Bringing Global Innovation and China Oncology into focus
Update | 21 March 2019
Hutchison China MediTech’s (Chi-Med’s) noteworthy achievements in FY18 include the landmark approval and launch of Elunate (fruquintinib) in China in 3L mCRC; the continued maturation of the tyrosine kinase inhibitor (TKI) pipeline with multiple assets either in, or approaching, China or Global registrational trials; and significant investment in building the US infrastructure to support the Global Innovation pipeline. 2019 should bring further progress, with a steady stream of clinical catalysts. Next up will be savolitinib NSCLC data at AACR (March 29-April 3). We continue to value Chi-Med at $33.49/ADS or £51.52/share.
|Year-end: December 31||2017||2018||2019E||2020E|
|Adj. PBT (US$m)||(53.5)||(86.7)||(205.6)||(204.5)|
|Net Income (US$m)||(23.0)||(71.3)||(170.6)||(166.9)|
|Earnings per ADS (US$)||(0.22)||(0.57)||(1.31)||(1.28)|
|Adj. EBITDA (US$m)||(17.2)||(69.7)||(163.9)||(159.5)|
21 March 2019
|Price (US ADS) (UK share)||$29.35|
|Shares in issue (ADS)|
Hutchison China MediTech is a Hong Kong headquartered biopharma with an established Commercial Platform in China, and a diverse pipeline of first-in-class/best-in-class selective oral tyrosine kinase inhibitors (Innovation Platform). Its pipeline, discovered in-house, is in development for the China and global oncology markets.
+44 (0) 20 3637 5041
Mick Cooper PhD
+44 (0) 20 3637 5042
+44 (0) 20 3637 5043
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.
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.
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 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:
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).
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.
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.
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.
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.
Trinity Delta Research Limited (“TDRL”; firm reference number: 725161), which trades as Trinity Delta, is an appointed representative of Equity Development Limited (“ED”). The contents of this report, which has been prepared by and is the sole responsibility of TDRL, have been reviewed, but not independently verified, by ED which is authorised and regulated by the FCA, and whose reference number is 185325.
ED is acting for TDRL and not for any other person and will not be responsible for providing the protections provided to clients of TDRL nor for advising any other person in connection with the contents of this report and, except to the extent required by applicable law, including the rules of the FCA, owes no duty of care to any other such person. No reliance may be placed on ED for advice or recommendations with respect to the contents of this report and, to the extent it may do so under applicable law, ED makes no representation or warranty to the persons reading this report with regards to the information contained in it.
In the preparation of this report TDRL has used publically available sources and taken reasonable efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee or warranty as to the accuracy or completeness of the information or opinions contained herein, nor to provide updates should fresh information become available or opinions change.
Any person who is not a relevant person under section of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom should not act or rely on this document or any of its contents. Research on its client companies produced by TDRL is normally commissioned and paid for by those companies themselves (‘issuer financed research’) and as such is not deemed to be independent, as defined by the FCA, but is ‘objective’ in that the authors are stating their own opinions. The report should be considered a marketing communication for purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. TDRL does not hold any positions in any of the companies mentioned in the report, although directors, employees or consultants of TDRL may hold positions in the companies mentioned. TDRL does impose restrictions on personal dealings. TDRL might also provide services to companies mentioned or solicit business from them.
This report is being provided to relevant persons to provide background information about the subject matter of the note. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information that we provide is not intended to be, and should not in any manner whatsoever be, construed as personalised advice. Self-certification by investors can be completed free of charge at www.fisma.org. TDRL, its affiliates, officers, directors and employees, and ED will not be liable for any loss or damage arising from any use of this document, to the maximum extent that the law permits.
Copyright 2019 Trinity Delta Research Limited. All rights reserved.