HUTCHMED (China) Limited
Q2 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Christian Hogg:]

Okay. I assume I'm ready to start now. Okay, great. Thanks. Welcome everybody to the Hutchinson China MediTech interim results presentation for first half of 2019. This is the first of two analysts' meetings today. We will do here for obviously the UK and Hong Kong people calling in and then later today at 9

[Unidentified Analyst:]

Yes. I've got a couple of questions. Firstly, on Surufatinib, it's obviously the first compound that you've retained full rights and profits. As you go into the filing, can you talk about what you might need to add in terms of commercial infrastructure when that product launches in China and what you can and can't leverage from the current commercial operations? And the second question was just a simple one the commercial platform. I wondered if you're expecting any impact from the four plus seven tender process during the remainder of the year that we should take into consideration?

[Christian Hogg:]

Great. Thanks, Richard. So, on Surufatinib commercial actually this 60-person team that we've built up on the oncology side just over the last six months in China is very focused on Surufatinib even already. They're involved today in what I would not classify as medical affairs activities but it's kind of supportive work, going out to all the clinical sites, engaging with all the clinicians that have been running the Surufatinib studies.You know, getting to know the NET landscape so that when Surufatinib, subject to approval, is launched then all of that infrastructure in NET is already established. I think that commercial team for the launch of the Surufatinib will be a multiple of its size today. I think we'll see it close to 200 people by the end of next year, maybe slightly higher than that. So, the work we're doing on the commercial organization today is actually preparing for Surufatinib coming maybe late next year if all goes well.The second question on the four plus seven. Did that answer your first part? Yep. The second question on the four plus seven, obviously the four plus seven policy is a great policy in our view in China. It's really driving down the price of generic drugs in China. What that's doing is it's opening up massive headroom in the medical insurance scheme for urban employees and residents in China to open up headroom to fund reimbursement of innovative drugs. That's why you see all those oncology drugs now going onto the reimbursement list because the price of generic drugs is being squeezed.So, the question is does that squeezing of generic drug prices affect Chi-Med? If you look at our portfolio on the commercial platform, we basically don't have any generic drugs. We got out of that business a long time ago because it's a difficult business to be compliant in. It's historically a low-margin and as has been proven the case to be very volatile from a pricing pressure standpoint. So, we got out of the generic drug business a long, long time ago. Most of our business, 95% plus of our commercial platform business is proprietary therapies.Now, obviously we have OTC business, an OTC cough/cold business etcetera. That is not affected by four plus seven. That's long since been affected by pricing pressure. Seven years ago, they took the prices down there and we suffered then but it's been quite stable ever since. But in the prescription drug space 95% of our business is proprietary where we're the only people making what we make. So, the four plus seven doesn't affect us. I think overall the four plus seven policy and the Chinese government's philosophy of driving down the prices of more mundane products to open up reimbursement on more innovative products, we're helped massively in that because our whole innovative drug pipeline will benefit from that strategic activity by the government.

[Unidentified Analyst:]

If I could just squeeze in a third. Merck is making a big investment behind KEYTRUDA and their TKI combinations. I know it's early days for Elunate in combination with PD-1, but could you talk about how your thoughts revolving and what tumor types you might target where you think there might be an opportunity despite Merck?

[Christian Hogg:]

I'll ask Weigou to answer that question.

[Dr. Weigou Su:]

Obviously, it's a very competitive area. Merck is in there, BMS as well. We think we're in reasonably good shape in China. At least there's a window of opportunity for us to take up some indications. So, in terms of specific tumor types with Inovan on their PD-1 combination with our Fruquintinib we're just going through a dose escalation and hope to complete dose escalation in a few months, certainly before the end of the year. We'll go into a dose expansion with multiple cohorts including renal cell, including HCC as well as Merck's KEYTRUDA and Lenvima just got breakthrough therapy designation in the U.S. So, it's clearly a valid approach but we think in China we can still get into the game. Actually, probably more than 50% of the patients are in China globally in HCC. So, we think it's a big opportunity there.Aside from there, we are also interested in endometrial cancer as well as perhaps gastric. I'm not sure if you noticed that BMS and Bayer they just announced a collaboration maybe two weeks ago post ASCO. So, they're working together to develop the Rego, Nivo combo in GI in particular gastric. So, we're interested in that as well. You know, China's got more than 50% of global gastric patients. Basically, relatively similar combinations targeting similar tumor types, but we are doing more in China with these major patient populations. A combination with Surufatinib with PD-1 we are interested in really trying to take advantage of the kinase profile of Surufatinib in particular CSF-1R and VGFR targeting hopefully to further activating the t-cell in a tumor migrating environment.So, we are looking at neuroendocrine malignancies including the NET and neck. We're also interested in breast cancer as well as small-cell lung cancer for instance. So, basically, tumors are not as hot. Actually, perhaps it would be quite interesting in OBGyn types including ovarian and cervical as well. It's wide open at this point in time. Both combinations are going through dose escalation. We think Surufatinib is a bit, maybe three months, ahead.So, we probably will wrap up the dose escalation portion sometime in August or September timeframe and we'll kick off multiple cohort dose expansion.

[Christian Hogg:]

Mike? Can you pass the microphone forward please, Julie?

[Unidentified Analyst:]

The national reimbursement pathway, the process is actually pretty short, and some players are through in three or four months. What are the key variables that you think you'll have to deal with and how sensitive are you on pricing?

[Christian Hogg:]

Actually, Lilly gets to determine the price so they will judge at the end of the day what the price discount will be with the government. Obviously, Lilly knows this, and they know that it's very important for Fruquintinib to get on the reimbursement list. That said, a negotiation is a negotiation. I think if you look at very deep in this presentation, I think the last couple of pages, you can see the 32 cancer drugs that have been added to the reimbursement list over the last couple of years. You can see the discount that have been agreed vary from 30% to 60%. Some of them are as high as 70% but generally those are discount off of very high global prices. Fruquintinib is a not a very high global price. It's at a reasonable price for Chine, a little bit over $3,000. Somewhere in that range is where it's probably going to end up, I would imagine. But it's a bit premature to guess. Could we pass it over to Steve? Actually, Julie, give it to me.

[Unidentified Analyst:]

Obviously, you've given us R&D guidance and cost guidance for this year, but as you begin global drug development and that sort of thing starts to get significantly more expensive. So, when we think of the R&D costs of the next two or three years without giving us quarter data maybe give us an idea of where the R&D spend could go and how you might consider funding that given obviously the proposed Hong Kong listing discussed over the past few months?

[Christian Hogg:]

Thanks, Steve. Yes. It's a good question. I think that with Fruquintinib you can see what we hope is going to happen with Fruquintinib. You get on the reimbursement list, we hope that's going to take off significantly. If that takes off significantly the cash that we're generating with Fruquintinib is going to be material to us. I think Surufatinib the fact that we own it outright, if we're able to launch it effectively next year and start generating cash from Surufatinib, that will be terrific. Our royalty on Savolitinib in China is a fixed royalty of 30%.So, as soon as Savolitinib hits the market in China, we're going to start generating some pretty material income. So, I think to answer your question, we're in this sort of transition period. Maybe the next couple of years you're going to see the R&D expense increase as we start to take certain of our assets out into the global market. So, you would expect the trend that we've seen in the last couple of years of rising R&D expenses to continue. But I think over the next year, two, three years you're going to see an offsetting amount of income coming in from our approved and our launched drugs that is going to help offset some of it. Maybe not all of that increase, but some of it.So, I would imagine, we've got a long history of kind of eating what we kill and managing our R&D expenses in the context of the income that we get from our commercial business, the income we get from our partners, and trying to balance it without ever finding ourselves as sort of into this very vulnerable binary biotech type environment. And we'll continue to do that. But to answer your question directly, I imagine you'll see a gradual increase in the R&D expenses, but I think you'll start to see incoming offset through the royalties and the revenues that we're going to generate from our approved assets.I think the other thing that we're totally open minded to is the divestiture of non-core commercial businesses. I think you look at our OTC business is a good example. In the next five, ten years Chi-Med having an OTC business is probably not necessary. You know, our focus is very much on the prescription drug side. It's very much on oncology in China. And while our OTC business has been very helpful through the years generating cash for us, it's not really strategically that core for us anymore. So, there are these aspects of sort of non-dilutive financing pools that we go to through that time to help out basically.

