TIDMHCM
RNS Number : 9446F
Hutchison China Meditech Limited
02 August 2016
Hutchison China MediTech Limited ("Chi-Med") Reports Interim
Results for the Six Months Ended June 30, 2016, Provides 2016
Financial Guidance and Updates Shareholders on Key Clinical
Programs
-- Group revenue up 27% to $104.5 million (H1 2015: $82.5m) and
net income attributable to Chi--Med of $0.5 million (H1 2015:
$15.9m), reflecting a sharp increase in clinical investment.
-- Innovation Platform - Seven drug candidates in 25 clinical
trials (H1 2015: 17) including four pivotal Phase III studies (H1
2015: 1). Planning to publish proof-of-concept or pivotal trial
data on four drug candidates at scientific meetings through Q1
2017.
-- Commercial Platform - Total consolidated sales up 48% to
$82.3 million (H1 2015: $55.6m); Total sales of non-consolidated
joint ventures up 9% to $249.6 million (H1 2015: $229.8m); Total
net income attributable to Chi-Med from our Commercial Platform up
12% to $22.1 million (H1 2015: $19.8m). Significant
property-related payment expected to come in H2 2016.
-- Completed Nasdaq listing, raising net proceeds of $95.9
million. Available cash resources of $197.5 million at Group level
as of June 30, 2016, which includes cash and cash equivalents,
short-term investments and unutilized bank facilities.
-- Post-period Event: Amendment of collaboration with
AstraZeneca AB (publ) ("AstraZeneca") - Chi-Med investing $50
million, mainly over three years, to accelerate savolitinib global
development in return for 5% point increase in tiered royalty
range.
UK Analysts Meeting and Webcast Scheduled Today at 9:00 a.m.
BST
U.S. Conference Call Scheduled Today at 9:00 a.m. EDT
London: Tuesday, August 2, 2016: Chi-Med (AIM/NASDAQ: HCM), the
China-based biopharmaceutical company focused on discovering and
developing targeted therapies for oncology and immunological
diseases for the global market, today announces its unaudited
financial results for the six months ended June 30, 2016.
Simon To, Chairman of Chi-Med, said: "Chi-Med has once again
made very considerable progress at both the operating and strategic
levels.
All aspects of our Innovation Platform's risk-balanced,
innovative drug pipeline have moved forward, including progress in
aligning with U.S. and European regulatory authorities in
end-of-Phase II meetings on savolitinib and completing enrollment
of our first Phase III study on fruquintinib. We have also made
great progress in the clinic on sulfatinib, epitinib, HMPL-523,
HMPL-689 and theliatinib, all of which are also potential global
first-in-class or best-in-class drug candidates.
Once again, our Commercial Platform has generated increased cash
flows helping fund our Innovation Platform activities as well as
providing a first-class marketing and distribution channel in China
for our drug candidates, if they are approved. Our partnerships
with major global pharmaceutical companies, created when the global
scope of our drug candidates began to emerge, continue to allow us
to broaden development plans and represent important global
marketing and distribution resources. In the first half, we
completed our Nasdaq listing, which broadened our exposure to U.S.
specialist investors and strengthened our cash position.
The progress of our drug pipeline and strong cash position,
resulting from our increased commercial profits and recent Nasdaq
listing, have enabled us to renegotiate our collaboration agreement
with AstraZeneca to take a greater share in the potential long-term
economic value of savolitinib in return for increasing our
investment in savolitinib's development. We believe this benefits
both Chi-Med and AstraZeneca as it allows us to accelerate and
broaden savolitinib's late-stage development in multiple oncology
indications.
Our pragmatic approach to finance and risk management has
enabled us to build our drug pipeline over a dozen years. We now
have multiple shots at success with four pivotal studies underway
today, and three more likely to initiate by H1 2017, on a
diversified group of drug candidates. The results of these pivotal
studies will emerge during 2017-2019, and we believe that if they
prove successful, substantial benefits can be created for patients
and shareholders alike. Consequently, we view the future with great
confidence."
FINANCIAL HIGHLIGHTS:
Our consolidated financial results are reported under U.S.
generally accepted accounting principles ("U.S. GAAP") and in U.S.
dollar currency unless otherwise stated. We also conduct our
business through three non-consolidated joint ventures, which are
accounted for under the equity accounting method as
non-consolidated entities in our consolidated financial statements.
Within this announcement, we refer to certain financial results
reported by such non-consolidated joint ventures, which are based
on figures reported in their respective consolidated financial
statements prepared pursuant to International Financial Reporting
Standards (as issued by the International Accounting Standards
Board). Unless otherwise indicated, references to "subsidiaries"
refer to our consolidated subsidiaries and joint ventures
(excluding non-consolidated joint ventures).
Group Results
-- Consolidated revenue up 27% to $104.5 million (H1 2015:
$82.5m).
-- Net income attributable to Chi-Med of $0.5 million (H1 2015:
$15.9m).
-- Strengthened cash position: Available cash resources of
$197.5 million as of June 30, 2016 (December 31, 2015: $38.8m) at
the Chi-Med Group level, including cash and cash equivalents,
short-term investments and unutilized banking facilities. Increase
in cash primarily reflects $95.9 million net proceeds of our March
2016 Nasdaq listing.
Innovation Platform - a broad, risk-balanced, global
oncology/immunology pipeline.
-- Consolidated revenue of $22.3 million (H1 2015: $26.9m) and
net loss attributable to Chi-Med of $13.7 million (H1 2015: net
income $2.0m) driven by $36.0 million (H1 2015: $24.9m) spending
mainly for 25 clinical trials, four of which are pivotal Phase III
studies on fruquintinib and sulfatinib, as well as the continued
expansion of our scientific team, which now includes over 310
scientists and staff.
-- Amendment yesterday to our collaboration with AstraZeneca
under which Chi-Med has agreed to provide up to $50 million for the
joint-development costs of savolitinib in return for a 5 percentage
point increase in the tiered royalty rates payable on savolitinib
sales across all indications in all markets outside of China.
Commercial Platform - a deeply established, cash-generative,
pharmaceutical business in China - a commercialization framework
for our Innovation Platform candidate drugs.
-- Total consolidated sales up 48% to $82.3 million (H1 2015:
$55.6m) mainly resulting from solid progress on Seroquel(R) .
-- Total sales of non-consolidated joint ventures up 9% to
$249.6 million (H1 2015: $229.8m) due primarily to continued
expansion of coronary artery disease prescription drug
business.
-- Total net income attributable to Chi-Med from our Commercial
Platform up 12% to $22.1 million (H1 2015: $19.8m).
-- Solid performance despite the weakening of the Chinese
renminbi ("RMB") over the last year which reduced both our top- and
bottom-line growth rates, during the first half of 2016, by -6% in
U.S. dollar terms.
-- Expect to receive about $70 million second installment of the
total approximately $114 million land compensation and subsidies
from the Shanghai government, leading to an estimated one-time gain
to the Chi-Med Group of over $35 million in Q4 2016.
2016 FINANCIAL GUIDANCE: We provide full year 2016 financial
guidance, as detailed below:
Group Level:
-- Consolidated revenue $190-205 million
-- Administrative, interest and income tax expenses $16-18 million
-- Net income attributable to Chi-Med $0-5 million
Innovation Platform:
-- Consolidated revenue $35-40 million
-- Research & development expenses $80-85 million
Commercial Platform:
-- Sales (consolidated) $155-165 million
-- Sales of non-consolidated joint ventures $430-440 million
-- One-time gain associated with property-related payments $35-37 million
-- Net income attributable to Chi-Med $63-66 million
KEY H1 2016 OPERATIONAL HIGHLIGHTS:
Innovation Platform: Multiple opportunities for success: four
pivotal Phase III studies underway and three more fully funded and
expected to begin by H1 2017. Each is expected to read-out over the
next three years.
-- Savolitinib: Potential global first-in-class mesenchymal
epithelial transition factor ("c-Met") inhibitor currently in 12
main clinical studies worldwide in multiple tumor types including
kidney, lung and gastric cancers as a monotherapy and in
combination with other targeted and immunotherapy agents:
1. Kidney cancer:
a. Completed end-of-Phase II meetings with U.S. Food & Drug
Administration ("FDA") and European Medicines Agency ("EMA");
alignment on plans for global savolitinib monotherapy Phase III
study in c-Met-driven papillary renal cell carcinoma ("PRCC")
patients.
b. Initiated global Phase Ib dose finding study of savolitinib
in combination with anti-programmed death-1 receptor ligand
("PD-L1") antibody, durvalumab, in clear cell renal cell carcinoma
("ccRCC") patients.
2. Non-small cell lung cancer ("NSCLC"):
a. Initiated global Phase IIb study of savolitinib in
combination with Tagrisso(R) (osimertinib) in second-line NSCLC
patients with epidermal growth factor receptor ("EGFR") mutations
who have failed first-line EGFR tyrosine kinase inhibitor ("TKI")
therapy and harbor c-Met gene amplification. This triggered a $10
million milestone from AstraZeneca to Chi-Med in June 2016.
b. Initiated or continued four further Phase Ib/II studies in
first-, second- and third-line NSCLC patients, including (i) as a
monotherapy in NSCLC patients with c-Met mutations that result in
Exon 14 skipping; (ii) as a monotherapy in pulmonary sarcomatoid
carcinoma ("PSC") patients with mutations that result in Exon 14
skipping; (iii) as a combination therapy with Iressa(R) (gefitinib)
in NSCLC patients with EGFR mutations and who have failed
first-line EGFR TKI therapy; and (iv) as a combination therapy with
Tagrisso(R) in third-line NSCLC patients who have failed
Tagrisso(R) therapy.
3. Gastric Cancer:
a. Proof-of-concept studies of savolitinib as a monotherapy in
gastric cancer patients with c-Met gene amplification are ongoing
in South Korea and China; promising response data, was published by
Dr. Jeeyun Lee of Samsung Medical Center in April 2016 at the
American Association of Cancer Research meeting.
b. A Phase Ib dose finding study of savolitinib in combination
with Taxol(R) (docetaxel) in gastric cancer patients with c-Met
over-expression is ongoing in South Korea.
-- Fruquintinib: Potential global best-in-class selective
inhibitor of vascular endothelial growth factor receptor 1/2/3
("VEGFR"):
1. Colorectal cancer (third-line or above): Completed enrollment
of a Phase III study, named FRESCO, to test fruquintinib as a
monotherapy among third-line metastatic colorectal cancer patients
in China; top-line Phase III data expected to be reported in early
2017; plan to submit the China NDA, subject to positive FRESCO
outcome, by mid-2017;
2. NSCLC (third-line): Began enrolling a Phase III study, named
FALUCA, to test fruquintinib in third-line NSCLC patients in China,
in late 2015 - now over 30 clinical centers are operational; expect
to complete enrollment in H1 2017; top-line Phase III data expected
to be reported in late 2017; plan to submit China NDA, subject to
positive FALUCA outcome, during H1 2018.
3. Gastric cancer (second-line): Completed dose finding stage of
fruquintinib Phase Ib study in combination with Taxotere(R)
(paclitaxel). Continue to enroll patients in Phase Ib expansion
stage.
4. NSCLC (first-line): Planning underway to start Phase Ib dose
finding study of fruquintinib in combination with Iressa(R) in
first-line EGFR-mutant NSCLC patients in China in late 2016.
5. Production facility in Suzhou, China, operational and ready
to support fruquintinib's potential commercial launch.
-- Sulfatinib: Selective inhibitor of VEGFR/fibroblast growth
factor receptor 1 ("FGFR1") with strong efficacy in neuroendocrine
tumors ("NET") - enrolling two pivotal Phase III studies:
1. NET (first-line):
a. Completed enrollment of a Phase II study of sulfatinib in 81
broad-spectrum NET patients in China; median Progression Free
Survival ("PFS") not yet reached; now enrolling two Phase III
studies, named SANET-p (in pancreatic NET patients) and SANET-ep
(in extra-pancreatic NET patients), with primary endpoint median
PFS; Phase III top-line data expected in 2018.
b. Initiated U.S. Phase I dose confirmation study in Caucasian
patients - currently in 200mg cohort and closing in on China 300mg
Phase III dose; expected to complete in H2 2016.
2. Thyroid cancer: Initiated Phase II proof-of-concept study in
patients with locally advanced or metastatic radioactive
iodine-refractory differentiated thyroid cancer or medullary
thyroid cancer in China.
3. Biliary tract cancer: Planning underway to start a Phase II
study in China in late 2016.
-- HMPL-523: Potential global first-in-class spleen tyrosine
kinase ("Syk") inhibitor - major potential in immunology and
oncology:
1. Hematological cancer: Granted China FDA Phase I to Phase III
clinical trial application clearance in H1 2016 - target to start
China Phase I dose escalation in patients with hematologic
malignancies in H2 2016; Australia Phase I dose escalation
currently in second dose cohort (200mg) and expected to complete in
H1 2017; U.S. hematological malignancy Investigational New Drug
("IND") application submitted in June 2016.
2. Immunology: Australia Phase I study completed with no
evidence of the hypertension/gastrointestinal toxicities
encountered by the first-generation Syk inhibitor (fostamatinib);
U.S. immunology IND application submitted in H1 2016 - U.S. FDA
feedback received, now preparing to submit additional data;
planning global rheumatoid arthritis Phase II study for 2017.
-- Epitinib: Highly differentiated inhibitor of the EGFR
designed for optimal blood-brain barrier penetration:
1. NSCLC with brain metastasis: Phase Ib study in NSCLC patients
with brain metastasis ongoing; granted China FDA Phase II/III
clinical trial application clearance granted in July 2016; target
to initiate pivotal registration study in H1 2017.
2. Glioblastoma: Planning underway to start a Phase II study in
glioblastoma, a primary brain cancer with EGFR gene amplification,
in early 2017.
-- HMPL-689: Potential global best-in-class, highly selective
phosphoinositide 3-kinase delta ("PI3K ") inhibitor, which is over
five times more potent than Zydelig(R) (idelalisib):
Hematological cancer: Initiated Phase I study in healthy
volunteers in Australia in H1 2016, now in fifth cohort and
expected to complete Phase I dose escalation in H2 2016; plan to
start Phase I dose escalation in patients with hematologic
malignancies in Australia in H1 2017.
-- Theliatinib: EGFR inhibitor, over five times more potent than
Tarceva(R) (erlotinib), with potential in patients with solid
tumors presenting EGFR gene amplification:
Esophageal cancer/Head and Neck: Phase I dose escalation study
ongoing in China; target to start Phase Ib proof-of-concept studies
by the end of 2016.
Commercial Platform: Continued strong growth in cash flow and
profit - representing a solid and stable financial base that
underpins a significant portion of Chi-Med's current market
value.
