Stellar evolution

Hutchison China MediTech 27 May 2016 ADR Outlook

Hutchison China MediTech

Stellar evolution

ADR initiation of coverage

Pharma & biotech

31 May 2016

ADR research

Price

US$12.53

Market cap

US$1,520m

ADS/Ord conversion ratio 1:0.5

Net debt ($m) at December 2015

18

ADSs in issue

121.3m

ADS code

HCM

ADS exchange

NASDAQ

Underlying exchange

AIM

Depository

Deutsche Bank

ADS price performance

High/low

$13.80

$12.32

Business description

Hutchison China MediTech (Chi-Med) 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

Interim results

Early August 2016

Possible savolitinib milestone payment

2016

Savolitinib PRCC data at ESMO

October 2016

Savolitinib US filing

End 2016

Fruquintinib NSCLC data, Epitinib Phase I data at WCLC

December 2016

Analyst

Dr Susie Jana

+44 (0) 20 3077 5736

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

Hutchison China MediTech (Chi-Med) (HCM) is an innovative biopharma company focused on the highly lucrative global oncology and immunology markets. HCM has built a substantial pipeline of potential first-in-class or best-in-class tyrosine kinase inhibitor (TKI) drugs, some of which are in development with strategic partners. HCM’s profitable Chinese healthcare business continues to benefit from the fast-growing domestic market. We expect progress of the mid- to late-stage pipeline during 2016-17 (including US and China regulatory filings) to catapult the company into the international spotlight. We initiate with a value of $2.3bn, or $19.31/ADS.

Year end

Revenue ($m)

PTP*
($m)

EPADS*
($)

DPADS
($)

P/E
(x)

Gross yield
(%)

12/14

87.3

(20.0)

(0.09)

0.0

N/A

N/A

12/15

178.2

(10.5)

0.07

0.0

179.0

N/A

12/16e

180.4

(48.1)

(0.00)

0.0

N/A

N/A

12/17e

226.0

(26.7)

0.03

0.0

417.0

N/A

Note: *excluding amortization of acquired intangibles, exceptional items and share-based payments. PTP excludes earnings from JVs (216% of 2015 net income). Dividend yield excludes withholding tax. Investors should consult their tax advisor regarding the application of any domestic and foreign tax laws.

Innovation Platform: Rich and deep R&D pipeline

By mid-2016 the Innovation Platform (IP) unit will have eight internally developed TKIs spanning 25 clinical trials, including three compounds in late-stage development. Potential regulatory filings for savolitinib (partner AstraZeneca) for renal cancer and fruquintinib (partner Lilly) for colorectal cancer in late 2016/early 2017 could pave the way for possible fast-tracked China fruquintinib and US savolitinib launches (if awarded breakthrough therapy designation) in 2017. Established partnership deals provide validation of the pipeline, and non-partnered assets could provide licensing opportunities.

Commercial Platform: Defensive earnings growth

Despite the economic uncertainties, the Chinese healthcare market is one of the largest and fastest growing in the world, driven by a multitude of factors including supportive government policies. The China Healthcare (CP) business taps into this growth potential with a range of products marketed through a broad distribution network, thus pipeline drugs should launch rapidly once approved by the China FDA.

Financials: Property windfall to aid 2016 cash

The FY15 cash position at the group level was $31.9m, with a further $76.9m in cash held at the JV level (not consolidated at the group level). The gross proceeds of the ~$110.2m Nasdaq listing (March 2016) and the expected $73.9m (JV level) property compensation payments translate to a $39.6m 2016 net cash forecast.

Valuation: $2.3bn $19.31 per ADS

Our sum-of-the-parts valuation uses an rNPV model for the IP unit and earnings-based multiples for the profitable CP unit. IP is valued at $1,712m; placing CP’s 2016e share of net profit on a 22.5x rating gives $657m ($5.41/ADS). Adding in net cash and netting out unallocated costs results in a value of $2.3bn ($19.31/ADS). Approval(s), clinical data and/or deals should increase our risk-adjusted valuation.

Investment summary

Company description: Complex and diverse

HCM, a Hong Kong-based healthcare company, was established in 2000 as a wholly-owned subsidiary of Hutchison Whampoa (now part of CK Hutchison) to commercialize on the opportunities arising out of the Chinese healthcare market. HCM has two business units: Innovation Platform (Hutchison MediPharma), the research and development arm, which is mainly focused on developing highly targeted oncology therapies and immunology therapies (tyrosine kinase inhibitors) for the global and domestic markets; and Commercial Platform (a profitable, cash-generative, drug distribution business wholly based in China), which comprises of a number of joint ventures with established Chinese players and wholly owned subsidiaries.

Valuation: $2.3bn suggests market overlooks full R&D potential

HCM’s business diversity means the best approach is a sum-of-the-parts valuation. We use earnings-based multiples for HCM’s Commercial Platform (subs and JVs) or China Healthcare business, and a risk-adjusted NPV model for Innovation Platform, the MediPharma unit. We use a 22.5x multiple (in line with the sector average for comparable Chinese companies) on our forecast 2016 net attributable profit (equity in earnings of equity investees, net of tax) for the SHPL and HYBS JVs of $29.2m, which results in a valuation of $657m ($5.41/ADS). We use a risk-adjusted net present value (rNPV) method to discount future cash flows for the Innovation Platform division, which yields a valuation of $1,712m ($14.12/ADS). Adding in net cash and netting out unallocated costs results in a value of $2,342m or $19.31 per ADS. Approval(s), clinical data and/or deals should increase our risk-adjusted valuation.

Sensitivities: CK Hutchison reduces Chinese risks

CK Hutchison’s involvement in HCM materially reduces the myriad of risks associated with any direct investment in China; however, it does mean investors are minority shareholders. Additionally, the limited available free float reduces the shares’ liquidity. HCM is subject to the usual biotech and drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. Expectations for the pipeline have increased and while our risk-adjusted NPV highlights the future sources of upside to the shares, failure of one or more products to succeed would have a negative impact on the shares; savolitinib, fruquintinib and sulfatinib contribute ~65% to our valuation of HCM.

Financials: FY15 reported under US GAAP

With the secondary listing (Nasdaq) underway, HCM reported 2015 financials under US GAAP (2013 and 2014 were consequently restated). At the group level, 2015 revenues were reported at $178.2m (+104%), with net profits attributable of $8m versus a loss in 2014 of $7.3m. Revenues reported at the group level do not include the reported revenues of the Shanghai Hutchison Pharmaceuticals (SHPL) and Hutchison Baiyunshan Chinese Medicine Co (HBYS), 50/50 joint ventures that are accounted for using the equity method, with only the net profit contribution recorded. At 31 December 2015 the company held $31.9m of cash and cash equivalents at the group level, with $76.9m in further cash and equivalents held at the 50/50 JV level, which is not consolidated at the group level. The 2015 year end reported cash additionally does not include the gross proceeds of ~$110.2m raised from the Nasdaq listing in March 2016, nor the expected $73.9m (at the JV level) property compensation payments expected from the Shanghai government in 2016 ($33.1m at the JV level was reported in 2015). All told, with HCM’s additional access to a total of $66.9m of bank facilities, we do not envisage any funding gap in our near-term forecast period despite the additional R&D investment requirements.

Company description: A complex organization

HCM was established in 2000 as a wholly owned subsidiary of CK Hutchison. HCM is dual listed; the company floated on AIM in May 2006 and on Nasdaq in 2016 (~40% listing), with CK Hutchison retaining a majority and management control. HCM is a complex business with multiple moving parts since inception (Exhibit 1 provides details on the group’s complicated organization structure and ownership). Investors should focus on the Innovation Platform unit, as ultimately valuation will be driven by this division over the near term as the eight tyrosine kinase inhibitors maintain their clinical progress, with potential first regulatory filings (savolitinib and fruquintinib) anticipated in 2016/17 followed by China and or US/International launches. The legacy China Healthcare (Commercial Platform) business remains an important cash cow with stable growth in cash from operations as well as significant property windfalls ($73.9m) due at the JV level in 2016.

Exhibit 1: Hutchison China MediTech business structure

Source: HCM reports

From inception HCM built a China-based fully integrated, manufacturing, marketing and distribution business (for prescription drugs, consumer health products), referred to as its ‘Commercial Platform’, through acquisitions and the formation of joint ventures with established drug distribution peers in China (including Shanghai Pharmaceuticals and Baiyunshan). The aim was to build a profitable and cash-generative China-based healthcare business that could aid in the long-term funding of an innovative biopharmaceutical drug portfolio. Since 2002 HCM has steadily invested in its R&D capabilities: the ‘Innovation Platform’ Hutchison MediPharma (HMP) unit. To date around $330m has been invested, resulting in the building of a high-grade discovery facility in China, which comprises a fully integrated drug discovery and development operation covering chemistry, biology, pharmacology, toxicology and chemistry, in addition to manufacturing controls for clinical and commercial supply. The result of 14 years of investment is a rich oncology and immunology, mainly tyrosine kinase inhibitor based, pipeline that has been developed by a China-based development team of over 290 scientists and staff.

Innovation Platform: Targeting targeted therapies

The core focus of the Innovation Platform is to develop innovative, highly selective, tyrosine kinase inhibitors with activity against multiple novel and validated molecular targets in oncology and immunology indications. A medicinal chemistry based approach is used to engineer highly selective drug candidates against these targets, with the aim to improve on efficacy and or toxicity versus available drugs to deliver best-in-class, next-generation compounds. HCM’s approach has generated a number of candidates that address both existing, well-validated targets (which is typically associated with a lower clinical risk) as well as more novel targets (where the as yet unproven nature of the mechanism means the clinical risk is higher). It uses the vibrant and accessible clinical trial environment for oncology drug candidates in China to rapidly progress through to proof of concept trials at a much lower cost versus drug development in the Western hemisphere. The result is a portfolio of novel and differentiated next-generation compounds that potentially could compete successfully in the global markets. Furthermore HMP is well placed to tap into compounds that demonstrate only equivalence to the existing globally-marketed compounds by developing these for sale by its Commercial Platform unit for the domestic Chinese market.

The company has built a substantial platform: eight tyrosine kinase inhibitors are spanning 19 active clinical trials (with six more trials in planning for 2016). Exhibit 2 summarizes the R&D pipeline.

Exhibit 2: Pipeline summary

Project

Partner 

Indication

Mechanism

Status

Savolitinib (AZD6094/volitinib)

AstraZeneca (AZD6094)

Solid tumors including renal carcinoma; NSCL; CRC; gastric cancer

Selective c-Met inhibitor (TKI)

Two parallel POC trials as monotherapy and combination with other targeted therapies and chemotherapy (nine active and three to start H116). The global Phase II in PRCC is expected to report interims in 2016 – if positive could apply for US NDA under Breakthrough Therapy designation and start global Phase III H216. Expect full results of Phase Ib/II POC studies in NSCLC H216 to catalyze start of Phase III NSCLC.

Fruquintinib

Eli Lilly

Solid tumors including CRC; NSCLC; gastric cancer

VEGFR inhibitor

Phase III China CRC (third-line), Phase III China NSCLC (third-line), Phase lI China Gastric planned for H216. Possible China NDA submission late 2016/early 2017. Phase III CRC top-line data expected end 2016/early 2017. Expect US IND submission 2016 and potential to start Phase I bridging studies in Caucasians in early 2017.

Sulfatinib

 

NET tumors including pancreatic NET; non-pancreatic NET and thyroid cancer

VEGFR/FGFR

Phase III China and Phase II US NET (first-line), Phase II China thyroid cancer.

