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 39% 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 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 $5.74bn, £4.78bn or HK$44.75bn, equivalent to $32.95/ADS or 549p/HK$51.40 per share (1 ADS = 5 shares; all listings are fungible).

Financials

HUTCHMED’s cash and equivalents at end-June 2023 were $856m (including receipt of the $400m Takeda upfront payment), with another $65.3m in unused bank facilities, and $43.6m at the SHPL JVs. Strategic prioritisation of registration studies and the late-stage pipeline resulted in 20% lower R&D spend in H123 vs H122, while restructuring of US operations contributed to a 14% reduction in  SG&A costs. Prudent cost management, coupled with anticipated revenue growth and the potential to extend the current cash runway through the achievement of milestones from existing partners or securing additional partnerships means that HUTCHMED remains well-funded. China revenues from the approved products (Elunate, Sulanda, Orpathys), plus partial recognition of the Takeda upfront, underpin FY23 Oncology/Immunology revenue guidance of $450-550m.

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: ticking important strategic boxes

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 and key pipeline programmes (including the haematology focused second wave) are progressing with multiple near-term clinical and regulatory catalysts. The most significant of these is the 30 November 2023 FDA PDUFA goal date for fruquintinib in mCRC; subject to a positive approval decision, partner Takeda is set for the first international launch of a HUTCHMED product as soon as practicable post-approval. Beyond this, HUTCHMED presents a unique biopharma opportunity, in our view, with a broad pipeline of largely de-risked late-stage assets, global ambitions supported by large pharma partners, proven commercial execution in China supporting a growing top line, together balanced with shrewd investment. Our HUTCHMED valuation is $5.74bn/£4.78bn/ HK$44.75bn, equivalent to $32.95/ADS or 549p/HK$51.40 per share.

The HUTCHMED investment case is progressively shifting from being solely pipeline-based to one driven by financials, as its revenues and marketed product portfolio in China grow from three currently (Elunate, Sulanda, Orpathys) to potentially six or seven in the next two years. Meaningful revenues are starting to come through, with management guiding to FY23 Oncology/Immunology revenue of $450-550m from marketed products including partial recognition of the Takeda upfront ($280m of the $400m received). H123 results confirm that HUTCHMED is well-funded with ample cash resources ($856m at end-June 2023) to support its clinical and commercial plans, with recent strategic cost cutting streamlining and focusing the business to ensure that breakeven in FY25 is an achievable target.

Aside from the forthcoming US and European fruquintinib approval decisions, and potential international launch(es) by Takeda, progressing priority late-stage assets towards registration and securing additional strategic ex-China global partnerships should unlock further near-term value. Over 15 registrational or registration-intent studies are ongoing for seven drug candidates, potentially supporting China (and ex-China) NDA filings over 2024-2026. Key programmes include wholly owned haematology assets, amdizalisib and sovleplenib, where clinical data (expected in H223 for the former; the latter has already read out positively) could form the basis of subsequent China NDA submissions.

This Outlook note provides an overview of HUTCHMED’s strategy and recent achievements commercially, clinically, and financially. Alongside continued commercial execution, HUTCHMED’s diverse and balanced pipeline is central to the long-term investment case and a Capital Markets Day (CMD) showcasing these assets is planned for Q423. We intend to use that as an opportunity to update our September 2022 Pipeline Review to reflect the progress over the past twelve months and prospects for the key pipeline programmes.

A clear strategy towards sustainable profitability

HUTCHMED has an established reputation for discovering, developing, and commercialising best or first-in-class small molecule TKIs (tyrosine kinase inhibitors). Since its foundation in 2000, the company has evolved from a China-based R&D-focused company and is now firmly on the path to maturing into a fully integrated commercial-stage global biopharmaceutical company. Breakeven is targeted in FY25, after which management expects the company will be sustainably profitable and benefit from significant operating leverage (Exhibit 1).

Exhibit 1: The path to sustainable profitability

Source: HUTCHMED

A focus on innovation and in-house discovery and development of internationally competitive TKIs, and its objective of expanding their penetration into global ex-China markets through multi-national blue-chip pharma partners, provides important differentiation for HUTCHMED vs its domestic Chinese biopharma peers. This global partnering approach has proved successful so far. Takeda, through the global ex-China deal for fruquintinib rights (January 2023 Lighthouse), joined long-time savolitinib partner AstraZeneca, as a strategic licensing partner. Such partnerships with large pharma players should maximise 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.

HUTCHMED’s in-house oncology-focused China commercial infrastructure has a broad geographic reach and currently supports the direct marketing of two products, Elunate (fruquintinib) and Sulanda (surufatinib). It 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. Commercial delivery in China is a priority for HUTCHMED and recent initiatives have focused on widening patient access and encouraging physician adoption of existing launched products, including through digital marketing and education programmes. Sales have also been boosted by continued National Reimbursement Drug List (NRDL) inclusion. The near-term plan is to grow Oncology/Immunology revenues from the first wave of marketed products, leveraging the sales infrastructure as follow-on indications are approved and/or further NDA-stage assets are in-licenced. By 2025, the aim is to have launched a portfolio of six or seven products in China, including the second wave haematology assets.

Exhibit 2: HUTCHMED registration/potential registration studies

Source: HUTCHMED   Note: * = in collaboration with AstraZeneca, ᴧ = in collaboration with Ipsen

Addressing its global ambitions with partners frees up internal bandwidth and allows HUTCHMED to prioritise resources into advancing its later-stage Oncology/Immunology assets into registration trials (Exhibit 2) that can potentially support near-term China NDA filings or facilitate the execution of further strategic global partnerships. The Oncology/Immunology business (previously known as Hutchison MediPharma, including China Oncology and Global Innovation) consists of the R&D, manufacturing, and commercialisation activities of HUTCHMED’s marketed and pipeline therapies. With >15 registrational or registration-intent studies ongoing for seven drug candidates, the next six to 18 months will be a critical period, with significant development and regulatory progress anticipated (Exhibit 3).

Exhibit 3: Clinical deliverables in 2023-24

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

Pipeline prioritisation to unlock near-term value

HUTCHMED’s broad, and increasingly diverse, pipeline has compelling prospects in China and beyond. It can be split into various waves of development (Exhibit 4). These successive waves underpin our view that HUTCHMED’s proven discovery and development expertise will generate sustainable new product flow to support the creation of a global biopharma business.

The global partnering strategy, with near-term ex-China commercialisation by multinational pharma partners,  means that the internal global development of several earlier-stage assets was de-prioritised in late-2022 in favour of expediting the clinical development pathway of programmes for the domestic China market. As a result, pending the read out of the respective registrational studies, the most advanced of the second wave drug candidates are approaching first China NDA filings within the next twelve months.

Exhibit 4: HUTCHMED pipeline consists of several product waves

Source: HUTCHMED

First wave: marketed in China, partnered globally…

HUTCHMED’s first wave comprises the solid tumour products that are already approved and marketed in China in their initial monotherapy indications: fruquintinib (Elunate), a VEGFR inhibitor for 3L mCRC (metastatic colorectal cancer), savolitinib (Orpathys), a c-MET inhibitor in a subset of non-small cell lung cancer patients (MET ex14 NSCLC) marketed by AstraZeneca; and surufatinib (Sulanda), a VEGFR/FGFR1/CSF-1R inhibitor therapy for neuroendocrine tumours (NETs). These three drugs posted FY22 consolidated revenues of $124.5m on in-market China sales of $167m (despite COVID-19 headwinds) and $79.7m consolidated revenues in H123 on in-market China sales of $100.9m (Exhibit 5).

The strategy for the first wave is for HUTCHMED and its partners to maximise the value of each asset by pursuing label extensions into additional indications – including as part of combination regimes with PD-1/PD-L1 checkpoint inhibitors through multiple collaborations – and, for fruquintinib and savolitinib, potential NDA approvals in ex-China territories.

