TIDMHCM
RNS Number : 9418V
Hutchison China Meditech Limited
27 July 2018
Chi-Med Reports 2018 Interim Results and Updates Shareholders
on
Key Clinical Programs
London: Friday, July 27, 2018: Hutchison China MediTech Limited
("Chi-Med") (AIM/Nasdaq: HCM) today announces its unaudited
financial results for the six months ended June 30, 2018 and
updates shareholders on key clinical programs.
-- Fruquintinib made substantial progress through China New Drug
Application ("NDA") process, aiming for approval and launch for
colorectal cancer ("CRC") this year; we also target to report Phase
III top-line results for non-small cell lung cancer ("NSCLC") in Q4
2018;
-- Savolitinib has two registration studies underway, global
Phase III in papillary renal cell carcinoma ("PRCC") and China
registration intent Phase II in MET exon 14 mutation/deletion
NSCLC; also Tagrisso(R) /savolitinib combination studies in NSCLC
indications are in planning, and set to start in late 2018 and
early 2019;
-- Expansion of U.S. and international operations firmly
underway, including recruitment of U.S. Chief Medical Officer and
Head of International Operations; and
-- Video webcast presentation at 9:00 a.m. BST and additional
conference call at 9:00 a.m. EDT.
Financial Highlights
The points below are selected financial data for the six months
ended June 30, 2018. For more details, please refer to "Financial
Review", "Operations Review" and "Unaudited Condensed Consolidated
Financial Statements" below.
Overall Group
-- Group revenue of $102.2 million (H1 2017: $126.6m).
-- Net loss attributable to Chi--Med of $32.7 million (H1 2017: net profit $1.7m).
-- Cash resources of $416.9 million at Group level as of June
30, 2018 ($479.6m as of December 31, 2017), including cash and cash
equivalents, short-term investments and unutilized bank
facilities.
Innovation Platform: increased investment in Research and
Development ("R&D") driven by initiation of new trials and
ongoing enrollment in existing Phase III programs
-- Consolidated revenue was $13.6 million mainly from service
fee payments from AstraZeneca AB (publ) ("AstraZeneca"), Eli Lilly
& Company ("Lilly") and Nutrition Science Partners Limited
("NSP"), our 50/50 joint venture with Nestlé Health Science S.A.
("Nestlé") (H1 2017: $22.7m, which included $9.5m in milestone
payments from AstraZeneca and Lilly).
-- R&D expenses on an as adjusted (non-GAAP) basis increased
to $66.7 million (H1 2017: $37.5m), primarily driven by rapid
expansion of operations and increased clinical trial expenses on
all eight clinical drug candidates.
-- Net loss attributable to Chi-Med of $52.9 million (H1 2017: -$14.8m).
Commercial Platform: strong net income growth amid shift in
revenue model and over-the-counter ("OTC") logistics divestment
-- Total consolidated sales fell 15% to $88.6 million (H1 2017:
$103.9m) due to the implementation of the Two-Invoice System
("TIS") in China, a new government policy that has led to a shift
in our revenue recognition for certain third-party drugs from gross
sales consolidation to a fee-for-service revenue model.
-- Total sales of non-consolidated joint ventures, on an as
adjusted (non-GAAP) basis excluding the effects of the divestment
of certain non-core operations, up 21% to $271.7 million (H1 2017:
$224.2m). Strong growth across main product categories.
-- Total consolidated net income attributable to Chi-Med,
unaffected by the TIS implementation, up 19% to $26.9 million (H1
2017: $22.7m), on an as adjusted (non-GAAP) basis which exclude
one-time gains in H1 2017.
Innovation Platform - Operating HIGHLIGHTS
The points below summarize some of the pipeline development
highlights so far this year. For more details, please refer to
"Operations Review - Innovation Platform" below.
Fruquintinib - Highly selective tyrosine kinase inhibitor
("TKI") of vascular endothelial growth factor receptor ("VEGFR")
1/2/3:
-- FRESCO China Phase III in third-line CRC, potentially
best-in-class in terms of both efficacy and safety:
o China NDA - substantial progress towards approval: nearing the
end of the pre-approval inspection of manufacturing facilities
stage of the NDA process, one of the last stages of the NDA
process, and aiming to receive an approval in the second half of
2018;
o JAMA publication: in June 2018, the full results were
published in the Journal of the American Medical Association
("JAMA"), which we believe to be the first China-based novel
oncology therapy trial to be published in the JAMA, another
landmark achievement.
o Two further analyses of FRESCO data presented at the annual
meeting of the American Society of Clinical Oncology ("ASCO") in
June 2018: subgroup analysis by prior anti-VEGF or anti-EGFR target
therapy showed that fruquintinib had clinically meaningful benefits
regardless of prior target therapy ("PTT") without observed
cumulative toxicity; ad-hoc analysis of quality-adjusted time
without symptoms or toxicity ("Q-TWiST") showed relative
improvement of Q-TWiST with fruquintinib, representing a
potentially clinically important quality-of-life benefit for
patients;
-- FALUCA China Phase III in third-line NSCLC: completed
enrollment of 527 patients; expect to reach median overall survival
("OS") endpoint maturity and report top-line results in late
2018.
-- FRUTIGA China Phase III in second-line gastric cancer:
recruiting for clinical study in combination with Taxol(R)
(paclitaxel) proceeding as planned, with an interim analysis
intended in 2019.
-- U.S. Phase I trial: enrolling as planned and intending to
complete at the end of 2018, which would allow us to explore
multiple innovative combination studies of fruquintinib and other
TKIs, chemotherapy and immunotherapy agents in the U.S.
Savolitinib - Highly selective TKI of mesenchymal epithelial
transition factor ("c-MET") - Global Phase III studies underway or
in planning:
-- In MET Exon 14 mutation/deletion first-line NSCLC: while
continuing to enroll patients in Phase II in China, we have reached
an agreement with regulators regarding the conditions under which
the existing trial could be sufficient for an NDA submission in
China.
-- In EGFR mutation-positive NSCLC, following ongoing
encouraging data in the TATTON Phase Ib/II trials of combinations
with Tagrisso(R) , AstraZeneca is proceeding to:
o In third-generation EGFR TKI-refractory (principally
second-line and third-line after Tagrisso(R) ) NSCLC: initiate the
next stage of global clinical trials around the end of 2018;
o In first-/second-generation EGFR TKI-refractory (principally
second-line after Iressa(R) / Tarceva(R) ) NSCLC: initiate the next
stage of global clinical trials in early 2019.
-- SAVOIR global Phase III study in c-MET-driven PRCC enrolling
patients at all sites now following its initiation in June
2017.
-- PRCC molecular epidemiology study ("MES") progressing: 200+
patient tissue-sample diagnostic analysis likely to yield data by
end of 2018, which we hope will highlight for regulatory
authorities an unmet medical need in c-MET-driven PRCC.
-- CALYPSO Phase II combinations with Imfinzi(R) programmed
death-ligand 1 ("PD-L1") inhibitor: enrolled rapidly in H1 2018 and
may complete enrollment in late 2018 and in mid-2019 in PRCC and
clear cell renal cell carcinoma ("ccRCC") patients,
respectively.
Sulfatinib - Unique angio-immuno kinase inhibitor of VEGFR,
fibroblast growth factor receptor ("FGFR") 1, and colony
stimulating factor-1 receptor ("CSF-1R"):
-- Phase IIIs in neuroendocrine tumor ("NET"): enrollment
continuing in the two Phase III studies in NET patients in China,
with interim analysis expected for 2019; if results are positive,
this could potentially be our first novel drug candidate to be
launched by our own commercial team.
-- U.S. Phase Ib/IIa expansion: enrolling pancreatic NET and
biliary tract cancer ("BTC") patients, following the completion of
the U.S. dose escalation stage and based on preliminary efficacy
and safety data observed in these two indications in China.
Further progress in early/proof-of-concept clinical trials,
including:
-- Epitinib Phase Ib/II in EGFR gene amplified glioblastoma:
trial initiated in China in the first quarter of 2018 with
epitinib, our unique EGFR inhibitor that has demonstrated the
ability to penetrate the blood-brain barrier.
-- HMPL-523 U.S. investigational new drug ("IND") clearance: The
U.S. Food and Drug Administration ("FDA") approved our highly
selective spleen TKI ("Syk") to progress into clinical trials in
June 2018, which we plan to initiate in early 2019.
-- HMPL004-6599 Australia Phase I initiated: proprietary
botanical drug being developed by our 50/50 joint venture with
Nestle initiated and completed the single ascending dose study in
the first half of 2018. Phase II enabling non-clinical studies are
being initiated.
Expansion of U.S. and international operations, and recruitment
of key personnel:
-- New office in New Jersey: U.S./ex-Asia operations expanded to
support our unpartnered compounds through proof-of-concept,
registration trials, and market launch in territories outside of
Asia.
-- Key personnel recruited, including the U.S. Chief Medical
Officer and Head of International Operations.
Key potential pipeline milestones anticipated in the next 6-12
months
-- Savolitinib:
o Third-generation (Tagrisso(R) ) EGFR-TKI refractory, c-MET
gene amplified, NSCLC (both second-line and third-line): initiation
of global study of savolitinib in combination with Tagrisso(R) in
this rapidly growing patient population.
o First-/second-generation (Iressa(R) /Tarceva(R) ) EGFR-TKI
refractory, c-MET gene amplified, T790M negative NSCLC
(second-line): initiation of a global randomized, controlled study
of savolitinib in combination with Tagrisso(R) along with multiple
supporting clinical studies.
o Presentation of preliminary Phase II data for savolitinib
monotherapy in c-MET gene amplified gastric cancer and first-line
MET Exon 14 mutation/deletion NSCLC.
o Release of results of global PRCC MES and review of the
potential Breakthrough Therapy opportunity in c-MET-driven
PRCC.
