HUTCHMED: on the path to sustainability

HUTCHMED’s FY22 results crowned a year of commercial execution in China and of pipeline progress in China and globally. Importantly, the November strategic update laid the framework for the transition to a self-sustaining profitable biopharma business, which includes a focus on ex-China partnerships, with the first already executed. The first wave of oncology products is gaining commercial momentum in China with FY22 revenues of c $164m despite COVID headwinds. The second wave has embarked on potentially registrational studies, with data expected in H223, potentially followed by China NDA filings if positive. Positive read out of FRESCO-2, HUTCHMED’s first global Phase III multi-regional clinical trial (MRCT), preceded the Takeda global ex-China deal for fruquintinib rights. This deal not only boosts HUTCHMED’s balance sheet through a $400m upfront payment (plus downstream milestones and net sales royalty potential), but also frees up internal bandwidth. Prioritising registration studies and the late-stage pipeline, coupled with a global partnering approach, should drive near-term value and help HUTCHMED achieve breakeven in FY25. Incorporating the Takeda deal and the updated strategy, we now value HUTCHMED at US$5.54bn / £4.61bn / HK$43.19bn, equivalent to $32.01/ADS or 534p / HK$49.94 per share..

The strategic update in November outlined the priorities and the steps to be taken as HUTCHMED completes its transition from a largely China-based R&D-focus to a fully integrated commercial-stage global biopharma company. A key area of management attention is on commercial delivery in China, with plans to grow Oncology/Immunology revenues from the first wave of marketed products and leverage the sales infrastructure as follow-on indications are approved and/or further NDA-stage assets are in-licenced. In the medium-term, selective investment into HUTCHMED’s China commercial operations will be made to support the future commercialisation of the second wave haem-oncology assets.

Exhibit 1: Several product waves comprise the HUTCHMED pipeline

Source: HUTCHMED

For ex-China markets, HUTCHMED is pursuing a global partnering approach. Takeda, through the January 2023 global ex-China deal for fruquintinib rights, joined long-time savolitinib partner AstraZeneca, as a strategic licensing partner. Such partnerships with large pharma players should maximise the global development and commercial potential of the respective assets, while allowing HUTCHMED to direct internal resources towards advancing its internal late-stage R&D pipeline. This portfolio has been prioritised with a focus on later-stage assets and China registrational trials for the first two product waves (Exhibit 1).

We recently published two extensive reports which explain HUTCHMED’s development and commercial strategy (September 2022 Outlook) and review the background, status and relative importance of key first and second wave pipeline programmes (September 2022 Pipeline Review). These provide more details on the component assets that should help HUTCHMED achieve its goal of self-sustainability in FY25 with up to six or seven potential blockbuster products launched in China, coupled with royalty income (and later sales milestones) from ex-China sales through partners.

China commercial business ramps up revenues

HUTCHMED’s Oncology/Immunology business generated FY22 revenues of $163.8m (+37% on FY21: $119.6m), largely from sales of the three marketed oncology products in China which produced revenue of $124.6m (FY21: $76.4m). Key initiatives in 2022 included efforts to widen patient access and to carry on with marketing and education programmes, albeit digitally, in response to constraints imposed by COVID-19 movement restrictions. The China commercial infrastructure is considered by management to be at optimal scale with a 900+ person oncology commercial team covering >33k physicians and >3k hospitals across 328 cities in China. This organisation has ample capacity to further grow sales as hospital pharmacy listings increase, and as additional indications (eg fruquintinib in 2L gastric cancer following positive read out of the China FRUTIGA Phase III trial) and products (eg Tazverik in relapsed/refractory follicular lymphoma, currently only available in the Hainan Medical Zone) are approved.

Elunate revenues continue to increase alongside market share gains in 3L metastatic colorectal cancer (mCRC), ie in patients previously treated with chemotherapy, anti-VEGF and/or anti EGFR therapy. FY22 in-market sales were $93.5m (FY21: $71.0m) which translated into consolidated revenues of $69.9m (FY21: $53.5m) booked by HUTCHMED. Under the terms of the July 2020 amendment to the Eli Lilly licence, HUTCHMED consolidates approximately 70-80% of Elunate in-market sales from manufacturing fees, commercial service fees, and royalties paid by Eli Lilly. Elunate overtook Stivarga (regorafenib) as the market leader during 2021, having now captured a 44% (Q422) share, due to its clinical profile and pricing. Inclusion in the Chinese Society of Clinical Oncology (CSCO) and Chinese Anti-Cancer Association (CACA) treatment guidelines, as well as ongoing inclusion on the NRDL (National Reimbursement Drug List) at a lower price to Stivarga have also contributed to this strong market position.

