TIDMHCM
RNS Number : 3706H
Hutchison China Meditech Limited
12 March 2018
Hutchison China MediTech Limited ("Chi-Med") Reports Final
Results for the Year Ended December 31, 2017 and Updates
Shareholders on Key Clinical Programs
Group: Year of major progress; results in line with guidance
-- Group revenue up 12% to $241.2 million (2016: $216.1m);
-- Net loss attributable to Chi--Med $26.7 million (2016: Net
profit $11.7m), including $88.0 million in research and development
expenses on an adjusted (non-GAAP) basis (2016: $76.1m).
Strengthened cash position: Expected to be sufficient to
accelerate and broaden pipeline into 2020
-- Cash resources of $479.6 million at Group level as of
December 31, 2017 ($173.7m as of December 31, 2016), including cash
and cash equivalents, short-term investments and unutilized bank
facilities;
-- Completed Nasdaq follow-on offering, raising net proceeds of $292.7 million in late 2017.
Innovation Platform: Submitted first China New Drug Application
("NDA") on fruquintinib; initiated first global Phase III
registration study on savolitinib; five other pivotal Phase III
studies underway and more preparing to start; and discovery engine
aiming to produce 1-2 novel clinical drug candidates per year
-- Deep clinical pipeline of novel small molecule tyrosine kinase inhibitors ("TKIs"):
o Eight clinical drug candidates now in active or completing
clinical trials in 36 target patient populations ("TPP") (2016: 30)
around the world; over 3,500 subjects dosed in trials to date, over
700 in 2017;
o Stream of second-generation immunotherapy compounds advancing
through pre-clinical development.
-- Savolitinib - Highly selective TKI of the mesenchymal
epithelial transition factor ("c-MET") - Global Phase III studies
underway or in planning in kidney and lung cancer with Phase I/Ib
studies in over a dozen exploratory TPPs in multiple further cancer
indications:
o Presented positive Phase Ib/II data in second- and third-line
non-small cell lung cancer ("NSCLC"), combination of savolitinib
and Tagrisso(R) or Iressa(R) at the 2017 World Conference on Lung
Cancer ("WCLC"); AstraZeneca AB (publ) ("AstraZeneca") have now
agreed to proceed with development in second-line NSCLC with the
initiation of multiple studies including a global randomized,
chemotherapy-doublet controlled study of savolitinib plus
Tagrisso(R) in first-generation epidermal growth factor receptor
("EGFR")-TKI refractory, c-MET gene amplified, T790M negative NSCLC
patients;
o Presented positive Phase II data in c-MET-driven papillary
renal cell carcinoma ("PRCC") at the ASCO Genitourinary Cancers
Symposium; then initiated global Phase III study, the SAVOIR study,
in c-MET-driven PRCC in a head-to-head comparison with current
standard therapy Sutent(R) (sunitinib), the first Phase III study
ever conducted with molecularly selected patients in renal cell
carcinoma ("RCC").
-- Fruquintinib - Highly selective TKI of vascular endothelial
growth factor receptor ("VEGFR")-1/2/3 - Likely to be Chi-Med's
first China Food and Drug Administration ("CFDA")-approved TKI,
Phase III studies in colorectal cancer ("CRC"), lung and gastric
cancer in China either complete or enrolling and global development
now underway:
o Positive outcome in Phase III study, the FRESCO study, in
third-line CRC patients in China; 2017 American Society of Clinical
Oncology ("ASCO") oral presentation; Potentially best-in-class in
terms of both efficacy and safety relative to Stivarga(R)
(regorafenib); NDA submitted to the Center for Drug Evaluation of
the CFDA in June 2017 and technical reviews and inspections are
ongoing;
o Completed enrolment in early 2018 of a 527 patient Phase III
study, the FALUCA study, in third-line NSCLC in China;
o Presented positive Phase Ib data, at the 2017 ASCO
Gastrointestinal Cancers Symposium, for fruquintinib in combination
with Taxol(R) (paclitaxel) in second-line gastric cancer; then
initiated the FRUTIGA study, an over 500 patient Phase III study in
China;
o Initiated Phase I development of fruquintinib in the United
States in late 2017.
-- In addition, presented positive preliminary proof-of-concept
efficacy and safety data on multiple drug candidates over last
year, including:
o Savolitinib in c-MET-driven gastric cancer;
o Fruquintinib in combination with Iressa(R) in first-line EGFR
mutation positive NSCLC;
o Sulfatinib against VEGFR, fibroblast growth factor receptor
1/2/3 ("FGFR") and colony stimulating factor 1 receptor ("CSF-1R"),
in neuroendocrine tumors ("NET") as well as thyroid cancer;
o Theliatinib in EGFR wild-type esophageal cancer.
-- Initiated early/proof-of-concept development on multiple drug
candidates over last year, including:
o Savolitinib in combination with Imfinzi(R) (durvalumab),
AstraZeneca's anti-programmed death-ligand 1 ("PD-L1") antibody -
Phase II in PRCC and clear cell renal cell carcinoma ("ccRCC") in
Europe;
o Savolitinib - Phase II study in pulmonary sarcomatoid
carcinoma in China;
o Savolitinib - Phase II study in prostate cancer in Canada;
o Sulfatinib - Phase II in second-line biliary tract cancer in
China;
o Epitinib - Phase Ib/II in EGFR gene amplified glioblastoma in
China;
o HMPL-523 against spleen tyrosine kinase ("Syk") - Phase I in
hematological cancer in China;
o HMPL-453 against FGFR 1/2/3 - Phase I in all comer solid
tumors in Australia and China;
o HMPL-689 against phosphoinositide 3-kinase delta ("PI3K ") -
Phase I in hematological cancer in China;
o Theliatinib against EGFR wild-type - Phase Ib in esophageal
cancer in China.
Commercial Platform: High-performance drug marketing and
distribution platform covers 300 cites/towns in China with
approximately 3,300 sales people. High-value products and
household-name brands
-- Total consolidated sales up 13% to $205.2 million (2016: $180.9m);
-- Total sales of non-consolidated joint ventures up 6% to $472.0 million (2016: $446.5m);
-- Total consolidated net income attributable to Chi-Med up 25%
to $37.5 million (2016: $29.9m) on an adjusted (non-GAAP) basis
which excludes one-time gains.
Potential milestones targeted for 2018
-- Savolitinib:
o Second-line NSCLC - Initiation of a global randomized,
chemotherapy-doublet controlled study of savolitinib plus
Tagrisso(R) in first-generation (Iressa(R) /Tarceva(R) ) EGFR-TKI
refractory, c-MET gene amplified, T790M negative NSCLC along with
multiple supporting studies;
o Third-line NSCLC - AstraZeneca to decide global registration
strategy in third-generation (Tagrisso(R) ) EGFR-TKI refractory
NSCLC;
o AstraZeneca/Chi-Med agreement on registration strategy in
China for savolitinib plus Iressa(R) combination in second-line
NSCLC;
o Release of results of global PRCC molecular epidemiology study
("MES") and review of the potential Breakthrough Therapy
opportunity in c-MET-driven PRCC.
-- Fruquintinib:
o NDA approval and launch in China, with our partner Eli Lilly
and Company ("Lilly"), in advanced CRC;
o Release of top-line results for the FALUCA Phase III study in
third-line NSCLC in late 2018.
-- Epitinib (EGFR): Initiation of Phase III registration study
in first-line NSCLC patients with EGFR activating mutations with
brain metastasis in China;
-- HMPL-523 (Syk): Presentation of preliminary safety and
efficacy data from Phase I/Ib dose escalation and dose expansion
study in hematological cancer in Australia and China.
Use of Non-GAAP Financial Measures - References in this
announcement to adjusted research and development expenses,
adjusted consolidated net income attributable to Chi-Med from the
Commercial Platform, adjusted consolidated net income attributable
to Chi-Med from our Prescription Drugs business and adjusted
revenue of HBYS are based on non-GAAP financial measures. Please
see the "Use of Non-GAAP Financial Measures and Reconciliation"
below for further information relevant to the interpretation of
these financial measures and reconciliations of these financial
measures to the most comparable GAAP measures, respectively.
U.K. Analysts Meeting and Webcast Scheduled Today at 9:00 a.m.
BST (5:00 p.m. HKT) - at Citigate Dewe Rogerson, 3 London Wall
Buildings, London, EC2M 5SY, U.K.. Investors may participate in the
call at +44 20 3003 2666 or access a live video webcast of the call
via Chi-Med's website at
www.chi-med.com/investors/event-information/.
U.S. Conference Call Scheduled Today at 9:00 a.m. EDT - to
participate in the call from the United States, please dial 1 866
966 5335.
Additional dial-in numbers are also available at Chi-Med's
website. For both calls please use conference ID "Chi-Med."
Simon To, Chairman of Chi-Med, said: "2017 was another year of
important progress for Chi-Med. Both our Commercial Platform and
our Innovation Platform delivered very strong performance; we met
our financial guidance, substantially strengthened our cash
position and continued Chi-Med's multi-year record of generating
considerable shareholder value. We believe that this record will
continue in 2018 and beyond.
In our Innovation Platform, we have progressed our deep
portfolio of eight clinical drug candidates, now in active or
completing clinical trials in 36 TPPs around the world. Two major
milestones were the formal NDA submission for fruquintinib in CRC
in China; and the initiation of our first global Phase III
registration study of savolitinib in c-MET-driven metastatic PRCC.
We also presented positive Phase Ib/II data at major scientific
conferences on savolitinib in PRCC, NSCLC and gastric cancer;
fruquintinib in NSCLC and gastric cancer; sulfatinib in NET and
thyroid cancer; and theliatinib in esophageal cancer, all
positioning us well for 2018.
We are now entering the final stage of the NDA process for
fruquintinib in China - the Good Manufacturing Practice ("GMP")
certification of our manufacturing facility in Suzhou - and subject
to approval, we expect to launch fruquintinib in China in 2018 with
our commercial partner, Lilly. Equally important, the positive
Phase Ib/II data on savolitinib in combination with Tagrisso(R) in
NSCLC, presented in late 2017 at WCLC, has now led AstraZeneca to
agree to move forward and initiate a global randomized
chemotherapy-doublet controlled study in NSCLC - which is targeted
to start in H2 2018. Furthermore, in late 2017 we initiated a Phase
III registration study in China of fruquintinib in gastric cancer
and, in 2018, will start a Phase III registration study on epitinib
in NSCLC patients with brain metastasis.
The systematic progress of our pipeline is testament to the
quality of our in-house research organization, which has discovered
all eight of our clinical drug candidates. This productivity
continues, with the first of a stream of novel second-generation
immunotherapy candidates now progressing towards starting human
trials in 2019. This all demonstrates that global quality drug
discovery is now taking center stage in China.
In parallel, our Commercial Platform continues to deliver, with
net income attributable to Chi-Med up 25%, on an adjusted
(non-GAAP) basis excluding one-time gains, to $37.5 million. This
achievement was made more noteworthy when we consider that during
the past two years, we have built two new large-scale GMP certified
manufacturing facilities that have affected over 1,000
manufacturing staff. Moving production to these new factories,
which approximately triple our capacity and lower production cost,
has unlocked one-time property compensation that is expected to
exceed their cost. Our Prescription Drugs marketing capabilities
are one of our greatest strengths, as proven by our success on
Seroquel(R) and Concor(R) . Our team of about 2,300 medical sales
people now stands ready to enter oncology either through, subject
to approval, the launch of our own Innovation Platform drugs, or
acquisition.
We are building a company with deep capabilities, aiming to take
advantage of emerging opportunities in China and beyond. To this
end, in 2017, we appointed five new members to the ten-person
Chi-Med board - all industry veterans well positioned to help the
company develop. We also successfully completed a $301.3 million
follow-on offering on Nasdaq sufficient, we believe, to take us to
approvals on multiple drugs. Consequently, we view Chi-Med's future
with confidence."
2017 FINANCIAL AND OPERATIONAL HIGHLIGHTS:
Consolidated financial results of the Group are reported under
U.S. generally accepted accounting principles ("U.S. GAAP") and in
U.S. dollar currency unless otherwise stated. Chi-Med also conducts
its 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, certain financial results reported by
such non-consolidated joint ventures are referred to, 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" mean the consolidated subsidiaries and joint
ventures (excluding non-consolidated joint ventures) of
Chi-Med.
Innovation Platform - a deep, broad, and risk-balanced global
oncology/immunology pipeline.
Consolidated revenue from our Innovation Platform was $36.0
million (2016: $35.2m) from milestone payments from Lilly
(fruquintinib NDA filing) and AstraZeneca (savolitinib Phase III
initiation) and service fee payments from Lilly, AstraZeneca and
Nutrition Science Partners Limited ("NSP"), our 50/50 joint venture
with Nestlé Health Science S.A. ("Nestlé"). Net loss attributable
to Chi-Med from our Innovation Platform of $51.9 million (2016:
-$40.7m) primarily driven by $75.5 million (2016: $66.9m) in
research and development expenses, or $88.0 million (2016: $76.1m)
on an adjusted (non-GAAP) basis, spent on our active or completing
clinical trials in 36 TPPs, six of which are pivotal Phase III
studies on savolitinib, fruquintinib, and sulfatinib.
-- Savolitinib: Potential first-in-class selective c-MET
inhibitor currently in active clinical studies in 14 TPPs worldwide
in multiple tumor types including kidney, lung, gastric and
prostate cancers as a monotherapy or in combination with other
targeted and immunotherapy agents. Developing globally in
partnership with AstraZeneca:
1. Kidney cancer:
a. Presented Phase II global multi-center study in advanced PRCC
at the 2017 ASCO Genitourinary Cancers Symposium showing robust
efficacy with savolitinib monotherapy in c-MET-driven patients.
Median progression free survival ("PFS") of 6.2 months in patients
with c-MET-driven tumors as compared with 1.4 months (p<0.0001)
in c-MET-independent patients. Objective response rate ("ORR") was
18.2% in c-MET-driven patients vs. 0% (p=0.002) in c-MET
independent patients, based on confirmed partial responses ("PRs").
Encouraging durable response and a tolerable safety profile were
reported in savolitinib treated patients. The full article has now
been published in the September 2017 issue of the Journal of
Clinical Oncology.
b. A global Phase III study, the SAVOIR study, was initiated in
late June 2017. The SAVOIR study is an open-label, randomized,
controlled trial evaluating the efficacy and safety of savolitinib,
compared with Sutent(R) , in patients with c-MET-driven,
unresectable, locally advanced or metastatic PRCC. Approximately
180 patients will be randomized in the United States, Europe, Asia
and Latin America; c-MET-driven PRCC will be selected via the use
of a companion diagnostic kit.
c. During 2017, the CALYPSO study confirmed a safe dose of
savolitinib in combination with Imfinzi(R) (PD-L1 antibody) in RCC
patients. Subsequently, a Phase II expansion of CALYPSO was
initiated, in both PRCC and ccRCC in the U.K. and Spain.
2. Lung cancer:
a. Presented Phase Ib/II data, the TATTON (Part B) study, in
second- and third-line NSCLC, combination of the savolitinib 600mg
once-daily ("QD") plus Tagrisso(R) 80mg QD combination dose regimen
at the 2017 WCLC. In c-MET gene amplified NSCLC patients refractory
to first-generation EGFR TKIs (Iressa(R) /Tarceva(R) ) confirmed
PRs were reported in 14/23 (ORR 61%) of T790M mutation negative
patients, as well as confirmed PRs in 6/11 (55% ORR) of T790M
mutation positive patients. In NSCLC patients refractory to
third-generation EGFR TKIs (primarily Tagrisso(R) ) confirmed PRs
were observed in 10/30 (ORR 33%) patients. Since 2017 WCLC, both
PFS and duration of response ("DoR") have further matured. The
safety profile of savolitinib plus Tagrisso(R) is in line with
previous reports and going forward, AstraZenca has concluded that a
weight-based dosing algorithm will be applied for the
combination.
AstraZeneca has now agreed to proceed with development in
second-line NSCLC with multiple studies including: (1) a global
randomized chemotherapy-doublet (platinum plus Alimta(R)
(pemetrexed)) controlled study of savolitinib plus Tagrisso(R)
combination in first-generation (Iressa(R) /Tarceva(R) ) EGFR-TKI
refractory, c-MET gene amplified, T790M negative NSCLC patients,
targeted to start in H2 2018; (2) TATTON (Part D), already
enrolling, a study of savolitinib 300mg QD combined with
Tagrisso(R) 80mg QD, aimed at exploring the lower dose in the
context of maximizing long-term tolerability of the savolitinib and
Tagrisso(R) combination for patients who could be on the
combination for long periods of time; and (3) further supporting
studies. We expect that later in 2018 or early 2019, the mature
TATTON (Part B) and preliminary TATTON (Part D) data will enable
AstraZeneca to engage in regulatory discussion for both second- and
third-line NSCLC.
b. Presented Phase Ib/II data in second-line NSCLC, combination
of savolitinib and Iressa(R) at the 2017 WCLC. In c-MET gene
amplified NSCLC patients refractory to first-generation EGFR TKIs
(Iressa(R) and Tarceva(R) ) confirmed PRs were reported in 12/23
(ORR 52%) of T790M mutation negative patients, similar to that
recorded by the savolitinib and Tagrisso(R) combination. Plans for
a registration study in China for this combination are currently
under discussion with AstraZeneca.
3. Gastric cancer:
a. As at the latest report in 2017, Phase II studies in China
and South Korea had screened over 850 gastric cancer patients,
enrolled 54 c-Met-driven patients (31 China and 23 South Korea) and
continue to enroll. Presented preliminary China savolitinib
monotherapy data at the 2017 Chinese Society of Clinical Oncology
("CSCO") conference. Based on confirmed and unconfirmed PRs, we
reported an ORR of 43% (3/7 patients) and disease control rate
("DCR") of 86% in c-MET gene amplified patients.
-- Fruquintinib: Designed to be a best-in-class selective
inhibitor of VEGFR 1/2/3 - we are developing outside of China and
in partnership with Lilly within China:
1. CRC (third-line): Reported in March 2017 that fruquintinib
met the primary endpoint of median overall survival ("OS"), 9.30
months versus 6.57 months (p<0.001), and all secondary endpoints
in the FRESCO Phase III study as a monotherapy among third-line CRC
patients in China; and further that the adverse events ("AEs")
demonstrated in FRESCO did not identify any new or unexpected
safety issues; then presented the full FRESCO data-set in an oral
presentation at the 2017 ASCO and CSCO conferences and completed
submission of our China NDA in June 2017.
2. NSCLC (third-line): Completed enrollment in early 2018 of a
527 patient Phase III study, named FALUCA, with a primary endpoint
of OS, to evaluate fruquintinib as a monotherapy in third-line
NSCLC patients in China; expect top-line Phase III data to be
reported in late 2018.
3. Gastric cancer (second-line): Presented positive preliminary
data in the Phase Ib dose finding/expansion study in early 2017 at
the ASCO Gastrointestinal Cancers Symposium. Established a
well-tolerated combination dose of fruquintinib with Taxol(R) with
encouraging efficacy, including ORR of 36% based on confirmed PRs;
DCR of 68%; >=16 week PFS of 50% and >=7 month OS of 50%. In
late 2017, we initiated the FRUTIGA study, a randomized,
double-blind, Phase III study in which we target to enroll over 500
patients.
4. NSCLC (first-line): In early 2017, we initiated a Phase II
study of fruquintinib in combination with Iressa(R) in first-line
NSCLC patients with EGFR activating mutations in China. Preliminary
data was presented at the 2017 WCLC in which 17 efficacy evaluable
patients showed an ORR of 76% (13/17 including 4 unconfirmed at
data cut-off) and a DCR of 100% (17/17). There were no serious AEs
or those that led to death. We have now completed enrollment of
about 50 patients and are monitoring outcome.
5. In December 2017, we initiated a multi-center, open-label,
Phase I clinical study to evaluate the safety, tolerability and
pharmacokinetics ("PK") of fruquintinib in the United States, which
is the first step toward development of fruquintinib outside
China.
6. Production facility in Suzhou, China operated by Chi-Med is
now ready to support the commercial launch of fruquintinib, if
approved, in 2018. The Suzhou facility is now entering the CFDA
Pre-Approval Inspection ("PAI") and GMP certification stage of the
NDA process.
-- Sulfatinib: A unique angio-immuno TKI therapy with high
potency against VEGFR, FGFR1 and colony stimulating factor-receptor
1 ("CSF-1R") with emerging strong efficacy in multiple solid tumor
settings - enrolling two pivotal Phase III studies as well as
multiple Phase II studies:
1. NET and Biliary tract cancer:
a. Presented positive preliminary Phase II data at the European
Neuroendocrine Tumor Society ("ENETS") conference in early 2017.
Established that sulfatinib was well tolerated with highly
encouraging efficacy in both pancreatic NET (ORR 17.1% based on
confirmed PRs; DCR 90.2%; and median PFS 19.4 months) and
non-pancreatic NET (ORR 15.0% based on confirmed PRs; DCR 92.5%;
and median PFS 13.4 months), including 100% DCR in 12 patients who
had disease progression on targeted therapies such as Sutent(R) and
Afinitor(R) (everolimus); now enrolling two Phase III studies in
China, named SANET-p (in pancreatic NET patients) and SANET-ep (in
non-pancreatic NET patients), with primary endpoint of median PFS
and expected to complete enrollment in 2019.
b. Initiated a Phase II proof-of-concept study in biliary tract
cancer in China in early 2017.
c. U.S. Phase I study has confirmed the recommended Phase II
dose ("RP2D"). Planning is now underway for expansion in the United
States into a multi-arm Phase IIa study to explore efficacy and
safety in Sutent(R) and Afinitor(R) refractory pancreatic NET
patients as well as solid tumor patients.
2. Thyroid cancer: Presented Phase II data at ASCO and at the
American Thyroid Association Annual Meetings in 2017 in patients
with locally advanced or metastatic radioactive iodine
("RAI")-refractory differentiated thyroid cancer ("DTC") or
medullary thyroid cancer ("MTC") in China. Preliminary data in 16
efficacy evaluable patients showing an ORR of 30.0% in RAI-DTC and
an ORR of 16.7% in MTC patients based on confirmed PRs, with all
other patients reporting stable disease ("SD").
-- Epitinib: Highly differentiated EGFR TKI designed for optimal
blood-brain barrier penetration allowing for higher drug exposure
in the brain than currently marketed first-generation EGFR
TKIs:
1. NSCLC with brain metastasis: Epitinib has been shown to be
well tolerated with encouraging preliminary efficacy. Including
confirmed and unconfirmed PRs, epitinib showed an overall ORR (lung
and brain) of 62% in all EGFR TKI naïve NSCLC patients (those
patients not previously treated with an EGFR TKI) and an ORR of 70%
in EGFR TKI naïve NSCLC patients who also had measurable brain
metastasis and were c-MET negative. Enrollment continued in 2017 to
explore a further dose regimen; we expect to decide on the Phase
III dose and initiate the Phase III during 2018.
2. Glioblastoma: Initiated a Phase Ib/II study in glioblastoma,
a primary brain cancer that harbors high levels of EGFR gene
amplification, in March 2018.
-- HMPL-523: Potential first-in-class Syk inhibitor in oncology and immunology:
1. Immunology: We have submitted investigational new drug
("IND") applications for autoimmune diseases and target, pending
the submission of additional data requested by the U.S. Food &
Drug Administration ("FDA"), to progress into a Phase II
proof-of-concept study in immunology in late 2018 or early
2019.
2. Hematological cancer: Currently enrolling Phase I dose
escalation studies in Australia and China in patients with
hematologic malignancies. We have established the RP2D in both
Australia and China. We are now in the process of increasing the
number of clinical sites in both countries to support Phase Ib/II
expansion in a broad range of indolent non-Hodgkin's lymphoma
sub-types.
-- HMPL-689: Potential best-in-class, highly selective PI3K
inhibitor, which we believe should have meaningful advantages in
safety and tolerability over Zydelig(R) (idelalisib) and
selectivity over Aliqopa(R) (copanlisib):
Hematological cancer: Completed Phase I study in healthy
volunteers in Australia, and subsequently initiated a Phase I dose
escalation and expansion study in patients with hematologic
malignancies in China in August 2017.
-- Theliatinib: EGFR inhibitor, with high binding affinity to
wild-type EGFR protein, with potential in patients with solid
tumors presenting EGFR gene amplification or high-level of protein
over-expression:
Esophageal cancer: Presented preliminary Phase I results at the
2017 CSCO conference with no dose limiting toxicities or maximum
tolerated dose established. The Phase I included seven esophageal
cancer patients, five of which were evaluated for response, with
all five achieving SD. Subsequently, in early 2017, we began a
Phase Ib expansion and are opening further clinical sites in
China.
-- HMPL-453: Potential first-in-class and/or best-in-class selective FGFR 1/2/3 inhibitor:
Solid tumors: During the first half of 2017, we initiated Phase
I dose escalation studies in both Australia and China.
Commercial Platform - a deeply established, cash-generative,
pharmaceutical business in China - an established platform to
commercialize our Innovation Platform drug candidates.
Total consolidated sales from the Commercial Platform were up
13% to $205.2 million (2016: $180.9m) mainly resulting from growth
in our Prescription Drug commercial services business. Total sales
of non-consolidated joint ventures were up 6% to $472.0 million
(2016: $446.5m). Flat first half sales, due to a price increase on
our main cardiovascular prescription drug and a relatively quiet
influenza season on the over-the-counter ("OTC") drug business,
were offset by very strong second half sales across both the
Prescription Drug and Consumer Health businesses. This resulted in
total consolidated net income attributable to Chi-Med of $40.0
million (2016: $70.3m), or up 25% to $37.5 million (2016: $29.9m)
on an adjusted (non-GAAP) basis excluding one-time gains of $2.5
million in 2017 from research and development subsidies and $40.4
million in 2016 primarily from property compensation.