-- Fruquintinib:
o Aim to receive NDA approval in advanced CRC and launch in
China, with our partner Lilly.
o Release of top-line results for the FALUCA Phase III study in
third-line NSCLC.
-- Epitinib: initiation of Phase III China registration study in
first-line NSCLC patients with EGFR activating mutations and brain
metastasis.
-- HMPL-523: presentation of preliminary safety and efficacy
data from Phase I dose escalation study in hematological cancer in
Australia and China.
-- Immunotherapy combinations: aim to take first steps to
develop our VEGFR inhibitors, fruquintinib and sulfatinib, in
combination with various programmed cell death protein-1 ("PD-1")
antibodies in several solid tumor settings.
Commercial Platform - Operating Highlights
The points below summarize some of the operational and financial
highlights of our Commercial Platform in the first half of 2018.
For more details, please refer to "Operations Review - Commercial
Platform" below.
Scaled, high-performance drug marketing and distribution
platform covering 300 cites/towns in China with approximately 3,400
sales personnel. Targeting multiple indications with many
household-name brands:
-- Sales of our non-consolidated Prescription Drugs joint
venture, Shanghai Hutchison Pharmaceuticals Limited ("SHPL") grew
by 18% to $152.7 million (H1 2017: $129.7m). SHPL's main product,
She Xiang Bao Xin ("SXBX") pill, an oral vasodilator and
pro-angiogenesis prescription therapy approved to treat coronary
artery disease, saw sales increase by 18% to $129.8 million.
-- Our consolidated Prescription Drugs business, operated through Hutchison Whampoa Sinopharm Pharmaceuticals (Shanghai) Company Limited ("Hutchison Sinopharm"), saw sales decrease by 21% to $68.0 million (H1 2017: $85.8m) as a result of the Chinese government's implementation of the new TIS, pursuant to which we had converted to earning service fees from the commercialization of certain third-party products instead of recognizing the gross sales from these products in our revenue as we had done prior to implementation of TIS in October 2017; despite the TIS change, service fees earned from key third-party products, such as anti-psychotic Seroquel(R) , grew rapidly, up 75% to $9.6 million (H1 2017: $5.5m).
-- Sales of our non-consolidated Consumer Health joint venture,
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company
Limited ("HBYS"), grew by 26% to $119.0m (H1 2017: $94.4m,
excluding divested operations), driven by the elimination of
production capacity constraints.
-- Our consolidated Consumer Health sales increased by 14% to
$20.6 million (H1 2017: $18.1m), resulting from higher volume in
infant nutrition products.
Simon To, Chairman of Chi-Med, said: "Chi-Med continues to
deliver on its clear strategy of developing its broad pipeline and
cultivating and growing its capabilities in global drug discovery
and development, while maintaining an over a decade-and-a-half long
track record of earnings growth in its Commercial Platform.
During the first half of 2018, we have focused on navigating the
China NDA process for fruquintinib, which we believe is now nearing
completion. We are optimistic that we will see fruquintinib
approved and launched by year end. We also look forward, around
year end, to reporting the top-line results for the pivotal Phase
III, the FALUCA study, of fruquintinib in third-line NSCLC in
China.
Our collaboration with AstraZeneca continues to gather momentum,
and we are currently enrolling registration studies in both kidney
and lung cancer indications for savolitinib monotherapy. We are
also in the process of planning and preparing to initiate multiple
additional studies in lung and gastric cancers, which we believe
may ultimately serve as registration studies.
Our un-partnered assets have also made good progress, with
sulfatinib in two Phase III studies in China that could produce
readout next year in NETs. In addition, we have worked with key
opinion leaders and the regulatory authorities in China to agree on
a Phase III pathway for epitinib and aim to initiate a pivotal
study around year end. On our Syk, phosphoinositide 3-kinase delta
("PI3K ") and FGFR compounds, all of which are in proof-of-concept,
we have made meaningful progress in enrollment thereby acquiring a
preliminary understanding of efficacy and safety for each compound.
We expect to present some of these data at scientific conferences
over the next twelve months.
We are now looking closely into multiple opportunities to
combine our highly selective TKIs with both PD-1 and PD-L1
immunotherapy agents and will strive to make progress during the
second half of 2018, via collaboration, in this very high potential
arena.
We have expanded our U.S./ex-Asia operations, including our
office in New Jersey, and continue to recruit seasoned talent to
manage the progress of our unpartnered compounds through
proof-of-concept, registration trials, and market launch in
territories outside of Asia.
Chi-Med has a clear and ambitious aim to bring three of our
drugs through approval over the next approximately three years. We
believe we are adequately structured and resourced to support this
aim. In the longer term, we intend to continue to emerge as a
world-class innovator based in China, bringing our assets to both
the China and global markets. We have confidence in our ability to
achieve these aims."
Use of Non-GAAP Financial Measures - References in this
announcement to adjusted R&D expenses, adjusted consolidated
net income attributable to Chi-Med from our Commercial Platform,
adjusted consolidated operating profit from our Commercial
Platform, adjusted consolidated net income attributable to Chi-Med
from our Prescription Drugs business and adjusted revenue of HBYS
and non-consolidated joint ventures 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.
FINANCIAL GUIDANCE:
Our updated guidance for 2018, compared to the most recent
guidance in our full year results announcement for the year ended
December 31, 2017 dated March 12, 2018, includes a $20 million
increase in expected full year Innovation Platform R&D expense
to $130-140 million. This increase reflects a rise in clinical
trial spending as well as broadening of organizational scale and
new middle management share-based incentive grants. These costs are
all driven by the heightened competitive environment in China
biotech, resulting from the step-change increase interest and
investment in the sector over the past two years. We make no other
changes to the full year 2018 financial guidance as detailed
below:
2018 Previous 2018 Current Adjustment
Guidance Guidance
-------------------------------------------------------------- ----------------- ------------------ ---------------
Group Level:
* Consolidated revenue $155-175m $155-175m None
* Admin., interest & tax $(16)-(18)m $(16)-(18)m None
----------------- ------------------ ---------------
* Net loss([1]) $(19)-(52)m $(39)-(72)m $(20)m increase
Innovation Platform:
* Consolidated revenue $40-50m $40-50m None
* Adjusted (non-GAAP) R&D expenses $(110)-(120)m $(130)-(140)m $(20)m increase
----------------- ------------------ ---------------
* Net loss([1]) $(60)-(80)m $(80)-(100)m $(20)m increase
Commercial Platform:
* Sales (consolidated) $115-125m $115-125m None
* Sales of non-consolidated JVs([) (2) (]) $460-480m $460-480m None
----------------- ------------------ ---------------
* Net income on an as adjusted (non-GAAP) basis excl.
one-time gains([1]) $41-43m $41-43m None
* One-time gains([1]) $0-20m([3]) $0-20m([3]) None
----------------- ------------------ ---------------
* Net income([1]) $41-63m $41-63m None
-------------------------------------------------------------- ----------------- ------------------ ---------------
Notes: [1] Attributable to Chi-Med; [2] Joint ventures; [3]
One-time property compensation, timing of which is dependent on
Guangzhou government policy.
---
U.K. Analysts Meeting and Webcast Scheduled Today at 9:00 a.m.
BST (4:00 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 U.S., 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."
---
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 (SEHK: 1). For more information, please
visit: www.chi-med.com.
CONTACTS
Investor Enquiries
Mark Lee, Senior Vice President,
Corporate Finance & Development +852 2121 8200
U.K. & International Media Enquiries
Anthony Carlisle, +44 7973 611 888 (Mobile)
Citigate Dewe Rogerson anthony.carlisle@cdrconsultancy.co.uk
U.S. Based Media Enquiries
Brad Miles, Solebury Trout +1 (917) 570 7340 (Mobile)
bmiles@troutgroup.com
Susan Duffy, Solebury Trout +1 (917) 499 8887 (Mobile)
sduffy@troutgroup.com
Investor Relations
Xuan Yang, Solebury Trout +1 (415) 971 9412 (Mobile)
xyang@troutgroup.com
David Dible, +44 7967 566 919 (Mobile)
Citigate Dewe Rogerson david.dible@citigatedewerogerson.com
Panmure Gordon (UK) Limited
Richard Gray / Andrew Potts +44 (20) 7886 2500
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
Financial Review
Chi-Med Group revenue for the six months ended June 30, 2018
decreased by 19% to $102.2 million (H1 2017: $126.6m). Revenue from
the Commercial Platform decreased to $88.6 million (H1 2017:
$103.9m) driven by the adoption of the TIS policy which caused our
consolidated joint venture Hutchison Sinopharm to cease recognizing
gross sales from certain third-party products and instead earn
service fees from such sales in the first half of 2018. Revenue
from the Innovation Platform decreased to $13.6 million in the
first half of 2018 (H1 2017: $22.7m), reflecting similar levels of
service fee payments from our partners as was received in the first
half of 2017 but, no milestone payments were received in the first
half of 2018 (H1 2017: $5.0m from AstraZeneca and $4.5m from
Lilly). 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.
In the first half of 2018 our Commercial Platform, which
continues to be an important profit and cash source for Chi-Med,
grew operating profit by 22% to $31.0 million (H1 2017: $25.3m on
an as adjusted (non-GAAP) basis excluding one-time gains of $2.5m)
as a result of strong growth in SHPL's coronary artery disease
Prescription Drug business, service fees on Seroquel(R) and
Concor(R) and elimination of production capacity constraints on our
Consumer Health businesses. The Innovation Platform incurred an
operating loss of $53.1 million (H1 2017: -$14.8m) as a result of
expansion of practically all aspects of our R&D organization
and operations as well as clinical development of our pipeline of
eight drug candidates.
