also known as AZD6094) is a novel highly selective inhibitor of the c-Met receptor tyrosine kinase (c-Met or HGFR). Aberrant activation of c-Met is implicated in many solid tumours (including kidney, lung, gastric, colorectal, oesophageal, and brain cancers) and plays a major role in tumour pathogenesis, including growth, survival, resistance, and, importantly, metastasis. C-Met amplification is a known feature of resistance following anti-EGFR treatment in NSCLC (non-small cell lung cancer), CRC (colorectal cancer), and RCC (renal cell carcinoma). As a result, c-MET has become widely studied as an anti-cancer target, with several selective inhibitors in development. Savolitinib is on track to be the first in class in China, however the first two c-Met products, specifically targeting MET ex14m/del NSCLC, were approved last year: Merck KGaA’s tepotinib (Tepmetko) in Japan in March 2020, and Novartis/Incyte’s capmatinib (Tabrecta) in the US in May 2020.

Savolitinib is partnered with AstraZeneca, with an extensive clinical programme underway, both as monotherapy and in combination protocols, in multiple indications (NSCLC: TKIs osimertinib [Tagrisso]; RCC: PD-L1 durvalumab [Imfinzi]). Savolitinib is an important facet of AstraZeneca’s efforts in life-cycle management and boosting the commercial potential of its EGFR TKI franchise. AstraZeneca has worldwide rights in return for tiered royalties of approximately 14% to 18% (subject to approval in PRCC), and 9% to 13% until then, for sales outside China up to $5bn, stepping down (over two years) to between 10.5-14.5% thereafter. AstraZeneca is responsible for development and regulatory filings ex-China. HUTCHMED is responsible for R&D and regulatory matters in China, and thus will benefit from a 30% royalty rate for all China sales.

Exhibit 4: Savolitinib clinical programme

HUTCHMED Note: Blue = China; Pink = Global; * in planning; ** investigator initiated

The development programme explored solid tumours where c-Met was seen as a key driver of disease progression. Savolitinib has been studied or is currently in several clinical trials across NSCLC (including in pulmonary sarcomatoid carcinoma, PSC), papillary renal cell carcinoma (PRCC), clear cell renal carcinoma (ccRCC), and gastric cancer. Savolitinib combinations have also been explored with other AstraZeneca drugs such as durvalumab (Imfinzi, PD-L1), osimertinib (Tagrisso, T790M), gefitinib (Iressa, EGFR), as well as docetaxel (chemotherapy). Exhibit 4 outlines the main ongoing and planned clinical trials, with NSCLC and renal cancers the most advanced; notably, reflecting the high relative incidence of gastric cancer in Asia, a development programme is also in planning here. Globally the major commercial opportunity for savolitinib is NSCLC, which forms the strategic cornerstone of the collaboration.

Global NSCLC development is focused on combination studies, including with AstraZeneca’s third-generation EGFR TKI Tagrisso. The EGFR mutation is a well-documented NSCLC oncogenic driver and AstraZeneca has an extensive franchise that can be traced back to Iressa (gefitinib), which was first launched in 2003 and remains a key first-line therapy for many patients globally. Tagrisso has become standard of care in 1L NSCLC across the US and Europe following significant PFS improvements (18.9 months) vs Iressa or Tarceva (erlotinib) in the FLAURA trial.

The first-generation EGFR inhibitors target the EGFR exon 19 and 21 mutations but suffer from rapid emergence of resistance, typically within 12-24 months, mostly through the exon 20 mutation at position 790. Tagrisso is active against T790M but resistance also develops, again typically within 12-24 months, with c-Met amplification one of the main resistance mechanisms. The T790M mutation (T790M+) in the EGFR gene accounts for around  50% of resistance cases and c-Met amplification (MET+) for c 20-30% of osimertinib-resistant patients.

Exhibit 5: Addressable NSCLC patient populations for savolitinib

HUTCHMED Note: Prevalence of EGFRm NSCLC c 32% worldwide (with regional prevalence of 38% in Asia, 24% in the US, 14% in Europe).

The combination EGFR + c-Met TKI approach is a potential mechanism to circumvent this. Thus, a successful savolitinib + osimertinib development programme could provide another treatment option for 2L/3L relapsed/refractory NSCLC and result in this combination becoming a new standard of care in NSCLC (depending on patient population and therapy line).

Global c-Met+ 2L EGFR/T790M NSCLC development

Global development in NSCLC is focused on combination studies with Tagrisso. The Phase II SAVANNAH trial (Exhibit 4) is the first step in the registration strategy for a savolitinib + osimertinib combination in NSCLC. The study consists of c 250 patients with EGFRm+ and MET+, locally advanced or metastatic NSCLC who have progressed following 1L or 2L treatment with osimertinib. The study was originally evaluating 80mg osimertinib daily with savolitinib 300mg daily (qd), based on the strong results seen with 300mg qd in part D of the exploratory Phase Ib/II TATTON study. AstraZeneca has more recently added two additional dosing regimes: 300mg twice daily (bid), or 600mg daily. It is hypothesised that patients with MET overexpression may benefit from higher doses; 300mg twice daily (bid), or 600mg daily. It is hypothesised that patients with MET overexpression may benefit from higher doses; AstraZeneca has also gained significant experience in managing adverse events at higher doses.

The study should read out in 2021 and, depending on the strength of the data, will guide regulatory interactions. These should determine whether a further Phase III trial is needed before a regulatory filing or if SAVANNAH alone is sufficient to file for accelerated approval for 2L/3L EGFRm+ osimertinib refractory MET+ NSCLC. If outcomes from SAVANNAH are sufficiently compelling to support a Breakthrough Therapy Designation (BTD), an accelerated approval pathway could be an option with a Phase III trial to run in parallel. This is possible given the significant unmet medical need in this late stage and heavily pre-treated NSCLC population. An expedited pathway could see the first global launch for this treatment combination occur in late-2022.

Exhibit 6: SAVANNAH a global registration intent study

Source: HUTCHMED

SAVANNAH is closely aligned with AstraZeneca’s ORCHARD Phase II platform trial, an open label multi-centre Phase II study examining multiple treatment options for 2L/3L EGFRm NSCLC following progression on osimertinib. ORCHARD involves molecular profiling: those patients identified with c-Met+ EGFRm NSCLC (which meet relevant inclusion criteria) are prioritised for enrolment in SAVANNAH. This strategy not only facilitates recruitment, but an enriched patient population should boost the chance of success for the trial.

TATTON B data suggests that savolitinib + osimertinib could offer an additional survival benefit as an effective targeted treatment option that can overcome MET-driven resistance mechanisms irrespective of prior EGFR-TKI therapy. The results (presented at AACR 2019 and detailed in our April 2019 Update) from a similar, albeit not identical, patient population to SAVANNAH (osimertinib approval in 1L EGFRm NSCLC occurred after TATTON had initiated), showed a 25% objective response rate or ORR (12/48 partial responses, PR) and a median duration of response (DoR) of 9.7 months. TATTON data published in The Lancet Oncology (March 2020) showed a 30% ORR (21/69 PR) and a median DoR of response of 7.9 months; median DoR increased in the final analysis, presented at WCLC 2020, to 9.5 months.

