WCLC: Positive data highlights NSCLC pipeline

Hutchison China MediTech 9 December 2016 Outlook

Hutchison China MediTech

WCLC: Positive data highlights NSCLC pipeline

Corporate update

Pharma & biotech

9 December 2016

Price

2,285p

Market cap

£1,387m

US$1.25/£

Net cash ($m) at June 2016

80.6

Shares in issue*

60.7m

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

Free float

37%

Code

HCM

Primary exchange

AIM

Secondary exchange

NASDAQ

Share price performance

%

1m

3m

12m

Abs

22.2

24.5

(19.2)

Rel (local)

20.6

24.0

(27.3)

52-week high/low

2,815p

1,680p

Business description

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

Next events

Savolitinib Phase II data PRCC

Feb 17

Fruquintinib Phase III data CRC

Feb/ Mar 17

Fruquintinib Phase III data NSCLC

H217

Analysts

Dr Susie Jana

+44 (0) 20 3077 5700

Daniel Wilkinson

+44 (0)20 3077 5734

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

At the recent IASLC World Conference on Lung Cancer, HCM published positive proof of concept data in NSCLC on key assets fruquintinib and epitinib. Affirmative data not only translates to further pipeline progression but critically underpins the R&D effort at HCM, fuelling the prospects of a fruquintinib regulatory filing in China in 2018. In 2017 we anticipate the initiation of three more pivotal trials, further data from the mid- to late-stage pipeline, including savolitinib data (papillary renal cell carcinoma, PRCC, and non-small cell lung cancer, NSCLC), and importantly potential China/US NDA submissions. We value HCM at $2.4bn or £32.2 share.

Year end

Revenue ($m)

Net profit*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

87.3

(9.3)

(17.8)

0.0

N/A

N/A

12/15

178.2

8.0

14.6

0.0

196

N/A

12/16e

196.7

3.8

6.3

0.0

453

N/A

12/17e

226.0

(26.6)

(43.9)

0.0

N/A

N/A

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

Spotlight on NSCLC: New data at IASLC WCLC

The recent proof of concept data published at IASLC WCLC in both the Phase II NSCLC trial with fruquintinib and the Phase Ib NSCLC trial with epitinib is highly encouraging. Importantly HCM has three TKIs in clinical development for NSCLC; each drug has a specific positioning and is truly differentiated: savolitinib (C-Met), fruquintinib (VEGFR) and epitinib (EGFR). Savolitinib has potential to be HCM’s first internationally launched asset (expect launch in US/EU/Japan in 2018). Depending on the strength of the NDA submission packages and speed of China FDA, we anticipate fruquintinib launch in China in 2018 and epitinib in 2019/20.

2017/18: Future stars are aligning

HCM’s seven internally developed next-generation TKIs are in 25 clinical trials (four pivotal Phase III are underway, three more to initiate in 2017) and we expect material newsflow over the upcoming 18 months on savolitinib (Phase II in PRCC), epitinib (mature PFS data from the recently reported Phase Ib NSCLC with BM trial), fruquintinib (Phase III third-line NSCLC and CRC) and sulfatinib (Phase II in pancreatic NET and extra-pancreatic NET). Positive data would pave the way for the start of pivotal clinical trials and potential regulatory filings (US and/or China) for savolitinib and fruquintinib, respectively.

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

We have increased our SOTP valuation to $2.4bn (£32.2/share) from $2.3bn (£25.7/share) in the main due to the impact of currency (spot $1.25/£), amendments to deal terms on savolitinib plus upgrades to our CP forecasts after a strong first half. IP is valued at $1,789m; and placing CP’s 2016e share of net profit on a 22.5x rating gives $657m (867p/share). Adding June 30 2016 net cash and netting out unallocated costs results in a value of $2.4bn. Approval(s), clinical data and/or deals should increase our risk-adjusted valuation.

Contents

Investment summary

All eyes on TKIs: Future stars are aligning

Spotlight on NSCLC: Triple-pronged approach

Fruquintinib: Best-in-class VEGFR inhibition?

Savolitinib targets TKI resistance in NSCLC

Epitinib targets NSCLC with brain metastasis

Targeted therapies transform cancer treatment

Sensitivities

Valuation

Financials


Investment summary

Company description: Progressing the NSCLC pipeline

Hutchison China MediTech (Chi-Med; HCM) is an innovative biopharma company focused on the highly lucrative global oncology and immunology markets. This note focuses on the Innovation Platform unit; we take a deeper dive into the group’s tyrosine kinase inhibitor (TKI) pipeline for non-small cell lung cancer (NSCLC), specifically savolitinib, fruquintinib and epitinib following the recent publication of positive top-line Phase Ib epitinib and full Phase II fruquintinib data at IASLC World Conference on Lung Cancer (WCLC). HCM has built a substantial pipeline of highly differentiated TKI drugs; we expect continued progress of the mid- to late-stage pipeline during the coming 12 months (including potential US and China regulatory filings) to catapult the company into the international spotlight. Additionally, HCM’s profitable Chinese healthcare business continues to benefit from the fast-growing domestic market; H116 results demonstrated robust double-digit growth despite currency headwinds. For a broader and more in-depth note on the group including the company’s full portfolio, see our note Stellar Evolution, published in May 2016.

Valuation: $2.4bn suggests market overlooks full R&D potential

We have increased our sum-of-the-parts (SOTP) valuation to $2.4bn (£32.2 share) from $2.3bn (£25.7/share). In US dollar terms, the overall value of the company has increased by $0.1bn, reflecting amendments to deal terms on savolitinib (we have increased R&D expenses and the royalty rate on sales) plus upgrades to our commercial platform (CP) business forecasts after a strong first half of the year. However, our per share valuation in sterling has increased materially related to the significant weakening of the pound versus the dollar (spot $1.25/£). We value the innovation platform (IP) at $1,789m; and placing CP’s 2016e share of net profit on a 22.5x rating gives $657m (867p/share). Adding in net cash of $80.6m at end June 2016 and netting out unallocated costs results in a value of $2.4bn (£32.2 share).

Sensitivities: CK Hutchison reduces Chinese risks

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, the 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. 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.

Financials: Healthy cash position

HCM’s CP business posted robust H1 results, prompting us to upgrade 2016 sales and net income forecasts. Additionally, the amendment of the AstraZeneca (AZN) deal on savolitinib has increased our R&D expense expectations in the near term, offset in the longer term by a higher expected royalty rate on sales ex China for the drug across all indications (now 14-18% from 9-13%). The group remains well funded in the near term; we expect future cash resources to be bolstered by profits generated by the CP business in China as well as the anticipated property windfall relating to cash compensation on land from the Shanghai government.

All eyes on TKIs: Future stars are aligning

HCM is approaching an inflection point; it is on the brink of the transformation of its Innovation Platform (IP) business into a late-stage portfolio story. A number of its next-generation TKI assets could reach the US (and ROW) and/or China market within the next few years (potential NDA submissions in the US and or China for savolitinib and fruquintinib, respectively, in 2017). We expect R&D driven newsflow, including multiple top-line clinical trial data plus initiation of pivotal registration trials over the coming 12 months, to focus investor attention on the pipeline potential; we summarise the newsflow by asset below. This note addresses HCM’s NSCLC portfolio, addressing savolitinib, fruquintinib and epitinib; collectively these three assets (across all oncology indications including NSCLC) contribute £18.4/share to our HCM valuation.

Savolitinib C-Met inhibitor for PRCC/RCC/NSCLC/gastric cancer

Data expected: Phase II data in c-Met driven PRCC H1 2017.

Next steps: Start of a global pivotal Phase III trial in c-Met driven PRCC in H117. Start of Phase III in combination with AZN’s Tagrisso in second-line NSCLC (T790m-/c-Met+). Depending on strength of Phase II data there is potential for US NDA (breakthrough therapy) submission.

Positioning: As a highly selective first-in-class c-Met inhibitor, savolitinib is hypothesised to have a greater beneficial impact on c-Met driven tumours than approved multi-kinase inhibitors; savolitinib has the potential to become the first selective c-Met inhibitor approved globally. Partnered with AstraZeneca.

Edison peak forecast: Global peak sales of $3.4bn across the PRCC, RCC, NSCLC and gastric cancer indications. Valuation contribution £10.5/share across all indications.

Fruquintinib VEGFR inhibitor for CRC/NSCLC/gastric cancer

Data reported: Phase II third-line NSCLC data published at IASLC conference 4-7 December.

Next steps: China NDA submission mid-2017; pivotal Phase III data in third-line colorectal cancer (CRC) (H117) and third-line NSCLC (H217).

Positioning: Selective VEGFR 1/2/3 inhibitor; limits off-target toxicity and enables full and sustained target inhibition. Partnered with Eli Lilly.

Edison peak forecast: Global peak sales of $2.3bn across the CRC, NSCLC and gastric cancer indications. Valuation contribution £6.5/share across all indications.

Epitinib EGFR inhibitor for NSCLC with BM

Data reported: Phase Ib data in NSCLC with brain metastasis published at IASLC WCLC

Next steps: Start of a China pivotal Phase II/III trial in first-line EGFRm+ NSCLC with brain metastasis in H117. Phase II planning for glioblastoma trial initiation 2017.

Positioning: Positioned to achieve higher concentrations within the brain versus established TKIs (eg Iressa, Tarceva) due to better blood brain barrier penetration; could translate to superior efficacy on brain metastasis in the clinical setting.

Edison peak forecast: Global peak sales of $0.9bn for the NSCLC with brain metastasis indication alone. Valuation contribution £1.4/share for this indication only.

Sulfatinib VEGFR/FGFR inhibitor for neuroendocrine tumours (NET)/thyroid cancer

Data expected: Data from two Phase II trials (pancreatic NET and extra-pancreatic NET) early 2017.

Next steps: Continue enrolment of thyroid cancer and initiation of biliary duct Phase II trials.

Positioning: Broad efficacy across all NET subtypes, an unmet need.

Edison peak forecast: Global peak sales of $1bn across the NET and thyroid cancer indications. Valuation contribution £3.9/share for both indications.

Spotlight on NSCLC: Triple-pronged approach

Following the presentation of positive, proof of concept, top-line Phase Ib epitinib and full Phase II fruquintinib data at IASLC WCLC, 4-7 December 2016, we discuss the data in full within the context of HCM’s NSCLC portfolio. HCM has three tyrosine kinase inhibitors in clinical development for NSCLC; each drug has a specific positioning in the ever-evolving armament to treat the complex and constantly mutating disease that is cancer:

Savolitinib is a highly selective first-in-class c-Met tyrosine kinase inhibitor, hypothesised to have a greater beneficial impact on c-Met driven tumours than approved multi-kinase inhibitors; savolitinib could straddle multiple lines of treatment as monotherapy and in combination with other novel cancer agents in the first-, second- and third-line advanced NSCLC setting, particularly in EGFR-TKI resistant patient sub groups.

Fruquintinib is a selective VEGFR 1, 2, 3 inhibitor; it limits off-target toxicity enabling full and sustained target inhibition. Potential as best-in-class, oral next-generation anti-angiogenesis inhibitor.

Epitinib is a highly-differentiated EGFR inhibitor; it achieves higher concentrations within the brain due to better blood-brain barrier penetration than available TKIs; this could translate to superior efficacy on brain metastasis in the clinical setting.

One of the clear strategic visions presented by HCM management is a focus on target selectivity, with the aim of having a potential first-in-class or best-in-class portfolio of TKI drugs within the targeted therapy space of cancer drugs. Multi-target kinase inhibitors, while efficacious, are hindered by side effect profiles (elicited from multiple target protein binding) and consequently lower clinical utility due to dose interruptions/reductions and or discontinuation of drug therapy. HCM is focused on designing and progressing candidates with superior kinase selectivity (eg savolitinib is a highly selective c-Met inhibitor); higher selectivity translates to lower dose reductions/interruptions and thus higher/more prolonged target coverage resulting in superior efficacy and better tolerability compared to first-generation TKIs. Below we discuss NSCLC pipeline in more detail. Exhibit 1 highlights the pivotal trials currently underway (not limited to the NSCLC indication): the seven shots at pivotal success as highlighted by the company.

Exhibit 1: Seven shots at pivotal success

Source: Hutchison China MediTech

Fruquintinib: Best-in-class VEGFR inhibition?

Fruquintinib is an oral small molecule inhibitor to all three VEGF receptors. Fruquintinib is an oral small molecule that is a highly selective VEGFR1, VEGFR2 and VEGFR3 inhibitor, which in preclinical trials demonstrated fewer off-target toxicities, allowing higher drug exposure that translates to 24 hours a day VEGFR receptor inhibition. Fruquintinib’s most advanced indications are in NSCLC (third-line) and CRC (third-line) in China, and pivotal trials are currently underway in these indications; Exhibit 4 summarises its ongoing clinical trial programme. We assume success in third-line NSCLC and CRC will lead to development of fruquintinib in the second and first line settings.

The first-generation VEGF/R inhibitors (examples include the monoclonal antibody Avastin [Roche]) had combined reported sales of approximately $8.7bn in 2015 across multiple tumour types. This class of drug revolutionised the treatment of cancer by targeting the growth of blood vasculature that is essential for tumour growth (anti-angiogenesis). Avastin has become a gold standard for the first-line treatment of NSCLC globally. A Phase III study (BEYOND) evaluating Avastin plus platinum doublet chemotherapy for first-line treatment in advanced non-squamous NSCLC in a Chinese patient population led to median OS of 24.3 months. Oral, small molecule VEGFR inhibitors Nexavar (Bayer) and Sutent (Pfizer) are approved for use in some cancers but not NSCLC given lack of efficacy in Phase III trials, highlighting the unmet need for an oral anti-angiogenesis agent with a demonstrable impact on progression-free survival (PFS) in NSCLC.

WCLC: Phase II NSCLC data, PFS met, consistent safety profile

In a Phase II, double-blind study, fruquintinib met the primary endpoint and significantly improved progression-free survival compared with placebo for third-line advanced NSCLC patients who had previously failed two lines of treatment. Data was presented at the recent IASLC World Conference on Lung Cancer (4-7 December 2016).

In the 91-patient study, patients were randomised to receive 5mg fruquintinib (n=61) once daily (three weeks on treatment followed by one week off) plus best supportive care (BSC) or placebo (n=30) plus BSC. The primary objective of PFS was met; as of August 2015, the fruquintinib group had a median PFS of 3.8 months versus 1.2 months on placebo (HR=0.27, p<0.001) (Exhibit 2). Of note was the disease control rate (DCR) of 70.5% on the fruquintinib arm compared to 16.7% on placebo (Exhibit 3). DCR or clinical benefit rate (CBR) is the percentage of patients who demonstrate a response to treatment, eg tumour shrinks or remains stable, ie it is the sum of complete, partial and stable disease rates. This data is highly encouraging given the third-line setting (Exhibit 2 and 3).

Comparison of overall survival between wild type and mutant demonstrated a marked benefit in EGFR mutant patients. Median overall survival in mutant was 8.44 months for fruquintinib (n=30) vs 5.49 months for placebo (n=15), (p=0.184). Median overall survival for wild type patients treated with fruquintinib was less then placebo (7.5 months vs 9.7 months, p=0.274). However, beyond 20 months, fruquintinib demonstrated a survival benefit. Due to the low power of this subgroup comparison and high p-values the significance of these results cannot be confirmed.

In terms of toxicity, 100% of patients on the fruquintinib arm had a treatment emergent adverse event vs 90% on placebo. The most common grade 1-2 events were palmar-plantar erythrodysaesthesia (PPE) syndrome (42.6%) and proteinuria (31.1%), and the most common grade 3-4 AE was hypertension (8.2%). Side effects of fruquintinib to date appear consistent with VEGFR inhibition. Hypertension, proteinuria and PPE are common side effects of many anti-cancer drugs, eg capecitabine, fludarabine and targeted therapies (including sorafenib and sunitinib).

Exhibit 2: PFS of fruquintinib

Source: Hutchison China MediTech

Exhibit 3: Best tumour response of fruquintinib

Source: Hutchison China MediTech

FALUCA pivotal NSCLC programme top-line data expected 2018

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 PFS with no unexpected safety issues. FALUCA is a double-blind, placebo-controlled Phase III evaluating fruquintinib 5mg once-a-day plus best supportive care in four-week treatment cycles (three weeks on drug, one week off). 521 patients are being randomised to the fruquintinib group or the placebo group at a ratio of 2:1 across 45 centres in China. The primary endpoint is overall survival; secondary endpoints include progression free survival, objective response rate, disease control rate and duration of response; top-line data is expected early 2018; trial enrolment is estimated to complete mid 2017.

Fruquintinib China NDA submission on the cards for 2018

HCM expects to submit an NDA for fruquintinib in NSCLC to the China FDA in 2018, paving the way for a potential approval late 2018; we model 2019. The speed of any approval is less clear than with the US FDA, but we expect it to take between six and 12 months. We assume that the speed will depend on the quality of the data and a faster approval (nearer six months) could be achieved if the Phase III data is substantial. We expect further fruquintinib NSCLC trials to initiate in 2017, likely in combination with other targeted therapies. Notably the company has indicated a Phase Ib/II trial with Iressa in first-line NSCLC patients will start in H117.

Next data points: Fruquintinib pivotal Phase III in CRC

Pivotal Phase III data for the treatment of third-line Chinese patients with colorectal cancer (CRC) will be HCM’s first Phase III readout and is a major inflection point for the company. We expect the data to be published in February/March with an NDA submitted to the Chinese FDA in mid-2017, with an approval six to 12 months later. The Phase III trial completed enrolment of 416 patients in H116; it is a randomised, double-blind trial comparing fruquintinib to placebo in third-line or above colorectal cancer patients. The primary endpoint is overall survival and patients who have had previous treatment with VEGF/R inhibitors are excluded.

Lilly deal has enabled accelerated development in China

HCM and partner Lilly are developing fruquintinib as a potential best-in-class drug due to its better side effect profile than 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. 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 for the positive phase II POC clinical trials in CRC and NSCLC 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.

Global development to focus on combination studies

In order to compete in the global anti-angiogenesis inhibition setting, 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 lack of CYP450 inhibition/inducing is favourable for potential in combination treatment regimens, given that many drugs are metabolised through the cytochrome p450 enzyme pathway.

Exhibit 4: Fruquintinib clinical trial programme

Programme

Indications

Clinical trial

Fruquintinib

VEGF 1/2/3

Partner: Lilly

Colorectal cancer

Phase III third-line monotherapy (China), data expected 2017

FRESCO (416 patients), expect to publish top-line results Q117.

Non-small cell lung cancer (NSCLC)

Phase III second-line (China). Enrolling.

FALUCA (521 patients), expect to publish top-line data early 2018

Gastric cancer

Phase II/II second-line (China) in combination with paclitaxel to start H117.

Source: Hutchison China MediTech reports

Untapped China market opportunity for new entrants

The relatively low penetration of Western developed drugs into China coupled with different patient demographics has generated a market that is open for opportunity. Many non-specific receptor tyrosine kinase inhibitors are marketed or in development that target combinations of VEGFR 1, 2 and 3. Due to their broad targeting they often have higher incidence of adverse events; as such more specific inhibitors of VEGFR 1, 2 and 3 are needed. In addition to fruquintinib there are four small molecule VEGFR inhibitors in development within China that we believe are comparable.

Anlotinib (Jiangsu Chia-tai Tianqing Pharmaceutical Co, a subsidiary of Sino Biopharmaceutical ) targets multiple receptor tyrosine kinases including VEGFR 1/2/3, FGFR1-4, PDGFR α/β, c-Kit, and Ret. It is currently in two active Phase II/III trials in patients with advanced NSCLC. The largest is a 450-patient, double-blind Phase II/III trial testing anlotinib against placebo in patients who have received at least two lines of chemotherapy. Enrolment is complete and the primary outcome is overall survival. The study is estimated to complete in the next six months. A Phase II trial demonstrated a DCR of 83% (n=50/60) in the treatment arm compared with 32% (n=18/57) in placebo. Both of these are higher compared with fruquintinib’s recently reported phase II data at WSCLC of 71% (n=43/61) and 17% (n=5/30) (placebo) potentially indicating initial selection of healthier patients in the anlotinib trial.

Apatinib (Jiangsu HengRui Medicine) targets VEGFR1 and VEGFR2; it is approved in China for advanced gastric cancer (December 2014) and is currently undergoing Phase II/III clinical trials in China for multiple cancers including NSCLC. PFS data from a third-line NSCLC Phase II reported as follows; median PFS 4.7 months for the apatinib arm versus 1.9 months for the placebo arm (HR 0.278, p<0.0001). The side effect profile was as expected with VEGFR inhibition: hypertension, proteinuria and hand-foot syndrome. The DCR reported as 68.9% on drug vs 24.4% on placebo. Apatinib is currently being investigated in multiple NSCLC trials including a Phase III study in patients with EGFR wild-type non-squamous NSCLC; we note its first Phase III was stopped on the grounds of adverse events (apatinib known to inhibit CYP450).

Famitinib (Jiangsu HengRui Medicene) targets VEGFR2, VEGFR3, PDGFR, c-Kit, Flt1 and Flt3. It is being evaluated for numerous cancers including NSCLC. Famitinib is in Phase III for second-line advanced NSCLC in combination with docetaxel; this 574-patient study is expected to complete in March 2019, and top-line data may be available after the primary completion date in October 2018.

Lenvantinib (Eisai) targets VEGFR 1, 2 and 3 along with PDGFR-α, PDGFR-β, FGFR1 and c-Kit. It has completed a Phase II trial in 135 third-line NSCLC patients. OS was 38.4 weeks (n=89) (95% CI; 26.57, 47.86) compared to 24.1 weeks for placebo (n=46) (95% CI; 15.29, 36.43). PFS was 20.9 weeks (95% CI; 15.86, 23.86) in the lenvantinib arm compared with 7.9 weeks for placebo (95% CI; 7.43, 8.14). Safety data to date has demonstrated significant toxicity; in a double blind phase III placebo controlled trial testing lenvantinib in 392 radioiodine refractory thyroid cancer patients, 75.9% (n=198/261) of patients had a grade 3 or above adverse event (9.9% [n=13/131] in placebo group). 7.7% (n=20/261) of patients died due to adverse events that arose because of treatment. 82.4% (n=215/261) of patients in the lenvantinib arm had a dose interruption compared with 18.3% (n=24/131) of those on placebo. Eisai has released no recent information about its plans to further develop lenvantinib in NSCLC.

While at first glance it appears that the competition is intensifying in the China NSCLC targeted therapy market, we make the following observations. Fruquintinib’s lack of cytochrome-450 inhibition should enable high doses and a cleaner toxicity profile then competitors anlotinib, apatinib and famitinib. This enables it to be delivered in combination with chemotherapy agents that typically demonstrate increased toxicity when used with CYP450 inhibiting agents. Further improvements in toxicity could become evident as of the three VEGFR1, 2, 3 selective inhibitors (fruquintinib, anlotinib and lenvantinib) fruquintinib is the most selective. Fruquintinib’s reported grade 3+ AEs appear lower than the competition highlighting the rationale for combination studies. Finally, while pricing information is unknown at this time, we expect fruquintinib to be competitively priced. We expect HCM to capitalise on its knowledge of the Chinese market and to drive adoption through the utilisation of its existing sales structure. The market in China remains untapped, especially by Western companies; there is room for multiple agents with demonstrable efficacy in the first-, second- and third-line settings.

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 4 details fruquintinib’s full clinical trial programme, 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 tiered 15-20% 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 5 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 5: Fruquintinib peak sales forecasts

Product

Indication

Launch year/
peak sales China

Launch year/
peak sales ROW

Assumptions

Fruquintinib

CRC

2018/2024 $106m

2020/2024 $632m

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 $297m

2019/2024 $706m

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 $141m

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 $1.25/£.


Savolitinib targets TKI resistance in NSCLC

Savolitinib (AZD6094), a highly selective first-in-class c-Met tyrosine kinase inhibitor, could be the first of its kind to market. Herein we discuss the clinical rationale for a c-Met inhibitor, the competitive market and finally our development and sales assumptions. Savolitinib is a novel, orally administered, small molecule tyrosine kinase inhibitor (TKI) that is being developed with partner AstraZeneca. The drug is a highly selective inhibitor of the c-Met signalling pathway and targets patients with resistant cancers whose tumour type tests positive for MET amplification or overexpression. Savolitinib is 1,000 times more selective for c-Met than the next kinase (PAK 3). MET activation is associated with poor prognosis in NSCLC and is also associated with EGFR TKI resistance. Pfizer’s c-Met targeting multi kinase inhibitor (MKI) Xalkori (currently only approved for ALK+ or ROS1+ NSCLC) has aimed to address this need, but there remains the clinical rationale for a highly specific c-Met inhibitor. A highly specific c-Met inhibitor should theoretically improve the efficacy and side effect profile of MKIs, enabling a wider range of combination treatment regimens for cancer.

Drug-related renal toxicity has been an issue with the first-generation selective c-Met TKIs that were under development and a factor in why none have reached the market to date. Savolitinib has been structurally designed by HCM’s scientists to address the renal toxicity issues that have, in part, prevented c-Met TKIs from gaining approval (the quinolone region of the compound has been replaced); clinical data so far shows it has not displayed any material renal toxicity (>370 patients to date).

Building an arsenal of clinical trial data across tumour types

Savolitinib is in 12 active clinical trials for renal cell carcinomas, NSCLC and gastric cancer. It is most advanced in its PRCC and NSCLC indications. Data from multiple Phase I/II studies support savolitinib’s early clinical benefit as a highly selective c-Met inhibitor in a number of cancer types. Given that savolitinib has demonstrated partial response in several solid tumours (Phase I overall response rate of 38% in PRCC indication compared to GSK’s foretinib 13.5% in Phase II), it is conceivable that savolitinib could be the first global, first-in-class c-Met inhibitor to reach the market. In Phase I studies the level of response to savolitinib by each patient correlated closely with the level of MET amplification. Savolitinib has additionally demonstrated synergistic effects with other cancer drugs in pre-clinical models; hence, its expansive clinical trial programme includes combination with other targeted therapies and immune therapies, eg 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.

Possible NDA submission for NSCLC and PRCC in 2017

A global, pivotal Phase II/II trial is evaluating the combination of savolitinib and Tagrisso for the second-line treatment of patients with c-Met driven NSCLC (T790M±) as part of the TATTON study. Data is expected from the Phase IIb expansion part and, if positive, this could lead to the initiation of a global Phase III programme in H117. The initiation of the Phase II expansion triggered a $10m milestone payment from AstraZeneca to HCM in June 2016 (this expansion was initiated following encouraging early data from a number of patients enrolled in the TATTON study who received savolitinib in combination with Tagrisso). Importantly, overwhelmingly positive data could support a US NDA under breakthrough therapy designation for the NSCLC indication (second-line in combination with Tagrisso).

Additionally, positive data from the Phase II in PRCC in February/March 2017 (the study completed enrolment in October 2015) could enable a US NDA submission (under the breakthrough therapy designation) with potential US launch for the PRCC indication in late 2017 or early 2018.

Companion diagnostic test to complete the NDA package

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

Savolitinib for NSCLC clinical trial programme

The NSCLC indication could be savolitinib’s largest opportunity given 1.7m new cases a year (8-10% MET amplification rate in NSCLC, source Frost & Sullivan). Exhibit 6 highlights where savolitinib could straddle the NSCLC treatment paradigm. The NSCLC clinical trial programme is assessing its utility in the first-, second- and third-line setting in certain identifiable patient populations. HCM estimates that the annual incidence of c-Met driven NSCLC in the US, European Union and Japan is around 40,000 to 50,000 patients across all treatment settings. Exhibit 6 shows the five opportunities for savolitinib within the current NSCLC treatment paradigm.

We believe the second-line NSCLC setting (#2 and #3 below) to be savolitinib’s largest commercial opportunity:

It has potential for breakthrough therapy designation and therefore US launch in 2018 for the second-line indication.

The clinical trial programme is most advanced in the second-line setting.

Combination therapy targeting EGFR and c-Met driven pathways should shut down two cancer pathways and have a synergistic impact on patient survival.

Exhibit 6: Five opportunities for savolitinib in the NSCLC treatment paradigm

Source: Hutchison China MediTech

HCM see five opportunities for savolitinib in NSCLC patients as outlined below:

Opportunity 1: first-line monotherapy in c-Met+ plus Exon 14 skipping subgroup
Of the worldwide 1.7 million new NSCLC patients per year, 6% patients will be sensitive to c-Met inhibitor (either have EXON 14 skipping or MET gene amplification). Pfizer’s Xalkori (trialled in c-Met+) is approved in the first-line treatment of metastatic NSCLC whose tumours are ALK positive or ROS-1 positive. HCM believes that savolitinib’s pre-clinical data demonstrates better target coverage and a durable tumour cell suppression versus Xalkori (savolitinib is 10x more potent against c-Met), which could translate to superior efficacy in this subgroup; savolitinib is being evaluated in an exploratory Phase IIa monotherapy trial in China. We view this setting as furthest from the market, as we expect the second-line setting to be the first to come into fruition.

Opportunity 2 and 3: second-line combination with Tagrisso in T790M+/c-Met+ or with Iressa/Tagrisso in T790M-/c-Met+
In the second-line NSCLC setting for patients with EGFR mutation derived EGFR resistance (to Iressa/Tarceva – median PFS 9-10 months) 16% of patients have c-Met driven NSCLC with or without T790 mutation. The TATTON Phase I/ II studies are evaluating Tagrisso in combination with savolitinib or Iressa in combination with savolitinib in TKI resistant c-Met driven patients. In June 2016, a $10m milestone payment from AZN was triggered by the start of an expansion Phase IIb study. A decision on whether to proceed to a global Phase III trial will depend on whether the expansion study reflects the efficacy rates seen in earlier clinical studies. As described above, strong efficacy data could lead to a US NDA submission under breakthrough therapy designation.

Opportunity 4 and 5: Third-line combination with Tagrisso in c-Met+
MET mutations are emerging as the main resistance pathway in third-line NSCLC patients on Tagrisso; 18% are c-Met+/T790M+.

Next data point: Savolitinib for papillary renal cell carcinoma

Renal (kidney) cell carcinoma (RCC) is the seventh most prevalent cancer in the Western world; RCC is diagnosed by histological subtype. Papillary renal cell carcinoma (PRCC) accounts for 14% of the 366,000 new renal cell carcinoma cases that occur worldwide, while clear cell renal carcinoma (CCRC) 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 c-Met driven PRCC specifically. As MET amplification occurs in 40-70% of PRCC cases (100% of hereditary PRCC patients test positive for MET mutation), while c-Met over-expression occurs in 79% of CCRC (source Frost & Sullivan), it follows that a successful c-Met TKI inhibitor could transform renal cancer treatment. Savolitinib is currently in four Phase I/II trials for PRCC and CRCC (clear cell renal carcinoma).

Papillary renal cell carcinoma (PRCC) Phase II data is expected in February/March 2017, most likely at ASCO GI. This 109-patient, open-label Phase II study will report results of savolitinib (600mg qd) on its primary endpoint, ORR (objective response rate). While a single-arm, open-label study has its limitations; it is important that the data on survival from this study is in line with previous early stage data.

While HCM and AZN have agreed to proceed savolitinib into its Phase III global pivotal study for PRCC, overtly positive data from the open-label Phase II trial could lead to a US NDA application under breakthrough therapy designation for the PRCC indication, given the clear unmet need for c-Met driven PRCC. The final design of the pivotal trial is being agreed with international health authorities. Importantly this trial will be aligned with a companion diagnostic for c-Met driven PRCC; and this PRCC Phase III diagnostic will be similar for use in other indications.

AZN deal enables a rich clinical development programme

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

Importantly the collaboration with AstraZeneca has resulted in the addition of savolitinib to AstraZeneca’s Tagrisso and Iressa in two separate Phase Ib/II trials to address the opportunity for combination therapy as second-line and third-line treatment for NSCLC. Further combination studies are likely, eg savolitinib plus AZN’s PD-1 inhibitor durvalumab.

Peak sales potential of $3.4bn across current indications

We forecast global peak sales for savolitinib of $3.4bn across the potential PRCC, CRCC, NSCLC and gastric cancer indications. Exhibit 7 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 new lung cancer drugs, including ALK (anaplastic lymphoma kinase) inhibitors such as Pfizer's Xalkori and Novartis's Zykadia (source: Reuters). Furthermore, savolitinib could be moved into earlier lines of therapy as part of combination treatments, increasing the market opportunity, depending on the results of ongoing trials. Our model assumes a 30% royalty on China sales and 14-18% tiered royalty on ROW sales payable to HCM from AstraZeneca and up to $100m more in milestone payments. We have not included milestone payments on further sales after initial launch, which would significantly enhance our valuation. We note that under the terms of the agreement with AZN, the royalty rate is expected to step down to 10.5-15.5% upon reaching aggregate savolitinib sales of $5bn.

We have assumed higher overall penetration rates for PRCC given the 40-70% MET amplification and NSCLC 79% c-Met over expression rates. Our China penetration rates for NSCLC and gastric cancer err on conservatism. While we expect initial launch in 2017 for PRCC in China and the US, it follows that NSCLC and gastric cancer are larger opportunities given the patient populations. Note 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 7: 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) 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) 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) 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) MET amplification 10%. China penetration 1%, $5,000 per month, 12-month treatment duration. ROW penetration 0.8%, $10,000 per month, 12-month treatment duration.

Deal economics

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

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

Competitor analysis: Capmatinib nipping at the heels

There remains a clear unmet need for a selective c-Met TKI inhibitor in the cancer armamentarium. The array of pathways that c-Met is involved in combined with the complex range of molecular alterations make it a difficult but extremely valuable target. It is increasingly apparent that the c-Met signalling network is complex, and combination therapy may be needed for optimal clinical efficacy. Exhibit 8 summarises the wider competitive landscape; this includes selective c-Met inhibitors, multi-kinase inhibitors and monoclonal antibodies. In our view, savolitinib’s closest competitor is capmatinib (INC280), a selective c-Met inhibitor that Novartis licensed from Incyte Corporation in 2009.

Per our analysis across the c-Met inhibitor space we view capmatinib as the closest compound to savolitinib in terms of target selectivity, clinical development programme and timeframe for NDA submission. Data to date shows promise; in preclinical work it demonstrated that it was 10,000-fold more selective for c-Met then 57 other human kinases. However, capmatinib unlike savolitinib retains a similar molecule structure (2-quinolinone molecule) to earlier drugs that failed due to renal toxicity; while no renal toxicity has been reported to date we do not expect Novartis to test capmatinib in patients with kidney cancer. As such in c-Met driven PRCC and clear cell renal carcinoma we would expect savolitinib to benefit from a lack of direct competition. Additionally through HCM’s collaboration with AZN, savolitinib benefits as the sole c-Met inhibitor in clinical development in combination therapy for NSCLC with the only EGFR/T790M inhibitor currently on the market (Tagrisso). As AZN look to position Tagrisso as a first-line therapy in NSCLC in developed markets, savolitinib could be well positioned as the only approved c-Met inhibitor that can be used in combination with Tagrisso. In emerging markets where pricing constraints are more common we expect an Iressa plussavolitinib combination protocol to dominate, partly due to the strength of Iressa plus savolitinib combination data in certain markets e.g. Chinese patients with NSCLC. HCM expect to be the first to launch a selective c-Met inhibitor in at least 50% of emerging markets. For the NSCLC indication, Novartis plans to file for capmatinib’s NDA in 2018. Capmatinib is being evaluated across multiple cancers; recent data presented at ASCO included data from a Phase I and Phase I/II study in NSCLC:

In a small Phase I study (n= 26) in NSCLC patients who were treated with capmatinib, only five (19%) had a partial response; however, in the only two patients that had MET exon 14 mutations, both had a partial response. In a follow-up expansion study five (of eight) patients (63%) who had a MET gene count number above 5 had a partial response.

In a Phase I/IIb combination study testing capmatinib with gefitinib (Iressa) in MET positive NSCLC patients who had progressed on gefitinib, erlotinib or afatinib, 12/65 (18%) evaluable patients had a partial response while 40/65 (62%) had stable disease.

Capmatinib is currently in 16 active Phase I/II trials, eight of which are in NSCLC. Novartis plans to file an NDA in NSCLC in 2018, potentially one year after savolitinib. We believe there is scope for a number of selective c-Met inhibitors given the NSCLC market size and with oncology heavyweights AstraZeneca and Novartis in the space, we would anticipate a stronger awareness of the potential for the selective c-Met class of drugs among prescribers and payors.

Crizotinib: Leading the pack of multi-target TKIs

In addition to c-Met specific inhibitors, a range of multi-target inhibitors that target c-Met are in development or marketed; these are summarised in Exhibit 8. One of the most clinically advanced is the marketed crizotinib (Xalkori). Crizotinib has been on the market since 2011 for treatment of NSCLC patients where it was approved for ALK (abnormal anaplastic lymphoma kinase gene)-positive patients and in March this year it was approved for ROS1 gene-positive NSCLC. It is currently in an array of Pfizer-sponsored and investigator-led trials for c-Met positive cancers.

A Phase I study in 13 c-Met amplified NSCLC patients treated with crizotinib were subdivided into three amplification groups (low [n=1], intermediate [n=6] and high [n=6]). Four partial responses were observed, one in the intermediate group and three in the high c-Met amplified group. Median duration of response was 35 weeks (95% CI). The most common adverse event (AE) was diarrhoea, which occurred in 50% of the patients: most AEs were grade 1 in severity. A Phase I trial in 17 (15 response evaluable) patients with MET exon 14 altered NSCLC treated with crizotinib observed that five patients (29%) had a confirmed partial response (an additional five patients had an unconfirmed partial response). The duration of treatment ranged from 0.5 to 9.1+ months. There were no deaths or progressive disease by the data cut-off date.

The correct identification of c-Met or MET status is needed to ensure efficacy of treatment. If savolitinib can demonstrate that it is effective in these patient subsets and is one of the first to market it could achieve significant success; however, the competitive environment still remains complex. The correct selection of patients in clinical trials could be fundamental in any c-Met inhibitor’s success. Theoretically savolitinib should provide an advantage over crizotinib as it provides full coverage of c-Met.

Exhibit 8: c-Met inhibitor competitive landscape

Drug

Company

Type

Target

Phase (MET+ NSCLC)

Note

Capmatinib

Novartis

Small molecule inhibitor

c-Met

II

Capmatinib is a selective c-Met inhibitor that is currently in eight Phase I/II NSCLC trials. Along with savolitinib it has one of the most advanced c-Met NSCLC programmes.

Tivantinib

ArQule

Small molecule inhibitor

c-Met

III (discontinued)

Tivantinib is a c-Met selective kinase inhibitor jointly developed by Daiichi Sankyo in the US, Europe and ROW excluding Asia and Kyowa-Hakko Kirin in Asia. Development is focused on hepatocellular carcinoma (HCC), which is in two Phase III trials. It was granted orphan drug designation in HCC by the FDA and EMA in 2013. A Phase III study in 1,048 pre-treated non-squamous NSCLC patients was discontinued due to futility at the interim analysis.

AMG337

NantPharma

Small molecule inhibitor

c-Met

N/A

AMG337 is a c-Met selective kinase inhibitor that was recently in-licensed from Amgen (for an undisclosed fee) for worldwide development except for Japan, Russia and Central Asia. NantPharma aims to utilise its NantOmics suite of genomic and proteomic capabilities to select suitable patients for future c-Met trials. According to clinicaltrials.gov it is in four Phase I/II active trials focused on stomach cancers. It currently has no trials in NSCLC.

Tepotinib

Merck Serono

Small molecule inhibitor

c-Met

II

Tepotinib (MSC2156119J) is a c-Met selective kinase inhibitor that is in four ongoing Phase I/II clinical trials in lung and liver cancer (two in each). Recent data published at ASCO 2016 from a Phase Ib trial of tepotinib plus gefitinib in Asian patients with c-Met positive/EGFR mutant NSCLC demonstrated 5/18 (27%) patients had a partial response and 4/18 (22%) had stable disease. No dose limiting toxicities were observed and at 11% (2/18) occurrence the most common grade 3 and above AEs were hyperamylasaemia and increased lipase concentration equally.

Crizotinib

Pfizer

Small molecule inhibitor

c-Met, ALK, Ron Axl, Tie-2

II

Crizotinib is marketed for the treatment of NSCLC patients who express ALK or ROS1. It is currently in multiple trials for c-Met expressing cancers.

Cabozantinib

Exelixis

Small molecule inhibitor

c-Met, VEGFR2, Ret, Kit, Flt3, Tie-2

II

Cabozantinib (CABOMETYX) is a c-Met, VEGF, AXL and RET inhibitor that was approved by the FDA and EMA in H116 for the treatment of patients with advanced renal cell carcinoma. It is currently in an array of Phase II trials testing its efficacy in NSCLC.

Glesatinib

Mirati Therapeutics

Small molecule inhibitor

c-Met, Axl inhibitor

II

Glesatinib (MGCD265) is a c-Met and AXL inhibitor. It is currently recruiting patients in a Phase II trial in second-line NSCLC patients (previously on chemotherapy) with genetic alterations in MET.

Ficlatuzumab

AVEO/Biodesix

Antibody

HGF

I/II

Ficlatuzumab is an antibody targeting the c-Met ligand hepatocyte growth factor (HGF). It is currently in a double-blind Phase II trial in combination with erlotinib for advanced NSCLC patients selected by a biomarker tests.

Sym015

Symphogen

Antibody

HGF

I/II

Symphogen is an antibody targeting the c-Met ligand hepatocyte growth factor (HGF). It is currently in a Phase I/II trial in solid tumours. It is currently in no clinical trials for NSCLC.

Source: Edison Investment Research, company reports


Epitinib targets NSCLC with brain metastasis

Epitinib is a selective EGFR tyrosine kinase inhibitor designed for optimal brain penetration, to target brain metastases (BM) associated with EGFR mutation positive solid tumours. Herein we discuss the clinical rationale for a next-generation EGFR inhibitor, the competitive market and finally our development and sales assumptions. Epitinib’s development rationale has been spurred on from preclinical studies where the drug demonstrated favourable drug exposures in the brain. TKIs as a class have revolutionised the treatment of EGFR positive cancers; however, few trials have been conducted to assess clinical utility in cancer patients with brain metastasis. In comparison to approved EGFR inhibitors (eg Iressa and Tarceva) preclinical data demonstrates that epitinib can cross the blood-brain barrier to reach more effective concentrations with potential higher efficacy in treating brain metastasis. Currently no targeted therapy has been approved that effectively can treat both NSCLC and brain metastases.

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. An estimated one-third of patients with EGFRm NSCLC experience disease progression due to development of brain metastasis. Furthermore, around 50% of NSCLC patients who eventually develop brain metastasis do not have effective treatments. Long-term prognosis is poor, with an estimated overall five-year survival rate less than 5% for patients with metastatic NSCLC.

Blood-brain barrier; anatomical significance

The blood-brain barrier (BBB) is an anatomical structure that serves to control and limit what molecules are able to enter the brain through selective passage of substances. The BBB consists of brain capillaries – endothelial cells that are sealed together with tight junctions and are surrounded by astrocytes – that allow lipid soluble substances, as well as glucose, oxygen, and water through. Proteins, ions, and large molecules do not enter at all or enter very slowly. While the BBB functions to protect the brain from the entry of harmful pathogens and substances, it throws up challenges for drug development. The majority of orally delivered pharmaceutical agents used to treat CNS disorders are lipophilic small molecules that cross the BBB by transmembrane diffusion. Most oral chemotherapeutic agents are unable to cross the blood brain barrier, thus at present treatment for brain metastasis is mainly limited to surgical resection and radiotherapy (whole-brain radiotherapy and stereotactic radiotherapy).

Epitinib highly differentiated EGFR TKI

Iressa and Tarceva, two approved EGFR inhibitors for NSCLC, have limited blood-brain barrier penetration and limited cerebral spinal fluid (CSF) concentrations of 2.5% for Iressa and 5% for Tarceva. Retrospective data analysis shows these TKIs have utility in treating EGFR mutated (NSCLC) in combination with whole brain radiation therapy (WBRT), however clinical trials have not directly addressed utility of these agents in treating NSCLC with BM. The impact of first-generation TKIs such as Tarceva and Crizotinib in CNS metastasis is modest, as limited CSF penetration has been seen with corresponding low rates of intracranial efficacy reported. HCM recognised the clinical need for a novel EGFR TKI with improved efficacy against brain metastasis, and has subsequently developed epitinib, which in preclinical studies demonstrated excellent brain exposure compared to gold standard EGFR TKI Tarceva (Exhibit 9).

Exhibit 9: Preclinical mouse model data

Source: Hutchison China MediTech reports

Currently, a number of third-generation TKIs that have demonstrated better CNS penetration are at various stages of clinical development, including Tagrisso (AZN), ASP8273 (Astellas), HM61713 (Hanmi Pharmaceutical) and epitinib. Tagrisso is in Phase II for NSCLC with exon 19 deletion, T790 mutation. AZN is also developing AZD 3759; it has been specifically designed to penetrate the BBB but lacks activity against T790M.

Epitinib proof-of-concept data encouraging (at IASLC WLCLC)

HCM presented data from the ongoing Phase Ib first-line epitinib for EGFR+ve NSCLC with BM clinical trial at the recent IASLC World Conference on Lung Cancer. The primary objective of the trial was to evaluate the safety and tolerability of continuous dosing of epitinib in addition to determining the MTD or recommended Phase II dose (RP2D). The trial results demonstrated that epitinib was well tolerated with a safety profile consistent with approved EGFR-TKIs. MTD was not reached and 160mg once a day was determined to be the RP2D. In terms of efficacy, clinical utility was evident in EGFR +ve patients, and patients who were EGFR-treatment naïve demonstrated a strong response with an overall response rate of 61.9% and DCR of 90.5% (Exhibit 10). Key points were:

The trial consisted of two parts: a dose escalation (n=36) and a dose expansion stage (n=37). Skin rash was the most common AE, occurring in 60% (n=21) and 83.8% (n=31) of patients in the dose escalation and dose expansion stages, respectively. Overall 2.9% (n=1) and 5.4% (n=2) of patients observed a grade 3-4 skin rash, respectively. These AEs are in line with approved therapies. Tarceva (erlotinib, Roche) prescribing information states that of first-line NSCLC patients, the most common AE is skin rash, occurring in 85% of patients. Grade 3-4 skin rashes occurred in 14% of patients.

More serious AEs were also typically in line with approved treatments; alanine aminotransferase (ALT) and aspartate aminotransferase (AST) increased in all grades by 31.4% (n=11) and 34.3% (n=12) of patients in the dose escalation stage. ALT and AST increased by 40.5% (n=15) for both in the dose expansion stage. Comparably Iressa (gefitinib) (AstraZeneca) prescribing information states that 38% and 40% of patients (n=1,126) demonstrated an increase in ALT and AST, respectively.

Of secondary objectives, preliminary signs of antitumour activity were observed, with a 90.5% DCR (95% CI; 38.4, 81.9) and 61.9% ORR (95% CI; 69.6, 98.8) demonstrated in EGFR TKI treatment naïve patients. Comparably Tarceva demonstrated an ORR of 65% (95% CI; 54.1, 75.1) in 86 first-line NSCLC patients, while Iressa demonstrated an ORR of 50% (95% CI; 41, 59) (blinded independent central review) and 70% (95% CI; 61, 78) (investigator assessment) in 106 first-line patients.

Intracranial data demonstrates promising signs of efficacy, of 11 EGFR TKI treatment naïve patients, 7 (63.6%) demonstrated an intracranial ORR (95% CI; 30.8, 89.1) and 10 (90.9%) patients demonstrated DCR (95% CI; 58.7, 99.8). While this promising intracranial data is in small patient numbers it highlights the potential in a patient population which has limited treatment options. A pivotal trial starting in 2017 should give further insight.

Exhibit 10: Epitinib P1 NSCLC with BM efficacy data

Source: Hutchison China MediTech reports

This Phase Ib trial has been expanded into a Phase Ib/II proof of concept trial, which is ongoing in China; mature PFS data is expected in 2017. HCM anticipates that a pivotal Phase III in first-line patients with EGFRm NSCLC with BM in China could be initiated in H117. We note that the China FDA has cleared the Phase II/III clinical trial protocol. This could pave the way for international studies and a potential application for US approval under the FDA’s breakthrough therapy designation.

Peak sales of $905m forecast for NSCLC with brain metastasis alone

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 a 12-month 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.

Targeted therapies transform cancer treatment

Lung cancer is the leading cause of cancer-related deaths globally (19.4% of total cancer-related deaths); 1.8m new cases were reported worldwide in 2012. The US and China are two of the largest single markets, with 214,000 and 653,000 new cases, respectively, in 2012 (source: Globocan). NSCLC is the most common type of lung cancer, accounting for 85-90% of all cases. Five-year survival rates for NSCLC remain poor despite significant investment resources over the last 15 years; only 15% of patients diagnosed with lung cancer survive more than five years. The more recent availability of new treatment options as described below has improved outcomes and survival for patients, but there is still much need for more effective treatments across first-, second- and third-line settings.

Over the last 20 years, significant advancements have been made in the development of personalised medicine for cancer. The understanding that many cancers develop at a genetic level has translated in the clinical setting to “genotyping” an individual’s cancer, to identify the genetic abnormalities that are a causal factor in the development and progression of cancer. The discovery of oncogenes and tumour suppressor genes alongside the complete sequencing of the human genome were important advances in the understanding of the molecular mechanism of cancer (mutations that arise activate a specific gene, such that healthy cells become cancerous cells). Targeted therapies (for specific molecularly defined subsets of cancer patients) that focus on relevant gene expressions have demonstrated a marked improvement in overall survival in patients with amenable cancers compared to initial treatment with traditional chemotherapy. Such drugs work to close the abnormally activated molecular pathways in cancer cells leading to cancer cell death while minimally affecting healthy cells.

A wide variety of genetic mutations and potential targets continue to be identified in oncology. Some targets have become synonymous with a particular cancer (eg B-Raf and melanoma). However, genetic mutations can exist across a variety of cancer types; some lymphomas and lung cancers have an aberrant ALK (anaplastic lymphoma kinase) gene. EGFR and or VEGFR mutations are found in a wide variety of cancers including CRC and lung cancer. The MET oncogene has been observed to be highly expressed in a number of solid tumour types, across a range of carcinomas, including, but not limited to, lung (40%), kidney (70%), colon (78%) and gastric (>95%) cancers.

Identification of ‘driver mutations’ in NSCLC

Historically NSCLC is histologically divided into adenocarcinoma (50%), squamous cell carcinoma (SCC) (30%) and large call carcinoma; it is now known that 60% of adenocarcinomas and 50-80% of SCC have identifiable ‘driver mutations’. NSCLC is not a single entity but a number of pathologies with different molecular abnormalities; subsets of NSCLC can be further defined at the molecular level by identification of ‘driver mutation’ that occurs across multiple oncogenes. Such mutations occur in the genome of the cancer cells within genes that encode for cell growth and survival and activation of mutant signalling proteins induce and sustain tumour growth. Lung adenocarcinomas are associated with KRAS (30%), EGFR (15%), ALK (5%) and MET (4%) mutations; see Exhibit 11. Common treatable oncogene mutations in NSCLC include the EGFR mutation and ALK translocation (see below, Current treatment modalities).

Exhibit 11: NSCLC – adenocarcinoma driver mutations

Source: Edison Investment Research, American Thoracic society papers

EGFR: Epidermal growth factor receptor mutations

The epidermal growth factor receptor (EGFR) is involved in the pathogenesis and progression of many cancer types; approximately 15% of patients with NSCLC in the US and c45-60% in Asian patient populations have tumour associated EGFR mutations. Mutations in EGFR are seen more frequently in non-smokers. Genetic alterations such as amplification of the EGFR gene and mutations of the EGFR tyrosine kinase domain in cancer patients are correlated with a high probability of responsiveness to anti-EGFR drug therapy. The two most common activating mutations involve exon 19 and exon 21.

C-met driven cancers and resistance

C-Met (mesenchymal-epithelial transition factor) overexpression, with or without gene amplification, has been reported in a variety of solid tumours, including lung cancers, and is correlated with poor prognosis. In the context of cancer, aberrant signalling through the c-Met receptor promotes pleiotropic effects that include growth, survival, invasion, migration, angiogenesis and metastasis. Additionally, up-regulation of MET can occur in patients after EGFR inhibitory therapy as a mechanism of resistance to this treatment; furthermore, as MET amplification occurs independently of EGFR (T790M) mutations it is a clinically relevant therapeutic target for some patients who acquire resistance to EGFR TKIs (Iressa and Tarceva).

One of the most prevalent MET-related mutations is exon 14 skipping, a result of defective messenger RNA (mRNA) splicing due to mutations or deletions at the acceptor or donor sites. This ‘skipping’ of exon 14 results in the loss of a key regulatory domain and promotes c-Met overexpression and tumour activation. Its prevalence in NSCLC has been shown in numerous academic studies and is recognised as a potential key indicator for efficacy for c-Met inhibitors. A 2014 study by the Cancer Genome Atlas Research Network of 230 resected lung adenocarcinomas found exon 14 skipping in MET mRNA in 4% of all cases.

VEGF/R: Angiogenesis inhibition critical treatment option

While detection and inhibition of individual patient mutations is becoming increasingly relevant in cancer treatment, inhibition of more global pathways such as angiogenesis (eg through VEGF/R inhibition) remain important therapeutic strategies. Therapeutic intervention of tumour angiogenesis pathways have been identified in many cancer types including NSCLC. Angiogenesis is critical for the process of tumour growth, proliferation and metastasis. Vascular endothelial growth factor (VEGF) plays an important role in tumour angiogenesis, and inhibition of VEGF/R is a clinically proven target; monoclonal antibody Avastin (inhibits VEGF-A) remains the leading VEGF/R inhibitor on the market. To date small molecule inhibitors of angiogenesis have failed to produce meaningful improvements in overall survival.

Current treatment modalities

Treatment of NSCLC varies and depends on the type and stage of the tumour as well as size and position in the lung; ~10% of lung cancers are surgically operated on, while the majority are treated with combinations of chemotherapy, radiotherapy and targeted drug therapies. Historically drug treatment decisions have been based on NSCLC tumour histology and platinum based chemotherapy has been the cornerstone of treatment; the main limitations of it are low survival rates alongside the troublesome side effects of these cytotoxic agents. More recently the treatment paradigm for the management of NSCLC has shifted with the availability of targeted therapies. Current guidelines from CAP (College of American Pathologists) and IASLC (International Association for the Study of Lung Cancer) recommend that patients with advanced NSCLC (adenocarcinoma) have the primary tumour or metastasis analysed for EGFR and ALK wherever feasible. Targeted therapies have improved progression-free survival in patients to 10-12 months versus six months on platinum doublet treatment in the clinical trial setting. In the clinical setting, treatment of NSCLC depends on stage diagnosed and molecular status of the tumour.

Historically chemotherapy has been the mainstay of treatment (before or/and after surgery); examples include cisplatin, carboplatin, paclitaxel, docetaxel and irinotecan. NSCLC patients often receive a combination of two drugs.

Targeted NSCLC therapies for molecular identifiable tumours

Targeted drug therapies are used for tumours with identifiable mutations or advanced tumours that progress despite chemotherapy (Exhibit 11):

EGFR tyrosine kinase inhibitors (TKI) eg Tarceva (Roche), Gilotrif (Boehringer-Ingelheim) and Iressa (AstraZeneca) are approved for the first-line treatment of advanced NSCLC patients who have identifiable EGFR exon 19 deletions or exon 21 substitution mutations as detected by an FDA-approved test.

EGFR T790M inhibitors eg Tagrisso (AstraZeneca), which has been designed to treat the emergence of resistance; Tagrisso is indicated for the treatment of EGFR T790M mutation-positive NSCLC patients who have progressed after EGFR TKI therapy.

ALK and ROS1 targeting inhibitors eg Xalkori (Pfizer) is a multi-kinase inhibitor (ALK, ROS1, & MET) specifically approved for subsets of NSCLC patients with ALK or ROS-1 positive NSCLC.

Anti-angiogenesis targets tumour dependence on blood supply

VEGF/R targeting drugs eg Avastin (Roche) (VEGF-A) and Cyramza (Lilly) (VEGFR-2) are monoclonal antibodies that target VEGF/R in combination with chemotherapy. Avastin is approved in combination with carboplatin and paclitaxel (PC) for first-line NSCLC. In a pivotal 878-patient Phase III trial with PC in combination with Avastin, patients demonstrated a median overall survival (OS) of 12.3 months vs 10.3 months for PC alone.

Immunotherapy harnesses patient’s own immune system

More recent advances are in the field of immunotherapy, specifically immune checkpoint inhibitors (ICIs). ICIs block immune related receptors (eg programmed death PD-1) found on either T-cells or cancerous cells. Activation of such receptors enables cancer cells to hide from an individual’s immune system; by inhibiting these receptors, a patient’s immune system can find and destroy cancer cells. This field is currently dominated by PD-1/PD-L1 immune checkpoint inhibitors:

PD-1 inhibitors Opdivo (Bristol Myers Squibb) and Keytruda (Merck) are approved for the treatment of second-line NSCLC patients who have progressed on or after platinum-based chemotherapy. Additionally, Keytruda is indicated for first-line patients with metastatic NSCLC whose tumours have high PD-L1 expression (above 50%); patients should have no EGFR or ALK genomic tumour aberrations and no prior treatment with chemotherapy. Opdivo and Keytruda have demonstrated impressive impact on OS: 12.2 months (vs 9.4 months) and 12.7 months (vs 8.5 months), respectively, versus chemotherapy in their respective clinical trials in second-line NSCLC patients. First-line Keytruda OS was 17.3 months vs 8.2 months for chemotherapy.

PD-L1 inhibitor Tecentriq (Roche) targets the ligand on the cancer cell rather than the receptor on the T-cell as with PD-1 targeting, and was approved (in Oct 2016) for the second-line treatment of NSCLC.

Commercial opportunities for targeted drug therapies

The NSCLC treatment paradigm will continue to evolve, as new resistance mechanisms and further driver mutations are identified. The treatment paradigm will move increasingly to a personalised level with genotype testing in all patients as soon as feasible. Furthermore, ongoing combinatorial drug studies are proving that combination therapy is more effective on progression-free survival rates and on challenging the resistance mechanisms; combinations such as but not limited to TKIs plus chemotherapy and TKIs plus immunotherapy (PD-L1) could become commonplace for identifiable patient subgroups. It is hypothesised that the combination of a PD-1 inhibitor with EGFR TKI could delay resistance and improve survival rates; such combinations have yet to be approved.

Targeted therapies already generate significant sales; in lung cancer, treatment was initially dominated by VEGF and EGFR inhibitors, eg Avastin and Tarceva, of which sales in Q316 were $1.7b and $252m, respectively, across all indications. As relevant new oncology targets have been identified, new and often highly effective drugs have been trialled and developed. Tagrisso, a novel drug for the treatment of EGFR T790M resistant NSCLC patients (launched in Q315) has demonstrated strong sales growth (45% increase in Q3 over Q2 [$133m from $92m]). Innovative new classes of drugs, eg immune checkpoint inhibitors, have posted significant sales to date; leading PD-L1 inhibitors Opdivo and Keytruda generated Q316 sales across all indications of $920m and $356m, respectively. EvaluatePharma’s consensus estimates predict the combined sales of the top 10 NSCLC drugs could reach $20bn by 2022.

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 crystallising 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 pairing. However, we have limited visibility beyond that on the terms and timing of any potential deal(s). 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. CK Hutchison is a HK-based multinational with a long and successful track record of prudent and prolonged investment and control of companies in China.

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

We have increased our SOTP valuation to $2.4bn (£32.2/share) from $2.3bn (£25.7/share), in the main due to the impact of currency (spot $1.25/£), amendments to deal terms on savolitinib (royalty rate 14-18% compared to previous 9-13% assumption) plus upgrades to our CP forecasts after a strong first half of the year. IP is valued at $1,789m; and placing CP’s 2016e share of net profit on a 22.5x rating gives $657m (867p/share). Adding in end June 2016 net cash and netting out unallocated costs results in a value of $2.4bn (£32.2/share).

Exhibit 12 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. For more detail on our valuation of the CP business, including a list comparable peers, see our note Stellar evolution, published in May 2016.

Exhibit 12: Innovation platform valuation by product and indication

Product

Indication

Launch

Peak sales ($m)

Value ($m)

Probability

rNPV ($m)

rNPV per share
($)

rNPV per share (£)

NPV per share* (£)

Savolitinib (AZD6094/volitinib)

Papillary renal cell carcinoma Phase II

2017 (China)
2017 (ROW)

$129m (China)

$475m (ROW)

332.3

75%**

246.6

4.1

3.3

4.4

Clear cell carcinoma Phase II

2020 (China),
2020 (ROW)

$127m (China)

$484m (ROW)

236.8

75%

177.0

2.9

2.3

3.1

NSCLC Phase II

2018 (China),
2018 (ROW)

$290m (China)

$845m (ROW)

354.3

75%**

265.5

4.4

3.5

4.7

Gastric cancer Phase I

2021 (China),
2021 (ROW)

$326m (China)

$742m (ROW)

309.3

35%

106.7

1.8

1.4

4.1

Fruquintinib

CRC Phase III China

2017 (China),
2017 (ROW)

$106m (China)

$632m (ROW)

276.6

60%

163.5

2.7

2.2

3.6

NSCLC Phase III China

2018

$297m (China)

$707m (ROW)

296.6

75%

222.4

3.7

2.9

3.9

Gastric cancer Phase II

2019

$141m (China)

$384m (ROW)

217.7

50%

108.9

1.8

1.4

2.9

Sulfatinib

NET Phase III China

2018

$78m (China)

$585m (ROW)

256.6

75%

192.5

3.2

2.5

3.4

Thyroid cancer Phase II (China)

2020

$69m (China)

$261m (ROW)

211.2

50%

105.6

1.7

1.4

2.8

Epitinib

NSCLC Phase II (China)

2018

$198m (China)

$706m (ROW)

352.0

30%

105.6

1.7

1.4

4.6

Theliatinib

Oesophageal cancer Phase Ib

2020

$319m (China)

$165m (ROW)

215.2

10%

21.5

0.4

0.3

2.8

Solid tumours Phase Ib

2020

$73m (China)

$310m (ROW)

88.1

10%

8.8

0.1

0.1

1.2

HMPL 523

RA Phase Ib

2021 (WW)

$1,626m (WW)

639.9

10%

64.0

1.1

0.8

8.4

Commercial Platform (share of net profit)

657.0

100%

657.0

10.8

8.67

8.7

Unallocated costs

(85.9)

(85.9)

(1.4)

(1.13)

(1.1)

Net Cash June 2016

80.6

100%

80.6

1.3

1.06

1.1

Valuation

 

 

 

$4,438.4

 

$2,441.0

$40.2

£32.2

£58.5

Valuation of IP only

 

 

 

$3,786.7

 

$1,789.3

$29.5

£23.6

£50.0

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. FX rate $1.25/£.

