HUTCHMED

Executing consistently on the road to breakeven

Outlook | 3 April 2024

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China commercial execution, the prospect of further approvals and launches globally and in China, plus a strong balance sheet means HUTCHMED is well positioned to achieve its goal of sustainable profitability from FY25. Having made significant progress during FY23, most notably with the FDA approval and US launch of first global product Fruzaqla (fruquintinib) in November 2023 (impressively generating $15.1m of in-market sales), its FY24 outlook is for continuing strong product revenue growth across its portfolio, coupled with lower expenses. The company is guiding to Oncology/Immunology consolidated revenues of $300-$400m, driven by targeted 30-50% growth in marketed product sales and royalties. In addition, the current pipeline, which now includes 15+ ongoing registration/registration-intent studies, could also yield several near-term regulatory filings. Our valuation is increased c 1% to $5.81bn/£4.84bn/HK$45.35bn, or $33.36/ADS and 556p/HK$52.05 per share.

Year-end: December 31202220232024E2025E
Revenues ($m)426.4 838.0 611.7 771.3
Adj. PBT ($m)(410.4)58.3 (167.9)(40.6)
Net Income ($m)(360.8)100.8 (120.8)8.8
Earnings per ADS ($)(2.13)0.59 (0.71)0.05
Cash ($m)631.0 886.3 757.8 746.4
Adj. EBITDA ($m)(349.3)73.9 (129.5)7.2
Source: Trinity Delta  Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments, Adjusted EBITDA includes equity in earnings of equity investees, $ refers to USD unless otherwise specified
  • Follow-on indications and new compounds approaching inflection points Several HUTCHMED pipeline assets could reach the market by 2025. These include other global fruquintinib launches by Takeda (Europe and Japan regulatory decisions in advanced mCRC are anticipated in 2024); fruquintinib indication expansion in China (2L gastric cancer and 2L endometrial cancer filed; potential 2025 filing for 2L renal cell carcinoma); potential China approval of the first immunology asset sovleplenib in 2L immune thrombocytopenia (under Priority Review in China), which is generating increasing investor interest; and potential for global savolitinib filings by partner Astra-Zeneca in Tagrisso-refractory NSCLC around end-2024.
  • FY24 guidance includes sizeable product revenue growth HUTCHMED’s FY24 Oncology/Immunology revenue guidance of $300m-400m is underpinned by a 30-50% revenue growth target from sales and royalties generated by its marketed products. Growing in-market sales in China, and especially the US, will be driven by market share gains, plus potential launches of marketed drugs in new indications, or new geographies, and launches of new products. This revenue growth together with remarkable control of costs (ahead of our expectations) are the principal contributors to HUTCHMED’s future profitability, firmly positioning the company on the path to sustainable profits from 2025.
  • Valuation of $33.36/ADS or 556p/HK$52.05 per share  Updating our sum-of-the parts valuation following FY23 results (which includes a detailed pipeline rNPV) leads to a HUTCHMED valuation of $5.81bn/£4.84bn/HK$45.35bn, or $33.36/ADS and 556p/HK$52.05 per share. Further value should be unlocked with clinical, regulatory, and commercial execution in China and globally.

Outlook

3 April 2024

Price (US ADS)
(UK share)
(SEHK share)
$16.72
268p
HK$26.80
Market Cap
 
$2.85bn
£2.29bn
HK$22.88bn
Enterprise Value
 
$2.05bn
£1.62bn
HK$16.58bn
Shares in issue (ADS)
(shares)
174.3m
871.3m
12-month range
 
$10.68-$20.73
174p-338p
HK$17.44-33.80
Free float61.8%
Primary exchange
 
NASDAQ
AIM
SEHK
SectorHealthcare
Company Code
 
HCM
HCM.L
00.13HK
Corporate clientYes

Company description

HUTCHMED is a Hong Kong headquartered biopharma focused on discovering, developing and commercialising innovative targeted therapeutics and immunotherapies to treat cancer and autoimmune diseases. It has a diverse pipeline of first-in-class/best-in-class selective oral TKIs in development for the China and global markets.

Analysts

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Philippa Gardner
pgardner@trinitydelta.org
+44 (0) 20 3637 5042

Investment case

HUTCHMED is a triple-listed China-based, globally focused, biopharmaceutical company, active in discovery, development, manufacturing, and commercialisation of novel, highly selective, small molecule TKI (tyrosine kinase inhibitor) drugs, and more recently biologics. The investment case centres on leveraging its pipeline, China commercial infrastructure, and ex-China partnerships (current partners are Takeda and AstraZeneca) to build a self-sustaining business that turns profitable in FY25, and then benefits from operational leverage and growing revenues from its diverse portfolio of potential blockbuster therapies. HUTCHMED was founded in 2000 by Hutchison Whampoa (a wholly owned subsidiary of Hong Kong-listed multinational conglomerate, CK Hutchison Holdings, which remains the largest shareholder with a c 38% stake). In May 2006, HUTCHMED went public with a £40m (gross) AIM IPO; the NASDAQ IPO followed in March 2016 raising $110m ($96m net), with a $585m net IPO on the Main Board of the HKEX in June 2021.