Sulanda, the second product launched by HUTCHMED’s own salesforce (in January 2021), is also building traction with in-market sales and revenues of $32.3m (+178% on FY21: $11.6m) reflecting NRDL inclusion from January 2022. As with Elunate, the greater patient penetration and higher volumes more than offset the NRDL price discount, which was at 52% for Sulanda. Sulanda has also been included in CSCO and CACA guidelines for advanced NETs (neuroendocrine tumours), and since Q322 has been the number two brand for NETs in China with 16% market share, behind sandostatin (42%) but ahead of Sutent (sunitinib) and Afinitor (everolimus) with 14% and 10% share respectively.

Orpathys, sold by AstraZeneca since launch in July 2021, generated in-market sales of $42.1m (+159% on FY21: $15.9m) with HUTCHMED receiving manufacturing revenue and a 30% royalty from AstraZeneca which totalled $22.3m (FY21: $11.3m). Revenues reflect a first full year of sales, in which market share more than doubled, driven by self-pay patients. Orpathys has been included in five new treatment guidelines (including CSCO and CACA) and from March 2023 is listed on the NRDL associated with a 38% price reduction. This is a relatively modest discount given the average NRDL price reduction trend since 2018 is around 60% (61% in 2019; 51% in 2020, and 62% in 2021).

Momentum in revenues from these China Oncology marketed products, coupled with partial recognition of the $400m upfront from the Takeda fruquintinib deal underpin FY23 revenue guidance of $450-550m (vs FY22 revenues of $163.8m). For FY23e we model Oncology/Immunology revenues of $503m, which includes $170m of consolidated revenues related to product sales (vs FY22: $124.6m), in addition to $300m partial recognition of the Takeda upfront. We forecast Other Ventures FY23e revenue of $223m, for total FY23e revenues of $726m.

Takeda to take fruquintinib global

The global (ex-China) licensing deal with Takeda for fruquintinib development and commercial rights (January 2023 Lighthouse) closed in March 2023. This is the first major partnership agreement executed since HUTCHMED’s new strategy was articulated. In addition to substantial economics, the deal provides important external validation for fruquintinib, which represents a material near-term opportunity ex-China. Its timely execution should help ensure fruquintinib’s commercial success in the key US, European, and Japan markets – in both the lead indication of ≥3L mCRC and subsequent indications in which development is likely to be pursued – while allowing Takeda sufficient time to make necessary preparations ahead of regulatory approval decisions and potential launch(es).

Takeda, a Japan-headquartered multi-national biopharma, is a well-suited partner given its global footprint across c 80 countries and strength in oncology. Major regions are the US, Europe and Canada, and Japan ($29.4bn FY21 revenue share of 48%, 21%, and 18% respectively); while oncology (14% of FY21 revenues) is  one of five key business areas. A historical focus more on the development and commercialisation of drugs to treat haematological cancers, including through partnerships, is being broadened through a growing solid tumour portfolio.

The terms of the transaction include an upfront payment of $400m (due to be received by HUTCHMED shortly) and up to $730m in potential future regulatory, development, and commercial milestones, plus tiered royalties on annual net sales. While undisclosed, we assume that these royalties start from mid-teens, as they are known to be commensurate with commercial launch-stage licencing deals, and this would also be consistent with the starting royalty from fruquintinib partner Eli Lilly in China (where HUTCHMED receives tiered 15-29% royalties).

Subject to positive regulatory review(s), fruquintinib is on track to become the first HUTCHMED discovered and developed drug to be launched outside China. The rolling NDA filing with the FDA in ≥3L mCRC began in December 2022 and completed in March 2023, with EMA and Japan PDMA submissions to follow in 2023. Despite the possibility of Priority Review, we conservatively assume a standard review schedule, for an FDA approval decision potentially in H124.

Prioritising the late-stage pipeline

The global partnering strategy means that HUTCHMED has de-prioritised internal global development of several earlier-stage assets in favour of expediting the clinical development pathway of programmes for the domestic China market. These include second wave assets:

• sovleplenib: progressing towards a late-2023 China NDA filing in relapsed/refractory ITP (immune thrombocytopenia), assuming positive read out of the pivotal ESLIM-01 monotherapy trial;
• amdizalisib: top line results of the fully enrolled China Phase IIb registration study in 3L follicular lyphoma are due in H223; and
• tazemetostat: two key China trials, a bridging study in follicular lymphoma (which could support conditional registration based on FDA approval) and the China portion of the global Phase III SYMPHONY trial, are underway.