-- Prescription Drugs business performing very well -
consolidated sales up 49% to $67.6 million (H1 2015: $45.4m); and
total sales of non-consolidated Prescription Drugs joint venture up
22% to $126.8 million (H1 2015: $103.9m).
1. She Xiang Bao Xin ("SXBX") pill - our most important
commercial product, is a prescription vasodilator proprietary to
our joint venture: Accounted for approximately 12% of China's over
$1.5 billion botanical coronary artery disease prescription drug
market, full patent protection through 2029; H1 2016 sales up 16%
to $110.1 million (H1 2015: $94.9m); SXBX pill represents 87% of
the sales of SHPL, our joint venture, which contributed 91% of our
$16.3 million (H1 2015: $12.1m) consolidated Prescription Drugs
operating profit in H1 2016.
2. Seroquel(R) - prescription antipsychotic under exclusive
commercial license from AstraZeneca within China: Accounted for
approximately 5% of China's antipsychotic prescription drug and 46%
of the generic quetiapine market; Seroquel(R) is the only extended
release ("XR") quetiapine formulation approved in China; H1 2016
sales up 282% to $17.2 million (H1 2015: $4.5m); 2016 is the first
full year of Seroquel(R) commercialization under Chi-Med.
-- Substantially completed move to new factory in Shanghai,
almost tripling the manufacturing capacity of our Prescription
Drugs joint venture. Triggering about $114 million total cash
compensation and subsidies for the surrender of its land-use rights
for its old factory site.
-- Consumer Health business stable despite over-the-counter
("OTC") drug capacity constraints - consolidated sales up 44% to
$14.6 million (H1 2015: $10.1m); and total sales of
non-consolidated Consumer Health joint venture down 2% to $122.7
million (H1 2015: $125.9m). Sales in our OTC drug joint venture
were down marginally due to tight manufacturing capacity resulting
from the move to new factory in Bozhou, Anhui province; despite
this, our OTC drug joint venture's portfolio of mature, market
leading products, contributed 99% of our $8.6 million (H1 2015:
$10.1m) consolidated Consumer Health operating profit in H1
2016.
EXPECTED MAJOR NEAR-TERM CATALYSTS: We target to publish data on
four drug candidates in five Phase Ib-III studies before the end of
Q1 2017, including:
-- Savolitinib Phase II data in PRCC patients;
-- Epitinib Phase Ib data in NSCLC patients with brain
metastasis;
-- Fruquintinib Phase II data in third-line NSCLC patients;
-- Sulfatinib Phase II data in pancreatic and extra-pancreatic
NET patients; and
-- Fruquintinib Phase III top-line data in third-line or above
colorectal cancer patients.
We target to initiate pivotal registration trials on two further
drug candidates before the end of H1 2017, including:
-- Savolitinib Phase III in c-Met-driven PRCC patients;
-- Epitinib Phase II/III in first-line patients with EGFR-mutant
NSCLC patients with brain metastasis; and
-- Savolitinib Phase III in combination with Tagrisso(R) in
second-line NSCLC (T790M-/c-Met+) patients.
POST PERIOD EVENT: Amendment of Co-Development Agreement with
AstraZeneca on Savolitinib global development plan:
In order to accelerate savolitinib's global development, as
announced yesterday, Chi-Med and AstraZeneca agreed to amend the
2011 global licensing, co-development and commercialization
agreement regarding savolitinib. Under the amendment, Chi-Med will
contribute up to $50 million, spread primarily over three years, to
the joint-development costs of the global pivotal Phase III study
in c-Met-driven PRCC. Subject to approval in the PRCC indication,
Chi-Med will receive a 5 percentage point increase in the global
(excluding China) tiered royalty rate payable on savolitinib sales
across all indications, thereby increasing the tiered royalty to
14% to 18%. After total aggregate sales of savolitinib have reached
$5 billion, the royalty will step down over a two year period, to
an ongoing royalty rate of 10.5% to 14.5%. All other provisions of
the 2011 Agreement will remain unchanged.
Conference Call and Webcast Information:
An analyst presentation and webcast will be held today at 9:00
a.m. BST (4:00 p.m. HKT) at Citigate Dewe Rogerson, Third Floor, 3
London Wall Buildings, London, EC2M 5SY. Investors may participate
in the call or access a live video webcast of the call via the
Company's website at www.chi-med.com/investors/event-information/.
A conference call for U.S. investors will also be held today at
9:00 a.m. EDT. To participate in the US call, please dial
+1-212-999-6659. For all dial-in numbers please use conference ID
"Chi-Med".
Enquiries
Investor Enquiries
Christian Hogg, CEO +852 2121 8200
International Media Enquiries
Anthony Carlisle, +44 7973 611 888 (Mobile) anthony.carlisle@cdrconsultancy.co.uk
Citigate Dewe Rogerson
U.S. Based Media Enquiries
Brad Miles, BMC Communications +1 (917) 570 7340 (Mobile) bmiles@bmccommunications.com
Susan Duffy, BMC Communications +1 (917) 499 8887 (Mobile) sduffy@bmccommunications.com
Investor Relations
Brian Korb, The Trout Group +1 (917) 653 5122 (Mobile) bkorb@troutgroup.com
David Dible, +44 7967 566 919 (Mobile) david.dible@citigatedr.co.uk
Citigate Dewe Rogerson
Panmure Gordon (UK) Limited
Richard Gray / Andrew Potts +44 (20) 7886 2500
About Chi-Med
Chi-Med is an innovative China-based biopharmaceutical company
which researches, develops, manufactures and sells pharmaceuticals
and healthcare products. Its Innovation Platform, Hutchison
MediPharma Limited, focuses on discovering and developing
innovative therapeutics in oncology and autoimmune diseases for the
global market. Its Commercial Platform manufactures, markets, and
distributes prescription drugs and consumer health products in
China.
Chi-Med is majority owned by the multinational conglomerate CK
Hutchison Holdings Limited ("CK Hutchison") (SEHK: 0001). For more
information, please visit: www.chi-med.com.
References
Unless the context requires otherwise, references in this
announcement to the "Group," the "Company," "Chi-Med," "Chi-Med
Group," "we," "us" and "our" refer to Chi-Med and its consolidated
subsidiaries and joint ventures unless otherwise stated or
indicated by context.
Forward-Looking Statements
This announcement contains forward-looking statements within the
meaning of the "safe harbor" provisions of the U.S. Private
Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by words like "will," "expects,"
"anticipates," "future," "intends," "plans," "believes,"
"estimates," "pipeline," "could," "potential," "believe,"
"first-in-class," "best-in-class," "designed to," "objective,"
"guidance," "pursue," or similar terms, or by express or implied
discussions regarding potential drug candidates, potential
indications for drug candidates or by discussions of strategy,
plans, expectations or intentions. You should not place undue
reliance on these statements. Such forward-looking statements are
based on the current beliefs and expectations of management
regarding future events, and are subject to significant known and
unknown risks and uncertainties. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those set
forth in the forward-looking statements. There can be no guarantee
that any of our drug candidates will be approved for sale in any
market, or that any approvals which are obtained will be obtained
at any particular time, or that any such drug candidates will
achieve any particular revenue levels. In particular, management's
expectations could be affected by, among other things: unexpected
regulatory actions or delays or government regulation generally;
the uncertainties inherent in research and development, including
the inability to meet our key study assumptions regarding
enrollment rates, timing and availability of subjects meeting a
study's inclusion and exclusion criteria and funding requirements,
changes to clinical protocols, unexpected adverse events or safety,
quality or manufacturing issues; the inability of a drug candidate
to meet the primary or secondary endpoint of a study; the inability
of a drug candidate to obtain regulatory approval in different
jurisdictions or gain commercial acceptance after obtaining
regulatory approval; global trends toward health care cost
containment, including ongoing pricing pressures; uncertainties
regarding actual or potential legal proceedings, including, among
others, actual or potential product liability litigation,
litigation and investigations regarding sales and marketing
practices, intellectual property disputes, and government
investigations generally; and general economic and industry
conditions, including uncertainties regarding the effects of the
persistently weak economic and financial environment in many
countries and uncertainties regarding future global exchange rates.
For further discussion of these and other risks, see Chi-Med's
filings with the U.S. Securities and Exchange Commission and on
AIM. Chi-Med is providing the information in this announcement as
of this date and does not undertake any obligation to update any
forward-looking statements as a result of new information, future
events or otherwise.
In addition, this announcement contains statistical data and
estimates that we obtained from industry publications and reports
generated by third-party market research firms, including Frost
& Sullivan, an independent market research firm, and publicly
available data. All patient population, market size and market
share estimates are based on Frost & Sullivan research, unless
otherwise noted. Although we believe that the publications, reports
and surveys are reliable, we have not independently verified the
data. Such data involves risks and uncertainties and are subject to
change based on various factors, including those discussed
above.
Inside Information
This announcement contains inside information for the purposes
of Article 7 of Regulation (EU) No 596/2014.
Ends
CHAIRMAN'S STATEMENT
Our aim is to become the first large-scale innovative global
biopharmaceutical company to emerge from China.
If we are able to become the first China-based company to
succeed in steering a novel drug from invention through global
approvals, we will take a major step towards this aim. We believe
our progress in advancing savolitinib and fruquintinib toward
submissions for approval is particularly encouraging. Approval of
these drug candidates, if successful, would propel us to a new era,
in which we believe our five other clinical drug candidates, and
the proven discovery capability of our scientific team, could take
us to new heights.
For over a decade, we and our partners have invested almost $400
million in pursuit of our aim. Our over 310-person strong
scientific team has created a broad portfolio of differentiated
products in the global targeted therapy arena in oncology and
immunology. We have focused on developing highly selective drug
candidates against multiple novel and validated molecular targets,
all of which have the potential to be global first-in-class or
best-in-class. We believe that the use of these drug candidates as
monotherapies or in combination treatments with other oncology and
immunology therapies can significantly improve global patient
outcomes and create substantial shareholder value.
The recent amendment of our global collaboration agreement on
savolitinib with AstraZeneca evidences our belief in savolitinib's
potential across multiple oncology indications.
Key elements of our strategy are:
To design novel drug candidates against well-characterized
targets with global first-in-class potential - We believe our most
significant market opportunity is developing innovative drug
therapies that have global first-in-class potential in areas of
high unmet needs. In order to limit our risk, we focus on novel
tyrosine kinase targets, that have a deep body of evidence to
support their role in cell signaling in cancer or inflammation,
such as c-Met, Syk and FGFR.
To use a chemistry-focused approach centered on kinase
selectivity to create global best-in-class products - In addition
to novel targets, we balance risk by also creating drug candidates
against proven validated targets including VEGFR, EGFR and PI3K .
We believe that there is a lot of room to improve on the first
generation of TKIs that have emerged over the last fifteen years.
We work to develop differentiated next generation TKIs
characterized by high selectivity and superior pharmacokinetic
properties leading to improved patient tolerability.
To pursue a practical and efficient clinical and regulatory
strategy - China's large patient population, combined with lower
clinical trial costs, as compared to the West, allows for rapid and
lower risk development through proof-of-concept on validated
targets. On novel targets, we accept higher risk and pursue global
clinical development from day one in order to maximize the chance
of achieving a global first-in-class position.
A risk-balanced approach to financing long-term investment in
innovation - Chi-Med has followed an unconventional path to reach
its current stage of development. We have balanced risk in every
manner possible, focusing on building a financially sustainable
company with a low chance of negative binary outcome. Starting with
the above risk-balanced portfolio approach to choosing the
novel/validated kinase targets on which we base our research; to
our partnerships with AstraZeneca and Eli Lilly and Company
("Lilly") which have broadened our development plans, and provided
technical support and global reach; to basing our operations in
China where generally lower operating costs allow us to employ a
scientific team large enough to manage development of such a broad
pipeline; to building a powerful Commercial Platform which provides
us steady cash flow; and finally, our relationship with our
majority shareholder, CK Hutchison, who has had a long-term,
practical, mind-set. These factors distinguish us from, and provide
a competitive advantage over, the venture capital-backed path of
evolution of most emerging global biotech companies.
We believe we are fast approaching the achievement of our aim,
and view the future with great optimism. As always, I would like to
express my deep appreciation for the support of our investors,
directors and partners and for the commitment and dedication of all
of Chi-Med's management and staff, without whom none of this would
be possible.
Simon To
Chairman, August 1, 2016
FINANCIAL REVIEW
Chi-Med Group revenues for the six months ended June 30, 2016
increased 27% to $104.5 million (H1 2015: $82.5m), driven mainly by
a full period of Seroquel(R) sales in China, which our consolidated
joint venture Hutchison Whampoa Sinopharm Pharmaceuticals
(Shanghai) Company Limited ("Hutchison Sinopharm") began marketing
under an exclusive license from AstraZeneca in Q2 2015. It should
be noted that Group revenues do not include the revenues of our two
large-scale, 50/50 joint ventures in China, Shanghai Hutchison
Pharmaceuticals Limited ("SHPL") and Hutchison Whampoa Guangzhou
Baiyunshan Chinese Medicine Company Limited ("HBYS"), since these
are accounted for using the equity method.
Our Commercial Platform, which continues to be Chi-Med's primary
profit and cash source, grew operating profit by 12% to $24.9
million (H1 2015: $22.2m) as a result of strong performance by
SHPL's coronary artery disease Prescription Drug business. The
Innovation Platform kept operating loss at $13.8 million (H1 2015:
operating profit $2.0m) despite a major expansion of clinical
activities, rapid organization growth to support these clinical
activities and investment in the expansion of small molecule
manufacturing operations.
Net corporate unallocated expenses, primarily Chi-Med Group
overhead and operating costs, increased to $5.8 million (H1 2015:
$4.3m) primarily due to our Nasdaq listing and the resulting
increased organization and third-party advisor costs in the audit
and compliance areas.
Consequently, Chi-Med Group operating profit was $5.3 million
(H1 2015: $19.9m).
Total interest expense, tax and profits attributable to
non-controlling interests during the period increased to $4.8
million (H1 2015: $4.0m) driven largely by 5% withholding taxes
accrued on the net income of our Commercial Platform joint ventures
during the period.
The resulting total Group net income attributable to Chi-Med was
therefore $0.5 million (H1 2015: $15.9m).
In the first half of 2015, in accordance with U.S. GAAP, Chi-Med
recorded a non-cash accretion charge of $42.0 million which was
equivalent to the estimated value of redeemable preferred shares in
our Innovation Platform subsidiary, Hutchison MediPharma Holdings
Limited ("HMHL"), held by Mitsui & Co., Ltd. ("Mitsui"). In
July 2015, we completed a transaction to roll-up Mitsui's preferred
shares in HMHL into Chi-Med ordinary shares and thereby eliminated
the chance that cash would be needed to redeem the preferred shares
as well as the need for further future non-cash accretion
charges.