Interestingly, in December 2020 the FDA approved the use of osimertinib in the adjuvant setting for EGFRm+ NSCLC; this followed striking disease-free survival data from the Phase III ADAURA presented at ASCO 2020. Currently savolitinib’s development is focussed on unresectable NSCLC patients that progress on osimertinib. However, AstraZeneca estimates that 20-30% of NSCLC patients present with resectable disease. Therefore, there may be a future, and sizeable, opportunity for savolitinib irrespective of residual disease or therapy line given that c-Met amplification is the most common acquired resistance mechanism to osimertinib (seen in 20-30% of osimertinib-refractory NSCLC patients).

China MET ex14m/del NSCLC: potential 2021 approval

Savolitinib is the leading MET inhibitor in China. The savolitinib monotherapy NDA for NSCLC with c-Met exon 14 mutation/deletion (MET ex14m/del) was accepted for review by the China National Medical Products Administration (NMPA) in May 2020, suggesting a first approval and China launch in 2021 by AstraZeneca. MET exon 14 mutations represent a clinically unique molecular subtype of NSCLC, with a notably poor prognosis, occurring in 3-4% of NSCLCs and about 32% of pulmonary sarcomatoid carcinomas (PSC). These inhibit degradation of the c-Met receptor and result in a persistent oncogenic effect. MET ex14m/del have also been detected in other tumours such as brain gliomas, gastrointestinal cancers, sarcomas, and cancers of unknown primary origin.

The 70-patient single arm, open label Phase II registration study had 61 evaluable patients, of which 36% had PSC (typically a more aggressive form of NSCLC). Data presented at ASCO 2020 in May 2020 showed a 49.2% ORR, a 93.4% disease control rate (DCR) and a 9.6-month duration of response (DoR). Data for DoR, progression-free survival (PFS) and overall survival (OS) are still maturing. The results also showed an acceptable safety profile, with a low adverse event (AE) discontinuations rate of 14.3%. This data supported the China NDA, the first filing for savolitinib globally and first for a selective MET inhibitor in China.

HUTCHMED estimates incidence of MET ex14m/del NSCLC in China is c 12,000-20,000 (c 3-4% of 1L NSCLC). This is clearly a niche opportunity with high unmet need and potential for accelerated approval; however, there are wider prospects for savolitinib monotherapy in other MET-driven patient populations, eg MET gene amplified NSCLC (with c 15,000-30,000 incidence). However, the catalyst for significant revenue generation will come from longer-term use of the savolitinib and EGFR inhibitor combination across a broader NSCLC population in China. As a reminder, savolitinib’s launch and commercialisation are AstraZeneca’s responsibility, with HUTCHMED eligible for a 30% royalty on China sales.

Development of savolitinib in additional NSCLC patient populations in China is also being pursued, in combination with osimertinib. Two Phase III registration trials are in planning, one in 2L c-Met+ EGFR refractory NSCLC (similar to the SAVANNAH study population) and one in naïve c-Met+ and EGFRm NSCLC (similar to the FLAURA study population). Both studies are slated to start in 2021.

PRCC: expanded clinical programme being established

Savolitinib is also being explored in other c-Met driven cancers, most notably in renal cell carcinoma (RCC) and gastric cancer. HUTCHMED and AstraZeneca have renewed their efforts in RCC, or more specifically c-Met-driven papillary renal cell carcinoma (PRCC), following maturing of patient data from the original Phase III SAVOIR monotherapy study and subsequent encouraging results from CALYPSO, an investigator sponsored Phase II study of savolitinib + durvalumab.

The SAVOIR study was a global multi-centre open-label 1:1 randomised trial evaluating efficacy and safety of savolitinib vs sunitinib (Sutent, Pfizer), a VEGFR inhibitor, in c-Met driven 1L/2L PRCC. It was terminated early (December 2018) after having enrolled c 60 of an intended 180 patients, which, with the benefit of hindsight, was premature. The decision followed a retrospective analysis of historic data from a molecular epidemiology study that indicated the likelihood of success was low for savolitinib in the 1L setting and that switching to alternative settings was difficult as few patients were using sunitinib in 2L PRCC. Additionally, the availability of immuno-oncology drugs (such as PD-1s) was viewed as changing the treatment landscape in RCC.

However, the mature data from the 33 savolitinib treated patients showed that PFS, the primary endpoint, was numerically superior (the sample size was too small to achieve statistical significance), the ORR was 27% (9/33) vs 7% for sunitinib, and it had a superior safety and tolerability profile.

Twelve-month follow up data from CALYPSO, a three-part study evaluating savolitinib monotherapy and in combination with durvalumab in RCC irrespective of c-Met status or PD-L1 expression, was presented at ASCO GU 2020. Results confirmed earlier findings, with encouraging efficacy and no new safety signals. The confirmed RR for MET+ patients was 40%, with overall results showing a 27% RR, median PFS of 4.9 months, and median OS of 12.3 months. The strength of these results prompted a reassessment and revived plans to expand savolitinib’s development programme. Planning is underway for a global Phase III trial of the savolitinib + durvalumab combination in MET+ PRCC to start in mid-2021.

PRCC is an attractive, albeit niche, commercial opportunity, representing 10-15% of total RCC incidence. Renal cancer is among the ten most common cancers worldwide and is expected to account for 73,750 new cases annually in the US alone and 365k globally. Over 90% of kidney tumours are RCC, of which clear cell RCC (ccRCC) accounts for 75%-80% and the balance termed non-clear cell RCC (non-ccRCC). Non-ccRCC consists principally of PRCC, which splits broadly equally into MET+ and MET-. This translates into c 8% of RCC patients globally and around 28k new cases pa.

C-Met driven PRCC has a poor prognosis and a lack of approved targeted therapies, raising the potential of accelerated approval. There is also industry enthusiasm for VEGFR TKI/PD-1 combinations in RCC given the emergence of acquired resistance to VEGF TKIs/mTOR inhibitors and the synergistic potential. The FDA approved the first combinations in 2019: axitinib (Inlyta, Pfizer)/pembrolizumab (Keytruda, Merck) and axitinib/avelumab (Bavencio, Pfizer) in 1L advanced RCC. The cabozantinib (Cabometyx, Exelixis)/nivolumab (Opdivo, Bristol Myers Squibb) combination was approved in 2020.

Savolitinib has also been studied in investigator-sponsored Phase II studies in gastric, prostate, and colorectal cancers. Results from the VIKTORY biomarker-based umbrella trial, run at the Samsung Medical Centre in South Korea and published in Cancer Discovery (October 2019), indicated that savolitinib monotherapy had promising efficacy with an ORR of 50% (n=20) in MET-amplified gastric cancer. A China Phase II registration intent trial in 2L MET+ gastric cancer is in planning.

We currently value savolitinib at $5.86/ADS ($853m) or 90p/share (£656m).