-- Prescription Drugs business continuing profit growth -
consolidated sales up 11% to $166.4 million (2016: $149.9m); total
sales of non-consolidated Prescription Drugs joint venture up 10%
to $244.6 million (2016: $222.4m); and total consolidated net
income attributable to Chi-Med up 28% to $26.5 million (2016:
$20.7m) on an adjusted (non-GAAP) basis excluding one-time
gains.
1. Shanghai Hutchison Pharmaceuticals Limited ("SHPL") - our
large-scale non-consolidated Prescription Drugs joint venture -
Continued progress on She Xiang Bao Xin ("SXBX") pill, our most
important commercial product, a prescription vasodilator that
accounts for 15.4% (2016: 12.0%) of China's rapidly growing,
approximately $2.0 billion, botanical coronary artery disease
prescription drug market. SXBX pill is a proprietary product with
full patent protection through 2029. During late 2016 and early
2017, we were able to effectively implement a pricing strategy that
led to very strong second half sales growth, $114.9 million (up 20%
versus H2 2016), and materially improved margins.
2. Shanghai government subsidy - In 2017, SHPL recognized a
one-time research and development subsidy totaling $5.9 million,
equivalent to $2.5 million in net income attributable to
Chi-Med.
3. Hutchison Whampoa Sinopharm Pharmaceuticals (Shanghai)
Limited ("Hutchison Sinopharm") - our Prescription Drugs commercial
services business - Continued commercial success in 2017 on
Seroquel(R) (bi-polar disorder/schizophrenia), including securing
inclusion of Seroquel XR(R) (extended release ("XR") formulation)
on the National Drug Reimbursement List ("NDRL") in China, leading
to a 22% increase in service fees to $11.4 million (2016: $9.3m)
received from AstraZeneca; and Concor(R) (hypertension/high blood
pressure) where strong sales led Merck Serono, in late 2017, to
expand Hutchison Sinopharm's exclusive territory by over 70% to now
cover a total of six provinces and municipalities with a population
of over 360 million people. As a result, service fees from
Concor(R) increased 31% to $1.8 million (2016: $1.4m).
-- Consumer Health business first half constrained but very
strong second half - consolidated sales up 25% to $38.8 million
(2016: $31.0m); total sales of non-consolidated Consumer Health
joint venture flat at $227.4 million (2016: $224.1m); and total
consolidated net income attributable to Chi-Med up 20% to $11.0
million (2016: $9.2m).
1. Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
Company Limited ("HBYS") - our large-scale non-consolidated OTC
drug joint venture - 2017 was a year of major change with the move
of a large part of our production to a new state-of-the-art,
high-capacity, cost-efficient factory in central China. The first
half of 2017 was consequently affected by short-term capacity
constraints; as well as an increase in certain key raw material
prices; and a mild influenza season. The second half of the year,
however, was very strong, with the new factory up and running and
raw material prices drawing back. Sales of our two key products, Fu
Fang Dan Shen tablets ("FFDS") (angina) and Banlangen granules
(anti-viral), accelerated, increasing to $54.5 million (up 17%
versus H2 2016), and margins were also materially improved.
2. Divestment of Nanyang Baiyunshan Hutchison Whampoa Guanbao
Pharmaceutical Company Limited ("Guanbao") - In September 2017,
HBYS divested Guanbao, a 60% subsidiary of HBYS for a consideration
approximately equal to its carrying value. Guanbao was a
low-margin, regional OTC logistics business, with no strategic
value to Chi-Med.
FINANCIAL GUIDANCE: 2017 revenue and net income met our most
recent guidance (provided in our interim results announcement for
the six months ended June 30, 2017 dated July 31, 2017) despite the
delay in one-time property compensation, reflecting the strength of
our Commercial Platform performance and lower than expected
administration, interest and tax expenses at the Group level.
In our guidance for 2018, we expect to see an increase in both
revenue and expenses in the Innovation Platform, driven by the
launch of fruquintinib if approved in China, potential milestone
payments from Lilly and AstraZeneca, and continued expansion of
clinical development investment on our drug candidates.
On the Commercial Platform, the new CFDA Two-Invoice System
("TIS") roll-out in China, while having limited effect on the scope
of our commercial operations or activities in 2018, will reduce the
revenue that Hutchison Sinopharm is able to consolidate from the
sales of certain third-party drugs. Furthermore, the divestment of
the 60% shareholding in Guanbao, under our non-consolidated joint
venture, HBYS, eliminates this low margin and non-core business
from our 2018 Guidance. Neither the TIS nor the Guanbao divestment,
however, will affect growth in the overall Commercial Platform net
income, which is expected to continue to progress steadily.
Finally, we continue to work towards achieving a one-time gain
on the property in HBYS, however the date of an auction remains
dependent on Guangzhou government policy.
Group Level: 2017 Guidance 2017 Actual 2018 Guidance
* Consolidated revenue $225-240 million $241.2 million $155-175 million
$(18)-(19) $(14.8) million $(16)-(18)
* Admin., interest & tax million million
$(13)-(28) $(26.7) million $(19)-(52)
* Net loss([1]) million million
Innovation Platform:
-- Consolidated revenue $35-40 million $36.0 million $40-50 million
$(85)-(90) $(88.0) million $(110)-(120)
* Adjusted (non-GAAP) R&D expenses million million
----------------- ---------------- --------------------
$(45)-(55) $(51.9) million $(60)-(80)
* Net loss([1]) million million
Commercial Platform:
$115-125 million([)
-- Sales (consolidated) $190-200 million $205.2 million (2) (])
$460-480 million([)
* Sales of non-consolidated JVs([) (3) (]) $480-500 million $472.0 million (4) (])
$32-34 million $37.5 million $41-43 million
* Net income on an adjusted (non-GAAP) basis excl.
one-time gains([1])
$3-16 million $2.5 million $0-20 million([)
(5) (])
* One-time gains([1])
----------------- ---------------- --------------------
* Net income([1]) $35-50 million $40.0 million $41-63 million
Notes:
[1] Attributable to Chi-Med;
[2] Under the new CFDA TIS policy Hutchison Sinopharm will no
longer be able to consolidate all sales of third-party products
(e.g. Seroquel(R) ), however, it will have no material impact on
profitability.
[3] Joint ventures;
[4] Divestment eliminates Guanbao from 2018 (sales in 2017 $38.6
million);
[5] One-time property compensation, timing of which is dependent
on Guangzhou government policy.
FINANCIAL STATEMENTS:
Chi-Med will today file with the U.S. Securities and Exchange
Commission its Annual Report on Form 20-F.
ANNUAL GENERAL MEETING:
The Annual General Meeting of Chi-Med will be held at 4(th)
Floor, Hutchison House, 5 Hester Road, Battersea, London SW11 4AN
on Friday, April 27, 2018 at 11:00 a.m.
CONTACTS:
Investor Enquiries
Mark Lee, Senior Vice President,
Corporate Finance & Development +852 2121 8200
U.K. & International Media Enquiries
Anthony Carlisle, Citigate Dewe Rogerson +44 7973 611 888 (Mobile) anthony.carlisle@cdrconsultancy.co.uk
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
Matt Beck, The Trout Group +1 (917) 415 1750 (Mobile) mbeck@troutgroup.com
David Dible, Citigate Dewe Rogerson +44 7967 566 919 (Mobile) david.dible@citigatedewerogerson.com
Panmure Gordon (UK) Limited
Richard Gray / Andrew Potts +44 (20) 7886 2500
About Chi-Med
Chi-Med is an innovative 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: 1). 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" mean Hutchison China MediTech Limited
and its consolidated subsidiaries and joint ventures unless
otherwise stated or indicated by context.
Past Performance and Forward-Looking Statements
The performance and results of operations of the Group contained
within this announcement are historical in nature, and past
performance is no guarantee of future results of the Group. 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 or net income 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 Chi-Med obtained from industry publications and
reports generated by third-party market research firms. Although
Chi-Med believes that the publications, reports and surveys are
reliable, Chi-Med has not independently verified the data and
cannot guarantee the accuracy or completeness of such data. You are
cautioned not to give undue weight to this 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
Chi-Med is consistently making significant progress towards its
goal of being an innovative global biopharmaceutical company based
in China, and our achievements last year amply demonstrate
this.
Our recent successes in advancing fruquintinib through NDA with
the CFDA as well as starting our first global Phase III study in
oncology with savolitinib have been particularly important. We are
also making solid progress on our other six, un-partnered, clinical
drug candidates as well as rapidly growing our Commercial Platform,
which stands ready to launch our drug candidates in China, if
approved. We believe that we are well positioned to create
shareholder value and our confidence in doing so stems from the
following factors.
The undisputed need for oncology drugs in China - In 2016,
global market sales of oncology drugs grew by 11% to $175.7 billion
making it the largest treatment area in the global pharmaceutical
market, with a 17% market share. In China, despite being the home
to 4.3 million new cancer patients per year, or about 20-30% of
those in the world, 2016 market sales of oncology drugs were just
$7.3 billion, or about 4% of the global market. In our view, it is
almost inevitable that the China oncology market is set to emerge
over the coming decade as an area of major opportunity, spurred by
China's increasing emphasis on innovation combined with its rapidly
improving regulatory environment.
China regulatory reforms - An important development in the
context of our ambitions is the transformation that is occurring in
the regulatory environment in China. In the clinical and regulatory
arena, dozens of policy documents have been published by the State
Council and CFDA, aiming to strengthen and speed up China's
clinical trial and approvals process. These include new standards,
supervision and accountability mechanisms. Also, the new Priority
Review and Market Authorization Holder systems are both clearly
helping to streamline the approval of innovative therapies that
meet major unmet medical needs in China.
In the commercial arena, the recent inclusion of 36 novel drugs
on the NDRL is a first step away from the 100% self-pay system.
Many targeted therapies in oncology are now set to be at least
partially reimbursed. While prices have been negotiated down to
between about one-third and one-half of global prices, both
innovators and patients in China are set to benefit from broadening
of access to these important therapies.
World-class science - Chi-Med has invested about $500 million,
including payments from our partners, in building an engine of
global oncology innovation in China. Our approximately 360-person
strong scientific team has created and advanced into development, a
portfolio of eight differentiated targeted therapies, primarily in
the field of oncology. These highly selective drug candidates, all
we believe with first- or best-in-class potential, act on novel
molecular targets, such as c-MET, Syk and FGFR, as well as on
validated targets, including EGFR, VEGFR and PI3K . To add to
these, we are developing the next wave of pre-clinical drug
candidates against multiple second-generation immunotherapy targets
which we believe are nearing readiness for clinical trials.
The reason we have created such a broad portfolio of assets is
because we believe that the future of cancer treatment lies in
combination therapies. As understanding around the biology of
cancer has evolved over the past ten years, it has become
increasingly clear in many solid tumor and hematological cancer
indications, that combination therapy, acting on multiple primary,
secondary and resistance signaling pathways will be required to
provide meaningful clinical outcomes. High selectivity and clean
drug-drug interaction profiles are essential, if a drug is to be
used in a combination regimen.
Establishing the infrastructure and financial support needed to
achieve our goal - During the past two years, we have taken steps
to further build ourselves into a company with the resources to
take advantage of opportunities and ultimately become a major
player in both China and the global markets. As long-standing board
members retired last year, we appointed five new directors to
Chi-Med's ten-person board, all with deep industry or financial
experience and all well positioned to help the company develop.
This is important as we embark into new areas, such as establishing
our clinical and regulatory team in the United States, and looking
to launch fruquintinib outside of China.
In financing, our initial and follow-on public offerings on
Nasdaq during the last two years have raised $411.5 million in cash
for the company. We believe that these resources, along with the
substantial cash generation of our Commercial Platform, will take
us through to approvals on multiple drugs. They will also allow us
to rapidly expand the indications in which we are developing these
drugs, as well as taking un-partnered assets further into
development by ourselves, thereby maximizing the economic value to
Chi-Med of these innovations.
For all these reasons, we are highly confident about Chi-Med's
long-term prospects. As always, our success and prospects are the
result of the commitment and dedication of our people, and I would
like to express my deep appreciation to all our management and
staff and for the support of the investors, directors and partners
of Chi-Med.
Simon To
Chairman, March 12, 2018
FINANCIAL REVIEW
Chi-Med Group revenue for the year ended December 31, 2017
increased 12% to $241.2 million (2016: $216.1m), mainly due to the
increase in revenue generated by our Commercial Platform to $205.2
million in 2017 (2016: $180.9m) driven by the progress of our
consolidated joint venture Hutchison Sinopharm. On the Innovation
Platform, we saw stable revenue of $36.0 million in 2017 (2016:
$35.2m), reflecting almost equal levels of milestone payments,
service fees and clinical cost reimbursements received from
AstraZeneca, Lilly and NSP compared to the prior year. It should be
noted that Group revenues do not include the revenues of our two
large-scale, 50/50 joint ventures in China, SHPL and HBYS, since
these are accounted for using the equity method.
Our Commercial Platform, which continues to be an important
profit and cash source for Chi-Med, recorded operating profit of
$45.1 million (2016: $74.3m) as a result of strong organic growth
in SHPL's coronary artery disease Prescription Drug business and
certain of our Consumer Health businesses, but was still lower than
2016 which had included a major $40.4 million one-time property
gain. The Innovation Platform incurred an operating loss of $52.0
million (2016: -$40.8m) as a result of expansion of clinical
development 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, declined to $11.5 million (2016:
$12.9m) primarily because 2016 included higher third-party advisor
costs in the audit, compliance and legal areas in relation to our
initial public offering on Nasdaq in that year.
Consequently, Chi-Med Group's operating loss was $18.4 million
(2016: profit of $20.5m).
The aggregate of interest and income tax expenses of Chi-Med
Group, as well as net income attributable to non-controlling
interests during the year fell 6% to $8.3 million (2016: $8.8m) due
mainly to higher taxes in 2016 because of the major one-time
property gain in 2016.
The resulting total Group net loss attributable to Chi-Med was
therefore $26.7 million (2016: net income $11.7m).
As a result, Group net loss attributable to ordinary
shareholders of Chi-Med in 2017, was -$0.43 per ordinary share /
-$0.22 per American depositary share ("ADS"), compared to net
income attributable to ordinary shareholders of Chi-Med of $0.20
per ordinary share / $0.10 per ADS, in 2016.
Cash and Financing
During the past two years, we have had a high degree of success
in proof-of-concept studies on our eight clinical drug candidates
and that has naturally led us to expand investment. The scale of
our late-stage clinical trial programs has expanded significantly,
with a total of six Phase III studies either underway or
completing. We plan for multiple further Phase III studies to start
in 2018 as well as to continue early development through Phase
Ib/II studies in 22 TPPs.
We have, and will continue to try to partially offset increasing
clinical investment with cash generated in our operating activities
from dividends paid by our non-consolidated Commercial Platform
joint ventures, as well as payments received from AstraZeneca,
Lilly, and NSP, our joint venture with Nestlé. In aggregate, in
2017, these helped offset a meaningful portion of the $88.0 million
(2016: $76.1m) in research and development expenses on an adjusted
(non-GAAP) basis.
In October 2017, we completed a follow-on offering on Nasdaq and
raised $301.3 million in new equity capital, or $292.7 million net
of expenses incurred, to strengthen our balance sheet and support
development plans, through to planned NDA submissions, for several
of our lead drug candidates.
As of December 31, 2017, we had available cash resources of
$479.6 million (December 31, 2016: $173.7m) at the Chi-Med Group
level including cash and cash equivalents and short-term
investments of $358.3 million (December 31, 2016: $103.7m) and
unutilized bank borrowing facilities of $121.3 million (December
31, 2016: $70.0m). In addition, as of December 31, 2017, our
non-consolidated joint ventures (SHPL, HBYS and NSP) held $67.0
million (December 31, 2016: $91.0m) in available cash
resources.
Outstanding bank loans as of December 31, 2017 amounted to $30.0
million (December 31, 2016: $46.8m) at the Chi-Med Group level,
with a weighted average cost of borrowing in 2017 of 2.7% (2016:
2.5%). As of December 31, 2017 and 2016, our non-consolidated joint
ventures had no outstanding bank loans.
In summary, we believe that the cash resources that we currently
hold are sufficient to fund all our near-term activities, including
the full development of our clinical drug pipeline into 2020.
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 built a large team of
about 360 scientists and staff (December 31, 2016: 330) 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 build and leverage this
platform, as we have in the past decade, to produce a stream of
novel drug candidates with global potential.
Innovation Platform revenue in 2017 was $36.0 million (2016:
$35.2m) reflecting generally similar levels of milestone payments,
service fees and clinical cost reimbursements received from
AstraZeneca and Lilly to those received last year. Net loss
attributable to Chi-Med increased to $51.9 million (2016: -$40.7m)
driven by $88.0 million (2016: $76.1m) in research operations and
clinical development spending of our pipeline of eight drug
candidates on an as adjusted (non-GAAP) basis. Since inception, the
Innovation Platform has dosed over 3,500 patients/subjects in
clinical trials of our drug candidates with over 700 dosed in 2017
primarily as a result of enrollment in the six Phase III studies
that we had underway during the year.
Product Pipeline Progress
Savolitinib (AZD6094): Savolitinib is a potential 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, addresses human metabolite-related
renal toxicity, the primary issue that halted development of
several other selective c-MET inhibitors. In clinical studies to
date, involving over 500 patients, savolitinib has shown promising
signs of clinical efficacy in patients with c-MET gene alterations
in PRCC, NSCLC, CRC and gastric cancer with an acceptable safety
profile.
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, and in June 2017,
we initiated our first global Phase III registration study in PRCC.
In late 2017, we presented positive Phase Ib/II data at the WCLC on
savolitinib in combination with Tagrisso(R) and Iressa(R) , in both
second- and third-line NSCLC, and are now working closely with
AstraZeneca on next steps for development as discussed below.
Savolitinib - Kidney cancer: High proportion of MET-driven
patients.
TPP (Target Patient Population) 1 - Enrolling (NCT03091192) -
Phase III PRCC savolitinib 600mg QD monotherapy (Global) - PRCC is
the most common of the non-clear cell RCCs representing about 14%
of kidney cancer. Approximately 366,000 new cases of kidney cancer
were diagnosed globally in 2015, equating to about 50,000 cases of
PRCC, with approximately half harboring c-MET-driven disease. No
targeted therapies have been approved specifically for PRCC, and to
date only modest efficacy in non-ccRCC has been reported in
sub-group analyses of broader RCC studies of VEGFR (e.g. Sutent(R)
) and mammalian target of rapamycin (mTOR) (e.g. Afinitor(R) )
TKIs, with ORRs of <10% and median PFS in first-line setting of
4-6 months and second-line setting of only 1-3 months (ESPN study,
Tannir N. M. et al.).
During early 2017, we presented the results of our 109-patient
global Phase II study in PRCC at the ASCO Genitourinary Cancers
Symposium, as well as in the Journal of Clinical Oncology as a
Rapid Communication Manuscript. This Phase II study was the largest
and most comprehensive clinical study in PRCC ever conducted. Of
109 patients treated with savolitinib, PRCC was c-MET-driven in 44
patients (40%), c-MET-independent in 46 (42%) and MET status
unknown in 19 (17%). c-MET-driven PRCC was strongly associated with
encouragingly durable response to savolitinib with ORR in the
c-MET-driven group of 18.2% (8/44) as compared to 0% (0/46) in the
c-MET-independent group (p=0.002, based on confirmed PRs). Median
PFS for patients with c-MET-driven and c-MET-independent PRCC was
6.2 months (95% CI: 4.1-7.0) and 1.4 months (95% CI: 1.4-2.7),
respectively (hazard ratio=0.33; 95% CI: 0.20-0.52; log-rank
p<0.0001). Savolitinib was well tolerated, with no reported
treatment related Grade >=3 AEs exceeding 5% incidence. Total
aggregate savolitinib treatment related Grade >=3 AEs occurred
in just 19% of patients comparing very well to the 70-75% Grade
>=3 AE level recorded in VEGFR inhibitors such as Sutent(R) and
Votrient(R) (pazopanib) in multiple RCC studies (N Eng J Med 369;8,
R J Motzer et al).
A global Phase III registration study, the SAVOIR study, of
savolitinib versus Sutent(R) in c-MET-driven metastatic PRCC
patients was initiated in June 2017. The primary endpoint for
efficacy in the SAVOIR study is median PFS, with secondary
endpoints of OS, ORR, DoR and DCR. We expect to complete enrollment
in late 2019.
Furthermore, in order to fully understand the role of
c-MET-driven disease in PRCC we are currently conducting a global
MES (molecular epidemiology study). The MES is in the process of
screening, using our companion diagnostic, archived tissue samples
from over 300 PRCC patients to identify c-MET-driven disease.
Historical medical records from these patients will then be used to
determine if c-MET-driven disease is predictive of worse outcome,
in terms of PFS and OS, in PRCC patients. If this is proven to be
the case, we will consider engaging in discussions regarding
Breakthrough Therapy potential with the U.S. Food and Drug
Administration ("FDA").
TPP 2 - Enrolling (NCT02761057) - Phase II study of multiple
TKIs in metastatic PRCC (U.S.) - A Phase II study, sponsored by the
U.S. National Cancer Institute, and named the PAPMET study, to
assess the efficacy of multiple TKIs in metastatic PRCC including
Sutent(R) ; Cabometyx(R) (cabozantinib); Xalkori(R) (crizotinib)
and savolitinib. PAPMET began enrolling patients in 2016, and is
expected to enroll about 180 patients in over 70 locations in the
United States with top-line data targeted for reporting in
2019.
TPP 3, TPP 4 and TPP 5 - Enrolling (NCT02819596) - Phase II
study of savolitinib (600mg daily) monotherapy and in combination
with Imfinzi(R) (anti-PD-L1) in both PRCC and ccRCC patients
(U.K./Spain) - A dose finding study began in 2016, named the
CALYPSO study, at St. Bartholomew's Hospital in London, to assess
safety/tolerability of savolitinib and Imfinzi(R) combination
therapy as well as preliminary efficacy of savolitinib as a
monotherapy or combination therapy in several c-MET-driven kidney
cancer patient populations. During 2016, the dose-finding phase of
the CALYPSO study successfully established the combination dose of
savolitinib and Imfinzi(R) and the study moved on to the Phase II
expansion stage in PRCC and ccRCC patients in the U.K. and Spain to
further explore efficacy during 2017.
Savolitinib - Lung cancer: Savolitinib's largest market
opportunity.
TPP 6 - Enrolling (NCT02143466) - Phase Ib/II expansion NSCLC
(second-line), EGFR TKI refractory, savolitinib (600mg QD) in
combination with Tagrisso(R) (Global) - In October 2016, at the
European Society for Medical Oncology meeting, AstraZeneca
presented preliminary proof-of-concept data, the TATTON study (Part
A), on 17 evaluable first-generation EGFR TKI (Iressa(R)
/Tarceva(R) ) refractory second-line NSCLC patients who had no
prior exposure to third-generation EGFR TKIs (Tagrisso(R)
/rocelitinib). Molecular analysis of both c-MET and T790M status
was completed for patients with sufficient available tumor tissue.
Of patients treated with the savolitinib and Tagrisso(R)
combination, confirmed PRs were reported in 4/5 (80% ORR) c-MET
positive/T790M negative patients and in 6/10 (60% ORR) c-MET
positive patients regardless of T790M status.
In 2016, we initiated a global Phase Ib/II expansion study in
second-line NSCLC, the TATTON study (Part B), aiming to recruit
sufficient c-MET gene amplified patients, who had progressed after
prior treatment with a first-generation EGFR inhibitor (Iressa(R)
/Tarceva(R) ), to support a decision on global Phase II/III
registration strategy. In this first-generation EGFR TKI refractory
NSCLC population, we estimate that c-MET gene amplification occurs
in 15-20% of patients. Preliminary data from TATTON (Part B), in 34
evaluable patients, was presented at 2017 WCLC and showed confirmed
PRs in 14/23 (ORR 61%) of T790M mutation negative patients, as well
as confirmed PRs in 6/11 (55% ORR) of T790M mutation positive
patients. AstraZeneca has recently decided to progress into the
next stage of development in this indication, with plans outlined
below.
TPP 7 - Enrolling (NCT02143466) - Phase Ib/II NSCLC
(third-line), EGFR/T790M TKI-refractory, savolitinib (600mg QD) in
combination with Tagrisso(R) (Global) - The TATTON study (Part B)
also enrolled third-line NSCLC patients that had progressed after
treatment with Tagrisso(R) as a result of c-MET gene amplification
acquired resistance. Data presented in June 2017 at ASCO, by
Harvard Medical School and Massachusetts General Hospital Cancer
Center ("HMS/MGH"), showed that about 30% (7/23 patients) of
Tagrisso(R) resistant third-line NSCLC patients harbor c-MET gene
amplification. This third-line patient population is generally
heavily pre-treated and highly complex from a molecular analysis
standpoint, with the HMS/MGH study showing that more than half the
c-MET gene amplification patients also harbored additional genetic
alterations, including but not limited to, EGFR gene amplification
and K-Ras mutations.