Net corporate unallocated expenses, primarily Chi-Med Group
overhead and operating costs, declined to $4.9 million (H1 2017:
$6.7m) mainly due to higher interest income from short-term
investments.
Consequently, Chi-Med Group's operating loss was $27.0 million
(H1 2017: operating profit of $6.3m).
The aggregate of interest and income tax expenses of Chi-Med
Group, as well as net income attributable to non-controlling
interests was $5.7 million (H1 2017: $4.6m) mainly due to higher
profit taxes and an increase in the share of net income
attributable to a non-controlling interest in the Commercial
Platform.
The resulting total Group net loss attributable to Chi-Med was
$32.7 million (H1 2017: net income $1.7m).
As a result, Group net loss attributable to Chi-Med in the first
half of 2018 was $0.49 per ordinary share / $0.245 per American
depositary share ("ADS"), compared to net income attributable to
Chi-Med of $0.03 per ordinary share / $0.015 per ADS, in H1
2017.
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,
which has naturally resulted in a significant increase in
investment. The scale of our late-stage clinical trial programs has
expanded significantly, with a total of seven registration studies,
either Phase III or Phase II registration intent studies, either
underway or completing. We plan for four additional registration
studies to start in late 2018/early 2019 as well as to continue
early development Phase Ib/II studies in approximately 20 Target
Patient Populations ("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 the
first half of 2018, these helped offset a meaningful portion of the
$66.7 million (H1 2017: $37.5m) in R&D expenses on an as
adjusted (non-GAAP) basis.
As of June 30, 2018, we had available cash resources of $416.9
million (December 31, 2017: $479.6m) at the Chi-Med Group level
including cash and cash equivalents and short-term investments of
$322.5 million (December 31, 2017: $358.3m) and unutilized bank
borrowing facilities of $94.4 million (December 31, 2017: $121.3m).
In addition, as of June 30, 2018, our non-consolidated joint
ventures (SHPL, HBYS and NSP) held $62.5 million (December 31,
2017: $67.0m) in available cash resources.
Outstanding bank loans as of June 30, 2018 amounted to $26.7
million (December 31, 2017: $30.0m) at the Chi-Med Group level,
with a weighted average cost of borrowing in the first half of 2018
of 2.33% (year ended December 31, 2017: 1.90%). As of June 30, 2018
and December 31, 2017, 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 R&D operation which was started in
2002. Since then, we have built a large team of about 390
scientists and staff (June 30, 2017: 330) based in China and are
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 the first half of 2018 was $13.6
million (H1 2017: $22.7m) reflecting generally similar levels of
service fees and clinical cost reimbursements received from
AstraZeneca and Lilly to those received in the first half of last
year. Revenue in the first half of 2017 also included milestone
payments from AstraZeneca and Lilly for the start of the
savolitinib Phase III clinical trial in PRCC ($5.0m) and the
submission of the first fruquintinib NDA ($4.5m). We did not
receive any milestone payments in the first half of 2018.
In the first half of 2018 we granted options to purchase on over
870,000 ordinary shares to over 40 members, primarily of the
Innovation Platform middle management team, an important step to
broaden equity participation among the future leaders of the
company. The non-cash expense for these grants totaled $20.4
million and will be amortized over four years, with $7.1 million
expected to be expensed in 2018.
Net loss attributable to Chi-Med increased to $52.9 million (H1
2017: -$14.8m) mainly from increased R&D expenses of $66.7
million (H1 2017: $37.5m) on an as adjusted (non-GAAP) basis driven
by expansion of clinical development activities, the aforementioned
organization growth and new share-based incentives, as well as
further investment in the expansion of small molecule manufacturing
operations.
Since inception, the Innovation Platform has dosed over 4,000
patients/subjects in clinical trials of our drug candidates with
over 400 dosed in the first half of 2018 primarily as a result of
enrollment in the seven registration studies that we had underway
during the period.
U.S. and International Operations Expanded
In the second quarter of 2018, we commenced operations of
Hutchison MediPharma (US) Inc. at our new U.S. offices in Florham
Park, New Jersey. While we have been conducting clinical and
non-clinical development in North America and Europe for over a
decade, the activities conducted by this new U.S. office will
support our growth strategy outside of China and significantly
broaden and scale our non-Asia clinical development and
international operations. As part of this strategy, we recruited
two experienced senior personnel, namely the U.S. Chief Medical
Officer, and the Head of International Operations. They will
support our expansion of clinical development and regulatory
activities outside Asia, including initiating and managing Phase II
trials of fruquintinib, sulfatinib and HMPL-523 in the U.S. and
preparing for the commercial launch of fruquintinib and sulfatinib
outside of mainland China, if approved.
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 700 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
combinations. Two registration studies, one in kidney and one in
lung cancer, are underway and several additional studies, that we
believe could ultimately serve as registration studies, are
expected to start over the next 6-12 months.
Savolitinib - Kidney cancer: High proportion of MET-driven
patients. The table below shows a summary of the clinical studies
that we have underway for savolitinib in kidney cancer
patients.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================== ======================= ======== ===== ==============
1 SAVOIR: 1L/2L c-MET-driven Savolitinib monotherapy Global III Initiated Q2
PRCC 2017
Est. enrolled
YE 2019
=== ========================== ======================= ======== ===== ==============
N/A MES: PRCC epidemiology N/A - diagnostic Global N/A Est. completed
study YE 2018
=== ========================== ======================= ======== ===== ==============
2 PAPMET: PRCC Savolitinib vs. US II Est. enrolled
sunitinib vs. (NCI) YE 2019
cabozantinib
vs. crizotinib
=== ========================== ======================= ======== ===== ==============
3 CALYPSO: PRCC Savolitinib and UK/Spain II Est. enrolled
Imfinzi(R) YE 2018
=== ========================== ======================= ======== ===== ==============
4 CALYPSO: 2L ccRCC (VEGFR Savolitinib monotherapy UK/Spain II Est. enrolled
TKI refractory) H1 2019
=== ========================== ======================= ======== ===== ==============
5 CALYPSO: 2L ccRCC (VEGFR Savolitinib and UK/Spain II Est. enrolled
TKI refractory) Imfinzi(R) H1 2019
=== ========================== ======================= ======== ===== ==============
TPP 1 - Enrolling (NCT03091192) - Phase III PRCC savolitinib
once daily ("QD") monotherapy (Global) - 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 progression free survival ("PFS"), with secondary endpoints
of OS, objective response rate ("ORR"), duration of response
("DoR") and disease control rate ("DCR"). All clinical trial site
initiations in six countries were completed early this year, and we
expect enrollment to complete around the end of 2019.
The MES is ongoing, whereby archived tissue samples from over
200 PRCC patients are being screened using our companion diagnostic
to identify c-MET-driven disease. We expect this global MES to
contribute to developing a more comprehensive understanding of the
role of c-MET-driven disease in PRCC. 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 FDA. We expect to have the full MES data by the end of
2018, and could present it at a major scientific conference in
2019.
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
U.S. The savolitinib arm of the study is over a third enrolled and
is expected to complete enrollment in 2019.
TPP 3, TPP 4 and TPP 5 - Enrolling (NCT02819596) - Phase II
study of savolitinib 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 onto the Phase II expansion stage in
PRCC and ccRCC patients in the U.K. and Spain to further explore
efficacy. Patient recruitment moved rapidly in the first half of
2018. Enrollment for PRCC patients is expected to complete in the
second half of 2018 and for ccRCC patients in the first half of
2019.
Savolitinib - Lung cancer: We believe this is Savolitinib's
largest market opportunity. The table below shows a summary of the
clinical studies that we have underway for savolitinib in lung
cancer patients.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ============================= ================ ====== ===== ====================
6 TATTON: NSCLC 1(st) /2(nd) Savolitinib Global Ib/II Next trial est.
-gen EGFR TKI refractory and Tagrisso(R) start H1 2019
=== ============================= ================ ====== ===== ====================
7 TATTON: NSCLC 3(rd) -gen Savolitinib Global Ib/II Next trial est.
EGFR TKI refractory and Tagrisso(R) start YE 2018
=== ============================= ================ ====== ===== ====================
8 2L NSCLC, EGFR TKI refractory Savolitinib China Ib/II Next trial in
and Iressa(R) discussion with
partner AstraZeneca
=== ============================= ================ ====== ===== ====================
9 1L NSCLC Savolitinib China II Enrollment complete
monotherapy
=== ============================= ================ ====== ===== ====================
10 MET Exon 14 mutation/deletion Savolitinib China II Registration
NSCLC monotherapy intent. Enrolling
=== ============================= ================ ====== ===== ====================
Tagrisso(R) combinations: In 2016, we initiated a global Phase
Ib/II expansion study in NSCLC, the TATTON (Part B) study, aiming
to recruit sufficient c-MET gene amplified patients, who had
progressed after prior treatment with a first/second-generation TKI
(e.g. Iressa(R) /Tarceva(R) ), to support a decision on global
Phase II/III registration strategy. In this first/second-generation
EGFR TKI refractory NSCLC population, we estimate that c-MET gene
amplification occurs in 15-20% of patients, while the T790M
mutation occurs in approximately 45-70% of patients. TATTON (Part
B) also included patients who subsequently developed resistance to
third-generation EGFR TKIs (primarily Tagrisso(R) ). Preliminary
data was presented in October 2017 at World Conference on Lung
Cancer ("WCLC") (as described below). TATTON (Part B) continued to
enroll and further data, including PFS, is expected to be presented
at a scientific conference in the future. Other parallel studies,
TATTON (Part C) and TATTON (Part D), were initiated in 2017 and
will further broaden our data set in the 400mg (Japan only) and
300mg QD dose, respectively, over the balance of 2018 and early
2019. Earlier this year, AstraZeneca decided to progress onto the
next stage of development of two separate indications, and planning
for each is underway as described below (TPP 7 & TPP 6).