Surufatinib: casting the NET even wider

Surufatinib (marketed as Sulanda in China) is a novel selective oral small molecule TKI which targets three RTKs involved in tumour angiogenesis, VEGFR (1,2, & 3) and FGFR (fibroblast growth factor receptor), and immune evasion, CSF-1R (colony stimulating factor-1 receptor). This unique dual angio-immuno kinase profile suggests promising activity as monotherapy and, especially with its safety and toxicity profile, its use in combination with checkpoint inhibitors. Surufatinib is HUTCHMED’s most advanced wholly owned asset, first launched in China in extra-pancreatic NET (epNET) in January 2021 by HUTCHMED’s own commercial team. A China NDA in a second indication, pancreatic NET (pNET), was accepted for review in September 2020, with an approval decision anticipated during 2021.

Exhibit 7: Surufatinib clinical programme

 Source: HUTCHMED Note: Blue = China, Pink = Global, * = in planning

Intrinsic and acquired resistance to VEGF inhibition is seen in many solid tumours, which is reflected in the broadening of surufatinib’s development to several difficult-to-treat cancers. Surufatinib’s profile means it is being evaluated as a multi-functional monotherapy and in combination with various PD-1 checkpoint inhibitors; seven China and global clinical trials are known to be underway, with four of these being China PD-1 combination studies (Exhibit 7). The first global PD-1 combination study initiated recently. Surufatinib is most advanced as monotherapy in NET, both globally and in China, with a form of biliary tract cancer likely to be the second indication.

Addressing unmet needs across the NET spectrum

NET (neuroendocrine tumours) is an umbrella term for tumours that develop from cells in the endocrine and nervous systems, most commonly in the digestive and respiratory tracts. It can be split into two distinct populations based on molecular genetics and treatment options. Non-(extra)-pancreatic NET (epNET) is the more common representing c 90% of NETs; the remainder are pancreatic NET (pNET). epNET is typically treated with somatostatin analogues (lancreotide, octreotide) which inhibit release of various hormones, or mTOR inhibitor Afinitor (everolimus, Novartis. The global standard of care for advanced (unresectable or metastatic) pNET is targeted therapy: approved drugs include Sutent (sunitinib, Pfizer), a multi-kinase TKI (targeting VEGFR, PDGR, c-kit, Flt3, Ret), and Afinitor.

Surufatinib was approved in China for non-pancreatic NET (epNET) in December 2020, and launched in January 2021, as Sulanda, by HUTCHMED’s dedicated China Oncology commercial team. In its first two months on the market, Sulanda generated sales of $4.9m (January-February 2021). The epNET approval was based on impressive results from the SANET-ep pivotal study. The equivalent NDA submission for pancreatic NET (pNET) was made in September 2020 based on the sister SANET-p study, which was terminated early due to efficacy in January 2020. The strength of the data means Sulanda will be positioned as an effective treatment option across all NET irrespective of tumour origin (Exhibit 8). The clinical need suggests inclusion in the NRDL (National Reimbursement Drug List) could happen as soon as 2022. As context, everolimus and sunitinib, which are used extensively in NET, are both listed on the NRDL priced at $1,320/month and $2,000/month respectively.

Exhibit 8: Evidence landscape for G1/2 advanced NET by site

 Source: HUTCHMED, Yao ESMO 2019

The results of the two pivotal Phase III trials were published in The Lancet Oncology, see SANET-ep (non-pancreatic) and SANET-p (pancreatic).

SANET-ep enrolled 198 patients in 24 hospitals across China, with 129 patients receiving 300mg surufatinib daily and 69 on placebo. Median PFS was 9.2 months (95% CI 7.4–11.1) in the surufatinib group vs 3.8 months (3.7–5.7) for placebo. The study was terminated early as it met the predefined criteria for early discontinuation at the interim analysis, as recommended by the IDMC (independent data monitoring committee). Treatment-related serious adverse events were reported in 32 (25%) of 129 patients in the surufatinib group and nine (13%) of 68 patients in the placebo group.

SANET-p studied 172 patients in 21 hospitals across China, 113 of whom received 300mg surufatinib daily and the remainder placebo. Median PFS was 10.9 months (7.5–13.8) for surufatinib vs 3.7 months (2.8–5.6) for placebo. The trial also met the early stopping criteria at the interim analysis and was terminated on recommendation from the IDMC. Treatment-related serious adverse events were reported in 25 (22%) patients in the surufatinib group and four (7%) patients in the placebo group.

The potential China NET opportunity could be significant; Frost & Sullivan estimates the prevalence is c 300k patients vs c 141k in the US and 139k in Europe. The epNET and pNET splits are c 240k and 60k patients respectively, with 127k and 14k patients for the US and 125k and 14k for Europe. Annual incidence in China is higher, 67.6k against 19.0k and 18.7k for the US and Europe.

Several features of the NET market could enlarge the commercial opportunity further. Unlike most cancers, the high prevalence to incidence ratio reflects that NETs are typically slow growing compared with other tumour types. This means that NETs are associated with a relatively long duration of survival, and so NET patients are typically on drug therapy for longer and often require multiple treatment options. Currently, these patients have limited treatment options; hence an effective and almost universal treatment option should have good uptake. In addition, diagnostic improvements coupled with more treatment options could increase the recognition of NETs and raising diagnosis rates and therefore current incidence.

Global registrations are also progressing smoothly. In the US surufatinib was granted Fast Track Designations for pNET and epNET in April 2020, having received Orphan Drug Designation in November 2019. A rolling NDA submission was started in December 2020 based on the SANET-ep and SANET-p data, coupled with the relevant results from the 105 patient Phase Ib US bridging study (that included 16 pNet and 16 epNET patients) to demonstrate no meaningful race impacts and confirm similar PK profiles and toxicities. A MAA submission to the European Medicines Agency (EMA) will follow during 2021.

In biliary cancer, a Phase IIb/III study is underway in China exploring surufatinib vs capecitabine in advanced biliary tract cancer that has progressed despite first-line chemotherapy. An interim analysis for futility is expected in 2021.

Surufatinib/PD-1 combinations progressing

Surufatinib is differentiated from other VEGFR TKIs as a novel selective oral small molecule TKI with an angio-immuno kinase profile. In addition to VEGFR, surufatinib targets FGFR and CSF-1R, and has a mechanism of action which involves: inhibition of angiogenesis and tumour growth; activation of T-cells through VEGFR/FGFR; and prevention of production of tumour-associated macrophages (TAM or white blood cells), which play a role in tumour cell immune evasion, via CSF-1R inhibition.

Surufatinib’s ability to inhibit TAM production amplifies the PD-1 induced immune response, and the potential for combining these treatment modalities is being evaluated in Phase I and Phase II trials as part of HUTCHMED’s PD-1 monoclonal antibody collaborations. These include global partnerships with Shanghai Junshi for Tuoyi (toripalimab), which incidentally is to be marketed by AstraZeneca in China, Innovent Biologics for Tyvvt (sintilimab), and Beigene for tislelizumab.