The TATTON (Part B) study, presented at the 2017 WCLC, also
included preliminary data in 30 evaluable patients previously
treated with third-generation T790M-directed EGFR inhibitors,
primarily Tagrisso(R) . Confirmed PRs were observed in 10/30 (ORR
33%) of these patients, and while this is lower than the 55-61% ORR
in TPP 6, it was as expected given the additional driver genes at
work post Tagrisso(R) monotherapy failure. We believe that the
savolitinib/Tagrisso(R) combination is an important treatment
option for these late-stage patients who have no remaining targeted
treatment alternatives.
Tagrisso(R) sales in 2017, only the second year since its
launch, were $955 million. At current pricing, this would indicate
that over 5,000 patients were treated with Tagrisso(R) during 2017,
thereby indicating that the market potential for savolitinib in
third-line, Tagrisso(R) resistant, NSCLC is material.
AstraZeneca decision on further development of TPP 6 and TPP
7:
In December 2017, AstraZeneca's governance committee in oncology
reviewed the TATTON (Part B) data that had been presented at the
2017 WCLC, to decide strategy for further development of the
savolitinib and Tagrisso(R) combination in first-generation
(Iressa(R) /Tarceva(R) ) and third-generation (Tagrisso(R) )
EGFR-TKI refractory NSCLC.
At that time, while the above strong ORR data was available for
the savolitinib 600mg QD plus Tagrisso(R) 80mg QD combination dose
regimen, neither median PFS nor DoR had been reached. Since then,
both PFS and DoR have continued to mature. The safety profile of
the combination is in line with previous reports for savolitinib
600mg QD plus Tagrisso(R) 80mg and going forward, AstraZeneca has
concluded that a weight-based dosing algorithm will be applied for
the combination, similar to the dosing algorithm used in the SAVOIR
Phase III study in PRCC.
Encouraged by the TATTON (Part B) data, AstraZeneca has decided
to proceed with development in second-line NSCLC (TPP 6). Planning
is now underway to initiate a global randomized
chemotherapy-doublet (platinum plus Alimta(R) ) controlled study of
the savolitinib plus Tagrisso(R) combination in first-generation
(Iressa(R) /Tarceva(R) ) EGFR-TKI refractory, c-MET-driven and
T790M negative NSCLC patients. This second-line NSCLC study,
currently targeted to start in H2 2018, will start as a Phase II
study until such time that regulatory discussions have taken place
on dosing approach, and will be powered based on TATTON (Part B)
for ORR and PFS.
To further support dosing approach ahead of regulatory
discussions, AstraZeneca has already initiated TATTON (Part D),
exploring savolitinib 300mg QD dose combined with Tagrisso(R) 80mg
QD, to explore the lower dose in the context of maximizing
tolerability of the combination for patients who could be on the
combination for long periods of time. A second supporting study, a
Phase II, aiming at strengthening the dose justification in
EGFR-TKI refractory, c-MET-driven NSCLC will also start in H2 2018,
randomizing to either 300mg Savolitinib QD plus Tagrisso(R) 80mg QD
or 600 mg Savolitinib (with weight based dosing) QD plus
Tagrisso(R) 80mg QD with a primary endpoint of tolerability.
Late in 2018 or early in 2019, and subject to the outcome of the
mature TATTON (Part B) data as well as preliminary TATTON (Part D)
results, we expect AstraZeneca to engage in regulatory discussions
regarding our dosing approach for the savolitinib and Tagrisso(R)
combination as well as potential Breakthrough Therapy. These
regulatory discussions will also enable AstraZeneca to decide
development strategy in third-line NSCLC (TPP 7), defined as
third-generation (Tagrisso(R) ) EGFR-TKI refractory, c-MET gene
amplified NSCLC patients.
TPP 8 - completed (NCT02374645) - Phase II NSCLC (second-line),
EGFR TKI-refractory, savolitinib (600mg QD) in combination with
Iressa(R) (China) - Also at the 2017 WCLC, we presented Phase II
proof-of-concept data assessing savolitinib in combination with
Iressa(R) in patients in China with EGFR activating mutation
advanced NSCLC with centrally confirmed c-MET gene amplification
who had progressed following first-generation EGFR inhibitor
therapy. Preliminary results showed confirmed PRs in 12/23 (ORR
52%) of T790M mutation negative patients, as well as confirmed PRs
in 2/23 (9% ORR) of T790M mutation positive patients. The 52% ORR
in T790M mutation negative patients was as expected, and similar to
that recorded in TATTON (Part B) for this TPP, and indicating that
for these patients Iressa(R) might be the most cost-efficient
combination partner for savolitinib. The low 9% ORR in T790M
mutation positive patients was also as expected, as Iressa(R) does
not effectively address T790M mutants. In terms of safety, the
savolitinib plus Iressa(R) combination dose was safe and well
tolerated.
With the launch of multiple lower-priced, and reimbursed,
generic first-generation EGFR TKIs in China in 2017, combined with
the very high 50% proportion of NSCLC patients who harbor the EGFR
activating mutations, we believe there may be a surge in c-MET gene
amplified second-line NSCLC patients in China over the coming
years. We continue to discuss Phase III plans in this TPP for the
savolitinib/Iressa(R) combination in China with AstraZeneca and
expect to reach agreement in 2018.
TPP 9 and TPP 10 - Enrolling (NCT01985555 / NCT02897479) - Phase
II c-MET-driven NSCLC savolitinib (600mg QD) monotherapy (China) -
Phase II studies of savolitinib are also ongoing in NSCLC and other
lung cancer patient populations, focusing on those with
c-MET-driven disease.
Savolitinib - Gastric cancer: Multiple Phase II studies underway
in Asia in c-MET-driven patients.
Phase II gastric cancer studies are ongoing in China as well as
the VIKTORY study, being run at Samsung Medical Center in South
Korea, in which savolitinib is represented in two out of the ten
treatment arms. As at the latest report in 2017, a total of over
850 gastric cancer patients have been screened in these studies and
those patients with confirmed c-MET-driven disease are being
treated with either savolitinib monotherapy or savolitinib in
combination with Taxotere(R) . Presentations of preliminary data
from these studies were made in 2017 at CSCO (China Phase II) and
ASCO (VIKTORY Phase II).
In China, as at June 2017, a total of 441 metastatic gastric
cancer patients had been screened with 13.2% (58/441) determined to
have aberrant c-MET, of which 5.0% (22/441) were c-MET gene
amplified. A total of 31 patients in China have been enrolled to
date in TPP 11 below. In South Korea, as of January 2017, a total
of 438 metastatic gastric cancer patients had been screened with
5.3% (23/438) being patients with c-MET-driven (gene amplification
or over-expression) disease. A total of 23 patients in South Korea
have been enrolled to date in TPP 11, 12 and 13 below.
TPP 11 - Enrolling South Korea (NCT02449551) / China
(NCT01985555) - Phase II gastric cancer, savolitinib monotherapy,
patients with c-MET gene amplification (South Korea/China) -
Preliminary results were presented at CSCO 2017 for the efficacy
evaluable c-MET gene amplified patients in China. Based on
confirmed and unconfirmed PRs, ORR was 42.9% (3/7) and DCR was
85.7% (6/7), with ORR of 13.6% (3/22) and DCR of 40.9% (9/22)
amongst the overall efficacy evaluable aberrant c-MET set. As of
data cut-off, the longest duration of treatment was in excess of
two years. Savolitinib monotherapy was determined as safe and well
tolerated in patients with advanced gastric cancer. Grade 3 or
above treatment emergent AEs occurring in above 5% of patients
included abnormal hepatic function in 12.9% (4/31), each of
gastrointestinal bleeding or decreased appetite in 9.7% (3/31
each), and each of diarrhea or gastrointestinal perforation in 6.4%
(2/31 each). This China study concluded that savolitinib
monotherapy demonstrated promising anti-tumor efficacy in gastric
cancer patients with c-MET gene amplification, and the potential
benefit to these patients warrants further exploration, with Phase
II enrollment continuing in China. The VIKTORY Phase II study is
ongoing in c-MET gene amplified patients in South Korea, with
preliminary data likely to be presented at a major scientific
conference in 2018.
TPP 12 and TPP 13 - Enrolling (NCT02447380 / NCT02447406) -
Phase II studies of savolitinib (600mg QD) in combination with
Taxotere(R) in c-MET over-expression or c-MET gene amplification
gastric cancer (South Korea) - Phase II studies are underway to
assess safety/tolerability of savolitinib and Taxotere(R)
combination as well as preliminary efficacy of the combination
therapy in both c-MET gene amplified patients and, the
approximately 40% of gastric cancer patients, that harbor c-MET
over-expression. The VIKTORY Phase II is ongoing in South Korea in
TPP 12 and 13, with preliminary data likely to be presented at a
major scientific conference in 2018.
TPP 14 - Enrolling (NCT03385655) - Phase II of savolitinib in
patients with metastatic Castration-Resistant Prostate Cancer
("mCRPC") (Canada) - Phase II study sponsored by the Canadian
Cancer Trials Group to determine: the effect of savolitinib on
prostate-specific antigen ("PSA") decline and time to PSA
progression; ORR as determined by RECIST 1.1 criteria: and to
evaluate the safety and toxicity profile of savolitinib in mCRPC
patients; and to identify potential predictive and prognostic
factors. The umbrella study targets to enroll around 500 patients
into six treatment arms based on molecular status, with patients
with c-MET-driven disease receiving savolitinib. High levels of
c-MET over expression can be prevalent prostate cancer
patients.
Fruquintinib (HMPL-013): Fruquintinib is a highly selective and
potent oral inhibitor of VEGFR 1/2/3 that was designed 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 better target
coverage, as well as possible use in combination with other agents
such as chemotherapies, targeted therapies and immunotherapies. We
believe these are points of meaningful differentiation compared to
other approved small molecule VEGFR inhibitors, such as Sutent(R) ,
Nexavar(R) (sorafenib) and Stivarga(R) , and can potentially
significantly expand the use and market potential of
fruquintinib.
In addition to our NDA submission in third-line CRC in China,
last month we completed enrollment in FALUCA, a pivotal Phase III
study of fruquintinib in 527 third-line NSCLC patients, and late
last year initiated FRUTIGA, a pivotal Phase III study of
fruquintinib in combination with Taxol(R) in the second-line
setting for gastric cancer. Furthermore, a Phase II study of
fruquintinib in combination with Iressa(R) in first-line EGFR
activating mutation NSCLC began in early 2017, with encouraging
preliminary results presented at the 2017 WCLC; and a Phase I study
of fruquintinib in the United States was also initiated in late
2017, the first step in development outside China. In China,
fruquintinib is jointly developed with Lilly, our commercial
partner.
TPP 15 - NDA submitted June 2017 (NCT02314819) - Phase III study
in CRC (third-line), fruquintinib monotherapy (China) - The FRESCO
study, is a pivotal Phase III study in 416 patients with locally
advanced or metastatic CRC disease that progressed following at
least two prior systemic chemotherapies. Patients were randomized
in a 2:1 ratio to receive either 5mg of fruquintinib QD orally, on
a 3 weeks on/1 week off cycle, plus best supportive care or placebo
plus best supportive care. The primary endpoint of median OS was
9.30 months [95% CI: 8.18-10.45] in the fruquintinib group versus
6.57 months [95% CI: 5.88-8.11] in the placebo group, with a hazard
ratio of 0.65 [95% CI: 0.51-0.83; two-sided p<0.001]. The
secondary endpoint of median PFS was 3.71 months [95% CI:
3.65-4.63] in the fruquintinib group versus 1.84 months [95% CI:
1.81-1.84] in the placebo group, with a hazard ratio of 0.26 [95%
CI: 0.21-0.34; two-sided p<0.001]. Significant benefits were
also seen in other secondary endpoints. The fruquintinib group DCR
was 62.2% vs. 12.3% for placebo (p<0.001), while the ORR based
on confirmed PRs was 4.7% vs. 0% for placebo (p=0.012).
In terms of safety, results showed that fruquintinib had a
manageable safety profile with lower off-target toxicities compared
to other VEGFR TKIs. Of particular interest was that the Grade 3 or
above hepatotoxicity was similar for the fruquintinib group as
compared to the placebo group, which is in contrast to Stivarga(R)
which was markedly worse and often difficult to manage in this
patient population in the CONCUR study. The most frequently
reported fruquintinib-related Grade >=3 AEs included
hypertension (21.2%), hand-foot skin reaction (10.8%), proteinuria
(3.2%) and diarrhea (2.9%), all possibly associated with VEGFR
inhibition. No other Grade >=3 AEs exceeded 1.4% in the
fruquintinib population, including hepatic function AEs such as
elevations in bilirubin (1.4%), alanine aminotransferase ("ALT")
(0.7%) or aspartate aminotransferase ("AST") (0.4%). In terms of
tolerability, dose interruptions or reductions occurred in only
35.3% and 24.1% of patients in the fruquintinib arm, respectively,
and only 15.1% of patients discontinued treatment of fruquintinib
due to AEs vs. 5.8% for placebo.
Since completing submission of the NDA to the CFDA in early June
2017, we have engaged with the Center for Drug Evaluation (CDE) to
conduct reviews in the areas of: pharmacology & toxicity;
clinical data and statistical analysis; and chemistry,
manufacturing and control of standards and process. We have also
facilitated the conduct of clinical site visits including Good
Clinical Practice (GCP) and Good Laboratory Practice (GLP)
inspections. We are currently entering the PAI (pre-approval
inspection) process for our active pharmaceutical ingredient (API)
contract manufacturer as well as the PAI and GMP certification
process for our Suzhou formulation facility.
TPP 16 - Enrollment complete (NCT02691299) - Phase III study of
fruquintinib monotherapy in third-line NSCLC (China) - Following a
positive Phase II study comparing fruquintinib with placebo in
advanced non-squamous NSCLC patients who have failed two prior
systemic chemotherapies, or third-line NSCLC, we initiated a Phase
III registration study, the FALUCA study, in December 2015. Results
of the Phase II study were presented at the 2016 WCLC and have been
accepted for publication in the Journal of Clinical Oncology. In
February 2018, we completed enrollment of the FALUCA study in
China, in which a total of 527 patients were 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 for FALUCA is OS,
with secondary endpoints including PFS, ORR, DCR and DoR. We expect
to reach median OS endpoint maturity and report top-line results in
late 2018.
TPP 17 - Enrolling (NCT02976116) - Phase II study of
fruquintinib in combination with Iressa(R) in first-line NSCLC
(China) - In early 2017, we initiated a multi-center, single-arm,
open-label, dose-finding Phase II study of fruquintinib in
combination with Iressa(R) in the first-line setting for patients
with advanced or metastatic NSCLC with EGFR activating mutations.
We have enrolled about 50 patients in this study with the objective
to evaluate the safety and tolerability as well as efficacy of the
combination therapy. Preliminary data was presented at the 2017
WCLC, with the eight (31%) Grade 3 treatment emergent AEs being
increased ALT (19%); increased AST (4%); proteinuria (4%) and
hypertension (4%). There were no serious AEs or those that lead to
death. Preliminary results in 17 efficacy evaluable patients showed
an ORR of 76% (13/17), including 9 confirmed and 4 unconfirmed PRs
at the time of data cut-off, as well as a DCR of 100% (17/17).
Fruquintinib's unique safety and tolerability profile, resulting
from its high kinase selectivity, combined with flexibility to
adjust dosage to manage treatment emergent toxicities due to its
shorter half-life versus monoclonal antibody therapies, along with
its potent anti-angiogenic effect, makes it a high potential
combination partner for EGFR-TKIs. Subject to continued positive
data in TPP 16, we will consider Phase III registration studies
both inside and outside of China.
TPP 18 - Enrolling (NCT03251378) - Phase I fruquintinib
monotherapy in advanced solid tumors (U.S.) - In December 2017, we
initiated a multi-center, open-label, Phase I clinical study to
evaluate the safety, tolerability and PK of fruquintinib in U.S.
patients with solid tumors. Upon completion, likely late in 2018,
our intention is to begin exploring multiple innovative combination
studies of fruquintinib and other TKIs, chemotherapy and
immunotherapy agents in the United States.
TPP 19 - Enrolling (NCT03223376) - Phase III study of
fruquintinib in combination with Taxol(R) in gastric cancer
(second-line) (China) - In early 2017, at the ASCO Gastrointestinal
Cancers Symposium, we presented results of an open label,
multi-center Phase Ib dose finding/expansion study of fruquintinib
in combination with Taxol(R) in second-line gastric cancer. A total
of 32 patients were enrolled in the study and 28 of 32 patients
were efficacy evaluable with an ORR of 36% (10/28 based on
confirmed PRs) and a DCR of 68% (19/28). At fruquintinib RP2D,
>=16 week PFS was 50% and >=7 month OS was 50%. Tolerability
of the RP2D combination was as expected with common treatment
related Grade >=3 AEs being neutropenia (41%), leukopenia (28%),
decreased hemoglobin (6%), and hand-foot syndrome (6%). Based on
this encouraging Phase Ib data, in October 2017 we initiated the
FRUTIGA study, a randomized, double-blind, Phase III study to
evaluate the efficacy and safety of fruquintinib combined with
Taxol(R) compared with Taxol(R) monotherapy for second-line
treatment of advanced gastric or gastroesophageal junction (GEJ)
adenocarcinoma, in patients who had failed first-line standard
5-flourouracil (5-FU)-based chemotherapy. A total of over 500
patients are expected to be enrolled into FRUTIGA at a 1:1 ratio.
The primary endpoint is OS, with secondary endpoints including PFS,
ORR, DCR and quality-of-life score. Biomarkers related to the
anti-tumor activity of fruquintinib will also be explored. We
intend to conduct an interim analysis of the FRUTIGA study for
futility, sometime during 2019.
Sulfatinib (HMPL-012): Sulfatinib is an oral drug candidate with
a unique angio-immuno kinase profile which provides both
anti-angiogenesis effect and, we believe, activates and effectively
enhances the body's immune system, specifically T-cells.
Importantly, in 2016 we presented pre-clinical data that show
sulfatinib, in addition to inhibiting VEGFR and FGFR1, is a potent
inhibitor of CSF-1R, a signaling pathway involved in blocking the
activation of tumor-associated macrophages. Sulfatinib is the first
oncology candidate that we have taken through proof-of-concept in
China and subsequently started clinical development in the United
States. We are currently conducting six clinical studies on
sulfatinib and retain all rights to sulfatinib worldwide.
In early 2017, at the ENETS conference, we presented the results
of an open-label, single-arm Phase II study in China to assess the
efficacy and safety of sulfatinib 300mg QD monotherapy in patients
with advanced Grade 1 or 2 NETs. A total of 81 patients (41
pancreatic NET and 40 extra-pancreatic NET) were enrolled. The
majority of patients had Grade 2 diseases (79%) and had failed
previous systemic treatments (65%). As of January 2017, 13 patients
had confirmed PR and 61 patients had SD, corresponding to an
overall ORR of 16.0% (13/81), with 17.1% (7/41) in pancreatic NET
and 15.0% (6/40) in extra-pancreatic NET, and an overall DCR of
91.4%. Median overall PFS was estimated to be 16.6 months (95% CI:
13.4, 19.4) with longer median PFS in pancreatic NET estimated at
19.4 months and shorter median PFS in extra-pancreatic NET
estimated at 13.4 months. Importantly, there were fourteen patients
who had progressed after treatment with targeted therapies (e.g.
Sutent(R) and Afinitor(R) ) and all benefited from sulfatinib
treatment (4 PRs and 10 SDs). These Phase II data compared
favorably to the less than 10% ORR and 11.4 month median PFS for
Sutent(R) and Afinitor(R) , the two approved single agent therapies
for pancreatic NET. Sulfatinib was well tolerated with Grade >=3
AEs, with >5% incidence, regardless of causality of hypertension
(31%), proteinuria (14%), hyperuricemia (10%), hypertriglyceridemia
(9%), diarrhea (7%) and ALT increase (6%). Based on the above
promising Phase II efficacy data and tolerability in patients with
advanced NETs, we initiated two randomized Phase III trials (TPPs
20 and 21 below) in China along with U.S. development (TPP 22
below).
TPP 20 - Enrolling (NCT02589821) - Phase III pancreatic NET
sulfatinib monotherapy (China) - In 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 in a 2:1 ratio to receive either 300mg of sulfatinib
orally QD, or placebo, on a 28-day treatment cycle. The primary
endpoint is PFS, with secondary endpoints including ORR, DCR, time
to response, DoR, safety and tolerability. We expect to complete
enrollment in 2019 and present top-line results thereafter.
TPP 21 - Enrolling (NCT02588170) - Phase III extra-pancreatic
NET sulfatinib monotherapy (China) - In December 2015, we initiated
the SANET-ep study, which is a pivotal Phase III study in patients
with low or intermediate grade advanced extra-pancreatic NET.
Patients are randomized in a 2:1 ratio to receive either 300mg of
sulfatinib orally QD, or placebo, on a 28-day treatment cycle. The
primary endpoint is PFS, with secondary endpoints including ORR,
DCR, time to response, DoR, safety and tolerability. We expect to
complete enrollment in 2019 and present top-line results
thereafter.
TPP 22 - Enrolling (NCT02549937) - Phase I sulfatinib
monotherapy in advanced solid tumors (U.S.) - A Phase I study in
cancer patients in the United States is now close to completion
having confirmed the RP2D dose. We are currently in final planning
for an expansion of sulfatinib development in the United States
into a multi-arm Phase IIa study to explore efficacy and safety in
both NET and solid tumor patients.
TPP 23 and TPP 24 - Enrollment complete (NCT02614495) - Phase II
study in recurrent/refractory thyroid cancer patients (China) - In
2016, we began an open-label, Phase II proof-of-concept study in
patients with recurrent/refractory MTC or RAI-refractory DTC in
China where there are few safe and effective treatment options. In
June 2017, we presented preliminary Phase II data at ASCO showing
that as at December 31, 2016 a total of 18 patients had been
enrolled, and treated with sulfatinib, with preliminary data
showing that confirmed PRs were reported in 3/10 (30.0% ORR)
RAI-refractory DTC patients and 1/6 (16.7% ORR) MTC patients, and
all other patients were SD.
TPP 25 - Enrolling (NCT02966821) - Phase II study in
chemotherapy refractory biliary tract cancer patients (China) - In
early 2017, we began a Phase II proof-of-concept study in patients
with biliary tract cancer (also known as cholangiocarcinoma), a
heterogeneous group of rare malignancies arising from the biliary
tract epithelia. We see a major unmet medical need for patients who
have progressed on chemotherapy, and sulfatinib may offer a new
targeted treatment option in this tumor type.
Epitinib (HMPL-813): A significant portion of NSCLC patients,
estimated at approximately 10-15%, have developed brain metastasis
by the time of first diagnosis and eventually approximately 50% of
NSCLC patients go on to develop brain metastasis. Patients with
brain metastasis have a dismal prognosis and a poor quality of life
with limited treatment options. Epitinib is a potent and highly
selective oral EGFR inhibitor which has demonstrated brain
penetration and efficacy in both pre-clinical and clinical studies.
EGFR inhibitors have revolutionized the treatment of NSCLC with
EGFR activating mutations. However, approved 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.
TPP 26 - Continues to enroll (NCT02590952) - Phase Ib epitinib
monotherapy in NSCLC patients with activating EGFR-mutations and
brain metastasis (China) - In December 2016 at the WCLC, we
presented encouraging efficacy data for an open label, multi-center
Phase I dose expansion study. For EGFR TKI naïve patients treated
with epitinib 160mg QD dose, ORR was in the range of 60-70%
(including confirmed and unconfirmed PRs). During 2017, we
continued to enroll patients in this Phase Ib study exploring a
lower 120mg QD dose in the context of further optimizing
tolerability for long-term usage. We expect to decide the Phase III
dose in early 2018 and initiate Phase III shortly thereafter.
TPP 27 - Enrolling (NCT03231501) - Phase Ib/II study in
glioblastoma - Glioblastoma is a primary brain cancer that harbors
high levels of EGFR gene amplification. This month, we initiated a
Phase Ib/II study multi-center, single-arm, open-label study to
evaluate the efficacy and safety of epitinib as a monotherapy in
patients with EGFR gene amplified, histologically confirmed
glioblastoma. The primary endpoint is ORR.
Theliatinib (HMPL-309): Theliatinib is a novel molecule EGFR
inhibitor under investigation for the treatment of solid tumors.
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 their
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 could benefit patients with tumor-types
with a high incidence of wild-type EGFR activation. This is notable
in certain cancer types such as esophageal cancer, where 8-30%
harbors EGFR gene amplification and 30-90% EGFR overexpression. We
currently retain all rights to theliatinib worldwide.
TPP 28 - Complete (NCT02601274) - Phase I study of theliatinib
monotherapy in solid tumors (China) - At the 2017 CSCO conference,
we presented results from the Phase I study of the safety and
preliminary anti-tumor activity of theliatinib. Results showed that
doses up to 500mg QD were determined to be safe and well-tolerated,
with no dose limiting toxicities or maximum tolerated dose
established. PK exposure increased with dose, with 300mg QD or more
considered sufficient to inhibit EGFR phosphorylation. Amongst the
21 patients that received 120mg to 500mg QD, there were only four
treatment emergent Grade >=3 AEs: each of gastrointestinal
bleeding, decreased white blood cell count, anemia or decreased
platelet count of 4.8% (1/21 each). There were no incidences of
Grade >=3 rash or diarrhea. Amongst seven esophageal cancer
patients, five had measurable lesions and could be evaluated for
response, with all five achieving SD. Of the efficacy evaluable
patients in the 120mg to 500mg cohorts, 44.4% (8/18) had SD after
12 weeks. The study concluded that further development of
theliatinib 400mg QD amongst esophageal cancer patients with EGFR
over expression was warranted (TPP 29).
