Hutchison China Meditech’s (HCM) largest shareholder, CK Hutchison, has sold 1.3 per cent of the company’s shares to take its stake below 50 per cent for the first time. The sale, which was completed on the US Nasdaq index, sparked a 6 per cent drop in the company’s Aim-traded shares, which had already fallen 36 per cent in just six months.
CK Hutchison’s share sale might have been easier to overlook had it not come just days after Donald Trump’s proposal to limit US investment in Chinese companies by forcing them to delist from the US stock market. Since 2006, Chi-Med has been dual-listed on Aim and Nasdaq. Meanwhile, investors are still reeling from a surprise clinical trial failure last year. For the first time, there is underlying scepticism about the company’s ability to launch new drugs, meaning its shares reacted badly when management halted a trial in June, despite assurances that the drug in question had produced good results.
But before investors find themselves swept up in the sell-off, it’s worth examining whether any of the concerns carry weight starting with CK Hutchison’s share sale, which shouldn’t come as too much of a surprise. The Hong Kong-based company has always said it aims to reduce its stake to below 50 per cent so that it can deconsolidate Chi-Med’s results from its own. Sceptics might question why CK Hutchison was in such a hurry to sell its shares following a dramatic price drop in the past few months – in June, the company sold shares at $24 (£20), in September the sale was completed at just $17.65. But the Hong Kong company’s financial results give reassurance that this isn’t a fire sale to raise cash. True, CK Hutchison has a weighty HK$347bn (£36bn) debt pile, but less than half is due to be repaid in the next four years. The group also has HK$145bn of cash and liquid assets and generated HK$55.7bn of cash from operations in 2018. Management at CK Hutchison has reassured that it has completed its sale of Chi-Med shares now that its stake has fallen below 50 per cent.
Then there is the fear that Chi-Med might soon be unwelcome on the Nasdaq – a market that has provided it with a great deal of capital to invest in expensive drug trials. It is impossible to speculate on the next escalation of Mr Trump’s trade war with China, although Nasdaq has been quick to dismiss the recent proposals and point out that US investors would miss out more than most if all Chinese companies were banned. Indeed, China would no doubt welcome the return of companies to its own indices. The Hong Kong stock exchange recently changed its governance codes to allow dual listings for the first time and would certainly be keen to list a fast-growing pharmaceutical company with a big network of pharmacies in China and a growing number of global drug development partnerships.
The only issue that might impact the long-term growth of Hutchison China Meditech is its ability to launch new medicines. In this area, Chi-Med has an impressive track record. Indeed, the trial that was halted in June found that the company’s home-grown drug surufatinib stalled the progression of neuroendocrine cancers by 9.2 months. Significantly, this medicine can be used in neuroendocrine tumours that originate anywhere in the body and can therefore fill a gap in the market in China and beyond. Surufatinib has now joined savolitinib in the final stages of registration in China and the company has a further five drugs in the late-stage clinical pipeline.
