HUTCHMED: FRESCO-2 supports ex-China filings

HUTCHMED’s investment case has been materially boosted by the positive data from the global fruquintinib FRESCO-2 trial in ≥3L mCRC. Fruquintinib is one of the first wave of products that underpin the HUTCHMED transition from a China-based R&D-focused biopharma to a fully integrated commercial-stage global biopharmaceutical company. Results of the pivotal FRESCO-2 study support ex-China filings, suggesting that, subject to positive regulatory review(s), fruquintinib is on track to become the first HUTCHMED discovered and developed drug to be launched outside China. Fruquintinib, marketed as Elunate, is one of three products – the others being Orpathys (savolitinib) and Sulanda (surufatinib) – currently commercialised in China which are expected to generate revenues of $160m-190m for FY22. We recently published two extensive reports, the first (September 2022 Outlook) explains HUTCHMED’s development and commercial strategy, while the second (September 2022 Pipeline Review) reviews the background, status, and relative importance of the key programmes including fruquintinib. We value HUTCHMED at US$5.51bn / £4.59bn / HK$43.08bn, equivalent to US$31.89/ADS or 531p/HK$49.08 per share.

Fruquintinib, a highly selective and potent oral inhibitor of VEGFR 1/2/3, was HUTCHMED’s first approved product in China and, assuming a positive approval decision, will also become the first product to be marketed in other territories. Confirmation of fruquintinib’s efficacy and attractive risk/benefit profile in the 691-patient pivotal FRESCO-2 multi-regional clinical trial (MRCT) in ≥3L mCRC (metastatic colorectal cancer) means HUTCHMED can embark on pre-NDA/MAA meetings with the US, EU, and Japanese regulators with a view to initiating filings from late-2022 onwards. Fruquintinib has FDA Fast Track Designation and so is eligible for a rolling NDA filing, which would likely begin in late-2022 and complete in early-2023. EMA and Japan PDMA submissions are expected in H123. While there is the possibility of Priority Review, we conservatively assume a standard review schedule with approval decision(s) possible in H124.

FRESCO-2 data presented at the European Society of Medical Oncology (ESMO) 2022 meeting showed that treatment with fruquintinib had a 2.6 month benefit in median overall survival (mOS of 7.4 months vs 4.8 months for placebo, p<0.001) and a 1.9 month improvement in median progression free survival (mPFS of 3.7 months vs 1.8 months for placebo, p<0.001) in a heavily pre-treated mCRC population where study participants had a median five lines of prior therapy. Importantly, these improvements were consistent across prespecified subgroups, and the safety profile was consistent with earlier studies.

These data compare favourably with typical 3L mCRC therapies and support broad use of fruquintinib across advanced refractory mCRC. With the prospect of first ex-China launches in 2024 (assuming approval), attention will fall on HUTCHMED’s commercial plans. Management has indicated a flexible, potentially territory-based, strategy is under consideration. Currently, the sole partnered region is China, with longstanding partner Eli Lilly. We understand that European and Japan partnerships are likely to be sought, and we continue to believe that a prudent US commercial strategy could involve the in-licencing of a complementary late-stage or approved product for marketing by HUTCHMED alongside fruquintinib, or securing a co-commercialisation partner.

The FRESCO-2 trial

The FRESCO-2 Phase III registration trial was a global (US, Europe, Japan and Australia), 2:1 randomised, double-blind, placebo-controlled, multicentre study to compare the efficacy and safety of fruquintinib in combination with best supportive care (BSC) vs placebo with BSC in refractory (3L/4L) mCRC patients who have progressed on, or were intolerant to, chemotherapy, biologics, and Lonsurf (TAS-102, trifluridine and tipiracil) or Stivarga (regorafenib, Bayer).