TPP 29 - Enrolling (NCT02601274) - Phase Ib expansion
theliatinib monotherapy in esophageal cancer (China) - In early
2017, we began a Phase Ib proof-of-concept expansion study of
theliatinib in esophageal cancer patients with EGFR protein
over-expression or gene amplification. This study is now in the
process of expanding through the opening of further clinical sites
in China.
HMPL-523: HMPL-523 is a potential first/best-in-class oral
inhibitor targeting Syk, a key protein involved in B-cell
signaling. Modulation of the B-cell signaling system has proven to
have significant potential for the treatment of certain chronic
diseases in immunology, such as rheumatoid arthritis or lupus, as
well as hematological cancers. We currently retain all rights to
HMPL-523 worldwide.
TPP 30 and TPP 31 - Complete (NCT02105129) - Phase I study
(healthy volunteers) (Australia/China) - We believe HMPL-523, as an
oral drug candidate, has advantages over intravenous monoclonal
antibody immune modulators in rheumatoid arthritis in that small
molecule compounds can be taken orally and have shorter half-lives,
thereby reducing the risk of infections from sustained suppression
of the immune system. The Phase I dose escalation study showed
HMPL-523 exhibited a tolerable safety profile, with data presented
in full at the 2016 American College of Rheumatology conference.
Off-target toxicities such as diarrhea and hypertension, seen with
the first-generation Syk inhibitor fostamatinib, were not
observed.
In addition to tolerable safety, this Phase I dose escalation
study evaluated the PK and pharmacodynamic ("PD") profile of
HMPL-523. We have submitted IND applications for autoimmune
diseases and expect, pending the imminent submission of additional
data requested by the U.S. FDA, to progress into a Phase II
proof-of-concept study in immunology in late 2018 or early
2019.
TPP 32 and TPP 33 - Enrolling (NCT02503033 / NCT02857998) -
Phase I study of HMPL-523 in hematological cancers
(Australia/China) - In early 2016, we initiated a Phase I dose
escalation study of HMPL-523 in Australia in hematological cancer
patients and have completed seven dose cohorts. China Phase I began
in early 2017 and has now completed five dose cohorts. In both
Australia and China, we have established both efficacious QD and
twice daily dose regimens. We are now in the process of increasing
the number of clinical sites in Australia and China to support
Phase Ib/II expansion in a broad range of indolent non-Hodgkin's
lymphoma sub-types. We target to present dose escalation and
expansion results, including preliminary proof-of-concept data, at
a major scientific conference later in 2018.
HMPL-689: HMPL-689 is a novel, potential best-in-class, 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 PK
properties have been found to be favorable with good oral
absorption, moderate tissue distribution and low clearance in
preclinical PK studies. We also expect that HMPL-689 will have low
risk of drug accumulation and drug-to-drug interaction. We
currently retain all rights to HMPL-689 worldwide.
TPP 34 and TPP 35 - Enrolling (NCT02631642 / NCT03128164) -
Phase I dose escalation (Australia/China) - In 2016, we completed a
Phase I dose escalation study in Australia in healthy adult
volunteers to evaluate HMPL-689's PK and safety profile following
single oral dosing. Results were as expected with linear PK
properties and good safety profile. We subsequently received IND
clearance in China and then initiated a Phase I dose escalation and
expansion study in patients with hematologic malignancies in August
2017.
HMPL-453: HMPL-453 is a novel, potentially first-in-class,
highly selective and potent small molecule inhibitor that targets
FGFR 1/2/3, a sub-family of receptor tyrosine kinases. Aberrant
FGFR signaling has been found to be a driving force in tumor
growth, promotion of angiogenesis and resistance to anti-tumor
therapies. To date, there are no approved therapies specifically
targeting the FGFR signaling pathway. In pre-clinical studies,
HMPL-453 demonstrated excellent kinase selectivity as well as
strong anti-tumor potency. Abnormal FGFR gene alterations are
believed to be the drivers of tumor cell proliferation in several
solid tumor settings. We currently retain all rights to HMPL-453
worldwide.
TPP 36 and TPP 37 - Enrolling (NCT02966171) / NCT03160833) -
Phase I dose escalation (Australia/China) - In early 2017, we
initiated first-in-human Phase I dose escalation studies in both
Australia and China to evaluate safety, tolerability, PK, PD and
preliminary anti-tumor activity in patients with advanced or
metastatic solid tumors.
HM004-6599: HM004-6599 is a proprietary botanical drug for the
treatment of inflammatory bowel diseases, which we are developing
through NSP, a 50/50 joint venture with Nestlé. In the first half
of 2017, we submitted our IND application for HM004-6599 in China
and we now await clearance to proceed into Phase I clinical
studies. We also target to initiate Phase I clinical studies in
Australia in 2018. HM004-6599 is an enriched/purified
re-formulation of HMPL-004, our drug candidate that reported
positive Phase II results in ulcerative colitis in 2010 but then
went on to prove futile in an interim analysis of the subsequent
Phase III study in 2014.
COMMERCIAL PLATFORM
The Commercial Platform, which has been built over the past 17
years, is focused on two business areas. First is our core
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 Innovation Platform drugs once approved in China. Second
is our Consumer Health business, which is a profitable and cash
flow generating business selling primarily market-leading,
household-name OTC pharmaceutical products through our
non-consolidated joint venture HBYS.
In 2017, sales of our Commercial Platform's subsidiaries grew by
13% to $205.2 million (2016: $180.9m), and sales of our Commercial
Platform's non-consolidated joint ventures, SHPL and HBYS, grew by
6% to $472.0 million (2016: $446.5m) resulting in consolidated net
income attributable to Chi-Med from our Commercial Platform of
$40.0 million (2016: $70.3m). Stripping out one-time gains,
adjusted (non-GAAP) consolidated net income attributable to Chi-Med
from our Commercial Platform grew by 25% to $37.5 million (2016:
$29.9m).
Prescription Drugs business:
In 2017, sales of our Prescription Drugs subsidiaries grew by
11% to $166.4 million (2016: $149.9m), and sales of our
non-consolidated Prescription Drugs joint venture (SHPL) grew by
10% to $244.6 million (2016: $222.4m). The consolidated net income
attributable to Chi-Med from our Prescription Drugs business was
$29.0 million (2016: $61.1m). Adjusted (non-GAAP) consolidated net
income attributable to Chi-Med grew 28% to $26.5 million (2016:
$20.7m), when excluding one-time gains of $2.5 million in 2017 from
research and development subsidies and $40.4 million in 2016
primarily from property compensation. The Prescription Drugs
business represented 72% of our overall Commercial Platform net
income in 2017.
SHPL: Our own-brand Prescription Drugs business, operated
through our non-consolidated joint venture SHPL, is a
well-established and stable-growth business. In 2016, SHPL
delivered sales growth of 23%. However, sales in the first half of
2017 were subdued at $129.7 million (up 2% versus H1 2016) as a
result of an 11% price increase on our main product SXBX pill,
which occurred in December 2016. As expected, SHPL sales
performance, as well as gross margins, materially improved as 2017
progressed. Sales in the second half were $114.9 million (up 20%
versus H2 2016).
SXBX pill: SHPL's main product is 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). SXBX
pill is the third largest botanical prescription drug in this
indication in China, with a market share of 15.4% nationally and
47.0% in Shanghai. Sales of SXBX pill have grown more than
twenty-fold since 2001 due to continued geographical expansion of
sales coverage, including 7% to $209.2 million in 2017 despite the
aforementioned late 2016 price increase.
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 with an average daily cost of RMB4.00, or approximately
$0.60 (2016: RMB3.30). In the coming years, we anticipate stable
growth in sales and profit for SXBX pill given the strength of its
proposition 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 2,300
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's new,
GMP-certified factory located 40 kilometers south of Shanghai in
Fengpu district, which holds 74 drug product manufacturing licenses
and is operated by about 550 manufacturing staff. This new factory
has approximately tripled SHPL's capacity and therefore positions
us well for continued long-term growth.
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 2017, Hutchison Sinopharm made continued
progress with sales up 11% to $166.4 million (2016: $149.9m) as a
result of growth in the third-party drug distribution businesses
and Seroquel(R) .
Seroquel(R) : Seroquel(R) (quetiapine tablets) is an
anti-psychotic therapy approved for bi-polar disorder and
schizophrenia, conditions that are under-diagnosed in China.
Seroquel(R) holds an 5.6% market share in China's approximately
$0.9 billion atypical anti-psychotic prescription drug market, and
45% 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 in 2017 was included on the NDRL,
thereby providing us with major competitive advantage over
quetiapine generics.
Hutchison Sinopharm is the exclusive marketing agent for
Seroquel(R) tablets in China and through a team of about 120
dedicated medical sales representatives reported sales in 2017 of
$35.4 million (2016: $34.4m). The new China TIS (two-invoice
system), explained in more detail below, came into effect in
October 2017, at which point Hutchison Sinopharm's Seroquel(R)
operating model began progressively switching to a fee-for-service
model. This change in business model has limited effect on the past
or future service fees paid by AstraZeneca to Hutchison Sinopharm
for marketing Seroquel(R) , which in 2017 increased 22% to $11.4
million (2016: $9.3m).
Subject to Hutchison Sinopharm's continued delivery of
pre-specified annual sales targets, which would require
approximately 22% sales growth in 2018 and 15% per year thereafter,
we can continue to retain exclusive commercial rights to
Seroquel(R) in China until 2025. Notwithstanding potential changes
in government pricing policy, we expect Seroquel(R) to have a
reasonable chance to meet these annual sales targets over the next
several years due to the XR formulation, its recent inclusion in
the NDRL, as well as expansion in diagnosis and treatment of
anti-psychotic 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 approximately 18% national market share in China's
beta-blocker drug market and 70% of China's generic bisoprolol
market. Hutchison Sinopharm is now the exclusive marketing agent in
six provinces, markets that contain over 360 million people. We
have created synergy with SHPL's existing cardiovascular medical
sales team by detailing Concor(R) alongside the SXBX pill on a
fee-for-service basis. In 2017, we grew Concor(R) sales by 90%,
resulting in service fees of $1.8 million (2016: $1.4m) to
Hutchison Sinopharm and SHPL in aggregate. We expect growth in
these fees will continue to be driven by cardiovascular market
expansion as well as potential further territorial expansion.
Regulatory reform in the China pharmaceutical distribution
system - The new TIS has now been mostly rolled-out across China.
In principle, the purpose of the TIS is to restrict the number of
layers in the drug distribution system in China, in order to
improve transparency, compliant business conduct, and efficiency
and thereby lower the cost of drugs. The impact to us is that,
starting in October 2017, the Seroquel(R) sales model, in which our
consolidated revenues historically reflected total gross sales of
Seroquel(R) , began to shift to a fee-for-service model similar to
that used all along on Concor(R) . This change will reduce the
top-line revenues that Hutchison Sinopharm will in the future be
able to record from sales of Seroquel(R) as well as many of our
other third-party customers. Therefore, as a direct result of TIS,
sales guidance for Hutchison Sinopharm for 2018 is now estimated at
approximately $75-85 million (2017: $166.4m). Importantly, however,
this drop in reported sales will have no impact on profitability,
the service fees paid to Hutchison Sinopharm, or our commercial
team operations and expansion plans.
Consumer Health business:
During 2017, sales of our Consumer Health subsidiaries increased
by 25% to $38.8 million (2016: $31.0m) and sales of our
non-consolidated Consumer Health joint venture (HBYS) were flat at
$227.4 million (2016: $224.1m). Consolidated net income
attributable to Chi-Med from our Consumer Health business grew by
20% to $11.0 million (2016: $9.2m) as a result of several factors
that are detailed below. The Consumer Heath business represented
28% of our overall Commercial Platform net income in 2017.
HBYS: Our OTC business operated through our non-consolidated
joint venture, HBYS, focuses on the manufacture, marketing and
distribution of OTC pharmaceutical products. Its Bai Yun Shan brand
is a market-leading, household name, established over 40 years ago,
and is known by the majority of Chinese consumers. In addition to
over 1,000 manufacturing staff, in Guangdong and Anhui, and 189
drug product licenses, HBYS has a commercial team of about 1,000
sales staff that covers the national retail pharmacy channel in
China.
2017 was a year of major change for HBYS with the move of the
majority of our production to a new low-cost factory over 1,400
kilometers away from its home base in Guangdong province. HBYS
sales had grown over five-fold since its establishment in 2005 and,
during that period, HBYS has used third-party contract
manufacturers to support expansion, a strategy no longer possible
under CFDA policy. In early 2017, we secured GMP-certification of
our new factory in Bozhou, Anhui province however, final clearance
to formally begin production from the local Guangdong and Anhui
province FDAs only came in August 2017. This regulatory pause led
HBYS to have to continue to use contract manufacturers during the
first half of 2017 while at the same time having to start recording
depreciation charges for our new factory. The delay also led to
some short-term production capacity constraints.
A further change came on September 1, 2017 when HBYS divested
its 60% shareholding in Guanbao for a consideration approximately
equal to its carrying value. Guanbao was a Good Supply Practice
(GSP) distribution company which had been established via a joint
venture in 2012. Sales reported under HBYS for Guanbao in 2017 were
$38.6 million (2016: 45.0m) as a result of partial year reporting
due to the divestiture. This low margin, primarily third-party OTC
logistics business, with operations limited mainly to Henan
province, had proven to be a business with no strategic value to
Chi-Med.
Once the Bozhou factory began production, capacity constraints
were eliminated and the performance of HBYS, excluding the divested
Guanbao, in the second half of 2017 was particularly strong with
revenue on an adjusted (non-GAAP) basis increasing 20% to $94.3
million (H2 2016: $78.5m). HBYS net income attributable to Chi-Med
also rebounded strongly in the second half of 2017 increasing 185%
to $3.7 million (H2 2016: $1.3m) driven by the available capacity
and a decline in the prices of certain key raw materials.
FFDS tablets and Banlangen granules: FFDS tablets (angina) and
Banlangen granules (anti-viral cold/flu), the two main products of
HBYS, are generic OTC drugs with leading national market share in
China of 38% (2016: 32%) and 53% (2016: 51%), respectively. The
first half of 2017 was a challenging period for FFDS and Banlangen
with sales totaling $64.3 million (down 8% versus H1 2016) due to
the aforementioned capacity constraints; unusually high raw
material prices on both Banlangen and Sanqi, the main raw material
in FFDS; and a relatively quiet influenza season which held back
Banlangen demand. In contrast, the second half of 2017 saw FFDS and
Banlangen's sales rebound to $54.5 million (up 17% versus H2 2016)
as all first half headwinds were either entirely eliminated or
materially reversed.
In the mid- to longer-term, while profitability of both FFDS
tablets and Banlangen granules in any given year will vary based on
the severity of the climate/influenza season, which affect both raw
material prices and demand, we anticipate that cost efficiencies in
the new Bozhou factory will enhance gross margins. Furthermore, we
expect to benefit from the underlying general OTC market expansion
and the low risk of price erosion due to our focus on the retail
pharmacy channel.
HBYS property update - HBYS's vacant Plot 2 (26,700 sqm.) in
Guangzhou has been listed for sale as part of the Guangzhou
municipal government's urban redevelopment scheme plan since 2016.
The date of this public auction will be determined by the Guangzhou
government, but we are actively working to trigger the process.
Land prices continue to rise in Guangzhou, and based on precedent
land transactions in the vicinity, we expect the auction value for
Plot 2 to be over $100 million of which 40 to 50% 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, when
auctioned, Plot 1 could bring HBYS compensation per square meter
comparable to Plot 2.
Hutchison Healthcare Limited ("HHL") and Hutchison Hain Organic
Holdings Limited ("HHOH"): HHL, HHOH and other minor entities are
subsidiaries involved in the commercialization of health related
consumer products. Sales of such products in 2017 grew by 25% to
$38.8 million (2016: $31.0m) driven in part by good progress on the
Zhi Ling Tong(R) and Earth's Best(R) infant nutrition business.
Commercial Platform dividends: The profits of the Commercial
Platform continue to pass on to the Chi-Med Group through dividend
payments primarily from our non-consolidated joint ventures, SHPL
and HBYS. Dividends of $55.6 million (2016: $30.5m) were paid from
these joint ventures to the Chi-Med Group level during 2017. Net
income from SHPL and HBYS have totaled $465.4 million since 2005,
of which a total of $316.2 million has been paid in dividends to
Chi-Med and its partners, with the balance retained by the joint
ventures as cash or used primarily to fund factory upgrades and
expansion. As of December 31, 2017, SHPL and HBYS held in aggregate
$57.4 million in cash and cash equivalents, with no outstanding
bank borrowings.
Christian Hogg
Chief Executive Officer, March 12, 2018
Use of Non-GAAP Financial Measures and Reconciliation: In
addition to financial information prepared in accordance with U.S.
GAAP, this announcement also contains certain non-GAAP financial
measures based on management's view of performance including:
-- Adjusted research and development expenses;
-- Adjusted consolidated net income attributable to Chi-Med from our Commercial Platform;
-- Adjusted consolidated net income attributable to Chi-Med from
our Prescription Drugs business; and
-- Adjusted revenue of HBYS.
Management uses such measures internally for planning and
forecasting purposes and to measure the Chi-Med Group's overall
performance. We believe these adjusted financial measures provide
useful and meaningful information to us and investors because they
enhance investors' understanding of the continuing operating
performance of our business and facilitate the comparison of
performance between past and future periods. These adjusted
financial measures are non-GAAP measures and should be considered
in addition to, but not as a substitute for, the information
prepared in accordance with U.S. GAAP. Other companies may define
these measures in different ways. The following items are excluded
from adjusted financial results:
Adjusted research and development expenses: We exclude the
impact of the revenue received from external customers of our
Innovation Platform, which is reinvested into on our clinical
trials, to derive our adjusted research and development expense.
Revenue received from external customers of our Innovation Platform
consists of milestone and other payments from our collaboration
partners. The variability of such payments makes the identification
of trends in our ongoing research and development activities more
difficult. We believe the presentation of adjusted research and
development expenses provides useful and meaningful information
about our ongoing research and development activities by enhancing
investors' understanding of the scope of our normal, recurring
operating research and development expenses.
Adjusted consolidated net income attributable to Chi-Med from
our Commercial Platform and adjusted consolidated net income
attributable to Chi-Med from our Prescription Drugs business: We
exclude the impact of one-time gains which were triggered by the
payment of land compensation and subsidies from the Shanghai
government to SHPL.
Adjusted HBYS revenue: We exclude the sales of Guanbao because
Guanbao was divested by HBYS in September 2017.
Reconciliation of GAAP to adjusted research and development
expenses:
$'000 Year Ended Year Ended
December 31, December 31,
2017 2016
-------------------------------------- -------------- --------------
Segment operating loss - Innovation
Platform (51,986) (40,837)
Less: Segment revenue from external
customers - Innovation Platform (35,997) (35,228)
-------------------------------------- -------------- --------------
Adjusted research and development
expenses (87,983) (76,065)
-------------------------------------- -------------- --------------
Reconciliation of GAAP to adjusted consolidated net income
attributable to Chi-Med from our Commercial Platform:
$'000 Year Ended Year Ended
December 31, December 31,
2017 2016
--------------------------------------- -------------- --------------
Consolidated net income attributable
to Chi-Med - Commercial Platform 40,033 70,337
Less: One-time gains from land
compensation and subsidies (2,494) (40,416)
--------------------------------------- -------------- --------------
Adjusted consolidated net income
attributable to Chi-Med - Commercial
Platform 37,539 29,921
--------------------------------------- -------------- --------------
Reconciliation of GAAP to adjusted consolidated net income
attributable to Chi-Med from our Prescription Drugs business:
$'000 Year Ended Year Ended
December 31, December 31,
2017 2016
----------------------------------------- -------------- --------------
Consolidated net income attributable
to Chi-Med - Prescription Drugs
business 28,999 61,120
Less: One-time gains from land
compensation and subsidies (2,494) (40,416)
----------------------------------------- -------------- --------------
Adjusted consolidated net income
attributable to Chi-Med - Prescription
Drugs business 26,505 20,704
----------------------------------------- -------------- --------------
Reconciliation of GAAP to adjusted HBYS revenue:
$'000 2017 2016
--------------------------------------- ---------- ----------
HBYS revenue - Year ended December
31, 227,422 224,131
Less: HBYS revenue - Six months
ended June 30, (123,408) (122,746)
Less: Guanbao revenue - Six months
ended December 31, (9,680) (22,901)
--------------------------------------- ---------- ----------
Adjusted HBYS revenue - Six months
ended December 31, 94,334 78,484
--------------------------------------- ---------- ----------
Hutchison China MediTech Limited
Consolidated Balance Sheets
(in US$'000)
December 31,
-------------------
Note 2017 2016
---------- --------- --------
Assets
Current assets
Cash and cash equivalents 5 85,265 79,431
Short-term investments 6 273,031 24,270
Accounts receivable-third parties 7 38,410 40,812
Accounts receivable-related parties 22 (ii) 3,860 4,223
Other receivables, prepayments and deposits 8 11,296 4,314
Amounts due from related parties 22 (ii) 8,544 1,136
Inventories 9 11,789 12,822
Deferred tax assets 23 (ii) - 372
--------- --------
Total current assets 432,195 167,380
Property, plant and equipment 10 14,220 9,954
Leasehold land 1,261 1,220
Goodwill 3,308 3,137
Other intangible asset 430 469
Deferred tax assets 23 (ii) 633 -
Long-term prepayment 1,648 1,771
Investments in equity investees 11 144,237 158,506
--------- --------
Total assets 597,932 342,437
========= ========
Liabilities and shareholders' equity
Current liabilities
Accounts payable 12 24,365 35,538
Other payables, accruals and advance receipts 13 40,953 31,716
Income tax payable 23 (iii) 979 274
Deferred revenue 1,295 962
Amounts due to related parties 22 (ii) 7,021 5,308
Short-term bank borrowings 14 29,987 19,957
Deferred tax liabilities 23 (ii) - 1,364
--------- --------
Total current liabilities 104,600 95,119
Deferred tax liabilities 23 (ii) 4,452 3,997
Long-term bank borrowings 14 - 26,830
Deferred revenue 809 2,039
Other deferred income 1,988 2,263
Other non-current liabilities 1,117 8,129
--------- --------
Total liabilities 112,966 138,377
Commitments and contingencies 15
Company's shareholders' equity
Ordinary shares; $1.00 par value; 75,000,000
shares authorized; 66,447,037 and 60,705,823
shares issued at December 31, 2017 and 2016
respectively 17 66,447 60,706
Additional paid-in capital 496,960 208,196
Accumulated losses (107,104) (80,357)
Accumulated other comprehensive income/(loss) 5,430 (4,275)
--------- --------
Total Company's shareholders' equity 461,733 184,270
Non-controlling interests 23,233 19,790
--------- --------
Total shareholders' equity 484,966 204,060
--------- --------
Total liabilities and shareholders' equity 597,932 342,437
========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
Hutchison China MediTech Limited
Consolidated Statements of Operations
(in US$'000, except share and per share data)
Year Ended December 31,
----------------------------------
Note 2017 2016 2015
--------- ---------- ---------- ----------
Revenues
Sales-third parties 196,720 171,058 118,113
Sales-related parties 22 (i) 8,486 9,794 8,074
Revenue from license and collaboration
agreements
* third parties 19 26,315 26,444 44,060
Revenue from research and development
services
* third parties - 355 2,573
Revenue from research and development
services
* related parties 22 (i) 9,682 8,429 5,383
---------- ---------- ----------
Total revenues 25 241,203 216,080 178,203
---------- ---------- ----------
Operating expenses
Costs of sales-third parties (169,764) (149,132) (104,859)
Costs of sales-related parties (6,056) (7,196) (5,918)
Research and development expenses 20 (75,523) (66,871) (47,368)
Selling expenses (19,322) (17,998) (10,209)
Administrative expenses (23,955) (21,580) (19,620)
---------- ---------- ----------
Total operating expenses (294,620) (262,777) (187,974)
---------- ---------- ----------
Loss from operations (53,417) (46,697) (9,771)
Other income/(expense)
Interest income 25 1,220 502 451
Other income 808 609 386
Interest expense 25 (1,455) (1,631) (1,404)
Other expense (692) (139) (202)
---------- ---------- ----------
Total other income/(expense) (119) (659) (769)
---------- ---------- ----------
Loss before income taxes and equity
in earnings of equity investees (53,536) (47,356) (10,540)
Income tax expense 23 (i) (3,080) (4,331) (1,605)
Equity in earnings of equity investees,
net of tax 11 33,653 66,244 22,572
---------- ---------- ----------
Net (loss)/income (22,963) 14,557 10,427
Less: Net income attributable to non-controlling
interests (3,774) (2,859) (2,434)
---------- ---------- ----------
Net (loss)/income attributable to the
Company (26,737) 11,698 7,993
Accretion on redeemable non-controlling
interests - - (43,001)
---------- ---------- ----------
Net (loss)/income attributable to ordinary
shareholders of the Company (26,737) 11,698 (35,008)
========== ========== ==========
(Losses)/earnings per share attributable
to ordinary shareholders of the Company-basic
(US$ per share) 24 (i) (0.43) 0.20 (0.64)
(Losses)/earnings per share attributable
to ordinary shareholders of the Company-diluted
(US$ per share) 24 (ii) (0.43) 0.20 (0.64)
Number of shares used in per share
calculation-basic 24 (i) 61,717,171 59,715,173 54,659,315
Number of shares used in per share
calculation-diluted 24 (ii) 61,717,171 59,971,050 54,659,315
The accompanying notes are an integral part of these
consolidated financial statements.