The combination of surufatinib with a PD-1 inhibitor has the potential to unlock wider opportunities in multiple cancer indications, provided that clinical data supports the tolerability and effectiveness of the combination(s). Simultaneous targeting of multiple cell types and signalling pathways in the tumour microenvironment may elicit a potential synergistic anti-tumour effect. Since signing its first PD-1 collaborations in November 2018, HUTCHMED and its partners have made steady progress towards and into the clinic with the first combinations.

The Shanghai Junshi global collaboration is the most clinically advanced. The China 30 patient Phase I dose-finding study of surufatinib and toripalimab (Tuoyi) completed in 2019. Three dose levels of surufatinib (200, 300 and 250mg, the Phase II dose) were evaluated with toripalimab 240 mg until MTD (maximum tolerated dose) or recommended phase II dose (RP2D) was reached. The results were presented at AACR 2020 and showed good tolerability and encouraging efficacy (one complete response, six partial responses, and 12 stable disease) in a difficult to treat patient population. A 250-patient Phase II combination trial in advanced solid tumours was initiated in January 2020; the data from this is intended to enable selection of two or three indications for registration intent studies planned to start in H221.

Further China and Global combination studies of surufatinib with other PD-1 inhibitors are being progressed. All the PD-1 inhibitors being trialled as combination therapies are already approved in China. A US/Europe Phase Ib/II with tislelizumab (BeiGene, and recently licensed by Novartis) in advanced or metastatic solid tumours is currently underway. This two part trial involves an initial dose finding stage that will guide a larger open-label multi-cohort design. The second stage will evaluate the activity of surufatinib in combination with tislelizumab in specific solid tumours, including neuroendocrine tumours, colorectal cancer, small cell lung cancer, gastric cancer, and soft tissue sarcoma.

We currently value surufatinib at $13.75/ADS ($2.0bn) or 212p/share (£1.54bn).

Fruquintinib: HUTCHMED’s first approved product

Elunate (fruquintinib) approval was a milestone for HUTCHMED as its first product to be approved. China approval in September 2018, for third-line colorectal cancer (3L CRC), also marked the first time a domestically discovered and developed innovative oncology compound made it through to market. Fruquintinib is a highly selective and potent oral inhibitor of VEGFR 1, 2, and 3 that is targeted as being best-in-class. It was designed to effectively block angiogenesis but, importantly, also to minimise off-target toxicities, improve tolerability, and provide more consistent target coverage. The cleaner profile makes it particularly suitable for use in combination with other therapies, notably checkpoint inhibitors (such as PD-1 inhibitors).

Approval was based on the positive results from the pivotal 416-pt Phase III FRESCO trial in 3L CRC. Full FRESCO data were published in the Journal of the American Medical Association in June 2018 (Li et al, JAMA 2018), the first time it had featured a China oncology trial in a full paper. 3L mCRC is the first of multiple oncology indications pursued for fruquintinib in China, which could collectively represent a $500m-$1bn potential China sales opportunity. Fruquintinib’s second indication, 2L gastric cancer, has the potential to be highly lucrative given the limited treatment options and high incidence in China. A pivotal Phase III study (FRUTIGA) of fruquintinib in combination with paclitaxel in 2L gastric cancer is underway and was recommended to continue by two interim analysis, the most recent in June 2020. FRUTIGA has been enlarged to 700 patients with enrolment targeted to complete around end 2021; a positive outcome is expected to lead to approval.

Exhibit 9: Fruquintinib clinical programme

 Source: HUTCHMED Note: Blue = China; Pink = Global; * = in planning

Other earlier-stage studies in China include Phase I and II trials in combination with PD-1 inhibitors, with plans for the first pivotal trials to begin in H221. The most advanced combination is fruquintinib plus sintilimab (Tyvyt, Innovent Biologics) which is in a 35-pt Phase II in CRC and a 120-pt Phase Ib/II trial in four solid tumour indications, which will be narrowed down to one or two for registration intent studies. Two 15-pt China Phase Ib trials in CRC and NSCLC of the fruquintinib with geptanolimab (Genor Biopharma) combination are also ongoing. Global exploratory PD-1 combination studies with tislelizumab (Beigene, and recently licensed by Novartis) are planned, with the first being a Phase Ib/II trial in advanced triple negative breast cancer.

Global monotherapy studies include the global FRESCO-2 Phase III registration trial in refractory (3L/4L) mCRC, where patients have progressed on or were intolerant to chemotherapy, biologics, and Lonsurf or Stivarga (regorafenib, Bayer). The study will enrol c 680 patients across 130 clinical sites in ten countries. The target group is those who have failed standard 1L and 2L therapies that include cytotoxic drugs such as 5-fluorouracil, oxaliplatin, and irinotecan; anti-VEGF therapy; and, if RAS wild type, anti-EGFR therapy. Typically, 3L therapy is either TAS-102 or regorafenib, or a reuse of prior therapies. The study initiated enrolment in September 2020 and is expected to complete, COVID-permitting, in late-2021. The FDA has granted Fast Track designation and a potentially rolling NDA can be submitted supported by data from the China Phase III FRESCO trial, the ongoing Global Phase III FRESCO-2 study and the US Phase 1b bridging study which included c 80 3L/3L+ CRC patients. The EMA and Japanese Pharmaceuticals and Medical Devices Agency (PMDA) have reviewed and agreed the same protocols. Positive study outcomes could result in fruquintinib launch in its first global market by 2023.

NRDL listing & HUTCHMED marketing boost sales

Elunate was launched in November 2018 by HUTCHMED’s partner Eli Lilly (which licensed China rights in 2013). The terms of the deal were revised in in December 2018 and again in July 2020 such that, although Lilly retains commercialisation rights, HUTCHMED took on all medical detailing, promotion, and local/ regional marketing activities from October 1, 2020. In return, Lilly pays, subject to meeting agreed sales targets, a total of 70-80% of Elunate sales in royalties, manufacturing costs, and service payments. These agreements mean that HUTCHMED has greater control over R&D plans, notably in solid tumours beyond the three initial indications (CRC, NSCLC, and gastric cancer), and will retain more of the commercial rewards of future successes.

The China VEGFR market is large and crowded, with seven known competing products across various cancer indications. Fruquintinib’s inclusion on the NRDL (National Reimbursement Drug List) entailed a sizeable price cut, around a 34% net price discount vs the PAP (Patient Access Programme) established at launch; however, as the NRDL reimburses 50% to 70% of patient costs, the discount is typically more than offset by greater penetration and higher volumes. Elunate was added to the NRDL in January 2020, with the patient cost falling to a competitive c $350 per treatment cycle if medical insurance cover is in place and $1,180 if there is no medical insurance. Bayer’s Stivarga (regorafenib) is a useful comparator: it was added to the NRDL in October 2018, with equivalent pricing of c $750 and $2,450 (renegotiated to $670 and $2,220 in December 2020).