Epitinib

 

NSCLC (brain metastasis)

EGFR

Phase II POC in China – top-line results expected in 2016. H216 plan to start Phase III China and initiate Phase I US dose confirmation study.

Theliatinib

 

Solid tumors

Wild-type EGFR

Phase I China. H216 Plan to start Phase Ib studies in esophageal and head and neck cancers in China.

HMPL-689

 

Hematological cancers; solid tumors

PI3K delta

Phase I Australia dose escalation study started Q216.

HMPL-523

 

RA/MS/lupus; hematological cancers

SYK

Phase II in RA and other indications start in 2016, Phase I dose escalation study (AUS) ongoing in hematological cancers.

HMPL-453

 

Solid tumors

Selective FGFR

Preclinical.

HMPL-004

Nestlé Health Science (NSP)

Ulcerative colitis and Crohn’s disease

NF-KB (TNF alpha)

Preclinical – reformulation underway, aim to re-start clinical trials in 2017.

Source: Edison Investment Research, HCM reports

Savolitinib, fruquintinib and sulfatinib are the most advanced compounds, with Phase II or III registration trials currently enrolling patients either in China and/or internationally. HMP has a proven track record of establishing collaborations with multinational companies. Savolitinib and fruquintinib are being developed with partners AstraZeneca and Lilly, respectively, whereas the reformulated version of HMPL-004, a botanical based drug, is about to re-enter Phase I under a joint venture with Nestlé Health Science (NSP). These three collaborations could contribute materially with up to $1.2bn in aggregate upfront, option and contingent milestone payments to HMP/NSP; this is in addition to tiered royalties on net sales. The $330m cost of funding investment in R&D to date (from establishing facilities through to clinical trial program funding) has been borne through a variety of sources, including cash flows generated from the commercial platform business; external cash from global partners (equity injections, licensing and developmental milestones); and funds raised from public offerings (AIM and Nasdaq listings). Furthermore HCM holds sole rights to Sulfatinib, Epitinib, Theliatinib, HMPL-523, HMPL-689 and HMPL-453; these have potential for new licensing deals depending on the outcome of ongoing and future clinical trial programs; future deals could be predicated on retaining an optionality to commercialize alone in certain territories (ex-China) to enhance economic returns.

HCM’s Innovation Platform reported $52m in revenues (+156%) in 2015, benefiting from developmental milestone payments from partners AstraZeneca and Lilly in the year. The division’s net attributable loss was reported at $3.8m (-83%), despite the major investment in clinical trials in the year.

Commercial Platform: Established infrastructure in China

Over the past 15 years, HCM has built a broad prescription drug, consumer health, and over the counter (OTC) fully integrated, manufacturing, marketing and distribution business under its Commercial Platform (CP) business division, which reaches across multiple provinces in China. The aim is to continue building this sizeable sales and manufacturing infrastructure (currently 1,900 prescription drugs and 1,300 OTC salespeople in over 300 cities) to harness the considerable growth opportunities that currently exist and will arise from partnering with third parties and launching in-house developed innovative therapies. CP reported total sales from subsidiaries and JVs from continuing operations of $519m in 2015 ($465.4m in 2014), with net profit attributable to the group of $25.2m in 2015 ($22.8m in 2014).

CP comprises Prescription Drugs (marketing and distribution of own and third party) and Consumer Health:

The Prescription Drugs business is conducted through two significant JVs established with well-known Chinese healthcare company peers: Shanghai Hutchison Pharmaceuticals (SHPL) is a 50/50 joint venture with Shanghai Pharmaceuticals (SHA: 601607) and focuses on prescription TCM; and Hutchison Sinopharm is a third-party prescription logistics and distribution services. They reported combined sales of $287m in 2015, with net profit attributable at the HCM level up 20% to $15.9m. HCM has operational control of the prescription drugs JVs.

Consumer Health consists of two wholly owned subsidiaries and two JVs. It reported combined sales of $232.3m in 2015. Hutchison Baiyunshan (HBYS) is a 50/50 joint venture (which is jointly controlled) with Guangzhou Baiyunshan (SHE: 000522) that is principally focused on OTC TCM; Hutchison Hain Organic is a joint venture with Hain Celestial that sells organic and natural products.

The Commercial Platform is a stable growth business in China, and we expect above-market growth rates to continue into the near term. We forecast 12.5% and 5.0% sales growth in 2016 for SHPL and for HBYS respectively. Importantly the China-based prescription platform will be invaluable once the R&D pipeline comes to fruition and will enable rapid commercialization of products once regulatory approved in China. We would anticipate operational leverage from the two businesses after the initial launch infrastructure costs have been met. We describe later in the note how in our view domestic players are at a better vantage point than the global multinationals in China.

Outlook: All eyes on IP and the pipeline evolution

Targeting tyrosine kinase inhibitors for oncology and immunology

Hutchison MediPharma’s platform has established a broad portfolio of small molecule, orally active tyrosine kinase inhibitors (TKI), eight of which are in clinical trials for a variety of cancers. Tyrosine kinases are an attractive drug research area since they play important roles in the modulation of growth factor signaling, being involved in tumor cell growth and proliferation, creating apoptosis resistance, and promoting angiogenesis and metastasis.

A number of tyrosine kinase inhibitors have been global commercial successes; for instance, Novartis’s Gleevec (imatinib), Roche’s Tarceva (erlotinib), AstraZeneca’s Iressa (gefitinib), Bayer’s Nexavar (sorafenib) and Pfizer’s Sutent (sunitinib) to name a few. In 2014 global sales of small molecule kinase inhibitors totaled $18bn (source: Visiongain). Although an increasingly competitive field, advances in the understanding of tumor biochemistries are creating exciting opportunities for novel next-generation inhibitors, particularly in stratified patient populations. Overall the small molecule TKI market will continue to grow, driven by product innovation and use of combination targeted therapies against the overall backdrop of cancer patient growth rates in the global setting. Advances in other modalities of cancer treatment, for example immunotherapies, will additionally expand the cancer drugs market.

Focus on kinase selectivity

HCM’s approach has generated a number of candidates that address existing, well-validated targets (which is typically associated with a lower clinical risk) as well as more novel targets (where the as yet unproven nature of the mechanism means the clinical risk is higher). Clinical trial programs for many compounds in development span multiple tumor/immunology indications and differing patient stratifications and multiple treatment paradigms that include monotherapy and in combination with other cancer treatments. Combinations of targeted therapies (TKI, monoclonal antibodies and immunotherapies) and chemotherapy is increasingly becoming the best approach to treating the complex and constantly mutating disease that is cancer. The collaboration on savolitinib with AstraZeneca exemplifies this as its development program includes clinical studies of savolitinib added to AstraZeneca’s Iressa and Tagrisso. Additionally AstraZeneca and HCM plan to initiate several combination trials evaluating savolitinib plus immunotherapy in patients with renal cell carcinoma.

High-grade discovery facility in a supportive environment

Sustained effort with around $330m invested has resulted in the building of a high-grade discovery facility, and all the elements to create a fully integrated drug discovery and development operation are in place, including versatile discovery and screening platforms. This taps into the wealth of talent and opportunities that are presenting in China right now, capitalizing on the cost efficiencies and speed benefits associated with performing R&D there. The attraction of China as a research base is confirmed by the high-profile formation of sizeable R&D units by a number of multinational pharmaceutical companies. For instance, Eli Lilly, Roche and Novartis have established laboratories at the Zhang Jiang High Tech Park in Shanghai. They and HCM cite the quality of the young research scientists available, the ease of recruiting treatment patients and the speed and cost efficiencies of undertaking high-quality clinical trials as critical reasons for being there. Incidentally, Hutchison MediPharma was one of the first tenants in Zhang Jiang, in 2002, in what has become the center of the Chinese biotech industry.

The aim has been to tap into the receptive environment in China for high-technology clinical projects by undergoing the proof of concept studies (Phase II trials) in China before a decision to either partner or initiate global trials is made. These clinical trials are performed to Western standards and generate high-quality data that allow a go or no-go decision to be made quickly and, more importantly, relatively cheaply. Once proof of concept in Chinese patients has been achieved, additional data requirements for Caucasian patients can be generated from bridging studies in Australia or by initiating larger trials internationally.

Product collaborations: Potential $1.2bn in partner payments

HCM has to date established major collaborative agreements with AstraZeneca, Lilly and Nestlé Health Science, the latter through a JV structure. These three collaborations could contribute materially with up to $1.2bn in aggregate upfront, option and contingent milestone payments to HMP/NSP; this is in addition to tiered royalties on net sales. As of 31 December 2015 HCM had received $96.5m in upfront payments, milestones and equity injections from partners. Subject to future clinical success, HCM could receive up to a further $360m in future development and regulatory approval milestones, up to $145m in further option payments and up to $560m in commercial milestones from existing partners.

US breakthrough therapy designation could fast track approval

HCM is likely to seek approval for at least three compounds under the US FDA breakthrough therapy designation. This includes savolitinib for papillary renal cell carcinoma, non-small cell lung cancer and gastric cancer, sulfatinib for neuroendocrine tumors and epitinib for non-small cell lung cancer with brain metastasis. Breakthrough therapy designation was introduced by the 2012 Food and Drug Administration Safety and Innovation ACT (FDASIA) as a process to expedite the development and review of drugs that are intended to treat a serious condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). We cite AstraZeneca’s Tagrisso as a recent example of a TKI that demonstrated rapid clinical development and regulatory approval for resistant non-small cell lung cancer (NSCLC). Tagrisso received FDA approval in 2015, just over two and a half years from the start of clinical trials to approval for the treatment of patients with metastatic epidermal growth factor receptor (EGFR) T790M mutation positive non-small cell lung cancer under the FDA’s accelerated approval process based on tumor response rate and duration of response through breakthrough therapy designation.

Global oncology market worth $102bn in 2014

According to Frost and Sullivan, in 2014 the value of the global oncology drug market was $102bn, while the oncology market in China alone was $11bn. While older established chemotherapies are a large share of the pie, targeted therapies as a therapeutic strategy have been well validated with several first-generation VEGF inhibitors having been approved globally since 2005 and 2006. These include both small molecule TKI drugs such as Nexavar and Sutent as well as monoclonal antibodies such as Avastin, which had combined global sales of approximately $8.7bn in 2015 across multiple tumor types. In China, targeted therapies represent 20.9% of the $11bn oncology market and growth in this territory will depend on ability to pay and pricing strategies. We detail the China healthcare market including oncology opportunities in more detail later in the note.

Savolitinib: Building an arsenal of clinical trial data

Savolitinib (AZD6094) is a novel, small molecule TKI that is being developed with partner AstraZeneca for the treatment of EGFR TKI resistant cancers. It is being assessed across an extensive global clinical trial program that spans 12 clinical trials (nine active and three due to start in H116) across papillary renal cell carcinoma, clear cell carcinoma, non-small cell lung cancer and gastric cancers, both as monotherapy and in combination with approved or investigational targeted therapies (see Exhibit 3). Savolitinib targets patients with resistant cancers whose tumor type tests positive for c-Met amplification or overexpression; for example C-met amplification occurs in 40-70% of papillary renal cell carcinoma (PRCC) patients. Importantly c-Met amplification is uncommon in previously untreated patients (note 2-4% of untreated NSCLC, Bean et al 2007) but plays a role in acquired resistance to EGFR inhibitors) of patients with EGFR-mutated tumors and can be seen in 5-20% of patients in this setting. Furthermore as MET amplification occurs independently of EGFR (T790M) mutations Met is a clinically relevant therapeutic target for some patients who acquire resistance to AstraZeneca’s Iressa and Roche’s Tarceva.