Valuation

We use a sum-of-the-parts (SOTP) approach to value HUTCHMED. The Oncology/Immunology business is a classic drug discovery, development, and commercialisation play; hence we calculate a net present value (NPV) of the various clinical projects, adopting conservative assumptions throughout, which are individually risk-adjusted, and then summed. Other Ventures generates meaningful sales and profits, so earnings-based metrics are appropriate. Our valuation is $5.81bn, £4.84bn or HK$45.35bn, equivalent to $33.36/ADS or 556p/HK$52.05 (1 ADS = 5 shares; all listings are fungible).

Financials

Marketed oncology product sales grew +35% in FY23 and growth is expected to continue with management targeting +30-50% in FY24e, driven by underlying market share gains plus new launches. This sales growth target underpins FY24 Oncology/Immunology revenue guidance of $300-400m; this includes consolidated revenues derived from drug product supply, royalties and commercial service fees (depending on deal terms), plus milestones and R&D service income. Pipeline prioritisation has already led to a >20% reduction in R&D spend and continued cost control, together with ongoing revenue growth, should drive sustainable profitability from FY25. HUTCHMED’s cash and equivalents at end-December 2023 were $886m, with a further $68m in unutilised banking facilities and $19m at the SHPL JV, providing a solid cash base.

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. 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 macro-related investor concerns.

HUTCHMED: new indications, markets, products

HUTCHMED is steadily executing on its strategy to accelerate its path to sustainable profitability from FY25. This remains centred around commercial delivery and near-term value creation from the most advanced in-house pipeline assets as the company transitions from a China-based R&D-focused biopharma to a fully integrated commercial enterprise addressing the significant global market opportunity with its Oncology/Immunology products. Commercial traction in China is building for first wave products, partner Takeda has launched the first HUTCHMED product in the US, and key pipeline programmes are progressing with multiple near-term clinical and regulatory catalysts for new indications, new markets, and new products. In our view, HUTCHMED represents a unique biopharma opportunity with a broad pipeline of largely de-risked late-stage assets, global ambitions supported by large pharma partners, proven commercial execution in China yielding a growing top line, all balanced with shrewd investment. Our HUTCHMED valuation is $5.81bn/ £4.84bn/ HK$45.35bn, equivalent to $33.36/ADS or 556p/HK$52.05 per share.

HUTCHMED achieved several strategic milestones during 2023, most notably the global (ex-China) Takeda licensing deal for fruquintinib rights (January 2023 Lighthouse), its subsequent FDA approval (November 2023 Lighthouse) and rapid US launch as Fruzaqla in ≥3L advanced mCRC (metastatic colorectal cancer). With fruquintinib NDAs in this indication currently under review with the European and Japan regulatory agencies, there is potential for approval decisions and additional launches by Takeda in other international markets during 2024.

The Takeda deal provided both important external validation for fruquintinib and substantial economics. HUTCHMED’s end-December 2023 cash of $886m was boosted by receipt of the $400m upfront and $35m US approval milestone. Partial recognition of these payments ($312m booked in FY23) made a significant contribution to FY23 Oncology/Immunology revenues of $529m (vs $450m-550m guidance). For FY24, commercial momentum from the China Oncology marketed products (currently Elunate, Sulanda, Orpathys) and from Fruzaqla ex-China is expected to drive 30-50% growth in product sales, with HUTCHMED guiding to Oncology/Immunology revenues of $300m-400m.

Revenue growth from Oncology/Immunology product sales coupled to prudent cost control, while still investing in development of priority pipeline programmes, means HUTCHMED is well-funded to achieve its FY25 goal of self-sustainability. The commercial and manufacturing infrastructure is largely in place to support the prospect of having several potential blockbuster products launched in China, with ex-China sales via partners generating royalty income (and later sales milestones).

The next 12-18 months should yield several important catalysts that could unlock valuation upside. These include potential Europe and/or Japan approvals for fruquintinib (advanced mCRC), and China approval decisions for fruquintinib (2L gastric cancer and 2L endometrial cancer PD-1 checkpoint inhibitor combination) and sovleplenib (2L immune thrombocytopenia, ITP) anticipated during 2024. Regulatory filings, subject to positive data, are also planned in 2024 for tazemetostat (China: 3L follicular lymphoma), and potentially savolitinib (global: 2/3L NSCLC) should SAVANNAH data support accelerated approval.