Elunate’e positioning is not simply one of price; the clinical efficacy and safety profile means that it is well placed to compete on these key factors too. Using Stivarga as an example, and the studies from their respective labels, Elunate offers comparable or better efficacy across a range of measures such as PFS, OS, and ORR. More relevantly, the clean toxicity profile is a major differentiator as the tight focus on the on-target kinases (VEGFR 1, 2, & 3) results in materially lower off-target toxicities than competing products. Additionally, Stivarga carries a black box warning for liver toxicity; a cause for concern as 65-75% of Chinese 3L CRC patients also have liver metastases. This clinical and safety profile makes Elunate highly applicable to monotherapy indications and, importantly, in future combination treatment regimens. The obvious combinations are with a checkpoint inhibitor, which could achieve improved therapeutic outcomes due to potentially synergistic mechanisms of action, ie simultaneously inhibiting tumour angiogenesis and tumour cell signalling or immune evasion. Hence, the evaluation of PD-1/fruquintinib combinations is a focus of HUTCHMED’s early-stage development plans as described earlier.

Exhibit 10: Elunate commercial update

Source: HUTCHMED    Note: [3] total sales to third parties as provided by Lilly; [4] manufacturing fees, commercial service fees and royalties paid by Lilly to HUTCHMED and sales to other third parties invoiced by HUTCHMED; * = Unaudited.

The commercial opportunity in China is attractive. HUTCHMED estimates annual incidence of 3L mCRC at c 57,000 treated patients (c 15% of the 380k annual incidence of mCRC), and at launch had assumed potential China peak sales of Elunate in this indication of $110-160m (assuming 20-25% penetration). We model Elunate (China 3L mCRC) peak sales of $142m pa. In FY20, HUTCHMED estimates that Elunate achieved 15% penetration. FY20 revenues from Elunate were $20.0m on $33.7m of in-market sales; the revenues consolidated by HUTCHMED were comprised of $11.3m manufacturing, $4.9m of royalties, and $3.7m in service fees; although not strictly comparable the FY19 revenues were $10.8m ($8.1m from manufacturing and $2.7m of royalties on $17.6m in end-user sales). We highlight that since the HUTCHMED oncology team has been involved with marketing, there has been a significant uptick in both in-market sales and consolidated revenues (Exhibit 8). For Q420, in market sales were $10.2m (with HUTCHMED recognising revenue of $7.2m), with this growing to $14.3m and $10.2m for the first two months of 2021.

Elunate contributes $11.40/ADS ($1.66bn) or 175p/share (£1.28bn) to our HUTCHMED valuation.

Second wave of innovation nears proof of concept

HUTCHMED’s first wave of products are approved or are in the final stages of development; hence the focus shifts firstly onto broadening their use into additional oncology indications and then onto the next wave of products that will sustain the building momentum. At present, the second wave consists of four development programmes (Exhibit 9): HMPL-689 (a PI3Kδ inhibitor) and HMPL-523 (a Syk inhibitor) are in China and global proof-of-concept trials for indolent NHL (Non-Hodgkin’s Lymphoma) and B-cell malignancies; HMPL-453 (a pan-FGFR, fibroblast growth factor receptor) is in China Phase II studies for malignant mesothelioma and intrahepatic cholangiocarcinoma; and HMPL-306 (a dual inhibitor of IDH 1 & 2, isocitrate dehydrogenase) is in Phase I in China for haematological malignancies.

Exhibit 11: Next wave of innovation clinical programmes

Source: HUTCHMED   Note: Blue = China, Pink = Global, * = in planning

HMPL-689: designed as a top PI3K

HMPL-689 is a novel oral PI3Kδ inhibitor, designed to be best-in-class (first-in-class in China) due to improved isoform selectivity, potency, and pharmacokinetic activity. PI3Kδ is one of four different isoforms of PI3K (phosphoinositide-3-kinase), an enzyme associated with allergy, inflammation, and cancer. Activating mutations are commonly found in solid tumours, with the PI3K pathway also implicated in development of drug resistance. Each isoform is differentially expressed in various tissues (which in part defines their toxicity profiles), with PI3Kδ preferentially expressed on leukocytes, and playing a role in Treg function and peripheral T-helper cell differentiation. HMPL-689 specifically does not inhibit PI3Kγ to minimize the risk of serious infection caused by immune suppression.

These characteristics are key to global plans to develop HMPL-689 as part of novel combinations, with the potential to tackle treatment resistant tumours. The efficacy profile appears competitive, albeit with data at ASH 2020 indicating superior tolerability vs other drugs in the class; this is an important factor when oncology treatments are moving towards greater combination therapies. Zydelig (idelalisib, Gilead) was the first PI3Kδ inhibitor, approved in 2014, and has proven effective in treating B-cell malignancies. However, it is associated with liver toxicity; most PI3Kδ inhibitors in development also show frequent and severe adverse events, with most of those approved carrying black box warnings.

The China trials in multiple tumours have established the preferred target indications within NHL, with interim data expected in H221, and Phase II/III registration trials planned to start by end-2021. A US and Europe Phase I trial is enrolling, and multiple dose cohorts have completed successfully. Discussions with the FDA are expected to start in H221, with the intention to initiate registration studies in indolent NHL as soon as possible. If the tolerability profile is endorsed in these later, larger population, trials then HMPL-689 would carve a sizeable place in what is an increasingly crowded segment.

HMPL-523: targeting Syk in haematology-oncology

HMPL-523 is a potential best-in-class oral small-molecule Syk-inhibitor. Syk (spleen tyrosine kinase) is a non-receptor kinase that plays a key role in B-cell signalling. HMPL-523 was designed to have high tissue distribution but selectively avoid the severe off-target toxicities (diarrhoea, hypertension) seen with first-generation Syk-inhibitors, and have a far better side-effect profile compared to second-generation programmes, such as entospletinib (Kronos). Although Syk is a clinically validated target in rheumatoid arthritis (RA), the near-term development focus is in B-cell malignancies and orphan immunological conditions such as ITP (idiopathic thrombocytopenic purpura), which require smaller clinical programmes. In China, this will include multiple NHLs, that may have fast track designation potential. Global development will centre on indolent NHL.

Two Phase I/Ib proof-of-concept trials inhaematological cancers are ongoing in Australia and China: the Phase I dose escalation (n=60) is complete with the recommended Phase II dose (600mg once daily) identified, and a sizeable multi-centre (c 30 sites) Phase Ib dose expansion enrolling (n=25 Australia; n=190 China). This data will guide the China registration trial strategy, likely to be focused on ITP (an acquired autoimmune disease), expected to start in H221. In the global programme, a US & Europe Phase I/Ib study (13 sites) has completed patient enrolment.

HMPL-306: aiming to be a best-in-class IDH1/2 inhibitor

HMPL-306 is a highly selective small molecule inhibitor of IDH1/2 (isocitrate dehydrogenase) that is designed to address resistance to the currently marketed IDH inhibitors. IDH has become of interest in a number of poorly treated cancers such as acute myeloid leukaemia (AML), myelodysplastic syndromes (MDS), and gliomas. Two drugs are approved for IDH-mutant AML: the IDH1 inhibitor ivosidenib (Tibsovo, Agios/Servier) and the IDH2 inhibitor enasidenib (Idhifa, Celgene/Agios). However, primary or acquired resistance has been noted as a rising problem. HMPL-306 initiated a Phase I dose escalation study in China during July 2020, in patients with relapsed or refractory haematological malignancies with an IDH1 and/or IDH2 mutation. This study is targeting establishment of the recommended Phase II dose around end-2021. An equivalent study is planned to start in the US in H121. Another US Phase I study in solid tumours with an IDH1 and/or IDH2 mutation has started.

