A Chinese Oncology Company With Great Potential

Summary

• Hutchison China MediTech is a major Chinese company with an established market in that country.
• Its R&D subsidiary is developing a number of oncology drugs which have shown great potential.
• The relative ignorance in the US about the company’s potential makes it a great investment right now.

By Dr. Udaya K Maiya, Oncologist, MBBS, MD, DNB, DCCF-Paris

The thesis is quite simple: Hutchison China MediTech Ltd - ADR (NASDAQ:HCM) is a Hong Kong based company with a market cap just shy of $3bn that is partnering with Eli Lilly (LLY) to develop a drug candidate targeting third line metastatic colorectal cancer (mCRC), which, if approved, will bring in peak sales of roughly $250mn per year.

That doesn't sound like much, but the market is missing sight of the huge pipeline, and ignoring that this drug candidate, fruquintinib, not only did extremely well in its pivotal Phase 3 trial but it actually did better than current US standard of care Stivarga (regorafenib) in both efficacy and safety, although not in a head-to-head trial.

The market is also forgetting fruquintinib's ability to combine in combo therapies, which opens it up for use in a variety of different cancers, many of them with potentially hundreds of millions in market revenues in China alone. These calculations do not even take into account the vast Western markets which could be targeted if the drug proves itself in comparator trials, especially since the company has tie-ups with Western pharma giants like Eli Lilly, AstraZeneca (AZN), and Nestle (OTCPK:NSRGF). They also do not account for the rest of the pipeline.

Chi-Med Pipeline

Fruquintinib just reported successful results from a pivotal trial in mCRC. It is also in Phase 3 trial for gastric cancer and non-small cell lung cancer (NSCLC) in China, both quite large markets there.

Source - Company website

Besides fruquintinib, the company has a number of other assets, as we see in the pipeline above. All told, there are eight Phase 3 trials involving four molecules, savolitinib, fruquintinib, sulfatinib, and epitinib, in papillary renal cell carcinoma, NSCLC (3), gastric cancer, mCRC, and pancreatic and non-pancreatic NET OR neuroendocrine tumors.

The total market size for all these Phase 3 indications can be calculated based on some data provided by the company, which includes time frame for achieving peak sales. A snapshot is provided below:

(Source)

In the calculations below, I took the upper limit of the incidence rate and the upper value of the WAC per month where applicable. I rounded out the PFS because I don't expect unused portions of drugs to be returned, and I multiplied the WAC with the PFS. In fruquintinib's case, I raised the price by about 30% from apatinib's price, given that apatinib is not only off-label in two indications but there are also serious doubts (free registration required) about its efficacy even in gastric cancer where it is approved. I took a somewhat optimistic 5% penetration rate globally, but I am much more confident about the 25% penetration rate in China; in cases where the drug is priced high, I took this as 20%. Given these assumptions, which I am sure will be argued against, I get the following peak sales potential figures.

Source: Author

Note that two of these drugs, savo and fruq, are under licenses to AZN and LLY, respectively. The royalty figures for the Eli Lilly license for 3L mCRC appear to be 15-20% as given by the company here. Upfront and milestone payments were about $90mn.

Figures for AZN are also given in the same document as between 14 and 18% ex-China and 30% in China. HCM pays $50mn over three years for development cost ex-China and 25% of all Chinese development costs.

(Source)

Breakup of incidence rates between China and ex-China is not provided for savo. Therefore, we will take a conservative ballpark figure across the board, say 15%, which looks realistic given available royalty rates and HCM's obvious deal-making prowess. Assuming, therefore, an average of 15% royalty across the board, we get an actual net income figure which totals to about $300mn for the two licensed drugs. Add the numbers for the fully-owned drugs, and we come up with a figure of $3bn in potential peak sales. Note that, this does not include global or even US figures for fruquintinib, which, as we shall see just below, has good potential compared to SoC.

Fruquintinib Trial results

The trial results were declared in this year's ASCO in an abstract titled "A randomized, double-blind, placebo-controlled, multi-centered Phase 3 trial comparing fruquintinib versus placebo plus best supportive care in Chinese patients with metastatic colorectal cancer (FRESCO)." 416 Chinese patients with mCRC who previously failed at least two lines of systemic chemotherapy were selected for the trial. The primary endpoint was overall survival or OS. According to available data, "Fruquintinib significantly improved OS comparing to placebo with a hazard ratio of 0.65 (95% CI: 0.51-0.83; two sided p, 0.001). Median OS was 9.30 months [95% CI 8.18-10.45] in the fruquintinib group versus 6.57 months [95% CI 5.88-8.11] in the placebo group. Statistically significant benefits were also seen with fruquintinib in all secondary endpoints, such as PFS, objective response rate and disease control rate."

Compare this with Bayer's (OTCPK:BAYZF) Stivarga trial. Stivarga is approved in the US for mCRC and last year earned $310mn, including gastric cancer, for which it was also approved. In its Phase 3 CORRECT trial, Stivarga had the following data:

"An interim analysis showed that patients who received regorafenib had a median OS of 6.4 months compared with 5.0 months in patients who received a placebo (hazard ratio [HR] = 0.77; 95% CI, 0.64-0.94; P = .0052). A statistically significant improvement was also seen in PFS, with patients in the regorafenib arm experiencing a median PFS of 1.9 months compared with 1.7 months in the placebo arm (HR = 0.49; 95% CI, 0.42-0.58; P < .000001). The benefits were observed across all prespecified subgroups, including patients who had either wild type or mutated KRAS. The results were favorable enough that the study was unblinded and patients in the placebo arm were allowed to cross over into the regorafenib arm."

There were 760 patients in this 2012 trial, and their profiles were quite similar to the fruquintinib trial profile; if anything, fruquintinib addressed a more severely diseased group of patients. The Stivarga trial patient profile was "the patients' diseases had to have progressed within three months of receiving standard treatments, including chemotherapy, bevacizumab (Avastin), cetuximab (Erbitux), and panitumumab (Vectibix)" while in fruquintinib's case, there were "patients with mCRC who previously failed at least two lines of systemic chemotherapy."

Note that the Chinese patients did not have Avastin and other recently approved therapies; instead, they had two or more lines of chemo. This is because in China and in most of the developing world, these non-generic, expensive therapies are not yet standard procedure. So, while it may be argued that some of the patients in the CORRECT trial failed even the latest therapies and were therefore more critically ill, it can also be countered that the Chinese patients did not receive these advanced therapies and were therefore more critically ill.

It should also be noted that in the non-US/EU scenario, second line chemo in mCRC will be all that fruquintinib will have to compete against for years to come, and also that this discussion will be moot once a proper head-to-head comparison of fruquintinib with Stivarga is done.

However that may be, fruquintinib had median OS of 9.30 months while regorafenib had a median OS of 6.4 months. Placebo groups had median OS of 6.57 months and 5.0 months, respectively.

Fruquintinib also compares well to recently approved chemotherapy agents like Lonsurf, approved in September 2015 for the treatment of "patients with mCRC who have previously received fluoropyrimidine-, oxaliplatin-, and irinotecan-based chemotherapy, as well as an anti-VEGF biologic product and an anti-EGFR monoclonal antibody, if RAS wild type."

While Lonsurf's median OS was 7.1 months and placebo was 5.3 months, fruquintinib did much better. See the tabular data below:

Source: Author

While this certainly does not present the right kind of comparison in a head-to-head trial, it is surely at least indicative of the merits of fruquintinib.

When should we expect such a head-to-head comparison? Well, Stivarga has been in the market since 2012, and Lonsurf - although a chemo drug- has never had a comparator trial with Stivarga. These trials cost money, and I think a company can only justify doing one when a) a competing drug goes generic and the company has to show it is better despite the higher price, or b) a company is entering a new market and can push out the current standard drug by showing overwhelmingly better efficacy or safety. When the difference is not overwhelming, I guess there's not much incentive to do this trial.

Now, I think fruquintinib, if it wants to enter the US market, will test the waters first by simply gaining approval without a comparator trial (assuming the FDA agrees to that). If market uptake looks positive based on the kind of data I just tabulated above, then they will take a call whether to do a comparator trial. This entire scenario should play out within the next 3-5 years, i.e., after they see some success in China and elsewhere.

Financials

Chi-Med has a market cap of around $2.7bn right now; its R&D subsidiary Hutchison MediPharma is developing this pipeline. Cash reserves are about $80mn, at least some of which seems to me to be what remains of the upfront and milestone payments from AZN and LLY. The financials are quite complex, because this is a large group of companies with an approved products arm that sales over 200 current drug products in the market, has a huge number of JVs with Chinese and Western companies etc. But to keep matters simple, take a look at what they say about the cash flow here:

(Source)

Roughly, therefore, operating cost is about $14mn. This would be its gross burn rate; however, the parent company produces almost $200mn in revenues, so actual burn rate is going to be quite different. Bottom line, though, is that bolstered by its existing revenue stream and the various partnerships and credit facilities, it should be able to go through 2020 and most of these trials without requiring dilution - note also that cost of conducting clinical trials in China is a fraction of US costs.

Risks and Bottom line

Frankly, I was a little overwhelmed by the scope of this "unknown" company's pipeline, products, and operations. It is vast. There's a lot going on, and frankly, a) if Eli Lilly and AZN had not bought in to the company, and b) Fruquintinib had not presented such outstanding data at ASCO 2017, I would have been wary of investing in the company.

There are also far too many trials ongoing at the same time, and Chi-Med is developing them all alone without active help from its partners. While Chinese trials cost less, I am unconvinced that all these trials could be made possible with $80mn and in just three years. Any delay, and the cash burn may overwhelm the company.

However, for a number of reasons - trial results, late stage pipeline, established profile in China, great deal-making capabilities, decent financials, existing revenue stream - for all these reasons, I believe this could be a great investment with considerable upside potential despite trading right near its 52-week highs now. There are a number of upcoming catalysts by end-2017, including fruquintinib's NDA in mCRC, and even at these current highs, this would be a good opportunity to invest into this Chinese company.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HCM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We hold LLY and AZN.