Savolitinib is a highly selective inhibitor of the c-Met signaling pathway (also known as hepatocyte growth factor receptor, HGFR). It has been structurally designed to address the kidney toxicity issues that have prevented the c-Met drug class from gaining approval by the replacement of the quinolone region of the compound; and it has not displayed any material renal toxicity to date. Savolitinib is most advanced in its PRCC and NSCLC indications. PRCC accounts for 14% of the 366,000 new kidney cancer cases that occur worldwide; while clear cell renal carcinoma accounts for 74%. A number of targeted therapies (including Roche’s Avastin, Pfizer’s Sutent and Bayer’s Nexavar), immunotherapies and immune checkpoint inhibitors are approved to treat advanced renal cell carcinoma; however there are no currently approved treatments for PRCC. Given that savolitinib has demonstrated partial response in several solid tumors (Phase I overall response rate of 38% compared to GSK’s Foretinib 13.5% in Phase II), it is conceivable that savolitinib could be a global, first in class c-Met inhibitor to reach the market. Importantly the level of response to savolitinib by each patient correlated closely with the level of c-Met amplification. Positive data from the Phase II in PRCC in 2016 (the study completed enrolment in October 2015) could enable a US NDA submission (under the breakthrough therapy designation) by end 2016 with potential US launch in 2017.

Savolitinib has additionally demonstrated synergistic effects with other cancer drugs in pre-clinical models, hence its expansive clinical trial program includes combination with other targeted therapies and immune therapies. For example, the combination of savolitinib with AstraZeneca’s Tagrisso could shut down two resistant pathways accounting for 60-70% of all EGFRm+ TKI resistant NSCLC patients. A Phase Ib expansion study in NSCLC is underway (second-line in combination with Tagrisso); if positive, this could lead to the initiation of global Phase II or III program by end 2016 and potential US submission under breakthrough therapy designation late 2017/ early 2018. The NSCLC indication could be savolitinib’s largest opportunity given 1,690,000 new cases a year (8-10% c-Met amplification rate in NSCLC, source Frost & Sullivan). Exhibit 3 highlights the ongoing or soon to start clinical trials across all indications.

Exhibit 3: Savolitinib clinical trial program

Program

Indications

Clinical trial

Savolitinib

(AZD6094)

Partner: AstraZeneca

Target

C-Met

Papillary renal cell carcinoma (PRCC)

Phase II 1st line monotherapy (global), expect final data in 2016.

Phase Ib combination with immunotherapy (UK) to start H116.

Clear cell renal carcinoma (CCRC)

Phase Ib 2nd line in VEGFR TKI refractory (UK) to start H116.

Phase Ib 2nd line in VEGFR TKI refractory in combination with immunotherapy (UK) start H116.

Non-small cell lung cancer (NSCLC)

Phase Ib expansion 2nd line in EGFR TKI refractory in combination with Tagrisso (global). If ORR is in line with previous study then could move to global Phase III study and possibly pursue US FDA breakthrough therapy design; enrolling.

Phase II 3rd line in EGFR/T790M TKI in combination with Tagrisso (Global). Enrolling.

Phase II 2nd line in EGFR TKI refractory in combination with Iressa (China). Enrolling.

Phase II 1st line in c-Met over-expression as monotherapy (China). Enrolling.

Gastric cancer

Phase I C-Met + (China). Enrolling.

Phase I C-Met O/E (China). Enrolling.

Phase I C-Met + in combination with docetaxel (China). Enrolling.

Phase I C-Met O/E in combination with docetaxel (China). Enrolling.

Source: HCM reports

AstraZeneca deal enables a rich clinical programme with drug combinations

In 2011, HCM granted AstraZeneca co-exclusive rights to develop manufacture and commercialize Savolitinib globally. HCM received an initial $20m non-refundable license fee with up to a further $120m in clinical development and early sales milestones payable (as of December 2015 HCM had received $10m of those milestones) in addition to significant further milestone payments based on sales. This is in addition to a 30% royalty rate payable on sales in China and tiered royalties of 9-13% of sales outside China. AstraZeneca will fund global development and share costs for development in the Chinese market. Notably the collaboration with AstraZeneca has resulted in the addition of Savolitinib to AstraZeneca’s Tagrisso and Iressa in two separate Phase Ib trials to address the opportunity for combination therapy as second- and third-line treatment for NSCLC.

Peaks sales potential of $3.4bn across current clinical indications

We forecast global peak sales for Savolitinib of $3.4bn across the potential PRCC, CRCC, NSCLC and gastric cancer indications. Exhibit 4 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, with China priced at a 50% discount. We believe this is conservative given that AstraZeneca’s Tagrisso, a third-generation TKI, is priced at $12,750 per month, which is in line with the pricing being attached to most of new lung cancer drugs, including ALK (anaplastic lymphoma kinase) inhibitors such as Pfizer's Xalkori and Novartis's Zykadia (source: Reuter’s). 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 11% ROW sales payable to HCM from AstraZeneca and up to $110m more in milestone payments. We have not included milestone payments on further sales after initial launch, which would significantly enhance our valuation.

We have assumed higher overall penetration rates for PRCC given the 40-70% c-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 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 4: Savolitinib peak sales forecasts

Product

Indication

Launch year/
Peak sales China

Launch year/
Peak sales ROW

Assumptions

Savolitinib

 

 

 

 

PRCC

2017/2025 $129m

2017/2023 $475m

Global 2015 new cases (50,000), China 2015 new cases (7,800) C-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

2020/2026 $127m

2020/2025 $484m

Global 2015 new cases (270,000), China 2015 new cases (54,000) C-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

2018/2027 $290m

2018/2025 $845m

Global new cases (1,690,000), China new cases (623,000) C-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

2021/2028 $326m

2021/2026 $742m

Global new cases (1,034,000), China new cases (454,000) C-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

Deal economics: $140m in initial upfront and milestones from AstraZeneca royalty rate 30% on China, 11% ROW. COGs & SG&A on China sales only. R&D proportioned.

Source: Edison Investment Research. Note: FX rate US$1.5/£.

Fruquintinib in advanced clinical trials in China

Fruquintinib is an oral small molecule that is a highly selective VEGFR inhibitor (anti-angiogenesis) and shows high potency at low doses. Fruquintinib’s broad development program in China is in partnership with Lilly. Fruquintinib’s selectivity for VEGFR 1, 2 and 3 results in fewer off-target toxicities, allowing higher drug exposure that enables improved target coverage. The first-generation VEGFR inhibitors (examples include the monoclonal antibody Avastin [Roche], and small molecule TKIs Nexavar [Bayer] and Sutent [Pfizer]) had combined sales of approximately $8.7bn in 2015 across multiple tumor types, according to Frost & Sullivan. These treatments revolutionized the treatment of cancer by targeting the growth of blood vasculature that is essential for tumor growth. The success of these drugs validated VEGFR inhibition as a new class of therapy for the treatment of cancer during the last decade. The aim is to develop fruquintinib as best-in-class due to its better side effect profile to the first-generation drugs, for it to compete in the global setting. Consequently, fruquintinib is being assessed in late-stage clinical trials across multiple indications in China. The global clinical trials will focus on more proprietary combination studies (eg, fruquintinib plus savolitinib in clear cell renal cell carcinoma, fruquintinib plus Iressa in first-line NSCLC, fruquintinib plus Taxol in second-line gastric cancer).

Fruquintinib’s most advanced indications are Phase III development for colorectal cancer (third-line) and NSCLC (third-line) in China, with a POC Phase II gastric cancer (second-line) in combination with paclitaxel in China expected to start enrolling in H216.

Data so far has been encouraging; in the Phase II China colorectal cancer trial assessing fruquintinib as second-line monotherapy, median progression-free-survival (PFS) on the drug arm was 4.7 months versus 1.0 months in the placebo arm (p<0.001), with a disease control rate of 68.1% vs 20.8% and an overall survival rate of 7.6 months versus 5.5 months. Fruquintinib’s safety profile was confirmed in this study.

Exhibit 5: Fruquintinib clinical trial program

Program

Indications

Clinical trial

Fruquintinib

VEGF 1/2/3

Partner: Lilly

Colorectal cancer

Phase III 3rd line monotherapy (China), expect to complete enrolment May 2016.

FRESCO (416 patients), expect to publish top-line results end 2016/early 2017.

Non-small cell lung cancer (NSCLC)

Phase III 2nd Line (China). Enrolling.

FALUCA. During 2015 positive Phase II ‘POC’ trials in CRC and NSCLC triggered a $33.1m milestone payment from Lilly.

Gastric cancer

Phase II 2nd Line (China) in combination with paclitaxel to start H216.

Source: HCM reports

FRESCO, the Phase III, registration study in third-line monotherapy for CRC in China, was initiated in December 2015. This study is evaluating patients with locally advanced or metastatic CRC that have failed at least two other lines of treatment including fluoropyrimidine, oxaliplatin and irinotecan across 25 centers in China. Enrolment of 416 patients completed in May 2016 and top-line data could be published by Q117. Results from FRESCO will drive the China-based registration strategy (possible China NDA submission 2017), paving the way for a 2018 launch in CRC. The strength of the FRESCO study results additionally would drive the international clinical development plans (decision to initiate studies to support US FDA approval and marketing authorization in Europe) and could result in Lilly extending the partnership further by exercising the option to develop and commercialize fruquintinib globally. We anticipate US NDA submission in 2016 and the start of Phase I bridging studies in Caucasian patients in 2017 to mark the start of the global clinical development program. The global development program could be undertaken relatively quickly, with Phase III trials starting once the Phase I bridging studies complete with positive results. We would anticipate first international launches in 2019/20 across NSCLC, CRC and gastric cancer indications.

FALUCA, the Phase III, registration trial in China, was initiated in December 2015 as third-line treatment for non-squamous non-small cell lung cancer, following a positive Phase II proof-of-concept (POC) trial that reached the primary endpoint of progression free survival (PFS) with no unexpected safety issues. The second-line Phase II study in gastric cancer in China is due to start in H216. We note that the Phase Ib in gastric cancer in combination with paclitaxel (Taxol) is already in progress.

Lilly deal has enabled accelerated development in China

In October 2013 Lilly signed a deal to co-fund development of fruquintinib for the Chinese market, worth up to $86.5m in upfront fees and milestones, with tiered royalties (15-20%), with an option for global development. HCM has received a $6.5m upfront fee (2013), and as of December 2015 $19.2m in development milestones plus $13.9m in reimbursement for certain developmental costs. Furthermore if Lilly exercises its option to develop fruquintinib outside of China, HCM could receive up to an additional $300m of developmental, regulatory and commercial milestones payments. Importantly the partnership agreement with Lilly has enabled HCM to establish a manufacturing facility in Suzhou, China, which is currently producing Phase III clinical supplies and will on approval be used to produce fruquintinib for commercial supply.

Peak sales potential of $2.3bn across all indications

We forecast global peak sales for fruquintinib of $2.3bn across the potential CRC, NSCLC and gastric cancer indications. Exhibit 6 details fruquintinib’s full clinical trial program, incident rates and penetration assumptions. We assume pricing of $5,000 per month in the US and ROW ex-China with a treatment course duration of 12 months, with China priced at a 50% discount. Our model assumes a 20% royalty on China sales and 11% ROW sales payable to HCM from Lilly and up to $60m more in milestone payments. We have not included milestone payments on further sales after initial launch nor sales ex China, which would significantly enhance our valuation, given that if Lilly exercises its option to global development of fruquintinib, HCM could receive up to $300m in additional milestones.