We have previously comprehensively reviewed HUTCHMED’s development portfolio in our September 2022 Pipeline Review, however, Exhibit 2 provides an up to date snapshot of the current status of the 12 molecules prioritised for development.

Exhibit 2: HUTCHMED development portfolio

Source: HUTCHMED

A brace of registration studies to report 2023/24

The next 18-24 months are a critical period, with significant development and regulatory progress anticipated from multiple late-stage programmes. Deliverables for 2023 are summarised in Exhibit 3, while Exhibit 4 provides more detail on the most advanced assets currently in registrational/registration potential trials.

Exhibit 3: Clinical deliverables in 2023

Source: HUTCHMED   Note: *Based on bridging study, Phase II registration study, or Phase II/III study design

Six of HUTCHMED’s first and second wave assets are currently under evaluation in more than 15 trials that support potential near-term NDA filings, several of which would be for follow-on indications as well as first China or US/EU/Japan approvals. Completion of late-stage internally funded studies should contribute to lower R&D costs over 2023-24, and, subject to supportive data and a positive regulatory review, their commercial launches could meaningfully increase China revenues (through HUTCHMED’s infrastructure, except for Orpathys) and provide first global sales (via new and existing strategic partners). Delivery on pipeline plans could mean that by end-2025, six or seven products are launched in China, with the first two available globally, helping achieve breakeven in FY25.

Exhibit 4: HUTCHMED registration/potential registration studies

Source: HUTCHMED  Note: *in collaboration with AstraZeneca; ^ in collaboration with Ipsen

Valuation

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 valuation has been updated to include the Takeda deal for ex-China rights to fruquintinib, and to reflect the broader ex-China commercial strategy which is now focused on partnerships. In addition, our valuation has been rolled forward in time and incorporates FY22 reported financial results. With all these changes, our company valuation is now $5.54bn (equivalent to $32.01 per ADS), £4.61bn (534p per share), or HK$43.19bn (HK$49.94 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

We note that any number of incremental improvements on our base case scenarios could result in sizeable uplifts in our valuation. Key will be visibility on sales traction and development/regulatory progress for the late-stage clinical programmes, and multiple catalysts are expected in the next 12 to 24 months. We are also conservative regarding a couple of areas where we expect visibility to increase, for example with respect to the second wave assets (lead indications, clinical trial timelines and first launches). Similarly, we presently do not ascribe a valuation for the emerging discovery assets or platform, nor to the Inmagene immunology partnership. We intend to review our model regularly to reflect clinical, regulatory, and commercial progress.

Financials

HUTCHMED’s FY22 consolidated revenues were $426m (+20%, FY21: $356m), with Oncology/Immunology marketed products making an increasing contribution with revenue of $163.8m (+37%, FY21: $119.6m), in-line with FY22 guidance of $160-190m. Revenue from Other Ventures increased 11% to $262.6m (FY21: $236.5m) due to higher sales of prescription drugs. 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 such as the consolidated JVs (eg Hutchison Sinopharm).

Oncology/Immunology revenues of $163.8m (FY21: $119.6m) were comprised of $124.6m (FY21: $76.4m) generated from sales of the four marketed oncology products in China, $24.2m (FY21: $18.2m) from other R&D service income, and a $15m milestone payment from AstraZeneca received on initiation of the global savolitinib Phase III SAFFRON trial (FY21: a $25m milestone was booked on first China sales of Orpathys).

Product sales were predominantly derived from Elunate, Sulanda and Orpathys, as Tazverik was only currently available in the Hainan Medical Zone. For FY22, HUTCHMED booked Elunate revenues of $69.9m (FY21: $53.5m) on in-market sales of $93.5m (FY21: $71.0m), while Sulanda generated revenues of $32.3m (FY21: $11.6m) reflecting NRDL inclusion from January 2022, and Orpathys manufacturing revenue and royalties from AstraZeneca amounted to $22.3m (FY21: $11.3m) on in-market sales of $41.2m (FY21: $15.9m).

