Business Context and Reporting Period
Hutchison China MediTech Limited (HUTCHMED) filed this Form 6-K on June 6, 2019, to provide unaudited condensed consolidated interim financial information in connection with a proposed listing on the Main Board of the Stock Exchange of Hong Kong Limited (SEHK). The financial data covers the three months ended March 31, 2018, and March 31, 2019, with balance sheet data as of April 30, 2019. The Company operates through a Commercial Platform (distribution of prescription drugs and consumer health) and an Innovation Platform (drug development and commercialization).
Key Financial Metrics
Results of Operations (Three Months Ended March 31)
| Item (US$'000) | 2018 | 2019 |
|---|---|---|
| Revenues | 52,337 | 52,168 |
| Cost of Sales | (37,056) | (40,956) |
| Gross Profit | 15,281 | 11,212 |
| Research and Development Expenses | (28,664) | (33,282) |
| Selling Expenses | (4,615) | (3,785) |
| Administrative Expenses | (7,023) | (10,195) |
| Equity in Earnings of Equity Investees | 15,030 | 17,110 |
| Net Loss | (10,405) | (19,106) |
| Net Loss Attributable to Company | (11,730) | (19,885) |
Liquidity and Debt (As of April 30, 2019)
- Cash and Cash Equivalents: US$82.6 million
- Short-term Investments: US$180.4 million
- Total Current Assets: US$339.9 million
- Total Current Liabilities: US$106.4 million
- Net Current Assets: US$233.5 million
- Total Indebtedness: US$32.7 million (Unsecured and unguaranteed)
Material Changes vs. Prior Period
- Revenue: Remained relatively flat at US$52.2 million in 2019 compared to US$52.3 million in 2018, despite a 5% depreciation of the renminbi. Commercial Platform revenue increased 3.3% (driven by Prescription Drugs), while Innovation Platform revenue decreased to US$5.8 million due to lower clinical development service fees.
- Cost of Sales: Increased 10.5% to US$41.0 million (78.5% of revenue vs. 70.8% prior year). This was driven by higher revenue from Hutchison Sinopharm and a shift of Seroquel promotion expenses from selling expenses to cost of sales due to the "two-invoice system" in certain provinces.
- R&D Expenses: Increased 16.1% to US$33.3 million (63.8% of revenue) due to expanded clinical activities for savolitinib, surufatinib, and HMPL-523.
- Administrative Expenses: Increased 45.2% to US$10.2 million, primarily due to US$1.6 million in accrued listing expenses for the proposed SEHK listing and increased staff costs.
- Net Loss: Widened significantly to US$19.1 million from US$10.4 million, driven by higher operating expenses and increased cost of sales, partially offset by higher equity earnings from investees.
Guidance, Outlook, Risks, and Contingencies
- Listing Status: The Company has filed a Listing Application with the SEHK for a global offering. There is no assurance as to if or when the listing will occur. The filing is not an offer to sell securities.
- Seroquel Dispute: In May 2019, Luye Pharma Group (successor to AstraZeneca's rights) purported to terminate the Company's distribution agreement for Seroquel. The Company disputes this termination and intends to enforce its rights. Consequently, the Company has ceased providing marketing services for Seroquel. The outcome is uncertain, and future revenue from this product is at risk.
- New Credit Facilities: On May 31, 2019, the Company secured unsecured credit facilities totaling HK$400.0 million (approx. US$51.3 million), consisting of a term loan and a revolving loan. No amounts have been drawn as of the filing date.
- Forward-Looking Risks: Risks include the completion of the SEHK listing, market conditions, the ability to progress drug development, and the potential for listing costs to exceed plans.
Investor Verification Checklist
- Verify the status and potential outcome of the legal dispute regarding the Seroquel distribution agreement with Luye Pharma.
- Confirm the timeline and terms of the proposed SEHK listing and global offering.
- Monitor the progress and clinical trial results for key pipeline assets: savolitinib, surufatinib, and HMPL-523.
- Review the impact of the "two-invoice system" on future cost of sales and gross margin structures.
- Assess the utilization of the new US$51.3 million credit facility and its effect on future liquidity.