Exhibit 6 details our peak sales forecasts and assumptions by indication. Note we forecast peak sales in China as seven to eight years from launch, and five years from launch for ROW.

Exhibit 6: Fruquintinib peak sales forecasts

Product

Indication

Launch year/

Peak sales China

Launch year/

Peak sales ROW

Assumptions

Fruquintinib

 

 

 

CRC

2018/2024 $107m

2020/2024 $633m

Global new cases (1,477,000), China new cases (283,000). China penetration 1%, $2,500 per month, 12-month treatment duration. ROW penetration 0.8%, $5,000 per month, 12-month treatment duration.

NSCLC

2019/2025 $298m

2019/2024 $707m

Global new cases (1,690,000), China new cases (623,000), China penetration 1.5%, $2,500 per month, 12-month treatment duration. ROW penetration 1.0%, $5,000 per month, 12-month treatment duration.

Gastric cancer

2019/2024 $142m

2019/2024 $384m

Global new cases (1,034,000), China new cases (454,000). China penetration 1%, $2,500 per month, 12-month treatment duration. ROW penetration 1%, $5,000 per month, 12-month treatment duration.

Deal economics

 

Deal economics: $86.5m in upfront and milestones from Lilly royalty rate 15-20% on China, 11% ROW. Majority of development costs, all commercial costs in China.

Source: Edison Investment Research. Note: FX rate US$1.5/£.

Sulfatinib forecast peak sales of $1bn, but could NET more

Sulfatinib is a novel, highly selective, oral VEGFR /FGFR1 TK inhibitor, being evaluated as a monotherapy for neuroendocrine tumors (NET) and thyroid cancers. VEGFR and FGFR are two tyrosine kinase receptors associated with angiogenesis and tumor growth. NETs are cancers that arise out of cells of the endocrine and nervous systems, predominately the digestive and respiratory tracts. While the current prevalence of NET in the US is ~140,000 patients (incidence of ~19,000 new cases per year), current treatment modalities are limited to subsets of NET with no broadly effective drugs across the NET spectrum.

Early Phase I data in China demonstrated sulfatinib has highly promising activity in neuroendocrine tumors, achieving an objective response rate (ORR) of 44.4% in 18 evaluable NET patients with 100% disease control rate (meaning no progression of disease). So far, the results of an ongoing Phase Ib/II trial assessing 81 NET patients are in line with expectations and importantly demonstrate that sulfatinib so far has superior ORR to Pfizer’s Sutent and Novartis’ Afinitor (currently approved treatments for pancreatic NET), as neither Sutent nor Afinitor have in clinical trials demonstrated an ORR of greater than 10%, and both drugs are only approved for pancreatic NET, which represents 10% of all NET. Sulfatinib is being evaluated across the spectrum of NET in pancreatic and non-pancreatic NET. A Phase III registration trial in China on non-pancreatic NET has started. International development plans are ongoing, with a Phase I US study that started in Q415 and a Phase II US study in broad spectrum NET patients is due to start in H216 once the Phase I concludes on the Phase II dose schedule.

Sulfatinib is additionally being evaluated for thyroid cancers; a Phase II study in China (thyroid cancer patients refractory to iodine treatment) started in March 2016. It also has potential in other tumor types, eg breast cancer with FGFR1 activation. Our current forecasts only include NET and thyroid opportunities as these indications are in active clinical stage development.

Exhibit 7: Sulfatinib clinical trial program

Program

Indications

Clinical trial

Sulfatinib

VEGFR/FGFR1

Partner: None

NET

Phase I/IIb 1st line monotherapy (China), enrolment complete. Top line results expected 2016.

Phase III 1st line in pancreatic NET (China).

SANET-ep Phase III 1st line in non-pancreatic NET (China). Enrolling.

Phase III 1st line in non- Pancreatic NET.

Thyroid cancer

Phase II China) started March 2016.

Source: HCM reports

Importantly HCM currently retains all rights to the products worldwide, and we believe a licensing deal could materialize as data from the US Phase II reads out. In our sulfatinib valuation, we assume a partnering deal worth $80m with a $20m upfront payment in 2017, and a further $60m in development milestones. Our partnering deal assumption takes a ballpark figure in between the initial deals established with AstraZeneca ($140m) and Lilly ($86.5m). However, future deals could be predicated on retaining an optionality to commercialize alone in certain territories (ex-China) to enhance economic returns. We assume a 30% royalty rate on China sales, and 11% ROW.

Peak sales potential of $1bn across all indications

We forecast global peak sales for sulfatinib of $1bn across the NET and thyroid cancer indications. Exhibit 8 details the full clinical trial program, penetration/incident rates and penetration assumptions. Our peak sales forecasts for sulfatinib in NET are conservative as at this point we assess mainly the US market, given a lack of meaningful statistics for either China or ROW across the broad spectrum of NET. We have assumed a 50,000 prevalence rate in China for modeling purposes. In our sulfatinib valuation, we assume a partnering deal worth $80m with a $20m upfront payment in 2017 and a further $60m in development milestones.

Exhibit 8: Sulfatinib peak sales forecasts

Product

Indication

Launch year/
Peak sales China

Launch year/
Peak sales ROW

Assumptions

Sulfatinib

 

 

NET

2019/2025 $78m

2029/2024 $585m

US prevalence 140,000, China prevalence assumption 50,000. China penetration 5%, $2,500 per month, 12-month treatment duration. US penetration 5.4%, $5,000 per month, 12-month treatment duration.

Thyroid

2019/2024 $69m

2019/2024 $261m

Global new cases 162,000, China new cases 46,000. China penetration 4%, $2,500 per month, 12-month treatment duration. ROW penetration 4.0%, $5,000 per month, 12-month treatment duration.

 Deal economic assumptions

 

Deal economics: Assume $80m in upfront license fees and milestones from a potential partner, royalty rate 30% on China, 11% ROW. COGs & SG&A on China sales only. R&D proportioned.

Source: Edison Investment Research. Note: FX rate US$1.5/£.

Epitinib: Optimally designed for brain penetration

Epitinib is an oral small molecule EGFR inhibitor for the treatment of NSCLC with brain metastasis that has been designed for optimal brain penetration. Unlike currently available EGFR inhibitors (Iressa and Tarceva) that have been revolutionary for the treatment of NSCLC with EGFR mutations, epitinib can cross the blood-brain barrier and reach effective concentrations to treat patients with solid tumors who develop brain metastasis. According to OncoLink, the exact incidence of brain metastases is not known. Studies suggest brain metastases occur in 10-30% of patients with cancer, including NSCLC. Furthermore, an estimated 50% of NSCLC patients who eventually develop brain metastasis do not have effective treatments. In pre-clinical studies, epitinib demonstrated better brain penetration and efficacy than Tarceva. A Phase Ib proof of concept trial is ongoing in China evaluating epitinib 160mg once a day as first-line in EGFRm+ NSCLC patients with brain metastasis. Full results are expected in 2016; if positive, a Phase III in China will be initiated in 2016. This could pave the way for international studies and a potential application for US approval under the FDA’s breakthrough therapy designation.

We forecast epitinib peak sales of $905m for the NSCLC with brain metastasis indication, based on a 5% penetration of the NSCLC patient population with brain metastasis (20% of the 1,690,000 global new cases of NSCLC patients worldwide, 623,000 new cases in China), $5,000 per month ex-China (50% discount on price in China) and 12 months’ duration of treatment. HCM currently retains all rights to the products worldwide. In our epitinib valuation, we assume a partnering deal worth $80m with a $20m upfront payment in 2019, and a further $60m in development milestones. We assume a 30% royalty rate on China sales, and 11% ROW.

Theliatinib: Targeting wild-type EGFR Kinase

Theliatinib is an oral small molecule EGFR inhibitor that has shown potent preclinical activity against tumors with EGFR-activating mutations and those without (known as wild-type). The hypothesis is that tumors with wild type EGFR activation (gene amplification or protein over-expression) are less sensitive to TKI treatment due to less optimal binding affinity. Theliatinib has been specifically engineered to have significantly greater binding affinity to wild type EGFR proteins; in pre-clinical models the drug demonstrated 5-10x more potency than Tarceva. EGFR over-expression as a validated target has been proven by BMS/Merck/Serono’s Erbitux, a monoclonal antibody approved for use in head and neck and colorectal cancer. However, there are many other EGFR over-expressed tumor types, notably esophageal, NSCLC, gastric cancers and glioblastoma, where there are no approved targeted therapies.

Theliatinib is being assessed for maximum tolerated dose in Phase I in China as a third-line therapy in patients with wild type EGFR gene amplification or EGFR over-expression NSCLC; data so far shows that while MTD has not yet been reached, theliatinib has achieved effective plasma concentrations. Safety and PK results are good and dose escalation is continuing. Once the Phase II dose is established, multiple Phase Ib studies in esophageal and head and neck cancers will commence.

We forecast theliatinib peak sales of $860m in our model; Exhibit 9 details our peak sales forecasts and assumptions by indication. Note our peak sales assumptions in China are seven to eight years from launch, and five years from launch ROW. HCM currently retains all rights to the products worldwide. In our theliatinib valuation we assume a partnering deal worth $80m, with a $20m upfront payment in 2018, and a further $60m in development milestones. We assume a 30% royalty rate on China sales, and 11% ROW.

Exhibit 9: Theliatinib peak sales forecasts

Product

Indication

Launch year/
Peak sales China

Launch year/
Peak sales ROW

Assumptions

Theliatinib

 

 

Esophageal cancers

2020/2026 $327m

2029/2024 $149m

Global new cases 496,000, China new cases 251,000. China penetration 4.1%, $2,500 per month, 12-month treatment duration. ROW penetration 3.6%, $5,000 per month, 12-month treatment duration.

Solid tumors

2020/2026 $73m

2020/2024 $310m

Global new cases 689,000, China new cases 230,000. China penetration 4.0%, $2,500 per month, 12-month treatment duration. ROW penetration 4.0%, $5,000 per month, 12-month treatment duration.

Deal economic assumptions

Deal economics: Assume $80m in upfront license fees and milestones from a potential partner. Royalty rate 30% on China, 11% ROW. COGs & SG&A on China sales only. R&D proportioned.

Source: Edison Investment Research. Note: FX rate US$1.5/£.

HMPL-523: Potential first in class for RA/lupus/MS

HMPL-523 is a novel Syk inhibitor for oncology and inflammation with first-in-class potential. Over the last two decades the armamentarium for the treatment of rheumatoid arthritis (RA) has made significant advances with the discovery of biologic agents (eg anti TNFs) that block the cytokine element of the inflammatory cascade response. These intravenous protein based drugs are greatly efficacious but have limitations in terms of side effects. The next generation of oral small synthetic molecules being developed more specifically block the signal transduction pathways that are triggered by the inflammatory cytokines. For example, Syk is a key kinase that plays a part in activating kinases PI3K (delta) and BTK present in the B-cell signaling pathway, therefore Syk is an important target for modulating B-cell signaling. Approved drugs targeting the B cell signaling pathway include AbbVie’s BTK inhibitor Imbruvica (approved for mantle cell lymphoma and CLL) reported 2015 sales of $1.3bn following approval for its first indication in November 2013.

However, to date the biopharmaceutical industry has had little success in developing Syk inhibitors with AstraZeneca/ Rigel Pharmaceutical deciding to discontinue fostamatinib for RA based on the Phase III OSKIRA-2 and OSKIRA-3 studies, which demonstrated mixed top-line results (second-line). Importantly, efficacy was not compelling enough versus the side effect profile (notably hypertension and diarrhea) compared to established anti TNF drug Humira (AbbVie). HMPL-523 has been designed as a highly selective Syk inhibitor, and its selectivity should lead to less off target toxicities such as hypertension (lack of KDR enzyme inhibition in comparison to fostamatinib).