Exhibit 1: FRESCO-2 trial design

Source: HUTCHMED  Note: To ensure the patient population is reflective of clinical practice, the number of patients treated with prior regorafenib was limited to 344 patients (50%)

FRESCO-2 is HUTCHMED’s first extensive truly global pivotal clinical study; it enrolled 691-patients at more than 150 centres in 14 countries, ensuring patient demographics are representative of local populations. It was designed to meet FDA requirements for a MRCT and, notably, the EMA and Japanese PDMA (Pharmaceuticals and Medical Devices Agency) have reviewed and agreed the same protocols. The study design also reflects current global treatment practices in advanced mCRC, where standard 1L and 2L therapies are chemotherapy, anti-VEGF and/or anti-EGFR biologics, and typical 3L therapy is either Lonsurf or Stivarga, or reuse of prior options. Exhibit 1 outlines the trial design.

Exhibit 2: Fruquintinib global registration strategy

Source: HUTCHMED

The primary endpoint of the FRESCO-2 study was overall survival (OS) with secondary endpoints including progression free survival (PFS). The objective was to confirm the overall clinical benefit of fruquintinib and complement data from the pivotal 416-patient China FRESCO study. The positive clinical data package comprising two registration studies (FRESCO and FRESCO-2) as well as the US Phase Ib bridging study which included c 80 ≥3L CRC patients will form the basis of regulatory filings to apply for fruquintinib marketing authorisation for advanced CRC in the US, Europe, and Japan (Exhibit 2).

Positive FRESCO-2 data presentation at ESMO 2022

The full data set presented at ESMO 2022 showed that FRESCO-2 met all its primary and secondary endpoints, with fruquintinib demonstrating statistically significant and clinically relevant efficacy, and a safety profile consistent with prior studies. The Kaplan-Meier curve for the primary endpoint of OS showed early separation (Exhibit 3), with median OS of 7.4 months vs 4.8 months for placebo (HR 0.66; 95% CI 0.55-0.80; p>0.001). A similar trend was seen in the key secondary endpoint of PFS (Exhibit 4), where median PFS was 3.7 months vs 1.8 months for placebo (HR 0.32; 95% CI 0.27-0.39; p<0.001). Improvements in OS and PFS were also seen across all prespecified subgroup analyses. A 55.5% disease control rate (DCR) was seen in the fruquintinib arm vs 16.1% in the placebo group. Median duration of follow-up was c 11 months in both arms.

Exhibit 3: FRESCO-2 Kaplan-Meier curve for Overall Survival

Source: HUTCHMED, ESMO 2022

Exhibit 4: FRESCO-2 Kaplan-Meier curve for Progression-Free Survival

Source: HUTCHMED, ESMO 2022

In addition to the efficacy endpoints, fruquintinib’s safety profile was shown to be consistent with prior clinical studies. Grade 3 or above adverse events occurred in 62.7% of patients in the fruquintinib arm vs 50.4% of placebo patients; however, the most common of these was hypertension (13.6% vs 0.9% in placebo) which is a manageable on-target class side-effect of VEGF inhibitors, asthenia (abnormal physical weakness, 7.7% vs 3.9%), and hand-foot syndrome (6.4% vs 0%).

Putting FRESCO-2 into context

FRESCO-2 data will contribute to the ex-China regulatory packages, but the magnitude of clinical effect and confirmed safety profile could have major implications for fruquintinib’s commercial potential in advanced mCRC and beyond. Our September 2022 Pipeline Review presents more background detail on the drug, its clinical development programme (as monotherapy in mCRC, with paclitaxel in gastric cancer, and the current status of potentially synergistic PD-1 combination approaches), and its commercial progress to date in China.

Globally, the unmet medical need in advanced mCRC is significant, with five-year survival still less than 15%. Fruquintinib’s attractive profile offers the prospect of an additional therapy for heavily pre-treated patients who currently have very limited options. The two randomised controlled trials have now shown a robust efficacy benefit which is consistent across subgroups and thus indicates that there are limited constraints to fruquintinib use in advanced mCRC and a biomarker-based strategy is unnecessary. It is an oral therapy with a convenient ‘three weeks on, one week off’ dosing schedule that facilitates at home treatment with monthly medical consultations, rather than in the hospital setting. This is likely to also have been a factor in the speed at which FRESCO-2 enrolled, despite being during the COVID pandemic where travel and access to hospitals were severely restricted. In addition, the relative lack of side effects and good tolerability is important for patient quality of life as a monotherapy, as well as facilitating the development of more tolerable combination regimens with other oncology agents.

The fruquintinib China experience provides useful context. It has made meaningful commercial progress since approval in China as Elunate in late 2018 for 3L mCRC (ie patients previously treated with chemotherapy, anti-VEGF and/or anti EGFR therapy). FY21 in-market sales were $53.5m (H122: $36.0m) and it has become the market leader having captured a 43% share (Q222 data) of the 3L mCRC market, overtaking Stivarga (current 33% share vs a 35% peak) during 2021, due to its clinical safety and efficacy profile (discussed further below) and pricing. Elunate is included on the NRDL (National Reimbursement Drug List) at a lower price to Stivarga, but greater penetration and higher volumes offset this discount.

Elunate approval was based on the pivotal China FRESCO study, in which fruquintinib use resulted in a statistically significant increase in median OS vs placebo of 9.3 vs 6.6 months, and a 35% lower risk of death (hazard ratio, HR, of 0.65, p<0.001). Median PFS was 3.7 months vs 1.8 months for placebo, with a 74% lower risk of disease progression (HR 0.26, p<0.001), and the DCR was 62.2% vs 12.4% respectively. FRESCO enrolled a less heavily pre-treated mCRC patient population than FRESCO-2. In FRESCO, around one-third of patients had prior anti-VEGF therapy, and none were treated with Lonsurf and/or Stivarga as these were not treatment options in China at the time. In contrast, patients enrolled in FRESCO-2 were heavily pre-treated, with a median five lines of prior therapy including c 96% previously treated with anti-VEGFs, c 52% with Lonsurf, <10% with Stivarga, and c 40% with both Lonsurf and Stivarga.

Sizing up the competition

Fruquintinib appears to compare favourably against both Stivarga and Lonsurf, although usual caveats regarding cross-trial comparisons apply given differences in patient populations, standard of care, trial design etc. The key studies from their respective labels indicate that fruquintinib offers comparable or better efficacy across a range of measures such as PFS, OS, and ORR (objective response rate) as well as materially lower off-target toxicities.

Stivarga has modest efficacy, demonstrating a 1.4 month improvement in median OS (6.4 months vs 5.0 months on placebo, HR 0.77, p<0.001) and a 0.2 month improvement in median PFS (1.9 months vs 1.7 months on placebo, HR 0.49, p<0.001) in the 760-patient pivotal global CORRECT Phase III trial. A similarly modest OS and PFS benefit with Lonsurf was shown in the 800-patient global RECOURSE Phase III trial: improvement in median OS vs placebo was 1.8 months (7.1 months vs 5.3 months, HR 0.68, p<0.001), with a 0.3 month improvement in median PFS (2.0 months vs 1.7 months on placebo, HR 0.48, p<0.001). With respect to safety profile, Stivarga carries a black box warning for liver toxicities (a concern for patients with liver metastases), while neutropenia, Lonsurf’s most common serious adverse event (affecting 38% of patients in RECOURSE) often results in dose interruptions and Neulasta use to boost white blood cell counts.

Fruquintinib’s 2.6-month median OS benefit shown in FRESCO-2, coupled with its cleaner safety profile, should ultimately enable capture of greater market share. In the roundtable discussion hosted by HUTCHMED following ESMO presentation of FRESCO-2 results, several key opinion leaders (KOLs) concluded that fruquintinib could be ‘practice changing’ for mCRC given the compelling positive data, with strong arguments for use in earlier lines of therapy across a broad spectrum of mCRC patients. The KOLs also commented that further evaluation of fruquintinib as a single agent in other malignancies/settings and as part of combination regime(s) would be of more interest to oncologists, and more beneficial to patients, than head-to-head studies to definitively confirm its profile.

Next steps for fruquintinib

These positive data from FRESCO-2 will enable completion of the clinical data packages for filing with ex-China regulatory agencies. Pre-NDA/MAA meetings are pending; however, the first FDA filings could be made around year-end (assuming a rolling submission), and those with the EMA and PMDA during H123, suggesting an approval decision in H124.

Management has indicated that a flexible, potentially territory-based, commercial strategy is under consideration. Fruquintinib is partnered with Eli Lilly in China, but HUTCMED retains all commercial rights elsewhere. Fruquintinib’s profile means it could potentially be marketed alongside another therapy to exploit synergies where there is overlap in the target physicians. Hence, we continue to believe that a prudent US commercial strategy could involve in-licencing of a complementary late-stage or approved gastrointestinal product for marketing by HUTCHMED alongside fruquintinib, or securing a co-commercialisation partner.

Valuation and Financials

We value HUTCHMED using a sum-of-the-parts methodology, which includes an rNPV based DCF model for the R&D pipeline and early-stage marketed products and an earnings-based multiple for the Other Ventures commercial businesses. Our company valuation is $5.51bn (equivalent to $31.89 per ADS), £4.59bn (531p per share), or HK$43.08bn (HK$49.83 per share).

Exhibit 5 provides a breakdown by segment, with the contributions of the most advanced Oncology/Immunology assets presented in Exhibit 6. These later stage assets are increasingly important contributors to our valuation. Our September 2022 Outlook outlines our valuation approach, with further valuation detail on the key assets in the September 2022 Pipeline Review.

Exhibit 5: 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

Exhibit 6: 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

Fruquintinib is currently HUTCHMED’s most valuable asset, comprising 38% of the value of the Oncology/Immunology portfolio and 27% of the company valuation. We currently forecast c $3.3bn peak global fruquintinib sales, which includes c $1.1bn in colorectal cancers. China represents c 24% of our global peak sales. Our current fruquintinib valuation is c $1.5bn (equivalent to $8.7/ADS and 144p/ HK$13.5 per share), based on risk-adjusted NPVs in a variety of indications and geographies. China represents 22% of our overall fruquintinib valuation, similar to the geographic sales split.

In mCRC, we currently assign a 100% probability in China where it is already approved, and 90% ex-China, based on positive FRESCO and FRESCO-2 data. Fruquintinib is the most valuable asset in our valuation, representing 38% of the value of the Oncology/Immunology portfolio and 27% of the company valuation.

Exhibit 7: Fruquintinib WW peak sales by indication and geography

Source: Trinity Delta

Our financial forecasts were also comprehensively covered in our September 2022 Outlook. Management guidance for FY22 focuses on consolidated Oncology/Immunology revenues: China revenues from the three marketed products are expected to grow to between $160m-$190m. This increase will be driven by continued acceleration in Elunate growth, a similarly growing Sulanda, and the first full year of Orpathys revenues coupled with the $15m milestone payment from AstraZeneca on initiation of the global NSCLC Phase III programme.

We forecast FY22 Oncology/Immunology revenues of $176.5m, within $160m-$190m guidance, with Other Ventures contributing $236.5m for group total revenues of $413.0m. We expect growth in R&D spend to $367.1m for FY22, further expanding to $397.6m for FY23 as an increasing number of later-stage trials – including global registration trials – initiate and run over the period. The continued commercial infrastructure build out will increase FY22 S&M costs to $45.3m and G&A to $98.2m on our forecasts.

End-June 2022 cash resources of $826m, consisted of cash, cash equivalents, and short-term investments. HUTCHMED also has $178m in unutilised banking facilities and $29m of additional cash held at the SHPL JV. Current resources should be sufficient to both maintain pipeline development momentum and support the planned expansion of the commercial infrastructure. HUTCHMED are managing these resources prudently, with an aim of having three years run rate.

Exhibit 8: Summary of financials

Source: Company, Trinity Delta  Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments