HUTCHMED (China) Ltd — FY2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016; this is an annual report, not a standalone 2016 fourth-quarter report. The company’s consolidated financial statements use U.S. GAAP; its three non-consolidated joint ventures report under IFRS.
Business context
HUTCHMED operates an Innovation Platform developing oncology and immunology medicines and a China-focused Commercial Platform selling and distributing prescription drugs and consumer health products. At year-end, eight clinical-stage drug candidates were in 30 active studies. The Commercial Platform’s results include consolidated businesses and equity-method joint ventures, so joint-venture revenue is not included in the company’s consolidated revenue.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Consolidated revenue | $216.1 million | $178.2 million |
| Loss from operations | $(46.7) million | $(9.8) million |
| Equity in earnings of investees, net of tax | $66.2 million | $22.6 million |
| Net income | $14.6 million | $10.4 million |
| Net income attributable to HUTCHMED | $11.7 million | $8.0 million |
| Basic and diluted EPS attributable to ordinary shareholders | $0.20 | $(0.64) |
| Cash and cash equivalents at year-end | $79.4 million | $31.9 million |
| Short-term investments at year-end | $24.3 million | None |
| Total assets | $342.4 million | $229.6 million |
| Total shareholders’ equity | $204.1 million | $102.3 million |
| Total bank borrowings | $46.8 million | $49.8 million |
Consolidated operating expenses were $262.8 million, including $66.9 million of research and development expense, $18.0 million of selling expense and $21.6 million of administrative expense. A conventional consolidated gross margin is not presented; cost of sales relates to goods, while total revenue also includes collaboration and R&D services.
Cash flow from operating activities was $(9.6) million, investing activities $(33.6) million and financing activities $92.4 million. The financing inflow primarily reflected the U.S. IPO: approximately $110.2 million gross proceeds, partly offset by $12.9 million of issuance costs. The filing reports approximately $103.7 million in cash, cash equivalents and short-term investments at year-end.
Current liabilities were $95.1 million and non-current liabilities $43.3 million. Bank borrowings included $20.0 million current and $26.8 million long-term; the company also reported $70.0 million of undrawn bank facilities at December 31, 2016. Restricted net assets in PRC subsidiaries were $100.8 million. Management stated that available resources and expected operating cash flows would fund requirements for at least 12 months, while noting the forecast depends on assumptions and access to joint-venture distributions and financing.
Material changes versus FY2015
- Revenue increased 21.3%, mainly because Commercial Platform revenue rose 43.3% to $180.9 million, including a full year of Seroquel sales. Innovation Platform revenue fell 32.3% to $35.2 million as collaboration milestones, service fees and reimbursements were lower.
- Research and development expense rose 41.2% to $66.9 million as active clinical studies increased from 19 to 30. Selling expense rose 76.3% to $18.0 million, including expanded commercialization and marketing activity.
- Loss from operations widened to $46.7 million. Net income nevertheless increased, largely because equity-method earnings rose to $66.2 million.
- The equity earnings increase included a one-time $40.4 million after-tax gain at Shanghai Hutchison Pharmaceuticals from land compensation and government subsidies. The joint venture reported an $88.5 million IFRS gain on disposal of assets held for sale; the Shanghai government paid approximately $113 million in cash and subsidies in total.
- Net income attributable to ordinary shareholders was $11.7 million in 2016 versus a $35.0 million loss in 2015, which included $43.0 million of accretion on redeemable non-controlling interests; no such accretion was recorded in 2016.
- Cash and cash equivalents increased substantially following the IPO, although operating cash flow remained negative. The company reported a $10.7 million foreign-currency translation loss in comprehensive income.
Outlook, commentary and risks
Management expected R&D expense to increase as clinical programs advance. The filing describes four Phase III studies underway or planned for 2017. Fruquintinib met the primary overall-survival endpoint and secondary endpoints in its China Phase III colorectal cancer study; management expected to submit an NDA by mid-2017 and, subject to approval, launch in China in 2018. A global Phase III savolitinib study in papillary renal cell carcinoma was planned for the second quarter of 2017. These are forward-looking expectations, not assured outcomes.
Material risks include clinical-trial failure or delay, regulatory uncertainty, pricing and reimbursement pressure, competition, dependence on collaborators and joint ventures, and the need for additional capital. Cash generation depends partly on joint-venture dividends, which require partner and board approval. Commercial revenue is concentrated: She Xiang Bao Xin pills represented 88% of Shanghai Hutchison Pharmaceuticals’ 2016 sales. Raw-material availability, distributor rules and foreign-exchange restrictions also pose risks.
HMPL-004’s global Phase III ulcerative-colitis study was terminated after an interim analysis found no overall material effect over placebo. The company and Nestlé were developing an enriched reformulation, HM004-6599, and expected to submit an IND application in China in 2017. The filing also disclosed that management considered a previously identified material weakness in financial reporting controls remediated, but no comprehensive assessment for 2016 was performed by management or the auditor. The auditor issued an unqualified opinion on the company’s U.S. GAAP consolidated financial statements.
Important facts for investors to verify
- Full FRESCO Phase III results, the timing and outcome of the fruquintinib NDA, and any subsequent launch or regulatory decisions.
- Whether the one-time land-compensation gain is excluded when assessing recurring earnings, and the underlying operating performance of the equity-method joint ventures.
- Cash burn, access to the reported credit facilities, debt repayment terms, and the actual ability to receive dividends from joint ventures.
- Clinical progress, costs and funding obligations for savolitinib and the broader pipeline, including the effect of the $50 million savolitinib development-cost commitment.
- Progress on HM004-6599 following the terminated HMPL-004 Phase III trial, and subsequent evidence that its reformulation addresses the earlier study’s limitations.