POC positive – so far so good for savolitinib in PRCC

Hutchison China MediTech 27 February 2017 Update

Hutchison China MediTech

POC positive - so far so good for savolitinib in PRCC

Corporate update

Pharma & biotech

27 February 2017

Price

2,105p

Market cap

£1,278m

US$1.25/£

Net cash ($m) at June 2016

80.6

Shares in issue*

60.7m

*£ share price based on 60.7m ordinary shares; US$ price based on 121.4m American depositary shares, 1 ADS = 0.5 ordinary shares.

Free float

37%

Code

HCM

Primary exchange

AIM

Secondary exchange

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(5.3)

9.8

(6.3)

Rel (local)

(6.7)

3.5

(23.3)

52-week high/low

2,407.50p

1,680.00p

Business description

Hutchison China MediTech (Chi-Med; HCM) is an innovative China-based biopharmaceutical company targeting the global market for novel, highly selective oral oncology, and immunology drugs. Its established China Healthcare business is growing ahead of the market.

Next events

FY16 results

13 March 2017

R&D day

29 March 2017

Fruquintinib FRESCO data in CRC

Early March 2017

Analysts

Dr Susie Jana

+44 (0) 20 3077 5700

Dr Daniel Wilkinson

+44 (0)20 3077 5734

Hutchison China MediTech is a research client of Edison Investment Research Limited

Hutchison (HCM) and partner AstraZeneca presented positive preliminary data from the ongoing phase II proof-of-concept trial evaluating savolitinib (c-Met TKI) in papillary renal cell carcinoma (PRCC) at the ASCO GU symposium on 16-18 February. Data presented demonstrate savolitinib’s strong anti-tumour activity in MET-driven patients. Importantly, the overall survival (OS) data readout expected later this year could support a US NDA application under breakthrough therapy designation, given the clear unmet need for c-Met-driven PRCC. Our valuation remains unchanged at $2.4bn.

Year
end

Revenue (US$m)

Net profit*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

87.3

(9.3)

(17.8)

0.0

N/A

N/A

12/15

178.2

8.0

14.6

0.0

180

N/A

12/16e

196.7

3.8

6.3

0.0

418

N/A

12/17e

226.0

(26.6)

(43.9)

0.0

N/A

N/A

Note: *Net profit and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

PRCC Phase II data reinforce hypothesis

At ASCO GU, data on savolitinib in advanced PRCC were presented; these data overwhelmingly support the hypothesis that MET status is a predominant factor in patient response; MET-driven patients demonstrated a median PFS of 6.2 months compared with 1.4 months for MET-independent patients. These efficacy data are highly encouraging given the clear unmet need in PRCC. The most common adverse event (AE), nausea (grade1-2), occurred in 39% (42/109) of patients. There were four serious AEs in three patients that were considered treatment related, with one treatment-related death due to hepatic encephalopathy.

2017: Defining year for Hutchison

We expect material newsflow over the forthcoming 18 months on savolitinib (data from both the NSCLC Phase IIb Tagrisso and Iressa combinations), fruquintinib (Phase III third-line NSCLC and CRC [top-line data early March]), sulfatinib (Phase II in advanced NET tumours at ENETS conference in early March and Phase II in thyroid cancer potentially at EMSO in September 2017) and HMPL-523 (Phase I lymphoma data potentially at ASH in Dec 2017).

Pipeline expansion continues

HCM has announced further momentum in its pipeline as multiple new trials have initiated. Of note is a Phase II trial testing savolitinib in pulmonary sarcomatoid carcinoma and a Phase II combination study of Fruquintinib with Iressa (gefitinib) in first-line NSCLC. We expect further expansion of the pipeline as HCM looks to capitalise on its assets as first indication approvals draw near.

Valuation: $2.4bn (£32.2/share, $20.1/ADS)

Our SOTP valuation remains unchanged at $2.4bn (£32.2/share). IP is valued at $1,789m and placing the commercial platform’s (CP) 2016e share of net profit on a 22.5x rating gives $657m (867p/share). Adding net cash at end June 2016 and netting out unallocated costs results in a value of $2.4bn. Approval(s), clinical data and/or deals should increase our risk-adjusted valuation.

Savolitinib POC in PRCC so far so good

Savolitinib is in 12 active clinical trials for renal cell carcinomas, NSCLC and gastric cancer. It is most advanced in its PRCC and NSCLC indications. Data from multiple Phase I/II studies support savolitinib’s clinical benefit as a highly selective c-Met inhibitor in a number of cancer types. Given that savolitinib has demonstrated responses in several solid tumours, it is conceivable that it could be the first global, first-in-class c-Met inhibitor to reach the market.