TPP 7 - Enrolling (NCT02143466) - Phase Ib/II NSCLC (second- or
third-line 3(rd) -generation EGFR TKI- (primarily Tagrisso(R) )
refractory), savolitinib (600mg QD) in combination with Tagrisso(R)
(Global) - 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 NSCLC patients harbor c-MET gene amplification. This
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. At the 2017 WCLC,
preliminary TATTON (Part B) study data included 30 evaluable
patients previously treated with third-generation T790M-directed
EGFR inhibitors, primarily Tagrisso(R) . Confirmed partial response
("PRs") were observed in 10/30 (ORR 33%) of these patients, which
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 c-MET gene amplified patients who have
no remaining targeted treatment alternatives. Moreover, the FDA and
the European Commission approved Tagrisso(R) for first-line
treatment of EGFR-mutation NSCLC in April and June 2018,
respectively, and as such the need for treatment following
Tagrisso(R) is expected to increase.
Encouraged by the above-mentioned data and recent approvals of
Tagrisso(R) , AstraZeneca has decided to prioritize proceeding with
development of savolitinib in NSCLC for patients that are
refractory to third-generation EGFR TKI by the end of 2018. This
will start out as a single-arm, Phase II study for savolitinib
(600mg, 300mg if <55kg QD) and Tagrisso(R) (80mg QD).
TPP 6 - Enrolling (NCT02143466) - Phase Ib/II expansion NSCLC
(second-line 1(st) /2(nd) -generation EGFR TKI-refractory),
savolitinib in combination with Tagrisso(R) (Global) - At the 2017
WCLC, preliminary TATTON (Part B) study data included 34 evaluable
patients who 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.
Planning is now underway for a global randomized controlled
study of the savolitinib plus Tagrisso(R) combination in this TPP
6, first/second-generation EGFR TKI-refractory (Iressa(R)
/Tarceva(R) ), c-MET-driven, T790M mutation-negative NSCLC
patients. This will also start out as a Phase II study and is
currently targeted to start in H1 2019.
Other lung cancer populations:
TPP 8 - Completed (NCT02374645) - Phase II NSCLC (second-line),
EGFR TKI-refractory, savolitinib in combination with Iressa(R)
(China) - We continue to discuss how this combination can be
further developed.
TPP 9 and TPP 10 - Enrollment Completed and Enrolling
(NCT01985555 / NCT02897479) - Phase II c-MET-driven NSCLC,
savolitinib monotherapy (China) - Phase II studies of savolitinib
are ongoing in NSCLC focusing on patients with c-MET-driven
disease. These are NSCLC patients with MET Exon 14
mutation/deletion who have failed prior systemic therapy, or are
unwilling or unable to receive chemotherapy. Following recent
regulatory dialogue and a subsequent protocol amendment, we expect
that this study, if successful, would be sufficient to support an
NDA submission in China. Preliminary data in these TPPs may be
presented at a major scientific conference in 2019.
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 umbrella study, being run at the Samsung Medical Center
in South Korea, in which savolitinib is represented in three out of
the twelve treatment arms. As at the latest report in 2017, a total
of over 850 gastric cancer patients had 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 the annual meetings of the
Chinese Society of Clinical Oncology ("CSCO") (China Phase II, 441
patients screened) and ASCO (VIKTORY Phase II, 438 patients
screened), with about 5.1% of patients determined to have c-MET
gene amplification. The table below shows a summary of the clinical
studies that we have underway for savolitinib in gastric cancer
patients.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== =========================== ======================= ============= ===== =========
11 Gastric cancer (c-MET Savolitinib monotherapy China & South II Enrolling
gene amplification) and Korea
VIKTORY (in South Korea)
=== =========================== ======================= ============= ===== =========
12 VIKTORY: Gastric cancer Savolitinib and South Korea II Enrolling
(c-MET over-expression) Taxotere(R)
=== =========================== ======================= ============= ===== =========
13 VIKTORY: Gastric cancer Savolitinib and South Korea II Enrolling
(c-MET gene amplification) Taxotere(R)
=== =========================== ======================= ============= ===== =========
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 the CSCO 2017 conference for
the efficacy evaluable c-MET gene amplified patients in China. 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
clearly warrants further exploration, including continuing
enrollment for a Phase II study in China. The VIKTORY Phase II
study is ongoing in c-MET gene amplified patients in South Korea,
and preliminary data may be presented at a major scientific
conference in the second half of 2018 or in 2019.
TPP 12 and TPP 13 - Enrolling (NCT02447380 / NCT02447406) -
Phase II studies of savolitinib 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 who harbor c-MET over-expression. The VIKTORY Phase
II is ongoing in South Korea in TPP 12 and 13, with preliminary
data may be presented at a major scientific conference in the
second half of 2018 or in 2019.
Savolitinib - Prostate cancer: The table below shows a summary
of the clinical study that we have underway for savolitinib in
prostate cancer patients.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== =============================== ======================= ====== ===== =========
14 Metastatic Castration-Resistant Savolitinib monotherapy Canada II Enrolling
Prostate Cancer
=== =============================== ======================= ====== ===== =========
TPP 14 - Enrolling (NCT03385655) - Phase II study in patients
with metastatic Castration-Resistant Prostate Cancer ("mCRPC")
(Canada) - study sponsored by the Canadian Cancer Trials Group is
designed 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, the safety
and toxicity profile of savolitinib in mCRPC patients, as well as
any potential predictive and prognostic factors. The umbrella study
targets to enroll around 500 patients into six treatment arms based
on molecular status, with one treatment arm being patients with
aberrant c-MET activation who will receive savolitinib. High levels
of c-MET over-expression can be prevalent in 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 global market potential of fruquintinib.
We believe that fruquintinib is the first home-grown,
China-discovered and developed drug candidate in a mainstream
oncology indication to succeed in a pivotal Phase III registration
trial. There are three pivotal Phase III trials (the FRESCO, FALUCA
and FRUTIGA studies) currently underway or completing in China. Our
first ever NDA in China for third-line CRC (the FRESCO study) is
near the end of the approval application process. We have also
completed enrollment in third-line NSCLC (the FALUCA study) and are
enrolling patients in a study in combination with Taxol(R) in
second-line gastric cancer (the FRUTIGA study). Furthermore, a
Phase II study in combination with Iressa(R) in first-line EGFR
activating mutation NSCLC is ongoing, following encouraging
preliminary results presented at the 2017 WCLC. We also expect a
Phase I study of fruquintinib in the U.S. to complete by the end of
2018, which will represent the first step in the development of
fruquintinib outside China. In China, fruquintinib is jointly
developed with Lilly, our commercial partner. The table below shows
a summary of the clinical studies that we have underway for
fruquintinib.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================== ============== ===== ===== ==============
15 FRESCO: 3L CRC Fruquintinib China III Pending NDA
monotherapy approval
=== ========================== ============== ===== ===== ==============
16 FALUCA: 3L NSCLC Fruquintinib China III Enrollment
monotherapy complete
Top-line data
YE 2018
=== ========================== ============== ===== ===== ==============
17 1L NSCLC Fruquintinib China II Enrollment
and Iressa(R) complete
=== ========================== ============== ===== ===== ==============
18 Solid tumors Fruquintinib US I Est. complete
monotherapy YE 2018
=== ========================== ============== ===== ===== ==============
19 FRUTIGA: 2L gastric cancer Fruquintinib China III Initiated Oct
and Taxol(R) 2017
=== ========================== ============== ===== ===== ==============
TPP 15 - NDA submitted June 2017 (NCT02314819) - Phase III study
in CRC (third-line), fruquintinib monotherapy (China) - Since
completing submission of the NDA to the China National Drug
Administration ("CNDA", formerly the China Food and Drug
Administration) in June 2017, we have engaged the CNDA's Center for
Drug Evaluation to conduct reviews in the areas of pharmacology and
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 and Good Laboratory Practice inspections, and the
pre-approval inspections ("PAIs") for our active pharmaceutical
ingredient contract manufacturer as well as the PAI and Good
Manufacturing Practice ("GMP") certification process for our Suzhou
formulation facility. We hope to receive an approval from the CNDA
on our NDA in the second half of 2018.
Following the initial presentation of FRESCO, a pivotal Phase
III study in 416 patients with locally advanced or metastatic CRC
disease that progressed following at least two prior systemic
chemotherapies, at the 2017 ASCO annual meeting, two further
analyses were subsequently presented at the 2018 ASCO annual
meeting. Firstly, the results of a subgroup analysis by prior
anti-VEGF or anti-EGFR target therapy in FRESCO showed that
fruquintinib had clinically meaningful benefits in third-line
metastatic CRC patients regardless of PTT without observed
cumulative toxicity. This subgroup analysis result is consistent
with the previously reported FRESCO intent-to-treatment population
result. Secondly, an ad-hoc analysis aiming to compare the
quality-adjusted survival between the two arms of the FRESCO study
using Q-TWiST showed that the relative improvement of Q-TWiST
observed represents a clinically important quality-of-life benefit
for metastatic CRC patients.
In addition, in June 2018, the JAMA published the full results
of the FRESCO study. We believe that this is the first time that
the JAMA has ever published novel oncology therapy results from
China, a testament to the quality of the FRESCO study design,
execution, and result.
