Investment case

HUTCHMED is a China-based, globally focused, biopharmaceutical company, active in discovery, development, manufacturing, and commercialisation. The investment case centres on the continued success of its Oncology/Immunology platform (formerly China Oncology and Global Innovation), which has multiple near-term clinical and regulatory catalysts from the novel, highly selective, small molecule TKI (tyrosine kinase inhibitor) pipeline. Prospects remain compelling, as the Chinese healthcare market is still one of the fastest growing in the world. Continued R&D and commercial success within China, and pipeline progress globally has opened the opportunity for management to create a direct global marketing presence. Successful execution would see HUTCHMED become a world-class biopharmaceutical innovator that, while continuing to have China-based discovery operations, sells its products directly in China and the US and through partnerships in other major Western markets.

Valuation

We use a SOTP approach to value HUTCHMED. The Oncology/Immunology business is a classic drug discovery, development, and commercialisation play, and a DCF-based model is particularly suitable. We calculate an rNPV of the various clinical projects (adjusted for success probabilities), sum them, and net this against costs, adopting conservative assumptions throughout. Other Ventures generates meaningful sales and profits, so earnings-based metrics are appropriate. Our valuation is $5.51bn, £4.59bn or HK$43.08bn, equivalent to $31.89/ADS or 531p/HK$49.83 per share (1 ADS = 5 shares).

Financials

HUTCHMED’s cash and equivalents at end-June 2022 were $826m, with another $178m in unused bank facilities, and $29m at non-consolidated JVs. Current resources should maintain pipeline development momentum and support the planned expansion of the commercial infrastructure. HUTCHMED is managing these resources prudently, with an aim of having three years run rate. FY22 guidance is focused on consolidated Oncology/Immunology revenues which are expected to reach $160m-190m (FY21: $119.6m) reflecting growth of Elunate, Sulanda, and Orpathys in China, as well as receipt of the $15m milestone triggered in February from AstraZeneca relating to trial initiation.

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: an increasingly global outlook

HUTCHMED is transitioning from a China-based R&D-focused biopharma to a fully integrated commercial-stage global company. Commercial traction of the three launched products in China (Elunate, Sulanda, Orpathys) is gaining momentum with FY22 revenue guidance of $160m-190m, +34%-59% on FY21. Several combination studies with checkpoint inhibitors are approaching or have begun registration trials, with this offering future growth potential. In parallel, HUTCHMED’s global ambitions are progressing with a traditional ex-China development strategy. Seven assets are in global development with several pivotal studies ongoing; recent positive fruquintinib FRESCO-2 data should support a potential first ex-China approval in 2024. Outside the solid tumour franchise, a second wave of assets is advancing: lead haem-oncology programmes amdizalisib and sovleplenib have embarked on China pivotal studies. Cash resources of $826m (end-H122) provide ample funding to support clinical and commercial plans. Our valuation is $5.51bn/ £4.59bn/ HK$43.08bn, equivalent to $31.89/ADS or 531p/HK$49.83 per share.

HUTCHMED has established an industry-wide reputation for discovering, developing, and commercialising best or first-in-class small molecule TKIs (tyrosine kinase inhibitors). A focus on innovation and in-house discovery and development, coupled with a genuinely global outlook, are major differentiators that set HUTCHMED apart from its domestic Chinese biopharma peers.

The potential of its broad, and increasingly diverse, pipeline is confirmed by the clinical data presented so far and its internationally competitive profile has opened the opportunity to build a global oncology franchise. The compelling prospects for its five most clinically advanced assets in both China and globally are becoming clearer, with near-term potential for first approvals and label extensions into additional indications as HUTCHMED seeks to optimise their value.

An element of HUTCHMED’s strategy across its TKI pipeline is initial development as monotherapies for China which, given the historical relative lack of innovation in marketed cancer therapies compared to other geographies, can offer a fast path to market. Alongside this, reflecting the continuing evolution of cancer treatment regimens, it is seeking to develop its oncology TKIs as part of combinations to improve clinical outcomes, unlock wider opportunities in multiple indications, and maximise pipeline value as appropriate in Greater China and key global markets.

The selectivity of HUTCHMED’s TKI pipeline offers advantages in terms of targeted efficacy and cleaner toxicity profiles, often the limiting factor restricting potential combinations, making them ideal candidates for various combination approaches, such as with other TKIs (eg savolitinib + osimertinib), or various PD-1/PD-L1 checkpoint inhibitors through multiple collaborations.