HCM and partner AstraZeneca (AZN) presented positive preliminary data from the ongoing Phase II trial evaluating savolitinib in PRCC at the ASCO GU symposium (16-18 February). Data demonstrated savolitinib’s strong anti-tumour activity in MET-driven patients; importantly OS data are expected later this year. HCM and AZN have agreed to advance savolitinib into its Phase III global pivotal study for PRCC and have also been conducting a molecular epidemiology study that is profiling patient samples from across the US, Europe and Asia to try to determine if any correlations between MET alterations and patient outcomes exist. Data that demonstrate negative patient outcomes for MET-dependent PRCC patients, in addition to both the positive PFS data observed to date (in Phase II PRCC trial) and overall survival data later in the year, could form part of a US NDA under breakthrough therapy designation (for the PRCC indication). The final design of the pivotal Phase III trial has been agreed with international health authorities. Importantly, this trial will be aligned with a companion diagnostic for c-Met-driven PRCC and the Phase III diagnostic will be similar in other indications.

The single-arm Phase II study of savolitinib in patients with advanced PRCC demonstrated that patients with MET-driven PRCC had a median PFS (Exhibit 1) of 6.2 months (95% confidence interval [CI]; 4.1-7.0) vs 1.4 months (95% CI; 1.4-2.7) for MET-independent patients (hazard ratio = 0.33 [95% CI; 0.20-0.52], p<0.0001). While 18% (n=8/44) of MET-driven patients had a partial response compared with 0% in the MET- independent and MET-unknown patient groups (MET status was determined by Next Generation Sequencing). Of the eight MET-driven patients who exhibited a partial response, six were still responding to treatment at data cut off, with duration of responses between 2.4 and 16.4 months. Stable disease was observed in 50% (22/44) of MET-driven patients, comparing favourably with 24% (11/46) and 26% (5/19) for MET-independent and MET-unknown patients respectively.

Exhibit 1: Kaplan-Meier estimates of PFS in patients with PRCC by MET status

Source: AstraZeneca, Hutchison China MediTech

There were serious AEs in 23/109 (21%) patients; however, only three of these (four serious AEs in three patients) were considered treatment related. One treatment-related death due to hepatic encephalopathy was reported. Drug discontinuations and dose reductions remained low at 8% (n=9/109) and 13% (n=14/109) respectively. Based on this Phase II PRCC data, savolitinib demonstrates an improved safety profile over other multi-kinase inhibitors in patients with renal cell carcinoma.

As demonstrated by the Phase II PRCC data, the level of response to savolitinib by each patient correlated closely with the level of MET amplification. Prognosis remains poor for patients with advanced PRCC due to limited efficacious treatment options; as such, savolitinib is well placed to capitalise on this unmet need.

Possible NDA submission for NSCLC and PRCC in 2017

The positive data from the Phase II trial in PRCC, along with data from the molecular epidemiology study, could enable a US NDA submission (under the breakthrough therapy designation), with potential US launch for the PRCC indication in early 2018. Additionally, a global, pivotal Phase II/II trial is evaluating the combination of savolitinib and Tagrisso for the second-line treatment of patients with c-Met-driven NSCLC (T790m-/c-Met+) as part of the TATTON study. Data are expected from the Phase IIb expansion part and, if positive, these could lead to the initiation of a global Phase III programme in 2017. Importantly, overwhelmingly positive data could support a US NDA under breakthrough therapy designation for the NSCLC indication (second-line in combination with Tagrisso).

Companion diagnostic test to complete the NDA package

The planned pivotal Phase III study in PRCC represents the first molecularly selected trial in renal cell carcinoma globally. Partner AZN entered an agreement with US-based Foundation Medicine to develop a companion diagnostic test (tissue biopsy) to identify patients with c-Met-driven cancers; the test has been developed in parallel with savolitinib’s clinical trial programme as part of a co-ordinated regulatory strategy and we anticipate it will form part of the regulatory filing with the FDA. We highlight HCM’s comments that the PRCC Phase III companion diagnostic platform will be largely similar for other indications such as NSCLC and gastric cancer. Currently there is no standard method for testing for aberrations; methods include gene sequencing, mass spectrometry and fluorescence in situ hybridisation (FISH).

AZN deal enables a rich clinical development programme

In 2011, HCM granted AZN co-exclusive rights to develop, manufacture and commercialise savolitinib globally. HCM received an initial $20m non-refundable licence fee with up to a further $120m in clinical development and early sales milestones payable (as of June 2016 HCM had received $20m of those milestones), in addition to significant further milestone payments based on sales. This is in addition to a 30% royalty rate payable on China sales and originally tiered royalties of 9-13% of sales outside China. Under the terms of the 2011 deal AZN would pay 100% of the development costs ex-China and 75% of the costs for development in the China market (with HCM funding the remaining 25%). Under the 2016 amendment, HCM will contribute an additional $50m to accelerate the PRCC programme over a three-year period and in return will receive an additional 5% of royalty on sales on all indications ex-China, effectively taking the tiered royalty rate to 14-18%.