Exhibit 5: Growing Oncology product sales

Source: HUTCHMED    Note: [1] Total sales to third parties by Lilly (Elunate) and AstraZeneca (Orpathys), and their sales to other third parties as invoiced by HCM. [2] Elunate manufacturing fees, commercial service fees and royalties paid by Lilly, to HCM, and sales to other third parties invoiced by HCM; Orpathys manufacturing fees and royalties paid by AstraZeneca and sales to other third parties invoiced by HCM; HCM sales of Sulanda and Tazverik to third parties.

Clinical data to date have shown how HUTCHMED’s pipeline of highly selective TKIs can offer significant advantages in terms of targeted efficacy and cleaner toxicity profiles with fewer on-target/off-tumour effects. Importantly, as the safety profile is often the limiting factor that restricts potential combinations, HUTCHMED’s programmes are ideal candidates for various combination approaches. Key combinations under evaluation with the first wave assets include:

• Chemotherapies: eg fruquintinib + paclitaxel in 2L gastric cancer which is under regulatory review in China;
• Other TKIs: eg savolitinib + osimertinib under evaluation in registration studies both in China [SACHI, SANOVO] and globally [SAVANNAH, SAFFRON] in various EGFRm+ MET+ NSCLC settings, and
• Various PD-1/PD-L1 checkpoint inhibitors: eg fruquintinib + sintilimab currently being evaluated in a China study with a registration-intent cohort in advanced endometrial cancer and in a China Phase II/III study in 2L metastatic renal cell carcinoma, RCC; and surufatinib + toripalimab in the China Phase III SURTORI-01 study in neuroendocrine carcinomas.

The global relevance of these first wave assets, in particular fruquintinib and savolitinib, is supported by the clinical data to date and the external validation provided by their large pharma partners. While the major value driver for HUTCHMED over the near-term will be its China Oncology/Immunology operations, over time it is expected that royalties on ex-China sales will make an increasing contribution to the top line, completing HUTCHMED’s transition into an international commercial business, with a strong commercial presence in China.

Fruquintinib is on track to become the first HUTCHMED discovered and developed drug to be launched outside China. Commercial partner Takeda is preparing for first launch, potentially in early 2024, subject to a positive US FDA approval decision on or by the PDUFA goal date of 30 November 2023. Our September 2022 and June 2023 Updates summarise the supporting data from the multi-regional Phase III FRESCO-2 study in advanced mCRC which, with the China FRESCO trial and US Phase Ib bridging study, formed part of the regulatory submissions to the US FDA and European EMA (the latter filing was validated in June 2023). The NDA submission with the Japan PDMA is expected to be completed by end-2023.

The global NDA filings for savolitinib could occur in 2024, subject to data read outs from the ongoing registrational trials. Savolitinib, under a development and commercialisation partnership with AstraZeneca globally, plays a central role in the lifecycle management plans for AstraZeneca’s Tagrisso (osimertinib) and Imfinzi (durvalumab). Three global registration trials are underway, two in combination with Tagrisso for 2L/3L EGFRm+ Tagrisso-refractory MET+ NSCLC (SAVANNAH, a Phase II registration-intent trial which might support an accelerated approval, and SAFFRON, a confirmatory Phase III study) and one with Imfinzi (SAMETA) for MET-driven unresectable advanced PRCC (papillary renal cell carcinoma).

…an aside on deal economics

We highlight that HUTCHMED could receive significant downstream economics from its current partners. The Takeda ex-China global licence included a $400m upfront (received in March 2023), with potential for 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). Note that under the terms of the July 2020 amendment to the Lilly licence, HUTCHMED consolidates around 70-80% of fruquintinib in-market sales from manufacturing fees, commercial service fees, and royalties paid by Lilly.