HMPL-523 is at an early stage of development but is one to watch given its pharmacokinetic and preliminary safety profile and the overall size of the RA and lupus markets plus potential in hematological malignancies. The Phase 1 Australian dose escalation studies in healthy patients have completed. No material off-target side effects (hypertension and severe diarrhea) were observed. Global phase II proof-of-concept studies in RA and possibly lupus could start in 2016.

Additionally a Phase I Australian dose escalation study is underway to determine HMPL-523 potential utility in hematological malignancies (relapsed and/or B-cell non-Hodgkin’s lymphoma or chronic lymphocytic leukemia). This follows on from proof-of-concept data that has emerged from Gilead’s entospletinib, which is serving to validate Syk as a target for such malignancies.

The immunological disease market is large, with the global market for Rheumatoid arthritis in 2015 was $35.5bn and for lupus $2.1bn. The global prevalence of RA was 19 million in 2015, of which 948,000 cases were in the US. The global prevalence of lupus was 4.2 million, of which 307,000 cases were in the US. There were 983,000 new hematological malignancies in 2015, with a treatment market value of $30bn. Given these statistics, there is a huge global opportunity for a successful Syk inhibitor even assuming low single-digit penetration rates (sources: Evaluate Pharma, HCM reports).

However, given the early stage of development we have erred on the side of caution and forecast only for RA at this stage as we anticipate start of the Phase II in RA in 2016. We forecast $1.6bn peak sales across in RA for HMPL-523. We assume a 20% royalty rate on worldwide sales but do not include any licensing or developmental milestones at this point. We would anticipate introducing peak sales forecasts for other indications as the clinical trial programs develop and or data become available. HMPL-523 could transform HCM’s prospects even further in the mid- to long-term. HCM currently retains all rights to the products worldwide.

Upcoming pipeline of material events

Exhibit 10: Key portfolio newsflow in 2016

Product

Indication

Next news

Timing

Savolitinib

PRCC

Phase II POC publication

H216

 

Potential Phase III initiation (global)

H216

Potential US Breakthrough therapy application

H216

Potential US NDA submission

H216

 

NSCLC

Global Savolitinib/Tagrisso combo publish Phase Ib PoC data, initiate Phase II/III

H216

Potential US breakthrough therapy application

Late 2017/ Early 2018

Fruquintinib

CRC

China third line CRC possible China NDA submission

Late 2016/ Early 2017

NSCLC

China Phase II POC publication (3rd line)

H216

Gastric cancer

Initiate China Phase II PoC 2nd line combination with Taxol

H216

Sulfatinib

NET

Initiate pivotal Phase III China (Pancreatic Net)

2016

 

Initiate Phase II PoC US

H2 2016

HMPL-523

RA

Initiate global Phase II PoC

H2 2016

Epitinib

NSCLC

Initiate China Phase III; start US development

H216

Theliatinib

Solid tumors

Start Phase Ib in China (esophageal and head & neck cancers)

H216

Source: Company presentations, Edison Investment Research

Outlook: CP is the near-term cash cow

Historically the investment case rested largely on the prospects for the China Healthcare component of this division. While increasing investor focus has shifted to the innovation platform and the pipeline growth opportunities, HCM’s commercial platform is well placed to capitalize from one of the fastest-growing healthcare markets in the world. Importantly cash generated from this business has been reinvested into developing the R&D business over the last 14 years. Unlike unprofitable biopharmaceutical peers, this reduces the need to raise cash to fund research and development as frequently.

Over the past 16 years, HCM has built a broad OTC and Rx (prescription-only drugs) TCM fully integrated, manufacturing, marketing and distribution network that reaches across China. This extensive commercial network consists of 3,200-person sales team; including 1900 medical reps for prescription drugs, 1,300 OTC sales reps covering greater than 300 cities and towns detailing to ~80,000 doctors across ~16,500 hospitals. Importantly this established commercial network will be invaluable in launching the innovative product portfolio in China; we anticipate operational leverage in the medium term from the two platforms after the initial launch infrastructure costs have been met. Exhibits 11 and 12 highlight the breadth of coverage in China and the holding structure.

Exhibit 11: China commercial platform

Exhibit 12: Prescription drug commercial platform in China

Source: Hutchison China MediTech

Source: Hutchison China MediTech

Exhibit 11: China commercial platform

Source: Hutchison China MediTech

Exhibit 12: Prescription drug commercial platform in China

Source: Hutchison China MediTech

Commercial Platform reported total sales of subsidiaries and JVs from continuing operations of $518.9m (+11%) in 2015 contributing $25.2m (+10%) net attributable profit (NAP) to HCM equity holders. The Commercial Platform is subdivided into prescription drugs and consumer health. Prescription drugs consist of two pharmaceutical JVs that account for~ 60% of net profits (sales of $286.6m, NAP booked $15.9m in 2015).

Shanghai Hutchison Pharmaceuticals (SHPL) is a 50/50 joint venture with Shanghai Pharmaceuticals (SHA: 601607) and focuses on prescription TCM. 2015 sales grew by 17% to $181.1m. SHPL holds a portfolio of 74 registered drug licenses, including its own and third party. A large percentage of SHPL sales are derived from She Xiang Bao Xin Wan (coronary heart disease). Importantly a new patent covering formulation was granted in July 2015, extending protection in China through 2029; growth is driven by continued expansion beyond its traditionally strong base in eastern China, helped by She Xiang Bao Xin Wan’s protected status and inclusion on the Essential Medicines List as well 22% price increase in 2015.The 1,900 medical reps within this division detail the product to hospitals based in provincial capitals, medium-sized cities and those in the country. In 2015 this division added third-party drugs Concor (Merck Serono) and Seroquel (AZN) to its distribution list on a fee-for-service basis.

Hutchison Sinopharm, a third-party prescription logistics and distribution service, reported sales of $105.5m in 2015 (+110%). It is currently a low-margin business although measures are in places to improve the profitability.

Consumer Health consists of two wholly owned subsidiaries and two JVs. Reported combined sales were $232.3m in 2015 and the NAP booked was $9.3m.

Hutchison Baiyunshan (HBYS) is a 50/50 joint venture with Guangzhou Baiyunshan (SHE: 000522) principally focused on OTC TCM. HBYS has 147 registered TCM products. Despite this broad portfolio, the bulk of sales arise from two products: Banlangen granules (26% of sales), an anti-viral treatment; and Fu Fang Dan Shen tablets (28%), principally for angina.

Hutchison Hain Organic is a joint venture with Hain Celestial that sells organic and natural products. Having started in 2010, this now imports over 500 products.

Hutchison Healthcare (HHL) and HCPL is a small wholly-owned infant and pregnant women’s nutritional business, mainly selling supplements under the Zhi Ling Tong brand.

We expect the CP unit to continue to post above-market rates in the near term. We forecast 12.5% and 5.0% sales growth in 2016 for SHPL and for HBYS respectively. Furthermore this China based distribution platform will be invaluable once the pipeline comes to fruition. We anticipate operational leverage from the two businesses after the initial launch infrastructure costs and specialist sales rep hires have been met. HCM intends to build an oncology focused sales team under the prescription drugs business for this purpose.

China fastest-growing healthcare market

The Chinese healthcare market is a large, untapped and fairly nascent market and like many developing economies in its multiple layers of complexity. This includes:

the types of treatments accepted and readily available (western versus traditional);

historical lack of universal coverage and sheer size has meant universal coverage under government schemes has been difficult;

Provincial and urban (and somewhere in between) infrastructure varied in terms of types of clinics and clinical staff; and

the funding and logistical infrastructure for drug delivery to point of access.

All this is compounded by various levels of literacy, availability of information and cultural acceptances of treatment normalities.

Despite these complexities, the Chinese healthcare market has demonstrably benefited from governmental social and strategic commitments, a burgeoning middle class (that is educated and understands the importance of non-traditional medicines) and a growth in wealth (polarized between rural and urban and more wealthy provinces) that gives people the ability and willingness to pay for goods where the direct consumer benefit can be seen. We highlight the impact that the growth the Chinese middle and affluent classes have historically contributed to the growth of the luxury goods companies such as LVMH, Prada, Tod’s and Remy Cointreau.

Second-largest healthcare market in the world

As of 2015 China is estimated to be the second-largest healthcare market in the world, with the US ranked number one. In nominal terms China’s expenditure on healthcare is still a relatively small percentage of its output, at 5.1% of GDP in 2011, or $369bn of $7.325tn. However, by 2020 GDP is forecast to be around $14.6tn and healthcare will represent 8.5% of this: a total of $1.25tn (sources: Forbes, China Ministry of Commence and Ministry of Health 2012).

The Chinese market is dominated by prescribed generic drugs, which accounted for 57% ($35.6bn) in 2010. A large percentage of spend within the healthcare system is on cheaper consumer products, OTC and TCM. Patented branded drugs accounted for only 4.1% in 2010 but this is forecast to rise to 7.9% by 2022. TCM is forecast to lose market share from 13.9% to 9.9% in 2022, while OTC is forecast to increase to 22.6%, from 15.2% (source: Visiongain, Evaluate Pharma, HCM reports). The growth of Western or chemically based drug products in China partly reflects the shift in medical practice as the efficacy of such therapies, especially in treating more debilitating conditions (notably cancer), is more recognized. With the region’s burden of increasing chronic diseases combined with an ageing population, the increase in revenues is mainly from treatments for cancer, cardiovascular diseases, diabetes and central nervous system disorders.

Exhibit 13: Healthcare growth as % of GDP in China to 2020e

Exhibit 14: Prescription drug growth as % of healthcare spending to 2020e

Source: PRC 2012 Health statistical Yearbook, PRC 2012 China statistical yearbook

Source: PRC 2012 Health statistical Yearbook, PRC 2012 China statistical yearbook

Exhibit 13: Healthcare growth as % of GDP in China to 2020e

Source: PRC 2012 Health statistical Yearbook, PRC 2012 China statistical yearbook

Exhibit 14: Prescription drug growth as % of healthcare spending to 2020e

Source: PRC 2012 Health statistical Yearbook, PRC 2012 China statistical yearbook

It is estimated that prescription drugs could grow from $60bn in 2010 to $261bn in 2022. This will be driven by ongoing government policies broadening access to healthcare, widening insurance coverage, a growing economy supporting a burgeoning middle class with an ability to pay, higher rates of education and acceptance of efficacious western drugs, with the backdrop of an alarming growth rate in the prevalence and incidence of cancers, diabetes and cardiovascular diseases.

Supportive government policies

The Chinese government is committed to improving access to healthcare on several levels and this underpins the robust growth rates in the Chinese market. China’s five-year plan sets up strategic goals for each of its major industries and prioritizes government support accordingly. The current five-year plan, the 13th, extends to 2020. The 12th five-year plan continued the multifactorial support of past plans and expanded on universal health coverage to a commitment to developing a world-class life-sciences industry backed up with intellectual property support.

Insurance coverage: more recently, government measures have centered on expanding cover to 95% of the population. However, the depth of coverage varies across the three publically funded insurance funds and the various provinces due to wealth levels. The shift of focus is now to improve the quality of coverage and diversify insurance cover to increase access to more costly therapies. To this end since 2013 China has opened up to allow more foreign investments. The growth of the private healthcare insurance sector will be crucial for the future development of the innovative, more specialist and inherently more expensive innovative therapies.