Hutchison China MediTech Limited
Consolidated Statements of Comprehensive (Loss)/Income
(in US$'000)
Year Ended December
31,
---------------------------
2017 2016 2015
-------- -------- -------
Net (loss)/income (22,963) 14,557 10,427
Other comprehensive income/(loss)
Foreign currency translation gain/(loss) 10,964 (10,722) (5,557)
-------- -------- -------
Total comprehensive (loss)/income (11,999) 3,835 4,870
Less: Comprehensive income attributable to non-controlling
interests (5,033) (1,427) (1,732)
-------- -------- -------
Total comprehensive (loss)/income attributable
to the Company (17,032) 2,408 3,138
======== ======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
Hutchison China MediTech Limited
Consolidated Statements of Changes in Shareholders' Equity
(in US$'000, except share data in '000)
Accumulated Total
Ordinary Ordinary Additional Other Company's Non-
Shares Shares Paid-in Accumulated Comprehensive Shareholders' controlling Total
Number Value Capital Losses Income/(Loss) Equity Interests Equity
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at December
31,
2014 53,076 53,076 76,256 (100,051) 9,870 39,151 17,764 56,915
Net income - - - 7,993 - 7,993 2,434 10,427
Accretion to
redemption
value of
redeemable
non-controlling
interests - - (43,001) - - (43,001) - (43,001)
Issuance in
exchange
for redeemable
non-controlling
interest 3,214 3,214 80,823 - - 84,037 - 84,037
Issuances in
relation
to share option
exercises 243 243 1,131 - - 1,374 - 1,374
Share-based
compensation
Share options - - 168 - - 168 - 168
Long-term
incentive
plan
("LTIP") - - 233 - - 233 - 233
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
- - 401 - - 401 - 401
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
LTIP-treasury
shares
acquired and
held
by Trustee - - (1,786) - - (1,786) - (1,786)
Dividend paid to
a
non-controlling
shareholder of a
subsidiary - - - - - - (590) (590)
Dilution of
interests
in a subsidiary
in relation to
exercise
of share options
of a subsidiary - - - 42 - 42 15 57
Transfer between
reserves - - 24 (24) - - - -
Foreign currency
translation
adjustments - - - - (4,855) (4,855) (702) (5,557)
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at December
31,
2015 56,533 56,533 113,848 (92,040) 5,015 83,356 18,921 102,277
======== ======== ========== =========== ============= ============= =========== ========
Net income - - - 11,698 - 11,698 2,859 14,557
Issuance in
relation
to public
offering 4,080 4,080 106,080 - - 110,160 - 110,160
Issuance costs - - (14,227) - - (14,227) - (14,227)
Issuances in
relation
to share option
exercises 93 93 333 - - 426 - 426
Share-based
compensation
Share options - - 1,373 - - 1,373 4 1,377
LTIP - - 1,378 - - 1,378 2 1,380
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
- - 2,751 - - 2,751 6 2,757
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
LTIP-treasury
shares
acquired and
held
by Trustee - - (604) - - (604) - (604)
Dividend paid to
a
non-controlling
shareholder of a
subsidiary - - - - - - (564) (564)
Transfer between
reserves - - 15 (15) - - - -
Foreign currency
translation
adjustments - - - - (9,290) (9,290) (1,432) (10,722)
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at December
31,
2016 60,706 60,706 208,196 (80,357) (4,275) 184,270 19,790 204,060
======== ======== ========== =========== ============= ============= =========== ========
Net loss - - - (26,737) - (26,737) 3,774 (22,963)
Issuance in
relation
to public
offering 5,685 5,685 295,615 - - 301,300 - 301,300
Issuance costs - - (8,610) - - (8,610) - (8,610)
Issuances in
relation
to share option
exercises 56 56 324 - - 380 - 380
Share-based
compensation
Share options - - 1,255 - - 1,255 3 1,258
LTIP - - 1,537 - - 1,537 1 1,538
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
- - 2,792 - - 2,792 4 2,796
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
LTIP-treasury
shares
acquired and
held
by Trustee - - (1,367) - - (1,367) - (1,367)
Dividends paid to
non-controlling
shareholders of
subsidiaries - - - - - - (1,594) (1,594)
Transfer between
reserves - - 10 (10) - - - -
Foreign currency
translation
adjustments - - - - 9,705 9,705 1,259 10,964
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at December
31,
2017 66,447 66,447 496,960 (107,104) 5,430 461,733 23,233 484,966
======== ======== ========== =========== ============= ============= =========== ========
The accompanying notes are an integral part of these
consolidated financial statements.
Hutchison China MediTech Limited
Consolidated Statements of Cash Flows
(in US$'000)
Year Ended December
31,
----------------------------
Note 2017 2016 2015
--------- --------- -------- -------
Net cash used in operating activities 26 (8,943) (9,569) (9,385)
--------- -------- -------
Investing activities
Purchases of property, plant and equipment 10 (5,019) (4,327) (3,324)
Deposits in short-term investments (325,032) (80,857) -
Proceeds from short-term investments 76,271 56,587 12,179
Investment in an equity investee 11 (7,000) (5,000) -
--------- -------- -------
Net cash (used in)/generated from investing
activities (260,780) (33,597) 8,855
--------- -------- -------
Financing activities
Proceeds from issuance of ordinary shares 301,680 110,586 1,374
Proceeds from exercise of share options
of a subsidiary - - 57
Purchases of treasury shares (1,367) (604) (1,786)
Dividends paid to non-controlling shareholders
of subsidiaries (1,594) (564) (590)
Repayment of loan to a non-controlling
shareholder of a subsidiary - (1,000) -
Proceeds from bank borrowings 32,540 25,128 3,205
Repayment of bank borrowings (49,487) (28,205) (6,410)
Payment of issuance costs (8,576) (12,906) (1,321)
--------- -------- -------
Net cash generated from/(used in) financing
activities 273,196 92,435 (5,471)
--------- -------- -------
Net increase/(decrease) in cash and cash
equivalents 3,473 49,269 (6,001)
Effect of exchange rate changes on cash
and cash equivalents 2,361 (1,779) (1,004)
--------- -------- -------
5,834 47,490 (7,005)
Cash and cash equivalents
Cash and cash equivalents at beginning
of year 79,431 31,941 38,946
--------- -------- -------
Cash and cash equivalents at end of year 85,265 79,431 31,941
========= ======== =======
Supplemental disclosure for cash flow information
Cash paid for interest 763 1,570 1,220
Cash paid for tax, net of refunds 3,836 2,664 510
Supplemental disclosure for non-cash activities
Accruals made for purchases of property,
plant and equipment 1,054 - -
Accrued issuance costs for public offering 34 - 3,125
Vesting of treasury shares for LTIP 18 (iii) 1,800 - -
Capitalization of amounts due from related
parties to investments in equity investees - 7,000 -
Issuance of ordinary shares in exchange
of redeemable non-controlling interests 16 - - 84,037
The accompanying notes are an integral part of these
consolidated financial statements.
Hutchison China MediTech Limited
Notes to the 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 healthcare products. The Group and its equity investees have
research and development facilities and manufacturing plants in the
People's Republic of China (the "PRC") and sell their products
mainly in the PRC and Hong Kong.
The Company considers Hutchison Healthcare Holdings Limited as
its immediate holding company and CK Hutchison Holdings Limited
("CK Hutchison") as its ultimate holding company.
The Company was incorporated in the Cayman Islands on December
18, 2000 as an exempted company with limited liability under the
Companies Law (2000 Revision), Chapter 22 of the Cayman Islands.
The address of its registered office is P.O. Box 309, Ugland House,
Grand Cayman, KY1--1104, Cayman Islands.
The Company's ordinary shares are listed on the AIM market of
the London Stock Exchange, and its American depositary shares
("ADS"), each representing one-half of one ordinary share, are
traded on the Nasdaq Global Select Market.
Liquidity
As at December 31, 2017, the Group had accumulated losses of
US$107,104,000, primarily due to its significant spending in
research and development activities. 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
at December 31, 2017, the Group had cash and cash equivalents of
US$85,265,000, short-term investments of US$273,031,000 and
unutilized bank borrowing facilities of US$121,282,000. Short-term
investments comprised of bank deposits maturing over three months.
As at December 31, 2016, the Group had cash and cash equivalents of
US$79,431,000, short-term investments of US$24,270,000 and
unutilized bank borrowing facilities of US$70,000,000. The Group's
operating plan includes the continued receipt of dividends from
certain of its equity investees. The increase in cash balances is
primarily due to a public follow-on offering of the Company's ADS
in October 2017, which raised net proceeds of US$292,690,000.
Additionally, dividends received from equity investees for the
years ended December 31, 2017, 2016 and 2015 were US$55,586,000,
US$30,528,000 and US$6,410,000 respectively.
Based on the Group's operating plan, the existing cash and cash
equivalents, short-term investments and unutilized bank borrowing
facilities 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).
2. Particulars of Principal Subsidiaries and Equity
Investees
Equity interest
attributable to
the Group
-----------------------
Place of As at
establishment December 31,
-----------------------
Name and operations 2017 2016 Principal activities
--------------------------------- -------------- ---------- -------- ---------------------------------
Subsidiaries
Hutchison MediPharma Limited PRC 99.75 % 99.75 % Research and development of
("HMPL") pharmaceutical products
Hutchison Whampoa Sinopharm PRC 51 % 51 % Provision of sales, distribution
Pharmaceuticals (Shanghai) and marketing services to
Company Limited ("Hutchison pharmaceutical manufacturers
Sinopharm")
Hutchison Hain Organic (Hong Hong Kong 50 % 50 % Wholesale and trading of
Kong) Limited ("HHOL") (note (a)) healthcare and consumer products
Hutchison Hain Organic PRC 50 % 50 % Wholesale and trading of
(Guangzhou) Limited ("HHOGZL") healthcare and consumer products
(note (a))
Hutchison Healthcare Limited PRC 100 % 100 % Manufacture and distribution of
("HHL") healthcare products
Hutchison Consumer Products Hong Kong 100 % 100 % Wholesale and trading of
Limited healthcare and consumer products
Equity investees
Shanghai Hutchison PRC 50 % 50 % Manufacture and distribution of
Pharmaceuticals Limited ("SHPL") prescription drug products
Hutchison Whampoa Guangzhou PRC 40 % 40 % Manufacture and distribution of
Baiyunshan Chinese Medicine over-the-counter drug products
Company Limited ("HBYS") (note
(b))
Nutrition Science Partners Hong Kong 49.88 % 49.88 % Research and development of
Limited ("NSPL") (note (c)) pharmaceutical products
Notes:
(a) HHOL and HHOGZL are regarded as subsidiaries of the Company,
as while both shareholders of these subsidiaries have equal
representation at their respective boards, in the event of a
deadlock, the Group has a casting vote and is therefore able to
unilaterally control the financial and operating policies of HHOL
and HHOGZL.
(b) The 50% equity interest in HBYS is held by an 80% owned
subsidiary of the Group. The effective equity interest of the Group
in HBYS is therefore 40% for the years presented.
(c) The 50% equity interest in NSPL is held by a 99.75% owned
subsidiary of the Group. The effective equity interest of the Group
in NSPL is therefore 49.88% for the years presented.
3. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements reflect the
accounts of the Company and all of its subsidiaries in which a
controlling interest is maintained. Investments in equity investees
over which the Group has significant influence are accounted for
using the equity method. All inter--company balances and
transactions have been eliminated in consolidation. The
consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States
of America ("U.S. GAAP").
Use of Estimates
The preparation of 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 consolidated 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,
revenues and cost accruals from research and development projects.
Actual results could differ from those estimates.
Foreign Currency Translation
The Group's functional currency is Renminbi ("RMB") but the
presentation currency is U.S. dollar ("US$"). The financial
statements of the Company's subsidiaries with a functional currency
other than the US$ have been translated into the Company's
reporting currency, the US$. All assets and liabilities of the
subsidiaries are translated using year--end exchange rates and
revenues and expenses are translated at average exchange rates for
the year. Translation adjustments are reflected in accumulated
other comprehensive income/(loss) in shareholders' equity.
Net foreign currency exchange losses of US$316,000, US$109,000
and US$79,000 were recorded in other expense in the consolidated
statements of operations for the years ended December 31, 2017,
2016 and 2015 respectively.
Cash and Cash Equivalents
The Group considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Cash and cash equivalents consist primarily of cash on hand and
bank deposits and are stated at cost, which approximates fair
value.
Short--term Investments
Short--term investments include deposits placed with banks with
original maturities of more than three months but less than one
year.
Concentration of Credit Risk
Financial instruments that potentially expose the Group to
concentrations of credit risk consist primarily of cash and cash
equivalents, short--term investments, accounts receivable, other
receivables and amounts due from related parties.
The Group places substantially all of its cash and cash
equivalents and short--term investments in major financial
institutions, which management believes are of high credit quality.
The Group has a practice to limit the amount of credit exposure to
any particular financial institution.
The Group has no significant concentration of credit risk. The
Group has policies in place to ensure that sales are made to
customers with an appropriate credit history and the Group performs
periodic credit evaluations of its customers. Normally the Group
does not require collateral from trade debtors.
Foreign Currency Risk
The Group's operating transactions and its assets and
liabilities are mainly denominated in RMB, which is not freely
convertible into foreign currencies. In the PRC, the Group's cash
and cash equivalents denominated in RMB are subject to such
government controls. The value of the RMB is subject to
fluctuations from central government policy changes and
international economic and political developments that affect the
supply and demand of RMB in the foreign exchange market. In the
PRC, certain foreign exchange transactions are required by law to
be transacted only by authorized financial institutions at exchange
rates set by the People's Bank of China (the "PBOC"). Remittances
in currencies other than RMB by the Group in the PRC must be
processed through the PBOC or other PRC foreign exchange regulatory
bodies which require certain supporting documentation in order to
complete the remittance.
Fair Value of Financial Instruments
The fair value of financial instruments that are measured at
fair value is determined according to a fair value hierarchy that
prioritizes the inputs and assumptions used, and the valuation
techniques used. The three levels of the fair value hierarchy are
described as follows:
Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs are quoted prices for similar assets or liabilities in active markets; or quoted prices
for identical or similar instruments in markets that are not active; and model--derived valuations
in which all significant inputs and significant value drivers are observable in active markets.
Level 3 Inputs are unobservable inputs based on the Group's assumptions and valuation techniques used
to measure assets or liabilities at fair value. The inputs require significant management
judgment or estimation.
The assessment of the significance of a particular input to the
fair value measurement requires judgment and may affect the
valuation of assets and liabilities and their placement within the
fair value hierarchy levels.
The fair value of assets and liabilities is established using
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, and a fair value hierarchy is
established based on the inputs used to measure fair value.
Accounts Receivable
Accounts receivable are stated at the amount management expects
to collect from customers based on their outstanding invoices.
Management reviews accounts receivable regularly to determine if
any receivable will potentially be uncollectible. Estimates are
used to determine the amount of allowance for doubtful accounts
necessary to reduce accounts receivable to its estimated net
realizable value. The amount of the allowance for doubtful accounts
is recognized in the consolidated statements of operations.
Inventories
Inventories are stated at the lower of cost or net realizable
value. Cost is determined using the weighted average cost method.
The cost of finished goods comprises raw materials, direct labor,
other direct costs and related production overheads (based on
normal operating capacity). Net realizable value is the estimated
selling price in the ordinary course of business, less applicable
variable selling expenses. A provision for excess and obsolete
inventory will be made based primarily on forecasts of product
demand and production requirements. The excess balance determined
by this analysis becomes the basis for excess inventory charge and
the written--down value of the inventory becomes its cost.
Written--down inventory is not written up if market conditions
improve.
Property, Plant and Equipment
Property, plant and equipment consist of buildings, leasehold
improvements, plant and equipment, furniture and fixtures, other
equipment and motor vehicles. Property, plant and equipment are
stated at cost, net of accumulated depreciation. Depreciation is
computed using the straight--line method over the estimated useful
lives of the depreciable assets.
Buildings 20 years
Plant and equipment 5-10 years
Furniture and fixtures, 4-5 years
other equipment and
motor vehicles
Leasehold improvements Shorter of (a) 5 years or (b)
remaining term of lease
Upon retirement or sale, the cost of assets disposed of and the
related accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in the consolidated
statements of operations in the year of disposition. Additions and
improvements that extend the useful life of an asset are
capitalized. Repairs and maintenance costs are expensed as
incurred.
Impairment of Long--Lived Assets
The Group evaluates the recoverability of long--lived assets in
accordance with authoritative guidance on accounting for the
impairment or disposal of long--lived assets. The Group evaluates
long--lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of these assets may
not be recoverable. If such indicators exist, the first step of the
impairment test is performed to assess if the carrying value of the
net assets exceeds the undiscounted cash flows of the assets. If
yes, the second step of the impairment test is performed in order
to determine if the carrying value of the net assets exceeds the
fair value. If yes, impairment is recognized for the excess.
Leasehold Land
Leasehold land represents fees paid to acquire the right to use
the land on which various plants and buildings are situated for a
specified period of time from the date the respective right was
granted and are stated at cost less accumulated amortization and
impairment loss, if any. Amortization is computed using the
straight--line basis over the lease period of 50 years.
Goodwill
Goodwill represents the excess of the purchase price plus fair
value of non--controlling interests over the fair value of
identifiable assets and liabilities acquired. Goodwill is not
amortized, but is tested for impairment at the reporting unit level
on at least an annual basis or when an event occurs or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. When
performing an evaluation of goodwill impairment, the Group has the
option to first assess qualitative factors, such as significant
events and changes to expectations and activities that may have
occurred since the last impairment evaluation, to determine if it
is more likely than not that goodwill might be impaired. If as a
result of the qualitative assessment, that it is more likely than
not that the fair value of the reporting unit is less than its
carrying amount, the quantitative fair value test is performed to
determine if the fair value of the reporting unit exceeds its
carrying value. No impairment of goodwill occurred in the years
presented.
The Group has adopted Accounting Standards Update ("ASU")
2017-04, Simplifying the Test for Goodwill Impairment, for annual
goodwill impairment tests performed on testing dates after January
1, 2017. This guidance removes Step 2 of the goodwill impairment
test, which required the estimation of an implied fair value of
goodwill in the same manner as the calculation of goodwill upon a
business combination. For prior years' annual goodwill impairment
tests, the Group determined that the fair values of their reporting
units exceeded their carrying values and Step 2 has never been
required.
Other Intangible Assets
Other intangible assets with finite useful lives are carried at
cost less accumulated amortization and impairment loss, if any.
Amortization is computed using the straight--line basis over the
estimated useful lives of the assets.
Borrowings
Borrowings are recognized initially at fair value, net of debt
issuance costs incurred. Borrowings are subsequently stated at
amortized cost; any difference between the proceeds (net of debt
issuance costs) and the redemption value is recognized in the
consolidated statements of operations over the period of the
borrowings using the effective interest method.
Ordinary Shares
The Company's ordinary shares are stated at par value of US$1.00
per ordinary share. The difference between the consideration
received, net of issuance cost, and the par value is recorded in
additional paid--in capital.
Treasury Shares
The Group accounts for treasury shares under the cost method.
The treasury shares were purchased for the purpose of the LTIP.
Convertible Preferred Shares
When the Company or its subsidiaries issue preferred shares, the
Group assesses whether such instruments should be liabilities,
mezzanine equity, or permanent equity classified based on multiple
indicators such as redemption features, conversion features, voting
rights and other embedded features. Freestanding equity instruments
with mandatory redemption requirements, embodying an obligation to
repurchase the issuer's equity shares by transferring assets, or
certain obligations to issue a variable number of shares, are
treated as liability--classified instruments. Equity instruments
that are redeemable at the option of the holder or not solely
within the Group's control are classified as mezzanine equity of
the issuer entity (and redeemable non--controlling interests in the
consolidated financial statements of the Group if preferred shares
are issued by its subsidiaries). Subsequent measurements of
financing instruments are driven by the instruments' balance sheet
classification.
The Group also reviews the terms of each convertible instrument
and determines whether the host instrument is more akin to debt or
equity based on the economic characteristics and risks in order to
evaluate if there were any embedded features which would require
bifurcation and separate accounting from the host contract. For
embedded conversion features that are not required to be separated,
the Group analyzes the accounting conversion price and the
Company's share price at the commitment date to identify any
beneficial conversion features.
For any amendment to the terms of the preferred shares not
classified as liabilities, the Group assesses whether the amendment
is an extinguishment or a modification using the fair value model.
The Group considers a significant change in fair value immediately
after the amendment to be substantive and to trigger
extinguishment. A change in fair value which is not significant
immediately after the amendment is considered non--substantive and
thus is subject to modification accounting. When preferred shares
are extinguished, the difference between the fair value of the
consideration transferred to the preferred shareholders and the
carrying amount of such preferred shares (net of issuance costs) is
treated as a deemed dividend to the preferred shareholders. When
preferred shares are modified and such modification results in a
value transfer between preferred shareholders and ordinary
shareholders, the change in fair value resulting from the amendment
is treated as a deemed dividend to or from the preferred
shareholders.
Share--Based Compensation
Share options
The Group recognizes share--based compensation expense on share
options granted to employees and directors based on their estimated
grant date fair value using the Polynomial model. This Polynomial
pricing model uses various inputs to measure fair value, including
estimated market value of the Company's underlying ordinary shares
at the grant date, contractual terms, estimated volatility,
risk--free interest rates and expected dividend yields. The Group
recognizes share--based compensation expense in the consolidated
statements of operations on a graded vesting basis over the
requisite service period.
The Group has adopted ASU 2016-09, Improvements to Employee
Share-Based Payment Accounting on January 1, 2017. This guidance
permitted the Group to make an accounting policy election to
account for forfeitures as they occur. The Group has elected to
account for forfeitures as they occur and adopted this election
using the modified retrospective approach as required with no
cumulative effect adjustment. Prior to January 1, 2017, the Group
applied an estimated forfeiture rate derived from historical and
expected future employee termination behavior.
Share options are classified as equity-settled awards.
Share--based compensation expense, when recognized, is charged to
the consolidated statements of operations with the corresponding
entry to additional paid--in capital.
LTIP
The Group recognizes the share-based compensation expense on the
LTIP awards based on a fixed or determinable monetary amount on a
straight line basis for each annual tranche awarded over the
requisite period. For LTIP awards with performance targets, prior
to their determination date, the amount of LTIP awards that is
expected to vest takes into consideration the achievement of the
performance conditions and the extent to which the performance
conditions are likely to be met. Performance conditions vary by
awards, including targets for shareholder returns, free cash flows,
revenues, net profit after taxes and/or the achievement of clinical
and regulatory milestones.
These LTIP awards are classified as liability-settled awards
before the determination date (i.e. the date when the achievement
of any performance conditions are known), as they settle in a
variable number of shares based on a determinable monetary amount,
which is determined upon the actual achievement of performance
targets. As the extent of achievement of the performance targets is
uncertain prior to the determination date, a probability based on
management's assessment of the achievement of the performance
targets has been assigned to calculate the amount to be recognized
as an expense over the requisite period.
After the determination date or if the LTIP awards have no
performance conditions, the LTIP awards are classified as
equity-settled awards. If the performance target is achieved, the
Group will pay the determined monetary amount to a trustee
appointed by the Group (the "Trustee") to purchase ordinary shares
of the Company or the equivalent ADS. 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 or ADS of
the Company will be purchased and the amount previously recorded in
the liability will be reversed and included in the consolidated
statements of operations.
Defined Contribution Plans
The Group's subsidiaries in the PRC participate in a
government--mandated multi--employer defined contribution plan
pursuant to which certain retirement, medical and other welfare
benefits are provided to employees. The relevant labor regulations
require the Group's subsidiaries in the PRC to pay the local labor
and social welfare authority's monthly contributions at a stated
contribution rate based on the monthly basic compensation of
qualified employees. The relevant local labor and social welfare
authorities are responsible for meeting all retirement benefits
obligations and the Group's subsidiaries in the PRC have no further
commitments beyond their monthly contributions. The contributions
to the plan are expensed as incurred.
The Group also makes payments to other defined contribution
plans for the benefit of employees employed by subsidiaries outside
the PRC. The defined contribution plans are generally funded by the
relevant companies and by payments from employees.
The Group's contributions to defined contribution plans for the
years ended December 31, 2017, 2016 and 2015 amounted to
US$2,092,000, US$2,286,000 and US$1,653,000 respectively.
Revenue Recognition-Accounting Standard Codification 605
Sales
Revenue from sales of goods in the Commercial Platform segment
are recognized when goods are delivered and title passes to the
customer and there are no further obligations to the customer.
Recognition of revenue also requires reasonable assurance of
collection of sales proceeds and completion of all performance
obligations. Sales discounts are issued to customers as direct
discounts at the point--of--sale or indirectly in the form of
rebates. Additionally, sales are generally made with a limited
right of return under certain conditions. Revenues are recorded net
of provisions for sales discounts and returns.
Revenue from sales of services in the Commercial Platform
segment are recognized based on amounts that can be invoiced to the
customer. The amount that can be invoiced corresponds directly with
the value to the customer for performance completed to date.
Revenues from research and development projects
The Group recognizes revenue for the performance of services
when each of the following four criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) services are rendered;
(iii) the sales price is fixed or determinable; and (iv)
collectability is reasonably assured.