HMPL-453: aiming to be the best FGFR 1,2,&3 inhibitor

HMPL-453 is a potentially best-in-class pan-FGFR (fibroblast growth factor receptor) inhibitor targeting FGFR1,2,&3. A China Phase II study is underway in patients with advanced IHCC (intrahepatic cholangiocarcinoma) with FGFR2 fusion that had failed at least one line of systemic therapy. IHCC patients are said to face a highly dismal prognosis, due to late-stage diagnosis, the relative chemoresistance of the disease, and a limited range of established therapeutics. Pemigatinib (Pemazyre, Incyte) was approved in April 2020 for the treatment of advanced IHCC; although it shows promising efficacy, it is associated with increasing primary and secondary resistance.

Further programmes emerging from discovery

HUTCHMED’s productive discovery engine continues to deliver further drug candidates. The tenth in-house discovered asset, HMPL-295 (a highly selective ERK 1/2, extracellular signal-regulated kinase, inhibitor) is due to begin a China Phase I trial in solid tumours in mid-2021. ERK inhibition has the potential to overcome or avoid intrinsic or acquired resistance from upstream mechanisms, and HMPL-295 is, according to management, the first of several assets targeting the MAPK (RAS-RAS-MEK-ERK) pathway.

Three new oncology candidates, with currently undisclosed mechanisms of action, are in IND-enabling toxicology studies and are targeting US/China IND clearance during 2021. Two are small molecules: HMPL-653 (directed at solid tumours) and HMPL-760 (haematological malignancies). Notably, the third, HMPL-A83 (solid tumours and haematological malignancies) is a monoclonal antibody and as such is HUTCHMED’s first non-small molecule drug candidate.
HUTCHMED’s in-house clinical pipeline is currently concentrated on oncology indications; however, TKIs also have utility in multiple immunological diseases. This is a distinct market from oncology for a number of reasons, including the fact that chronic therapy is the norm, and given this long-term approach, it is imperative to establish a clean safety and tolerability profile in large clinical studies (often with many 100s if not 1000s of patients). Four novel preclinical drug candidates for immunological disease have been identified through HUTCHMED’s discovery work, and these are the foundation of a new strategic collaboration with Inmagene Biopharmaceuticals.

Under the Inmagene deal, signed in January 2021, HUTCHMED has granted exclusive options to four separate drug candidates solely for the treatment of immunological disease. Both parties will collaborate to progress the assets to IND-stage, with funding provided by Inmagene. On option exercise, Inmagene will have the global development, manufacturing, and commercialisation right to a particular programme, with HUTCHMED retaining first right to co-commercialisation in China. Deal economics include aggregate development milestones of up to $95m, with commercial milestones of up to $135m, and up to double-digit royalties.

The success of the first wave of products is set to demonstrate, in a tangible financial manner, the commercial viability of HUTCHMED’s R&D platform; the progress of the second wave shows the outputs from this discovery engine are consistent and reproducible; whilst the third wave will, in our view, reveal that it can produce programmes outside of oncology and beyond small molecules.

Corporate structure reflects the global ambitions

Hutchison China MediTech’s name change to HUTCHMED aims to unify its group and R&D operations under a cohesive corporate identity that better reflects its increasingly global focus. The China operations are set to be a major value driver in the near- and medium-term, however the fleshing out of operations in Europe and the US underscores the product portfolio’s global clinical appeal. It is this that will propel, over the medium- and longer-term, HUTCHMED to become a multi-national business with a strong commercial presence in China.

HUTCHMED is a dual-listed global science-focused biopharmaceutical company, founded in 2000 by Hutchison Whampoa (a wholly owned subsidiary of Hong Kong-listed multinational conglomerate, CK Hutchison Holdings). In May 2006, HUTCHMED went public with a £40m (gross) AIM flotation, which was followed in March 2016 by a $110m ($96m net) NASDAQ IPO. Subsequent NASDAQ offerings raised $301m ($293m net) in October 2017, and $118m ($110m net) in January 2020. Two PIPE offerings of $100m, with General Atlantic in June 2020 and CPPIB in November 2020, strengthened the balance sheet further. CK Hutchison remains the largest shareholder but has, in recent years, reduced its holding to under 46% (previously c 60%) following its secondary offerings (June and September 2019) and non-participation in the latest capital raises.

Oncology/Immunology is the future growth driver

Management has restructured the organisation to reflect the growing financial contribution the first wave of newly launched products will make. The main Oncology/Immunology business (Hutchison MediPharma, previously encompassing China Oncology and Global Innovation) consists of discovery, development, manufacturing, and commercialisation of novel therapeutics. This has discovery and development facilities and the growing commercial operations in Shanghai (China), clinical development and regulatory affairs in New Jersey (USA), sizeable GMP-certified manufacturing in Suzhou (China), and regional representation in Beijing, Australia, and several European locations. There are now over 600 scientists and staff in the discovery and development side, with headcount over 420 in oncology commercialisation.

The launch of Elunate, for 3L mCRC, in China in November 2018 marked the first marketing of any in-house developed product by HUTCHMED. Initial marketing was undertaken by China partner Eli Lilly; however, understandably given Eli Lilly’s small oncology presence in China, the marketing efforts behind Elunate were relatively modest, and it generated in-market sales of $17.8m in FY19 ($10.8m was booked as revenue by HUTCHMED). In July 2020, the terms of the collaboration were revised, with HUTCHMED becoming responsible for the sales and marketing from 1 October, through its own oncology-focused salesforce. The impact has been rapid; in-market sales in Q120-Q320 were $23.5m under Lilly, while HUTCHMED has generated in-market sales of $10.5m in Q420, and $14.3m in January and February 2021. For these periods, HUTCHMED booked revenues of $12.8m, $7.2m, and $10.2m respectively.

The growth in Elunate sales stem in part from the far greater geographic reach, c 2,380 hospitals in c 325 cities are covered, but also reflect the greater efforts at employing the positive clinical data to gain hospital listings and encourage physician adoption. This team is also responsible for Sulanda, which was approved for epNET in December 2020 and was being prescribed in 30 provinces a month later. It is hoped that Sulanda will be included on the NRDL during 2021. Approval of Sulanda’s second indication, pNET, is also anticipated this year. China approval of a third product, savolitinib, is also expected around mid-year (the NDA was accepted for review in May 2020 for MET ex14/del NSCLC), assuming a smooth regulatory pathway. Savolitinib will be launched and sold by partner AstraZeneca’s 2,000 strong commercial team. HUTCHMED plans to further expand its commercial team, to c 600 salespeople, by end-2021 and, potentially, to c 900 by 2023. The value of the commercial team’s contribution is highlighted by expectations they will generate FY21 revenues of $110m-$130m.