As a result, Group net income attributable to ordinary
shareholders of Chi-Med, for the first half of 2016, was $0.5
million, or $0.01 per ordinary share / $0.005 per American
Depositary Share ("ADS"), compared to a net loss attributable to
ordinary shareholders of Chi-Med of $26.1 million, or $0.49 per
ordinary share / $0.245 per ADS, in the same period in 2015.
Cash and Financing
In the past five years, as our clinical spending has escalated,
we endeavored to remain consistently cash-positive at the Chi-Med
Group level. In the first half of 2016, we succeeded in generating
$9.1 million (H1 2015: $0.4m) in net cash from operating
activities. This was driven by increased dividends paid by our
non-consolidated Commercial Platform joint ventures and payments
received from AstraZeneca, Lilly, and Nutrition Science Partners
Limited ("NSP"), our joint venture with Nestlé Health Science SA
("Nestlé"), which, in aggregate, more than offset the costs of our
research and development programs.
In March 2016, we successfully completed our Nasdaq listing and
were able to raise $110.2 million in new equity capital, or $95.9
million net of expenses incurred, to strengthen our balance sheet
and support development plans, through to planned NDA submissions,
for our lead drug candidates, savolitinib, fruquintinib, sulfatinib
and epitinib.
As of June 30, 2016, we had available cash resources of $197.5
million (December 31, 2015: $38.8m) at the Chi-Med Group level
including cash and cash equivalents and short-term investments of
$122.5 million (December 31, 2015: $31.9m) and unutilized bank
borrowing facilities of $75.0 million (December 31, 2015:
$6.9m).
In addition, as of June 30, 2016, our non-consolidated joint
ventures (SHPL, HBYS and NSP) held $72.2 million (December 31,
2015: $80.9m) available cash resources. In Q4 2016, our
Prescription Drug joint venture, SHPL, expects to receive about $70
million of property compensation from the Shanghai government. This
will lead to, at the Chi-Med Group level, an estimated one-time
gain of over $35 million and a further dividend of about $40
million in H1 2017. We also expect to conclude negotiations for the
return of land use rights for unused land under the HBYS joint
venture in Guangzhou in 2017, thereby triggering further
compensation.
Outstanding bank loans as of June 30, 2016 amounted to $41.9
million (December 31, 2015: $49.8m) at the Chi-Med Group level, of
which $26.8 million is guaranteed by a wholly-owned subsidiary of
CK Hutchison. Our total Chi-Med Group weighted average cost of
borrowing in H1 2016 on both unsecured and guaranteed loans,
including all interest and guarantees fees, was 2.6%. As of June
30, 2016, our non-consolidated joint ventures had outstanding bank
loans of $31.5 million (December 31, 2015: $26.5m) as they
approached completion of construction of the two new Commercial
Platform factories. These new factories will almost triple our
joint ventures' manufacturing capacity and are enabling them to
move out of central Shanghai and Guangzhou thereby unlocking the
significant land-value of their old sites.
In summary, we believe that the cash currently held are
sufficient to fund all our near-term activities, including the
increased cash requirements resulting from the recent amendment to
the savolitinib collaboration with AstraZeneca.
OPERATIONS REVIEW
INNOVATION PLATFORM
The Chi-Med pipeline of drug candidates has been created and
developed by the in-house research and development operation which
was started in 2002. Since then, we have assembled a large team of
over 310 scientists and staff (June 30, 2015: 251) based in China
and operating a fully-integrated drug discovery and development
operation covering chemistry, biology, pharmacology, toxicology,
chemistry and manufacturing controls for clinical and commercial
supply, clinical and regulatory and other functions. Looking ahead,
we plan to continue to leverage this platform, as we have in the
past decade, to produce novel drug candidates with global
potential.
Innovation Platform revenue in the first half of 2016 remained
largely flat at $22.3 million (H1 2015: $26.9m) reflecting a
combination of milestone payments, service fees and clinical cost
reimbursements received from AstraZeneca, Lilly and NSP. Net loss
attributable to Chi-Med increased to $13.7 million (H1 2015: net
profit $2.0m) driven by $36.0 million (H1 2015: $24.9m) in research
and development spending on our pipeline of seven oncology and
immunology drug candidates.
Product Pipeline Progress
Savolitinib (AZD6094): Savolitinib is a potential global
first-in-class inhibitor of c-Met, an enzyme which has been shown
to function abnormally in many types of solid tumors. We designed
savolitinib to be a potent and highly selective oral inhibitor,
which through chemical structure modification addressed human
metabolite-related renal toxicity, the primary issue that halted
development on several other selective c-Met inhibitors. In
clinical studies to-date, in over 370 patients, savolitinib has
exhibited no renal toxicity as well as promising signs of clinical
efficacy in patients with c-Met gene alterations in PRCC, NSCLC,
colorectal cancer and gastric cancer. We are currently testing
savolitinib in partnership with AstraZeneca in multiple Phase Ib/II
studies, both as a monotherapy and in combination with other
targeted therapies.
AstraZeneca collaboration amendment: On August 1, 2016, Chi-Med
agreed to contribute up to $50 million, spread primarily over three
years, to the joint development costs of the global pivotal Phase
III study in c-Met-driven PRCC. Subject to approval in the PRCC
indication, Chi-Med will receive a 5 percentage point increase in
the global (excluding China) tiered royalty rate payable on
savolitinib sales across all indications, thereby increasing the
tiered royalty to 14% to 18%. After total aggregate sales of
savolitinib have reached $5 billion, the royalty will step down
over a two year period, to an ongoing royalty rate of 10.5% to
14.5%. All other provisions of the 2011 agreement will remain
unchanged.
Savolitinib - Kidney Cancer: High proportion of MET-driven patients. Four studies underway.
Study 1 - Enrollment complete - Phase II PRCC savolitinib 600mg
monotherapy (U.S., Canada, U.K. and Spain) - We completed
enrollment of this 109 patient study in October 2015. We plan to
report the results of this study at a future scientific conference
in early 2017. We have observed in this open-label Phase II study,
as we did in the Australia Phase I study, clear efficacy among
patients with c-Met-driven disease. We remain of the view that PRCC
represents a clear unmet medical need. We have completed end of
Phase II meetings with the U.S. FDA and EMA and planning for a
pivotal Phase III study, targeting c-Met-driven PRCC patients, is
underway. We expect to initiate the global Phase III study in late
2016 or early 2017. PRCC represents approximately 10-15% of kidney
cancer, with about half of all PRCC patients harboring c-Met-driven
disease.
Study 2, Study 3 and Study 4 - Enrolling - Phase Ib study of
savolitinib (600mg daily) monotherapy and in combination with
durvalumab (anti-PD-L1) in both PRCC and ccRCC patients (U.K.) - A
Phase Ib dose finding study began in H1 2016, named the CALYPSO
study, at Bart's Hospital in London, to assess safety/tolerability
of savolitinib and durvalumab combination therapy as well as
preliminary efficacy of the savolitinib as a monotherapy or
combination therapy in several c-Met-driven kidney cancer patient
populations.
Savolitinib - Lung Cancer: Savolitinib's largest market opportunity. Four studies underway.
Study 5 - Enrolling - Phase IIb expansion NSCLC (second-line),
EGFR TKI refractory, savolitinib (600mg daily) in combination with
Tagrisso(R) (Global) - In June 2015, we published the TATTON Phase
I dose finding study at the American Society of Clinical Oncology
("ASCO") meeting, reporting a 55% objective response rate ("ORR")
and 100% disease control rate ("DCR") among Iressa(R) or Tarceva(R)
refractory T790M+/- patients, meaning that the patient's T790M
status was known. Since then we have continued to enroll patients
to confirm safety and efficacy and to further define the molecular
types that benefit from the combination therapy. We have now
initiated a global Phase IIb expansion study in second-line NSCLC,
for which AstraZeneca paid Chi-Med a $10 million milestone, aiming
to recruit 25 further c-Met gene amplified and T790M- patients. We
target to complete this Phase IIb expansion study by the end of
2016, and if ORR and duration of response are in line with what we
have seen to-date, we will consider moving directly to a pivotal
global Phase III study and seeking potential U.S. FDA Breakthrough
Therapy designation. In this second-line NSCLC population,
c-Met-driven disease exists in 15-20% of patients.
Study 6 - Enrolling - Phase II NSCLC (third-line), EGFR/T790M
TKI-refractory, savolitinib (600mg daily) in combination with
Tagrisso(R) (Global) - Our second study arm has begun enrollment
for a Phase II trial to evaluate the use of savolitinib in
combination with Tagrisso(R) in patients with c-Met gene
amplification who have progressed following treatment with
Tagrisso(R) (i.e. T790M+/c-Met+). Data presented in June 2016 at
ASCO (rociletinib) suggested that in this third-line EGFR/T790M
TKI-resistant NSCLC population about 18% of patients harbor c-Met
gene amplification.
Study 7 - Planned for H2 2016 - Phase II NSCLC (second-line),
EGFR TKI-refractory, savolitinib (600mg daily) in combination with
Iressa(R) (China) - We have completed a Phase Ib dose finding study
of savolitinib in combination with Iressa(R) in c-Met gene
amplified patients. We believe savolitinib in combination with
Iressa(R) could provide a lower-cost treatment option, as compared
to savolitinib in combination with Tagrisso(R) (Study 5 and Study
6), which could benefit uninsured, second-line NSCLC patients in
both developed and emerging markets, given recent patent expiry of
Iressa(R) .
Study 8 - Enrolling - Phase II c-Met-driven NSCLC (first-line)
savolitinib (600mg daily) monotherapy (China) - A Phase II study of
savolitinib in ongoing in first-line NSCLC and PSC patients,
focusing on two main patient populations: (1) the 3-4% of patients
with c-Met Exon-14 skipping; and (2) the 1-2% of patients with
c-Met gene amplification.
Savolitinib - Gastric Cancer: Four Phase Ib gastric cancer
clinical studies in China and a Phase Ib study, named the VIKTORY
study, being run at Samsung Medical Center in South Korea:
Study 9 - Enrolling - Phase Ib gastric cancer, savolitinib
monotherapy, patients with c-Met gene amplification (South
Korea/China) - Phase Ib studies of savolitinib are ongoing, and to
date we have seen promising preliminary clinical efficacy in the
roughly 10% of gastric cancer patients that harbor c-Met gene
amplification.
Study 10, Study 11 and Study 12 - Enrolling - Phase Ib studies
of savolitinib (600mg daily) monotherapy and in combination with
Taxotere(R) in c-Met over-expression gastric cancer (South
Korea/China) - Phase Ib dose finding studies are underway to assess
safety/tolerability of savolitinib and Taxotere(R) combination as
well as preliminary efficacy of the savolitinib monotherapy and
combination therapy in the approximately 40% of gastric cancer
patients harboring c-Met over-expression.
HMPL-523: HMPL-523 is a potential global first-in-class oral
inhibitor targeting Syk, a key protein involved in B-cell
signaling. Modulation of the B-cell signaling system has proven
significant potential for the treatment of certain chronic
autoimmune diseases, such as rheumatoid arthritis as well as
hematological cancers. We believe HMPL-523, as an oral drug
candidate, has important advantages over intravenous monoclonal
antibody immune modulators in rheumatoid arthritis in that small
molecule compounds clear the system faster, thereby reducing the
risk of infections from sustained suppression of the immune
system.
Study 20 - Complete - Phase I study (healthy volunteers)
(Australia) - In June 2014, we began a Phase I dose escalation
study among healthy individuals to ascertain the maximum tolerated
dose of HMPL-523. We successfully completed ten single dose
cohorts, from 5mg once daily through to 800mg once daily; and three
multiple dose cohorts, from 200mg once daily through 400mg once
daily for 14 days. We determined that the 400mg multiple dose is
well above our expected efficacious dose in humans. Consequently,
we have no intention to escalate the dose further in healthy
volunteers. The preliminary safety profile of HMPL-523 is in-line
with expectations. Off-target toxicities such as diarrhea and
hypertension, which led to the failure of first-generation Syk
inhibitor fostamatinib, were not observed with HMPL-523 in Phase I.
Furthermore, HMPL-523 demonstrated a dose-dependent suppression of
B-cell activation. We have submitted our U.S. immunology IND
application and engaged with the U.S. FDA around our plan for a
global Phase II study in rheumatoid arthritis; we are currently
preparing for submission of additional data to the U.S. FDA after
which we target to initiate the Phase II study in 2017.
Study 21 - Enrolling - Phase I study of HMPL-523 in
hematological cancer (second/third-line) (Australia/China) - In
January 2016, we initiated a Phase I dose escalation study of
HMPL-523 in Australia in patients with relapsed and/or refractory
B-cell non-Hodgkin's lymphoma or chronic lymphocytic leukemia for
whom there is no standard therapy. We are planning two stages for
this study, dose escalation and dose expansion. We have completed
the 100mg daily cohort and are now mid-way through the 200mg
cohort. In Q2 2016, we received clearance from the China FDA on our
hematological cancer IND application, meaning that, for the first
time, we were granted clearance to progress a drug candidate from
Phase I through Phase III in China without further formal
submissions being required. We intend to initiate a Phase I dose
escalation in B-cell non-Hodgkin's lymphoma or chronic lymphocytic
leukemia patients in China during H2 2016. In addition, we also
target to submit a U.S. hematological cancer IND application during
Q3 2016 and accelerate U.S. development. We believe that these
Australia, China and U.S. studies can rapidly provide
proof-of-concept on HMPL-523, consistent with the strong efficacy
of Gilead's Syk inhibitor entospletinib.
Fruquintinib (HMPL-013): Fruquintinib is a highly selective and
potent oral inhibitor of VEGFR 1/2/3 that we believe has the
potential to be a global best-in-class VEGFR inhibitor for many
types of solid tumors. Fruquintinib's unique kinase selectivity has
been shown to reduce off-target toxicity thereby allowing for full
VEGFR inhibition 24-hours a day, as well as possible use in
combination with other TKIs and chemotherapy in earlier lines of
treatment. We believe these are major points of differentiation
compared to other approved small molecule VEGFR inhibitors, such as
Sutent(R) (sunitinib), Nexavar(R) (sorafenib) and Stivarga(R)
(regorafenib). In partnership with Lilly, we are running pivotal
Phase III studies of fruquintinib in China in colorectal cancer and
NSCLC while also exploring fruquintinib combinations with
Taxotere(R) in gastric cancer and Iressa(R) in NSCLC.
Study 14 - Enrollment complete - Phase III study in colorectal
cancer (third-line or above), fruquintinib monotherapy (China) - In
December 2014, following positive Phase II results which were
published at the 2015 European Society for Medical Oncology
conference, we initiated the FRESCO study, which is a pivotal Phase
III study in patients with locally advanced or metastatic
colorectal cancer who have failed at least two prior systemic
chemotherapies. Patients are randomized at a 2:1 ratio to receive
either 5mg of fruquintinib orally once per day, on a 3 weeks on/1
week off cycle, plus best supportive care or placebo plus best
supportive care. The primary endpoint is overall survival, with
secondary endpoints including PFS, ORR, DCR and duration of
response. Enrollment was completed in April 2016. Once FRESCO hits
a predetermined number of overall survival events, currently
expected in Q1 2017, we will un-blind the study. Subject to a
positive outcome, we intend to submit fruquintinib's NDA to the
China FDA by mid-2017.
Study 15 - Enrolling - Phase III NSCLC third-line fruquintinib
monotherapy (China) - In December 2015, following positive Phase II
results, which will be presented in a scientific conference in late
2016, we initiated the FALUCA study, which is a pivotal Phase III
study in advanced non-squamous NSCLC patients in China who have
failed two prior systemic chemotherapies. Patients are randomized
at a 2:1 ratio to receive either 5mg of fruquintinib orally once
per day, on a 3 weeks on/1 week off cycle plus best supportive
care, or placebo plus best supportive care. The primary endpoint is
overall survival, with secondary endpoints including PFS, ORR, DCR
and duration of response. We expect to complete FALUCA enrollment
in early 2017 and reach overall survival endpoint maturity in late
2017.
Study 16 - Enrollment expanded - Phase Ib study of fruquintinib
in combination with Taxotere(R) in gastric cancer (second-line)
(China) - In early 2015, we began a Phase Ib dose finding study of
fruquintinib in combination with Taxotere(R) . We have now
completed the study and have established what we believe is a safe
and effective combination regimen, in which the combination is well
tolerated and the fruquintinib dose is expected to provide full
VEGFR inhibition 24-hours a day. This is an outcome that has not
been achieved before with a small molecule VEGFR TKI. We continue
to enroll patients in this Phase Ib, in order to expand the
data-set.
Sulfatinib (HMPL-012): Sulfatinib is an oral drug candidate that
selectively inhibits the tyrosine kinase activity associated with
VEGFR and FGFR1, a receptor which also plays a role in tumor
growth. Our published Phase I clinical data show that sulfatinib
has the highest ORR and PFS, albeit in a small base study, in NET
patients for a TKI reported to date. Sulfatinib's ORR of 38.1% and
18.3 month median PFS in the intent-to-treat population (n=21),
across a broad spectrum of NET sub-types, compares favorably to the
less than 10% ORR and 11.4 month median PFS for Sutent(R) and
Afinitor(R) (everolimus), the two approved single agent therapies
for pancreatic NET. Sulfatinib is the first oncology candidate that
we have taken through proof-of-concept in China and subsequently
started clinical development in the U.S. We retain all rights to
sulfatinib worldwide and are currently conducting five clinical
studies, and planning to initiate a sixth, a Phase II study in
biliary tract cancer in late 2016:
Study 17 - Enrollment complete - Phase II open-label study in
NET (first-line) of sulfatinib monotherapy (China) - In early 2015,
we began a Phase Ib study in China in broad-spectrum NET patients
(pancreatic, gastrointestinal tract, liver, lymph and lung, among
others) which was transitioned into an open-label, Phase II study
for which enrollment of 81 patients was completed in December 2015.
We expect to reach median PFS in the second half of 2016 and
present data at a scientific conference shortly thereafter.
Study 17.a. - Enrolling - Phase III pancreatic NET sulfatinib
monotherapy (China) - In March 2016, we initiated the SANET-p
study, which is a pivotal Phase III study in patients with low- or
intermediate-grade, advanced pancreatic NET. Patients are
randomized at a 2:1 ratio to receive either 300mg of sulfatinib
orally once per day, or placebo, on a 28-day treatment cycle. The
primary endpoint is PFS, with secondary endpoints including ORR,
DCR, time to response, duration of response, overall survival,
safety and tolerability. We expect to complete enrollment in H2
2017 and publish top-line results in 2018.
Study 17.b. - Enrolling - Phase III extra-pancreatic NET
sulfatinib monotherapy (China) - In December 2015, we initiated the
SANET-ep study, which is pivotal Phase III study in patients with
low or intermediate grade advanced extra-pancreatic NET. Patients
are randomized at a 2:1 ratio to receive either 300mg of sulfatinib
orally once per day, or placebo, on a 28-day treatment cycle. The
primary endpoint is PFS, with secondary endpoints including ORR,
DCR, time to response, duration of response, overall survival,
safety and tolerability. We expect to complete enrollment in H2
2017 and publish top-line results in 2018.
Study 18 - Enrolling - Phase I sulfatinib monotherapy in
advanced solid tumors (U.S.) - A Phase I study Caucasian cancer
patients began in the U.S. in November 2015. We are currently in
the 200mg cohort and expect to complete dose escalation in H2 2016.
Once the Phase II dose among Caucasian patients is established, we
intend to begin a U.S. Phase II study in broad-spectrum NET
patients in 2017.
Study 19 - Enrolling - Phase II study in recurrent/refractory
thyroid cancer patients (China) - In March 2016, we began a Phase
II study in patients with recurrent/refractory medullary or
differentiated thyroid cancer. We believe that sulfatinib's
VEGFR/FGFR1 inhibition profile has strong potential in this
second-line patient population, particularly in China, where there
are few safe and effective treatment options.
Epitinib (HMPL-813): Epitinib is a potent and highly selective
and potent oral EGFR inhibitor designed to optimize brain
penetration and has demonstrated brain penetration and efficacy in
pre-clinical studies. EGFR inhibitors have revolutionized the
treatment of NSCLC with EGFR activating mutations. However,
existing EGFR inhibitors such as Iressa(R) and Tarceva(R) cannot
penetrate the blood-brain barrier effectively, leaving the majority
of patients with brain metastasis without an effective targeted
therapy. We currently retain all rights to epitinib worldwide.
Study 22 - Enrolling - Phase Ib epitinib monotherapy in NSCLC
(first-line), EGFR-mutation positive with brain metastasis (China)
- We are conducting a Phase Ib proof-of-concept study of epitinib
to establish activity in EGFR-mutant NSCLC patients with tumors
metastasized to the brain. The preliminary clinical results have
been encouraging, showing clear efficacy in both the lung and
brain. We plan to present ongoing Phase Ib results at a scientific
conference in late 2016. In July 2016, we were granted China FDA
Phase II/III clinical trial application clearance thereby allowing
us, subject to Phase Ib data remaining positive, to initiate a
pivotal Phase II/III trial in early 2017.
Theliatinib (HMPL-309): Like epitinib, theliatinib is a novel
molecule EGFR inhibitor for the treatment of solid tumors. Our
hypothesis is that tumors with wild-type EGFR activation, for
instance, through gene amplification or protein over-expression,
are less sensitive to current EGFR TKIs, Iressa(R) and Tarceva(R) ,
due to sub-optimal binding affinity. Theliatinib has been designed
with strong affinity to the wild-type EGFR kinase and has been
shown to be five to ten times more potent than Tarceva(R) .
Consequently, we believe that theliatinib has a good chance to
benefit patients with esophageal and head and neck cancer,
tumor-types with a high incidence of wild-type EGFR activation. We
currently retain all rights to theliatinib worldwide.
Study 23 - Enrolling - Phase I study of theliatinib monotherapy
in wild-type EGFR NSCLC (China) - We are conducting an open-label
Phase I dose escalation study that has completed eight once-daily
dose cohorts. The maximum tolerated dose has not yet been reached
and dose escalation is continuing, however, we believe that the
drug exposures achieved in cohort eight is likely already
sufficient to provide clinical efficacy in a selected patient
population. When the Phase II dose is finally established,
currently expected by the end of 2016, we intend to commence
exploratory Phase Ib proof-of-concept studies in esophageal and
head and neck cancer.
HMPL-689: HMPL-689 is a novel, highly selective and potent small
molecule inhibitor targeting the isoform PI3K , a key component in
the B-cell receptor signaling pathway. We have designed HMPL-689
with superior PI3K isoform selectivity, in particular to not
inhibit PI3K (gamma), to minimize the risk of serious infection
caused by immune suppression. HMPL-689's strong potency,
particularly at the whole blood level, also allows for reduced
daily doses to minimize compound related toxicity, such as the high
level of liver toxicity observed with the first generation PI3K
inhibitor Zydelig(R) (idelalisib). HMPL-689's pharmacokinetic
properties have been found to be favorable with expected good oral
absorption, moderate tissue distribution and low clearance,
suitable for once daily dosing. We also expect HMPL-689 will have
low risk of drug accumulation and drug-to-drug interaction. Given
this, we believe that HMPL-689 has the potential to be a global
best-in-class PI3K agent.
Study 24 - Enrolling - Phase I study (healthy volunteers)
(Australia) - In April 2016, we began a Phase I dose escalation
study in healthy adult volunteers to evaluate HMPL-689's
pharmacokinetic and safety profile. We plan to transition this into
a Phase I in patients with hematologic malignancies in H1 2017.
HMPL-453: HMPL-453 is a novel, highly selective and potent small
molecule that targets FGFR 1/2/3. HMPL-453 exhibited strong
anti-tumor activity that correlated with target inhibition in tumor
models with abnormal FGFR gene alterations. We filed our China IND
application late in 2015 and await clearance.
HM004-6599: HMPL-004 is a proprietary botanical drug for the
treatment of inflammatory bowel diseases, which we are developing
through a joint venture with Nestlé. We are working with Nestlé to
prepare an IND application for HM004-6599, an enriched version of
HMPL-004, which we expect to submit in 2017.
COMMERCIAL PLATFORM
In the first half of 2016, sales of our Commercial Platform's
subsidiaries grew by 48% to $82.3 million (H1 2015: $55.6m), and
sales of our Commercial Platform's non-consolidated joint ventures,
SHPL and HBYS, grew by 9% to $249.6 million (H1 2015: $229.8m).
Consequently, consolidated net income attributable to Chi-Med from
our Commercial Platform increased by 12% to $22.1 million (H1 2015:
$19.8m).
Performance was solid, and we believe in-line with peer group
companies in our sub-sector of the China pharmaceutical industry,
despite the weakening of the RMB over the last year which reduced
both our top- and bottom-line growth rates, during the first half
of 2016, by -6% in U.S. dollar terms.
The Commercial Platform, which has been built over the past 16
years, is focused on two core business areas. The first area is our
Prescription Drugs business, a high margin/profit business operated
through our joint ventures SHPL and Hutchison Sinopharm, in which
we nominate management and run the day-to-day operations. Our
Prescription Drugs business is a platform that we plan to use to
launch our un-partnered drug candidates, such as sulfatinib and
epitinib, if approved. The second area is our Consumer Health
business, which is a profitable and cash flow generating business
selling primarily OTC pharmaceutical products through our
non-consolidated joint venture HBYS.
Prescription Drugs business:
In the first half of 2016, sales of our Prescription Drugs
subsidiaries grew by 49% to $67.6 million (H1 2015: $45.4m), and
sales of our non-consolidated Prescription Drugs joint venture
(SHPL) grew by 22% to $126.8 million (H1 2015: $103.9m).
Consequently, consolidated net income attributable to Chi-Med from
our Prescription Drugs business increased by 29% to $15.3 million
(H1 2015: $11.9m), representing 69% of our overall Commercial
Platform net income.
SHPL: Our own-brand, Prescription Drugs business, operated
through our non-consolidated joint venture SHPL, continues to
perform extremely well with the above 22% sales growth leading to
26% growth in net income after tax of $29.6 million (H1 2015:
$23.5m). Our shareholding in SHPL, therefore resulted in
consolidated net income attributable to Chi-Med during the first
half of 2016 of $14.8 million (H1 2015: $11.7m).
SXBX pill: SHPL's key product is its SXBX pill, an oral
vasodilator and pro-angiogenesis prescription therapy approved to
treat coronary artery disease, which includes stable/unstable
angina, myocardial infarction, and sudden cardiac death. There are
over 1 million deaths due to coronary artery disease per year in
China, with this number set to rise due to an aging population with
high levels of smoking (34% of adults), increasing levels of
obesity (28% of adults overweight) and hypertension (26% of
adults). Its SXBX pill is the third largest botanical prescription
drug in this indication in China, with a 12% national market share.
Sales of SXBX pill have grown more than twenty-fold since 2001,
including 16% in the first half of 2016 to $110.1 million (H1 2015:
$94.9m) as a result of continued geographical expansion of sales
coverage.
Its SXBX pill is protected by a formulation patent that expires
in 2029 and is one of less than two dozen proprietary prescription
drugs represented on China's National Essential Medicines List,
which means that all Chinese state-owned health care institutions
are required to carry the drug. SXBX pill is a low-cost drug, fully
reimbursed in all provinces in China, listed on China's Low Price
Drug List ("LPDL") with an average daily cost of RMB 3.3
(approximately $0.50). In the coming years, we anticipate continued
growth in sales of SXBX pill, in line with recent years given the
strength of its proposition, head-room to increase price under the
LPDL and the expected expansion of the coronary artery disease
market in China driven by an aging population and trends in diet
leading to increasing obesity.
The SHPL operation is large-scale in both the commercial and
manufacturing areas. The commercial team now has about 2,000
medical sales representatives which allows for the promotion and
scientific detailing of our prescription drug products not just in
hospitals in provincial capitals and medium-sized cities, but also
in the majority of county-level hospitals in China. SHPL is
transitioning to a new, Good Manufacturing Practice-certified
factory located 40 kilometers south of Shanghai, which holds 74
drug product manufacturing licenses and is operated by over 500
manufacturing staff. The move to this new higher capacity factory
will be completed in September 2016 thereby allowing SHPL to return
the land use rights of its old factory located 12 kilometers from
the center of Shanghai. As compensation for returning the old
factory's land use rights, the local government has agreed to pay
SHPL cash and subsidies totaling about $114 million. SHPL received
the first installment of $31.1 million in cash in December 2015,
and will now receive the second, about $70 million, installment of
this compensation in H2 2016 allowing the Chi-Med Group to record a
one-time gain of over $35 million in 2016. The final approximately
10% installment will be paid to SHPL in H1 2017 the Chi-Med Group
will likely receive an extraordinary dividend of about $40 million
from SHPL.
Hutchison Sinopharm: Our Prescription Drugs commercial services
business, which is operated through Hutchison Sinopharm, focuses on
providing logistics services to, and distributing and marketing
prescription drugs manufactured by, third-party pharmaceutical
companies in China. In the first half of 2016, Hutchison Sinopharm
made very good progress with sales up 49% to $67.6 million (H1
2015: $45.4m) as a result of full period consolidation of the
Seroquel(R) business versus just over two months in H1 2015. In
early 2015, we completed exclusive commercialization deals on
Seroquel(R) (AstraZeneca) and Concor(R) (Merck Serono) in China
which have progressed well in 2016. The deals are helping Hutchison
Sinopharm migrate towards being a higher margin, full-service,
third-party prescription drugs commercial services company in
China.
Seroquel(R) : Seroquel(R) (quetiapine tablets) is an
antipsychotic therapy approved for bi-polar disorder and
schizophrenia, conditions that are underdiagnosed in China.
Seroquel(R) holds an approximately 5% market share in China's
anti-psychotic prescription drug market, and 46% of China's generic
quetiapine market, primarily as a result of being the first-mover
and original patent holder on quetiapine. Seroquel(R) is the only
brand in China to have an XR (extended release) formulation which
provides it with a competitive advantage over quetiapine generics.
In Q2 2015, we became the exclusive first-tier distributor to
distribute and market AstraZeneca's Seroquel(R) tablets in China,
and we subsequently built a team of over 120 dedicated medical sale
representatives, and grew sales in H1 2016 to $17.2 million (H1
2015: $4.5m). We target double-digit growth in sales of Seroquel(R)
over the next several years due to the XR formulation and expected
expansion in diagnosis and treatment of antipsychotic diseases in
China.
Concor(R) : Concor(R) (Bisoprolol tablets) is a cardiac
beta1-receptor blocker, relieving hypertension and reducing high
blood pressure. Concor(R) is the number two beta-blocker in China
with an approximate 19% national market share. In 2015, we took
over commercial operations in three pilot territories in China with
the intention to create synergy with our existing cardiovascular
medical sales team by detailing Concor(R) alongside the SXBX pill
on a fee-for-service basis. Sales of Concor(R) in territories that
we control grew 44% in the first half of 2016 resulting in service
fees of $0.7 million (H1 2015: $0.4m). We expect strong growth in
these fees will be driven by base cardiovascular market expansion
as well as potential territorial expansion of Hutchison Sinopharm's
activities.
Consumer Health business:
In the first half of 2016, sales of our Consumer Health
subsidiaries increased by 44% to $14.6 million (H1 2015: $10.1m)
and sales of our non-consolidated Consumer Health joint venture
(HBYS) decreased by 2% to $122.7 million (H1 2015: $125.9m).
Consequently, consolidated net income attributable to Chi-Med from
our Consumer Health business decreased by 14% to $6.8 million (H1
2015: $7.9m), representing 31% of our overall Commercial Platform
net income attributable to Chi-Med.
HBYS: Our OTC business operated through our non-consolidated
joint venture HBYS focuses on the manufacture, marketing and
distribution of proprietary OTC pharmaceutical products and is an
important source of cash for Chi-Med. HBYS sales have grown over
five-fold since its establishment in 2005 and, during this period,
HBYS has adopted a low-capex strategy of expanding mainly through
the use of contract manufacturers. However, the China FDA's policy
in recent years has made contract manufacturing more difficult, so
HBYS has recently moved to expand in-house production capacity
three-fold through the establishment of a new factory in Bozhou.
The Bozhou factory will commence operations in early 2017; however,
in the meantime, supply constraints affected HBYS results during
the first half of 2016 with its sales, as shown above, decreasing
by 2% and leading to an 11% decline in net income after tax of
$17.1 million (H1 2015: $19.2m). Our shareholding in HBYS,
therefore resulted in consolidated net income attributable to
Chi-Med during the first half of 2016 of $6.9 million (H1 2015:
$7.7m).
Fu Fang Dan Shen ("FFDS") tablets and Banlangen granules: FFDS
tablets (angina) and Banlangen granules (anti-viral cold/flu) are
generic OTC drugs with leadership national market share in China of
32% and 51%, respectively. Sales in the first half of 2016 of these
two products were $69.9 million (H1 2015: $73.3m) down 5% due to
tightness in contract manufacturer supply relating to the move to
Bozhou. While sales in any given year will vary based on the
severity of climate/flu season, we anticipate that sales of these
key OTC drugs will benefit from the underlying general market
expansion and the low risk of price erosion due to our focus on the
retail pharmacy channel.
HBYS is well established in the OTC industry in China. Its Bai
Yun Shan brand (literally meaning "White Cloud Mountain," a famous
scenic spot in Guangzhou) is a household name, established over the
past 40 years, and known by the majority of Chinese consumers. In
addition to its over 730 manufacturing staff and 147 drug product
licenses, HBYS has a commercial team of over 1,200 sales staff that
fully cover the retail pharmacy channel on a national level in
China. We believe that HBYS's move to build the Bozhou factory,
expanding capacity and decreasing reliance on contract
manufacturers, will position us for long-term and sustainable
growth.
HBYS property update - HBYS's vacant Plot 2 (26,700 sqm.) in
Guangzhou city, China, has now been listed for sale as part of the
Guangzhou municipal government's redevelopment scheme plan for
2016. The public auction of this land will likely occur in 2017.
Based on precedent land transactions in the vicinity, we expect the
auction value for Plot 2 to be well over $100 million of which 40%
would be paid to HBYS as compensation for return of the land use
rights. In addition, the move away from HBYS's larger, Plot 1
(59,400 sqm.) will be contingent on how the Bozhou factory
develops, but, if auctioned, Plot 1 could bring HBYS compensation
per sqm. comparable to Plot 2.
Commercial Platform Dividends: The increasing profits of the
Commercial Platform continue to pass through to the Chi-Med Group
through dividend payments from our non-consolidated joint ventures,
SHPL and HBYS. Dividends of $15.9 million (H1 2015: $6.4m) were
paid from these joint ventures to the Chi-Med Group level during
the first half of 2016. Net income in SHPL and HBYS have totaled
$335 million since 2005, of which a total of $175 million has been
paid in dividends to Chi-Med and its partners, with the balance
retained primarily to fund factory upgrades, expansion and
relocation with minimal bank borrowing. In addition, we expect
further dividends in the near term, resulting from property
compensation payments to SHPL and HBYS.
Christian Hogg
Chief Executive Officer, August 1, 2016
Hutchison China MediTech Limited
Condensed Consolidated Balance Sheets
(In US$'000)
December
June 30, 31,
Note 2016 2015
------------ ------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents 3 75,952 31,941
Short-term investments 3 46,587 -
Accounts receivable - third
parties 35,851 33,346
Accounts receivable - related
parties 13 2,678 1,869
Other receivables, prepayments
and deposits 2,522 3,258
Amounts due from related parties 13 1,045 9,293
Inventories 4 7,923 9,555
Deferred tax assets 215 250
Total current assets 172,773 89,512
Property, plant and equipment,
net 5 8,773 8,507
Leasehold land 1,291 1,343
Goodwill 3,282 3,332
Other intangible asset 523 571
Long-term prepayment 1,964 2,132
Deferred costs for initial
public offering in the United
States - 4,446
Investments in equity investees 6 134,237 119,756
Total assets 322,843 229,599
============ ==================
Liabilities and shareholders'
equity
Current liabilities
Accounts payable - third parties 24,147 20,565
Accounts payable - a related
party 13 4,547 3,521
Other payables, accruals and
advance receipts 23,679 26,177
Deferred revenue 906 1,171
Amounts due to related parties 13 8,551 6,243
Short-term bank borrowings 7 15,077 23,077
Deferred tax liabilities 2,400 308
Total current liabilities 79,307 81,062
Deferred tax liabilities 1,571 3,415
Long-term bank borrowings 7 26,799 26,768
Deferred revenue 2,903 3,498
Deferred income 2,578 2,132
Other non-current liabilities 10,519 10,447
------------ ------------------
Total liabilities 123,677 127,322
Commitments and contingencies
(note 8)
Company's shareholders' equity
Ordinary share; US$1.00 par
value; 75,000,000 shares authorized;
60,649,342 and 56,533,118
shares issued at June 30,
2016 and December 31, 2015 9 60,649 56,533
Additional paid-in capital 206,985 113,848
Accumulated losses (91,510) (92,040)
Accumulated other comprehensive
income 2,327 5,015
Total Company's shareholders'
equity 178,451 83,356
Non-controlling interests 20,715 18,921
------------ ------------------
Total shareholders' equity 199,166 102,277
------------ ------------------
Total liabilities and shareholders'
equity 322,843 229,599
============ ==================
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Operations
(Unaudited, in US$'000, except share and per share data)
Six Months Ended
June 30,
-------------------------------
Note 2016 2015
----------- ------------------
Revenues
Sales of goods - third parties 76,861 50,786
Sales of goods - related parties 13 5,398 4,772
Revenue from license and collaboration
agreements - third parties 11 18,088 23,248
Revenue from research and development
services - third parties 355 1,317
Revenue from research and development
services - related parties 13 3,815 2,362
----------- ------------------
Total revenues 104,517 82,485
----------- ------------------
Operating expenses
Costs of sales of goods - third
parties (66,445) (46,448)
Costs of sales of goods - related
parties (4,041) (3,494)
Research and development expenses (31,184) (21,260)
Selling expenses (8,846) (3,799)
Administrative expenses (9,958) (7,516)
----------- ------------------
Total operating expense (120,474) (82,517)
----------- ------------------
Loss from operations (15,957) (32)
----------- ------------------
Other income/(expense)
Interest income 189 318
Other income 138 278
Interest expenses (811) (707)
Other expenses (329) -
----------- ------------------
Total other expense (813) (111)
----------- ------------------
Loss before income taxes and
equity in earnings of equity
investees (16,770) (143)
Income tax expense 14 (1,687) (1,161)
Equity in earnings of equity
investees, net of tax 21,251 19,368
----------- ------------------
Net income 2,794 18,064
Less: Net income attributable
to non-controlling interests (2,257) (2,115)
----------- ------------------
Net income attributable to the
Company 537 15,949
----------- ------------------
Accretion on redeemable non-controlling
interests - (42,015)
----------- ------------------
Net income/(loss) attributable
to ordinary shareholders of
the Company 537 (26,066)
=========== ==================
Earnings/(losses) per share
attributable to ordinary shareholders
of the Company - basic (US$
per share) 15 0.01 (0.49)
Earnings/(losses) per share
attributable to ordinary shareholders
of the Company - diluted (US$
per share) 15 0.01 (0.49)
Number of shares used in per
share calculation - basic 15 58,822,425 53,172,325
Number of shares used in per
share calculation - diluted 15 59,126,085 53,172,325
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Comprehensive
(Loss)/Income
(Unaudited, in US$'000)
Six Months Ended
June 30,
---------------------------------------
2016 2015
------------------- ------------------
Net income 2,794 18,064
Other comprehensive (loss)/income:
Foreign currency translation
(loss)/income (3,151) 5
------------------- ------------------
Total comprehensive (loss)/income (357) 18,069
Less: Comprehensive income attributable
to non-controlling interests (1,794) (2,122)
------------------- ------------------
Total comprehensive (loss)/income
attributable to ordinary shareholders
of the Company (2,151) 15,947
=================== ==================
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Changes in Shareholders'
Equity
(Unaudited, in US$'000, except share data in '000)
Accumulated Total
Additional Other Company's Non-
Ordinary Shares Paid-in Accumulated Comprehensive Shareholders' controlling Total
Number Amount Capital Losses Income Equity Interests Equity
As of January
1, 2015 53,076 53,076 76,256 (100,051) 9,870 39,151 17,764 56,915
Net income - - - 15,949 - 15,949 2,115 18,064
Issuance
of ordinary
shares
in relation
to exercise
of options 224 224 1,024 - - 1,248 - 1,248
Share-based
compensation:
share options - - 106 - - 106 - 106
Transfer
between
reserve - - 24 (24) - - - -
Foreign
currency
translation
adjustments - - - - (2) (2) 7 5
Dilution
of interests
in a subsidiary
in relation
to exercise
of options
of a subsidiary - - - 2 - 2 - 2
Accretion
to redemption
value of
redeemable
non-controlling
interests - - (42,015) - - (42,015) - (42,015)
As of June
30, 2015 53,300 53,300 35,395 (84,124) 9,868 14,439 19,886 34,325
======== ====== ================= =========== ================== ============== ============ =========
As of January
1, 2016 56,533 56,533 113,848 (92,040) 5,015 83,356 18,921 102,277
Net income - - - 537 - 537 2,257 2,794
New ordinary
shares
issued 4,080 4,080 106,080 - - 110,160 - 110,160
Issuance
of ordinary
shares
in relation
to exercise
of options 36 36 109 - - 145 - 145
Issuance
costs - - (14,227) - - (14,227) - (14,227)
Share-based
compensation:
Share options - - 1,088 - - 1,088 - 1,088
Long-term
incentive
plan - - 684 - - 684 - 684
-------- ------ ----------------- ----------- ------------------ -------------- ------------ ---------
- - 1,772 - - 1,772 - 1,772
-------- ------ ----------------- ----------- ------------------ -------------- ------------ ---------
Transfer
between
reserve - - 7 (7) - - - -
Foreign
currency
translation
adjustments - - - - (2,688) (2,688) (463) (3,151)
Long-term
incentive
plan: treasury
shares
held by
Trustee - - (604) - - (604) - (604)
As of June
30, 2016 60,649 60,649 206,985 (91,510) 2,327 178,451 20,715 199,166
======== ====== ================= =========== ================== ============= =========== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Cash Flows
(Unaudited, in US$'000)
Six Months Ended
June 30,
--------------------------------------
2016 2015
------------------ ------------------
Operating activities
Net income 2,794 18,064
Adjustments to reconcile net
income to net cash generated
from operating activities
Amortisation of finance costs 31 31
Depreciation and amortization 1,133 896
Loss on retirement of property
plant and equipment 5 -
Inventories written off - 9
Decrease in provision for excess
and obsolete inventories due
to sales of inventories (20) (6)
Allowance for doubtful accounts 55 51
Share-based compensation expense
- share options 1,160 275
Share-based compensation expense
- long-term incentive plan 786 -
Equity in earnings of equity
investees (21,251) (19,368)
Dividend received from equity
investees 15,917 6,410
Unrealized currency translation
losses/(gains) 791 (87)
Income taxes 76 746
Changes in operating assets
and liabilities
Accounts receivable - third
parties (2,560) (8,150)
Accounts receivable - related
parties (809) (1,071)
Other receivables, prepayments
and deposits 736 208
Amounts due from related parties 1,248 (1,284)
Inventories 1,652 (2,607)
Long-term prepayment 168 (2,404)
Accounts payable - third parties 3,582 466
Accounts payable - related parties 1,026 3,108
Other payables, accruals and
advanced receipts 641 326
Deferred revenue (860) (721)
Deferred income 446 2,404
Amounts due to related parties 2,308 3,147
Net cash generated from operating
activities 9,055 443
------------------ ------------------
Investing activities
Purchases of property, plant
and equipment (1,570) (1,446)
Deposit (in)/out short-term
investments (46,587) 12,179
Investment in an equity investee (5,000) -
------------------ ------------------
Net cash (used in)/generated
from investing activities (53,157) 10,733
------------------ ------------------
Financing activities
Proceeds from issuance of ordinary
shares 110,305 1,248
Proceeds from exercise of share
options of a subsidiary - 2
Payment of issuance costs (12,721) -
Purchase of treasury shares (604) -
Proceeds from bank borrowings 5,128 -
Repayment of bank borrowings (13,128) (2,564)
------------------ ------------------
Net cash generated from/(used
in) financing activities 88,980 (1,314)
------------------ ------------------
Net increase in cash and cash
equivalents 44,878 9,862
Effect of exchange rate changes
on cash and cash equivalents (867) 22
------------------ ------------------
44,011 9,884
Cash and cash equivalents
Cash and cash equivalents at
beginning of period 31,941 38,946
------------------ ------------------
Cash and cash equivalents at
end of period 75,952 48,830
================== ==================
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial
Statements
1. Organization and Nature of Business
Hutchison China MediTech Limited (the "Company") and its
subsidiaries (together the "Group") are principally engaged in
researching, developing, manufacturing and selling pharmaceuticals
and health-related consumer products. The Group and its equity
investees have research and development facilities and
manufacturing plants in Shanghai and Guangzhou in the People's
Republic of China (the "PRC") and sell mainly in the PRC and Hong
Kong.
On March 17, 2016, the Company's American Depositary Shares
("ADS"), each representing one-half of one ordinary share,
commenced trading on the NASDAQ. Concurrently, the Company issued
3,750,000 ordinary shares in the form of 7,500,000 ADS for gross
proceeds of US$101,250,000. On April 13, 2016, the Company issued
an additional 330,000 ordinary shares in the form of 660,000 ADS
for gross proceeds of US$8,910,000. Issuance costs totalled
US$14,227,000, of which US$1,321,000 and US$12,721,000 was paid in
the year ended December 31, 2015 and the six months ended June 30,
2016 respectively, with US$185,000 accrued in other payables,
accruals and advanced receipts as of June 30, 2016. The Company's
ordinary shares continue to be listed on the AIM regulated by the
London Stock Exchange.
Liquidity
The Group regularly monitors current and expected liquidity
requirements to ensure that it maintains sufficient cash balances
and adequate credit facilities to meet its liquidity requirements
in the short and long term. As of June 30, 2016, the Group had cash
and cash equivalents of US$75,952,000, short-term investments of
US$46,587,000 and unutilized bank borrowing facilities of
US$74,923,000. Short-term investments are primarily comprised of
term deposits over 3 months. The Group generated positive cash
flows from operations of US$9,055,000 and US$443,000 for the six
months ended June 30, 2016 and 2015 respectively, including
dividends received from equity investees of US$15,917,000 and
US$6,410,000 respectively. The Group's net income attributable to
the Company was US$537,000 and US$15,949,000 for the six months
ended June 30, 2016 and 2015 respectively, and as of June 30, 2016,
the Group had accumulated losses of US$91,510,000.
Based on the Group's operating plan, existing cash and cash
equivalents and short-term investments are considered to be
sufficient to meet the cash requirements to fund planned operations
and other commitments for at least the next twelve months (the
look-forward period used). The Group's operating plan includes the
continued receipt of dividends from certain of its equity investees
but there can be no assurances that these entities will continue to
declare and pay dividends to their shareholders.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
("U.S. GAAP") for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements.
The unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the annual audited
consolidated financial statements except for the adoption of
Accounting Standards Update ("ASU") 2015-03 as described below. In
the opinion of management, all adjustments, consisting of normal
recurring adjustments necessary for the fair statement of results
for the periods presented, have been included. The results of
operations of any interim period are not necessarily indicative of
the results of operations for the full year or any other interim
period.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
2. Summary of Significant Accounting Policies (Continued)
Basis of Presentation (Continued)
The unaudited condensed consolidated financial statements and
related disclosures have been prepared with the presumption that
users of the unaudited interim condensed consolidated financial
statements have read or have access to the audited consolidated
financial statements for the preceding fiscal year. The condensed
consolidated balance sheet at December 31, 2015 has been derived
from the audited financial statements at that date as adjusted by
the effect of the retrospective application of ASU 2015-03 as
described below but does not include all the information and
footnotes required by U.S. GAAP. Accordingly, these unaudited
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 2015.
The Group has adopted ASU 2015-03, Interest-Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs on January 1, 2016. This guidance requires debt
issuance costs to be presented in the balance sheet as a direct
deduction from the carrying value of the associated debt liability.
The Group has applied the guidance retrospectively; accordingly,
the condensed consolidated balance sheet as of December 31, 2015
has been adjusted by a reclassification from other receivables,
prepayments and deposits to long-term bank borrowings for
US$155,000.
The preparation of condensed consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Estimates are
used when accounting for amounts recorded in connection with
acquisitions, including initial fair value determinations of assets
and liabilities and other intangible assets as well as subsequent
fair value measurements. Additionally, estimates are used in
determining items such as useful lives of property, plant and
equipment, write-down of inventories, allowance for doubtful
accounts, share-based compensation, impairments of long-lived
assets, impairment of other intangible asset and goodwill, taxes on
income, tax valuation allowances and revenues from research and
development projects. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board
("FASB") issued ASU 2016-02, Leases (Topic 842). The core principle
of Topic 842 is that a lessee should recognize the assets and
liabilities that arise from leases. A lessee should recognize in
the balance sheet a liability to make lease payments (the lease
liability) and a right-of-use asset representing its right to use
the underlying asset for the lease term. For leases with a term of
12 months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognise lease
assets and lease liabilities. If a lessee makes this election, it
should recognize lease expense for such leases generally on a
straight-line basis over the lease term. ASU 2016-02 is effective
for fiscal years and interim periods within those years beginning
after December 15, 2018. Early adoption is permitted. The Group is
currently evaluating the method of adoption and the impact ASU
2016-02 will have on the Group's consolidated balance sheets,
results of operations, cash flows and associated disclosures.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
2. Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
In March 2016, the FASB issued ASU 2016-08, Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net). ASU 2016-08
clarifies the implementation guidance on principal versus agent
considerations. It includes indicators to assist an entity in
determining whether it controls a specified good or service before
it is transferred to the customer. ASU 2016-08 is effective for
fiscal years and interim periods within those years beginning after
December 15, 2017, and early adoption is permitted but not earlier
than December 15, 2016. The Group is currently evaluating the
method of adoption and the impact ASU 2016-08 will have on the
Group's consolidated balance sheets, results of operations, cash
flows and associated disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. ASU 2016-09 involves several aspects of the
accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash flows.
ASU 2016-09 is effective for fiscal years and interim periods
within those years beginning after December 15, 2016. The Group is
currently evaluating the method of adoption and the impact ASU
2016-09 will have on the Group's consolidated balance sheets,
results of operations, cash flows and associated disclosures.
In April 2016, the FASB issued ASU 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing. ASU 2016-10 clarifies the two aspects of
Topic 606: identifying performance obligations and the licensing
implementation guidance. ASU 2016-10 along with ASU 2014-09 are
effective for fiscal years and interim periods within those years
beginning after December 15, 2017, and early adoption is permitted
but not earlier than December 15, 2016. The Group is currently
evaluating the method of adoption and the impact ASU 2016-10 and
ASU 2014-09 will have on the Group's consolidated balance sheets,
results of operations, cash flows and associated disclosures.
Other amendments that have been issued by the FASB or other
standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the
Group's consolidated financial statements upon adoption.
3. Fair Value Disclosures
The following table presents the Group's financial instruments
by level within the fair value hierarchy:
Fair Value Measurement Using
-----------------------------------
(in US$'000) Level Level Level
1 2 3 Total
-------- ------- ------- -------
As of June 30,
2016
Cash and cash
equivalents 75,952 - - 75,952
Short-term investments 46,587 - - 46,587
======== ======= ======= =======
As of December
31, 2015
Cash and cash
equivalents 31,941 - - 31,941
======== ======= ======= =======
Accounts receivable, other receivables, amounts due from related
parties, accounts payable and amounts due to related parties are
carried at cost, which approximates fair value due to the
short-term nature of these financial instruments and are therefore,
excluded from the above table. The carrying values of bank
borrowings also approximate their fair values.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
4. Inventories
Inventories consisted of the following:
December
June 30, 31,
2016 2015
--------- ---------------
(in US$'000)
Raw materials 443 753
Finished goods 7,480 8,802
--------- ---------------
7,923 9,555
========= ===============
Movements on the provision for excess and obsolete inventories
are as follows:
2016 2015
------- ------
(in US$'000)
As at January 1 25 34
Decrease due to sale of inventories (20) (6)
Exchange difference (1) -
As at June 30 4 28
======= ======
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
December
June 30, 31,
2016 2015
----------------- -----------------
(in US$'000)
Cost
Buildings 2,332 2,392
Leasehold improvements 6,162 5,989
Plant and equipment 86 88
Furniture and fixtures, other
equipment and motor vehicles 13,814 12,806
Construction in progress 406 567
----------------- -----------------
Total Cost 22,800 21,842
Less: Accumulated depreciation 14,027 13,335
----------------- -----------------
8,773 8,507
================= =================
The movements in accumulated depreciation are as follows:
2016 2015
--------------------- -------
(in US$'000)
As at January 1 13,335 12,501
Exchange differences (341) 2
Depreciation 1,082 841
Disposals (49) (3)
As at June 30 14,027 13,341
===================== =======
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
6. Investments in Equity Investees
Investments in equity investees comprised the following:
December
June 30, 31,
2016 2015
--------- ------------------
(in US$'000)
Hutchison Whampoa Guangzhou
Baiyunshan Chinese Medicine
Company Limited ("HBYS") 64,732 60,762
Shanghai Hutchison Pharmaceuticals
Limited ("SHPL") 50,324 49,709
Nutrition Science Partners
Limited ("NSPL") 18,954 9,046
Others 227 239
--------- ------------------
134,237 119,756
========= ==================
Summarized financial information for the significant equity
investees HBYS, SHPL and NSPL are as follows:
(i) Summarized balance sheets
Innovation
Commercial Platform Platform
---------------------------------------- -----------------
Prescription
Consumer Health Drugs Drug R&D
HBYS SHPL NSPL
------------------ -------------------- -----------------
June December June December June December
30, 31, 30, 31, 30, 31,
2016 2015 2016 2015 2016 2015
-------- -------- --------- --------- ------- --------
(in US$'000)
Current assets 138,394 114,383 127,366 129,456 9,117 3,034
Non-current
assets 94,473 88,263 102,026 95,513 30,000 30,000
Current liabilities (77,688) (61,467) (127,746) (124,617) (1,208) (14,941)
Non-current
liabilities (18,662) (16,116) (6,999) (7,089) - -
-------- -------- --------- --------- ------- --------
Net assets 136,517 125,063 94,647 93,263 37,909 18,093
Non-controlling
interests (7,054) (3,540) - - - -
-------- -------- --------- --------- ------- --------
129,463 121,523 94,647 93,263 37,909 18,093
======== ======== ========= ========= ======= ========
(ii) Summarized statements of operations
Innovation
Commercial Platform Platform
---------------------------------- ----------------------------------
Consumer Prescription
Health Drugs Drug R&D
NSPL (note
HBYS SHPL (a))
---------------- ---------------- ----------------------------------
June June June June June June
30, 30, 30, 30, 30, 30,
2016 2015 2016 2015 2016 2015
------- ------- ------- ------- ---------------- ----------------
(in US$'000)
Revenue 122,746 125,878 126,846 103,934 - -
Gross profit 54,873 57,424 90,743 74,574 - -
Depreciation
and amortization (1,506) (1,818) (541) (1,437) - -
Interest
income 124 379 385 128 - -
Finance cost (87) (95) - - - -
Income/(loss)
before taxes 20,494 23,054 35,482 27,741 (4,184) (3,974)
Income tax
expense (3,320) (3,760) (5,925) (4,251) - -
Non-controlling
interests (37) (67) - - - -
Net income/(loss)
attributable
to the company 17,137 19,227 29,557 23,490 (4,184) (3,974)
======= ======= ======= ======= ================ ================
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
6. Investments in Equity Investees (Continued)
(ii) Summarized statements of operations (Continued)
Notes:
(a) NSPL only incurs research and development expenses for the
six months ended June 30, 2016 and 2015.
(b) The net loss for other individual immaterial equity
investees for the six months ended June 30, 2016 and 2015 is
approximately US$8,000 and US$7,000 respectively.
(iii) Reconciliation of summarized financial information
Reconciliation of the summarized financial information presented
to the carrying amount of investments in equity investees is as
follows:
Innovation
Commercial Platform Platform
----------------------------------- ----------------
Consumer Prescription
Health Drugs Drug R&D
HBYS SHPL NSPL
---------------- ----------------- ----------------
2016 2015 2016 2015 2016 2015
------- ------- -------- ------- ------- -------
(in US$'000)
Opening
net assets
at January
1 125,063 115,308 93,263 71,906 18,093 25,645
Net income/(loss)
attributable
to the company 17,137 19,227 29,557 23,490 (4,184) (3,974)
Investments - - - - 10,000 -
Capitalization
of loans - - - - 14,000 -
Dividend
declared (6,000) (6,410) (25,833) (6,410) - -
Other comprehensive
income and
non-controlling
interests 317 117 (2,340) 85 - -
------- ------- -------- ------- ------- -------
Closing
net assets
at June
30 136,517 128,242 94,647 89,071 37,909 21,671
------- ------- -------- ------- ------- -------
Group's
share of
net assets 68,259 64,121 47,324 44,536 18,954 10,835
Goodwill - - 3,000 3,204 - -
Non-controlling
interests (3,527) (1,933) - - - -
------- ------- -------- ------- ------- -------
Carrying
value 64,732 62,188 50,324 47,740 18,954 10,835
======= ======= ======== ======= ======= =======
7. Bank Borrowings
In February 2016, the Group through its subsidiary, entered into
a facility agreement with banks for the provision of unsecured
credit facilities in the aggregate amount of HK$468.0 million
(equivalent to US$60.0 million). These credit facilities include
(i) a HK$156.0 million (equivalent to US$20.0 million) term loan
facility with a term of 18 months and an annual interest rate of
1.35% over HIBOR, and (ii) a HK$312.0 million (equivalent to
US$40.0 million) revolving loan facility with a term of 12 months
and an annual interest rate of 1.30% over HIBOR. These credit
facilities are guaranteed by the Company and include certain
financial covenant requirements. No amount has been drawn from this
facility as of June 30, 2016.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
7. Bank Borrowings (Continued)
The Group's bank borrowings are repayable as follows:
December
June 30, 31,
2016 2015
------------------ ------------------
(in US$'000)
Within 1 year 15,077 23,077
Between 1 and 2 years 26,799 -
Between 2 and 3 years - 26,768
41,876 49,845
================== ==================
8. Commitments and Contingencies
(i) Lease commitments
The Group leases various factories and offices under
non-cancellable operating lease agreements. Future aggregate
minimum payments under non-cancellable operating leases as of the
date indicated are as follows:
December
June 30, 31,
2016 2015
----------------- -----------------
(in US$'000)
Not later than one year 1,045 1,274
Between 1 to 2 years 318 519
Between 2 to 3 years 177 134
Between 3 to 4 years 119 129
Between 4 to 5 years 119 129
Later than five years 109 183
Total minimum lease payments 1,887 2,368
================= =================
(ii) Capital commitments
The Group had the following capital commitments:
December
June 30, 31,
2016 2015
--------- ---------
(in US$'000)
Property, plant and equipment
Contracted but not provided
for 499 593
========= =========
In addition, the Group has also undertaken to provide the
necessary additional funds for NSPL to finance its ongoing
operations.
9. Ordinary Share
The Company is authorized to issue 75,000,000 ordinary shares.
On March 17, 2016 and April 13, 2016, the Company issued 3,750,000
and 330,000 ordinary shares, respectively in the form of ADS in a
public offering on the NASDAQ.
A summary of ordinary shares transactions (in thousands) is as
follows:
2016 2015
------- -------
Balance as at January 1 56,533 53,076
Issuances in relation to exercise
of options 36 224
New ordinary shares issued 4,080 -
------- -------
Balance as at June 30 60,649 53,300
======= =======
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
10. Share-based Compensation
(i) Share-based Compensation of the Company
The Company conditionally adopted a share option scheme on June
4, 2005 (as amended on March 21, 2007) and another share option
scheme on April 24, 2015 (collectively the "HCML Share Option
Schemes"). Pursuant to the HCML Share Option Schemes, the Board of
Directors of the Company may, at its discretion, offer any
employees and directors (including Executive and Non-executive
Directors but excluding Independent Non-executive Directors) of the
Company, holding companies of the Company and any of their
subsidiaries or affiliates, and subsidiaries or affiliates of the
Company share options to subscribe for shares of the Company. The
aggregate number of shares issuable under the HCML Share Option
Schemes is 3,560,606 ordinary shares.
Share options granted are generally subject to a three-year or
four-year vesting schedule, depending on the nature and the purpose
of the grant. Share options subject to three-year vesting schedule,
in general, vest 33.3% upon the first anniversary of the vesting
commencement date as defined in the grant letter, and 33.3% every
subsequent year. Share options subject to four-year vesting
schedule, in general, vest 25% upon the first anniversary of the
vesting commencement date as defined in the grant letter, and 25%
every subsequent year. No outstanding share options will be
exercisable or subject to vesting after the expiry of a maximum of
eight or ten years from the date of grant.
A summary of the Company's share option activity and related
information is as follows:
Weighted-average Weighted-average
exercise remaining Aggregate
Number price contractual intrinsic
of share in GBP life value
options per share (years) (in GBP'000)
---------- ----------------- ----------------- --------------
Outstanding
at January
1, 2015 684,403 4.67
Granted - -
Exercised (242,038) 3.77
Lapsed - -
Outstanding
at December
31, 2015 442,365 5.16 6.53 10,061
Granted 693,686 19.70
Exercised (36,224) 2.77
Lapsed (3,750) 6.10
Outstanding
at
June 30,
2016 1,096,077 14.44 7.13 5,528
Vested and
expected
to vest at
December
31, 2015 333,393 4.85 6.05 7,685
Vested and
exercisable
at December
31, 2015 291,015 4.67 5.77 6,762
Vested and
expected
to vest at
June 30,
2016 1,083,703 14.43 7.12 5,475
Vested and
exercisable
at June 30,
2016 601,635 13.45 6.80 3,609
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
10. Share-based Compensation (Continued)
(i) Share-based Compensation of the Company (Continued)
The Company uses the Binomial model to estimate the fair value
of share option awards using various assumptions that require
management to apply judgment and make estimates, including:
Volatility
The Company calculated its expected volatility with reference to
the historical volatility prior to the issuances of share
options.
Risk-free Rate
The risk-free interest rates used in the Binomial model are with
reference to the sovereign yield of the United Kingdom because the
Company's shares are currently listed on AIM and denominated in
pounds sterling (GBP).
Dividends
The Company has not declared or paid any dividends and does not
currently expect to do so in the foreseeable future, and therefore
uses an expected dividend yield of zero in the Binomial model.
In determining the fair value of share options granted, the
following assumptions were used in the Binomial model for awards
granted in the periods indicated:
Effective date of grant
of share options
--------------------------------
June 24, December June 15,
20,
2011 2013 2016
Value of each share GBP1.841 GBP3.154 GBP8.830
option
Significant inputs into the
valuation model:
Exercise price GBP4.405 GBP6.100 GBP19.700
Share price at effective GBP4.325 GBP6.100 GBP19.700
date of grant
Expected volatility 46.6% 36.0% 37.1%
Risk-free interest
rate 3.130% 3.160% 0.690%
Contractual life 10 years 10 years 8 years
of share options
Expected dividend
yield 0% 0% 0%
The following table summarizes the Company's share option
values:
Six Months Ended
June 30,
-------------------
2016 2015
Weighted-average grant-date
fair value of share option
granted during the period (GBP
per share) 8.83 -
Total intrinsic value of share
options exercised (GBP'000) 548 1,675
Total intrinsic value of share
options exercised (US$'000) 775 2,613
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
10. Share-based Compensation (Continued)
(i) Share-based Compensation of the Company (Continued)
Share-based Compensation Expense
The Company recognizes compensation expense for only the portion
of options expected to vest, on a graded vesting approach over the
requisite service period. The following table presents share-based
compensation expense included in the Group's consolidated
statements of operations:
Six Months Ended
June 30,
-------------------
2016 2015
(in US$'000)
Research and development expenses 965 -
Administrative expenses - 12
--------- --------
965 12
========= ========
As of June 30, 2016, the total unrecognized compensation cost
was US$753,000, net of estimated forfeiture rates, and will be
recognized on a graded vesting approach over the weighted-average
remaining service period of 1.52 years.
Cash received from option exercises under the share option plan
for the six months ended June 30, 2016 and 2015 was approximately
US$145,000 and US$1,248,000 respectively. The Company will issue
new shares to satisfy share options exercises.
(ii) Share-based Compensation of a Subsidiary
Hutchison MediPharma Holdings Limited, a subsidiary of the
Company, adopted a share option scheme on August 6, 2008 (as
amended on April 15, 2011) and another share option scheme on
December 17, 2014 (collectively the "HMHL Share Option Schemes").
Pursuant to the HMHL Share Option Schemes, any employee or director
of HMHL and any of its holding company, subsidiaries and affiliates
is eligible to participate in the HMHL Share Option Schemes subject
to the discretion of the board of directors of HMHL. The aggregate
number of shares issuable under the HMHL Share Option Schemes is
9,622,414 ordinary shares.
Share options granted are generally subject to a four-year
vesting schedule, depending on the nature and the purpose of the
grant, share options subject to four-year vesting schedule, in
general, vest 25% upon the first anniversary of the vesting
commencement date as defined in the grant letter, and 25% every
subsequent year. No outstanding share options will be exercisable
or subject to vesting after the expiry of a maximum of six or nine
years from the date of grant.
On December 20, 2013, 2,485,189 share options were cancelled
with the consent of the relevant eligible employees in exchange for
new share options of the Company vesting over a period of four
years and/or cash consideration payable over a period of four
years. This was accounted for as a modification of the original
share options which did not result in any incremental fair value to
the Group for the options in exchange for new share options under
HCML Share Option Scheme. For the share options in exchange for
cash consideration, this was accounted for as a modification in
classification that changed the award's classification from
equity-settled to a liability.
A liability has been recognized on the modification date taking
into account the requisite service period that has been provided by
the employee at the modification date. As at June 30, 2016, US$0.9
million have been recognized in other non-current liabilities. As
at December 31, 2015, US$0.9 million and US$0.8 million have been
recognized in other non-current liabilities and other payables
respectively.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
10. Share-based Compensation (Continued)
(ii) Share-based Compensation of a Subsidiary (Continued)
On June 15, 2016, 1,187,372 share options pursuant to the HMHL
Share Option Schemes were cancelled with the consent of the
relevant eligible employees in exchange for 593,686 new share
options of the Company pursuant to the HCML Share Option Schemes.
This was accounted for as a modification of the original share
options granted which did not result in any incremental fair value
to the Group.
A summary of the subsidiary's share option activity and related
information is as follows:
Weighted-average Weighted-average
exercise remaining Aggregate
Number price contractual intrinsic
of share in US$ life value
options per share (years) (in US$'000)
------------ ----------------- ----------------- --------------
Outstanding at January
1, 2015 1,211,772 7.71
Granted - -
Exercised (24,400) 2.34
Lapsed - -
Cancelled - -
Outstanding at December
31, 2015 1,187,372 7.82 7.97 32,292
Granted - -
Exercised - -
Lapsed - -
Cancelled (1,187,372) 7.82
Outstanding at June
30, 2016 - - - -
Vested and expected
to vest at December
31, 2015 759,918 7.82 7.97 20,667
Vested and exercisable
at December 31,
2015 593,686 7.82 7.97 16,146
The following table summarizes the subsidiary's share option
values:
Six Months Ended
June 30,
--------------------
2016 2015
(in US$'000)
Total intrinsic value of
share options exercised - 5
Share-based Compensation Expense
The subsidiary recognizes compensation expense for only the
portion of options expected to vest, on a graded vesting approach
over the requisite service period. The following table presents
share-based compensation expense included in the Group's
consolidated statements of operations:
Six Months Ended
June 30,
-------------------
2016 2015
(in US$'000)
Research and development expenses 195 263
========= ========
Cash received from option exercises under the share option plan
for the six months ended June 30, 2016 and 2015 was nil and
US$2,000 respectively.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
10. Share-based Compensation (Continued)
(iii) Long-term Incentive Plan ("LTIP")
The Company granted awards under LTIP on October 19, 2015. The
LTIP awards grant to participating directors or employees a
conditional right to receive ordinary shares of the Company or the
equivalent ADS (collectively the "Ordinary Shares"), to be
purchased by a trustee consolidated by the Company (the "Trustee")
up to a maximum cash amount depending upon the achievement of
annual performance targets for each financial year of the Company
stipulated in the LTIP awards. The Trustee has been set up solely
for the purpose of purchasing and holding the Ordinary Shares
during the vesting period on behalf of the Group using funds
provided by the Group.
On the determination date, the Company will determine the cash
amount, based on the actual achievement of each annual performance
target, for the Trustee to purchase the Ordinary Shares. The
Ordinary Shares will then be held by the Trustee until they are
vested. Vesting will occur one business day after the publication
date of the annual report of the Company for the financial year
falling two years after the financial year to which the LTIP award
relates. Vesting will also depend upon continued employment of the
award holder with the Group and will otherwise be at the discretion
of the Board of Directors of the Group. The initial LTIP awards
will cover a three-year period from 2014 to 2016 (the "LTIP
Period"). The maximum cash amount per annum for the LTIP Period
stipulated in the LTIP awards is approximately US$1.8 million.
LTIP awards prior to the determination date
As the extent of achievement of the performance targets is
uncertain prior to the determination date, a probability based on
management's assessment on the achievement of the performance
target has been assigned to calculate the amount to be recognized
as an expense over the requisite period with corresponding entry to
liability. As at June 30, 2016 approximately US$177,000 was
recorded as compensation expense with a corresponding liability for
LTIP awards prior to the determination date.
LTIP awards after the determination date
Upon the determination date, if the performance target is
achieved, the Company will pay the fixed monetary amount to the
Trustee to purchase the Ordinary Shares. Any cumulative
compensation expense previously recognized as a liability will be
transferred to additional paid-in capital, as an equity-settled
award. If the performance target is not achieved, no Ordinary
Shares of the Company will be purchased and the amount previously
recorded in the liability will be reversed through profit or
loss.
On March 24, 2016, the Company granted additional awards under
LTIP up to a maximum cash amount of US$312,500 that do not
stipulate performance targets. Shares under this LTIP award are
subject to a four-year vesting schedule, 25% upon the first
anniversary of the vesting commencement date as defined in the
award letter, and 25% every subsequent year.
During the six months ended June 30, 2016, approximately
US$604,000 was paid to the Trustee and debited to the additional
paid-in capital as treasury shares and approximately US$684,000 was
recorded as a compensation expense with a credit to additional
paid-in capital.
As at June 30, 2016, the number of Ordinary Shares purchased and
held by the Trustee was 62,921 amounting to approximately US$2.4
million, with none and US$5,000 of the LTIP awards vested and
forfeited, respectively. Other than the treasury shares, the
Trustee does not have any assets or liabilities as at June 30,
2016.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
10. Share-based Compensation (Continued)
(iii) Long-term Incentive Plan (Continued)
The following table presents the expenses recognized under the
LTIP awards:
Six Months Ended
June 30,
---------------------
2016 2015
(in US$'000)
Research and development
expenses 409 -
Administrative expenses 377 -
--------- --------
786 -
========= ========
As of June 30, 2016, the total unrecognized compensation cost
was approximately US$2,191,000 net of the estimated probability
rate, and will be recognized over the requisite period.
11. Revenue from License and Collaboration Agreements - Third
Parties
The Group recognized revenue from license and collaboration
agreements - third parties of US$18.1 million and US$23.2 million
for the six months ended June 30, 2016 and 2015 respectively, which
consisted of the following:
Six Months Ended
June 30,
--------------------
2016 2015
(in US$'000)
Milestone revenue 9,931 10,000
Amortisation of upfront payment 856 546
Research and development services 7,301 12,702
--------- --------
18,088 23,248
========= ========
These are mainly from 2 license and collaboration agreements as
follows:
License and collaboration agreement with Eli Lilly
On October 8, 2013, the Group entered into a licensing,
co-development and commercialization agreement in China with Eli
Lilly relating to fruquintinib, a targeted oncology therapy for the
treatment of various types of solid tumors.
