Hutchison China MediTech

Weathering the COVID-19 storm

Update | 20 April 2020

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Hutchison China MediTech (Chi-Med) is, in our view, better positioned than many biopharma companies to weather the potential impact of the COVID-19 pandemic. Chi-Med’s response to operational challenges posed by restrictions on movement has limited the disruption to its China Commercial business, and recent completion of key China Phase III studies coupled with adjustments to ensure protocol compliance in ongoing trials means China Oncology remains broadly on track. As China was the first country to be materially affected by COVID-19, the experience gained there provides Chi-Med with valuable practical knowledge that can be applied to Global Innovation. While there is less visibility on COVID-19 repercussions for Chi-Med’s US/Europe clinical plans, fortunate phasing of clinical and regulatory activities in China suggests the latter will proceed to plan. Our Chi-Med valuation is £5.08/share or $32.99/ADS.

Year-end: December 31201820192020E2021E
Sales (US$m)214.1204.9210.3274.2
Adj. PBT (US$m)86.7141.1202.6190.3
Net Income (US$m)(71.3)(103.7)(166.5)(151.1)
Earnings per ADS (US$)(0.57)(0.80)(1.22)(1.11)
Cash (US$m)301.1217.2145.9197.0*
Adj. EBITDA (US$m)(69.7)(100.7)(157.1)(133.5)
Source: Trinity Delta Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments, Adjusted EBITDA includes equity in earnings of equity investees. *2021E cash figure includes assumed raise of $250m.
  • China Commercial not materially affected   Despite reduced promotional efforts and spend (via e-detailing rather than hospital visits) China Commercial sales have remained resilient, with continued sales of proprietary prescription drugs for chronic conditions. Product shipments were maintained between provinces and given the quantities in the supply chain, with only a brief temporary closure in February, there has been no material effect on any of the China manufacturing operations.
  • Fortunate timings for China Oncology   Data collation/analysis from Phase III trials that completed pre-China lockdown and regulatory interactions are the H120 focus. Two China NDA filings are expected by mid-year: savolitinib (MET ex14m/del NSCLC) and surufatinib (pancreatic NET). Surufatinib’s NDA in non-pancreatic NET is under active review, with potential for approval/launch in H220. After a slowdown in enrolment, ongoing studies are getting back on track. March initiation of the Phase II HMPL-453 mesothelioma study is another positive indicator.
  • Less visibility on Global Innovation   The situation in US/Europe is less clear as COVID-19 is yet to peak in many regions; estimates put it 6-8 weeks behind China. Visibility on Global Innovation timelines will improve in the coming months as regulatory discussions conclude, and global registration trials are potentially initiated in H220 for fruquintinib (3L/4L CRC) and surufatinib (NET).
  • Well-funded and with valuation upside  The $110m (net) raised in January coupled to >$300m in available cash resources at end-FY19 provides cash into 2021 and the means to invest in its pipeline. Any COVID-19 related delay to clinical trial starts could mean lower spend, further extending the current runway. We value Chi-Med at £5.08/share (£3.51bn) or $32.99/ADS ($4.56bn) using a DCF-based SOTP methodology. Our April 2020 Outlook details our valuation assumptions.

Update

20 April 2020

Price (UK share)
(US ADS)
306p
$19.15
Market Cap
 
£2.11bn
$2.64bn
Enterprise Value
 
£1.87bn
$2.34bn
Shares in issue (shares)
(ADS)
690.6m
138.1m
12-month range
 
249p-478p
$14.74-$31.19
Free float38.5%
Primary exchange
 
AIM
NASDAQ
SectorHealthcare
Company Code
 
HCM.L
HCM
Corporate clientYes

Company description

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

Analysts

Franc Gregori
fgregori@trinitydelta.org
+44 (0) 20 3637 5041

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

Hutchison China MediTech: ahead of the curve

Chi-Med’s experiences in China, the first country to be materially affected by COVID-19, put it in good stead to weather the potential impact of the pandemic as it has spread worldwide. While repercussions of COVID-19 on Chi-Med’s operations vary by business line (Commercial Platform vs Innovation Platform) and geography (China vs Global) they appear to be containable. Regional differences reflect the regulatory and government guidance and policies connected to COVID-19 as well as timing issues, both in relation to the peak of the outbreak and to Chi-Med’s clinical and regulatory plans. Management remarks highlight resilience in China Commercial manufacturing and sales despite various challenges, while some adjustment to ongoing China Oncology studies has helped keep timelines broadly on track. At present, there is least visibility in Global Innovation, but this should become clearer over the coming months and provides Chi-Med with the opportunity to apply learnings from its China COVID-19 experience to mitigate potential negative impacts.

The COVID-19 pandemic is associated with many uncertainties, some connected to its epidemiology, others to its potential scope and duration, and to governmental responses that attempt to moderate its effects on society. COVID-19’s transmission potential has not yet been determined, nor the level of immunity in various populations, nor the likelihood and magnitude of a potential second peak as lockdowns are exited.

Global policies vary by country but there is some commonality, with international and national travel restrictions, physical distancing and isolation. These present operational challenges to corporates irrespective of industry; biopharmaceutical companies are also uniquely impacted by other factors, such as their ability to access clinical and healthcare resources in an environment where priorities may be changed. For example, R&D companies may experience slower clinical trial recruitment due to restrictions on movement (more likely to impact large late-stage trials) and limited availability of intensive care beds (an important safety net for Phase I first-in-man studies). However, as Chi-Med has indicated, adjustments to usual processes have been successful in enabling continuing operations.

Chi-Med management commented on the impact of COVID-19 on operations at FY19 results in March, and subsequently via several media outlets. Reassuringly, while restrictions on movement in China had created some operational challenges (eg on commercial team activities and reducing patient hospital visits for clinical assessment), the impact on the China Commercial business was limited, and there had been no material effects on any of the China manufacturing operations.

We explore Chi-Med’s strategies to manage COVID-19 related challenges, and the implications on its business segments in more detail below. Importantly, we also emphasize that Chi-Med is well financed, with a cash runway in 2021 and available cash resources in excess of $400m (>$300m at end-FY19 boosted by the $110m January equity raise). Thus, the company has the means to continue to progress its China Oncology and Global Innovation pipelines, although any COVID-19 related delays to clinical trial starts could mean lower R&D spend incurred in FY20, further extending the current runway.

China Commercial: logistical tribulations addressed

Chi-Med’s China Commercial business has an extensive presence in both the domestic prescription (Rx) and over the counter (OTC) markets through various joint ventures and subsidiaries. It has three manufacturing facilities and a sales network comprised of 2,400 Rx and 900 OTC reps across China, with c 150 in the most affected area (Wuhan and the surrounding Hubei province). Restrictions on movement in China presented logistical challenges for manufacturing, product distribution, and sales, although Chi-Med has now addressed all these aspects with limited disruption, and the China Commercial business has stabilized around a ‘new normal’.

Chi-Med’s manufacturing facilities were viewed as essential operations, and thus given rapid permission to resume manufacturing during the nationwide lockdown. A brief and temporary closure in February following the Lunar New Year holiday, when protective equipment for staff was also sourced, had a limited impact on capacity, in part due to the quantities already in the supply chain. Product shipments have been maintained between provinces using qualified suppliers. These activities have ensured there was no material effect on manufacturing and distribution in China.

China Commercial sales have remained resilient, benefitting from continued sales of proprietary Rx drugs for chronic conditions, including low-cost coronary medicines. The Rx business is a physician-targeted marketing model; thus, travel restrictions reduced promotional efforts and spend, and necessitated a switch from hospital visits to online platforms, e-detailing, and video calls. However, visits to many hospitals and other customers are resuming.

China Oncology: a regulatory focus for H120

The timing of clinical and regulatory activities for China Oncology has been fortuitous. Plans for H120 are predominantly centered around data collation and analysis from two large Phase III studies that completed pre-China lockdown, and on associated regulatory interactions with the NMPA. Pre-NDA discussions for surufatinib in pancreatic neuroendocrine tumours (pNET) and savolitinib in MET ex14m/del non-small cell lung cancer (NSCLC) are underway, ahead of China NDA filings by mid-2020. Additionally, the China NDA for surufatinib in extra-pancreatic NET (epNET) is under review, with potential for approval and a first in-house launch by Chi-Med in H220. Chi-Med has observed that there has been no indication of material delay to timelines for regulatory reviews in China so far.

Some ongoing clinical studies have experienced a temporary slowdown, with new patient enrollment lagging targets largely due to the need for pre-screening at hospitals. However, during March recruitment rates have picked up, with an expectation that all affected trials will catch up over time, and the initiation of the HMPL-453 Phase II mesothelioma trial in March is another positive indicator that China Oncology operations are getting back on track.

Existing patients enrolled on trials (such as the FRUTIGA trial of fruquintinib in 2L gastric cancer) are understood to be well-managed with various practical adjustments made to ensure adherence to trial protocols. These tactics include telemedicine to facilitate virtual visits/follow ups, deliveries of study drug to patients at home (as Chi-Med’s products are oral medications and not infusions/injections), and carrying out diagnostic tests such as CT scans at more local sites convenient for patients rather than major hospitals. Such learnings may also be applicable to clinical studies run by Chi-Med outside China.

Global Innovation: behind the curve

There is currently less visibility on the situation in the US and Europe as COVID-19 is yet to peak in many regions; estimates put it 6-8 weeks behind China. However, the coming months should give more clarity on Global Innovation timelines, partly as a result of conclusion of regulatory discussions with the FDA, EMA and Japan PMDA, which should determine whether global registration trials for fruquintinib (3L/4L colorectal cancer) and surufatinib (NET) are still able to initiate as planned in H220. Alongside, early-stage studies are ongoing, but recruitment rates may be slowed. However, there is the opportunity for Chi-Med to leverage its China experience in managing the challenges around clinical trial recruitment and administration, which could mitigate any potential delay.

Finally, Chi-Med has previously indicated its intention to present clinical data from both China and Global studies at various scientific conferences in 2020. These conferences have not yet been disclosed but are expected to include one or more of the key cancer conferences. COVID-19 restrictions have prompted many conferences to move to a virtual format, including the American Association for Cancer Research (AACR, 27-28 April) and American Society for Clinical Oncology (ASCO, 29 May – 2 June) meetings, which remain potential fora for data presentations. The European Society for Medical Oncology meeting (ESMO, 18-22 September) is currently expected to be a physical meeting, although this may yet change depending on circumstances.

Exhibit 1: Summary of financials
Source: Company, Trinity Delta  Note: Adjusted PBT excludes exceptionals, Cash includes short-term investments, Adjusted EBITDA includes equity in earnings of equity investees. *2021E cash figure includes assumed raise of $250m

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