The Group follows Accounting Standard Codification ("ASC")
605--25, Revenue Recognition-Multiple--Element Arrangements and ASC
808, Collaborative Arrangements, if applicable, to determine the
recognition of revenue under the Group's license and collaborative
research, development and commercialization agreements. The terms
of these agreements generally contain multiple elements, or
deliverables, which may include (i) licenses to the Group's
intellectual property, (ii) materials and technology, (iii)
clinical supply, and/or (iv) participation in joint research or
joint steering committees. The payments the Group may receive under
these arrangements typically include one or more of the following:
non--refundable, upfront license fees; funding of research and/or
development efforts; amounts due upon the achievement of specified
milestones; and/or royalties on future product sales.
ASC 605--25 provides guidance relating to the separability of
deliverables included in an arrangement into different units of
accounting and the allocation of arrangement consideration to the
units of accounting. The evaluation of multiple--element
arrangements requires management to make judgments about (i) the
identification of deliverables, (ii) whether such deliverables are
separable from the other aspects of the contractual relationship,
(iii) the estimated selling price of each deliverable, and (iv) the
expected period of performance for each deliverable.
To determine the units of accounting under a multiple--element
arrangement, management evaluates certain separation criteria,
including whether the deliverables have stand--alone value, based
on the relevant facts and circumstances for each arrangement.
Management then estimates the selling price for each unit of
accounting and allocates the arrangement consideration to each unit
utilizing the relative selling price method. The Group determines
the estimated selling price for deliverables within each agreement
using vendor--specific objective evidence ("VSOE") of selling
price, if available, or third party evidence of selling price if
VSOE is not available, or the Group's best estimate of selling
price, if neither VSOE nor third party evidence is available.
Determining the best estimate of selling price for a deliverable
requires significant judgment. The Group typically uses its best
estimate of a selling price to estimate the selling price for
licenses to development work, since it often does not have VSOE or
third party evidence of selling price for these deliverables. In
those circumstances where the Group applies its best estimate of
selling price to determine the estimated selling price of a license
to development work, it considers market conditions as well as
entity--specific factors, including those factors contemplated in
negotiating the agreements as well as internally developed
estimates that include assumptions related to the market
opportunity, estimated development costs, probability of success
and the time needed to commercialize a product candidate pursuant
to the license. In validating its best estimate of selling price,
the Group evaluates whether changes in the key assumptions used to
determine its best estimate of selling price will have a
significant effect on the allocation of arrangement consideration
between deliverables. The Group recognizes consideration allocated
to an individual element when all other revenue recognition
criteria are met for that element.
The allocated consideration for each unit of accounting is
recognized over the related obligation period in accordance with
the applicable revenue recognition criteria.
If there are deliverables in an arrangement that are not
separable from other aspects of the contractual relationship, they
are treated as a combined unit of accounting, with the allocated
revenue for the combined unit recognized in a manner consistent
with the revenue recognition applicable to the final deliverable in
the combined unit. Payments received prior to satisfying the
relevant revenue recognition criteria are recorded as unearned
revenue in the accompanying balance sheets and recognized as
revenue when the related revenue recognition criteria are met.
The Group typically receives non--refundable, upfront payments
when licensing the Group's intellectual property, which often
occurs in conjunction with a research and development agreement. If
management believes that the license to the Group's intellectual
property has stand--alone value, the Group generally recognizes
revenue attributed to the license upon delivery provided that there
are no future performance requirements for use of the license. When
management believes that the license to the Group's intellectual
property does not have stand--alone value, the Group will recognize
revenue attributed to the license ratably over the contractual or
estimated performance period. For payments payable on achievement
of milestones that do not meet all of the conditions to be
considered substantive, the Group recognizes a portion of the
payment as revenue when the specific milestone is achieved, and the
contingency is removed. Other contingent event--based payments for
which payment is either contingent solely upon the passage of time
or the result of a collaborator's performance are recognized when
earned. The Group's collaboration and license agreements generally
include contingent milestone payments related to specified
pre--clinical research and development milestones, clinical
development milestones, regulatory milestones and sales--based
milestones. Pre--clinical research and development milestones are
typically payable upon the selection of a compound candidate for
the next stage of research and development. Clinical development
milestones are typically payable when a product candidate initiates
or advances in clinical trial phases or achieves defined clinical
events such as proof--of--concept. Regulatory milestones are
typically payable upon submission for marketing approval with
regulatory authorities or upon receipt of actual marketing
approvals for a compound, approvals for additional indications, or
upon the first commercial sale. Sales--based milestones are
typically payable when annual sales reach specified levels.
At the inception of each arrangement that includes milestone
payments, the Group evaluates whether each milestone is substantive
and at risk to both parties on the basis of the contingent nature
of the milestone. This evaluation includes an assessment of whether
(a) the consideration is commensurate with either (i) the entity's
performance to achieve the milestone or (ii) the enhancement of the
value of the delivered item(s) as a result of a specific outcome
resulting from the entity's performance to achieve the milestone;
(b) the consideration relates solely to past performance; and (c)
the consideration is reasonable relative to all of the deliverables
and payment terms within the arrangement. The Group evaluates
factors such as the scientific, regulatory, commercial and other
risks that must be overcome to achieve the respective milestone,
the level of effort and investment required to achieve the
respective milestone and whether the milestone consideration is
reasonable relative to all deliverables and payment terms in the
arrangement in making this assessment.
Research and Development Expenses
Research and development expenses consist primarily of salaries
and benefits, share--based compensation, materials and supplies,
contracted research, consulting arrangements and other expenses
incurred to sustain the Group's research and development programs.
Research and development costs are expensed as incurred.
Government Incentives
Incentives from governments are recognized at their fair values.
Government incentives that are received in advance are deferred and
recognized in the consolidated statements of operations over the
period necessary to match them with the costs that they are
intended to compensate. Government incentives in relation to the
achievement of stages of research and development projects are
recognized in the consolidated statements of operations when
amounts have been received and all attached conditions have been
met. Non-refundable incentives received without any further
obligations or conditions attached are recognized immediately in
the consolidated statements of operations.
Operating Leases
Leases in which a significant portion of the risks and rewards
of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases are charged to the
consolidated statements of operations on a straight--line basis
over the period of the leases.
Total operating lease rentals for buildings for the years ended
December 31, 2017, 2016 and 2015 amounted to US$2,285,000,
US$1,838,000 and US$1,426,000 respectively. Sub-lease rentals for
the years ended December 31, 2017, 2016 and 2015 amounted to
US$274,000, US$228,000 and US$229,000 respectively.
Interest Income
Interest generated from cash and cash equivalents and short-term
investments is recorded over the period earned. It is measured
based on the actual amount of interest the Group earns.
Income Taxes
The Group accounts for income taxes under the liability method.
Under the liability method, deferred income tax assets and
liabilities are determined based on the differences between the
financial reporting and income tax bases of assets and liabilities
and are measured using the income tax rates that will be in effect
when the differences are expected to reverse. A valuation allowance
is recorded when it is more likely than not that some of the net
deferred income tax asset will not be realized.
The Group accounts for an uncertain tax position in the
consolidated financial statements only if it is more likely than
not that the position is sustainable based on its technical merits
and consideration of the relevant tax authority's widely understood
administrative practices and precedents. If the recognition
threshold is met, the Group records the largest amount of tax
benefit that is greater than 50 percent likely to be realized upon
ultimate settlement.
Comprehensive (Loss)/Income
Comprehensive (loss)/income is defined as the change in equity
of a business enterprise during a period from transactions, and
other events and circumstances from non--owner sources, and
currently consists of net (loss)/income and foreign currency
translation gain/(loss) related to the Company's subsidiaries.
(Losses)/Earnings per Share
Basic (losses)/earnings per share is computed by dividing net
(loss)/income attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the year.
Weighted average number of ordinary shares outstanding during the
period excludes treasury shares. In addition, periodic accretion on
preferred shares of Hutchison MediPharma Holdings Limited ("HMHL")
(Note 16) is recorded as a deduction to consolidated net
(loss)/income to arrive at net (loss)/income attributable to
ordinary shareholders of the Company for purposes of calculating
the consolidated basic (losses)/earnings per share.
Diluted (losses)/earnings per share is computed by dividing net
(loss)/income attributable to ordinary shareholders by the weighted
average number of ordinary shares and dilutive ordinary share
equivalents outstanding during the period. Dilutive ordinary share
equivalents include ordinary shares and treasury shares issuable
upon the exercise or settlement of share--based awards issued by
the Company using the treasury stock method. In determining the
impact from share-based awards and convertible preferred shares
issued by HMHL, the Company first calculates the diluted earnings
per share at HMHL and includes in the numerator of consolidated
(losses)/earnings per share the amount based on the diluted
earnings per share of HMHL multiplied by the number of shares owned
by the Company. The computation of diluted (losses)/earnings per
share does not assume conversion, exercise, or contingent issuance
of securities that would have an anti--dilutive effect.
Segment Reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief executive officer who is
the Group's chief operating decision maker. The chief operating
decision maker reviews the Group's internal reporting in order to
assess performance and allocate resources and determined that the
Group's reportable segments are as disclosed in Note 25.
Discontinued Operations
A discontinued operation is a component of the Group's business,
the operations and cash flows of which can be clearly distinguished
from the rest of the Group and which represents a separate major
line of business or geographic area of operations, or is part of a
single coordinated plan to dispose of a separate major line of
business or geographical area of operations, or is a subsidiary
acquired exclusively with a view to resale. When an operation is
classified as discontinued, a single amount is presented in the
statements of operations, which comprises the post tax profit or
loss of the discontinued operation.
Profit Appropriation and Statutory Reserves
The Group's subsidiaries and equity investees established in the
PRC are required to make appropriations to certain
non--distributable reserve funds.
In accordance with the laws applicable to the Foreign Investment
Enterprises established in the PRC, the Group's subsidiaries and
equity investees registered as wholly--owned foreign enterprise
have to make appropriations from its after--tax profit (as
determined under generally accepted accounting principles in the
PRC ("PRC GAAP") to reserve funds including general reserve fund,
the enterprise expansion fund and staff bonus and welfare fund. The
appropriation to the general reserve fund must be at least 10% of
the after--tax profits calculated in accordance with PRC GAAP.
Appropriation is not required if the general reserve fund has
reached 50% of the registered capital of the company. Appropriation
to the enterprise expansion fund and staff bonus and welfare fund
is made at the company's discretion.
The use of the general reserve fund, enterprise expansion fund,
statutory surplus reserve and discretionary surplus fund are
restricted to the offsetting of losses or increases the registered
capital of the respective company. The staff bonus and welfare fund
is a liability in nature and is restricted to fund payments of
special bonus to employees and for the collective welfare of
employees. All these reserves are not allowed to be transferred to
the company in terms of cash dividends, loans or advances, nor can
they be distributed except under liquidation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB")
issued ASU 2014-09, Revenue from Contracts with Customers (Topic
606) ("ASU 2014-09"), to clarify the principles of recognizing
revenue and create common revenue recognition guidance for U.S.
GAAP and International Financial Reporting Standards. An entity has
the option to apply the provisions of ASU 2014-09 either
retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of initially applying
this standard recognized at the date of initial application. ASU
2014-09 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 the original effective date of
December 15, 2016. The new standard supersedes U.S. GAAP guidance
on revenue recognition and requires the use of more estimates,
judgements and additional disclosures.
The Group will adopt the new standard using the modified
retrospective method on January 1, 2018 and has assessed the impact
on revenue from customers. The Group's revenue from contracts with
customers comprises of research and development projects in its
Innovation Platform and sales of goods and services in its
Commercial Platform operating segments. The Group expects the
changes from applying the new guidance will primarily impact the
Innovation Platform.
Innovation Platform - The Group has reviewed its research and
development contracts and identified two contracts related to the
Group's license and collaboration arrangements that will be
impacted by the application of ASU 2014-09. The license and
collaboration arrangements contain multiple performance
obligations: (1) the license to the drug compound and (2) the
research and development services for each specified treatment
indication. The transaction price includes fixed and variable
consideration in the form of upfront payment, research and
development costs reimbursements, contingent milestone payments and
sales-based royalties. The allocation of the transaction price to
each performance obligation is based on the relative standalone
selling price of each performance obligation. The Group has
determined that control of the license to the drug compound was
transferred as of the inception date of the collaboration
agreements and consequently, amounts allocated to this performance
obligation are recognized at a point in time. Conversely, control
of the research and development services for each specified
indication is transferred over time and amounts allocated to these
performance obligations are recognized over time using cost inputs
as a measure of progress. In addition, royalty revenues will be
recognized as future sales occur as they meet the requirements for
the sales-usage based royalty exception. The Group expects US$1.1
million deferral of revenue as a cumulative adjustment to opening
accumulated loss upon adoption.
Commercial Platform - For sales of goods and services, the Group
has applied a portfolio approach to aggregate contracts into
portfolios whose performance obligations do not differ materially
from each other. In its assessment of each portfolio, the Group has
assessed the contracts under the new five-step model and does not
expect a significant impact to the timing or amount of revenue
recognition under the new guidance. Control of the goods passes to
the customer when the goods are delivered, which matches the timing
of revenue recognition under the Group's existing accounting
policy.
The Group has applied updates to the new guidance in its
assessment including ASU 2016-08, Principal versus Agent
Considerations, ASU 2016-10, Identifying Performance Obligations
and Licensing.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic
842) ("ASU 2016-02"). The core principle of ASU 2016-02 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 recognize 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. The Group expects to adopt the new standard using the
modified retrospective method on January 1, 2019 with a
retrospective adjustment to comparable periods presented starting
from January 1, 2017. The Group is currently determining the
potential impact ASU 2016-02 will have on the Group's consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business
("ASU 2017-01"), which revises the definition of a business. To be
considered a business, an acquisition would have to include an
input and a substantive process that together significantly
contribute to the ability to create outputs. To be a business
without outputs, there will now need to be an organized workforce.
ASU 2017-01 is effective for fiscal years and interim periods
within those years beginning after December 15, 2018. The Group
currently does not expect ASU 2017-01 to have a material impact on
the Group's consolidated financial statements, but will apply the
guidance upon adoption to business acquisitions, disposals and
segment changes, if any.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification
Accounting (Topic 718) ("ASU 2017-09"), which provides guidance on
the types of changes to the terms or conditions of share-based
payment awards to which an entity would be required to apply
modification accounting under share-based payment accounting. The
guidance clarifies that no new measurement date will be required if
there is no change to the fair value, vesting conditions, and
classification, and in effect simplifies the accounting for
non-substantive changes to share-based payment awards. ASU 2017-09
is effective for fiscal years and interim periods within those
years beginning after December 15, 2017. The Group shall apply the
guidance upon adoption to share-based payment modifications, if
any.
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.
4. Fair Value Disclosures
The following table presents the Group's financial instruments
by level within the fair value hierarchy:
Fair Value Measurement Using
----------------------------------
Level 1 Level 2 Level 3 Total
------- ------- ------- -------
(in US$'000)
As at December 31, 2017
Cash and cash equivalents 85,265 - - 85,265
Short-term investments 273,031 - - 273,031
======= ======= ======= =======
As at December 31, 2016
Cash and cash equivalents 79,431 - - 79,431
Short-term investments 24,270 - - 24,270
======= ======= ======= =======
Accounts receivable, other receivables, amounts due from related
parties, accounts payable, other payables 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. Bank borrowings are
floating rate instruments and carried at amortized cost, which
approximates their fair values, and are therefore excluded from the
above table.
5. Cash and Cash Equivalents
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Cash at bank and on hand 30,018 31,218
Bank deposits maturing in three months or less (note (a)) 55,247 48,213
------ ------
85,265 79,431
====== ======
Denominated in:
US$ (note (b)) 66,381 65,509
RMB (note (b)) 15,140 9,505
UK Pound Sterling ("GBP") (note (b)) 295 408
Hong Kong dollar ("HK$") 3,449 4,009
------ ------
85,265 79,431
====== ======
Notes:
(a) The weighted average effective interest rate on bank
deposits for the years ended December 31, 2017 and 2016 was 1.06%
and 0.58% per annum respectively (with maturity ranging from 7 to
90 days).
(b) Certain cash and bank balances denominated in RMB, US$ and
GBP were deposited with banks in the PRC. The conversion of these
RMB, US$ and GBP denominated balances into foreign currencies is
subject to the rules and regulations of foreign exchange control
promulgated by the PRC government.
6. Short--term Investments
December 31,
---------------
2017 2016
------- ------
(in US$'000)
Bank deposits maturing over three months (note)
Denominated in:
US$ 272,659 24,270
HK$ 372 -
------- ------
273,031 24,270
======= ======
Note:
The weighted average effective interest rate on bank deposits
for the years ended December 31, 2017 and 2016 was 1.32% and 0.71%
per annum respectively (with maturity ranging from 91 to 183 days,
and 91 to 186 days respectively).
7. Accounts Receivable-Third Parties
December 31,
---------------
2017 2016
------ -------
(in US$'000)
Accounts receivable, gross 38,668 43,532
Allowance for doubtful accounts (258) (2,720)
------ -------
Accounts receivable, net 38,410 40,812
====== =======
Substantially all the accounts receivable are denominated in
RMB, US$ and HK$ and are due within one year from the end of the
reporting periods. The carrying values of accounts receivable
approximates their fair values due to their short--term
maturities.
Movements on the allowance for doubtful accounts:
2017 2016 2015
------- ----- -----
(in US$'000)
As at January 1 2,720 3,127 1,793
Increase in allowance for doubtful
accounts 242 29 1,408
Decrease in allowance due to subsequent
collection - (237) -
Write-off (2,874) - -
Exchange difference 170 (199) (74)
------- ----- -----
As at December 31 258 2,720 3,127
======= ===== =====
In December 2015, the Group recorded a provision amounting to
approximately US$1,322,000 which represented an outstanding balance
due from a distributor. In January 2016, the Group terminated the
distributor's exclusive distribution rights and in December 2017,
the amount due was written off along with other allowance for
doubtful accounts balances.
8. Other Receivables, Prepayments and Deposits
Other receivables, prepayments and deposits consisted of the
following:
December 31,
--------------
2017 2016
------- -----
(in US$'000)
Prepayments 2,565 699
Purchase rebates 284 238
Other service receivables 490 756
Deposits 932 620
Value-added tax receivables 5,436 1,380
Interest receivables 506 63
Others 1,083 558
------- -----
11,296 4,314
======= =====
9. Inventories
Inventories, net of provision for excess and obsolete
inventories, consisted of the following:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Raw materials 314 660
Finished goods 11,475 12,162
------ ------
11,789 12,822
====== ======
Movements on the provision for excess and obsolete inventories
are as follows:
2017 2016 2015
----- ---- ----
(in US$'000)
As at January 1 160 25 34
Increase in provision for excess and obsolete inventories 128 163 37
Decrease in provision due to subsequent sale or recovery (144) - (33)
Write-off (32) (23) (12)
Exchange difference 9 (5) (1)
----- ---- ----
As at December 31 121 160 25
===== ==== ====
10. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
Furniture
and
fixtures,
other
Plant equipment
Leasehold and and motor Construction
Buildings improvements equipment vehicles In progress Total
--------- ------------ --------- --------- ------------ ------
(in US$'000)
Cost
As at January 1, 2017 2,232 6,296 86 13,976 1,760 24,350
Additions - 301 155 1,374 4,243 6,073
Disposals - - - (394) - (394)
Transfers - 2,050 2,321 (722) (3,649) -
Exchange differences 140 410 6 920 204 1,680
--------- ------------ --------- --------- ------------ ------
As at December 31, 2017 2,372 9,057 2,568 15,154 2,558 31,709
--------- ------------ --------- --------- ------------ ------
Accumulated depreciation
As at January 1, 2017 971 4,249 71 9,105 - 14,396
Depreciation 105 763 169 1,441 - 2,478
Disposals - - - (337) - (337)
Transfers - - 255 (255) - -
Exchange differences 65 284 4 599 - 952
--------- ------------ --------- --------- ------------ ------
As at December 31, 2017 1,141 5,296 499 10,553 - 17,489
--------- ------------ --------- --------- ------------ ------
Net book value
As at December 31, 2017 1,231 3,761 2,069 4,601 2,558 14,220
========= ============ ========= ========= ============ ======
Furniture
and
fixtures,
other
Plant equipment
Leasehold and and motor Construction
Buildings improvements equipment vehicles in progress Total
--------- ------------ --------- --------- ------------ -------
(in US$'000)
Cost
As at January 1,
2016 2,392 5,989 88 12,806 567 21,842
Additions - 742 - 1,453 2,132 4,327
Disposals - (12) - (248) - (260)
Transfers - - - 886 (886) -
Exchange differences (160) (423) (2) (921) (53) (1,559)
--------- ------------ --------- --------- ------------ -------
As at December 31,
2016 2,232 6,296 86 13,976 1,760 24,350
--------- ------------ --------- --------- ------------ -------
Accumulated depreciation
As at January 1,
2016 932 3,549 70 8,784 - 13,335
Depreciation 106 977 3 1,153 - 2,239
Disposals - (12) - (218) - (230)
Exchange differences (67) (265) (2) (614) - (948)
--------- ------------ --------- --------- ------------ -------
As at December 31,
2016 971 4,249 71 9,105 - 14,396
--------- ------------ --------- --------- ------------ -------
Net book value
As at December 31,
2016 1,261 2,047 15 4,871 1,760 9,954
========= ============ ========= ========= ============ =======
Depreciation for the year ended December 31, 2015 was
US$1,908,000.
11. Investments in Equity Investees
Investments in equity investees consisted of the following:
December 31,
----------------
2017 2016
------- -------
(in US$'000)
HBYS 55,308 63,536
SHPL 69,417 77,939
NSPL 19,201 16,806
Other 311 225
------- -------
144,237 158,506
======= =======
Particulars regarding the principal equity investees are
disclosed in Note 2. All of the equity investees are private
companies and there are no quoted market prices available for their
shares.
Summarized financial information for the significant equity
investees HBYS, SHPL and NSPL is as follows:
(i) Summarized balance sheets
Commercial Platform Innovation Platform
-------------------------------------- ---------------------
Prescription
Consumer Health Drugs Drug R&D
HBYS SHPL NSPL
------------------ ------------------ ---------------------
December 31, December 31, December 31,
------------------ ------------------ ---------------------
2017 2016 2017 2016 2017 2016
-------- -------- -------- -------- ---------- ---------
(in US$'000)
Current assets 101,570 123,181 129,535 146,350 9,640 5,393
Non-current assets 107,226 98,554 103,477 97,656 30,000 30,000
Current liabilities (75,787) (70,218) (91,665) (86,946) (1,239) (1,782)
Non-current liabilities (18,748) (18,148) (8,616) (6,926) - -
-------- -------- -------- -------- ---------- ---------
Net assets 114,261 133,369 132,731 150,134 38,401 33,611
Non-controlling interests (3,645) (6,297) - - - -
-------- -------- -------- -------- ---------- ---------
110,616 127,072 132,731 150,134 38,401 33,611
======== ======== ======== ======== ========== =========
(ii) Summarized statements of operations
Commercial Platform Innovation Platform
------------------------------------------------------ -------------------------
Consumer Health Prescription Drugs Drug R&D(note (a))
HBYS SHPL NSPL
------------------------- --------------------------- -------------------------
Year Ended December Year Ended December Year Ended December
31, 31, 31,
------------------------- --------------------------- -------------------------
2017 2016 2015 2017 2016 2015 2017 2016 2015
------- ------- ------- -------- -------- ------- ------- ------- -------
(in US$'000)
Revenue 227,422 224,131 211,603 244,557 222,368 181,140 - - -
Gross profit 91,458 89,355 91,461 175,965 158,131 127,608 - - -
Depreciation
and amortization (4,985) (2,958) (3,274) (6,942) (3,526) (2,765) - - -
Interest income 220 238 628 757 565 306 - - -
Finance cost (117) (123) (158) - - - - - -
Profit/(loss)
before taxation 24,434 23,759 25,164 66,497 148,144 37,401 (9,210) (8,482) (7,552)
Income tax
expense (note
(b)) (3,629) (3,631) (3,948) (10,874) (27,645) (6,094) - - -
------- ------- ------- -------- -------- ------- ------- ------- -------
Net income/(loss) 20,805 20,128 21,216 55,623 120,499 31,307 (9,210) (8,482) (7,552)
Non-controlling
interests (29) 248 160 - - - - - -
------- ------- ------- -------- -------- ------- ------- ------- -------
Net income/(loss)
attributable
to the
shareholders
of equity
investee 20,776 20,376 21,376 55,623 120,499 31,307 (9,210) (8,482) (7,552)
======= ======= ======= ======== ======== ======= ======= ======= =======
Notes:
(a) NSPL only incurred research and development expenses in the periods presented.
(b) HBYS and SHPL have been successful in their respective
applications to renew the High and New Technology Enterprise
("HNTE") status. Accordingly, the companies were eligible to use a
preferential income tax rate of 15% for the years ended December
31, 2017, 2016 and 2015.
For the years ended December 31, 2017, 2016 and 2015, other
immaterial equity investees had net income of approximately
US$117,000, US$95,000 and US$12,000 respectively.
