Hutchison China MediTech — 2020 insights into a breakout year

HCM’s recent share price underperformance provides an opportunity to revisit the investment case. We believe the long-term investment case is solid, with multiple near-term catalysts on the horizon. With HCM’s financial strength and its drive to retain the economic value of its assets, the next steps for the company are to commercialize its own assets firstly in China then internationally (outside of current partnerships). The launch of Elunate in China with partner Eli Lilly and subsequent inclusion on China’s exclusive National Reimbursement Drug List (NRDL) are significant milestones, giving us confidence in the company’s ability to execute on its R&D philosophy of building first- or best-in-class molecules with lower toxicity profiles to enable combination-based strategies for the treatment of cancers. We expect the next approvals in China to be for surufatinib NET, savolitinib in NSCLC MET Exon 14 deletion (NDA to be filed in Q220) and fruquintinib line extension in gastric cancer (Phase III FRUTIGA interim analysis mid-2020).

HCM is accelerating its operations as it transitions into a global biotech. Importantly, clinical and regulatory teams are now fully operational in the US and EU. HCM’s first global approval (we forecast launch in 2022) in the US/EU could be for a savolitinib combination with AstraZeneca’s (AZN) Tagrisso in MET+ EGFRm NSCLC. Exhibit 1 highlights the plethora of clinical and regulatory catalysts ahead. 2020–22 are thus pivotal years as HCM expands its global clinical trial programs and invests in growing its international infrastructure to leverage on the potential for multiple asset launches from 2024 onwards.

Exhibit 1 highlights HCM’s global and China development plans across its burgeoning pipeline, which includes clinical trial readouts, trial initiations, NDA submissions and potential approvals. We summarize below the recent developments and what to expect in 2020–22 for each late-stage asset. Savolitinib’s, surufatinib’s and fruquintinib’s Phase III programs (in combination and as monotherapies) across multiple cancer indications will define the eligible patient populations for these compounds. HCM now has a total of eight clinical-stage assets and a number of second-generation immunotherapy compounds moving towards entering the clinic in China and internationally

Elunate China NRDL inclusion is key to driving volumes

Elunate is now being commercialized in China (third-line colorectal cancer, CRC) by partner Eli Lilly. The early sales trajectory is notable (H119 implied in-market sales of $11.4m), but the most interesting opportunity relates to its inclusion on China’s NRDL, effective from 1 January 2020. Elunate is required to be available in all state-run hospital pharmacies and patients on NHSA insurance schemes will be reimbursed (albeit it at a lower price). Elunate was the first innovative China developed oncology asset to be approved in its domestic market. Multiple clinical trials are ongoing and positive data could support line extension strategies. The next development focus is on Phase III gastric cancer (FRUTIGA), for which approval could occur in 2022. FRUTIGA is a combination trial (second line) evaluating fruquintinib and established chemotherapy agent Taxol (paclitaxel) for the treatment of advanced gastric cancer patients (n>500) who have progressed after first-line standard chemotherapy (5-fluorouracil and platinum doublets). If the FRUTIGA Taxol combination data are positive, this would enable fruquintinib use in earlier lines of gastric cancer. The second interim analysis by the Independent Data Monitoring Committee (IDMC) is expected in mid-2020. International development plans include an FDA end of Phase II meeting (H120); the US Phase Ib/II CRC trial initiated in 2019 has completed enrolment and the US/Europe Phase III registration trial is expected to initiate in mid-2020.

Combination studies are key to establishing targeted therapies in many oncology settings given the rapid rise of the PD-1/PD-L1 class of therapeutics to treat a broad range of cancers regardless of PD 1 status. For fruquintinib, HCM has a global partnership with Innovent Biologics and its PD-1 inhibitor sintilimab (IBI308) and a China-focused collaboration with Genor BioPharma and its PD-1 inhibitor genolimzumab (GB226). These trials are currently in dose-finding/safety run-in studies in China and/or globally. Importantly, HCM retains the full development and commercial rights to fruquintinib outside China (assuming regulatory approvals are achieved). Exhibit 2 highlights the status of fruquintinib clinical trials in a broad range of oncology indications.

Surufatinib NETs an unmet need

Surufatinib could be the first of HCM’s unpartnered assets to reach the China market in 2020. The China NDA was accepted in November 2019, based on data from Phase III SANET-ep for advanced non-pancreatic neuroendocrine tumors (NET), and priority review was granted in December. Surufatinib’s China Phase III program consists of two studies evaluating the drug (vs placebo) in pancreatic NET (SANET-p, planned n=195) and non-pancreatic NET (SANET-ep, actual n=198), thus covering all NET patient types. In June 2019, HCM announced that the independent data monitoring committee had recommended stopping the Phase III SANET-ep non-pancreatic NET trial early following positive interim data. This was based on the trial meeting its primary endpoint of PFS and the trial was unblinded a year ahead of schedule. Subsequently, on the basis of these data, HCM filed the China NDA in October 2019. More recently, proof of surufatinib’s unequalled utility across the breadth of NET tumors was supported by the early cessation of the pancreatic NET (SANET-p) trial as surufatinib met its primary endpoint of PFS earlier than expected. We expect data from SANET-p to be submitted to the China regulatory body and this could potentially lead to a broader label encompassing all NET; Surufatinib could be the first universal drug to treat NET in all patients regardless of tumor subtype. We forecast launch in China in late 2020. Ahead of potential launch, HCM expects to have 300–350 reps in place, making up the China oncology commercial team.

Following encouraging POC data from the Phase II study in biliary tract cancer (BTC), HCM recently initiated a pivotal open-label Phase IIb/III BTC trial (NCT03873532) in China, with the first patient dosed in March 2019. BTC represents a high unmet need due to limited treatment options and an increasing patient population. HCM is developing the drug internationally: the global Phase Ib/II study (NCT02549937) in pancreatic NET (second-line in Sutent/Afinitor refractory cancer) and BTC started enrolling US patients in July 2018. Surufatinib’s global registration trial is at the planning stage, with US and Europe Phase III trials estimated to start in H220. The FDA has granted orphan drug designation for the pancreatic NET indication. HCM recently initiated a Phase II study, NCT04169672, in patients with advanced tumors in combination with Shanghai Junshi Biosciences’ PD-1 inhibitor Tuoyi (toripalimab), which was recently approved in China for melanoma.

Savolitinib China debut on the cards in 2021

An estimated 2–3% of newly diagnosed NSCLC patients have a specific mutation known as MET Exon 14 skipping (Exon 14 of the MET gene is not functioning or deleted) leading to c-MET over expression. In China, HCM estimates this to be >10,000 patients. Primary data from the Phase II have demonstrated efficacy in these hard-to-treat patients, and although the patient size is relatively small, this indication could be savolitinib’s first China NDA submission in Q220 and its first monotherapy indication in the region (launch in 2021). In the longer term in China, we believe a savolitinib plus Tagrisso combination will expand use in other subsets of NSCLC. In the field of lung cancer, AZN’s Tagrisso is raising the bar as it moves into the first-line setting in EGFR mutation-positive NSCLC (median OS of 38.6 months Tagrisso vs 31.8 months on Iressa/Tarceva FLAURA first-line treatment study), reporting sales of $2.3bn in the first nine months of 2019, its second full year on the market. The implication here is that savolitinib’s largest opportunity could be in combination with Tagrisso in EGFRm MET+ NSCLC patients, as MET mutations are the biggest driver in Tagrisso resistance. The savolitinib/Tagrisso combination could rewrite the second-line/third-line treatment paradigm and our forecast peak sales could be conservative. Following the encouraging data from the TATTON study, in December 2018, AZN and HCM initiated the global registration study SAVANNAH for Tagrisso-refractory NSCLC patients (enrolment is expected to complete by end 2020). This specific subset of patients has an unmet medical need and, although we forecast a 2022 launch, breakthrough therapy designation could lead to earlier approval and launch. Interim data are expected in mid-2020 and the strength of the data will determine whether a larger Phase III is required as part of the US regulatory submission package, although it could be sufficient for an NDA filing.

Successful commercialization of savolitinib in kidney cancer (both ccRCC and PRCC) now hinges on SAVOIR data and CALYPSO, an investigator-sponsored Phase II study combining savolitinib with AZN’s PD-L1 inhibitor Imfinzi (durvalumab). In clear cell renal cell carcinoma (ccRCC) PD-(L)1 immune checkpoint inhibitors are revolutionizing the treatment landscape. The combination of MET inhibition with PD-(L)1 inhibition could have utility in this space, as underlined by the promising preliminary data from CALYPSO presented at ASCO GU 2019. HCM has indicated that renal cancer regulatory plans will be determined post data presentation at ASCO 2020.

Global development of HMPL-523 and HMPL-689

Longevity for R&D-driven biopharmaceutical companies is dependent on having a pipeline of innovative assets that span both indications and development phases. HCM’s strategy to date has focused on developing best-in-class kinase inhibitors that target solid cancers. The next wave of internally developed assets, HMPL-523 (Syk inhibitor) and HMPL-689 (PI3Kδ inhibitor), are kinase inhibitors, which have a clinical focus for various hematological (blood) cancers and autoimmune conditions. Concurrent global and Chinese clinical programs are ongoing as outlined below and, importantly, both are moving rapidly towards global registration studies.

HMPL-523 targets Syk, an enzyme believed to be involved in a diverse range of biological functions including autoimmune disorders and hematological malignancies. HCM believes that HMPL-523 is a potential best-in-class molecule and potentially first-in-class for hematological malignancies, and we anticipate that launch in China in 2023 is feasible. Phase Ib dose expansion is ongoing in separate Chinese and Australian studies and will be used to guide a Chinese Phase II/III registration study, which is planned to start in 2020. Following recent IND approval, an EU/US Phase I/Ib clinical study for HMPL-523 has started in advanced relapsed or refractory lymphoma (NCT03779113). Outside oncology, HMPL-523 is in a Phase I study in patients with immune thrombocytopenia (ITP) in China (NCT03951623).

HMPL-689 is in a Phase I dose escalation study in Chinese patients with hematological malignancies, with top-line data expected in H120. Recent IND approval has enabled the start of a parallel US/EU Phase I/Ib study in patients with indolent non-Hodgkin lymphoma (NHL).

We value HCM at $6.0bn $43.81/ADS) vs $5.7bn or $42.78/ADS previously. Our product forecasts remain unchanged. Our valuation reflects forecast net cash of $163m at end December 2019 plus $105m net proceeds from the January 2020 capital raise, and we roll forward our model and update for FX. We use a risk-adjusted net present value (NPV) method to discount future cash flows for the innovation platform (savolitinib, fruquintinib, surufatinib, epitinib, HMPL-523 and HMPL-689, valuation of $4,359.9m). We use earnings-based multiples for HCM’s commercial platform (subsidiaries and JVs). Applying a 20.4x multiple to our forecast 2019 net attributable profit (equity in earnings of equity investees, net of tax) for the JVs of $39.2m yields a valuation of $800.4m (Exhibit 5). Our SOTP valuation does not include HCM’s early phase assets HMPL-453 (FGFR inhibitor), HMPL-306 (IDH1/2 inhibitor) or HMPL-309 (EGFR WT) or its discovery platform.