Global markets, notably US, Japan and Europe, are next

has directed a growing proportion of R&D spend towards US/EU and Japan trials as multiple assets transitioned into registration studies. The 60 strong global clinical and regulatory team in New Jersey is fully operational and is supported by the c 600-person scientific team in China. The progress of the three leading programmes in global registration trials means the focus will increasingly be on the commercial infrastructure required to retain as great a proportion of economic value as possible. The specific nature of the oncology indications these products target suggest that some markets, including the US, could be addressed with small, focussed sales teams. There is obvious commercial synergy from surufatinib and fruquintinib, as there is significant overlap in the target physicians for NET and CRC. However, we suspect that certain geographies, such as Japan, will likely be better served by partnering with appropriate local players. The likely structure of these commercial operations will, in our view, unfold as the market traction in China becomes more apparent.

Other Ventures played an essential strategic role

HUTCHMED’s current business also encompasses what are termed Other Ventures, which include: Hutchison Sinopharm, a 51% owned joint-venture (JV) with Sinopharm Group for Rx drug commercialisation; Shanghai Hutchison Pharmaceuticals (SHPL), a 50% owned JV with Shanghai Pharma for Rx drug manufacture and commercialisation; Hutchison BYS (HBYS), a 40% owned JV with Guangzhou Pharma that has a number of well-known OTC brands; and a smaller Consumer Healthcare unit that is mainly a JV with The Hain Celestial Group. Collectively these businesses employ around 4,800 people and sell directly into 320 cities across China. FY20 consolidated revenues were $197.8m (up 11%), with actual revenues of $673.9m (+7%) and attributable net income of $72.8m (up 75%). Net income included another one-time land compensation gain, of $28.8m.

Over the past 18 years, these Other Ventures businesses have contributed a total of $384m in net income, $73m as one-time property gains, that have help fund HUTCHMED’s R&D programmes. The land compensation gains are drawing to a close, with HBYS expected to receive c $43m from the Guangzhou government in 2021, with final payments of c $17m due once administrative processes are completed (HUTCHMED receives half of these payments). Based solely on recurring incomes and multiples of similar domestically quoted peers, and not attributing any form of intrinsic value, we value Other Ventures at c $0.8bn, exclusive of the recently announced HBYS divestment.

March 2021, HUTCHMED announced the divestment of its Hutchison BYS (HBYS) OTC joint venture to GL Mountrose Investment Two, which is controlled and managed by GL Capital Group, for $169m. HBYS is majority owned by Guangzhou Baiyunshan Pharmaceutical Holdings and has a range of well-known OTC products. The cash proceeds of $169m consist of a payment of $42m that is equivalent to the FY20 profit contribution and land compensation payments that had yet to be distributed, with the $127m balance reflecting the implied value of 40% of the underlying business (a 16.5x multiple on the $7.7m attributable FY20 net income). $15.9m will be payable immediately on signature of the transaction, with the remaining $151m due on completion, expected in mid-2021. HBYS was increasingly viewed as a non-core asset and, whilst the strategic logic is sound, the impact on our valuation model is minimal.

Sensitivities

As a fully integrated biopharmaceutical company, HUTCHMED is subject to the typical risks associated with drug R&D and commercialisation. These include failure or delay in clinical development or the regulatory process, patent litigation, partnering, financing, commercial implementation/risks (eg competition), and pricing and reimbursement decisions. More specifically, the major near-term risks relate to outcomes of clinical trials and regulatory decisions for key late-stage assets (surufatinib, savolitinib, and fruquintinib) in global markets and their commercial execution in China.

Overall, HUTCHMED’s TKI pipeline breadth helps to technically de-risk the company; it covers a variety of mechanisms of action with potential across a range of cancer indications. Its best-in-class assets have been de-risked as the mechanisms of action are known, while first-in-class TKIs – with an expected clean safety profile and potential for use in combination settings – should prove to be commercially attractive (both to potential partners and payors).
HUTCHMED’s sustained commercial success in China is due to the established infrastructure, which has significant national and regional expertise. Management is expanding its China commercial footprint through which it markets the products emerging from its R&D pipeline. Increased competition for quality staff from existing domestic and multinational players, as well as emerging Chinese companies, may hinder the scale-up required.

Political/economic concerns are inevitable with such a large and influential market as China, and as HUTCHMED’s operations become increasingly global. Regulatory risks are relevant as HUTCHMED’s activities are subject to extensive oversight from a variety of international, national, and regional bodies. In this context, the strong domestic management helps mitigate many of these sensitivities with a more nuanced approach, supplemented by ex-China expertise in the growing US operations. However, we highlight that potential regulatory interactions with, and decisions by, the China NMPA, FDA, EMA, and Japan PMDA may be subject to delays as a result of the impact of the global COVID-19 pandemic.

HUTCHMED’s largest shareholder, CK Hutchison, has in recent years reduced its stake (from c 60% to c 46%) to enable the deconsolidation of HUTCHMED in its accounts, and has stated that it has no intention of further secondary offerings in the foreseeable future.

Valuation

value HUTCHMED using a sum-of-the-parts methodology, with an rNPV model for the development portfolio and early-stage marketed products and an earnings-based multiple for the established Other Ventures commercial platforms. We have updated our comprehensive model (see Exhibit 13) to reflect the most recent company guidance on clinical trial starts and read outs (and the ensuing impact on potential approval and launch timelines). Our HUTCHMED valuation is $6.27bn, equivalent to $43.10/ADS, or £4.83bn, equivalent to 663p/share. The Oncology & Immunology platform contributes $4.92bn ($33.78/ADS) or £3.78bn (520p/share), while Other Ventures adds $779m ($5.36/ADS) or £600m (82p/share). The balance is proforma net cash of $577m (FY20 + HBYS proceeds).

The Oncology & Immunology business, essentially the drug discovery and development operations, is a classic emerging biopharmaceutical play that we value with a DCF approach. We calculate a rNPV (risk-adjusted net present value) for each clinical programme, adjusting this with success probabilities that reflect the nature of the compound (eg novel or proven mechanism of action) and proposed indication (eg degree of expected competition, likely rate of adoption). We strive to employ conservative assumptions throughout, which will tend, collectively, to underestimate the inherent value. Intuitively it follows that later stage projects have a higher rNPV, with the step-change occurring on completion of Phase II proof-of-concept trials. The individual programmes (which explore the lead indications) are summed and netted off against costs of running the company and net cash/debt.

Exhibit 12: Relative contributions of HUTCHMED programmes to valuation

Source: Trinity Delta

The relative contributions of each drug asset to our valuation are shown in Exhibit 12 while the detailed components of our development portfolio valuation are presented in Exhibit 13. Looking at the elements of our rNPV valuation in more detail: fruquintinib ($11.40/ADS, 175p/share) has been overtaken as the largest contributor by surufatinib ($13.75/ADS, 212p/share), with savolitinib ($5.86/ADS, 90p/share) being the next most valuable clinical asset.