In China, the marketing success of the first three products in their first indications provides a tangible sign of the value of the R&D organisation, and of commercial execution, and will contribute increasingly meaningfully to the top line. However, given HUTCHMED’s ambitious yet disciplined clinical development, regulatory, and commercial plans across its pipeline (Exhibit 1), the scale of investment needed will also increase.

The company’s balance sheet comprises over $1bn of available resources which will be deployed across several late-stage development programmes, including follow-on indications and PD-1 combinations, as well as supporting the expansion of China and global commercial infrastructures. Commercial execution is key for HUTCHMED; the establishment and expansion of marketing operations and quality CMC (chemistry, manufacturing, and controls) is central to strategy.

Exhibit 1: Highly differentiated and increasingly broad China and Global pipeline

Source: HUTCHMED Note: (1) approx estimated loss of exclusivity (LOE) in key markets; (2) most advanced clinical stage and indication; (3) investigator-initiated trials (IITs); (4) subject to meeting pre-agreed sales targets, Lilly will pay HUTCHMED an estimated total of 70-80% of Elunate sales as royalties, manufacturing costs and service payments.

Macro considerations, notably the sector-wide mark down of company valuations, coupled with lingering concerns over businesses with extensive exposure to China, have weighed upon the share price. These, coupled with the FDA’s CRL (Complete Response Letter) for surufatinib, have distracted from the considerable progress achieved to date (Exhibit 2), and the prospect of important clinical, regulatory, and commercial news flow over the next 12-24 months (Exhibit 3) as the plethora of new studies initiating in 2022 start to deliver data in 2023.

Three product waves, with the first gaining traction

The three solid tumour focused products in HUTCHMED’s first wave have been approved and launched in China in their first monotherapy indications, with life cycle management indications and combinations with PD-1/PD-L1 checkpoint inhibitors being actively pursued.

The first wave includes: savolitinib, a c-MET inhibitor in development for lung, renal, and gastric cancers and launched in China as Orpathys to treat a subset of lung cancer patients (MET ex14 NSCLC); fruquintinib, a VEGFR inhibitor marketed as Elunate in China for 3L CRC (colorectal cancer) and in global development for multiple solid tumours; and surufatinib, a VEGFR/FGFR1/CSF-1R inhibitor that was launched in in 2021 in China as Sulanda for neuroendocrine tumours.

Exhibit 2: Most recent achievements

Source: HUTCHMED

From an international perspective, these assets are globally relevant, and several registration studies are underway. Savolitinib, partnered with AstraZeneca globally and playing a key role in lifecycle management of AstraZeneca’s Tagrisso (osimertinib) and Imfinzi (durvalumab), has recently initiated two registration trials in combination with Tagrisso (SAFFRON) for NSCLC and Imfinzi (SAMETA) for PRCC (papillary renal cell carcinoma). The first global launch is likely to be fruquintinib, subject to regulatory filings and review following positive data from the multi-regional Phase III FRESCO-2 mCRC study in August 2022.

Exhibit 3: 2022-2023 outlook

Source: HUTCHMED Note: * Subject to acceptance by scientific conference; **In planning; bold = regulatory progress /new clinical data; blue = China; pink = international; purple = China and international

FRESCO-2 is HUTCHMED’s first extensive truly global pivotal clinical study, and this forms the template for future global clinical programme design. The company is following a traditional ex-China development strategy across its portfolio that meets relevant regulatory requirements with the US FDA, European EMA, and Japan’s PMDA. In most cases this involves undertaking a number of appropriate multi-regional clinical trials (MRCTs) to support the relevant registrations, with the aim of ensuring patient demographics are representative of local populations.

Ex-China regulatory filings for fruquintinib and savolitinib will be supported by data from a completed or ongoing MRCT (FRESCO-2 and SAFFRON respectively), whilst the surufatinib global NETs programme was an exception to this strategy. In the case of surufatinib, a filing package consisting of compelling data from two China pivotal trials and a US bridging study was deemed sufficient for regulatory bodies given the significant unmet medical need and limited options for NET patients. However, following FDA review, a Complete Response Letter (CRL) was received outlining a requirement for a new MRCT in NETs that includes a more representative US patient population. This has set back US regulatory and commercial timelines but importantly does not, in our view, have read through to surufatinib’s clinical utility or the data to date. Similarly, the surufatinib MAA for NETs has been withdrawn given the EMA view that the pivotal China SANET trials are not applicable to Europe and a MRCT is also needed. Discussions continue with the FDA and EMA on the path forward for surufatinib in these regions.