Under the terms of this agreement, the Group did not recognize
any milestone revenue in relation to this contract for the six
months ended June 30, 2016. For the six months ended June 30, 2015,
the Group recognized US$10.0 million milestone revenues in relation
to the achievement of the "proof of concept" milestone for one
indication. The Group recognized US$0.8 million and US$0.5 million
revenue from amortization of the up-front payment during the six
months ended June 30, 2016 and 2015 respectively. In addition, the
Group recognized US$6.0 million and US$10.6 million for the
provision of research and development services for the six months
ended June 30, 2016 and 2015 respectively.
License and collaboration agreement with AstraZeneca
On December 21, 2011, the Group and AstraZeneca ("AZ") entered
into a global licensing, co-development, and commercialization
agreement for volitinib (name subsequently changed to
'savolitinib'), a novel targeted therapy and a highly selective
inhibitor of the c-Met receptor tyrosine kinase for the treatment
of cancer.
Under the terms of this agreement, the Group recognized US$9.9
million milestone revenue for the six months ended June 30, 2016 in
relation to the Phase IIb initiation milestone for the primary
indication. The Group did not recognize any milestone revenue for
the six months ended June 30, 2015. The Group also recognized
US$1.3 million and US$2.1 million for the provision of research and
development services for the six months ended June 30, 2016 and
2015 respectively.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
12. Government Incentives
The Group receives government grants from the PRC Government.
During the six months ended June 30, 2016 and 2015, the Group
received government grants of US$1,153,000 and US$1,192,000
respectively.
The government grants recorded as a reduction to research and
development expenses for the six months ended June 30, 2016 and
2015 was US$608,000 and US$360,000 respectively.
13. Significant Related Party Transactions
The Group has the following significant transactions during the
period with related parties which were carried out in the normal
course of business at terms determined and agreed by the relevant
parties:
Six Months Ended
June 30,
2016 2015
(in US$'000)
(a) Transactions with related
parties:
Sales of goods to
* Indirect subsidiaries of CK Hutchison 5,398 4,772
========= ========
Revenue from research and development
services
* Equity investees 3,815 2,362
========= ========
Purchase of goods from
* A non-controlling shareholder of a subsidiary 5,998 5,750
* Equity investees 62 3,950
--------- --------
6,060 9,700
========= ========
Rendering of marketing services
from
* Indirect subsidiaries of CK Hutchison 273 465
* An equity investee 4,258 1,919
--------- --------
4,531 2,384
========= ========
Rendering of management service
from
* An indirect subsidiary of CK Hutchison 437 422
========= ========
Interest paid to
* An indirect subsidiary of CK Hutchison 84 -
* An immediate holding company - 68
* A non-controlling shareholder of a subsidiary 47 42
--------- --------
131 110
========= ========
Guarantee fee on bank loan
to
* An indirect subsidiary of CK Hutchison 234 234
========= ========
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
13. Significant Related Party Transactions (Continued)
December
June 30, 31,
2016 2015
----------------- -----------------
(in US$'000)
(b) Balances with related parties
included in:
Accounts receivable from related
parties:
* Indirect subsidiaries of CK Hutchison (note (i)) 2,070 1,379
* An equity investee (note (i)) 608 490
----------------- -----------------
2,678 1,869
================= =================
Accounts payable due to a related
party:
* A non-controlling shareholder of a subsidiary (note
(i)) 4,547 3,521
================= =================
Amounts due from related parties:
* Indirect subsidiaries of CK Hutchison (note (i)) 109 136
* Equity investees (note (i)) 936 2,157
* Loan to an equity investee (note (ii)) - 7,000
----------------- -----------------
1,045 9,293
================= =================
Amounts due to related parties:
* Immediate holding company (note (iii)) 2,937 1,775
* Indirect subsidiaries of CK Hutchison (note (i)) 104 20
* An equity investee (note (i)) 2,960 1,898
* Loan from a non-controlling shareholder of a
subsidiary (note (iv)) 2,550 2,550
----------------- -----------------
8,551 6,243
================= =================
Non-controlling shareholders:
* Loan from a non-controlling shareholder of a
subsidiary (note (v)) 579 579
* Interest payable due to a non-controlling shareholder
of a subsidiary 152 105
----------------- -----------------
731 684
================= =================
Deferred income:
* An equity investee (note (vi)) 1,964 2,132
================= =================
Other non-current liabilities:
* Immediate holding company (note (iii)) 9,000 9,000
================= =================
Notes:
(i) Other balances with related parties are unsecured,
interest-free and repayable on demand. The carrying values of
balances with related parties approximate their fair values due to
their short-term maturities.
(ii) Loan to an equity investee is unsecured, interest-bearing
(with waiver of interest) as at December 31, 2015. The loan has
been capitalized on June 8, 2016 and included in investment in
equity investees as at June 30, 2016.
(iii) Amount due to immediate holding company is unsecured,
interest-bearing. As of June 30, 2016, approximately US$2,937,000
(December 31, 2015: US$1,775,000) is repayable within one year or
repayable on demand and approximately US$9,000,000 is repayable
within three years from December 2017.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
13. Significant Related Party Transactions (Continued)
Notes (Continued):
(iv) Loan from a non-controlling shareholder of a subsidiary is
unsecured and interest-bearing and is repayable in December
2016.
(v) Loan from a non-controlling shareholder of a subsidiary is
unsecured, interest-bearing (with waiver of interest) and is
recorded in other non-current liabilities.
(vi) Deferred income represents amount recognized from granting
of promotion and marketing rights.
14. Income Taxes
Income tax expense is based on the Group's estimate of the
annual effective income tax rate expected for the full financial
year. The estimated annual income tax rate used for the year ended
December 31, 2015 is 22%. The estimated annual income tax rate used
for the six months ended June 30, 2016 is 22%.
Subsidiaries where ordinary losses are expected for the full
financial year and where no benefits are expected to be recognized
from those losses are excluded from the computation of the overall
estimated annual effective income tax rate. A full valuation
allowance against these tax losses resulted in a separate effective
tax rate of nil.
Tax on undistributed earnings of equity investees, which gives
rise to deferred tax liabilities, was calculated on a separate
estimated annual effective tax rate of 5%.
15. Earnings/(Losses) per Share
(a) Basic earnings/(losses) per share
Basic earnings/(losses) per share is calculated by dividing the
net income/(loss) attributable to ordinary shareholders of the
Company by the weighted average number of ordinary shares in issue
during the year.
Six Months Ended
June 30,
------------------------
2016 2015
Weighted average number of
outstanding ordinary shares
in issue 58,822,425 53,172,325
=========== ===========
Net income (US$'000) 2,794 18,064
Net income attributable to
non-controlling interests
(US$'000) (2,257) (2,115)
Accretion on redeemable non-controlling
interests (US$'000) - (42,015)
----------- -----------
Net income/(loss) for the
period attributable to ordinary
shareholders of the Company
(US$'000) 537 (26,066)
----------- -----------
Earnings/(losses) per share
attributable to ordinary
shareholders of the Company
(US$ per share) 0.01 (0.49)
=========== ===========
(b) Diluted earnings/(losses) per share
Diluted earnings/(losses) per share is calculated by dividing
net income/(losses) attributable to ordinary shareholders, by the
weighted average number of ordinary and dilutive ordinary share
equivalent outstanding during the period. Dilutive ordinary share
equivalents include shares issuable upon the exercise or settlement
of share-based awards issued by the Company and its subsidiaries
using the treasury stock method.
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
15. Earnings/(Losses) per Share (Continued)
(b) Diluted earnings/(losses) per share (Continued)
Six Months Ended
June 30,
------------------------
2016 2015
Weighted average number
of outstanding ordinary
shares in issue 58,822,425 53,172,325
Adjustment for share options 303,660 -
----------- -----------
59,126,085 53,172,325
=========== ===========
Net income/(loss) for the
period attributable to
ordinary shareholders of
the Company (US$'000) 537 (26,066)
=========== ===========
Earnings/(losses) per share
attributable to ordinary
shareholders of the Company
(US$ per share) 0.01 (0.49)
=========== ===========
For the period ended June 30, 2015, share options issued by the
Company were not included in the calculation of diluted loss per
share because of their anti-dilutive effect.
16. Segment Reporting
The performance of the reportable segments are assessed based on
two measurements: (a) earnings or losses of subsidiaries before
interest income, finance costs and tax expenses ("EBIT/(LBIT)") and
(b) equity in earnings of equity investees, net of tax.
The segment information for the reportable segments is as
follows:
For the six months ended June 30, 2016
----------------------------------------------------------------------------
Innovation
Platform Commercial Platform
Drug Prescription Consumer Reportable
R&D Drugs Health segment
Hong
PRC PRC PRC Kong Total Unallocated Total
---------- ------------ ------- ------ ---------- ----------- --------
(in US$'000)
Revenue
from external
customers 22,258 67,614 2,704 11,941 104,517 - 104,517
---------- ------------ ------- ------ ---------- ----------- --------
EBIT/(LBIT) (11,708) 1,463 (1,120) 1,166 (10,199) (5,949) (16,148)
Interest
income 25 19 15 1 60 129 189
Equity in
earnings
of equity
investees,
net of tax (2,096) 14,779 8,568 - 21,251 - 21,251
---------- ------------ ------- ------ ---------- ----------- --------
Operating
profit/(loss) (13,779) 16,261 7,463 1,167 11,112 (5,820) 5,292
Interest
expenses - - - 47 47 764 811
Additions
to non-current
assets (other
than financial
instrument
and deferred
tax assets) 1,440 19 14 50 1,523 47 1,570
Depreciation/
amortization 1,041 52 5 10 1,108 25 1,133
Income tax
expense - 434 (279) 150 305 1,382 1,687
========== ============ ======= ====== ========== =========== ========
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
16. Segment Reporting (Continued)
As at June 30, 2016
--------------------------------------------------------------------------
Innovation
Platform Commercial Platform
Drug Prescription Consumer Reportable
R&D Drugs Health segment
Hong
PRC PRC PRC Kong Total Unallocated Total
---------- ------------ ------ ------ ---------- ----------- -------
(in US$'000)
Total assets 63,977 100,392 68,996 10,523 243,888 78,955 322,843
Property,
plant and
equipment 8,510 120 35 47 8,712 61 8,773
Leasehold
land 1,291 - - - 1,291 - 1,291
Goodwill - 2,875 407 - 3,282 - 3,282
Other intangible
asset - 523 - - 523 - 523
Investments
in equity
investees 19,181 50,324 64,732 - 134,237 - 134,237
========== ============ ====== ====== ========== =========== =======
For six months ended June 30, 2015
---------------------------------------------------------------------------------
Innovation
Platform Commercial Platform
---------- ------------------------------
Drug Prescription Consumer Reportable
R&D Drugs Health segment
Hong
PRC PRC PRC Kong Total Unallocated Total
---------- ------------- ----- ------ ---------- ---------------- ------
(in US$'000)
Revenue
from external
customers 26,927 45,409 1,742 8,407 82,485 - 82,485
---------- ------------- ----- ------ ---------- ---------------- ------
EBIT/(LBIT) 3,997 322 (60) 534 4,793 (4,547) 246
Interest
income 18 73 21 - 112 206 318
Equity in
earning
investees,
net of tax (1,991) 11,745 9,614 - 19,368 - 19,368
---------- ------------- ----- ------ ---------- ---------------- ------
Operating
profit/(loss) 2,024 12,140 9,575 534 24,273 (4,341) 19,932
Interest
expenses - - - 42 42 665 707
Additions
to
non-current
assets (other
than
financial
instrument
and deferred
tax assets) 1,436 9 1 - 1,446 - 1,446
Depreciation/
amortization 821 47 5 3 876 20 896
Income tax
expense - 116 - 46 162 999 1,161
========== ============= ===== ====== ========== ================ ======
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
16. Segment Reporting (Continued)
As at December 31, 2015
--------------------------------------------------------------------------
Innovation
Platform Commercial Platform
---------- ----------------------------
Drug Prescription Consumer Reportable
R&D Drugs Health segment
Hong
PRC PRC PRC Kong Total Unallocated Total
---------- ------------ ------- ----- ---------- ----------- -------
(in US$'000)
Total assets 49,545 97,572 66,552 8,651 222,320 7,279 229,599
Property,
plant and
equipment 8,312 122 27 7 8,468 39 8,507
Leasehold
land 1,343 - - - 1,343 - 1,343
Goodwill - 2,925 407 - 3,332 - 3,332
Other intangible
asset - 571 - - 571 - 571
Investments
in equity
investees 9,285 49,709 60,762 - 119,756 - 119,756
========== ============ ====== ===== ========== =========== =======
Revenue from external customers is after elimination of
inter-segment sales. The amount eliminated attributable to sales
within Consumer Health business from Hong Kong to the PRC of nil
and US$1,283,000 for the periods ended June 30, 2016 and 2015.
Sales between segments are carried out at mutually agreed
terms.
There was one customer under Innovation Platform who accounted
for 26% of the Group's revenue for the six months ended June 30,
2015.
Unallocated expenses mainly represent corporate expenses which
include corporate employee benefit expenses. Unallocated assets
mainly comprise cash at banks.
A reconciliation of EBIT/(LBIT) for reportable segments to net
income is provided as follows:
June 30, June 30,
2016 2015
--------- ---------
(in US$'000)
EBIT/(LBIT) (10,199) 4,793
Unallocated expenses (5,949) (4,547)
Interest income 189 318
Equity in earnings of equity
investees, net of tax 21,251 19,368
Finance costs (811) (707)
Income taxes (1,687) (1,161)
--------- ---------
Net income 2,794 18,064
========= =========
Hutchison China MediTech Limited
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
17. Litigation
From time to time, the Group may become involved in litigation
relating to claims arising from the ordinary course of business.
The Group believes that there are currently no claims or actions
pending against the Group, the ultimate disposition of which could
have a material adverse effect on the Group's results of
operations, financial condition or cash flows. However, litigation
is subject to inherent uncertainties and the Group's view of these
matters may change in the future. When an unfavourable outcome
occurs, there exists the possibility of a material adverse impact
on the Group's financial position and results of operations for the
periods in which the unfavourable outcome occurs, and potentially
in future periods.
18. Subsequent Events
The Group evaluated subsequent events through August 1,
2016.
In July 2016, the Group entered into an amendment to the global
licensing, co-development, and commercialization agreement with AZ.
Under the terms of the amendment, the Group shall pay for up to a
maximum of US$50 million of phase III clinical trial costs related
to developing savolitinib for papillary renal cell carcinoma. In
return, AZ agrees to increase ex-China royalties on net sales by an
additional 5% over the royalties stipulated in the original
agreement until cumulative additional royalties paid reaches US$250
million, after which the additional royalty decreases to 3% for 24
months and then 1.5% thereafter.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UGURCRUPQUAP
(END) Dow Jones Newswires
August 02, 2016 02:01 ET (06:01 GMT)