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, 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 published 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
fruquintinib or placebo plus best supportive care. The primary
endpoint for the FALUCA study 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 - Enrollment complete (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, showing an encouraging efficacy and safety profile.
Fruquintinib's unique safety and tolerability profile, resulting
from its high kinase selectivity, combined with better flexibility
to manage treatment emergent toxicities due to its shorter
half-life than monoclonal antibody anti-angiogenesis therapies,
makes it a very high potential combination partner for
EGFR-TKIs.
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 pharmacokinetics ("PK") of
fruquintinib in U.S. patients with solid tumors. Upon completion,
likely at the end of 2018, our intention is to begin exploring
multiple innovative combination studies of fruquintinib and other
TKIs, chemotherapy and immunotherapy agents in the U.S.
Recent innovations in solid tumor drugs have focused on targeted
therapies and immunotherapies which, as monotherapies, have both
delivered improved outcomes for patients. Our proof-of-concept
studies have already demonstrated the benefits of TKI combinations
with other TKIs or with chemotherapy, and immunotherapy
combinations will also be included. As unique next-generation
anti-angiogenesis VEGFR TKIs, fruquintinib (with its uniquely
selective profile) and sulfatinib (with its inhibition of
tumor-associated macrophages, facilitating PD-1 induced immune
response) represent ideal candidates for combination with
immunotherapy agents such as PD-1/L1 inhibitors to extend the
duration of these benefits and expand them to more patients. This
hypothesis was recently demonstrated at this year's ASCO annual
meeting relating to the combination of Inlyta(R) (axitinib) and
Keytruda(R) (pembrolizumab) in first-line ccRCC in 52 patients,
which yielded an ORR of 73% vs. 34% and 38% for Inlyta(R) or
Keytruda(R) monotherapy, respectively.
TPP 19 - Enrolling (NCT03223376) - Phase III study of
fruquintinib in combination with Taxol(R) in gastric cancer
(second-line) (China) - 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 adenocarcinoma, in patients
who had failed first-line standard 5-flourouracil-based
chemotherapy. A total of over 500 patients are expected to be
enrolled into the FRUTIGA study 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 mid-2019.
Sulfatinib (HMPL-012)
Sulfatinib is an oral drug candidate with a unique angio-immuno
kinase profile which provides both effects on anti-angiogenesis and
effects on enhancing the body's immune system, specifically
T-cells. In addition to suppressing angiogenesis through inhibiting
VEGFR and FGFR1, sulfatinib 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 U.S. We are
currently conducting studies in six TPPs on sulfatinib and retain
all rights to sulfatinib worldwide. A summary of these clinical
studies is shown in the table below.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ==================================== ====================== ===== ===== =============
20 SANET-p: Pancreatic NET Sulfatinib monotherapy China III Est. enrolled
2019
=== ==================================== ====================== ===== ===== =============
21 SANET-ep: Non-pancreatic Sulfatinib monotherapy China III Est. enrolled
NET 2019
=== ==================================== ====================== ===== ===== =============
22 Pancreatic NET and BTC Sulfatinib monotherapy US Ib/II Enrolling
=== ==================================== ====================== ===== ===== =============
23 Thyroid cancer (Recurrent/refractory Sulfatinib monotherapy China II Enrollment
MTC) complete
=== ==================================== ====================== ===== ===== =============
24 Thyroid cancer (RAI-refractory Sulfatinib monotherapy China II Enrollment
DTC) complete
=== ==================================== ====================== ===== ===== =============
25 Chemotherapy refractory Sulfatinib monotherapy China II Enrolling
BTC
=== ==================================== ====================== ===== ===== =============
TPP 20 - Enrolling (NCT02589821) - Phase III in pancreatic NET
patients (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 sulfatinib 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 in non-pancreatic
NET patients (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 non-pancreatic NET. Patients are
randomized at a 2:1 ratio to receive either sulfatinib 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 Ib/II in pancreatic NET
and BTC patients (U.S.) - A Phase I dose escalation study in
advanced solid tumor patients in the U.S. completed at the end of
the first half of 2018, having confirmed the 300mg QD recommended
Phase II dose. Earlier in July 2018, we initiated a U.S. multi-arm
Phase Ib/II study to explore efficacy and safety in both pancreatic
NET and BTC 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 medullary thyroid cancer ("MTC")
or radioactive iodine ("RAI")-refractory differentiated thyroid
cancer ("DTC") in China where there are few safe and effective
treatment options. In June 2017, we presented preliminary Phase II
data at ASCO 2017 conference showing that at the time of data
cut-off, 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 reported as
stable disease.
TPP 25 - Enrolling (NCT02966821) - Phase II study in
chemotherapy refractory BTC patients (China) - In early 2017, we
began a Phase II proof-of-concept study in patients with BTC, a
heterogeneous group of rare malignancies arising from the biliary
tract epithelia and the gallbladder. We see a major unmet medical
need for patients who have progressed while on chemotherapy, and
believe that sulfatinib may offer a new targeted treatment option
in this tumor type. Planning for a Phase III pivotal study in China
in this TPP is now underway.
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 are estimated 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. The table below shows a
summary of the clinical studies that we have underway for
epitinib.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================= ==================== ===== ===== ===============
26 EGFR-mutation NSCLC with Epitinib monotherapy China Ib Enrolling
brain metastasis Ph. III start
YE 2018
=== ========================= ==================== ===== ===== ===============
27 Glioblastoma Epitinib monotherapy China Ib/II Initiated March
2018
=== ========================= ==================== ===== ===== ===============
TPP 26 - Enrolling (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 from 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), with a tolerable safety profile.
During the first half of 2018, we continued to enroll patients in
this Phase Ib study and, as a result of our recent dialogue with
regulators, are planning to initiate a Phase III study in late
2018.
TPP 27 - Enrolling (NCT03231501) - Phase Ib/II study in
glioblastoma - Glioblastoma is a primary brain cancer that harbors
high levels of EGFR gene amplification. In March 2018, 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% of patients
harbors EGFR gene amplification and 30-90% EGFR over-expression. We
currently retain all rights to theliatinib worldwide. The table
below shows a summary of the clinical studies that we have underway
for theliatinib.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================= ======================= ===== ===== =========
28 Solid tumors Theliatinib monotherapy China I Completed
=== ========================= ======================= ===== ===== =========
29 Esophageal cancer Theliatinib monotherapy China Ib Enrolling
=== ========================= ======================= ===== ===== =========
TPP 28 - Completed (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. 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 additional clinical
sites in China.
HMPL-523
HMPL-523 is a potential 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, immune thrombocytopenia (ITP) or lupus, as
well as hematological cancers where it is a potential
first-in-class compound. We currently retain all rights to HMPL-523
worldwide. The table below shows a summary of the clinical studies
that we have underway for HMPL-523.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== =============================== ==================== ========= ===== ==========
30 Immunology (healthy volunteers) HMPL-523 monotherapy Australia I Completed
=== =============================== ==================== ========= ===== ==========
31 Immunology (healthy volunteers) HMPL-523 monotherapy China I Initiating
=== =============================== ==================== ========= ===== ==========
32 Hematological cancers HMPL-523 monotherapy Australia I Enrolling
=== =============================== ==================== ========= ===== ==========
33 Lymphoma HMPL-523 monotherapy China I Enrolling
=== =============================== ==================== ========= ===== ==========
TPP 30 and TPP 31 - Completed (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.
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 completed five dose cohorts. Recommended Phase II
doses have been determined and dose expansion studies have
initiated in both Australia and China. Since early 2018, we have
been increasing the number of active clinical sites, now totaling
13, in Australia and China to support a large dose expansion
program in a broad range of hematological cancers. These include,
chronic lymphocytic leukemia, small lymphocytic lymphoma, mantle
cell lymphoma, follicular lymphoma and diffuse large B-cell
lymphoma. We target to present dose escalation results, including
preliminary proof-of-concept data, at a major scientific conference
later in 2018 or in 2019. Our U.S. IND application for HMPL-523 was
cleared by the FDA at the end of June 2018 and we are now planning
Phase II development.
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.
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. The table below
shows a summary of the clinical studies that we have underway for
HMPL-689.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================= ==================== ========= ===== ================
34 Healthy volunteers HMPL-689 monotherapy Australia I Completed
=== ========================= ==================== ========= ===== ================
35 Lymphoma HMPL-689 monotherapy China I Initiated August
2017
=== ========================= ==================== ========= ===== ================
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 tolerable safety profile. We subsequently initiated
a Phase I dose escalation and expansion study in patients with
hematologic malignancies in China 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. The
table below shows a summary of the clinical studies that we have
underway for HMPL-453.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================= ==================== ========= ===== ============
36 Solid tumors HMPL-453 monotherapy Australia I Discontinued
=== ========================= ==================== ========= ===== ============
37 Solid tumors HMPL-453 monotherapy China I Enrolling
=== ========================= ==================== ========= ===== ============
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. In July 2018 we discontinued the
Australian Phase I study due to the emergence of certain serious,
though non-life threatening, FGFR target related toxicities. The
China Phase I continues, with additional measures designed to
minimize risk to patients, due to the overall greater tolerance and
lower toxicities experienced in Chinese patients.
HMPL004-6599
The table below shows the clinical study that we have underway
for HMPL004-6599.
