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Research: Healthcare
Hutchison China MediTech’s (HCM) lead TKI asset, fruquintinib, has received China registration approval from the National Medical Products Administration of China (NMPA) for the treatment of CRC (third line). The approval serves as a major validation of the R&D innovation strategy, which HCM has cultivated over the years. This is the first innovative drug for an oncology indication, discovered and developed in China through a randomized clinical trial, to be unconditionally approved in that country. We expect launch in China by HCM and partner Eli Lilly during Q418. The approval has triggered a $13.6m milestone payment to HCM from Lilly. Our revised valuation is £74/ share.
Written by
Hutchison China MediTech |
Fruquintinib capsules approved in China |
Corporate news |
Pharma & biotech |
18 September 2018 |
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Hutchison China MediTech is a research client of Edison Investment Research Limited |
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Hutchison China MediTech’s (HCM) lead TKI asset, fruquintinib, has received China registration approval from the National Medical Products Administration of China (NMPA) for the treatment of CRC (third line). The approval serves as a major validation of the R&D innovation strategy, which HCM has cultivated over the years. This is the first innovative drug for an oncology indication, discovered and developed in China through a randomized clinical trial, to be unconditionally approved in that country. We expect launch in China by HCM and partner Eli Lilly during Q418. The approval has triggered a $13.6m milestone payment to HCM from Lilly. Our revised valuation is £74/ share.
Year end |
Revenue (US$m) |
Net profit* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
216.1 |
11.7 |
19.6 |
0.0 |
293 |
N/A |
12/17 |
241.2 |
(26.7) |
(43.3) |
0.0 |
N/A |
N/A |
12/18e |
162.5 |
(72.8) |
(109.5) |
0.0 |
N/A |
N/A |
12/19e |
180.1 |
(92.7) |
(139.4) |
0.0 |
N/A |
N/A |
Note: *PBT, net profit and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Fruquintinib first internally developed drug approved
Fruquintinib (branded Elunate in China) has received approval for CRC (third line) for Chinese patients based on the results of the Phase III FRESCO clinical trials. FRESCO data underpin the hypothesis that fruquintinib’s safety and efficacy profile could position it as best-in-class in China. This is a major inflection point for HCM as its R&D strategy to develop first or best-in-class, highly selective tyrosine kinase inhibitors has come to fruition with its first approval. While the actual pricing is unknown, we forecast peak sales of $149m in China in CRC alone, based on our assumption of pricing at ~$3,500/month. We note that competitor product apatinib (Jiangsu HengRui Medicine) is priced at $2,870/month. We believe fruquintinib is a superior product given its highly selective inhibition of VEGFR1/2/3.
Fruquintinib could achieve blockbuster status
We forecast global peak sales for fruquintinib of $2.2bn across all indications under investigation (CRC, NSCLC and gastric cancer). The magnitude of fruquintinib’s success will depend on the global opportunity; HCM is developing fruquintinib outside China (the global Phase I trial is expected to complete later this year). Its profile internationally will be determined by ex-China Phase III trials (data from FRESCO bode well) as we believe the global clinical trials will focus on more proprietary immunoncology combination studies. In forthcoming news, the Phase III FALUCA (third-line NSCLC) fruquintinib trial in China has fully enrolled, and OS maturity and top-line data are expected in Q418.
Valuation: $6.5bn (£74.0/share, $48.7/ADS)
We have updated our model for the approval of fruquintinib capsules in China, including the $13.6m milestone payment and roll forward our DCF. Our revised valuation of HCM is $6.5bn or £74.0/share from $6.4bn or £73.3/share previously.
Exhibit 1: Financial summary
USD'000s |
|
2016 |
2017 |
2018e |
2019e |
|
December |
US GAAP |
US GAAP |
US GAAP |
US GAAP |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
216,080 |
241,203 |
162,463 |
180,105 |
Cost of Sales |
(156,328) |
(175,820) |
(89,900) |
(94,632) |
||
Gross Profit |
59,752 |
65,383 |
72,563 |
85,473 |
||
Research and development |
(66,871) |
(75,523) |
(126,500) |
(154,500) |
||
Other overheads |
(39,578) |
(43,277) |
(45,353) |
(51,260) |
||
EBITDA |
|
|
(44,264) |
(50,692) |
(94,790) |
(113,909) |
Operating Profit (before amort. and except.) |
|
|
(46,697) |
(53,417) |
(99,290) |
(120,287) |
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Operating Profit |
(46,697) |
(53,417) |
(99,290) |
(120,287) |
||
Net Interest |
(1,129) |
(235) |
(176) |
208 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(47,356) |
(53,536) |
(99,466) |
(120,079) |
Profit Before Tax (reported) |
|
|
(47,356) |
(53,536) |
(99,466) |
(120,079) |
Tax |
(4,331) |
(3,080) |
(3,000) |
(5,004) |
||
Equity investments, after tax |
66,244 |
33,653 |
34,524 |
37,390 |
||
Profit After Tax (norm) |
14,557 |
(22,963) |
(67,942) |
(87,692) |
||
Profit After Tax (reported) |
14,557 |
(22,963) |
(67,942) |
(87,692) |
||
Minority |
(2,859) |
(3,774) |
(4,900) |
(5,000) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
||
Net profit (norm) |
11,698 |
(26,737) |
(72,842) |
(92,692) |
||
Net profit (reported) |
11,698 |
(26,737) |
(72,842) |
(92,692) |
||
Average Number of Shares Outstanding (m) |
59.7 |
61.7 |
66.5 |
66.5 |
||
EPS - normalised (c) |
|
|
19.6 |
(43.3) |
(109.5) |
(139.4) |
EPS - normalised and fully diluted (c) |
|
|
19.5 |
(43.3) |
(109.5) |
(139.4) |
EPS - (reported) (c) |
|
|
19.6 |
(43.3) |
(109.5) |
(139.4) |
Average number of ADS outstanding (m) |
119.4 |
123.4 |
133.0 |
133.0 |
||
Earnings per ADS - normalised ($) |
|
|
0.10 |
(0.22) |
(0.55) |
(0.70) |
Earnings per ADS ($) |
|
|
0.10 |
(0.22) |
(0.55) |
(0.70) |
BALANCE SHEET |
||||||
Fixed Assets |
|
|
175,057 |
165,737 |
177,761 |
195,774 |
Intangible Assets |
3,606 |
3,738 |
3,513 |
3,194 |
||
Tangible Assets |
9,954 |
14,220 |
21,945 |
32,886 |
||
Investments |
161,497 |
147,779 |
152,303 |
159,694 |
||
Current Assets |
|
|
167,380 |
432,195 |
360,180 |
238,513 |
Stocks |
12,822 |
11,789 |
14,000 |
7,778 |
||
Debtors |
49,349 |
53,566 |
66,659 |
73,231 |
||
Cash |
79,431 |
85,265 |
57,977 |
23,960 |
||
ST investments |
24,270 |
273,031 |
213,000 |
125,000 |
||
Other |
1,508 |
8,544 |
8,544 |
8,544 |
||
Current Liabilities |
|
|
(95,119) |
(104,600) |
(115,256) |
(101,294) |
Creditors |
(35,812) |
(25,344) |
(36,000) |
(22,038) |
||
Short term borrowings |
(19,957) |
(29,987) |
(29,987) |
(29,987) |
||
Other |
(39,350) |
(49,269) |
(49,269) |
(49,269) |
||
Long Term Liabilities |
|
|
(43,258) |
(8,366) |
(8,366) |
(8,366) |
Long term borrowings |
(26,830) |
0 |
0 |
0 |
||
Other long term liabilities |
(16,428) |
(8,366) |
(8,366) |
(8,366) |
||
Net Assets |
|
|
204,060 |
484,966 |
414,319 |
324,627 |
Minority |
(19,790) |
(23,233) |
(28,133) |
(33,133) |
||
Shareholder equity |
|
|
184,270 |
461,733 |
386,186 |
291,494 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(9,569) |
(8,943) |
(72,614) |
(103,017) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(4,327) |
(5,019) |
(12,000) |
(17,000) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Dividends |
(564) |
(1,594) |
(2,700) |
(2,000) |
||
Equity financing and capital movements |
97,076 |
291,737 |
0 |
0 |
||
Other |
(29,270) |
(255,761) |
60,026 |
88,000 |
||
Net Cash Flow |
53,346 |
20,420 |
(27,288) |
(34,017) |
||
Opening net debt/(cash and ST investments) |
|
|
18,051 |
(56,914) |
(328,309) |
(240,990) |
Increase/(decrease) in ST investments |
24,270 |
248,761 |
(60,031) |
(88,000) |
||
Other |
(2,651) |
2,214 |
0 |
0 |
||
Closing net debt/(cash and ST investments) |
|
|
(56,914) |
(328,309) |
(240,990) |
(118,973) |
Source: Company accounts, Edison Investment Research
|
|