Financials: Healthy cash outlook

Interim results published in August 2016 highlighted robust growth within the commercial platform division (CP continues to be in the near term HCM’s primary profit and cash generative division), coupled with clinical progress within the IP portfolio. HCM has a healthy cash position with available cash resources of $197.5m (at 30 June) at the group level; this includes cash and cash equivalents ($75.9m), short-term investments ($46.6m) and unutilised bank borrowing facilities of $75m. We calculate net cash at 30 June of $80.6m and this will benefit in the second half of 2016 from a one-time gain of $38m related to property compensation (see below) and subsidies from the Shanghai government. Furthermore for the first time management has provided guidance across the group for 2016. Exhibit 13 highlights our forecasts vs guidance.

At the H116 results consolidated revenue at the group level grew by 27% from $82.5m to $104.5m, with the IP division contributing $22.3m (largely attributable from payments by partners) and consolidated CP sales contributing $82.3m (H115: $55.6m). We forecast IP revenues of $40m in 2016 and $54.5m 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 $156.7m in 2016 and $171.5m in 2017. These CP revenue numbers do not take into account revenues reported by the Shanghai Hutchison and Hutchison Baiyunshan joint ventures as these are accounted for using the equity method; thus 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 H116 this was reported as $21.3m and we forecast $65.8m in 2016 and $42.8m in 2017. A major component in the uplift is the share of profits from the land compensation, which we include in our model as $38.2m in 2016 and $8m 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).

Profit before tax at the group level reported a loss of $16.8m in H116 (versus loss of $0.1m in H115), largely due to the increase in R&D ($31.2m in H116 versus $21.2m in H115), S&M ($8.8m in H116 versus $3.8m in H115) and administrative expenses ($10.0m in H116 versus $7.5m in H115). Specifically, the increase in operating costs reflects a widening of clinical programmes, plus expansion of the small molecule manufacturing operations. We expect R&D expenses to increase to $80.0m and $110.2m in 2016 and 2017, reflecting the substantial need for investment in the burgeoning clinical trial programmes across the IP division, including the increased investment in savolitinib post the AZN deal amendment. We expect S&M and admin costs to increase marginally and, given higher cost assumptions, we forecast operating losses of $53.8m in 2016 and $56.8m in 2017 due to higher R&D costs in 2016 and 2017. In H116 net income from continuing operations, which includes the profit contribution from JVs (see above), reported at $2.8m and we forecast $6.6m in 2016 and loss of $22.1m in 2017. After stripping out minorities we forecast a net income attributable to the company of $3.8m in 2016 and a net loss of $26.6m in 2017.

HCM retains a healthy gross cash position. As of 30 June 2016, there was $122.5m in cash and cash equivalents with cash of $75.9m and short-term investments of $46.6m, offset by $41.9m in bank loans at the group level, translating to a net cash position of $80.6m. Reported cash benefits from the net proceeds of $95.9m raised from the Nasdaq listing in March 2016. At the JV level, not consolidated by the group, Hutchison Baiyunshan and Shanghai Hutchison had cash and equivalents of $78.3m (offset by a $26.5m loan) at the end of December 2015. We forecast a net cash position of $41m 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 Shanghai Hutchison Pharmaceuticals Limited (SHPL) and Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (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 98% of the ~$140m capex requirement has been invested (funded internally at the JV level) in two new factories in Shanghai and Anhui province, with the Shanghai factory having opened at the start of September 2016 and the Anhui factory is expected to come online early 2017. 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 to early 2017 with $31.1m received in H215. A further $73.9m from the Shanghai property compensation is expected at the JV level in 2016/early 2017; $59.5m was received in October 2016 with the balance expected early 2017. 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 13: HCM guidance for 2016 versus Edison estimates

2014
($m)

2015
($m)

2016 guidance ($m)

2016 Edison estimate ($m)

Group consolidated revenue

 

87.3

178.2

190.0- 205.0

196.7

Innovation platform

 

 

 

 

 

Consolidated revenue

20.3

52.0

35.0- 45.0

40.0

Innovation Platform operating expenses

(80.0)- (85.0)

(80.0)

Commercial Platform

 

 

 

 

 

Sales (consolidated)

67.0

126.2

155.0 - 165.0

156.7

Sales on non-consolidated joint ventures

398.4

392.7

430.0- 440.0

441.1

Net income attributable to Chi-Med - Total

63.0- 66.0

65.8

- One-time property gain

0.0

0.0

35.0- 37.0

38.2

Chi-Med Group Costs

 

 

 

 

 

General & administrative expenses (incl. interest/tax)

(16.0)- (18.0)

Discontinued operations

 

 

 

 

 

Net (loss)/income attributable to Chi-Med

-7.3

8.0

0.0- 5.0

3.8

Source: Hutchison China MediTech reports, Edison Investment Research

Exhibit 14: Financial summary

USD'000s

2013

2014

2015

2016e

2017e

December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

36,547

87,329

178,203

196,737

225,967

Cost of Sales

(11,194)

(58,849)

(110,777)

(138,332)

(137,473)

Gross Profit

25,353

28,480

67,426

58,405

88,493

Research and development

(22,731)

(29,914)

(47,368)

(80,000)

(110,200)

Other overheads

(15,818)

(16,825)

(29,829)

(32,190)

(34,779)

EBITDA

 

(12,233)

(16,994)

(7,756)

(51,004)

(52,696)

Operating Profit (before amort. and except.)

 

(13,196)

(18,259)

(9,771)

(53,785)

(56,485)

Intangible Amortisation

0

0

0

0

0

Operating Profit

(13,196)

(18,259)

(9,771)

(53,785)

(56,485)

Net Interest

(1,034)

(957)

(953)

(1,300)

(1,500)

Exceptionals

30,000

0

0

0

0

Profit Before Tax (norm)

 

(13,078)

(19,957)

(10,540)

(55,085)

(57,985)

Profit Before Tax (reported)

 

16,922

(19,957)

(10,540)

(55,085)

(57,985)

Tax

(1,050)

(1,343)

(1,605)

(4,131)

(6,958)

Equity investments, after tax

11,031

15,180

22,572

65,809

42,802

Profit After Tax (norm)

(3,097)

(6,120)

10,427

6,593

(22,141)

Profit After Tax (reported)

26,903

(6,120)

10,427

6,593

(22,141)

Minority

(983)

(3,220)

(2,434)

(2,800)

(4,500)

Discontinued operations

(1,978)

2,034

0

0

0

Net profit (norm)

(4,080)

(9,340)

7,993

3,793

(26,641)

Net profit (reported)

23,942

(7,306)

7,993

3,793

(26,641)

Average Number of Shares Outstanding (m)

52.1

52.6

54.7

60.6

60.6

EPS - normalised (c)

 

(7.8)

(17.8)

14.6

6.3

(43.9)

EPS - normalised and fully diluted (c)

 

(7.8)

(17.8)

14.6

6.3

(43.9)

EPS - (reported) (c)

 

46.0

(13.9)

14.6

6.3

(43.9)

Average number of ADS outstanding (m)

104.1

105.1

109.3

121.3

121.3

Earnings per ADS - normalised ($)

 

(0.04)

(0.09)

0.07

0.03

(0.22)

Earnings per ADS ($)

 

0.23

(0.07)

0.07

0.03

(0.22)

BALANCE SHEET

Fixed Assets

 

118,239

120,992

140,087

183,615

190,128

Intangible Assets

407

4,096

3,903

3,903

3,903

Tangible Assets

5,028

7,482

8,507

13,226

19,436

Investments

112,804

109,414

127,677

166,486

166,789

Current Assets

 

67,164

89,842

89,667

153,533

128,179

Stocks

1,420

4,405

9,555

10,000

12,000

Debtors

17,497

27,924

38,628

43,000

45,000

Cash

46,863

38,941

31,941

90,990

61,636

Other

1,384

18,572

9,543

9,543

9,543

Current Liabilities

 

(79,463)

(75,299)

(81,062)

(84,976)

(88,976)

Creditors

(4,163)

(20,427)

(24,086)

(28,000)

(32,000)

Short term borrowings

(51,508)

(26,282)

(23,077)

(23,077)

(23,077)

Other

(23,792)

(28,590)

(33,899)

(33,899)

(33,899)

Long Term Liabilities

 

(15,366)

(37,584)

(46,415)

(46,415)

(46,415)

Long term borrowings

0

(26,923)

(26,923)

(26,923)

(26,923)

Other long term liabilities

(15,366)

(10,661)

(19,492)

(19,492)

(19,492)

Net Assets

 

90,574

97,951

102,277

205,757

182,916

Minority

(6,960)

(17,764)

(18,921)

(21,721)

(26,221)

Shareholder equity

 

83,614

80,187

83,356

184,036

156,695

CASH FLOW

Operating Cash Flow

 

5,028

8,359

(9,393)

(25,338)

(18,654)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(2,500)

(3,729)

(3,324)

(7,500)

(10,000)

Acquisitions/disposals

0

689

0

0

0

Financing

7

2,801

(355)

0

0

Dividends

(577)

(1,179)

(590)

(700)

(700)

Equity financing

0

0

0

92,600

0

Other

0

(9,120)

10,858

0

0

Net Cash Flow

1,958

(2,179)

(2,804)

59,062

(29,354)

Opening net debt/(cash)

 

6,603

4,645

14,264

18,059

(40,990)

HP finance leases initiated

0

0

0

0

0

Other

0

(7,440)

(991)

(13)

0

Closing net debt/(cash)

 

4,645

14,264

18,059

(40,990)

(11,636)

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

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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

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

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

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