TPP Name, Line, Patient Focus Therapy Sites Phase Status
=== ========================= ======================== ========= ===== ===========
38 Healthy volunteers HMPL004-6599 monotherapy Australia I Initiated
April 2018
=== ========================= ======================== ========= ===== ===========
TPP 38 - Enrolling (NCT03597971) - Phase I dose escalation
(Australia) - HMPL004-6599 is a proprietary botanical drug for the
treatment of inflammatory bowel disease, which we are developing
through NSP, our 50/50 joint venture with Nestlé. We initiated
Phase I clinical studies in Australia in April 2018 and completed
the single ascending dose stage. Phase II enabling non-clinical
studies are being initiated. HMPL004-6599 is an enriched/purified
re-formulation of HMPL-004, our drug candidate that reported
positive Phase II results in ulcerative colitis in 2010, but later
proved 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 higher-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 the first half of 2018, the Commercial Platform delivered
strong net income growth despite a change in the way we recognize
certain sales resulting from the implementation of the TIS and the
divestment of a non-core OTC logistics business. Consolidated sales
of our Commercial Platform's subsidiaries decreased by 15% to $88.6
million (H1 2017: $103.9m) as TIS caused us to shift from a gross
sales revenue model to a service fee revenue model with respect to
sales of certain third-party products. The sales of our Commercial
Platform's non-consolidated joint ventures, SHPL and HBYS, grew by
21% to $271.7 million (H1 2017: $224.2m excluding divested
operations). These resulted in adjusted (non-GAAP) consolidated net
income attributable to Chi-Med from our Commercial Platform up 19%
to $26.9 million (H1 2017: $22.7m) when one-time gains were
excluded (H1 2017: $2.5m, R&D-related subsidies to SHPL).
Prescription Drugs business
In the first half of 2018, sales of our Prescription Drugs
subsidiaries decreased as expected by 21% to $68.0 million (H1
2017: $85.8m) as a result of the implementation of TIS. Sales of
our non-consolidated Prescription Drugs joint venture (SHPL) grew
by 18% to $152.7 million (H1 2017: $129.7m). The consolidated
(non-GAAP) net income attributable to Chi-Med from our Prescription
Drugs business was up 23% to $20.8 million (H1 2017: $16.9m,
excluding one-time gains from R&D-related subsidies to SHPL).
The Prescription Drugs business represented 77% of our overall
Commercial Platform net income in the first half of 2018.
SHPL: Our own-brand Prescription Drugs business, operated
through our non-consolidated joint venture SHPL, is a
well-established and stable-growth business. In the first half of
2018, SHPL delivered sales growth of 18% at $152.7 million (H1
2017: $129.7m) as a result of both volume and price growth on SXBX
pill.
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 one
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 are 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% nationally and 47%
in Shanghai. Sales of SXBX pill have grown more than twenty-fold
since 2001 due to continued geographical expansion of sales
coverage, including 18% to $129.8 million in the first half of 2018
(H1 2017: $110.4m).
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 a 2017 average daily cost of RMB4.00 (2016:
RMB3.30), or approximately $0.60. 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 2,400
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 holds 74 drug product manufacturing licenses and is
operated by about 550 manufacturing staff. This new factory, opened
in 2017, has approximately tripled SHPL's capacity and therefore
positions us well for continued long-term growth.
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. SHPL 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 SXBX pill. In the first half of 2018,
we grew Concor(R) sales by 25%, resulting in service fees of $2.2
million (H1 2017: $1.1m). We expect growth in these fees will
continue to be driven by cardiovascular market expansion.
Hutchison Sinopharm: Our Prescription Drugs commercial services
business, which is operated through Hutchison Sinopharm, focuses on
providing logistics services to, and distributing and marketing
prescription drugs manufactured by, third-party pharmaceutical
companies in China. In the first half of 2018, Hutchison Sinopharm
sales decreased 21% to $68.0 million (H1 2017: $85.8m) as a result
of the TIS implementation, as described below.
Regulatory reform in the China pharmaceutical distribution
system - The new TIS, a mandatory government policy, has now been
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 and 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) , shifted to a fee-for-service model similar
to that used with respect to Concor(R) . This change reduced the
top-line revenues that Hutchison Sinopharm records from sales of
Seroquel(R) as well as several of our other third-party products.
Importantly, however, this drop in reported sales has had no impact
on profitability, the service fees paid to Hutchison Sinopharm, or
our commercial team operations and expansion plans.
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 a 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 extended release
(XR) formulation, which in 2017 was included on the National Drug
Reimbursement List (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 operates through a team of about
110 dedicated medical sales representatives. As stated throughout,
the new TIS has had no effect on profitability, with service fees
paid to Hutchison Sinopharm for marketing Seroquel(R) during the
first half of 2018 increasing 75% to $9.6 million (H1 2017:
$5.5m).
In June 2018, AstraZeneca sold and licensed rights to
Seroquel(R) to Luye Pharma Group, Ltd., including the transfer of
contracts entered into by AstraZeneca with third parties. The terms
of our agreement with AstraZeneca were assigned to Luye Pharma Hong
Kong Ltd. and remain unchanged following this transaction, and this
transaction has not affected our 2018 financial guidance.
Subject to Hutchison Sinopharm's continued performance of
marketing services, and delivery of approximately 22% in-market
sales growth in 2018 and 15% per year thereafter, we will continue
to retain exclusive commercial rights to Seroquel(R) in China until
2025. Growth in Seroquel in-market sales during the first half of
2018 was 36% due to overall strong execution. We expect Hutchison
Sinopharm to have a reasonable chance to meet these annual
Seroquel(R) sales targets over the next several years, although
such sales are subject to a number of factors, some of which are
beyond our control, including potential changes in government
pricing policies in China.
Consumer Health business:
During the first half of 2018, sales of our Consumer Health
subsidiaries increased by 14% to $20.6 million (H1 2017: $18.1m)
and sales of our non-consolidated Consumer Health joint venture
(HBYS) were $119.0 million, a 26% increase (H1 2017: $94.4m on an
as adjusted (non-GAAP) basis, excluding divested operation sales of
$29.0m). Consolidated net income attributable to Chi-Med from our
Consumer Health business grew by 7% to $6.1 million (H1 2017:
$5.8m). The Consumer Health business represented 23% of our overall
Commercial Platform net income in the first half of 2018.
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
about 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.
The increased available production capacity as detailed below, and
a decline in the prices of certain key raw materials, resulted in
the above strong revenue and net income growth in the first half of
2018.
New Bozhou factory: In August 2017, HBYS transferred the
majority of production to our new GMP-certified low-cost factory in
Bozhou, Anhui. Capacity until this point had been constrained and
production had to be supplemented by third-party contract
manufacturers. These production capacity constraints were
eliminated in the second half of 2017 once the Bozhou factory began
production.
Fu Fang Dan Shen ("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 2018 saw the combined sales
of these products increased by 10% to $70.7 million (H1 2017:
$64.3m). This was largely due to the reversal of several headwinds
affecting Banlangen during the same period in 2017. Banlangen sales
grew 34% to $37.9 million in the first half of 2018 due to a
moderate to severe flu season and the elimination of manufacturing
capacity constraints. This increase was offset in part by a decline
in sales of FFDS which fell 9% to $32.8 million as a result of
price increases and a reduction in distribution channel inventory
ahead of the approval and label expansion of FFDS for use in
certain early-stage dementia indications, which is expected in the
second half of 2018.
Nanyang Baiyunshan Hutchison Whampoa Guanbao Pharmaceutical
Company Limited ("Guanbao") divestment: In September 2017, HBYS
divested its 60% shareholding in Guanbao for a consideration
approximately equal to its carrying value. Guanbao was a Good
Supply Practice distribution company which had been established via
a joint venture in 2012. 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. Sales reported under HBYS for Guanbao were nil in the
first half of 2018 (H1 2017: $29.0m).
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, while we are actively working to facilitate the
process, external factors have to-date hampered progress. Land
prices however continue to rise in Guangzhou, and based on
precedent land transactions in the vicinity, we expect the auction
value for Plot 2 to be well over $100 million of which 40 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, we anticipate that based on recent
precedent land transactions, 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 the first half of 2018
grew by 14% to $20.6 million (H1 2017: $18.1m) driven in part by
growth of the Zhi Ling Tong(R) and Earth's Best(R) infant nutrition
products.
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 $23.5
million (H1 2017: $42.6m) were paid from these joint ventures to
the Chi-Med Group level in the first half of 2018. Dividends in the
first half of 2017 were unusually high as the proceeds of one-time
land compensation from SHPL were paid out. Net income from SHPL and
HBYS have totaled over $500 million since 2005, of which $355
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 June 30,
2018, SHPL and HBYS held in aggregate $41.9 million in cash and
cash equivalents, with no outstanding bank borrowings.
Christian Hogg
Chief Executive Officer
July 27, 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 R&D expenses;
-- Adjusted consolidated operating profit from our Commercial Platform;
-- 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 revenues of HBYS and non-consolidated joint ventures.
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 R&D expenses: We exclude the impact of the revenue
received from external customers of our Innovation Platform, which
is reinvested into our clinical trials, to derive our adjusted
R&D 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 R&D activities more
difficult. We believe the presentation of adjusted R&D expenses
provides useful and meaningful information about our ongoing
R&D activities by enhancing investors' understanding of the
scope of our normal, recurring operating R&D expenses.
Adjusted consolidated operating profit from our Commercial
Platform, 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 R&D-related subsidies from the Shanghai government
to SHPL.
Adjusted revenues of HBYS and non-consolidated joint ventures:
we exclude the sales of Guanbao because Guanbao was divested by
HBYS in September 2017.