Importantly the collaboration with AZN has resulted in the addition of savolitinib to AZN’s Tagrisso and Iressa in two separate Phase Ib/II trials to address the opportunity for combination therapy as second-line and third-line treatment for NSCLC. Further combination studies include a Phase I/II study with savolitinib plus AZN’s PD-L1 inhibitor durvalumab.

Valuation $2.4bn (£32.2/share, $20.1/ADS)

Our SOTP valuation remains unchanged at $2.4bn (£32.2/share). IP is valued at $1,789m and placing the CP’s 2016e share of net profit on a 22.5x rating gives $657m (867p/share). Adding in end-June 2016 net cash and netting out unallocated costs results in a value of $2.4bn (£32.2/share).

For more details on our valuation, including a breakdown of contribution from products by indication, see our note WCLC: Positive data highlights NSCLC pipeline dated 9 December 2016.

Savolitinib poised to generate value

We forecast global peak sales for savolitinib of $3.4bn across the potential PRCC, CRCC, NSCLC and gastric cancer indications. Exhibit 2 details savolitinib’s peak sales potential by indication, incident rates and penetration assumptions. We assume pricing of $10,000 per month in the US and RoW ex-China, with a treatment course duration of 12 months and China priced at a 50% discount. We believe this is conservative given that AZN’s Tagrisso, a third-generation TKI, is priced at $12,750 per month, which is in line with the pricing being attached to most new lung cancer drugs, including ALK (anaplastic lymphoma kinase) inhibitors such as Pfizer's Xalkori and Novartis's Zykadia (source: Reuters). Furthermore, savolitinib could be moved into earlier lines of therapy as part of combination treatments, increasing the market opportunity, depending on the results of ongoing trials. Our model assumes a 30% royalty on China sales and 14-18% tiered royalty on RoW sales payable to HCM from AZN and up to $100m more in milestone payments. We have not included milestone payments on further sales after initial launch, which would significantly enhance our valuation. We note that under the terms of the agreement with AZN, the royalty rate is expected to step down to 10.5-15.5% on reaching aggregate savolitinib sales of $5bn.

We have assumed higher overall penetration rates for PRCC given the 40-70% MET amplification and NSCLC 79% c-Met over-expression rates. Our China penetration rates for NSCLC and gastric cancer err on conservatism. While we expect initial launch in 2017 for PRCC in China and the US, it follows that NSCLC and gastric cancer are larger opportunities given the patient populations. Note that we forecast peak sales in China as seven to eight years from launch, and five years from launch in the rest of the world.

Exhibit 2: Savolitinib peak sales forecasts

Product

Indication

Launch year/
peak sales China

Launch year/
peak sales RoW

Assumptions

Savolitinib

PRCC

2017/25 $129m

2017/23 $475m

Global 2015 new cases (50,000), China 2015 new cases (7,800) MET amplification 40-70%, therefore assume higher penetration rates. China penetration 20%, $5,000 per month, 12-month treatment duration. RoW penetration 8%, $10,000 per month, 12-month treatment duration.

Clear cell renal carcinoma

2020/26 $127m

2020/25 $484m

Global 2015 new cases (270,000), China 2015 new cases (54,000) MET over-expression 79%. China penetration 3%, $5,000 per month, 12-month treatment duration. RoW penetration 1.5%, $10,000 per month, 12-month treatment duration.

NSCLC

2018/27 $290m

2018/25 $845m

Global new cases (1,690,000), China new cases (623,000) MET amplification 10%. China penetration 0.6%, $5,000 per month, 12-month treatment duration. RoW penetration 0.5%, $10,000 per month, 12-month treatment duration.

Gastric cancer

2021/28 $326m

2021/26 $742m

Global new cases (1,034,000), China new cases (454,000) MET amplification 10%. China penetration 1%, $5,000 per month, 12-month treatment duration. RoW penetration 0.8%, $10,000 per month, 12-month treatment duration.

Deal economics

$140m in initial upfront and milestones from AstraZeneca, royalty rate 30% on China, 14-18% RoW. COGS and SG&A on China sales only. R&D proportioned.

Source: Edison Investment Research. Note: FX rate US$1.25/£.