Pipeline progress to catalyse valuation upside

The momentum in Oncology/Immunology revenues from HUTCHMED’s first wave of marketed products in China provide evidence of commercial delivery. As follow on indications are approved, there will be opportunities to leverage the existing sales and marketing infrastructure, although medium-term, selective investment will be needed to support the future commercialisation of the next wave of haem-oncology/immunology assets. Recently, however, the focus of infrastructure investment has been on strengthening manufacturing capabilities, in particular the completion of the Shanghai facility to expand capacity five-fold and the establishment of a global supply chain with sites in China and Switzerland.

With NDAs submitted and under review for fruquintinib (global: ≥3L mCRC; China: 2L gastric cancer) and sovleplenib (2L ITP) and confirmation that several studies are fully enrolled, there is increasing visibility for the outlook of HUTCHMED’s late-stage clinical programmes. A steady stream of pipeline news flow is expected over the next three years and beyond, through the company’s breakeven point in FY25. Multiple pipeline catalysts, as well as commercial execution, could unlock significant valuation upside. Seven of HUTCHMED’s first and second wave assets are currently under evaluation in more than 15 trials supporting potential near-term NDA filings (Exhibit 1) for both follow-on indications and first approvals. Delivery on pipeline plans could mean that by end-2025, five products are launched in China, with the first two available globally.

Exhibit 1: Potential near-term NDA filings for 7 drug candidates in 15+ registration/potential registration trials
Source: HUTCHMED  Note: * = in collaboration with AstraZeneca; ᴧ = in collaboration with Ipsen; # = clinical development plan & regulatory guidance under evaluation prior to deciding regulatory strategy in this indication in light of changing regulatory landscape

Subject to supportive data and a positive regulatory review, these planned commercial launches could meaningfully increase China revenues (generated through HUTCHMED’s infrastructure, except for Orpathys which is marketed by AstraZeneca) and the nascent global sales via strategic partners. In addition, the completion of a number of late-stage internally funded studies has helped HUTCHMED reduce R&D spend. The global partnering strategy for ex-China markets allows the company to concentrate on clinical development and commercialisation in its home market while partners maximise the global development and commercial potential of the assets to which they have secured global rights (AstraZeneca: savolitinib; Takeda: fruquintinib ex-China).

Exhibit 2: Investing in new launches and the near- and mid-term pipeline
Source: HUTCHMED

First wave progressing with new indications and markets

HUTCHMED currently has three drugs approved as monotherapy in China: Elunate (fruquintinib, 3L mCRC), Orpathys (savolitinib, non-small cell lung cancer, NSCLC, with MET exon14 alterations), and Sulanda (surufatinib, advanced neuroendocrine tumours, NETs). All three also have the potential for near-term follow-on indications in China.

The China supplementary NDA (sNDA) for the second Elunate indication of 2L gastric cancer in combination with paclitaxel has already been accepted for review, with a decision expected later in 2024 (February 2024 Lighthouse). Plans are well developed for subsequent indications with two registration-intent studies in combination with Innovent Biologics’ PD-1 checkpoint inhibitor Tyvyt (sintilimab) fully enrolled: FRUSICA-1 in 2L EMC (endometrial cancer) and FRUSICA-2 in 2L RCC (renal cell carcinoma), with the former accepted for review and the latter on track for China regulatory filing in 2025, respectively. Takeda is responsible for ex-China life cycle management and has not yet disclosed plans beyond advanced mCRC where Europe/Japan regulatory decisions are pending.

Combinations are a central element of HUTCHMED’s (and China partner Eli Lilly’s) life cycle plans for fruquintinib in China as this exploits its ease of use as a once daily oral drug, and its high specificity and best-in-class clinical and safety/ tolerability profile. In addition, the PD-1 checkpoint inhibitor plus fruquintinib combination brings together potentially synergistic mechanisms of action (ie simultaneous inhibition of tumour angiogenesis and tumour cell signalling or immune evasion). Similarly, a PD-1 combination (Junshi Biosciences’ Tuoyi, toripalimab) with Sulanda is under evaluation, with an ongoing China SURTORI-1 Phase III trial in 2L neuroendocrine carcinomas (NECs) potentially supporting an sNDA filing in 2025, subject to positive data.

Selective MET inhibitor Orpathys (savolitinib) is currently approved in China as a monotherapy in a niche NSCLC setting: 2L NSCLC MET exon 14 skipping alterations in patients who have progressed following prior systemic therapy or are unable to receive chemotherapy. Clinical development plans (Exhibit 3) are set to expand the addressable China NSCLC patient population over the next 24 months, support the first global approval in NSCLC, and generate data in the first non-NSCLC follow on indications (China: as monotherapy in 3L MET-amplified gastric/gastroesophageal cancer; Global: in combination with Imfinzi in MET-driven papillary renal cell carcinoma, PRCC).

Exhibit 3: Major late-stage expansion for savolitinib
Source: HUTCHMED

Savolitinib is HUTCHMED’s second most advanced international asset and is set to play a key role in the life cycle management of AstraZeneca’s third generation EGFR inhibitor Tagrisso (osimertinib) and its PD-1 inhibitor Imfinzi (durvalumab). The savolitinib and Tagrisso combination has FDA Fast Track designation in 2/3L osimertinib-refractory MET+ NSCLC and, with the Phase II/III SAVANNAH trial having completed enrolment in February 2024, there is potential for a late-2024 NDA filing for accelerated approval in the US in this setting, subject to positive data. The confirmatory Phase III SAFFRON running in parallel uses MET biomarker-based patient selection to enrich the patient population, and is anticipated to read out in 2026. This is a similar timeframe to the global SAMETA Phase III study of savolitinib in combination with Imfinzi for MET-driven PRCC.

Orpathys received conditional approval in China in 2021 in 2L NSCLC with MET ex14 skipping alterations. Following positive read out of the confirmatory Phase III trial, the China NDA submission for advanced or metastatic MET exon 14 NSCLC in treatment-naïve or previously treated patients was filed and accepted for review in March 2024. Grant of full approval would expand the label to include 1L patients, especially as MET diagnostic testing has now become standard of care in late-stage NSCLC. Two additional China Phase III trials are underway with Orpathys in combination with Tagrisso in other NSCLC settings:

  • SACHI addresses 2L EGFR TKI refractory NSCLC with MET-amplification (similar to the Phase II SAVANNAH study patient population); and
  • SANOVO is evaluating savolitinib + osimertinib 1L EFGRm+ MET+ NSCLC (a similar population to the osimertinib Phase III FLAURA study).

Both studies should complete enrolment in late-2024, and positive read outs (SACHI in 2025; SANOVO in 2025/2026) could unlock a wider opportunity for longer-term use of the savolitinib plus osimertinib oral combination across a broader patient population in China in both 1L and 2L EGFRm NSCLC.

First immunology asset approaching commercial reality

Investors are increasingly focused on the prospects for sovleplenib, a wholly-owned best-in-class oral small-molecule Syk (spleen tyrosine kinase) inhibitor, which is the most advanced of HUTCHMED’s next wave of haem-oncology/ immunology assets. The China NDA for the treatment of 2L ITP was accepted for Priority Review in January 2024 and an approval decision is expected end-2024.

ITP (immune thrombocytopenia) is a heterogeneous chronic autoimmune disorder in which self-destruction of platelets and decreased platelet production leads to increased bleeding risk. Current therapy options in China include corticosteroids, followed by thrombopoietin/thrombopoietin receptor agonists (TPO/TPO-RA) in the 2L; however, ultimately, most patients end up refractory to treatment or are lost to follow up for other reasons. Sovleplenib could address this unmet medical need; it is a once daily oral drug with a new mechanism of action (preventing immunological destruction of platelets rather than boosting platelet production).

The China market opportunity could be significant if sovleplenib can penetrate both the currently treated (c 250,000 patients) and untreated ITP patient segment (c 215,000 patients). The latter includes patients who may be seeking new treatment options due to relapse, having become refractory to existing therapies, and/or affordability concerns. Peak sales potential for sovleplenib will also be influenced by currently unknown pricing and duration of treatment given that five-year survival is relatively high at 80%.

The China NDA was supported by positive data from the ESLIM-01 Phase III monotherapy study which met its primary endpoint of a clinically meaningful and a statistically significant increase in durable response rate (DRR) in sovleplenib treated relapsed/refractory ITP patients in China vs those on placebo, as well as all secondary endpoints including safety. The latter is particularly important as first- and second-generation Syk inhibitors are associated with severe off-target toxicities (diarrhoea, hypertension, liver toxicity). To date, only one small molecule drug specifically targeting Syk is approved in the US, EU, and Japan: Tavalisse (fostamatinib, Rigel) for chronic ITP, which has modest efficacy (18% DRR and 43% overall response rate, ORR, in clinical trials) with dose limiting toxicities.

Full ESLIM-01 data are anticipated to be presented at an upcoming scientific conference, where the focus will be on the magnitude of effect and tolerability. For context, the sovleplenib Phase Ib/II study (The Lancet Haematology) reported an ORR of 80% and DRR of 40% in a heavily pre-treated patient group, with a median treatment duration of 142 days (range: 23-170), and similar levels of efficacy in patients with or without prior treatment with TPO/TPO-RA (ie eltrombopag or romiplostim).

If approved, sovleplenib would become HUTCHMED’s first immunology product. While Syk is a validated target in rheumatoid arthritis, HUTCHMED is initially pursuing orphan immune disorders which require smaller clinical programmes. Further development could include selected haematological cancers, specifically B-cell malignancies. China development is already underway in a second indication, warm antibody autoimmune hemolytic anemia (wAIHA), a very rare disease with no current treatment options, with the first patient dosed in the registration stage of the Phase II/III ESLIM-02 study during March 2024.

Outside China, following discussions with regulators, HUTCHMED intends to initiate clinical development of sovleplenib with an international dose finding study during 2024. An ex-China partner is sought for further development and, in our view, ESLIM-01 data publication could be the catalyst for a licensing deal.

PI3Kδ inhibitor amdizalisib had formerly been slated for regulatory filings in a comparable timeframe to sovleplenib. However, the shifting regulatory landscape in China means that HUTCHMED is seeking regulatory guidance and evaluating options for its clinical development plan in haematological indications. Prior plans were for the amdizalisib NDA to be filed on the back of data from Phase II studies in 3L follicular lymphoma (FL) and 2L marginal zone lymphoma (MZL); now randomised Phase III studies are required to support registration.

A deep pipeline in solid and haematological cancers

The depth of HUTCHMED’s pipeline is highlighted by further wholly owned assets that are approaching potential registration studies, including:

  • HMPL-453, a FGFR1/2/3 inhibitor which in March 2023 began enrolling a registration cohort in its China Phase II monotherapy trial in 2L intrahepatic cholangiocarcinoma (IHCC with FGFR fusion); and
  • HMPL-306, a dual IDH1/2 inhibitor targeting haematological malignancies such as acute myeloid leukaemia (AML), with a China Phase III study planned in 2024.

However, the next most advanced programme behind sovleplenib is the first in-licenced asset, tazemetostat (Tazverik) a global first-in-class methyltransferase inhibitor of EZH2. Greater China rights were licenced from Epizyme (Ipsen) in 2021 and it is currently available for 3L FL in restricted geographies (Hainan and Macau) within HUTCHMED’s region. Wider approval across China, albeit on a conditional basis based on the FDA approval, is approaching following completion of enrolment of the China Phase II bridging study in r/r FL, and plans to file the NDA during mid-2024.

An FDA accelerated approval for tazemetostat was granted in 2020 for metastatic or locally advanced epithelioid sarcoma (ES) and relapsed/refractory FL with the relevant EZH2 mutation. Epizyme is currently running a global SYMPHONY-1 (EZH-302) Phase Ib/III study of tazemetostat in combination with R2 (Revlimid and rituximab) in 2L FL, with HUTCHMED conducting the China element. Data read out is expected in mid-2026 (Ipsen Capital Markets Day 2023).

With first approval of an immunology asset on the horizon, followed by potential for wider approvals in haem-oncology, and a deep and broad, yet well-balanced, pipeline of earlier-stage assets (albeit with currently limited disclosure) HUTCHMED’s strategy encompasses more than solid tumours. This pipeline will continue to be evaluated, with HUTCHMED prioritising development of those programmes with the greatest commercial relevance and a clear path to market, opening up opportunities to leverage its China commercial infrastructure and attract potential ex-China partners on its path to profitability.

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 risk surrounds its target of achieving sustainable profitability from 2025 onwards, as missing this would dent investor confidence. In our view this is mitigated by HUTCHMED’s consistent execution and track record in driving revenues from product sales, securing commercially attractive licence deals (and renegotiating more favourable terms), and managing costs prudently.

The outcomes of clinical trials and regulatory decisions for key late-stage assets (savolitinib in global markets; fruquintinib in Europe and Japan; sovleplenib in China) and their commercial execution both in China and through partners in ex-China territories could make a significant contribution towards HUTCHMED’s FY25 breakeven target. Conversely, a delayed decision or a negative outcome may mean that this target is missed.

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). We highlight that HUTCHMED’s global ex-China commercialisation strategy rests on execution under deals with existing partners and securing further partnerships for the timely development and launch of the next wave(s) of assets ex-China.

HUTCHMED’s sustained commercial success in China is due to the established infrastructure, which has significant national and regional expertise. Management has expanded its China manufacturing capabilities and capacity to support late-stage development and future commercialisation of products emerging from its R&D pipeline, which may also bring about an evolution in its commercial footprint particularly with haematology/immunology assets progressing towards approvals. 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 developed in-house and at large pharma partners.

HUTCHMED’s largest shareholder, CK Hutchison, reduced its stake in 2019 (from c 60% to c 39%) to enable the deconsolidation of HUTCHMED from its financial accounts, and has stated that following the two ADS placings (June and September 2019) it has no intention of further secondary offerings in the foreseeable future.

Valuation

We value HUTCHMED using a sum-of-the-parts (SOTP) valuation methodology, with a risk-adjusted net present value (rNPV) model for the Oncology/ Immunology portfolio, an earnings-based multiple for the established Other Ventures commercial platforms, and net cash. Our updated HUTCHMED valuation is slightly increased by c 1% following FY23 results, to $5.81bn (equivalent to $33.36 per ADS), £4.84bn (556p per share), or HK$45.35bn (HK$52.05 per share).