Reconciliation of GAAP to adjusted R&D expenses:
$'000 Six Months Six Months
Ended June Ended June
30, 2018 30, 2017
------------------------------------------------- ----------- -----------
Segment operating loss - Innovation Platform (53,041) (14,811)
Less: Segment revenue from external customers
- Innovation Platform (13,624) (22,726)
------------------------------------------------- ----------- -----------
Adjusted R&D expenses (66,665) (37,537)
------------------------------------------------- ----------- -----------
Reconciliation of GAAP to adjusted consolidated operating profit
from our Commercial Platform:
$'000 Six Months Six Months
Ended June Ended June
30, 2018 30, 2017
---------------------------------------------------- ----------- -----------
Consolidated operating profit - Commercial Platform 30,958 27,798
Less: One-time gains from R&D-related subsidies - (2,494)
---------------------------------------------------- ----------- -----------
Adjusted consolidated operating profit - Commercial
Platform 30,958 25,304
---------------------------------------------------- ----------- -----------
Reconciliation of GAAP to adjusted consolidated net income
attributable to Chi-Med from our Commercial Platform:
$'000 Six Months Six Months
Ended June Ended June
30, 2018 30, 2017
--------------------------------------------------- ----------- -----------
Consolidated net income attributable to Chi-Med
- Commercial Platform 26,914 25,158
Less: One-time gains from R&D-related subsidies - (2,494)
--------------------------------------------------- ----------- -----------
Adjusted consolidated net income attributable
to Chi-Med - Commercial Platform 26,914 22,664
--------------------------------------------------- ----------- -----------
Reconciliation of GAAP to adjusted consolidated net income
attributable to Chi-Med from our Prescription Drugs business:
$'000 Six Months Six Months
Ended June Ended June
30, 2018 30, 2017
--------------------------------------------------- ----------- -----------
Consolidated net income attributable to Chi-Med
- Prescription Drugs business 20,768 19,421
Less: One-time gains from R&D-related subsidies - (2,494)
--------------------------------------------------- ----------- -----------
Adjusted consolidated net income attributable
to Chi-Med - Prescription Drugs business 20,768 16,927
--------------------------------------------------- ----------- -----------
Reconciliation of GAAP to adjusted revenues of HBYS and
non-consolidated joint ventures:
$'000 Six Months Six Months
Ended June Ended June
30, 2018 30, 2017
-------------------------------------------- ----------- -----------
HBYS revenue 118,983 123,408
Less: Guanbao revenue - (28,964)
-------------------------------------------- ----------- -----------
Adjusted revenue of HBYS 118,983 94,444
SHPL revenue 152,717 129,718
-------------------------------------------- ----------- -----------
Adjusted revenues of non-consolidated joint
ventures 271,700 224,162
-------------------------------------------- ----------- -----------
Unaudited Condensed Consolidated Financial Statements
Hutchison China MediTech Limited
Condensed Consolidated Balance Sheets
(in US$'000, except share data)
December
June 30, 31,
Note 2018 2017
--------- ------------ ----------
(Unaudited)
Assets
Current assets
Cash and cash equivalents 3 75,329 85,265
Short--term investments 4 247,165 273,031
Accounts receivable-third parties 5 44,419 38,410
Accounts receivable-related parties 18 (ii) 2,550 3,860
Other receivables, prepayments and
deposits 6 14,315 11,296
Amounts due from related parties 18 (ii) 1,110 8,544
Inventories 7 9,788 11,789
------------ ----------
Total current assets 394,676 432,195
Property, plant and equipment 8 14,416 14,220
Deferred tax assets 19 (ii) 681 633
Investments in equity investees 9 161,589 144,237
Other assets 6,581 6,647
------------ ----------
Total assets 577,943 597,932
============ ==========
Liabilities and shareholders' equity
Current liabilities
Accounts payable 10 19,308 24,365
Other payables, accruals and advance
receipts 11 49,669 40,953
Income tax payable 19 (iii) 1,167 979
Deferred revenue 16 3,753 1,295
Amounts due to related parties 18 (ii) 10,687 7,021
Short--term bank borrowings 12 - 29,987
------------ ----------
Total current liabilities 84,584 104,600
Deferred tax liabilities 19 (ii) 5,052 4,452
Long--term bank borrowings 12 26,692 -
Deferred revenue 16 924 809
Other liabilities 2,846 3,105
------------ ----------
Total liabilities 120,098 112,966
Commitments and contingencies 13
Company's shareholders' equity
Ordinary shares; $1.00 par value; 75,000,000
shares authorized; 66,532,683 and 66,447,037
shares issued at June 30, 2018 and
December 31, 2017 respectively 14 66,533 66,447
Additional paid--in capital 497,517 496,960
Accumulated losses (140,890) (107,104)
Accumulated other comprehensive income 8,571 5,430
------------ ----------
Total Company's shareholders' equity 431,731 461,733
Non--controlling interests 26,114 23,233
------------ ----------
Total shareholders' equity 457,845 484,966
------------ ----------
Total liabilities and shareholders'
equity 577,943 597,932
============ ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Operations
(Unaudited, in US$'000, except share and per share data)
Six Months Ended June 30,
----------------------------
Note 2018 2017
-------- ------------- -------------
Revenues
Sales-third parties 16 85,116 99,950
Sales-related parties 16 3,449 3,908
Revenue from license and collaboration agreements-third parties 16 8,548 17,843
Revenue from research and development services-related parties 16 5,076 4,883
------------- -------------
Total revenues 102,189 126,584
------------- -------------
Operating expenses
Costs of sales-third parties (69,423) (86,528)
Costs of sales-related parties (2,455) (2,859)
Research and development expenses 17 (60,053) (31,566)
Selling expenses (9,392) (9,681)
Administrative expenses (14,549) (12,015)
------------- -------------
Total operating expenses (155,872) (142,649)
------------- -------------
Loss from operations (53,683) (16,065)
Other income/(expense) 3,188 (673)
------------- -------------
Loss before income taxes and equity in earnings of equity investees (50,495) (16,738)
Income tax expense 19 (i) (2,680) (1,846)
Equity in earnings of equity investees, net of tax 9 23,050 22,269
------------- -------------
Net (loss)/income (30,125) 3,685
Less: Net income attributable to non--controlling interests (2,566) (2,003)
------------- -------------
Net (loss)/income attributable to the Company (32,691) 1,682
============= =============
(Losses)/earnings per share attributable to the Company-basic (US$ per
share) 20 (i) (0.49) 0.03
(Losses)/earnings per share attributable to the Company-diluted (US$ per
share) 20 (ii) (0.49) 0.03
Number of shares used in per share calculation-basic 20 (i) 66,389,454 60,660,846
Number of shares used in per share calculation-diluted 20 (ii) 66,389,454 61,134,539
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Comprehensive
(Loss)/Income
(Unaudited, in US$'000)
Six Months Ended June 30,
----------------------------
2018 2017
-------------- ------------
Net (loss)/income (30,125) 3,685
Other comprehensive income
Foreign currency translation gain 3,445 3,308
-------------- ------------
Total comprehensive (loss)/income (26,680) 6,993
Less: Comprehensive income attributable to non-controlling interests (2,870) (2,367)
-------------- ------------
Total comprehensive (loss)/income attributable to the Company (29,550) 4,626
============== ============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Changes in Shareholders'
Equity
(Unaudited, in US$'000, except share data in '000)
Accumulated Total
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 January 1,
2017 60,706 60,706 208,196 (80,357) (4,275) 184,270 19,790 204,060
Net income - - - 1,682 - 1,682 2,003 3,685
Issuances in
relation to share
option exercises 31 31 143 - - 174 - 174
Share--based
compensation
Share options - - 551 - - 551 1 552
Long--term
incentive plan
("LTIP") - - 1,125 - - 1,125 1 1,126
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
- - 1,676 - - 1,676 2 1,678
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
LTIP-treasury
shares acquired
and held by
Trustee - - (1,367) - - (1,367) - (1,367)
Dividend paid to a
non--controlling
shareholder of a
subsidiary - - - - - - (37) (37)
Transfer between
reserves - - 10 (10) - - - -
Foreign currency
translation
adjustments - - - - 2,944 2,944 364 3,308
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at June 30,
2017 60,737 60,737 208,658 (78,685) (1,331) 189,379 22,122 211,501
======== ======== ========== =========== ============= ============= =========== ========
As at December 31,
2017 66,447 66,447 496,960 (107,104) 5,430 461,733 23,233 484,966
Impact of change
in accounting
policy (Note 2) - - - (1,080) - (1,080) (3) (1,083)
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at January 1,
2018 66,447 66,447 496,960 (108,184) 5,430 460,653 23,230 483,883
Net (loss)/income - - - (32,691) - (32,691) 2,566 (30,125)
Issuances in
relation to share
option exercises 86 86 634 - - 720 - 720
Share--based
compensation
Share options - - 2,784 - - 2,784 7 2,791
LTIP - - 2,575 - - 2,575 7 2,582
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
- - 5,359 - - 5,359 14 5,373
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
LTIP-treasury
shares acquired
and held by
Trustee - - (5,451) - - (5,451) - (5,451)
Transfer between
reserves - - 15 (15) - - - -
Foreign currency
translation
adjustments - - - - 3,141 3,141 304 3,445
-------- -------- ---------- ----------- ------------- ------------- ----------- --------
As at June 30,
2018 66,533 66,533 497,517 (140,890) 8,571 431,731 26,114 457,845
======== ======== ========== =========== ============= ============= =========== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Condensed Consolidated Statements of Cash Flows
(Unaudited, in US$'000)
Six Months Ended
June 30,
---------------------
Note 2018 2017
-------- ---------- ---------
Net cash (used in)/generated from operating
activities 22 (18,596) 19,422
---------- ---------
Investing activities
Purchases of property, plant and equipment (2,079) (3,045)
Deposits in short--term investments (491,169) (16,000)
Proceeds from short--term investments 517,035 40,270
Investment in an equity investee (8,000) (7,000)
---------- ---------
Net cash generated from investing activities 15,787 14,225
---------- ---------
Financing activities
Proceeds from issuance of ordinary shares 15 (i) 720 174
Purchases of treasury shares 15 (ii) (5,451) (1,367)
Proceeds from bank borrowings 26,923 22,551
Repayment of bank borrowings (30,000) (22,564)
Payment of issuance costs (34) -
Dividends paid to a non--controlling shareholder
of a subsidiary - (37)
---------- ---------
Net cash used in financing activities (7,842) (1,243)
---------- ---------
Net (decrease)/increase in cash and cash
equivalents (10,651) 32,404
Effect of exchange rate changes on cash
and cash equivalents 715 697
---------- ---------
(9,936) 33,101
Cash and cash equivalents
Cash and cash equivalents at beginning
of period 85,265 79,431
---------- ---------
Cash and cash equivalents at end of period 75,329 112,532
========== =========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Hutchison China MediTech Limited
Notes to the Unaudited Condensed Consolidated Financial
Statements
1. Organization and Nature of Business
Hutchison China MediTech Limited (the "Company") and its
subsidiaries (together the "Group") are principally engaged in
researching, developing, manufacturing and selling pharmaceuticals
and 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.
