Chi-Med: a wealth of opportunity

2018 marked several important achievements for Hutchison China MediTech (Chi-Med), and 2019 will be another critical year for the company with a rich vein of news flow (Exhibit 1). Several clinical studies are due to produce both interim and mature results, and various new trials will initiate, including global proof of concept studies for Syk inhibitor HMPL-523 and PI3Kδ inhibitor HMPL-689. However, the focus for investors will largely be on Chi-Med’s two most valuable assets – fruquintinib (Elunate) and savolitinib – and on the burgeoning US infrastructure and Global Innovation pipeline. We continue to value Chi-Med at $4.5bn ($33.49/ADS) or £3.4bn (£51.52/share) but expect to revisit our assumptions as clinical, regulatory, and commercial catalysts unlock further value.

Exhibit 1: Key near-term Hutchison China MediTech newsflow

Source: Trinity Delta, Hutchison China MediTech

Fruquintinib: early commercial traction

Elunate (fruquintinib) was the first domestically discovered and developed innovative oncology compound approved in China. Following launch in 3L mCRC last November, Elunate is showing solid early signs of clinical acceptance. In the first five weeks on the market, it generated revenue of $3.6m for Chi-Med, broken down as $3.3m from product purchases (manufacturing) and royalties of $0.3m (15% of c$2m in end-user sales) from partner EIi Lilly. Management also confirmed that by end-January (ie the first nine weeks on market), over 1,000 patients had received Elunate therapy.

Elunate is currently an out-of-pocket drug, priced at RMB 21,960 per 4-week cycle (equivalent to US$3,300), although a domestic Patient Access Programme (PAP) essentially limits the pateint’s cost of treatment to a maximum of three cycles. The PAP is designed to ensure broad availability while reimbursement discussions are ongoing.

Eli Lilly and Chi-Med have focused on ensuring patient access to increase penetration into the 3L mCRC setting, and drive sales through volume rather than solely price. Negotiations to secure National Drug Reimbursement List (NDRL) inclusion in a potential 2019 update will be pursued. We believe there is strong potential for Elunate’s future inclusion on the NDRL given the precedent set by the listing of domestically developed drugs such as apatinib (in gastric cancer) and anlotinib (in NSCLC).

On the development front, an interim analysis for futility for the Phase III FRUTIGA trial in 2L gastric cancer is imminent, and PD-1/PD-L1 combination studies are planned as part of the first wave of life cycle indications (LCIs). Chi-Med’s pursuit of LCI development is facilitated by the amendment to the Eli Lilly collaboration announced in December. This amendment provides Chi-Med with greater control over China R&D plans (including LCIs) in exchange for assuming R&D funding. Amended terms are shown in Exhibit 2.

Exhibit 2: Chi-Med/Eli Lilly fruquintinib deal terms – 2013 vs 2018

Source: Hutchison China MediTech   Note: 1 = Per LCI in China, up to 3 LCIs; 2 = Based on total Elunate sales in China, triggered by first LCI launch; 3 = Not expected before 2021 as it will be triggered by China launch of Eli Lilly’s anti-VEGF mAb Cyramza (ramucirumab).

Fruquintinib is a core asset in both China Oncology and Global Innovation. The deal amendment expands the potential Elunate market opportunity in China, which coupled to potential co-promotion rights (from 2021+), significantly improves Chi-Med’s share of deal economics. It also leverages Chi-Med’s commercial acumen and provides a cornerstone product for the nascent Oncology Commercial organisation (currently c30-strong but expanding to 200 by end-2021). Fruquintinib is also one of five Global Innovation clinical assets, which, excepting savolitinib (partnered with AstraZeneca), will be sold through the global marketing organisation.

Elunate is currently Chi-Med’s most valuable China asset, contributing $8.51/ADS ($1,132m) or £13.09/share (£871m) to our Chi-Med valuation.

Savolitinib: clinical data to determine direction

Savolitinib development has been prioritised in non-small cell lung cancer (NSCLC) by Chi-Med and partner AstraZeneca. Data from two key NSCLC trials will be presented at AACR. These trials are critical in determining the potential for accelerated launch in China (as monotherapy in 1L MET exon 14m/del NSCLC), and the global development timeline and positioning of the savolitinib/osimertinib combination in EGFR/T790M refractory NSCLC.

Read out of the complete data set from the China 92-pt single arm Phase II study in MET exon 14m/del NSCLC will establish potential for accelerated approval of savolitinib monotherapy in this indication. Enrolment is on track to complete in H219, data read out is expected in 2020. Should an agreed efficacy threshold be met, an NDA could be filed in 2020 with potential for China approval in 2021.