Exhibit 3: Financial summary

US$'000s

2013

2014

2015

2016e

2017e

December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

36,547

87,329

178,203

196,737

225,967

Cost of Sales

(11,194)

(58,849)

(110,777)

(138,332)

(137,473)

Gross Profit

25,353

28,480

67,426

58,405

88,493

Research and development

(22,731)

(29,914)

(47,368)

(80,000)

(110,200)

Other overheads

(15,818)

(16,825)

(29,829)

(32,190)

(34,779)

EBITDA

 

(12,233)

(16,994)

(7,756)

(51,004)

(52,696)

Operating Profit (before amort. and except.)

 

(13,196)

(18,259)

(9,771)

(53,785)

(56,485)

Intangible Amortisation

0

0

0

0

0

Operating Profit

(13,196)

(18,259)

(9,771)

(53,785)

(56,485)

Net Interest

(1,034)

(957)

(953)

(1,300)

(1,500)

Exceptionals

30,000

0

0

0

0

Profit Before Tax (norm)

 

(13,078)

(19,957)

(10,540)

(55,085)

(57,985)

Profit Before Tax (reported)

 

16,922

(19,957)

(10,540)

(55,085)

(57,985)

Tax

(1,050)

(1,343)

(1,605)

(4,131)

(6,958)

Equity investments, after tax

11,031

15,180

22,572

65,809

42,802

Profit After Tax (norm)

(3,097)

(6,120)

10,427

6,593

(22,141)

Profit After Tax (reported)

26,903

(6,120)

10,427

6,593

(22,141)

Minority

(983)

(3,220)

(2,434)

(2,800)

(4,500)

Discontinued operations

(1,978)

2,034

0

0

0

Net profit (norm)

(4,080)

(9,340)

7,993

3,793

(26,641)

Net profit (reported)

23,942

(7,306)

7,993

3,793

(26,641)

Average Number of Shares Outstanding (m)

52.1

52.6

54.7

60.6

60.6

EPS - normalised (c)

 

(7.8)

(17.8)

14.6

6.3

(43.9)

EPS - normalised and fully diluted (c)

 

(7.8)

(17.8)

14.6

6.3

(43.9)

EPS - (reported) (c)

 

46.0

(13.9)

14.6

6.3

(43.9)

Average number of ADS outstanding (m)

104.1

105.1

109.3

121.3

121.3

Earnings per ADS - normalised ($)

 

(0.04)

(0.09)

0.07

0.03

(0.22)

Earnings per ADS ($)

 

0.23

(0.07)

0.07

0.03

(0.22)

BALANCE SHEET

Fixed Assets

 

118,239

120,992

140,087

183,615

190,128

Intangible Assets

407

4,096

3,903

3,903

3,903

Tangible Assets

5,028

7,482

8,507

13,226

19,436

Investments

112,804

109,414

127,677

166,486

166,789

Current Assets

 

67,164

89,842

89,667

153,533

128,179

Stocks

1,420

4,405

9,555

10,000

12,000

Debtors

17,497

27,924

38,628

43,000

45,000

Cash

46,863

38,941

31,941

90,990

61,636

Other

1,384

18,572

9,543

9,543

9,543

Current Liabilities

 

(79,463)

(75,299)

(81,062)

(84,976)

(88,976)

Creditors

(4,163)

(20,427)

(24,086)

(28,000)

(32,000)

Short term borrowings

(51,508)

(26,282)

(23,077)

(23,077)

(23,077)

Other

(23,792)

(28,590)

(33,899)

(33,899)

(33,899)

Long Term Liabilities

 

(15,366)

(37,584)

(46,415)

(46,415)

(46,415)

Long term borrowings

0

(26,923)

(26,923)

(26,923)

(26,923)

Other long term liabilities

(15,366)

(10,661)

(19,492)

(19,492)

(19,492)

Net Assets

 

90,574

97,951

102,277

205,757

182,916

Minority

(6,960)

(17,764)

(18,921)

(21,721)

(26,221)

Shareholder equity

 

83,614

80,187

83,356

184,036

156,695

CASH FLOW

Operating Cash Flow

 

5,028

8,359

(9,393)

(25,338)

(18,654)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(2,500)

(3,729)

(3,324)

(7,500)

(10,000)

Acquisitions/disposals

0

689

0

0

0

Financing

7

2,801

(355)

0

0

Dividends

(577)

(1,179)

(590)

(700)

(700)

Equity financing

0

0

0

92,600

0

Other

0

(9,120)

10,858

0

0

Net Cash Flow

1,958

(2,179)

(2,804)

59,062

(29,354)

Opening net debt/(cash)

 

6,603

4,645

14,264

18,059

(40,990)

HP finance leases initiated

0

0

0

0

0

Other

0

(7,440)

(991)

(13)

0

Closing net debt/(cash)

 

4,645

14,264

18,059

(40,990)

(11,636)

Source: Hutchison China MediTech reports, Edison Investment Research. Note: Equity investments after tax include the net profit contribution from JVs.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

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Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

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