Benefit from Chi-Med’s world class drugs pipeline

The drug in question is savolitinib, a cancer medicine that has proved very effective in treating patients’ whose illness displays what is known as a tyrosine kinase protein, a strain of cancer that is particularly common in Asia. In 2017, the drug began a global trial in kidney cancer patients that analysts think has a 75 per cent chance of success – higher than the industry average.

Chi-Med – the group’s trading name in China – has developed savolitinib with pharma giant AstraZeneca (AZN) and is also trialling it alongside Astra’s own specialist cancer treatment, Tagrisso. In October, the two companies announced a successful Phase II trial in non-small-cell lung cancer, a disease that claims 1.4m lives every year. The massive patient population is why broker Edison expects savolitinib to generate peak annual sales of $3.4bn (£2.4bn), on which Chi-Med will earn royalties: 30 per cent for sales in China and between 9 and 13 per cent in the rest of the world.

Savolitinib is not the only cancer medicine that Chi-Med is close to commercialising – in fact the group currently has eight final-phase clinical trials ongoing. In China, management has filed a new drug application for fruiquintinib alongside its commercial partner Eli Lilly. The drug will primarily be used to treat colorectal cancer, with non-small-cell lung cancer following once it completes a final-phase clinical trial. Approval and commercial launch are expected later this year. Meanwhile, epitinib is being studied in brain cancer. If successful, the potential for this drug is huge as there are currently relatively few treatments for cancers that cross into the brain.

Together, Chi-Med’s four late-stage cancer medicines are expected to generate peak annual sales of $7.6bn. That is why brokers at Edison continue to think the company is undervalued, despite a strong share price run in the past year. 

And on top of the four drugs that are fast approaching commercialisation, Chi-Med has a host of cancer medicines that could provide substantial future upside. The company has five drugs that are undergoing early-stage human trials – with commercial launch expected between 2020 and 2023 – and a further five are in pre-clinical development. This pipeline depth proves Chi-Med is a credible competitor in global pharmaceuticals, with a strong long-term outlook. It also ensures that the company will not be badly affected when its first wave of drugs lose patent protection after about 10 years.

Supporting its impressive drug development division is a solid commercial platform in China that sells prescription medicines and consumer health goods. In the 2017 financial year, the platform generated after-tax profit of $37.5m, off $205m of direct revenue and $472m of sales from joint ventures. Revenues in the division are expected to grow at a compound annual rate of 18 per cent between 2017 and 2022 as more of the group’s own drugs gain commercial approval. The average earnings multiple of Chinese pharma companies of 23.6 times forecast earnings implies this business alone could be worth close to $1bn.

And it is not just the cash generated by the commercial platform that means Chi-Med is in good financial shape. In late 2017, the company completed a $293m fundraising round via its Nasdaq listing and its biggest shareholder, CK Hutchison Holdings – run by the Hong Kong billionaire, Sir Ka-shing – recently topping up its holding with another 3.4m shares.