Data review from the dose expansion parts of the Phase Ib/II TATTON study (TATTON B and D) coupled to the outcome of regulatory discussions will determine pivotal trial design and dosing for global savolitinib + osimertinib combination studies. SAVANNAH, a global Phase II study evaluating savolitinib + osimertinib in c-Met+ 2L EGFR/T790M refractory NSCLC, which could enable US approval, was initiated in December 2018 and should read out in 2021. However, Chi-Med/AstraZeneca have indicated that they anticipate announcing plans for further potentially pivotal combination trials later this year. This strategy of running two global trials in parallel in two NSCLC target patient populations with breakthrough therapy designation (BTD) potential should increase the probability that the combination reaches the market rapidly. We believe savolitinib could receive FDA approval in combination with osimertinib by 2022, if not earlier.

Initial data from the China Phase II study in exon 14m/del NSCLC and mature data from the B cohort of the global Phase Ib/II TATTON combination study will be presented orally on March 31 in a plenary session entitled ‘Can the challenge of NSCLC resistance be MET or will we not MEK it?’. Abstracts are currently embargoed, but titles have been released:

• Preliminary efficacy and safety results of savolitinib treating patients with pulmonary sarcomatoid carcinoma (PSC) and other types of NSCLC harbouring MET exon 14 skipping mutations (CT031);
• TATTON Phase Ib expansion cohort: Osimertinib plus savolitinib for patients with EGFR-mutant, MET-amplified NSCLC after progression on prior first/second-generation epidermal growth factor receptor (EGFR) TKI (CT032);
• TATTON Phase Ib expansion cohort: Osimertinib plus savolitinib for patients with EGFR-mutant, MET-amplified NSCLC after progression on prior third-generation EGFR TKI (CT033).

In addition, a biomarker analysis of the TATTON study will be presented in a poster on April 3: Detection of MET-mediated EGFR tyrosine kinase inhibitor (TKI) resistance in advanced non-small cell lung cancer (NSCLC): biomarker analysis of the TATTON study (4897/20).

We currently value savolitinib at $5.61/ADS ($746m) or £8.63/share (£574m).

Valuation

We value Chi-Med using a sum-of-the-parts methodology, incorporating an earnings-based multiple for the Commercial Platform and an rNPV model for the Innovation Platform. Our valuation remains $4,456m (equivalent to $33.49 per ADS) or £3,428m (£51.52 per share).

Exhibit 3 provides a high-level overview of the relative importance of the various assets to the valuation; a detailed breakdown of our valuation can be found in our February 2019 initiation. Our valuation is broadly split between the Innovation Platform which contributes $3,029m or £2,330m, and the Commercial Platform which adds $1,131m or £870m.

Exhibit 3: Relative contributions of Chi-Med programmes to valuation

Source: Trinity Delta

We employ conservative assumptions throughout our modelling; therefore, any number of incremental improvements on our base case scenarios (notably within the Innovation Platform) could result in sizeable uplifts in our valuation. Additionally, visibility on the 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 over the coming 24 months.

Financials

Chi-Med reported FY18 results that met or beat expectations. Group revenues were $214.1m, down 11.2% (FY17: $241.2m) due to the implementation of the ‘two-invoice’ accounting/booking system which altered how domestic China sales are reported. Revenue growth at the JVs of 13.4% to $491.5m (from $433.3m) provides a better reflection of the Commercial Platform’s performance. R&D spend in the Innovation Platform of $142.2m, up 61.6% from $88.0m, rose in line with the increasing number of later-stage clinical studies that are underway. This translated into an attributable net loss rising at the Group level to $74.8m, against $26.7m last year.

Cash resources remained strong, with $420.3m available at December 2018, vs $479.6m at end-2017. This consists of cash, cash equivalents, and short-term investment of $301m, and unutilised bank facilities of $119m. An additional $42m in available cash resources is held within the non-consolidated JVs. Management are confident this should support the increased spending in R&D through to at least 2020. We believe, given the clinical opportunities, that it would be judicious to issue some additional debt (c $30m in FY20 in our modelling), in the absence of an additional capital raise. Debt financing for Chi-Med could be an attractive option for the company, given the strength of its commercial operations, broad pipeline and backing (implicit and explicit) from CK Hutchison.

For FY19, Chi-Med has streamlined its financial guidance, focusing on the most important guidance metrics: R&D investment and adjusted Group net cash flows.

• R&D expenses are expected to fall within the $160-200m range;
• Adjusted net cash outflows (non-GAAP), excluding any financing activity, are anticipated to be between $120m-$150m.

We estimate that Chi-Med will be investing $200.5m and $220.6m in R&D in FY19 and FY20, respectively. to support the growing number of pivotal studies and increased investment in Global Innovation.

We have revised our estimates as indicated in Exhibit 4, to take into account the FY18 results and management guidance; and our financial forecasts are shown in Exhibit 5 overleaf.

Exhibit 4: Summary of changes to estimates

Source: Trinity Delta

Exhibit 5: Summary of financials

Source: Company, Trinity Delta  Note: Adjusted numbers exclude exceptionals