Regulate drug supply: for example, the government aims to lower drug prices, primarily in the generic and off patent originator drugs and expand the essential drug list (EDL) to cover more drugs but also increase use from the basic healthcare system to all city and county hospitals.

Target Innovation: the National Major scientific and Technological Special Project for Significant New Drugs development funding program supports pre-commercialization pharmaceutical research.

Growth covers a multitude of healthcare products. However, the biggest beneficiaries are the lower-cost generic products (which accounted for 61.4% of the market in 2009). High cost of novel treatments and a lack of universal private healthcare insurance may hinder the rapid development of specialized areas such as oncology across the country. If we consider that the highest-earning urban residents (source: PRC National Bureau of Statistics ) earn on average $7,705 per year, then only a minority of the population will be able to afford out-of-pocket treatments priced over $15,000 per year. Increased penetration of private health insurance and pricing will be a key component to success. For example, Roche Shanghai has pitched Xeloda pricing at a lower level in China than on international levels. As a result Xeloda is on the national reimbursement list and is one of the top 10 cancer treatments in China. Additionally, it is worth noting that for some Chinese people, the average household savings (cash in the bank) are very high relative to the West. When a family member is diagnosed with cancer, the family savings can be used to purchase treatments.

Highly fragmented market, players with local expertise at an advantage

The pharmaceutical market is highly fragmented with more than 4,000 domestic manufacturers and, by 2006, over 1,500 foreign owned or joint venture pharmaceutical manufacturers. China has a complicated, multi-tiered pharmaceutical supply chain with more than 12,000 local wholesalers. Improved prospects for pharmaceuticals have attracted many multi-national drug companies, with all of the top 20 global pharmaceutical companies either having a direct presence or established extensive joint ventures. Since 2006, 13 of the top 20 international pharmaceutical companies have established R&D centers in China to access the supportive government environment and unmet need. Pfizer is the leading pharmaceutical group by sales, with just 2% of the market in 2012, demonstrating the highly fragmented market place. The largest three domestic distribution companies accounted for 18% of the $110bn 2010 market (Sinopharm 9%, Shanghai Pharmaceuticals 5% and China Resources 4%).

Despite the challenges faced, there is a significant opportunity for regional players, with extensive local knowledge and competitive pricing strategies. HCM’s domestic player position is of huge importance, as local players with local knowledge will remain at an advantage.

Oncology in China remains an untapped market

The market for targeted oncology therapies has grown enormously during the last decade, reaching $41.8bn in 2013 and representing 46% of the total cancer therapy market (source: Evaluate Pharma, HCM reports). Oncology in China remains an untapped market and opportunities for cancer treatments are huge; the Chinese Ministry of Health reports that the cancer mortality rate has increased by 80% over the past 30 years with around 1.8 million people dying annually (compared to around 0.6 million in the US according to the American Cancer Society).Yet, despite their proven efficacy, the high cost of targeted therapies has proven to be the major limitation on growth. For example, the 10 main global approved targeted therapies in China range in price from $2,730 per month (AZN’s Iressa for NSCLC) to $16,580 per month (Roche’s Rituxan for NHL, close to its US prices). Local Chinese companies have begun to exploit this by entering the market with ‘me-too’ EGFR products (they are different molecules but their mode of action, efficacy and safety profile is very similar to the originator product). Such undifferentiated products can be developed locally at a lower cost and priced with the domestic market in mind rather than having to work within a global pricing regime. The leading example is Zhejiang Beta Pharma’s Conmana (icotinib), which is similar to Iressa (gefitinib) but priced at around a 30% discount. HCM’s more targeted approach to developing best or first in class will be one differentiating factor (eg novel drugs for unmet needs such as papillary renal cell carcinoma, ones with improved side effect profiles). Another will be its established drug distribution platform. However, regional pricing strategies will also be of great importance to the commercialization strategies on a molecule-by-molecule basis.

Management

HCM executive and senior management consists of internationally experienced Chinese and British nationals with established track records within multinational businesses. Exhibit 15 outlines management biographies.

Exhibit 15: Management biographies

Position

Biography

Chairman

Simon To is managing director and founder of Hutchison Whampoa (China), with over 30 years’ service. He has built up the business from a small trading company to a large investment group with interests in aviation, hotels, port logistics, consumer products, residential developments, power plants and transport infrastructure. He is chair or director of a number of China-focused businesses and joint ventures. He has a BSc in mechanical engineering from Imperial College and an MBA from Stanford.

CEO

Christian Hogg joined the company in 2000 and has, as CEO, led all aspects of the creation, implementation & management of Hutchison China MediTech's strategy, operations in both the innovation and commercial platforms & London and New York IPOs. This included establishing research collaborations with AstraZeneca and Lilly and operating joint ventures with Nestlé, Hain Celestial, Shanghai Pharmaceuticals, Guangzhou Pharmaceuticals and Sinopharm. Previously he spent 10 years with Procter & Gamble, including managing the detergent business in China and the global bleach business. He has a BSc in civil engineering from Edinburgh and an MBA from Tennessee.

CFO

Johnny Cheng has been CFO since 2008. Previously he was VP finance of Bristol Myers Squibb in China and a director of Sino-American Shanghai Squibb Pharmaceuticals and BMS (China) Investment Co. He also spent eight years in various financial positions with Nestlé China, and was an auditor with Price Waterhouse (Australia) and KPMG (Beijing). He has a bachelor of economics from the University of Adelaide and is a member of the Institute of Chartered Accountants in Australia.

CSO

Weiguo Su is chief scientific officer with 11 years’ experience at the company. He created HCM’s R&D strategy innovation platform and led all pipeline discovery. Previous experience includes director of medicinal chemistry at Pfizer. He spent seven years at Harvard under E.J. Corey, the Nobel Prize winning medicinal chemist. Weiguo was one of the first mainland Chinese people to be granted a scholarship to study at Harvard.

Position

Chairman

CEO

CFO

CSO

Biography

Simon To is managing director and founder of Hutchison Whampoa (China), with over 30 years’ service. He has built up the business from a small trading company to a large investment group with interests in aviation, hotels, port logistics, consumer products, residential developments, power plants and transport infrastructure. He is chair or director of a number of China-focused businesses and joint ventures. He has a BSc in mechanical engineering from Imperial College and an MBA from Stanford.

Christian Hogg joined the company in 2000 and has, as CEO, led all aspects of the creation, implementation & management of Hutchison China MediTech's strategy, operations in both the innovation and commercial platforms & London and New York IPOs. This included establishing research collaborations with AstraZeneca and Lilly and operating joint ventures with Nestlé, Hain Celestial, Shanghai Pharmaceuticals, Guangzhou Pharmaceuticals and Sinopharm. Previously he spent 10 years with Procter & Gamble, including managing the detergent business in China and the global bleach business. He has a BSc in civil engineering from Edinburgh and an MBA from Tennessee.

Johnny Cheng has been CFO since 2008. Previously he was VP finance of Bristol Myers Squibb in China and a director of Sino-American Shanghai Squibb Pharmaceuticals and BMS (China) Investment Co. He also spent eight years in various financial positions with Nestlé China, and was an auditor with Price Waterhouse (Australia) and KPMG (Beijing). He has a bachelor of economics from the University of Adelaide and is a member of the Institute of Chartered Accountants in Australia.

Weiguo Su is chief scientific officer with 11 years’ experience at the company. He created HCM’s R&D strategy innovation platform and led all pipeline discovery. Previous experience includes director of medicinal chemistry at Pfizer. He spent seven years at Harvard under E.J. Corey, the Nobel Prize winning medicinal chemist. Weiguo was one of the first mainland Chinese people to be granted a scholarship to study at Harvard.

Source: Edison Investment Research, company annual reports

Sensitivities

Drug development sensitivities

HCM is subject to the usual biotech and drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. The key sensitivities for HCM relate to crystallizing value from the mid- to late -stage pipeline, in particular savolitinib, fruquintinib and sulfatinib: these three products contribute ~65 % to our valuation. For the earlier-stage pipeline, both clinical development and partnering risks remain. We expect HCM to develop oncology assets epitinib and theliatinib and immunology assets HMPL-523 and HMPL-689 through to Phase II with initial proof-of-concept data before partnering. However, we have limited visibility beyond that on the terms and timing of any potential deal(s).

Macroeconomic impact

Economic uncertainties will always exist in China, alongside queries over who will fund healthcare costs. However, we believe government measures to open up the private healthcare insurance market to international players on top of extensive (although less broad) universal state coverage should help acquiesce these concerns. Furthermore, uptake of the more expensive innovative cancer drugs is likely to be skewed to the growing and increasingly affluent middle class population. One need only look to the luxury and branded goods sectors as a benchmark of what consumers will pay if they see a perceived benefit. Regulation and reimbursement risks are pertinent for all drug companies. Navigating the nuances of the healthcare system in China has been particularly troublesome for a number of Western companies, but HCM’s local expertise stands it in good stead.

Limited free float

CK Hutchison’s involvement is a key attraction. The undoubted expertise and presence (commercial, political and corporate governance) materially reduces the myriad risks associated with any direct investment in China. However, CK’s Hutchison holding of 60% of shares does raise concerns for some investors about the pitfalls of being a minority shareholder. The large shareholding also limits the liquidity of the shares, but poor liquidity is a feature of many attractive smaller healthcare companies. The recent NASDAQ listing, however, could improve liquidity.

Valuation

HCM’s business diversity means the best approach to valuation is a sum-of-the-parts. The innovation platform (R&D unit) is a classic emerging pharmaceutical play and is valued using a discounted cash flow (DCF), with the rNPV of the individual clinical projects (adjusted for the success probabilities) summed and netted against the costs of running the operation. CP is cash and profit generating, so earnings-based metrics are appropriate.

Exhibit 16: Sum-of-the-parts valuation

Business unit

Method

Value

Value per ADS**

Innovation Platform

rNPV

$1,712.1m

$14.12

Commercial Platform

P/E multiple (22.5x) on 2016e forecast of $29.2m (SHPL and HBYS JVs)*

$657.0m

$5.41

Net cash at end 2016e

$39.6m

$0.33

Minus unallocated costs

NPV

$66.8m

$0.55

Hutchison China MediTech total

$2,342m

$19.31

Source: Edison Investment Research. Note: *Equity in earnings of equity investees, net of tax. **Value per ADS is based on equivalent ADSs outstanding of 121,279,852

For the innovation platform, our DCF-based calculation of the clinical projects gives a risk-adjusted value of $1,712m (equivalent to $14.12c per ADS), with the later clinical stage of assets savolitinib, fruquintinib and sulfatinib carrying the most value (at $1,512m) within our model. These quickly progressing TKIs have the scope to add more value as regulatory filings and potential approval trigger milestone payments, and the probability of success alters our risk-adjusted discount rate. HMPL-523 for RA now contributes a risk-adjusted value of $64m (we apply 10% probability of success) to our valuation but progress could result in a material uplift given the numbers of patients afflicted with RA/lupus and hematological malignancies. Understandably, it follows that the later projects have a higher current value, with the step change occurring at Phase II when proof of principle largely occurs. Assuming even modest success within this element of the development pipeline could see a material uplift in our valuation for HMPL-523.

Exhibit 17: Innovation platform valuation by product and indication

Product

Indication

Launch

Peak sales ($m)

Value ($m)

Probability

rNPV ($m)

rNPV/ ADS ($)

NPV/ ADS ($)*

Savolitinib (AZD6094)

Papillary renal cell carcinoma Phase II

2017 (China)

2017 (ROW)

$129m (China)

$475m (ROW)

319.6

75%**

241.8

2.0

2.6

Clear cell carcinoma

Phase II

2020 (China)

2020 (ROW

$127m (China)

$484m (ROW)

201.6

75%

150.6

1.2

1.7

NSCLC

Phase II

2018 (China)

2018 (ROW

$ 290m (China)

$845m (ROW)

305.5

75%**

228.9

1.9

2.5

Gastric Ca

Phase I

2021 (China)

2021 (ROW

$ 326m (China)

$742m (ROW)

283.5

30%

97.7

0.8

2.3

Fruquintinib

CRC

Phase III China

2017 (China)

2017 (ROW)

$106m (China)

$632m (ROW)

276.3

60%

163.8

1.4

2.3

NSCLC

Phase III China

2018

$297m (China)

$707m (ROW)

296.6

75%

222.4

1.8

2.4

Gastric Ca

Phase II

2019

$141m (China)

$384m (ROW)

217.7

50%

108.9

0.9

1.8

Sulfatinib

NET

Phase III China

2018

$78m (China)

$585m (ROW)

256.6

75%

192.5

1.6

2.1

Thyroid ca

Phase II (China)

2020

$69m (China)

$261m (ROW)

211.2

50%

105.6

0.9

1.7

Epitinib

NSCLC

Phase II (China)

2018

$198m (China)

$706m (ROW)

352.0

30%

105.6

0.9

2.9

Theliatinib

Esophageal ca (Phase Ib)

2020 (China)

2020 (ROW)

$319m (China)

$165m (ROW)

215.2

10%

21.5

0.2

1.8

Solid Tumors

(Phase Ib)

2020 (China)

2020 (ROW)

$73m (China)

$310m (ROW)

88.1

10%

8.8

0.1

0.7

HMPL-523

RA

(Phase Ib)

2021 (WW)

$1,626m (WW)

639.2

10%

64.0

0.5

5.3

Valuation of IP only

 

 

 

$3,664

 

$1,712

$14.12

$30.21

Source: Edison Investment Research. Note: *Non-risk adjusted NPV per share assumes 100% probability of success. **Probability reflects likely filing with Phase II data for breakthrough therapy designation.

Exhibit 17 details the breakdown of contribution from products by indication to our risk-adjusted NPV. However, we have included the non-risk adjusted NPV (in grey) to illustrate the potential value of the pipeline should all projects in our forecasts succeed. Projects in pre-clinical development or very early Phase I are not yet included in our valuation.

With the commercial platform we look at the earnings multiples of peers quoted on the Chinese stock exchanges. Using a 22.5x multiple (in line with the sector average for comparable domestic Chinese companies) on the 2016 forecast net attributable profit of $29.2m for the commercial platform unit results in a valuation of $657m ($5.41 per ADS). The net cash forecast for December 2016 is to $39.6m ($0.33 per ADS) and subtracting unallocated corporate costs (valued using an NPV) of $66.8m ($0.55c per ADS) results in our sum-of-the-parts valuation of $2,342m ($19.31 per ADS).

Exhibit 18: Peers quoted on the Chinese stock exchanges

Company

Code

Net sales ($m)

Net profit ($m)

2015 margin (%)

Valuation metrics

2013

2014

2015

Growth 14-15 (%)

2013

2014

2015

Growth 14-15 (%)

Market cap ($m)

2015 P/E

2016 P/E

Tianjin Zhong Xin Pharm Co-A

600329 ch

915

1080

1079

-0.06

54

55

69

20.74

6.42

1,569

11.7

23.3

Livzon Pharmaceutical Grou-A

000513 ch

699

840

1003

16.28

75

79

96

17.13

9.52

2,371

35.5

22.5

Kpc Pharmaceuticals Inc-A

600422 ch

546

658

748

12.12

36

44

65

31.37

8.63

1,607

37.3

19.7

Dong-E-E-Jiaoco Ltd-A

000423 ch

609

607

826

26.46

185

209

249

15.97

30.18

4,493

21.0

15.4

Zhejiang Conba Pharmaceuti-A

600572 ch

442

542

805

32.60

64

85

68

-25.43

8.39

2,398

47.7

24.6

Jiangzhong Pharmaceutical-A

600750 ch

423

430

395

-8.92

26

41

56

27.84

14.27

1,310

28.9

19.5

Jinling Pharmaceutical-A

000919 ch

398

423

492

14.06

24

30

32

5.25

6.49

964

41.7

23.1

Guizhou Yibai Pharmaceutic-A

600594 ch

420

476

498

4.43

66

73

29

-152.63

5.83

1,900

88.7

25.6

Jiangsu Kanion Pharmaceuti-A

600557 ch

337

387

426

9.08

46

49

56

11.79

13.06

1,336

35.2

18.8

Zhuzhou Qianjin Pharmaceut-A

600479 ch

299

333

371

10.34

19

16

14

-13.05

3.84

776

72.1

32.2

Average

 

509

578

664

11.64

59

68

73

-6.10

10.66

1,872

42.0

22.5

Source: Bloomberg. Note: Priced at 12 May 2016. Exchange rate CNY0.1533/US$ at 12 May 2016.

It is worth noting that under US GAAP, jointly controlled entities (JCEs) are no longer consolidated proportionately, with attributable profit only shown on the P&L. JCE assets are now effectively off-balance sheet. For our valuation this means the cash held by the JCEs is not included in our valuation of the group.

Financials: Healthy cash outlook

The change of reporting from IFRS to US GAAP in 2015 had a significant impact on the historical consolidated financial statements before the restated years of 2013 and 2014. This includes two main changes. First, revenue recognition of upfront and milestone payments under US GAAP is now recorded in its entirety when received as opposed to a percentage of completion method to recognize milestones under IFRS. Second, the accounting treatment of redeemable convertible shares under US GAAP these will be classified as mezzanine equity.

At the FY15 results revenue from continuing operations grew by 104% from $87.3m to $178.2m, with the IP division contributing $52.0m (largely attributable from payments by partners) and consolidated CP sales contributing $126.2m. We forecast IP revenues of $40m in 2016 and $70m in 2017 largely driven by developmental milestone payments from partners AstraZeneca and Lilly for progress of savolitinib and fruquintinib respectively. We expect CP to continue posting double-digit top-line growth and forecast $140.4m in 2016 and $156.0m in 2017 respectively. These CP revenue numbers do not take into account revenues reported by the Shanghai Hutchison and Hutchison Baiyunshan joint ventures. Only the net attributable profit of the JV contribution is reported as equity in earnings of equity investees, net of tax below the PBT line. In 2015 this was reported as $22.6m and we forecast this to grow to $54.2m in 2016 and $38.1m in 2017. A major component in the uplift is the distribution of profits from the land compensation which we book as $30m in 2016 and $15m in 2017. Importantly net attributable profit of the JV contribution also includes a negative contribution from the Nestlé JV (NSP), which is not recording revenues at present but is investing around $3m a year for the development of HMPL-004 (reformulation to enter Phase I trials in 2017). Exhibit 19 details the historic and forecast breakdown of CP revenues and profit. Note the revenue and net profit breakdown include all subsidiaries and 100% of the JV contribution. However, under US GAAP only the net profit/(loss) attributable to HCM is recorded in the consolidated P&L at PBT level. PBT at the HCM consolidated level therefore includes contribution from the consolidated CP subsidiaries, the innovation platform segment and unallocated costs.

For valuation purposes we do not include the NSP negative contribution as we include R&D associated with this in unallocated costs, given we do not explicitly model forecasts for HMPL-004.

Exhibit 19: Commercial Platform breakdown and reconciliation to group net income

US$m

2013

2014

2015

2016e

2017e

2018e

Sales of subsidiaries and JVs*

402.3

465.4

518.9

571.6

650.2

733.0

Prescription drugs

138.2

204.9

286.6

323.4

373.0

425.6

Consumer Health

264.1

260.5

232.3

248.2

277.2

307.4

 

 

 

 

 

 

 

Net profit/(loss) of subsidiaries and JVs, after tax

39.6

48.8

54.1

59.9

69.8

78.7

Prescription drugs

22.4

26.5

31.9

35.3

43.1

49.5

Consumer Health

17.2

22.3

22.2

24.6

26.8

29.1

 

 

 

 

 

 

 

Consolidated net profit/(loss) after tax attributable to the group**

18.2

22.8

25.2

27.7

31.5

35.9

Prescription drugs

11.2

13.2

15.9

18.0

21.0

24.3

Consumer Health

7.0

9.6

9.3

9.7

10.5

11.6

 

 

 

 

 

 

 

Net profit/(loss) attributable to HCM (SHPL &HBYS)

19.8

23.6

26.4

29.2

33.1

37.1

Prescription drugs

11.2

13.2

15.7

17.7

20.6

23.7

Consumer Health

8.6

10.4

10.7

11.5

12.5

13.5

 

 

 

 

 

 

 

NSP net profit/(loss) attributable, net of tax

(8.8)

(8.4)

(3.8)

(5.0)

(10.0)

(15.0)

Equity in earnings of equity investees, net of tax****

11.0

15.2

22.6

24.2

23.1

22.1

 

 

 

 

 

 

 

PBT at the HCM consolidated level***

16.9

(20.0)

(10.5)

(48.1)

(26.7)

(21.9)

Taxation

(1.1)

(1.3)

(1.6)

(3.6)

(3.2)

(3.0)

Equity in earnings of equity investees, net of tax****

11.0

15.2

22.6

24.2

23.1

22.1

Equity in earnings or equity investees, net of tax, from property compensation*****

0.0

0.0

0.0

30.0

15.0

10.0

Net income from continuing operations

26.9

(6.1)

10.4

2.5

8.1

7.2

Net income from discontinued operations

(2.0)

2.0

0.0

0.0

0.0

0.0

Net income (reported)

24.9

(4.1)

10.4

2.5

8.1

7.2

Minority interest

(1.0)

(3.2)

(2.4)

(2.8)

(4.5)

(5.5)

Net income (reported) attributable to the company

23.9

(7.3)

8.0

(0.3)

3.6

1.7

Source: HCM, Edison Investment Research. Notes: *Includes unconsolidated sales from JVs. **Consolidated numbers excludes JV contribution. ***Includes consolidated CP and IP and unallocated costs. ****Includes SHPL, HBYS and NSP. *****Property compensation received at the JV level and distributed proportionally

Profit before tax at the group level reported a loss of $10.5m in 2015, largely due to the increase in R&D ($47.4m in 2015 versus $29.9m in 2014), S&M ($10.2m in 2015 versus $4.1m in 2014) and administrative expenses ($19.6m in 2015 versus $12.7m in 2014). We expect R&D expenses to increase to $70.1m and $78.2m in 2016 and 2017, reflecting the substantial need for investment in the burgeoning clinical trial programs across the IP division. We expect S&M and admin costs to increase marginally and, given higher cost assumptions, we forecast operating losses of $46.8m in 2016 and $25.2m in 2017 due to higher R&D costs in 2016 and 2017. In 2015 net income from continuing operations, which includes the profit contribution from JVs (see above), reported at $10.4m and we forecast $2.5m in 2016 and $8.1m in 2017. After stripping out minorities we forecast a net loss attributable to the company of $0.3m in 2016 and a net profit of $3.6m in 2017.

HCM retains a healthy gross cash position. At year end 2015 there was $31.9m in cash and bank balances, offset by $50m in bank loans at the group level. At the JV level, not consolidated by the group, Hutchison Baiyunshan and Shanghai Hutchison had cash and equivalents of $76.9m (offset by a $0.6m loan) at the end of December 2015. This does not include gross proceeds of $110.2m raised from the Nasdaq listing in March 2016. We forecast a net cash position of $39.6m at end 2016 versus a net debt position of $18m at year end 2015.

