Hutchmed (China) Limited (LON: HCM) – Recently launched the IPO on Hong Kong Stock Exchange.

Hutchmed (China) Limited (LON: HCM) is an FTSE AIM 100 index listed Company engaged in the manufacturing and sale of drugs. Moreover, the Company is focused on the development and commercialization of targeted therapies and immunotherapies for the treatment of cancer and immunological diseases. HCM had about ten cancer drug candidates undergoing clinical studies around the world. Nonetheless, the first two oncology drugs had received mandatory approvals and subsequently commercialized.

On 28 July 2021, HCM will announce H1 FY21 results.

R&D Initiatives and Clinical Development Activities 

The Company had witnessed an accelerated expansion of the US/EU clinical & regulatory team, progressing abroad clinical portfolio of trials and regulatory engagements. HCM had a healthy clinical trials pipeline -

(Source: Company result) 

Growth Prospects

• Regulatory achievements during FY20: The Company received China approval for SULANDA, a treatment for patients with advanced non-pancreatic NET, in December 2020. Moreover, it had secured U.S. FDA Fast Track Designations for surufatinib for the treatment of both pancreatic and non-pancreatic NET in April 2020.
• Successful launch of SULANDA® (surufatinib): HCM launched SULANDA® as a treatment for patients with advanced non-pancreatic NET during January 2021 in China. Moreover, the sales of SULANDA® remained around USD 4.90 million during the first two months of 2021. Furthermore, it remained on track to receive potential surufatinib U.S. approval in late 2021 or early 2022.
• New Manufacturing Facility: HCM broke ground on a USD 130 million new Shanghai production facility in December 2020, which will enable a five-fold increase in small molecule medicinal product manufacturing capacity over its current Suzhou facilities.
• Expansion to support ELUNATE® and SULANDA® launch: HCM had over 500 people oncology commercial team to drive the sales of ELUNATE® and SULANDA®.

Key Risks

• Compliance Risk: The Company operates in a highly regulated market, and any non-compliance with rules and laws could lead to penalties and loss of reputation.
• Potential delay in drug launches: Any delay in rolling out treatments could lead to a loss in revenue and market share to competitors.
• Financial Risk: The Company requires funding for product development programs and commercialization efforts, and any delay or failure to attain the funds could lead to delay in operations and plans.
  

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Hutchmed (China) Limited.

Hutchison Healthcare Holdings Ltd. is the most significant shareholder as it holds nearly 316.90 million shares as of 30 June 2021.  

Recent Developments

• On 6 July 2021, HCM initiated Phase I Trials of novel ERK inhibitor HMPL-295 in Patients with Advanced Solid Tumours in China.
• On 1 July 2021, U.S. FDA accepted the filing of the New Drug Application for surufatinib for the treatment of pancreatic and extra-pancreatic (non-pancreatic) neuroendocrine tumors.
• On 22 June 2021, Hutchmed announced that AstraZeneca PLC ("AstraZeneca") and savolitinib had been granted conditional approval in China for patients with non-small cell lung cancer.
• On 17 June 2021, Hutchmed launched its IPO on Hong Kong Stock Exchange.

FY20 Financial & Operational Highlights (for the twelve months ended 31 December 2020, as of 04 March 2021)

(Source: Company presentation)

• The Company posted decent growth in 2020, where revenues for the year ended 31 December 2020, was USD 228.0 million compared to USD 204.9 million in 2019. 
• The ELUNATE® (fruquintinib) segment in-market sales increased by around 91% to USD 33.7 million in 2020.
• HCM continued to invest in R&D facilities, with an R&D Expense of USD 174.8 million in 2020, while in 2019, it was USD 138.2 million.
• As of 31 December 2020, Cash, Cash Equivalents, & Short-Term Investments were USD 435.2 million compared to USD 217.2 million as of 31 December 2019.

Financial Ratios (FY20)

Share Price Performance Analysis

 (Source: Refinitiv; Analysis done by Kalkine Group)

On 08 July 2021, at 09:30 AM GMT, HCM’s shares were trading at GBX 523.00, down by around 1.32% from the previous day closing price. Stock 52-week High and Low were GBX 656.00 and GBX 337.00, respectively.

From a technical perspective, a 20-days exponential moving average of GBX 481.18 is indicating an upside potential in the stock price.

Over the last two years, HCM’s stock price has delivered a positive return of ~87.32%, and it has outperformed the FTSE AIM 100 index (benchmark index) with a return of about 32.60% and FTSE All-Share Pharmaceuticals & Biotechnology (benchmark sector) with a return of around 15.01%.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Peers used in the valuation methodology (EV/NTM Sales)

Business Outlook Scenario

The management had posted a strong revenue guidance for 2021 with Oncology/Immunology consolidated revenues to increase to USD 110 - 130 million in 2021 from USD 30.2 million in 2020. However, the Company fails to share the guidance for net cash flow but also remains optimistic about the increase in investment to support the many new potential registration studies and continued expansion in China, the U.S., and Europe over the next three years. The management continues to assess non-core asset divestiture prospects and has successfully launched the IPO on the Hong Kong Stock Exchange. The next important support level on the technical chart is at GBX 427.00.

Considering the healthy clinical pipeline, strong revenue guidance, robust cash generation, strong liquidity profile, better leverage position as compared to the industry, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Hutchmed (China) Limited at the current price of GBX 523.00 (as on 08 July 2021 at 09:30 AM GMT), with lower-double digit upside potential based on 22.50x EV/NTM Sales (approx.) on FY21E sales (approx.).

 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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