Under the long-standing AstraZeneca deal, first signed in 2011 and subsequently amended, HUTCHMED is eligible for up to $140m in upfront, development and regulatory milestones as well as royalties on sales, of which milestones totalling $85m have been received to date. In China, HUTCHMED bears responsibility for R&D and regulatory aspects, and benefits from a 30% royalty on all sales. Ex-China, AstraZeneca is responsible for development and regulatory filings and will pay HUTCHMED tiered royalties of 9-13% until approval in PRCC (papillary renal cell carcinoma), when these will increase to c 14-18% on ex-China sales up to $5bn, before stepping down over two years to between 10.5-14.5%.

Second wave: in registration studies, with filings in sight

The second wave of programmes, which target haematological indications, is set to maintain the growing momentum at HUTCHMED. Two in-house assets have reached China registration-enabling monotherapy trials: PI3Kδ inhibitor amdizalisib (previously HMPL-689) currently in a Phase IIb 3L follicular lymphoma (FL) study and Syk inhibitor sovleplenib (HMPL-523) which recently met the primary endpoint and all secondary endpoints in the pivotal ESLIM-01 trial in relapsed/refractory 2L ITP (immune thrombocytopenia). The amdizalisib trial is anticipated to read out in H223 and, if it renders positive results, China NDA filings for both assets could be submitted around year-end.

Sovleplenib is the first of HUTCHMED’s haematology programmes to deliver pivotal data and has also been granted Breakthrough Therapy Designation for ITP by the China NMPA, which means that the sovleplenib NDA may be considered for priority review in this indication. The 188-patient Phase III ESLIM-01 study met its primary endpoint of a clinically meaningful and statistically significant increase in durable response rate in adult ITP patients, and met all secondary endpoints (including response rate and safety and tolerability). Full results will be presented at a future scientific conference.

In addition to the two in-house programmes, Greater China rights to a third asset, EZH2 inhibitor Tazverik (tazemetostat), were in-licenced from Ipsen (August 2021 Lighthouse) in a deal that includes up to $110m in clinical/regulatory milestones (across up to eight oncology indications), up to $175m in commercial milestones, and mid-teen to low twenties percentage royalties on net sales. This transaction is the first example of HUTCHMED’s business development strategy to externally bolster and expand the potential of its in-house pipeline.

Tazverik fits with this strategy in two key ways as a late-stage targeted oncology programme with potential clinical and commercial synergies with HUTCHMED’s in-house assets. Two important China trials of tazemetostat monotherapy are underway, a bridging study in FL (which could support conditional registration based on existing FDA accelerated approval) and the China portion of the global Phase III SYMPHONY trial in combination with rituximab and lenalidomide (R²) in 2L relapsed/refractory FL. However, tazemetostat may also synergistically combine with existing HUTCHMED assets, and is being evaluated in a China Phase II study in combination with amdizalisib in relapsed/refractory lymphoma.

The China Oncology/Immunology commercial team is currently focused on solid tumours; however, the potential regulatory approvals of these three programmes will both leverage the existing infrastructure and prompt selective investment into establishing a haematology-focused sales team, further accelerating growth in revenues. We note that Tazverik is already commercially available on a restricted basis for relapsed/refractory FL but, as this is only in the Hainan Medical Zone and Macau Special Administrative Region, sales to date have been modest.

Building on solid operational foundations

Underpinning the commercial and R&D activities is a robust operations infrastructure and quality CMC (chemistry, manufacturing, and controls), both of which are central to HUTCHMED’s strategy. The current infrastructure includes discovery and development facilities, commercial operations, and a new flagship manufacturing facility in Shanghai (China), sizeable GMP-certified manufacturing in Suzhou (China), and regional clinical development and regulatory representation in Beijing, Australia, the US, EU, and Japan.

HUTCHMED utilises contract manufacturing organisations (CMOs) in China to produce the active pharmaceutical ingredients (APIs) for its products, and a combination of CMOs and its Suzhou facility to manufacture drug products. The new Shanghai facility, which is expected to complete qualification in H223, will expand HUTCHMED’s in-house manufacturing capacity five-fold. It is on track to start manufacturing of clinical supplies in 2023, with commercial manufacturing anticipated to begin during 2025, in line with prior guidance.