Property windfalls aid additional cash injections; the appreciation in land values has benefited SHPL and HBYS old factory sites in Shanghai and Guangzhou, which are now in prime residential locations. The growth in production volumes and tighter regulations in China mean new, modern factories are needed. Around 90% of the ~ $140m capex requirement has been invested (funded internally at the JV level) in two new factories in Shanghai and Anhui province and are expected to come online in mid and late 2016 respectively, enabling triple production capacity for own brand labels. Fortunately, the compensation formulas (c 40% of land auction values) mean the total cash compensation is significant even after the JV capex requirements. The group is to receive $105m total cash compensation for the SHPL sites from the Shanghai government over 2015 and 2016 with $31.1m received in H215. A further $73.9m from the Shanghai property compensation is expected at the JV level in 2016. HCM’s share of this should feed in through special dividends over a number of years and we forecast an increase in dividends received from equity investees in 2016 to $32m from $6.4m in 2015. Further compensations are anticipated for the Guangzhou sites and we include a minor contribution only in our 2017 and 2018 forecasts, erring on the side of conservatism due to the uncertainty of the timing and outcome of any deal.

Exhibit 20: Financial summary

USD'000s

2013

2014

2015

2016e

2017e

2018e

December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

36,547

87,329

178,203

180,407

226,025

254,242

Cost of Sales

(11,194)

(58,849)

(110,777)

(123,585)

(136,805)

(154,787)

Gross Profit

25,353

28,480

67,426

56,822

89,220

99,455

Research and development

(22,731)

(29,914)

(47,368)

(70,073)

(78,200)

(82,400)

Other overheads

(15,818)

(16,825)

(29,829)

(33,563)

(36,255)

(37,468)

EBITDA

 

(12,233)

(16,994)

(7,756)

(43,334)

(20,496)

(14,938)

Operating Profit (before amort. and except.)

 

(13,196)

(18,259)

(9,771)

(46,814)

(25,236)

(20,413)

Intangible Amortization

0

0

0

0

0

0

Operating Profit

(13,196)

(18,259)

(9,771)

(46,814)

(25,236)

(20,413)

Net Interest

(1,034)

(957)

(953)

(1,300)

(1,500)

(1,500)

Exceptionals

30,000

0

0

0

0

0

Profit Before Tax (norm)

 

(13,078)

(19,957)

(10,540)

(48,114)

(26,736)

(21,913)

Profit Before Tax (reported)

 

16,922

(19,957)

(10,540)

(48,114)

(26,736)

(21,913)

Tax

(1,050)

(1,343)

(1,605)

(3,609)

(3,208)

(3,000)

Equity investments, after tax

11,031

15,180

22,572

54,197

38,076

32,124

Profit After Tax (norm)

(3,097)

(6,120)

10,427

2,474

8,132

7,212

Profit After Tax (reported)

26,903

(6,120)

10,427

2,474

8,132

7,212

Minority

(983)

(3,220)

(2,434)

(2,800)

(4,500)

(5,500)

Discontinued operations

(1,978)

2,034

0

0

0

0

Net profit (norm)

(4,080)

(9,340)

7,993

(326)

3,632

1,712

Net profit (reported)

23,942

(7,306)

7,993

(326)

3,632

1,712

Average Number of Shares Outstanding (m)

52.1

52.6

54.7

60.6

60.6

60.6

EPS - normalized (c)

 

(7.8)

(17.8)

14.6

(0.5)

6.0

2.8

EPS - normalized and fully diluted (c)

 

(7.8)

(17.8)

14.6

(0.5)

6.0

2.8

EPS - (reported) (c)

 

46.0

(13.9)

14.6

(0.5)

6.0

2.8

Average number of ADS outstanding (m)

104.1

105.1

109.3

121.3

121.3

121.3

Earnings per ADS - normalized ($)

 

(0.04)

(0.09)

0.07

(0.00)

0.03

0.01

Earnings per ADS ($)

 

0.23

(0.07)

0.07

(0.00)

0.03

0.01

BALANCE SHEET

Fixed Assets

 

118,239

120,992

140,087

171,304

199,141

203,869

Intangible Assets

407

4,096

3,903

3,903

3,903

3,903

Tangible Assets

5,028

7,482

8,507

17,527

25,288

29,813

Investments

112,804

109,414

127,677

149,874

169,950

170,153

Current Assets

 

67,164

89,842

89,667

157,125

143,721

148,504

Stocks

1,420

4,405

9,555

14,000

16,000

18,023

Debtors

17,497

27,924

38,628

44,000

47,000

50,000

Cash

46,863

38,941

31,941

89,582

71,178

70,938

Other

1,384

18,572

9,543

9,543

9,543

9,543

Current Liabilities

 

(79,463)

(75,299)

(81,062)

(81,976)

(88,976)

(93,976)

Creditors

(4,163)

(20,427)

(24,086)

(25,000)

(32,000)

(37,000)

Short term borrowings

(51,508)

(26,282)

(23,077)

(23,077)

(23,077)

(23,077)

Other

(23,792)

(28,590)

(33,899)

(33,899)

(33,899)

(33,899)

Long Term Liabilities

 

(15,366)

(37,584)

(46,415)

(46,415)

(46,415)

(46,415)

Long term borrowings

0

(26,923)

(26,923)

(26,923)

(26,923)

(26,923)

Other long term liabilities

(15,366)

(10,661)

(19,492)

(19,492)

(19,492)

(19,492)

Net Assets

 

90,574

97,951

102,277

200,038

207,470

211,982

Minority

(6,960)

(17,764)

(18,921)

(21,721)

(26,221)

(31,721)

Shareholder equity

 

83,614

80,187

83,356

178,317

181,249

180,261

CASH FLOW

Operating Cash Flow

 

5,028

8,359

(9,393)

(25,146)

(5,204)

9,539

Net Interest

0

0

0

0

0

0

Tax

0

0

0

0

0

0

Capex

(2,500)

(3,729)

(3,324)

(12,500)

(12,500)

(10,000)

Acquisitions/disposals

0

689

0

0

0

0

Financing

7

2,801

(355)

0

0

0

Dividends

(577)

(1,179)

(590)

(700)

(700)

(2,700)

Equity financing

0

0

0

96,000

0

0

Other

0

(9,120)

10,858

0

0

2,921

Net Cash Flow

1,958

(2,179)

(2,804)

57,654

(18,404)

(240)

Opening net debt/(cash)

 

6,603

4,645

14,264

18,059

(39,582)

(21,178)

HP finance leases initiated

0

0

0

0

0

0

Other

0

(7,440)

(991)

(13)

0

0

Closing net debt/(cash)

 

4,645

14,264

18,059

(39,582)

(21,178)

(20,938)

Source: HCM reports, Edison Investment Research. Note: *Equity investments, after tax includes the net profit contribution from JVs.

Contact details

Revenue by geography

21st Floor,

Hutchison House,

10 Harcourt Road,

Hong Kong

+852 2121 8281

www.chi-med.com

Contact details

21st Floor,

Hutchison House,

10 Harcourt Road,

Hong Kong

+852 2121 8281

www.chi-med.com

Revenue by geography

Management team

Chairman: Simon To

CEO: Christian Hogg

Simon To is managing director and founder of Hutchison Whampoa (China), with over 30 years’ service, having built up the business from a small trading company to a large investment group with interests in aviation, hotels, port logistics, consumer products, residential developments, power plants and transport infrastructure. He is chair or director of a number of China-focused businesses and joint ventures. He has a BSc in mechanical engineering from Imperial College and an MBA from Stanford.

Christian Hogg joined the company in 2000 and has, as CEO, led all aspects of the creation, implementation & management of Hutchison China MediTech's strategy, operations in both the innovation and commercial platforms & London and New York IPOs. This included establishing research collaborations with AstraZeneca and Lilly and operating joint ventures with Nestlé, Hain Celestial, Shanghai Pharmaceuticals, Guangzhou Pharmaceuticals and Sinopharm. Previously he spent 10 years with Procter & Gamble, including managing the detergent business in China and the global bleach business. He has a BSc in civil engineering from Edinburgh and an MBA from Tennessee.

CFO: Johnny Cheng

CSO: Weiguo Su

Johnny Cheng has been CFO since 2008. Previously he was VP finance of Bristol Myers Squibb in China and a director of Sino-American Shanghai Squibb Pharmaceuticals and BMS (China) Investment Co. He also spent eight years in various financial positions with Nestlé China, and was an auditor with Price Waterhouse (Australia) and KPMG (Beijing). He has a bachelor of economics from the University of Adelaide and is a member of the Institute of Chartered Accountants in Australia.

Weiguo Su is chief scientific officer, with 11 years’ experience at the company. He created HCM’s R&D strategy innovation platform and led all pipeline discovery. Previous experience includes director of medicinal chemistry at Pfizer. He spent seven years at Harvard under E.J. Corey, the Nobel Prize winning medicinal chemist. Weiguo was one of the first mainland Chinese to be granted a scholarship to study at Harvard.

Management team

Chairman: Simon To

Simon To is managing director and founder of Hutchison Whampoa (China), with over 30 years’ service, having built up the business from a small trading company to a large investment group with interests in aviation, hotels, port logistics, consumer products, residential developments, power plants and transport infrastructure. He is chair or director of a number of China-focused businesses and joint ventures. He has a BSc in mechanical engineering from Imperial College and an MBA from Stanford.

CEO: Christian Hogg

Christian Hogg joined the company in 2000 and has, as CEO, led all aspects of the creation, implementation & management of Hutchison China MediTech's strategy, operations in both the innovation and commercial platforms & London and New York IPOs. This included establishing research collaborations with AstraZeneca and Lilly and operating joint ventures with Nestlé, Hain Celestial, Shanghai Pharmaceuticals, Guangzhou Pharmaceuticals and Sinopharm. Previously he spent 10 years with Procter & Gamble, including managing the detergent business in China and the global bleach business. He has a BSc in civil engineering from Edinburgh and an MBA from Tennessee.

CFO: Johnny Cheng

Johnny Cheng has been CFO since 2008. Previously he was VP finance of Bristol Myers Squibb in China and a director of Sino-American Shanghai Squibb Pharmaceuticals and BMS (China) Investment Co. He also spent eight years in various financial positions with Nestlé China, and was an auditor with Price Waterhouse (Australia) and KPMG (Beijing). He has a bachelor of economics from the University of Adelaide and is a member of the Institute of Chartered Accountants in Australia.

CSO: Weiguo Su

Weiguo Su is chief scientific officer, with 11 years’ experience at the company. He created HCM’s R&D strategy innovation platform and led all pipeline discovery. Previous experience includes director of medicinal chemistry at Pfizer. He spent seven years at Harvard under E.J. Corey, the Nobel Prize winning medicinal chemist. Weiguo was one of the first mainland Chinese to be granted a scholarship to study at Harvard.

Principal shareholders

(%)

Hutchison Healthcare Holdings (wholly owned subsidiary of CK Hutchison Holdings Ltd)

60.47

Mitsui & Co.

5.30

FIL Investment Managers (Singapore)

4.22

Slater Investments

3.71

Companies named in this report

AstraZeneca (LON:AZN),CK Hutchison (HK:1), Nestlé SA (VX:NESN), Guangzhou Baiyunshan (SHE: 000522), Shanghai Pharmaceuticals (SHA: 601607), Eli Lilly (LLY US)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Hutchison China MediTech and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Hutchison China MediTech and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues