Carrying momentum into H219
Update | 13 August 2019
Hutchison China MediTech (Chi-Med) H119 results highlight ongoing financial and operational progress. First China NDA filings for surufatinib and savolitinib are on track for H219 and H120 respectively, following in the footsteps of Elunate’s November 2018 launch. Global registration studies of surufatinib and fruquintinib will also initiate in H120. Investment into the maturing China Oncology and Global Innovation pipelines means future R&D spend will continue to grow, but Chi-Med is well-funded with flexibility surrounding future funding options. These are not limited to a future Hong Kong IPO, but include prospects of enhanced revenues from Elunate (post potential NRDL inclusion in Q4) and near-term China approvals/launches, plus possible non-dilutive finance from non-core asset divestment (eg OTC). Our valuation remains $38.55/ADS ($5.14bn) or £5.93/share (£3.95bn).
|Year-end: December 31||2017||2018||2019E||2020E|
|Adj. PBT (US$m)||(53.5)||(86.7)||(205.6)||(202.0)|
|Net Income (US$m)||(23.0)||(71.3)||(170.6)||(164.4)|
|Earnings per ADS (US$)||(0.22)||(0.57)||(1.31)||(1.26)|
|Adj. EBITDA (US$m)||(17.2)||(69.7)||(163.9)||(159.5)|
13 August 2019
|Price (US ADS) (UK share)||$20.20|
|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
Hutchison China MediTech (Chi-Med) has made significant progress over H119 in advancing its proprietary Global Innovation and China Oncology pipelines. In China, NDAs for the first indications for surufatinib and savolitinib will be filed with the NMPA within the next 12 months. Potential NRDL inclusion of Elunate in Q419 should increase market penetration and catalyse revenue generation potential from the China Oncology franchise. Chi-Med’s Global Innovation ambitions are also progressing. The most advanced asset, savolitinib is currently enrolling in the registration-intent SAVANNAH trial for the global market; results from an interim analysis in H120 will determine whether conditional approval could be sought. Two other assets, surufatinib and fruquintinib are also on the cusp of initiating US/EU Phase IIb/III studies (H120). Near-term, these, clinical, regulatory, and commercial catalysts will unlock further pipeline value.
Continued pipeline progress (Exhibit 1) is expected over the coming 12 months as various clinical trials initiate and ongoing studies render data. In total eight assets are under evaluation in over 30 clinical trials, not including a newly disclosed China IND filing (IDH 1/2 inhibitor HMPL-306). An overview of anticipated news is shown in Exhibit 2, and we highlight the following as key catalysts:
In H119, reported group revenues were flat at $102.2m compared to H118, or grew at 5% at constant exchange rates (CER) due to weakening of the renminbi against the US dollar.
Underlying sales growth was driven by the continued strong performance of the Commercial Platform, which grew at 2% on a reported basis or 7% at CER to $90.2m. Non-consolidated JVs performed similarly with reported sales increasing by 2% or 8% at CER to $276.9m. Total revenues from the Commercial Platform and non-consolidated JVs on a non-GAAP basis was $367m during the period, generating $28m in net income.
The sales contribution from the Innovation Platform, Hutchison Medipharma, fell by $1.6m to $12.0m due to reduced fee-for-service revenues, largely because of the renegotiation of the Eli Lilly fruquintinib collaboration in December 2018. The impact of lower research fees was offset by Elunate royalties of $1.7m and manufacturing revenues of $3.0m, which mark the start of the transition towards higher quality and more predictable sales for the Innovation Platform.
Investment in R&D grew by 15% to $69.3m to support the broadening pipeline. The increase was moderated slightly by the weaker renminbi, and, together with the start of the global registration studies with surufatinib and fruquintinib being delayed from H219 to H120, has led Chi-Med to reduce its guidance for R&D expenses for FY19 to $130m-170m as indicated in Exhibit 3.
Overall, group net loss during H119 increased by 39% (48% at CER) to $45.4m, reflecting the increase in R&D. In line with the revised R&D guidance, Chi-Med has also reduced its guidance for group net cash outflows to $90m-120m. The company remains very well-funded with a cash position of $237.3m: in addition to $146.3m in unutilised banking facilities and $64m in cash within the JVs.
A summary of the changes in our estimates is shown in Exhibit 4, and financial forecasts are shown overleaf in Exhibit 6.
Ongoing investment is required to maximise Chi-Med’s pipeline opportunities. The proposed Hong Kong IPO and associated global raise is one such mechanism to boost the company’s resources. Since the intention to list was announced in April, market conditions have deteriorated which, coupled with an underwriter mandated 90 day lock-in period and a lower share price in connection with CK Hutchison’s discounted secondary placement (see June Lighthouse), means timing is uncertain. Management’s view is that market conditions are a critical factor in determining transaction success. We believe that various other options are also available to finance Chi-Med’s pipeline.
Historically, profits from the Commercial Platform provided funding for the drug development activities of the Innovation Platform. In addition to these cash flows, divestment of non-core assets (such as the China OTC business) could generate further cash. Chi-Med is also going through a transition where the Innovation Platform, specifically the China Oncology business is starting to generate revenues. China Oncology will require significant near-term investment in both R&D and expanding its sales capabilities ahead of upcoming launches; however, over time, revenues from Elunate, surufatinib, and savolitinib will become material and increasingly contribute to profits, helping to fund the later-stage development of the Global Innovation pipeline.
We maintain our valuation at $38.55/ADS ($5.14bn) or £5.93/share (£3.95bn), which remains a pre-money valuation that does not include any assumed proceeds from the proposed Hong Kong IPO and global placement. Various upcoming catalysts highlighted in this note could prompt us to revisit our assumptions in future. Our valuation methodology is outline in our February 2019 Initiation report, and we provide a summary in Exhibit 5 below.
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