(iii) Reconciliation of summarized financial information
Reconciliation of the summarized financial information presented
to the carrying amount of investments in equity investees is as
follows:
Commercial Platform Innovation Platform
------------------------------------------------------- -------------------------
Consumer Health Prescription Drugs Drug R&D
HBYS SHPL NSPL
-------------------------- --------------------------- -------------------------
2017 2016 2015 2017 2016 2015 2017 2016 2015
-------- ------- ------- -------- -------- ------- ------- ------- -------
(in US$'000)
Opening net
assets after
non-controlling
interests as
at January
1 127,072 121,523 111,506 150,134 93,263 71,906 33,611 18,093 25,645
Net income/(loss)
attributable
to the
shareholders
of equity
investee 20,776 20,376 21,376 55,623 120,499 31,307 (9,210) (8,482) (7,552)
Dividends
declared (45,128) (6,000) (6,410) (81,299) (55,057) (6,410) - - -
Other
comprehensive
income/(loss) 7,896 (8,827) (4,949) 8,273 (8,571) (3,540) - - -
Investments - - - - - - 14,000 10,000 -
Capitalization
of loans - - - - - - - 14,000 -
-------- ------- ------- -------- -------- ------- ------- ------- -------
Closing net
assets after
non-controlling
interests as
at December
31 110,616 127,072 121,523 132,731 150,134 93,263 38,401 33,611 18,093
Group's share
of net assets 55,308 63,536 60,762 66,365 75,067 46,632 19,201 16,806 9,046
Goodwill - - - 3,052 2,872 3,077 - - -
-------- ------- ------- -------- -------- ------- ------- ------- -------
Carrying amount
of investments
as at December
31 55,308 63,536 60,762 69,417 77,939 49,709 19,201 16,806 9,046
======== ======= ======= ======== ======== ======= ======= ======= =======
The equity investees had the following lease commitments and
capital commitments:
(a) The equity investees lease various factories and offices
under non--cancellable operating lease agreements. Future aggregate
minimum payments under non--cancellable operating leases as from
the dates indicated are as follows:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Not later than 1 year 1,282 1,511
Between 1 to 2 years 400 1,184
Between 2 to 3 years 151 -
Between 3 to 4 years 141 -
Between 4 to 5 years 47 -
------ ------
Total minimum lease payments 2,021 2,695
====== ======
(b) Capital commitments
The equity investees had the following capital commitments:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Property, plant and equipment
Contracted but not provided for 1,034 6,162
====== ======
12. Accounts Payable
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Accounts payable-third parties 17,095 30,383
Accounts payable-non-controlling shareholders of subsidiaries 7,250 5,136
Accounts payable-related party (Note 22 (ii)) 20 19
------ ------
24,365 35,538
====== ======
Substantially all the accounts payable are denominated in RMB
and US$ and due within one year from the end of the reporting
period. The carrying values of accounts payable approximate their
fair values due to their short--term maturities.
13. Other Payables, Accruals and Advance Receipts
Other payables, accruals and advance receipts consisted of the
following:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Accrued salaries and benefits 9,295 7,057
Accrued research and development expenses 14,613 11,771
Accrued selling and marketing expenses 4,121 4,340
Accrued administrative and other general expenses 4,729 4,078
Deferred government incentives 1,790 1,755
Loan from a non-controlling shareholder of a subsidiary
(Note 22 (iv)) 1,550 -
Payments in advance from customers 1,282 899
Others 3,573 1,816
------ ------
40,953 31,716
====== ======
14. Bank Borrowings
Bank borrowings consisted of the following:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Current 29,987 19,957
Non-current - 26,830
------ ------
29,987 46,787
====== ======
The weighted average interest rate for outstanding bank
borrowings for the years ended December 31, 2017, 2016 and 2015 was
1.90%, 1.52% and 1.39% per annum respectively. In addition, the
Group incurred guarantee fees of US$320,000, US$471,000 and
US$471,000 respectively for the years ended December 31, 2017, 2016
and 2015, which was 0.76%, 0.94% and 0.95% per annum respectively
of the weighted average outstanding bank borrowings. The carrying
amounts of the Group's bank borrowings are all denominated in
HK$.
3-year term loan and 18-month revolving loan facilities
In November 2017, the Group through its subsidiary, entered into
a facility agreement with a bank for the provision of unsecured
credit facilities in the aggregate amount of HK$400,000,000
(US$51,282,000). The credit facilities include (i) a HK$210,000,000
(US$26,923,000) 3-year term loan facility and (ii) a HK$190,000,000
(US$24,359,000) 18-month revolving loan facility. The term loan
bears interest at 1.50% over the Hong Kong Interbank Offered Rate
("HIBOR") per annum. The revolving loan facility bears interest at
1.25% over HIBOR per annum. As at December 31, 2017, no amounts
have been drawn from the term loan or the revolving loan
facilities. These credit facilities are guaranteed by the
Company.
In December 2011, the Group through its subsidiary, entered into
a three--year term loan with the same bank above in the aggregate
principal amount of HK$210,000,000 (US$26,923,000). The term loan
bears interest at 1.50% over the HIBOR per annum. In June 2014, the
term loan was refinanced into a four-year term loan due June 2018
which bears interest at 1.35% over the HIBOR per annum. The loan
was fully repaid in two installments of HK$180,000,000
(US$23,077,000) and HK$30,000,000 (US$3,846,000) in August 2017 and
November 2017 respectively. The term loan was unsecured and
guaranteed by Hutchison Whampoa Limited, an indirect subsidiary of
CK Hutchison. An annual fee was paid to Hutchison Whampoa Limited
for the guarantee (Note 22(i)).
18-month term loan and revolving loan facilities
In February 2017, the Group through its subsidiary, entered into
two separate facility agreements with banks for the provision of
unsecured credit facilities in the aggregate amount of
HK$546,000,000 (US$70,000,000). The first credit facility includes
(i) a HK$156,000,000 (US$20,000,000) term loan facility and (ii) a
HK$195,000,000 (US$25,000,000) revolving loan facility, both with a
term of 18 months and an annual interest rate of 1.25% over HIBOR.
The term loan was drawn from the first credit facility in March
2017 and is due in August 2018. The second credit facility includes
(i) a HK$78,000,000 (US$10,000,000) term loan facility and (ii) a
HK$117,000,000 (US$15,000,000) revolving loan facility, both with a
term of 18 months and an annual interest rate of 1.25% over HIBOR.
The term loan was drawn from the second credit facility in August
2017 and is due in August 2018. Accordingly, the term loans are
recorded as short-term bank borrowings as at December 31, 2017. No
amounts have been drawn from the revolving loan facilities. These
credit facilities are guaranteed by the Company.
In March 2017, the Group repaid the HK$156,000,000
(US$20,000,000) term loan facility with the same banks above, which
was part of the unsecured credit facilities in the aggregate amount
of HK$468,000,000 (US$60,000,000) entered in February 2016. These
unsecured credit facilities have been terminated.
3-year revolving loan facility
In November 2015, the Group through its subsidiary renewed a
three year revolving loan facility with a bank in the aggregate
amount of HK$234,000,000 (US$30,000,000) with an annual interest
rate of 1.25% over HIBOR. This facility will expire in November
2018. In February 2017, HK$20,000,000 (US$2,564,000) was drawn from
this facility and the amount was fully repaid in March 2017. As at
December 31, 2017 and 2016, there were no amounts due under this
loan.
The Group's bank borrowings are repayable as from the dates
indicated as follows:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Not later than 1 year 30,000 20,000
Between 1 to 2 years - 26,923
------ ------
30,000 46,923
====== ======
As at December 31, 2017 and 2016, the Group had unutilized bank
borrowing facilities of HK$946,000,000 (US$121,282,000) and
HK$546,000,000 (US$70,000,000) respectively.
15. Commitments and Contingencies
(i) Lease commitments
The Group leases various factories and offices under
non--cancellable operating lease agreements. Future aggregate
minimum payments under non--cancellable operating leases as from
the dates indicated as follows:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Not later than 1 year 3,330 1,711
Between 1 to 2 years 2,875 1,383
Between 2 to 3 years 2,132 1,053
Between 3 to 4 years 345 597
Between 4 to 5 years 161 108
Later than 5 years 17 45
------ ------
Total minimum lease payments 8,860 4,897
====== ======
(ii) Capital commitments
The Group had the following capital commitments as from the
dates indicated as follows:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Property, plant and equipment
Contracted but not provided for 161 2,545
====== ======
In addition, the Group has also undertaken to provide the
necessary additional funds for NSPL to finance its ongoing
operations.
16. Redeemable Non--controlling Interests
As at December 31, 2017 and 2016, no redeemable non-controlling
interests were outstanding.
In November and December 2010, the Company and HMHL, entered
into subscription and shareholders' agreements ("SSAs") with Mitsui
& Co., Ltd. ("Mitsui") and SBCVC Fund III Company Limited
("SBCVC") (collectively, the "preferred shareholders"), whereby
HMHL issued 7,390,029 redeemable convertible preferred shares
("Preferred Shares") for an aggregate consideration of US$20.1
million. The Preferred Shares on an as--if--converted basis
represented approximately 19.76% of the aggregate issued and
outstanding share capital of HMHL on the closing date.
In October 2012, the Company repurchased all 2,815,249 Preferred
Shares from SBCVC. The remaining 4,574,780 Preferred Shares of
US$12.5 million held by Mitsui represented approximately 12.24% of
HMHL on a fully diluted basis.
In May and June 2014, the Company and HMHL further entered into
two subscription agreements with Mitsui, whereby HMHL issued a
total of 672,713 HMHL's Preferred Shares to Mitsui and 4,825,418
HMHL's ordinary shares to the Company for an aggregate
consideration of US$25.0 million, after which Mitsui's interest in
HMHL remained at 12.24% on a fully diluted basis.
On July 23, 2015, the Company entered into a subscription
agreement with Mitsui under which the Company issued 3,214,404 new
ordinary shares of the Company valued at approximately US$84.0
million in exchange for the Preferred Shares held by Mitsui with
carrying value of US$84.0 million (including accretion adjustment
up to July 23, 2015). The transaction was completed on July 23,
2015 and as a result of this transaction, Mitsui held approximately
5.69% of the enlarged share capital of the Company at that time.
The outstanding balance of redeemable non--controlling interests
was extinguished with the corresponding increase in the Company's
shares and additional paid--in capital.
Accounting for preferred shares
The Preferred Shares were redeemable upon occurrence of an event
that is not solely within the control of the issuer. Accordingly,
the Preferred Shares were recorded and accounted for as redeemable
non--controlling interests outside of permanent equity in the
Group's consolidated balance sheets. The Group recorded accretion
when it was probable that the Preferred Shares will become
redeemable. The accretion, which increases the carrying value of
the redeemable non--controlling interests, was recorded against
retained earnings, or in the absence of retained earnings, by
recording against the additional paid--in capital. During the year
ended December 31, 2015, HMHL recorded an accretion of
US$43,001,000 to the Preferred Shares based on such preferred
shareholder's share of the estimated valuation of HMHL.
17. Ordinary Shares
The Company is authorized to issue 75,000,000 ordinary
shares.
On March 17, 2016, the Company's ADS, each representing one-half
of one ordinary share, commenced trading on the Nasdaq Global
Select Market. Concurrently, the Company issued 3,750,000 ordinary
shares in the form of 7,500,000 ADS for gross proceeds of US$101.3
million. 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$8.9 million. Issuance costs totaled US$14.2 million,
of which US$12.9 million and US$1.3 million were paid in the years
ended December 31, 2016 and 2015 respectively.
In October 2017, the Company issued 5,684,905 ordinary shares in
the form of 11,369,810 ADS for gross proceeds of US$301.3 million.
Issuance costs totaled US$8.6 million.
A summary of ordinary shares transactions (in thousands) is as
follows:
2017 2016 2015
------ ------ ------
As at January 1 60,706 56,533 53,076
Public offering 5,685 4,080 -
Share option exercises 56 93 243
Exchange of redeemable non-controlling interest
(Note 16) - - 3,214
------ ------ ------
As at December 31 66,447 60,706 56,533
====== ====== ======
Each ordinary share is entitled to one vote. The holders of
ordinary shares are also entitled to receive dividends whenever
funds are legally available and when declared by the Board of
Directors of the Company.
18. 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 such scheme has a term
of 10 years. It expired in 2016 and no further share options can be
granted. Another share option scheme was conditionally adopted on
April 24, 2015 (the "HCML Share Option Scheme"). Pursuant to the
HCML Share Option Scheme, 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 Scheme is 2,425,597 ordinary shares. The aggregate number of
shares issuable under the prior share option scheme which expired
in 2016 is 282,726 ordinary shares. As at December 31, 2017, the
number of shares authorized but unissued was 8,552,963 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 the 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. However, certain share option grants
may have a different vesting schedule as approved by the Board of
Directors of the Company. No outstanding share options will be
exercisable or subject to vesting after the expiry of a maximum of
eight to ten years from the date of grant.
On June 15, 2016, 1,187,372 share options of a subsidiary were
cancelled with the consent of the relevant eligible employees in
exchange for 593,686 new share options of the Company (Note
18(ii)). 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 Company's share option activity and related
information is as follows:
Weighted-average
Number of Weighted-average remaining Aggregate
share exercise price in contractual life intrinsic value
options GBP per share (years) (in GBP'000)
--------- ----------------- ---------------- ---------------
Outstanding at January 1, 2015 684,403 4.67
Granted - -
Exercised (242,038) 3.77
Cancelled - -
Outstanding at December 31, 2015 442,365 5.16 6.53 10,061
Granted 693,686 19.70
Exercised (92,705) 3.54
Cancelled (3,750) 6.10
Outstanding at December 31, 2016 1,039,596 15.00 6.77 7,900
Granted 150,000 31.05
Exercised (56,309) 5.16
Cancelled (6,875) 6.10
Outstanding at December 31, 2017 1,126,412 17.69 6.29 43,158
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 December 31,
2016 1,039,596 15.00 6.77 7,900
Vested and exercisable at December 31, 2016 767,376 14.64 6.66 6,106
Vested and expected to vest at December 31,
2017 1,126,412 17.69 6.29 43,158
Vested and exercisable at December 31, 2017 951,412 15.52 5.81 38,508
The Company uses the Polynomial 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 Polynomial model are
with reference to the sovereign yield of the United Kingdom because
the Company's ordinary shares are currently listed on AIM and
denominated in 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 Polynomial
model.
In determining the fair value of share options granted, the
following assumptions were used in the Polynomial model for awards
granted in the periods indicated:
Grant date
-------------------------------------------
June 24, December 20, June 15, March 27,
2011 2013 2016 2017
-------- ------------ -------- ---------
Value of each share option (in GBP per share) 1.84 3.15 8.99 12.69
Significant inputs into the valuation model:
Exercise price (in GBP per share) 4.41 6.10 19.70 31.05
Share price at effective date of grant
(in GBP per share) 4.33 6.10 19.70 31.05
Expected volatility 46.6% 36.0% 39.0% 36.3%
Risk-free interest rate 3.13% 3.16% 1.00% 1.17%
Contractual life of share options 10 years 10 years 8 years 10 years
Expected dividend yield 0% 0% 0% 0%
The following table summarizes the Company's share option
values:
Year Ended December 31,
---------------------------
2017 2016 2015
-------- -------- -------
Weighted-average grant-date fair value of share options granted during the period
(in GBP
per share) 12.69 8.99 -
Total intrinsic value of share options exercised in US$'000 2,290 1,907 5,020
Share--based Compensation Expense
The Group 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:
Year Ended December 31,
---------------------------
2017 2016 2015
--------- -------- ------
(in US$'000)
Research and development expenses 1,284 1,278 74
Administrative expenses - - 14
--------- -------- ------
1,284 1,278 88
========= ======== ======
As at December 31, 2017, the total unrecognized compensation
cost was US$1,539,000, and will be recognized on a graded vesting
approach over the weighted--average remaining service period of 3.1
years.
Cash received from share option exercises under the share option
plan for the years ended December 31, 2017, 2016 and 2015 was
approximately US$380,000, US$426,000 and US$1,374,000
respectively.
The Company will issue new shares to satisfy share option
exercises.
(ii) Share--based Compensation of a subsidiary
HMHL adopted a share option scheme on August 6, 2008 (as amended
on April 15, 2011) and such scheme has a term of 6 years. It
expired in 2014 and no further share options can be granted.
Another share option scheme was adopted on December 17, 2014 (the
"HMHL Share Option Scheme"). Pursuant to the HMHL Share Option
Scheme, any employee or director of HMHL and any of its holding
company, subsidiaries and affiliates is eligible to participate in
the HMHL Share Option Scheme subject to the discretion of the board
of directors of HMHL.
The aggregate number of shares issuable under the HMHL Share
Option Scheme is 2,144,408 ordinary shares. As at December 31,
2017, the number of shares authorized but unissued was 157,111,839
ordinary shares of HMHL.
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 the 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. For the share options in exchange for new share options
under HCML Share Option Scheme, 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 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 December 31, 2017 and
2016, US$0.2 million and US$1.4 million have been recognized in
other payables respectively.
On June 15, 2016, 1,187,372 share options pursuant to the HMHL
Share Option Schemes were cancelled with the consent of the
relevant eligible employees in exchange for 593,686 new share
options of the Company pursuant to the HCML Share Option Schemes.
This was accounted for as a modification of the original share
options granted which did not result in any incremental fair value
to the Group.
A summary of the HMHL's share option activity and related
information is as follows (with no activity for the year ended
December 31, 2017):
Weighted-average
Number
of Weighted-average remaining Aggregate
exercise contractual Intrinsic
share price in life value
options GBP per share (years) (in GBP'000)
----------- ---------------- ---------------- ------------
Outstanding at January 1, 2015 1,211,772 7.71
Granted - -
Exercised (24,400) 2.34
Cancelled - -
Outstanding at December 31, 2015 1,187,372 7.82 7.97 32,292
Granted - -
Exercised - -
Cancelled (1,187,372) 7.82
Outstanding at December 31, 2016
and 2017 - - - -
Vested and expected to vest at
December 31, 2015 759,918 7.82 7.97 20,667
Vested and exercisable at December
31, 2015 593,686 7.82 7.97 16,146
Vested and expected to vest at
December 31, 2016 and 2017 - - - -
Vested and exercisable at December
31, 2016 and 2017 - - - -
Share--based Compensation Expense
The subsidiary recognizes compensation expense for only the
portion of options expected to vest, on a graded vesting approach
over the requisite service period. The following table presents
share--based compensation expense included in the Group's
consolidated statements of operations:
Year Ended December 31,
---------------------------
2017 2016 2015
-------- ------- --------
(in US$'000)
Research and development 32 502 1,063
======== ======= ========
As at December 31, 2017, the total unrecognized compensation
cost was nil.
Cash received from option exercises under the share option plan
for the year ended December 31, 2015 was US$57,000.
(iii) LTIP
The Company grants awards under the LTIP to participating
directors and employees, giving them a conditional right to receive
ordinary shares of the Company or the equivalent ADS (collectively
the "Awarded Shares") to be purchased by the Trustee up to a cash
amount. Vesting will 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 Company. Additionally, some awards
are subject to change based on annual performance targets prior to
their determination date.
LTIP awards prior to the determination date
Performance targets vary by award, and may include targets for
shareholder returns, free cash flows, revenues, net profit after
taxes and the achievement of clinical and regulatory milestones. 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 a corresponding entry
to liability.
LTIP awards after the determination date
Upon the determination date, the Company will pay a determined
monetary amount, up to the maximum cash amount based on the actual
achievement of the performance target specified in the award, to
the Trustee to purchase the Awarded 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 Awarded Shares
of the Company will be purchased and the amount previously recorded
in the liability will be reversed through profit or loss.
Granted awards under the LTIP are as follows:
On December 15, 2017, the Company granted awards up to a maximum
cash amount per annum of US$0.5 million that stipulated annual
performance targets. Shares under such LTIP awards will cover each
financial year from 2018 to 2019. The annual performance target
determination date is the date of the announcement of the Group's
annual results for the covered financial year and vesting occurs
two business days after the announcement of the Group's annual
results for the financial year falling two years after the covered
financial year to which the LTIP award relates.
On March 15, 2017 and August 2, 2017, the Company granted awards
up to a maximum cash amount per annum of US$6.0 million that
stipulated annual performance targets. Shares under such LTIP
awards will cover each financial year from 2017 to 2019. The annual
performance target determination date is the date of the
announcement of the Group's annual results for the covered
financial year and vesting occurs two business days after the
announcement of the Group's annual results for the financial year
falling two years after the covered financial year to which the
LTIP award relates.
On March 15, 2017, the Company granted awards up to a maximum
cash amount of US$0.4 million in aggregate that did not stipulate
performance targets. Shares under such LTIP awards will vest one
business day after the publication date of the annual report for
the 2017 financial year.
On March 24, 2016, the Company granted awards up to a maximum
cash amount of US$0.3 million in aggregate that do not stipulate
performance targets. Shares under such LTIP awards are subject to
the vesting schedule of 25% on each of the first, second, third and
fourth anniversaries of the date of grant.
On October 19, 2015, the Company granted initial awards under
the LTIP up to a maximum cash amount per annum of US$1.8 million
that stipulated annual performance targets. Shares under such LTIP
awards will cover each financial year from 2014 to 2016. The annual
performance target determination date is the date of the
announcement of the Group's annual results for the covered
financial year and vesting occurs one business day after the
publication date of the annual report of the Company for the
financial year falling two years after the covered financial year
to which the LTIP award relates.
The Trustee has been set up solely for the purpose of purchasing
and holding the Awarded Shares during the vesting period on behalf
of the Group using funds provided by the Group. On the
determination date, if any, the Company will determine the cash
amount, based on the actual achievement of each annual performance
target, for the Trustee to purchase the Awarded Shares. The Awarded
Shares will then be held by the Trustee until they are vested.
The Trustee's assets include treasury shares and funds for
additional treasury shares, trustee fees and expenses. As at
December 31, 2017, the number of treasury shares (in the form of
ordinary shares or ADS of the Company) purchased and held by the
Trustee are as follows:
Number of treasury shares Cost in US$'000
------------------------- ---------------
As at January 1, 2017 62,921 2,390
Purchased 35,095 1,367
Vested (42,038) (1,800)
------------------------- ---------------
As at December 31, 2017 55,978 1,957
========================= ===============
Based on the actual achievement of performance targets for the
2017 financial year, the Group expects to purchase up to
US$5,621,000 of treasury shares in 2018.
For the year ended December 31, 2017, US$1,800,000 and US$79,000
of the LTIP awards have vested and been forfeited respectively.
The following table presents the share-based compensation
expenses recognized under the LTIP awards:
Year Ended December 31,
---------------------------
2017 2016 2015
--------- -------- ------
(in US$'000)
Research and development expenses 1,894 850 156
Selling and administrative expenses 1,529 811 152
--------- -------- ------
3,423 1,661 308
========= ======== ======
Recorded with a corresponding credit to:
Liability 2,336 345 75
Additional paid-in capital 1,087 1,316 233
--------- -------- ------
3,423 1,661 308
========= ======== ======
For the years ended December 31, 2017, 2016 and 2015,
US$451,000, US$64,000 and nil was reclassified from liability to
additional paid-in capital respectively upon LTIP awards reaching
the determination date. As at December 31, 2017 and 2016,
US$2,241,000 and US$356,000 was recorded as liability respectively
for LTIP awards prior to the determination date.
As at December 31, 2017, the total unrecognized compensation
cost was approximately US$8,681,000, which considers expected
performance targets and the amount expected to vest, and will be
recognized over the requisite periods.
19. Revenue from License and Collaboration Agreements-Third
Parties
Year Ended December 31,
---------------------------
2017 2016 2015
-------- -------- -------
(in US$'000)
Milestone revenue 9,457 9,931 19,212
Amortization of upfront payment 1,655 1,679 1,907
Research and development services 15,203 14,834 22,941
-------- -------- -------
26,315 26,444 44,060
======== ======== =======
The revenue is mainly from 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 ("Lilly") relating to fruquintinib, a targeted oncology
therapy for the treatment of various types of solid tumors. Under
the terms of the agreement, the Group is entitled to receive a
series of payments of up to US$86.5 million, including upfront
payments and development and regulatory approval milestones. Should
fruquintinib be successfully commercialized in China, the Group
would receive tiered royalties based on certain percentages of net
sales. Development costs after the first development milestone are
shared between the Group and Lilly. Following execution of the
agreement, the Group received a non--refundable, upfront payment of
US$6.5 million.
In addition, the Group also signed an option agreement which
grants Lilly an exclusive option to expand the fruquintinib rights
beyond Hong Kong and China. The option agreement further sets out
certain milestone payments and royalty rates that apply in the
event the option is exercised on a global basis. However, these are
subject to further negotiation should the option be exercised on a
specific territory basis as opposed to a global basis. The option
was not considered to be a separate deliverable in the arrangement
as it was not considered to be substantive. As at December 31,
2017, the option has not been exercised.
The license rights to fruquintinib, delivered at the inception
of the arrangement, did not have stand--alone value apart from the
other deliverables in the arrangement which include the development
services, the participation in the joint steering committee and the
manufacturing of active pharmaceutical ingredients during the
development phase. The non--refundable upfront payment was deferred
and is being recognized ratably over the development period. The
Group recognizes milestone revenue relating to the deliverables in
the agreement as a single unit of accounting using the milestone
method.
Under the terms of this agreement, the Group recognized US$4.5
million milestone revenue for the year ended December 31, 2017 in
relation to the acceptance of a new drug application by the China
Food and Drug Administration for fruquintinib as a treatment of
patients with advanced colorectal cancer. For the year ended
December 31, 2016, the Group did not recognize any milestone
revenue in relation to this contract and for the year ended
December 31, 2015, the Group recognized US$19.2 million milestone
revenues in relation to the achievement of the "proof of concept"
milestone for two indications. The Group recognized US$1.6 million,
US$1.7 million and US$1.8 million revenue from amortization of the
upfront payment during the years ended December 31, 2017, 2016 and
2015 respectively. In addition, the Group recognized US$12.1
million, US$12.1 million and US$19.4 million revenue from research
and development services for the years ended December 31, 2017,
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 savolitinib ("AZ Agreement"), 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 the
agreement, development costs for savolitinib in China will be
shared between the Group and AZ, with the Group continuing to lead
the development in China. AZ will lead and pay for the development
of savolitinib for the rest of the world. The Group received a
non--refundable upfront payment of US$20.0 million upon the signing
of the agreement and may receive up to US$120.0 million contingent
upon the successful achievement of clinical development and
first-sale milestones. The agreement also contains possible
significant future commercial sale milestones and up to
double--digit percentage royalties on net sales.