The momentum building at HUTCHMED should be sustained by its next wave of programmes which are progressing through late clinical development. These assets target haematological indications, with the most advanced, PI3Kδ inhibitor amidizalisib (previously HMPL-689) and Syk inhibitor sovleplenib (HMPL-523), having initiated potential registration-enabling trials in China. Data read out from these studies is anticipated in 2023. Unlike the first wave, the plan for the second wave is for more parallel clinical development in China and globally.

The in-licensing of China rights to tazemetostat (Tazverik) from Epizyme (an Ipsen company) demonstrates that HUTCHMED is also looking externally to bolster and expand the potential of its in-house pipeline through selective and complementary business development. This deal provides access to a late-stage drug with potential synergies with its in-house assets, which will also be used to seed the China haem-oncology sales force. The Epizyme/Tazverik collaboration is one example of the type of partnerships that are part of HUTCHMED’s strategy to augment its capabilities, reach, and product offering (Exhibit 4).

Exhibit 4: Three-part scientific/medical partnership strategy

Source: HUTCHMED Note: MNC = multinational company

The most advanced third wave assets have recently started first-in-human studies and include non-oncology programmes and the first biologics. The latter include IMG-007, an anti-OX40 monoclonal antibody for atopic dermatitis partnered with Inmagene, and HMPL-A83, an anti-CD47 monoclonal antibody in development for advanced malignant neoplasms. These successive waves underpin our view that HUTCHMED’s proven discovery and development expertise will generate sustainable new product flow to support creation of a global biopharma business.

Continued clinical and regulatory success should create several value-inflection points over the next few years (Exhibit 5), as well as material progress in the expanding China commercial infrastructure and execution of the global direct marketing organisation. We note that at present, the market attributes little value to the Oncology/Immunology business, with the current market cap largely supported by HUTCHMED’s solid balance sheet (end-June 2022 cash of $826m) and equity stakes in two profitable joint ventures/subsidiaries.

Exhibit 5: Potential near-term NDA filings for six drug candidates in 13 registration trials

Source: HUTCHMED Note: ᴧ = in collaboration with Epizyme; * = in collaboration with AstraZeneca

We believe HUTCHMED presents a unique opportunity within biopharma given a well-balanced pipeline with largely de-risked late-stage assets, global ambitions supported by robust clinical trial plans, and proven commercial execution. Hence, we see the current entry point as compelling, which ascribes limited value to the commercial prospects of launched assets, or to the pipeline.

Given the importance of the pipeline to the longer-term investment case, we will be publishing a companion report to this Outlook. This companion Update note provides a comprehensive pipeline review, exploring the first wave of products (savolitinib, fruquintinib, and surufatinib) in greater detail, as well as outlining development plans for the next wave of product candidates (including amdizalisib and sovleplenib) and the earlier pipeline programmes. These two notes reflect the differing needs of HUTCHMED’s diverse investor base. Although both may be viewed in isolation, we would suggest that for a more complete understanding of the HUTCHMED investment case they should be read together.

Corporate structure aligned with global ambitions

HUTCHMED is a triple-listed global science-focused biopharmaceutical company, founded in 2000 by Hutchison Whampoa (a wholly owned subsidiary of Hong Kong-listed multinational conglomerate, CK Hutchison Holdings). In May 2006, HUTCHMED went public with a £40m (gross) AIM flotation, followed in March 2016 by a $110m ($96m net) NASDAQ IPO, and most recently in June 2021 by a $585m net IPO on the Main Board of the HKEX. All listings are fungible.

The company has raised significant sums in subsequent NASDAQ offerings ($293m net in October 2017 and $110m net in January 2020) and private placements ($100m with each of General Atlantic in June 2020, CPPIB in November 2020, and Baring Private Equity Asia in April 2021). CK Hutchison remains the largest shareholder but has, in recent years, reduced its holding to under 39% (previously c 60%) following its 2019 secondary offerings and non-participation in the most recent capital raises. Other significant shareholders are listed at the back of this report.

Global Oncology/Immunology commercial strategy

HUTCHMED’s structure reflects the growing financial contribution that the first wave of marketed Oncology/Immunology products will make. This business (which was previously known as Hutchison MediPharma, including China Oncology and Global Innovation) consists of the research, development, manufacturing, and commercialisation activities of HUTCHMED’s marketed and R&D stage innovative therapies.

The current infrastructure includes discovery and development facilities and optimally sized commercial operations in Shanghai (China), clinical development and regulatory affairs in New Jersey (USA), sizeable GMP-certified manufacturing in Suzhou (China), and regional representation in Beijing, Australia, and several European locations.

Over the near- and medium-term, HUTCHMED’s China operations will continue to be the major value driver. The establishment and expansion of US and European operations provides an infrastructure for the future global commercialisation of its internally discovered and developed assets. Over time, it is expected that ex-China sales will increasingly contribute to the top line, helping HUTCHMED transition into a multi-national business, albeit still retaining its strong commercial presence in China.

China: positive sales development

HUTCHMED’s oncology-focused salesforce has come to the fore since October 1, 2020, when it took over responsibility for China sales and marketing of Elunate in third line (3L) mCRC following a revision in the terms of the licencing agreement with Eli Lilly. Exhibit 6 illustrates the sales progression of Elunate since launch in November 2018 by Eli Lilly, highlighting the impact of both NRDL (National Reimbursement Drug List) inclusion and sales impetus created by HUTCHMED’s broader geographic reach (>3,000 oncology hospitals and >30,000 physicians) and efforts in leveraging positive clinical data to gain hospital listings and encourage physician adoption.

Exhibit 6: Elunate in-market sales since launch

Source: HUTCHMED Note: [1] IQVIA audit data in proprietary post-launch research panel of mainly Class 3 hospitals in Top 30 cities in China; [2] New & continuing patients.

Sulanda, launched in epNET in January 2021 and pNET in summer 2021, is the second product marketed by HUTCHMED, and from January 2022 is also on the NRDL. HUTCHMED’s third approved product, Orpathys, is sold by AstraZeneca and thus should benefit from synergies with its leading lung cancer franchise and China field force. Orpathys was included in the 2021 negotiations with the NHSA (National Healthcare Security Administration); however, HUTCHMED and AstraZeneca declined NRDL inclusion for 2022. This position will be reassessed ahead of the next NRDL update.

HUTCHMED’s commercial team has expanded rapidly, and management has indicated that the team is now optimally sized, with capacity for continued sales growth. We note that FY21 Oncology/Immunology revenues of $119.6m (which were within guidance of $110m-130m) are expected to grow further in FY22 with management guiding to $160m-190m in China alone.

Exhibit 7: Sulanda and Orpathys in-market sales

Source: HUTCHMED

Deals to leverage the China oncology infrastructure

HUTCHMED’s first strategic collaboration deal is with Epizyme (acquisition by Ipsen completed in August 2022) for the development and commercialisation rights to the EZH2 inhibitor tazemetostat (Tazverik) in Greater China. A stated use of funds at the time of the HK IPO/global raise was potential global business development and strategic M&A, and this in-licencing transaction fits the criteria for a synergistic targeted oncology asset (Exhibit 8). The deal should accelerate growth and leverage the China Oncology commercial infrastructure, as well as securing access to a product with the potential for synergistic combination with existing programmes.

Exhibit 8: EZH2 fits into HUTCHMED’s broad pipeline

Source: HUTCHMED

The China oncology team is currently focused on solid tumours; however, once the tazemetostat regulatory pathway in China is established, this would prompt the near-term establishment of a haematology-focused sales team. Tazemetostat is likely to be the first product marketed through this infrastructure, although several in-house programmes – specifically amdizalisib and sovleplenib – could follow shortly after (subject to supportive clinical data and regulatory review).

Under the terms of the agreement, HUTCHMED is responsible for tazemetostat development and commercialisation in Greater China. Tazemetostat will in time also be manufactured in-house by HUTCHMED for the China market. Deal terms include a $25m upfront payment to Epizyme, up to $110m in clinical/regulatory milestones (across up to eight oncology indications), and up to $175m in commercialisation milestones. HUTCHMED’s existing cash resources will cover the upfront and early milestone, with payment of later milestones anticipated to come out of future cash flows. Epizyme is also eligible for tiered royalties on net sales in Greater China (mainland China, Hong Kong, Macau, and Taiwan), ranging from a mid-teen to low-twenties percentage.

US, Europe, Japan: key global markets being addressed

A growing proportion of R&D investment has been directed towards US/EU and Japan trials, reflecting the baseline strategy of conducting clinical studies globally, as multiple assets transition into registration studies. Seven pipeline programmes are currently in global clinical development, including fruquintinib and savolitinib. The first ex-China regulatory filings were made for surufatinib in NETs (supported mainly by China pivotal data) with the FDA (CRL received in May 2022) and EMA (withdrawn pending further regulatory discussions), with fruquintinib filings (supported by the data from the pivotal FRESCO-2 MRCT) set to follow in late-2022/early-2023.

In the US, HUTCHMED has been putting the necessary infrastructure in place to commercialise its own products which, coupled with China, means it aims to address >50% of the global oncology market. Current US infrastructure includes commercial and medical affairs staff, with a flexible future expansion strategy. With initial surufatinib US launch likely postponed until beyond 2026, in our view, given the need to conduct an additional trial following the unexpected FDA CRL, the first US product launch is likely to be fruquintinib for 3L/4L CRC. Fruquintinib is the type of product that could potentially be marketed alongside another therapy to exploit commercial synergies where they may be overlap in the target physicians. Hence, we believe that a prudent US commercial strategy could involve the in-licencing of a complementary late-stage or approved gastrointestinal product for marketing by HUTCHMED alongside fruquintinib, or a securing a co-commercialisation partner.

HUTCHMED is also pursuing development and regulatory approvals in other regions such as Europe and Japan; here the intention is to secure strategic commercial partners that are well-positioned to address these more fragmented markets. The first such RoW deal(s) – for fruquintinib – are anticipated near-term.

Other Ventures: prior strategic importance now non-core

HUTCHMED’s current business also includes what are termed Other Ventures. With the establishment and rapid expansion of its China commercial platform for Oncology/Immunology prescription pharmaceuticals, these legacy joint ventures (JVs) are increasingly viewed as less relevant, despite representing substantial value. Following the divestment of its OTC medicines joint-venture Hutchison BYS (HBYS) in September 2021, Other Ventures now comprise two subsidiaries:

• Hutchison Sinopharm, a 51% JV with Sinopharm Group for prescription (Rx) drug commercialisation;

• Shanghai Hutchison Pharmaceuticals (SHPL), a 50% owned JV with Shanghai Pharma for Rx drug manufacture and commercialisation.

Collectively these businesses employ around 2,900 staff, mainly in manufacturing and commercial roles, and sell directly into c 290 cities across China. H122 consolidated revenues were $110.9m (down 3% on H121: $114.5m) with attributable net income of $35.4m (up 19% from H121: $29.8m, excluding net income contribution of $11.5m from HBYS). SHPL is the main contributor, having generated non-consolidated JV revenues of $212.4m (up 18%) and contributing net income of $33.6m (H121: $28.6m).

For FY21, consolidated revenues were $236.5m (up 20%) and attributable net income of $142.9m (up 96%). Net income included a one-time gain of $82.9m on the sale of HBYS and a one-time land compensation gain of $5.6m (FY20: $28.8m). The divestment of HUTCHMED’s entire indirect 40% stake in HBYS, a JV with Guangzhou Pharma, to GL Capital Group, for $127m in cash and a payment of $42m related to undistributed profit, represented a 22x multiple on the $7.7m attributable FY20 net income.

Since HUTCHMED’s inception, Other Ventures businesses have contributed a total of $562m in net income (Exhibit 9), $74.8m as one-time property gains, which have made an important contribution towards funding HUTCHMED’s Oncology/Immunology R&D programmes. However, as the scale of the core business expands and management focus is increasingly on the development and global commercialisation of HUTCHMED’s innovative assets, we anticipate further divestments of non-core assets. Based solely on recurring incomes and multiples of similar domestically quoted peers, and not attributing any form of intrinsic value, we value Other Ventures at c $786m (£655m, HK$6.14bn).

Exhibit 9: Other Ventures contribute considerable income

Source: HUTCHMED

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 risks relate to outcomes of clinical trials and regulatory decisions for key late-stage assets (savolitinib, fruquintinib, and surufatinib) in global markets, and their commercial execution in China.

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).

HUTCHMED’s sustained commercial success in China is due to the established infrastructure, which has significant national and regional expertise. Management is expanding its China commercial footprint through which it markets the products emerging from its R&D pipeline. 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 in the growing international operations. However, we highlight that potential regulatory interactions with, and decisions by, the China NMPA, US FDA, European EMA, and Japan PMDA may be subject to delays as a result of ongoing impacts of the global COVID-19 pandemic.

HUTCHMED has been provisionally named by the SEC as an issuer that falls under the US Holding Foreign Companies Accountable Act (HFCAA), which provides for the de-listing of ADS from NASDAQ in early 2024 unless the Act is amended or a full inspection of HUTCHMED’s auditor is carried out ahead of that deadline. Management has issued two status updates indicating that market developments and all strategic options are under evaluation, including appointing an ex-China auditor if, and when the contribution of the international business exceeds that of the China business. We note that the HFCAA has no impact on business operations, nor does it affect HUTCHMED shares listed on HKEX and AIM, which are fully fungible with the ADSs.

HUTCHMED’s largest shareholder, CK Hutchison, has over the past three years reduced its stake (from c 60% to c 39%) to enable the deconsolidation of HUTCHMED from its financial accounts, and has stated that it has no intention of further secondary offerings in the foreseeable future.

Valuation

We value HUTCHMED using a sum-of-the-parts methodology, with an rNPV model for the development portfolio and early-stage marketed products and an earnings-based multiple for the established Other Ventures commercial platforms. 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).

The Oncology/Immunology business, essentially the drug discovery and development operations, is a classic biopharmaceutical play that we value with a DCF approach. We calculate a rNPV (risk-adjusted net present value) for each major clinical programme, adjusting this with success probabilities that reflect the nature of the compound (eg novel or proven mechanism of action) and proposed indication (eg degree of expected competition, likely rate of adoption). We strive to employ conservative assumptions throughout, which will tend, collectively, to underestimate the inherent value. Intuitively it follows that later stage projects have a higher rNPV, with the step-change occurring on completion of Phase II proof-of-concept trials.

Other Ventures consists of the JV operations in China that are revenue generating and profitable, so earnings-based metrics are appropriate. We base our various multiples on the averages of suitable Chinese-based peers, excluding companies where the multiples appear to be distorted by non-recurring events (such a property profits) or are outliers. We also exclude companies where the multiples appear too high, suggesting an element of speculation within the share prices rather than simply reflecting the operating businesses. While there is an element of subjectivity in this peer group selection, the logic driving the decisions is to maintain our cautious approach throughout.

A breakdown is shown in Exhibit 10. Reflecting the progress achieved and the near- and medium-term prospects the Oncology/Immunology platform now accounts for 71% of our company valuation, Other Ventures (the remaining JV operations in China) for 14%, with H122 net cash representing the 15% balance.

Exhibit 10: 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 11 and 12. HUTCHMED’s most valuable asset is fruquintinib which comprises 38% of the value of the Oncology/Immunology portfolio and 27% of the company valuation. The next most valuable assets are savolitinib (23% and 17%, respectively) and surufatinib (23% and 16%, respectively). The earlier-stage clinical assets carry lower success probabilities and collectively represent 16% and 11% respectively, but we expect these to unlock significant additional value as they progress through clinical development (subject to positive trial results).

Exhibit 11: 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 12: Relative contributions of HUTCHMED programmes to valuation

Source: Trinity Delta

We note that any number of incremental improvements on our base case scenarios could result in sizeable uplifts in our valuation. We are also conservative regarding a couple of areas where we expect visibility to increase, for example with respect to development strategy clarification (lead indications, clinical trial timelines) for the second wave assets. Similarly, we presently do not ascribe a valuation for the emerging discovery assets, the Inmagene immunology partnership, nor the discovery platform, which remain as upside to our valuation.

Equally importantly, the visibility for the outlook of 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 in the next 12 to 24 months. We intend to review our model regularly to reflect clinical, regulatory, and commercial progress.

Financials

HUTCHMED’s H122 group revenue of $202.0m was up 28% from $157.4m in H121, due to an increasing contribution from Oncology/Immunology marketed products (+113% to $91.1m vs H121: $42.9m), while consolidated revenues from Other Ventures fell slightly (-3% to $110.9m vs H121: $114.5m). Revenues are split into two reporting segments: Oncology/Immunology covers all activities relating to new products including research and development, manufacture, sales, and marketing; and Other Ventures, which includes all other activities, including both the consolidated JVs (eg Hutchison Sinopharm) and non-consolidated JVs (eg Shanghai Hutchinson Pharmaceuticals).

