德意志银行中国医疗健康HutchisonChinaMediTechOntheLeadingEdgea

18July2017Pharmaceuticals/BiotechnologyHutchisonChinaMediTechRatingBuyValuation&RisksHealthCarePharmaceuticals/BiotechnologyPriceat17Jul2017(USD)23.30Pricetarget-12mth(USD)27.0052-weekrange(USD)23.78-11.22SP500–ForecastChangeAsiaChinaCompanyHutchisonChinaMediTechReutersBloombergExchangeTickerHCM.OQHCMUSNSMHCMDate18July2017DeutscheBankMarketsResearchOntheLeadingEdgeasChineseBiotechComesIntoFocusTransfercoveragewithaBuyValuationandRisks:Buywith$27PTOur$27PTisbasedonablendedvaluationapproachincorporatingbothDCFandSOTP(45%each,with10%attributedtostrategicpremium).OurDCFassumesa9.5%discountrate,roughlyin-linewithotherSMIDbiotechcompaniesatthecommercialstageaswellasa-1.5%terminalgrowthrate.Additionally,OurSOTPuses5xand10xmultiples(EV/sales),discountedtopresentvalue,forwholly-ownedproductsandroyaltyrevenues,accordingly,in-linewithhistoricalmetrics.Risks:regulatoryprocesstakeslongerforfruquintinibapproval;fruquintinibfailstoshowclinicalbenefitinotherprograms,includingNSCLCandgastriccancer;savolitinibfailstoshowclinicalbenefitlineNSCLC;earlierstageprogramsfailtoreachregulatoryapprovals;commercialplatformslowsdown.WearetransitioningcoverageofHCMwithanew$27pricetargetatatimewhenthecompanyisonthecuspofitsfirstproductapprovalandcontinuedprogressontheexpansivepipelinewhichincludesbothwholly-ownedandpartneredprograms.Indeed,withfulldatafromthephase-3fruquintinibFRESCOtrialrecentlypresentedatASCO,webelievetheprogramispoisedtobecomethefirstfullyChina-developedproducttobeapprovedandlaunchedintheChinesemarket.Additionally,webelievetheprogramprovidesvalidationtothediscoveryanddevelopmentenginethathasfueledtheexpansiveportfolioatHCM.Beyondfruquintinib,whichinitialdatasuggestcouldbedifferentiatedvs.existingstandardsofcareacrossawiderangeoftumortypes,weviewtherestoftheportfolioasunder-appreciatedandasdevelopmentcontinuestoprogressshouldyieldde-riskingdataandupdatesoverthenext12-18months.Further,withlarge-pharmapartnersincreasinglyfocusingonHCM-programsaspotentialgrowthdrivers(ieAZNandsavolitinib),weseepotentialforadditionalpartnerships(atgreatlyimprovedeconomics),aswellasvalidationoftheR&Denginewhichshoulddriveconfidenceintheearlier-stagewholly-ownedpipeline.WearetransitioningcoveragewithaBuyratingandestablishinga$27pricetargetaswebelievetheupsidepotentialofthepipeline,andde-riskedvaluationfloorfortheChinesecommercialbusinessareunderappreciated,andlooktofruquintinibandsavolitinibdevelopmentupdatesasthenextvalue-drivingeventsforthestock.KeyhighlightsofourBUYrating■FruquintinibushersHCMintoaneweraofdrugdevelopment,and,onceapproved,shouldhelpvalidatetheChina-discoveredR&Dengine.Followingtherecentpresentationofthephase-3FRESCOdataandChineseregulatoryfiling(withpotentialapprovalbyyear-end),weviewthecontinuedsuccessoftheprogramasvalidationoftheHCMdiscoveryanddevelopmentplatform,andcouldhelppropelthecompanyasoneoftheleadersinChineseR&Dontheglobalstage.Giventheexpansivenessoftheportfolioandencouraging(early)datafromotherprograms,weviewfruquintinibaspotentiallythefirstofmanyandseevalueintheportfolioapproach.■TheR&Dplatformhasyieldedrobustportfolioacrosspartneredandwholly-ownedpipeline.KeytoourfavorableoutlookonHCMsharesistherobustnessoftheR&Dplatform,whichwebelievetakesameasuredapproachtodrugdevelopment,largelyfocusingonAndrewPetersResearchAnalyst+1-415-262-2002MaryanaBreitman,PhDResearchAnalyst+1-212-250-7726CarlosSolorzano-Say,PhDResearchAssociate+1-415-2622098KeychangesPricetarget16.50to27.00↑63.6%Sales(FYE)240to250↑4.3%Opprofmargin(FYE)-25.2to48.4↑-292.3%Netprofit(FYE)-24.2to119.0↑-591.8%Source:DeutscheBankDeutscheBankSecuritiesInc.DeutscheBankdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.DISCLOSURESANDANALYSTCERTIFICATIONSARELOCATEDINAPPENDIX1.MCI(P)083/04/2017.Distributedon:19/07/201703:48:08GMT0bed7b6cf11c18July2017Pharmaceuticals/BiotechnologyHutchisonChinaMediTechknownpharmacologicaltargets,andleveragingconsiderablemedicinalchemistryexpertisetobuildoutthepipelineinareasofunmetneed.Asanexample,theAZN-partneredsavolitinibtargetsc-Met,whichhashadlimitedsuccessasatargetto-dateduetotoxicityconcerns.Thecompanybelievestheyhaveidentifiedthedriverofpriortoxicityforotherprograms,andhasdesignedsavolitinibasasaferalternative.Welooktotheongoingphase-3programinPRCCandupcomingread-outinNSCLCasprimarypointsofvalidationoftheapproach.■TheChina-focusedmodel(whensupplantedwithanbroadpipeline)isattractiveaswell.Beyondmedicinalchemistryexpertise,wealsohighlightthatbyfocusingmuchoftheinitialdevelopmentfortheChinesemarket,thecostsforclinicalde-riskingarelower,especiallyasthecommercialopportunityinChinacontinuestomatureandgrow.Additionally,whileChinaremainstheprimarymarketforHCM,itisbecomingincreasinglyclearthatatleastsomeoftheassetswillfeatureamoreglobaldevelopmentandcommercialfocus.Notably,savolitinib,afirst-in-classselectivec-MetinhibitorpartneredwithAstraZenec