The license right to develop savolitinib in the rest of the
world was delivered to AZ at the inception of the arrangement. Such
license had stand--alone value apart from the other deliverables in
the arrangement which include the development of savolitinib in
China and the participation in the joint steering committee. The
non--refundable up--front payment was allocated to (a) the license
to develop savolitinib in the rest of the world, which was
recognized at inception and (b) the research and development
services for which the amount allocated has been deferred and is
being recognized ratably over the development period. The Group
recognizes milestone revenue relating to the deliverables in the
agreement as a single unit of accounting using the milestone
method.
Under the terms of this agreement, the Group recognized US$5.0
million milestone revenue for the year ended December 31, 2017 in
relation to the Phase III initiation for the secondary indication,
papillary renal cell carcinoma, and US$9.9 million milestone
revenue for the year ended December 31, 2016 in relation to the
Phase IIb initiation for the primary indication, non-small cell
lung cancer. For the year ended December 31, 2015, the Group did
not recognize any milestone revenue in relation to this contract.
The Group recognized less than US$0.1 million revenue from
amortization of the up-front payment for each of the years ended
December 31, 2017, 2016 and 2015. In addition, the Group recognized
US$3.1 million, US$2.7 million and US$3.5 million revenue from
research and development services for the years ended December 31,
2017, 2016 and 2015 respectively.
In August 2016, the Group entered into an amendment to the AZ
Agreement. 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$250 million, after which the additional royalty
decreases to 3% for 24 months and then 1.5% thereafter. The costs
of the additional Phase III clinical trial costs shall be expensed
to research and development expense as incurred. Under the current
revenue recognition policy, future royalties shall be recognized as
revenue from license and collaboration agreements-third parties as
net sales occur. The amendment does not impact the original
accounting for the AZ Agreement under the milestone method.
20. Research and Development Expenses
Research and development expenses are summarized as follows:
Year Ended December 31,
---------------------------
2017 2016 2015
-------- -------- -------
(in US$'000)
Clinical trial related costs 45,250 38,589 24,690
Personnel compensation and related costs 24,848 21,698 17,339
Other research and development expenses 5,425 6,584 5,339
-------- -------- -------
75,523 66,871 47,368
======== ======== =======
21. Government Incentives
The Group receives government grants from the PRC Government
(including the National level and Shanghai Municipal City). These
grants are given in support of drug research and development
activities and are conditional upon i) the Group spending a
predetermined amount, regardless of success or failure of the
research and development projects and ii) the achievement of
certain stages of research and development projects being approved
by the relevant PRC government authority. These government grants
are subject to ongoing reporting and monitoring by the PRC
Government over the period of the grant.
Government incentives, which are deferred and recognized in the
consolidated statements of operations over the period necessary to
match them with the costs that they are intended to compensate, are
recognized in other payable, accruals and advance receipts (Note
13) and other non-current liabilities. They are refundable to the
PRC Government if the related research and development projects are
suspended. For the years ended December 31, 2017, 2016 and 2015,
the Group received government grants of US$1,323,000, US$1,872,000
and US$4,898,000 respectively.
The government grants recorded as a reduction to research and
development expenses for the years ended December 31, 2017, 2016
and 2015 were US$876,000 US$1,269,000 and US$3,664,000
respectively.
22. Significant Transactions with Related Parties and
Non-Controlling Shareholders of Subsidiaries
The Group has the following significant transactions with
related parties and non-controlling shareholders of subsidiaries,
which were carried out in the normal course of business at terms
determined and agreed by the relevant parties.
(i) Transactions with related parties:
Year Ended December 31,
---------------------------
2017 2016 2015
--------- ------- -------
(in US$'000)
Sales to:
Indirect subsidiaries of CK Hutchison 8,486 9,794 8,074
========= ======= =======
Revenue from research and development services:
Equity investees 9,682 8,429 5,383
========= ======= =======
Purchases from:
Equity investees 1,182 280 3,701
========= ======= =======
Rendering of marketing services from:
Indirect subsidiaries of CK Hutchison 372 741 751
An equity investee 10,195 8,401 5,093
--------- ------- -------
10,567 9,142 5,844
========= ======= =======
Rendering of management services from:
Indirect subsidiaries of CK Hutchison 897 874 845
========= ======= =======
Interest paid to:
Immediate holding company - 152 144
An indirect subsidiary of CK Hutchison 132 - -
--------- -------
132 152 144
========= ======= =======
Guarantee fee on bank loan to:
An indirect subsidiary of CK Hutchison 320 471 471
========= ======= =======
(ii) Balances with related parties included in:
December 31,
--------------
2017 2016
------ ------
(in US$'000)
Accounts receivable-related parties
Indirect subsidiaries of CK Hutchison (note (a)) 2,761 2,589
Equity investees (note (a)) 1,099 1,634
3,860 4,223
====== ======
Accounts payable
An indirect subsidiary of CK Hutchison (note (a)) - 19
An equity investee (note (a)) 20 -
------ ------
20 19
====== ======
Amounts due from related parties
An indirect subsidiary of CK Hutchison (note (a)) 23 107
Equity investees (note (a)) 893 1,029
Dividend receivable from an equity investee 7,628 -
------ ------
8,544 1,136
====== ======
Amounts due to related parties
Immediate holding company (note (b)) - 2,086
An indirect subsidiary of CK Hutchison (note (b)) 454 152
An equity investee (note (a)) 6,567 3,070
------ ------
7,021 5,308
====== ======
Other deferred income
An equity investee (note (c)) 1,648 1,771
====== ======
Other non-current liabilities
Immediate holding company (note (d)) - 6,000
====== ======
Notes:
(a) 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.
(b) Amounts due to immediate holding company and an indirect
subsidiary of CK Hutchison are unsecured and interest--bearing.
During the year ended December 31, 2017, amounts due to immediate
holding company were assigned to an indirect subsidiary of CK
Hutchison. As at December 31, 2017, approximately US$454,000
(December 31, 2016: US$2,238,000) of such balances are repayable
within one year or repayable on demand.
(c) Other deferred income represents amounts recognized from
granting of promotion and marketing rights.
(d) In December 2017, the Group repaid the amount due. As at
December 31, 2016, this amount was recorded in non-current
liabilities as it was repayable in equal installments of
US$3,000,000 in December 2018 and December 2019.
(iii) Transactions with non-controlling shareholders of subsidiaries:
Year Ended December 31,
---------------------------
2017 2016 2015
-------- -------- -------
(in US$'000)
Sales 13,307 12,274 6,196
======== ======== =======
Purchases 21,236 15,225 12,169
Interest expense 66 78 85
======== ======== =======
Dividend declared 1,594 564 590
(iv) Balances with non-controlling shareholders of subsidiaries included in:
December 31,
2017 2016
(in US$'000)
Accounts receivable-third parties 1,846 -
Accounts payable 7,250 5,136
Other payables, accruals and advance receipts
Loan 1,550 -
Interest payable 80 14
------
1,630 14
======
Other non-current liabilities
Loans 579 2,129
======
23. Income Taxes
(i) Income tax expense
Year Ended December
31,
2017 2016 2015
------ ------
(in US$'000)
Current tax
HK (note (a)) 572 520 150
PRC (note (b)) 782 458 415
Deferred income tax 1,726 3,353 1,040
------
Income tax expense 3,080 4,331 1,605
Notes:
(a) The Company, a subsidiary incorporated in the British Virgin
Islands and its Hong Kong subsidiaries are subject to Hong Kong
profits tax which has been provided for at the rate of 16.5% on the
estimated assessable profits less estimated available tax losses in
each entity.
(b) Taxation in the PRC has been provided for at the applicable
rate on the estimated assessable profits less estimated available
tax losses, if any, in each entity. Under the PRC Enterprise Income
Tax Law (the "EIT Law"), the standard enterprise income tax rate is
25%. In addition, the EIT Law provides for, among others, a
preferential tax rate of 15% for companies which qualify as HNTE.
HMPL qualifies as a HNTE up to December 31, 2019. Pursuant to the
EIT law, a 10% withholding tax is levied on dividends declared by
PRC companies to their foreign investors. A lower withholding tax
rate of 5% is applicable under the China-HK Tax Arrangement if
direct foreign investors with at least 25% equity interest in the
PRC companies are Hong Kong tax residents, and meet the conditions
or requirements pursuant to the relevant PRC tax regulations
regarding beneficial ownership. Since the equity holders of the
major subsidiaries and equity investees of the Company are Hong
Kong incorporated companies and Hong Kong tax residents, and meet
the aforesaid conditions or requirements, the Company has used 5%
to provide for deferred tax liabilities on retained earnings which
are anticipated to be distributed. As at December 31, 2017 and
2016, the amounts accrued in deferred tax liabilities relating to
withholding tax on dividends were determined on the basis that 100%
of the distributable reserves of the major subsidiaries and equity
investees operating in the PRC will be distributed as
dividends.
The reconciliation of the Group's reported income tax expense to
the theoretical tax amount that would arise using the tax rates of
the Company against the Group's loss before income taxes and equity
in earnings of equity investees is as follows:
Year Ended December 31,
2017 2016 2015
(in US$'000)
Loss before income taxes and equity in
earnings of equity investees (53,536) (47,356) (10,540)
Tax calculated at the statutory tax rate
of the Company (8,833) (7,814) (1,739)
Tax effects of:
Different tax rates available in different
jurisdictions 2,531 453 (2,953)
Tax valuation allowance 11,410 9,886 6,601
Preferential tax deduction (3,347) (3,205) (2,096)
Expenses not deductible for tax purposes 391 688 253
Utilization of previously unrecognized
tax losses (387) (21) (34)
Withholding tax on undistributed earnings
of PRC entities 1,980 3,532 1,216
Others (665) 812 357
Income tax expense 3,080 4,331 1,605
(ii) Deferred tax assets and liabilities
The significant components of deferred tax assets and
liabilities are as follows:
December 31,
2017 2016
(in US$'000)
Deferred tax assets
Tax losses 31,028 20,145
Others 1,267 372
--------
Total deferred tax assets 32,295 20,517
Less: Valuation allowance (31,662) (20,145)
--------
Deferred tax assets 633 372
Deferred tax liabilities
Undistributed earnings from PRC entities 4,332 5,230
Others 120 131
--------
Deferred tax liabilities 4,452 5,361
As at December 31, 2017, all deferred tax assets and liabilities
are classified as non-current after adopting ASU 2015-17. As at
December 31, 2016, deferred tax assets and liabilities of
US$372,000 and US$1,364,000 respectively were classified as
current, with the remainder as non-current.
The significant components of deferred tax assets and
liabilities are as follows:
2017 2016 2015
(in US'000)
As at January 1 (4,989) (3,473) (2,842)
Utilization of previously recognized
withholding tax on undistributed
earnings 3,179 1,526 321
(Charged)/Credited to the consolidated
statements of operations
Withholding tax on undistributed
earnings of PRC entities (1,980) (3,532) (1,216)
Deferred tax on amortization of intangible
assets 18 32 24
Deferred tax on provision for assets 236 147 152
Exchange differences (283) 311 88
As at December 31 (3,819) (4,989) (3,473)
The deferred tax assets and liabilities are offset when there is
a legally enforceable right to set off and when the deferred income
taxes relate to the same fiscal authority.
The tax losses can be carried forward against future taxable
income and will expire in the following years:
December 31,
2017 2016
(in US$'000)
No expiry date 42,385 32,859
2017 - 3,651
2018 858 807
2019 4,261 4,012
2020 36,188 34,059
2021 50,494 53,194
2022 65,195 -
199,381 128,582
The Company believes that it is more likely than not that future
operations will not generate sufficient taxable income to realize
the benefit of the deferred tax assets. The Company's subsidiaries
have had sustained tax losses, which will expire within five years
if not utilized in the case of PRC subsidiaries, and which will not
be utilized in the case of Hong Kong subsidiaries as they do not
generate taxable profits. Accordingly, a valuation allowance has
been recorded against the relevant deferred tax assets arising from
the tax losses.
The table below summarizes changes in the deferred tax valuation
allowance:
2017 2016 2015
(in US$'000)
As at January 1 20,145 11,393 7,455
Charged to consolidated statements of operations 11,410 9,886 6,601
Utilization of previously unrecognized tax losses (387) (21) (34)
Write-off of expired tax losses (558) - (1,493)
Others (89) (288) (901)
Exchange differences 1,141 (825) (235)
As at December 31 31,662 20,145 11,393
The Group recognizes interest and penalties, if any, under
income tax payable on its consolidated balance sheets and under
other expenses in its consolidated statements of operations. As at
December 31, 2017 and 2016, the Group did not have any material
unrecognized uncertain tax positions.
(iii) Income tax payable
2017 2016 2015
------- -----
(in US$'000)
As at January 1 274 442 112
Current tax 1,354 978 565
Withholding tax upon dividend declaration
from PRC entities 3,179 1,526 321
Tax paid (3,836) (2,664) (510)
Exchange difference 8 (8) (46)
------- -----
As at December 31 979 274 442
=====
24. (Losses)/Earnings per Share
(i) Basic (losses)/earnings per share
Basic (losses)/earnings per share is calculated by dividing the
net (loss)/income attributable to ordinary shareholders of the
Company by the weighted average number of ordinary shares in issue
during the year. Treasury shares held by the Trustee are excluded
from the weighted average number of outstanding ordinary shares in
issue for purposes of calculating basic (losses)/earnings per
share.
Year Ended December 31,
2017 2016 2015
Weighted average number of outstanding ordinary shares in issue 61,717,171 59,715,173 54,659,315
Net (loss)/income (US$'000) (22,963) 14,557 10,427
Net income attributable to non-controlling interests (US$'000) (3,774) (2,859) (2,434)
Accretion on redeemable non-controlling interests (US$'000) - - (43,001)
Net (loss)/income for the year attributable to ordinary shareholders of
the Company (US$'000) (26,737) 11,698 (35,008)
(Losses)/earnings per share attributable to ordinary shareholders of the
Company (US$ per
share) (0.43) 0.20 (0.64)
(ii) Diluted (losses)/earnings per share
Diluted (losses)/earnings per share is calculated by dividing
net (loss)/income attributable to ordinary shareholders of the
Company, by the weighted average number of ordinary and dilutive
ordinary share equivalents outstanding during the year. 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.
Year Ended December 31,
2017 2016 2015
Weighted average number of outstanding ordinary shares in issue 61,717,171 59,715,173 54,659,315
Adjustment for share options and LTIP - 255,877 -
61,717,171 59,971,050 54,659,315
Net (loss)/income for the year attributable to ordinary shareholders of
the Company (US$'000) (26,737) 11,698 (35,008)
(Losses)/earnings per share attributable to ordinary shareholders of the
Company (US$ per
share) (0.43) 0.20 (0.64)
For the years ended December 31, 2017 and 2015, the share
options and LTIP awards issued by the Company as well as the
preferred shares issued by HMHL were not included in the
calculation of diluted losses per share because of their
anti-dilutive effect.
25. Segment Reporting
The Group determines its operating segments from both business
and geographic perspectives as follows:
(i) Innovation Platform (Drug research and development ("Drug
R&D")): focuses on discovering and developing innovative
therapeutics in oncology and autoimmune diseases, and the provision
of research and development services; and
(ii) Commercial Platform: comprises of the manufacture,
marketing and distribution of prescription and over--the--counter
pharmaceuticals in the PRC as well as consumer health products
through Hong Kong. The Commercial Platform is further segregated
into two core business areas:
(a) Prescription Drugs: comprises the development, manufacture,
distribution, marketing and sale of prescription pharmaceuticals;
and
(b) Consumer Health: comprises the development, manufacture, distribution, marketing and sale of over--the--counter pharmaceuticals and consumer health products.
Innovation Platform and Prescription Drugs businesses under the
Commercial Platform are primarily located in the PRC. The locations
for Consumer Health business under the Commercial Platform are
further segregated into the PRC and Hong Kong.
The performance of the reportable segments is assessed based on
three measurements: (a) losses or earnings of subsidiaries before
interest income, interest expense, income tax expenses and equity
in earnings of equity investees, net of tax ("Adjusted (LBIT)/EBIT"
or "Adjusted LBIT"), (b) equity in earnings of equity investees,
net of tax and (c) operating (loss)/profit.
The segment information is as follows:
Year ended December 31, 2017
Innovation
Platform Commercial Platform
Drug Prescription Consumer
R&D Drugs Health
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
(in US$'000)
Revenue from external
customers 35,997 166,435 9,858 28,913 205,206 - 241,203
----------
Adjusted (LBIT)/EBIT (47,503) 3,272 578 3,029 6,879 (12,677) (53,301)
Interest income 64 37 13 13 63 1,093 1,220
Equity in earnings
of equity investees,
net of tax (4,547) 27,812 10,388 - 38,200 - 33,653
----------
Operating (loss)/profit (51,986) 31,121 10,979 3,042 45,142 (11,584) (18,428)
Interest expense - - - 66 66 1,389 1,455
Income tax expense 26 934 (457) 509 986 2,068 3,080
Net (loss)/income
attributable to ordinary
shareholders of the
Company (51,880) 28,999 9,773 1,261 40,033 (14,890) (26,737)
Depreciation/amortization 2,400 116 17 18 151 27 2,578
Additions to non-current
assets (other than
financial instrument
and deferred tax
assets) 5,936 56 43 8 107 30 6,073
==========
As at December 31, 2017
Innovation
Platform Commercial Platform
Drug Prescription Consumer
R&D Drugs Health
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
------ ------ -------- -------
(in US$'000)
Total assets 63,268 122,665 58,961 13,794 195,420 339,244 597,932
Property, plant and
equipment 13,917 160 61 30 251 52 14,220
Leasehold land 1,261 - - - - - 1,261
Goodwill - 2,901 407 - 3,308 - 3,308
Other intangible
asset - 430 - - 430 - 430
Investments in equity
investees 19,512 69,417 55,308 - 124,725 - 144,237
==========
Year ended December 31, 2016
Innovation
Platform Commercial Platform
Drug Prescription Consumer
R&D Drugs Health
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
(in US$'000)
Revenue from external
customers 35,228 149,861 6,984 24,007 180,852 - 216,080
----------
Adjusted (LBIT)/EBIT (36,657) 2,377 (493) 1,852 3,736 (13,306) (46,227)
Interest income 52 31 34 1 66 384 502
Equity in earnings
of equity investees,
net of tax (4,232) 60,288 10,188 - 70,476 - 66,244
---------- --------
Operating (loss)/profit (40,837) 62,696 9,729 1,853 74,278 (12,922) 20,519
Interest expense - - - 79 79 1,552 1,631
Income tax expense - 777 (497) 289 569 3,762 4,331
Net (loss)/income
attributable to ordinary
shareholders of the
Company (40,735) 61,120 8,384 833 70,337 (17,904) 11,698
Depreciation/amortization 2,176 102 3 19 124 41 2,341
Additions to non-current
assets (other than
financial instrument
and deferred tax
assets) 4,138 67 20 51 138 51 4,327
==========
As at December 31, 2016
Innovation
Platform Commercial Platform
Drug Prescription Consumer
R&D Drugs Health
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
(in US$'000)
Total assets 53,774 134,681 67,161 10,701 212,543 76,120 342,437
Property, plant and
equipment 9,686 145 34 40 219 49 9,954
Leasehold land 1,220 - - - - - 1,220
Goodwill - 2,730 407 - 3,137 - 3,137
Other intangible asset - 469 - - 469 - 469
Investments in equity
investees 17,031 77,939 63,536 - 141,475 - 158,506
Year ended December 31, 2015
Innovation
Platform Commercial Platform
Drug Prescription Consumer
R&D Drugs Health
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
(in US$'000)
Revenue from external
customers 52,016 105,478 3,028 17,681 126,187 - 178,203
----------
Adjusted (LBIT)/EBIT (119) 676 (169) 1,211 1,718 (11,186) (9,587)
Interest income 79 114 29 1 144 228 451
Equity in earnings
of equity investees,
net of tax (3,770) 15,653 10,689 - 26,342 - 22,572
---------- -------- -------
Operating (loss)/profit (3,810) 16,443 10,549 1,212 28,204 (10,958) 13,436
Interest expense - - - 85 85 1,319 1,404
Income tax expense - 239 - 148 387 1,218 1,605
Net (loss)/income
attributable to ordinary
shareholders of the
Company (3,810) 15,934 8,640 581 25,155 (13,352) 7,993
Depreciation/amortization 1,864 94 11 5 110 41 2,015
Additions to non-current
assets (other than
financial instrument
and deferred tax
assets) 3,218 88 5 4 97 9 3,324
==========
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 was
US$2,536,000, US$1,306,000 and US$2,874,000 for the years ended
December 31, 2017, 2016 and 2015 respectively. Sales between
segments are carried out at mutually agreed terms.
There were no customers who accounted for over 10% of the
Group's revenue for the years ended December 31, 2017 and 2016.
There was one customer under the Innovation Platform which
accounted for 23% of the Group's revenue for the year ended
December 31, 2015.
Unallocated expenses mainly represent corporate expenses which
include corporate employee benefit expenses and the relevant
share--based compensation expenses. Unallocated assets mainly
comprise cash and cash equivalents and short-term investments.
A reconciliation of Adjusted LBIT to net (loss)/income is as
follows:
Year Ended December
31,
2017 2016 2015
-------- -------- -------
(in US$'000)
Adjusted LBIT (53,301) (46,227) (9,587)
Interest income 1,220 502 451
Equity in earnings of equity investees,
net of tax 33,653 66,244 22,572
Interest expense (1,455) (1,631) (1,404)
Income tax expense (3,080) (4,331) (1,605)
-------- -------- -------
Net (loss)/income (22,963) 14,557 10,427
======== =======
26. Note to Consolidated Statements of Cash Flows
Reconciliation of net (loss)/income for the year to net cash
used in operating activities:
Year Ended December
31,
2017 2016 2015
(in US$'000)
Net (loss)/income (22,963) 14,557 10,427
Adjustments to reconcile net (loss)/income
to net cash used in operating activities
Amortization of finance costs 147 92 62
Depreciation and amortization 2,578 2,341 2,015
Loss on retirement of property,
plant and equipment 57 30 60
Provision for excess and obsolete
inventories (16) 163 4
Provision for doubtful accounts 242 (208) 1,408
Share-based compensation expense-share
options 1,316 1,780 1,151
Share-based compensation expense-LTIP 3,423 1,661 308
Equity in earnings of equity investees,
net of tax (33,653) (66,244) (22,572)
Dividends received from equity investees 55,586 30,528 6,410
Unrealized currency translation
(gain)/loss (399) 633 198
Changes in income tax balances (756) 1,667 1,093
Changes in working capital
Accounts receivable-third parties 2,160 (7,258) (12,030)
Accounts receivable-related parties 363 (2,354) 315
Other receivables, prepayments and
deposits (6,982) (1,129) (459)
Amounts due from related parties 220 1,157 (3,010)
Inventories 1,049 (3,430) (5,154)
Long-term prepayment 123 361 (2,132)
Accounts payable (11,173) 11,452 3,659
Other payables, accruals and advance
receipts 5,194 7,554 4,660
Deferred revenue (897) (1,668) (1,907)
Other deferred income (275) 131 2,132
Amounts due to related parties (4,287) (1,385) 3,977
Total changes in working capital (14,505) 3,431 (9,949)
Net cash used in operating activities (8,943) (9,569) (9,385)
======== ========
27. 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 position 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 unfavorable 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 unfavorable outcome occurs, and potentially in
future periods.
28. Restricted Net Assets
Relevant PRC laws and regulations permit payments of dividends
by the Company's subsidiaries in the PRC only out of their retained
earnings, if any, as determined in accordance with PRC accounting
standards and regulations. In addition, the Company's subsidiaries
in the PRC are required to make certain appropriations of net
after--tax profits or increases in net assets to the statutory
surplus fund prior to payment of any dividends. In addition,
registered share capital and capital reserve accounts are also
restricted from withdrawal in the PRC, up to the amount of net
assets held in each subsidiary. As a result of these and other
restrictions under PRC laws and regulations, the Company's
subsidiaries in the PRC are restricted in their ability to transfer
their net assets to the Group in terms of cash dividends, loans or
advances, with restricted portions amounting to US$7,277,000 and
US$6,847,000 as at December 31, 2017 and 2016 respectively, which
excludes the Company's subsidiaries with a shareholders' deficit.
Even though the Group currently does not require any such
dividends, loans or advances from the PRC subsidiaries, for working
capital and other funding purposes, the Group may in the future
require additional cash resources from the Company's subsidiaries
in the PRC due to changes in business conditions, to fund future
acquisitions and development, or merely to declare and pay
dividends to make distributions to shareholders.
In addition, the Group has certain investments in equity
investees in the PRC, where the Group's equity in undistributed
earnings amounted to US$85,400,000 and US$116,953,000 as at
December 31, 2017 and 2016 respectively.
29. Subsequent Events
The Group evaluated subsequent events through March 12, 2018,
which is the date when the consolidated financial statements were
issued.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GLGDXXSBBGID
(END) Dow Jones Newswires
March 12, 2018 03:02 ET (07:02 GMT)
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