A valuation summary is shown in Exhibit 4. The importance of the Oncology/Immunology business is shown in its relative contribution, with this accounting for c 71% of our company valuation. For this business we calculate a NPV for each major clinical programme, which is then adjusted with success probabilities that reflect the nature of the compound (eg novel or proven mechanism of action) and stage of development (eg early or late-stage, approved and marketed) to derive a risk-adjusted NPV. Our peak sales forecasts reflect the proposed indication(s) in development, based on a top-down model which includes patient numbers, potential pricing, likely rate of adoption, and degree of expected competition. We factor in related costs (eg CoGS, R&D, S&M) in addition to any deal terms, known or assumed (eg royalties, milestones, service and/or R&D fees). We strive to employ conservative assumptions throughout. Other Ventures consists of the JV operations in China that are revenue generating and profitable, so earnings-based metrics are appropriate.

Exhibit 4: HUTCHMED valuation summary
Source: Trinity Delta   Note: 12.5% discount rate for development stage products and 10% for commercial products; taxation at 20%; FX rates of 1.2 USD:GBP and 7.8 USD:HKD

The contributions of the various Oncology/Immunology assets are shown in Exhibits 5 and 6. We have made no major changes to any peak sales forecasts for the launched products. However, we have refined some assumptions regarding the ex-China deal with Takeda for fruquintinib, following first in-market sales, royalties, and manufacturing fees. On the pipeline, the contribution of amdizalisib has been reduced to just 1% (from 3%) of our overall HUTCHMED valuation through lower peak sales and probability given that the regulatory strategy is currently being assessed due to the changing regulatory requirements in China. In contrast, we have slightly increased the China peak sales for sovleplenib, albeit these are largely placeholder estimates with significant upside pending upcoming detailed data and a better understanding of the potential market opportunities.

The most valuable asset remains fruquintinib which comprises 34% of the value of the Oncology/Immunology portfolio and 24% of the company valuation. Following the changes outlined above, sovleplenib is becoming an increasingly important component of our valuation, and we expect significant future value to be unlocked as it progresses and the commercial opportunities become clearer.

Exhibit 5: HUTCHMED Oncology/Immunology portfolio valuation summary
Source: Trinity Delta   Note: 12.5% discount rate for development stage products and 10% for commercial products; taxation at 20%; FX rates of 1.2 USD:GBP and 7.8 USD:HKD
Exhibit 6: Relative contributions of HUTCHMED programmes to valuation
Source: Trinity Delta

We note that clinical progress, better than expected commercial sales/greater patient uptake, launch of new indications, or the addition of new later-stage programmes could result in uplifts to our valuation. In addition, we expect visibility to increase particularly on sovleplenib, both in terms of clinical data (allowing a better understanding of the commercial potential), and on the development strategy (lead indications, clinical trial timelines), which together could lead to refined peak sales forecasts. Note that 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.

There are multiple clinical and regulatory catalysts expected in the next 12 to 24 months. These include potential Europe and/or Japan approvals for fruquintinib. In addition, China approval decisions for fruquintinib in 2L gastric cancer and 2L endometrial cancer PD-1 checkpoint inhibitor combination, plus sovleplenib in 2L ITP are also anticipated during 2024. Regulatory filings, subject to positive data, are also planned in 2024 for, tazemetostat (China: 3L follicular lymphoma), and potentially savolitinib (global: 2/3L NSCLC) should SAVANNAH data support accelerated approval. We intend to review our model regularly to reflect clinical, regulatory, and commercial progress.

Financials

Our forecasts have been updated to reflect FY23 financial results; an overview of our key forecasts is shown in Exhibit 11. Below we review FY23 results and provide an outline of our updated forecasts and the path to profitability.

Review of FY23 results

HUTCHMED reports revenues in two segments: Oncology/Immunology, which covers all activities relating to new products including R&D, manufacturing and S&M; and Other Ventures, which includes the consolidated JVs. Consolidated FY23 group revenues were $838m (+102% at CER; FY22: $426m) including:

  • Oncology/Immunology: $529m (+228% at CER; FY22: $164m), at the upper end of HUTCHMED’s original guidance of $450m-550m;
  • Other Ventures: $309m (+24% at CER; FY22: $263m)

Oncology/Immunology revenues of $529m included: (1) $164m (+39% at CER; FY22: $125m) derived from sales of marketed products in China and the US (outlined in more detail below); (2) R&D service fees from partners (AstraZeneca, Eli Lilly, and Takeda) of $52m (+119% at CER; FY22: $24m), and; (3) upfront and milestone income of $312m (FY22: $15m), consisting of $280m recognised from the $400m upfront from Takeda, and $32m recognised from the $35m US fruquintinib approval milestone.