[Unidentified Analyst:]

Thanks.

[Christian Hogg:]

One for Simi.

[Unidentified Analyst:]

Thanks for taking my questions. First one, can you just give some comments on your postponed Hong Kong IPO? And the second one, on savolutinib you mentioned that Astra is leading the effort for the global development in the MET Exon 14 patients. Are they going to initiate a global pivotal Phase III trial and also what's the royalty rate for ex-China sales?

[Christian Hogg:]

Postponed Hong Kong listing is not the way to describe it. We've done a lot of work in preparation for a potential listing of our shares on the Hong Kong stock exchange. We've done it for the right reasons. We're a Hong Kong based company. We're well-known in the region. The region with regards to biotech is really developing quickly. There's a lot of investor interest in that part of the world on biotech as we've mentioned around the battle for talent and all this sort of stuff. But right now the Hong Kong market is a little bit shaky with all the protests that are going on. In our view, it's not the right market conditions are very important for a successful transaction.So, as we've taken you through the financial picture of the Company from a cash standpoint, we don't need to be moving forward into difficult markets. We can take our time to reach various valuation inflection points around delivery of our pipeline and our programs and then when the time is right, we're a biotech company.So, you're always going to need to raise finance at one point or another. The key is to do it when the markets are right and when your assets are really showing that they are worth further investment. We're confident that we will do that in due course. On the second question on the savolutinib Exon 14, the SAVANNAH study is registration intent, so it's a Phase II study. But it's designed to be used for registration. That would be for conditional approval if all goes well. It's a single-arm study with objective response rate as the outcome. The interim next year will determine if that Phase II can be used for registration.In other words, we'll do an interim analysis. We'll look at the strength of the data and then we'll go with AstraZeneca, talk to the regulatory authorities in the U.S., to the FDA. At that point, if we are at a level of efficacy and confidence that the SAVANNAH study itself will be sufficient for submission for conditional approval, then we'll continue to enroll and submit SAVANNAH --

[Dr. Weigou Su:]

Actually, Exon 14.

[Christian Hogg:]

Sorry. You were talking Exon 14. Sorry. I misunderstood your question. So, say again?

[Dr. Weigou Su:]

Global Exon 14.

[Unidentified Analyst:]

You mentioned that AstraZeneca is looking at taking salovutinib in MET Exon 14 deletion patients in the U.S. ex-China. So, are they going to initiate a separate pivotal trial in that patient population?

[Christian Hogg:]

Sorry. I misunderstood. So, what we're doing because we have a very large data set in Chine in Exon 14 and are continuing to enroll patients in China, we're now opening up sites hopefully around the world and the United States and Europe to be able to potentially aggregate all that data. These are very specific patients with a very specific molecular profile. So, the intention is to try to aggregate all of the data. If the aggregated data is sufficiently strong, potentially then go and have interactions and engagement with the regulatory authorities in the U.S. around submission of the aggregated data for approval outside of China. That's the idea, today. Ultimately, we find ourselves behind Capmatinib and Tepotinib. So, what we've got to do is try and find a way to catch up and that would be our approach.

[Unidentified Analyst:]

What's the royalty rate for ex-China sales?

[Christian Hogg:]

So, it's quite a broad range and it's complicated. But in a nutshell, it's between 9% and 18% subject to a couple of things happening. So, it's a tiered royalty. Actually, tiered royalty of 9% to 13% but if we're able to get an approval in kidney cancer you add another 5% to the royalty. So, it's 9% to 13% plus potentially an additional 5% if kidney cancer works out.

[Unidentified Analyst:]

Thank you.

[Christian Hogg:]

Okay. Great. Thanks very much for coming. Thank you very much. Bye.