Oncology/Immunology revenues of $91.1m in H122 (H121: $42.9m; FY21: $119.6m) consisted of $63.5m (H121: $37.8m; FY21: $76.4m) generated by the three marketed oncology products in China (Elunate, Sulanda, and Orpathys), and other R&D service fee revenues of $12.6m (H121: $5.1m; FY21: $18.2m) plus a $15m milestone from AstraZeneca received on initiation of the global Orpathys Phase III SAFFRON trial ($25m milestone in FY21 on first China sales). H122 Elunate revenues of $36.0m (H121: $29.8m; FY21: $53.5m) were booked by HUTCHMED on in-market sales of $50.4m (H121: $40.1m; FY21: $71.0m). HUTCHMED launched its second drug, Sulanda, in China in mid-January 2021 and generated H122 revenues of $13.6m (H121: $8.0m; FY21: $11.6m). Orpathys, launched in mid-July 2021, generated H122 revenues of $13.8m (H121: nil; FY21: $11.3m) in royalties and manufacturing revenues from AstraZeneca (on in market sales of $23.3m in H122 and $15.9m for FY21).

Cost of Sales rose 11% to $137.3m (H121: $123.2m; FY21: $258.2m), largely attributable to the cost of third-party prescription drug products marketed through Other Ventures as well as costs associated with the marketed Oncology products. The 45% increase in SG&A expenses to $79.8m (H121: $54.8m; FY21: $127.1m) reflected the expansion of the oncology commercial operations in China, while the 47% increase in R&D spend, $181.7m from $123.1m (FY21: $299.1m), highlights both the continuing progress and expansion of clinical development of the twelve Oncology/Immunology assets, seven of which are in global development. US/European R&D spend of $83.6m (H121: $59.3m; FY21: $140.1m) is approaching a similar level to the investment in China R&D (H122: $98.1m; H121: $63.8m; FY21: $159m). R&D expense is expected to rise further as pivotal trials initiate and run to completion, additional indications are evaluated, early-stage assets progress, and new INDs are filed.

Income from Other Items of $33.9m (H121: $41.3m; FY21: $133.7m) decreased following HBYS divestment in September 2021. Net income from equity investees was up 17% on a like-for-like basis to $33.5m (H121: $28.7m). HUTCHMED delivered a H122 net loss of $162.9m (H121: net loss of $102.4m; FY21: net loss of $194.6m). Broken down between the two reporting segments: Oncology/ Immunology posted a H122 segment operating loss of $186.0m (H121: operating loss of $127.6m; FY21: operating loss of $297.5m), while Other Ventures generated a segment operating profit of $36.1m (H121: operating profit of $44.7m; FY21: operating profit of $185.2m), with a residual unallocated balance (operating loss of H122: $16.9m; H121: $14.3m; and FY21: $42.3m respectively).

Management guidance for FY22 focuses on consolidated Oncology/Immunology revenues: the expectation is that China revenues from the three marketed products will grow to between $160m-190m. This increase will be driven by continued acceleration in Elunate growth, a similarly growing Sulanda (with increased volumes more than offsetting the NRDL discount), and the first full year of revenues for Orpathys coupled with the $15m milestone payment from AstraZeneca received in March on the initiation of the global NSCLC Phase III programme.

Exhibit 13: Oncology/Immunology in-market sales and consolidated revenue

Source: HUTCHMED

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 build out of China and US commercial infrastructure will increase FY22 S&M costs to $45.3m and G&A to $98.2m on our forecasts. Changes to our key estimates are shown in Exhibit 14.

Exhibit 14: Summary of changes to estimates

Source: Trinity Delta

At end-June 2022, HUTCHMED had cash resources of $826m, consisting of cash, cash equivalents, and short-term investments. The company also has $178m in unutilised banking facilities and a 50% stake in the $58m in 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 is managing these resources prudently, with an aim of having three years run rate.

Exhibit 15: 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

Source: HUTCHMED Note: * ultimately controlled by The Carlyle Group Inc; ** Chief Executive and Founding Partner of Baring Private Equity Asia