Consolidated product revenues of $164m (which, depending on deal terms, can include drug product supply, royalties and commercial service fees) are derived from in-market oncology product sales generated from Elunate, Fruzaqla, Sulanda, Orpathys and Tazverik. These grew +35% CER to $214m (FY22: $167m), which translated to consolidated revenues as follows:

  • Elunate consolidated revenues of $83m (+26% at CER; FY22: $70m) on in-market sales of $108m (+22% at CER; FY22: $94m). Recall that under the deal with Eli Lilly, HUTCHMED consolidates approximately 70-80% of Elunate in-market sales (from manufacturing fees, commercial service fees, and royalties). In-market sales growth in China was driven by market share gains in 3L mCRC, which now stands at c 47%, and continued inclusion on the NRDL (National Reimbursement Drug List).
  • Fruzaqla consolidated revenues of $7m (including $2m of royalties and $5m for drug product supply) on initial in-market sales of $15m, impressive in our view given that launch only occurred in November 2023. The first prescription in the US was written within 48 hours of approval, and inclusion in the US NCCN (National Comprehensive Cancer Network) clinical practice guidelines for colon and rectal cancers occurred in the same month. According to Takeda, uptake has been strong and ahead of their expectations.
  • Sulanda in-market sales of $44m (+43% at CER; FY22: $32m) generated directly through HUTCHMED’s own sales force. Growth in prescriptions was supported by continued NRDL inclusion and inclusion in China treatment guidelines, as well as the typically long duration of treatment. Since Q322 Sulanda has been the number two brand for NETs in China, with a market share at end-Q423 of 21%, behind sandostatin (38%).
  • Orpathys consolidated revenues of $29m (+37% at CER; FY22: $22m) from manufacturing fees and a 30% royalty from AstraZeneca on in-market sales of $46m (+19% at CER; FY22: $41m). Orpathys was listed on the NRDL from March 2023 with a 38% price reduction. Increased patient access has driven higher prescription volumes, offsetting the pricing discount to deliver 19% sales growth.
  • Tazverik in-market sales of $1.0m (FY22: $0.1m) generated directly through HUTCHMED. Tazverik is currently only available in the Hainan Medical Zone under the Clinically Urgently Needed Imported Drugs scheme (providing early access to some epithelioid sarcoma and follicular lymphoma patients as per the FDA-approved label) and is approved in the Macau Special Administrative Region.

Cost of sales in FY23 were $384m (FY22: $311m), growing at a slower rate than revenues, with the gross margin spiking to 54% in FY23 (vs a trailing two-year average of c 27%). This was due to the large contribution of upfront and milestone income from Takeda which is essentially pure profit. Within cost of sales, the gross margin on Other Ventures dropped slightly to c 5% (from c 8% in FY22) owing to increasing sales from third-party prescription drug products, whereas the underlying Oncology/Immunology gross margin (excluding milestone income) was essentially flat year-on-year.

Over the course of FY23, the implementation of various strategic initiatives meant lower operating expenses were incurred. Restructuring of US commercial operations contributed to slightly reduced SG&A spend of $133m (FY22: $136m), while portfolio optimisation, a focus on ex-China development through partnerships, and completion of several large late-stage trials resulted in 22% lower R&D investment of $302m (FY22: $387m). Ex-China R&D expenses saw a significant fall (to $107m vs $171m for FY22), with a more modest yet still sizeable decrease in China R&D costs ($195m vs $216m for FY22). Net income from Other Items of $82m (FY22: $47m) reflected higher interest income earned following receipt of the Takeda upfront.

The Net Profit for FY23 of $101m (FY22: Net Loss $361m) will likely be a temporary profit until FY25. The partial recognition of the Takeda upfront and approval milestone enabled Oncology/Immunology to generate a temporary segment operating profit of $51m (FY22: loss of $385m), with Other Ventures delivering a segment operating profit of $50m (FY22: $55m). At end-December 2023, HUTCHMED had cash resources (including the Takeda upfront and milestone receipts) of $886m, consisting of cash, cash equivalents, and short-term investments, with a further $68m in unutilised banking facilities and $19m in additional cash held at the SHPL JV. In our view, this should be sufficient funding to reach sustainable profitability.

Updated forecasts

FY24 guidance again focuses on the Oncology/Immunology segment, with Oncology/Immunology consolidated revenues expected to be between $300m and $400m, driven by targeted 30-50% growth in marketed product sales and royalties. In addition to the anticipated strong momentum in product revenue growth across the portfolio (including the first full year of Fruzaqla sales), R&D expenditure will remain focused on key programmes.