In preparation for potential NDA filings of amdizalisib and sovleplenib, and the global launch of fruquintinib, the respective technology transfer and process validations have been completed for API and drug product manufacture at the relevant facilities.

Other Ventures are now largely non-core

HUTCHMED also reports operational and financial results for its legacy joint ventures (JV) which are termed Other Ventures. As the Oncology/Immunology part of its business expands, these are increasingly viewed as less relevant despite representing considerable value. Other Ventures consists of two subsidiaries:

• Hutchison Sinopharm, a 51% JV with Sinopharm Group for prescription (Rx) drug commercialisation services to third parties;
• Shanghai Hutchison Pharmaceuticals (SHPL), a 50% owned JV with Shanghai Pharma for Rx drug manufacture and commercialisation.

Collectively these businesses employ around 3,000 FTEs, mainly in manufacturing and commercial roles, selling directly into c 290 cities across China. H123 consolidated revenues were $173.7m, up 57% (67 % at CER) vs $110.9m in H122, with attributable net income of $37.2m (up 5%, 12% at CER vs $35.4m). SHPL is the main contributor, generating non-consolidated JV revenues of $235.3m (up 11%, 19% at CER, H122: $212.4m) and contributing net income of $35.1m (vs $33.6m). 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 $889m (£741m, HK$6.93bn).

Since HUTCHMED’s inception, the Other Ventures businesses have contributed over $500m in net income, c $75m as one-time property gains, which have helped fund the Oncology/Immunology R&D pipeline. Aggregated dividends of >$300m have been received from SHPL, including receipt of $14.6m in H123 (H122: $22.7m). Additionally, the September 2021 divestment of HUTCHMED’s entire indirect 40% stake in Hutchison BYS (HBYS), the over-the-counter (OTC) medicines joint-venture 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.

As the scale of the Oncology/Immunology business expands and management focus is increasingly on the development and commercialisation of its innovative pipelines, we expect further realisation of value from non-core assets. Divestment and equity capital market opportunities for SHPL are being explored.

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 and fruquintinib) in global markets, and their commercial execution both in China and through partners in ex-China territories, with both influencing the likelihood that HUTCHMED is able to achieve sustainable profitability from 2025 onwards.

In our view, the key near-term sensitivity is the outcome of the FDA review of the fruquintinib NDA in advanced mCRC. An approval on or before the 30 November PDUFA goal date means that US fruquintinib revenues from 2024 onwards 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. This same sensitivity surrounds the outcome of the EMA review process.

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 is expanding its China manufacturing capabilities and capacity to support later-stage development and the future commercialisation of products emerging from its R&D pipeline, which may also bring about an evolution in its commercial footprint especially as haematology programmes progress 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 in June and September 2019 it has no intention of further secondary offerings in the foreseeable future.

Valuation

We continue to value HUTCHMED using a sum-of-the-parts methodology, with an rNPV model for the Oncology/Immunology portfolio, an earnings-based multiple for the established Other Ventures commercial platforms and net cash. Our company valuation is $5.74bn (equivalent to $32.95 per ADS), £4.78bn (549p per share), or HK$44.75bn (HK$51.40 per share).

For the Oncology/Immunology business we calculate a net present value (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 (rNPV). 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. 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 as 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 valuation summary is shown in Exhibit 6. The importance of the Oncology/Immunology business is shown in its relative contribution, with this accounting for 70% of our company valuation. Other Ventures is worth 16%, with net cash representing the 14% balance.

Exhibit 6: 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 7 and 8. We have made no major changes to any of our peak sales forecasts. The main changes are to our risk-adjustments, where we have increased the probability of success for sovleplenib (to 80% in China and 50% ex-China) following the positive Phase III ITP data in China, whereas for surufatinib ex-China we now take a more cautious stance (now 50%) as additional trials are needed in most regions, which will likely be pending a partner, on which we have limited visibility. The most valuable asset remains fruquintinib which comprises 37% of the value of the Oncology/Immunology portfolio and 26% of the company valuation. The next most valuable assets are savolitinib (26% and 18%, respectively) and surufatinib (22% and 16%, respectively). The earlier-stage clinical assets which have not yet launched and hence carry lower success probabilities collectively represent 15% and 10% respectively, but we expect these to unlock significant additional value as they progress through clinical development (subject to positive trial results). We do not include any third-wave or other development projects in our Oncology/Immunology valuation.

Exhibit 7: 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 8: 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 on the commercial potential of the second wave assets, particularly as clinical data become available, which could lead to refined forecasts. Similarly, as we do not ascribe a valuation for the emerging discovery assets, the Inmagene immunology partnership, nor the discovery platform, these also remain as upside to our valuation. Hence, there is significant upside potential, and multiple catalysts over the next six to 18 months. We intend to review our model regularly to reflect clinical, regulatory, and commercial progress.

Financials

Our financial forecasts have been updated to reflect the interim H123 financial results and an overview of our key forecasts are shown in Exhibit 13. We review interim results, provide an outline of our forecasts, and discuss profitability below.

Review of interim H123 results

HUTCHMED 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). HUTCHMED’s H123 consolidated group revenues were $533m (+173% at CER; H122: $202m), consisting of revenue contribution from the Oncology/Immunology segment of $359m (+301% at CER; H122: $91m) and $174m (+67% at CER; H122: $111m) from Other Ventures.

Within Oncology/Immunology, consolidated revenue derived from sales of marketed oncology products in China was $80m (+35% at CER; H122: $64m), R&D service fees from partners AstraZeneca, Eli Lilly and now Takeda were $20m (+66% at CER; H122: $13m), and milestone income was $259m (H122: $15m). The latter represented the revenue recognised in H123 from the $400m Takeda upfront payment, while in 2022, a $15m milestone was received from AstraZeneca on initiation of the global savolitinib Phase III SAFFRON trial.

Elunate, Sulanda and Orpathys generated the bulk of product sales as Tazverik is currently only available in the Hainan Medical Zone and Macau Special Administrative Region. For H123, HUTCHMED booked:

• Elunate consolidated revenues of $42m (+25% at CER; H122: $36m) on in-market sales of $56m (+20% at CER; H122: $50m);
• Sulanda in-market sales of $23m (+79% at CER; H122: $14m); and
• Orpathys generated $15m (+17% CER; H122: $14m) from manufacturing fees and a 30% royalty from AstraZeneca on in-market sales of $22m (+2% CER; H122: $23m).

All three products are now included on the NRDL and together have shown solid in-market sales growth of 25% at CER to $101m (H122: $87m), with volume growth offsetting any pricing discounts. We highlight the significant growth in Sulanda revenue which reflected the increasing number of patients on a drug with a long-term treatment duration, while channel fluctuations in Q123 ahead of NRDL inclusion from 1 March 2023 impacted Orpathys sales, although these recovered during Q223 as volumes increased (volumes up 84% vs Q222).

Cost of sales were $208m (H122: $137m), due to growing sales of third-party prescription drug products marketed via through Other Ventures and of the marketed China Oncology products. We note that the gross margin spiked in H123 to c 61% (compared to the trailing two-year average of c 27%) owing to recognition of $259m from the Takeda upfront, which is essentially pure profit. Implementation of strategic initiatives meant reduced operating expenses with restructuring of US operations contributing to decreased SG&A costs of $68m (H122: $80m) and pipeline prioritisation resulting in a 20% reduction in R&D spend to $145m (H122: $182m). The shift to a global partnering strategy significantly reduced US/European R&D expenses (to $56m vs $84m for H122), with a more modest decrease in China R&D costs ($89m vs $98m in H122). Net income from Other Items of $57m (H122: $34m) reflected higher interest income earned following receipt of the Takeda upfront and FX gains.

HUTCHMED’s H123 net profit was $169m (H122 net loss: $259m). Oncology/ Immunology generated a temporary segment operating profit of $134m (H122: loss of $186m), boosted by partial recognition of the Takeda upfront, with Other Ventures delivering a segment operating profit of $37m (H122: $36.1m).

At end-June 2023, HUTCHMED had cash resources of $856m (end-FY22: $631m) consisting of cash and equivalents, which includes the $400m Takeda upfront, and short-term investments. The company also has unutilised bank facilities of $65m (FY22: $140m) and a 50% stake in the $44m of cash held at the SHPL JV. We note that HUTCHMED had bank borrowings of $40m at end-June 2023 related to its manufacturing plant and drawn under its secured ten-year fixed asset loan facility with Bank of China. Management indicated in March 2023 that FY22 was a peak year for cash burn and with a target of breakeven in 2025, we do not anticipate any near-term financing requirements.

Updated forecasts

Oncology/Immunology FY23 revenue guidance of $450-550m is unchanged, driven by momentum from the three marketed oncology products in China, coupled with $280m as partial recognition of the Takeda upfront. Our updated FY23e revenue forecast is for $496m (from $503m) with the slight decrease owing to adjusting the estimate for the amount of the Takeda upfront that will be recognised in FY23e to $280m (from $300m), largely offset by an increase in R&D services income to $43m (from $28m) based on the H123 trend, and some adjustments to our in-market sales forecasts, notably for Orpathys given the volume fluctuations in Q123. A breakdown of our key forecasts for Oncology/Immunology revenues are shown in Exhibit 9. Together with our updated Other Ventures FY23e revenue forecast of $302m (from $223m) based on H123 growth, our total FY23e revenue forecast is now $798m (from $726m).

Exhibit 9: FY23e forecasts underpinning Oncology/Immunology revenues

Source: HUTCHMED and Trinity Delta

Further detail on how revenue recognised by HUTCHMED (including a mix of royalties on sales, fees from product manufacture and supply, and commercial service income received from partners) can be reconciled to in-market sales is presented in our April 2023 Update.

HUTCHMED’s pipeline prioritisation, the completion of several large and late-stage trials, and the strategy to pursue global development through partners means that R&D costs will reduce over 2023-2024. Given H123 trends, we now forecast FY23e R&D spend of $320m (from $378m and vs FY22: $387m), and $292m in FY24e (from $330m). We have made only minor adjustments to our SG&A forecasts as within S&M we expect continued investment into the China commercial infrastructure to support existing and new product launches (including potentially the first haematology products from 2024 onwards). For G&A we continue to expect a slight decrease in FY23 as existing US operations are reduced given the strategy to partner ex-China; from this new base we then expect modest G&A growth. Our updated S&M forecasts are for $58m in FY23e (from $54m and vs FY22: $44m) and $65m in FY24e (from $64m), whilst for G&A our forecasts of $83m in FY23e (vs FY22: $92m) and $85m in FY24e are unchanged. We anticipate a temporary profit in FY23e due to the Takeda upfront partial recognition. Changes to our key estimates are shown in Exhibit 10.

Exhibit 10: Summary of changes to estimates

Source: Trinity Delta

On the path to profitability

HUTCHMED is targeting sustainable profitability from 2025, and we believe this is achievable given the growing revenues from in-market sales, and from the reduced cost base, notably R&D prioritisation. Whilst non-recurring milestone income is a large component of FY23e revenues, 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 11). We also expect a continuous improvement in underlying gross margins through scale and efficiencies and due to the changing product mix.

Exhibit 11: Growing revenues driven by in-market sales

Source: Trinity Delta   Note: Cons Revs = Consolidated Revenues; MS = milestones

Meanwhile, the cost base, notably R&D, has already seen a sizeable reduction in 2023 (a 20% decrease in H123) and SG&A has also been optimised. We expect these costs to become more stable over the coming years. Hence, if HUTCHMED can continue to deliver on revenue growth from in-market sales, and if costs remain controlled, then we believe sustainable profitability is possible from 2025, as shown in Exhibit 12.

Exhibit 12: Growing revenues and declining costs drive 2025 profitability

Source: Trinity Delta

Exhibit 13: 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