Cost of Sales rose 20% to $311.1m (FY21: $258.2m), largely due to the cost of third-party prescription drug products marketed via through Other Ventures plus costs associated with the marketed Oncology products. SG&A spend grew 7% to $136.1m (FY21: $127.1m) as a result of higher staff costs and expansion of the China oncology commercial operations. A 29% increase in R&D expenses to $386.9m (FY21: $299.1m) reflects the 15+ registration trials with six oncology assets. Income from Other Items was lower at $46.9m (FY21: $133.7m), due largely to a $82.9m one-off gain on HBYS divestment in FY21.

HUTCHMED’s FY22 net loss was $360.8m (FY21: $194.6m). The breakdown between the two reporting segments was a segment operating loss of $385.4m (FY21: operating loss of $291.7m) for Oncology/Immunology, while Other Ventures generated an operating profit of $54.6m (FY21: $142.9m), and there was an unallocated balance with an operating loss of $30.0m and $45.8m for FY22 and FY21 respectively.

At end-December 2022, HUTCHMED had cash resources of $631m, consisting of cash, cash equivalents, and short-term investments. The company also has $140m in unutilised banking facilities and a 50% stake in the $34m of additional cash held at the SHPL JV. These figures do not include the $400m upfront payment from Takeda, payable on deal close in March 2023. Management has not provided net cash flow guidance for FY23 but has indicated that FY22 was a peak year for cash burn and that the current cash runway will be extended through partnering and HUTCHMED’s strategic focus on progressing the most advanced pipeline assets.

HUTCHMED guidance for consolidated Oncology/Immunology revenues is $450m-550m, which includes expected partial recognition of the Takeda upfront payment. China commercial revenues from the three marketed products and Tazverik are expected to deliver high double-digit revenue growth on FY22 (we forecast 36%) driven by continued growth in Elunate and Sulanda, and the impact of NRDL inclusion from March 2023 for Orpathys. For the Takeda upfront, we include partial recognition of $300m in FY23e, with the $100m balance then split roughly evenly between FY24e and FY25e. A breakdown of our key forecasts for Oncology/Immunology revenues are shown in Exhibit 7. We forecast Other Ventures FY23e revenue of $223m, for total FY23e revenues of $726m.

Exhibit 7: FY23e forecasts underpinning Oncology/Immunology revenues

Source: HUTCHMED and Trinity Delta

Orpathys consolidated revenues on in-market sales in China simply comprise a fixed 30% royalty, in addition to revenues for product manufactured and supplied to AstraZeneca (done at cost). For Elunate, consolidated revenues also include commercial service fees for promotion and marketing, in addition to royalties and manufacturing fees (from partner Eli Lilly). Together these represent c.70-80% of in-market sales. A breakdown of our forecasts for consolidated Elunate revenues are shown in Exhibit 8, together with our key underlying assumptions, whilst Exhibit 9 graphically depicts the component parts of consolidated revenues against in-market sales in China.

HUTCHMED also receives R&D service income and milestones on both Orpathys and Elunate, although these can be harder to forecast. Hence, we assume only modest growth in the near-term for R&D service income, whilst for milestones we generally only include known/disclosed items, or a minor contribution.

Exhibit 8: Underlying assumptions for Elunate revenues in FY23e

Source: HUTCHMED, Trinity Delta

Exhibit 9: Elunate in-market sales in China vs HUTCHMED’s consolidated revenues

Source: HUTCHMED, Trinity Delta

Management has outlined that R&D costs will reduce over 2023-2024, and we forecast FY23e R&D spend of $378m (FY22: $387m), further decreasing to $330m in FY24e. This is due to pipeline prioritisation and as a number of large and late-stage trials complete. We expect continued build out of the China commercial infrastructure to support existing and new product launches, leading to an increase in S&M costs to $54m in FY23e (FY22: $44m) and then to $64m in FY24e. However, given S&M for fruquintinib ex-China will now be borne by Takeda we do not expect significant S&M investment outside of China. For G&A we expect a slight decrease in FY23e to $83m (FY22: $92m) as existing US operations are reduced given the strategy to partner ex-China; from this new base we then expect modest G&A growth to $85m in FY24e.

Changes to our key estimates are shown in Exhibit 10 and a summary of our financial forecasts is presented in Exhibit 11. The biggest driver of change in our FY23e forecasts is the Takeda upfront, where we include $300m in milestone revenues in FY23e, leading to a much narrower operating and net loss.

Exhibit 10: Summary of changes to estimates

Source: Trinity Delta

Exhibit 11: Summary of financials

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