Exhibit 13: rNPV-based valuation of HUTCHMED

Source: Trinity Delta Note: * currently not HUTCHMED focus indications; ^ includes PD-1 combinations; pRCC = papillary renal cell carcinoma; ccRCC = clear cell renal cell carcinoma; NSCLC = non-small cell lung cancer; CRC = colorectal cancer; NET = neuroendocrine tumours; 12.5% discount rate for development stage products and 10% for commercial products; taxation at 20%; 1.28 USD:GBP FX rate.

Other Ventures consists of wholly owned and JV operations in China that generate material revenues and profits so examining earnings-based metrics is appropriate. We highlight that as the sales of Shanghai Hutchison Pharmaceuticals (and Hutchison BYS) are not consolidated any simple revenue-based ratios will significantly undervalue these operations. We have applied revenue-based multiples to the wholly owned assets and the JVs as a reality check and have found that they do support the earnings-based results.

To arrive at the earnings multiples, we examine 42 Chinese listed pharmaceutical companies, with market capitalisations ranging from c $300m to c $4bn. All are revenue generating (with sales arising mainly within China) and post recurring profits (loss-making companies are excluded). We ignore companies where the multiples appear to be distorted by non-recurring events or are outliers. We also exclude companies where the multiples appear too high, suggesting an element of speculation within the share prices rather than simply reflecting the operating businesses. While there is an element of subjectivity in this peer group selection, the logic driving the decisions is to maintain our cautious approach throughout.

The result is a valuation of $779m for Other Ventures: which equates to a multiple of 18.6x on FY21e earnings of $41.9m (removing the HBYS contribution to reflect its divestment). The range of valuations from the various scenarios examined is quite tight, spanning from $698m to $864m.

We emphasise that any number of incremental improvements on our base case scenarios could result in sizeable uplifts in our valuation. We are also conservative regarding a couple of areas where we expect transparency to increase in the near-term, for example with respect to development strategy clarification (lead indications, clinical trial timelines) for the second wave assets. Similarly, we presently do not ascribe a valuation for the emerging discovery assets, the preclinical Inmagene immunology partnership, nor the discovery platform, which remain as upside to our valuation.

Equally importantly, the visibility for the outlook of late-stage clinical programmes is increasing, with a rich news flow over the coming years. This suggests that there is significant upside potential, with multiple catalysts expected in the next 12 to 24 months. We intend to review our model regularly to reflect clinical, regulatory, and commercial progress.

Financials

Following the commercialisation of the first of the wave of new oncology products, Elunate (fruquinitinib), Sulanda (surufatinib), and shortly savolitinib, HUTCHMED’s reporting format has changed. From FY20, with restatement of FY19, there are two reporting segments: Oncology/Immunology will cover all the activities relating to the new products including research and development, manufacture, sales, and marketing; and Other Ventures, which includes all other activities, including both the consolidated JVs (eg Hutchison Sinopharm) and non-consolidated JVs (eg the HBYS OTC business).

FY20 results show that product and clinical momentum is being maintained. Consolidated revenues grew 11.3% to $228m (FY19: $204.9m) with Oncology/ Immunology revenues contributing $30.2m (FY19: $26.8m) and Other Ventures $197.8m (+11.1% on $178.1m). Cost of Sales rose 11.7% to $188.5m (FY19: $160.2m) and SG&A expenses by 15.8% to $61.3m (FY19: $52.9m). The 26.5% increase in R&D spend ($174.8m from $138.2m) highlights the continuing clinical progress of the ten oncology assets, six of which are in global development. Other Items were $70.9m (FY19: $40.4m), due to the one-time land compensation gain of $28.8m. HUTCHMED delivered a net loss for the year of $125.7m (FY19: net loss of $106.0m), slightly better than our $132.9m forecast.

Management guidance for FY21 is focused on consolidated Oncology/ Immunology revenues: the expectation is that these will grow from $30.2m in FY20 to between $110m to $130m. This significant increase will be driven by continued acceleration in Elunate growth, a similarly growing Sulanda (during its first year on the market), and a potential China launch of savolitinib coupled with and a $25m first sales milestone.

Our FY21 forecast sees Oncology/Immunology revenues of $121.2m, with Other Ventures contributing $207.6m to give group total revenues of $328.8m. Continued investment in advancing the pipeline, especially with the larger, and more expensive, global registration trials, sees our estimated R&D spend rise to $342.5m. Building out the China and global (notably in the US) commercial infrastructure, sees sales costs rise to $28.3m and G&A to $78.1m. We note that guidance also assumes no material impact from the COVID-19 pandemic on progressing trials. Changes to our key estimates are shown in Exhibit 14.

Exhibit 14: Summary of changes to estimates

Source: Trinity Delta

At end-December 2020, HUTCHMED had cash resources of $435m, which consisted of cash, cash equivalents, and short-term investments. There was an additional $69m of unutilised bank facilities (with $27m in bank borrowings) and the non-consolidated JVs (notably Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan) held a further $89m in available cash resources. During the year HUTCHMED raised $118m through the NASDAQ follow-on offering in January 2020, with further equity funding through PIPEs of $100m each with General Atlantic (July 2020) and CPPIB (November 2020). We note that General Atlantic also holds warrants to purchase an additional $100m of ADS, priced at $30.00 per ADS, before end-FY21.

Management is monitoring market conditions with a view to consider listings on other stock exchanges, with Hong Kong and Shanghai the obvious candidates. On the corporate front, the rapid progress in establishing a wholly owned China commercial platform in prescription pharmaceuticals has left a few of the earlier JVs decidedly non-core. HBYS, the well-regarded OTC business, is in the process of being divested; the transaction is expected to close in mid-2021 with HUTCHMED set to receive $169m in cash proceeds ($127m in connection with its shareholding, c $42m relating to land compensation distributions). We suspect that it will be a matter of timing as to when other non-core assets will be divested.

Given the rising visibility of the commercial operations, coupled with the acknowledged pipeline, we feel HUTCHMED should have a number of funding routes available to support the ongoing progress of its burgeoning pipeline and the planned commercial expansion. Further equity raises are an obvious avenue given the recent track record of successful PIPEs as well as considerations for an Asian lPO. There is also the potential prospect of further non-core asset disposals (one or more of the Other Ventures businesses). Sizeable debt financing, at attractive rates, is also an option not generally available to similar sized biopharmaceutical companies as HUTCHMED would benefit from the backing, both explicit and implicit, from CK Hutchison. Until there is further clarity on funding source, we illustrate our assessment of HUTCHMED’s financing need as short term-debt ($250m in FY21).

Exhibit 15: Summary of financials

Source: Company, Trinity Delta  Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments, Adjusted EBITDA includes equity in earnings of equity investees. *2022E cash figure includes assumed equity raise of $250m (shown as short-term debt above)

Company information

Contact details

Level 18, The Metropolis Tower,
10 Metropolis Drive,
Hung Hom, Kowloon,
Hong Kong
Tel: +852 2121 8200

www.hutch-med.com

Top shareholdings

Source: Hutchison China MediTech Note: *Wholly owned subsidiary of CK Hutchison Holdings