Anthony Hilton: The remarkable tale of Chi-Med’s growth

Chi Med: Shares have risen fast due to trial breakthroughs
Frederick Florin/AFP/Getty Images
Anthony Hilton18 October 2017

You could have bought shares in Hutchison China MediTech, or Chi-Med, listed on AIM — and on Nasdaq in the US — for 30p in the aftermath of the financial crash in 2008.

When this column drew attention to the company in March they were changing hands at £22. Last week, they went over £44.

This is all about the company’s success in discovering drugs to treat cancer.

The spur in March was the news that the first, Fruquintinib, which Chi-Med discovered and is developing in partnership with the US pharma giant Eli Lilly, had come through its Phase III trials with stunning success.

Phase III is the final testing hurdle which is then routinely followed by a new drug application, paving the way for the commercial launch.

This particular product is targeted at colorectal cancer from which about 380,000 patients die each year in China alone, and then at gastric and lung cancers.

Given the size of this potential market, and with commercial launch likely next year, this could be a blockbuster with analysts estimating peak sales at more than $1 billion (£760 million), even at Chinese prices which are significantly lower than those in the West. Hence the excitement.

When all this became public knowledge last March the entire company had a stock market value of only £1.5 billion.

Now just seven months later the company seems to have hit the jackpot again.

This time, Chi-Med’s partner is AstraZeneca, the drug is called Savolitinib and it has been under clinical trials in combinations with two existing AstraZeneca products, Tagrisso and Iressa, as a treatment for lung cancer.

Savolitinib is a potential first in class global drug which disables factors which the cancer needs to grow and spread.

This makes it ideally suited to be used in combination with other therapies causing far fewer of the debilitating side effects which beset many existing treatments.

Yesterday Chi-Med announced the results of the Savolitinib Phase III trials at the 18th world conference on lung cancer — in Yokohama, Japan, so you can be forgiven for not noticing — and again the results were all, and more, than could be expected.

When, as in this case, more than 60% of those being treated respond positively to the drug, analysts and pharmacologists really sit up.

The interesting thing is what happens now. When drug trial results are exceptionally good the pharmaceutical company can apply to the regulators for it to be treated as a breakthrough therapy.

If granted, this allows the business to fast-track the route to market, the idea being that since there is a medical need which has not been met, it should be made available to existing patients as soon as possible.

This, however, is simply an added bonus. If that special status is not granted, the drug still comes to market — it just takes a bit longer.

Using the drug to treat lung cancer could result in sales of up to $2 billion, with Chi-Med’s share in royalties (given it is in this with AstraZeneca), weighing in at around $300 million per year.

Applying the usual stock-market formula to such an income stream creates a value for the drug of about $10 billion.

But that is only taking account of the lung cancer sales which are expected to be only about 60% of the total. Like most such drugs it can also be used against other forms of the disease, in particular gastric and kidney cancer. If you factor in similar potential sales for these other treatments you have an asset with a potential value of between $15 billion and $20 billion.

It will take a while to get there, of course — normally peak sales come about four to five years after the launch so it could be around 2023-24 — but that does not negate the fact that on this projection this one drug alone will be four to five times Chi-Med’s present stock market value.

There are huge uncertainties of course — uncertainty is ever-present in the pharmaceutical industry and history is littered with sure-fire treatments which somehow got derailed.

Even if there are no such setbacks, it might also take time for a world which has got used to drug breakthroughs coming from the US and Europe to get accustomed to the presence of a new kid on the block. But Chi-Med’s efforts do suggest that China now needs to be recognised as a new source of pharmaceutical innovation in its own right, rather than simply a vast potential market for western products.

It will be interesting to see how the stock market reacts in the next few weeks and months given that the present value of the company is probably not even equivalent to what should come through from Fruquintinib — to say nothing of the fact that it, plus Savolitinib, are only the first two in a pipeline of six other promising products.

Two of these are expected to complete Phase III trials in 2019. Then there is a further batch of innovative drugs in early-stage trials behind that and then even further down the line there are another three candidates in pre-clinical trials.

Put all this together and the company is adding a serious new candidate drug at the rate of one a year.

It is a truly remarkable story for a small company — which is probably why it might not be a small company much longer.