We forecast FY24e Oncology/Immunology revenues of $349m, in the middle of the $300m-$400m guidance range. However, there is upside to our forecasts for a number of factors, including: (1) our in-market sales growth expectations are largely towards the bottom end of the targeted 30-50%; (2) we conservatively assume a decline in R&D service income, given larger late-stage trials are completing, plus we expect HUTCHMED’s own R&D spend to continue decreasing in FY24e; and (3) we only factor in deferred recognition of already received milestones, but do not include any new or uncertain milestones eg any potential milestone income for fruquintinib approvals in Europe or Japan.

Exhibit 7 provides a breakdown of our Oncology/Immunology forecasts, which together with our Other Ventures revenue forecast of $263m leads to total group revenues of $612m in FY24e.

Exhibit 7: FY24e forecasts underpinning Oncology/Immunology revenues
Source: HUTCHMED and Trinity Delta

HUTCHMED’s pipeline prioritisation, the completion of several large registration-enabling trials, and the strategy to pursue global development through partners all contribute to more focused R&D investment, with R&D costs likely to continue to decline in the near-term from $302m in FY23. We now forecast FY24e R&D spend of $280m (previously $292m), and $251m in FY25e. Within S&M we expect continued investment into the China commercial infrastructure to support existing and new product launches (including potentially the first immunology product from late-2024) and forecast S&M expenses of $61m and $69m for FY24e and FY25e respectively (from $44m in FY23). For G&A we expect modest growth from $80m in FY23, forecasting G&A spend of $82m for FY24e and $85m for FY25e. Changes to our key estimates are shown in Exhibit 8.

Exhibit 8: Summary of changes to estimates
Source: Trinity Delta

On the path to sustainable profitability

FY23 revenue (and net profit) received a boost from substantial non-recurring payments from Takeda; however, from 2024 we expect that consolidated revenues derived from sales of marketed products, plus new product launches, will represent the largest, and growing component of the revenue mix (Exhibit 9).

Exhibit 9: Growing revenues driven by in-market sales
Source: Trinity Delta  Note: Cons Revs = Consolidated Revenues; MS = milestones

As shown in Exhibit 10, we believe that HUTCHMED’s target of sustainable profitability from 2025 is achievable given the growing revenues from in-market sales, and from the reduced cost base, notably from R&D prioritisation, with FY23 expense levels setting a new foundation.

Exhibit 10: Growing revenues and declining costs drive 2025 profitability
Source: Trinity Delta
Exhibit 11: Summary of financials
Source: Company, Trinity Delta  Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments

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

% holding
CK Hutchison Holdings Ltd38.18
M&G4.96
CA Fern Parent*4.69
Top institutional investors 47.83
Directors1.73
Other shareholders50.44
Total shareholders100.00
Source: HUTCHMED Note: * ultimately controlled by The Carlyle Group Inc

Key personnel

PersonPositionBiography
Simon ToChairmanDirector since 2000 and Chairman since 2006. Managing Director and founder of Hutchison Whampoa (China) Ltd, with >40 years service. He built the business from a small trading company to a multi-billion dollar investment group with diverse interests, negotiating major transactions with various multinationals (including P&G, Lockheed, Pirelli, Beiersdorf, United Airlines and British Airways). Currently a director of Gama Aviation Plc. Holds a BSc (Hons) Mechanical Engineering (Imperial College London) and an MBA (Stanford).
Dr Weiguo SuChief Executive Officer / Chief Scientific OfficerJoined in 2005; became CEO in March 2022; EVP and CSO (since 2012); and Executive Director (since 2017). As CSO he is responsible for all R&D and R&D strategy, and created the Innovation Platform, leading all the small molecule pipeline discovery activities. Prior roles include 15 years with Pfizer’s US R&D department (most recently as Director of Medicinal Chemistry). Holds a BSc in Chemistry (Fudan University, Shanghai) and completed a PhD and Post-Doctoral Fellowship in Chemistry at Harvard University under Nobel Laureate, EJ Corey.
Johnny ChengChief Financial OfficerCFO since 2008 and Executive Director since 2011. Previously VP, Finance of Bristol Myers Squibb in China and a director of Sino-American Shanghai Squibb Pharmaceuticals and BMS (China) Investment Co (2006-2008). He also spent eight years with Nestle China in various finance and control functions, and was an auditor at Price Waterhouse (Australia) and KPMG (Beijing). Holds a Bachelor of Economics, Accounting Major (University of Adelaide) and is a member of the Institute of Chartered Accountants in Australia.
Dr Michael ShiHead of R&D and Chief Medical OfficerJoined in 2022; EVP, Head of R&D and CMO overseeing discovery and development from strategy to execution. Prior roles include CMO at Transcenta and >15 years at Novartis holding various senior leadership positions in clinical development. Member of numerous societies, including American Society of Clinical Oncology, European Society of Medical Oncology, American Society of Hematology, and Sino-American Pharmaceutical Association. Holds a PhD in Molecular Pharmacology and Toxicology from the University of Southern California; received his medical education from Peking Union Medical College.

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