Liquidity
As at June 30, 2018, the Group had accumulated losses of
US$140,890,000, primarily due to its significant spending in drug
research and development ("Drug R&D") 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 June 30, 2018, the Group had cash and cash
equivalents of US$75,329,000, short--term investments of
US$247,165,000 and unutilized bank borrowing facilities of
US$94,359,000. Short--term investments comprised of bank deposits
maturing over three months. 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. The Group's operating plan includes the continued
receipt of dividends from certain of its equity investees.
Dividends received from equity investees for the six months ended
June 30, 2018 and 2017 were US$23,526,000 and US$42,617,000
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. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim unaudited condensed consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("U.S. GAAP") for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements.
The interim unaudited condensed consolidated financial statements
have been prepared on the same basis as the annual audited
consolidated financial statements, except for the adoption of
Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts
with Customers (Topic 606) ("ASC 606") as described below. In the
opinion of management, all adjustments, consisting of normal
recurring adjustments necessary for the fair statement of results
for the periods presented, have been included. The results of
operations of any interim period are not necessarily indicative of
the results of operations for the full year or any other interim
period.
The comparative year-end condensed balance sheet data was
derived from the annual audited consolidated financial statements,
but does not include all disclosures required by U.S. GAAP.
The interim unaudited condensed consolidated financial
statements and related disclosures have been prepared with the
presumption that users have read or have access to the annual
audited consolidated financial statements for the preceding fiscal
year.
The preparation of these interim unaudited condensed
consolidated financial statements in conformity with U.S. GAAP
required management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities as at the end of the reporting
period and the reported amounts of revenues and expenses during the
reporting period. 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, income tax expense, tax valuation
allowances and revenues from research and development projects.
Actual results could differ from those estimates.
Revenue Recognition-ASC 606
Summary of impact of applying ASC 606
The Group applied ASC 606 to all contracts at the date of
initial application of January 1, 2018. As a result, the Group has
changed its accounting policy for revenue recognition as detailed
below. The Group applied ASC 606 using the modified retrospective
method by recognizing the cumulative effect as an adjustment to
opening accumulated losses at January 1, 2018. The comparative
information prior to January 1, 2018 has not been adjusted and
continues to be reported under Accounting Standard Codification
605, Revenue Recognition (Topic 605) ("ASC 605").
The Group assessed its license and collaboration contracts under
ASC 606. Refer to Note 16. As a result of this assessment, the
Group recorded an aggregate US$1.1 million deferral of revenue as a
cumulative adjustment to opening accumulated losses upon
adoption.
For sales of goods and services, the Group applied a portfolio
approach to aggregate contracts into portfolios whose performance
obligations do not differ materially from each other. In its
assessment of each portfolio, the Group assessed the contracts
under the new five-step model under ASC 606 and determined there
was no significant impact to the timing or amount of revenue
recognition under the new guidance.
Under the Group's previous accounting policy, deferred revenue
comprised deferred upfront payments from the Group's license and
collaboration contracts. Under ASC 606, advance payments from
customers preceding an entity's performance are considered contract
liabilities; therefore, advance payments from customers from the
Group's Commercial Platform have been reclassified from other
payables, accruals and advance receipts to deferred revenue.
Expected rebates for sales of goods remain in other payables,
accruals and advance receipts.
The following tables summarize the impact of adopting ASC 606 on
the Group's unaudited condensed consolidated financial statements
as at and for the six months ended June 30, 2018, as compared to
the amounts as if applying ASC 605:
As reported As if applied
ASC 606 Adjustments ASC 605
----------- ----------- -------------
(in US$'000)
Condensed Consolidated Balance Sheet
Current assets 394,676 - 394,676
Non-current assets 183,267 - 183,267
----------- ----------- -------------
Total assets 577,943 - 577,943
=========== =========== =============
Liabilities and shareholders' equity
Current liabilities
Other payables, accruals and advance receipts 49,669 1,754 51,423
Deferred revenue 3,753 (2,434) 1,319
Other current liabilities 31,162 - 31,162
----------- ----------- -------------
Total current liabilities 84,584 (680) 83,904
Deferred revenue 924 (267) 657
Other non-current liabilities 34,590 - 34,590
----------- ----------- -------------
Total liabilities 120,098 (947) 119,151
Company's shareholders' equity
Accumulated losses (140,890) 916 (139,974)
Accumulated other comprehensive income 8,571 28 8,599
Other shareholders' equity 564,050 - 564,050
----------- ----------- -------------
Total Company's shareholders' equity 431,731 944 432,675
Non-controlling interests 26,114 3 26,117
----------- ----------- -------------
Total shareholders' equity 457,845 947 458,792
----------- ----------- -------------
Total liabilities and shareholders' equity 577,943 - 577,943
=========== =========== =============
As reported As if applied
ASC 606 Adjustments ASC 605
----------- ----------- -------------
(in US$'000)
Condensed Consolidated Statement of Operations
Total revenues 102,189 (164) 102,025
Total operating expense (155,872) - (155,872)
----------- ----------- -------------
Loss from operations (53,683) (164) (53,847)
Total other income 3,188 - 3,188
----------- ----------- -------------
Loss before income taxes and equity in earnings of equity investees (50,495) (164) (50,659)
Income tax expense (2,680) - (2,680)
Equity in earnings of equity investees, net of tax 23,050 - 23,050
----------- ----------- -------------
Net loss (30,125) (164) (30,289)
Less: Net income attributable to non-controlling interests (2,566) - (2,566)
----------- ----------- -------------
Net loss attributable to the Company (32,691) (164) (32,855)
=========== =========== =============
As reported As if applied
ASC 606 Adjustments ASC 605
----------- ----------- -------------
(in US$'000)
Condensed Consolidated Statement of Comprehensive Loss
Net loss (30,125) (164) (30,289)
Other comprehensive income 3,445 28 3,473
----------- ----------- -------------
Total comprehensive loss (26,680) (136) (26,816)
Less: Comprehensive income attributable to non-controlling interests (2,870) - (2,870)
----------- ----------- -------------
Total comprehensive loss attributable to ordinary shareholders of
the Company (29,550) (136) (29,686)
=========== =========== =============
There are no adjustments to net cash (used in)/generated from
operating activities, investing activities or financing activities
in the condensed consolidated statement of cash flows.
Updated accounting policy
Revenue is measured based on consideration specified in a
contract with a customer, and excludes any sales incentives and
amounts collected on behalf of third parties. Taxes assessed by a
governmental authority that are both imposed on and concurrent with
a specific revenue-producing transaction, that are collected by the
Group from a customer, are also excluded from revenue. The Group
recognizes revenue when it satisfies a performance obligation by
transferring control over a good, service or license to a
customer.
Nature of goods and services
The following is a description of principal activities,
separated by reportable segments, from which the Company generates
its revenue:
(i) Innovation Platform
The Innovation Platform reportable segment principally generates
revenue from license and collaboration contracts. The license and
collaboration contracts generally contain multiple performance
obligations including (1) the license to the drug compound and (2)
the research and development services for each specified treatment
indication, which are accounted for separately if they are
distinct, i.e. if a product or service is separately identifiable
from other items in the arrangement and if a customer can benefit
from it on its own or with other resources that are readily
available to the customer.
The transaction price generally includes fixed and variable
consideration in the form of upfront payment, research and
development cost reimbursements, contingent milestone payments and
sales-based royalties. Contingent milestone payments are not
included in the transaction price until it becomes probable that a
significant reversal of revenue will not occur, which is generally
when the specified milestone is achieved. The allocation of the
transaction price to each performance obligation is based on the
relative standalone selling prices of each performance obligation
determined at the inception of the contract. The Group estimates
the standalone selling prices based on the income approach. Control
of the license to the drug compounds transfers at the inception
date of the collaboration agreements and consequently, amounts
allocated to this performance obligation are generally recognized
at a point in time. Conversely, research and development services
for each specified indication are performed over time and amounts
allocated to these performance obligations are generally recognized
over time using cost inputs as a measure of progress. The Group has
determined that research and development expenses provide an
appropriate depiction of measure of progress for the research and
development services. Changes to estimated cost inputs may result
in a cumulative catch-up adjustment. Royalty revenues are
recognized as future sales occur as they meet the requirements for
the sales-usage based royalty exception.
Deferred revenue is recognized if allocated consideration is
received in advance of the Group rendering research and development
services. Accounts receivable is recognized based on the terms of
the contract and when the Group has an unconditional right to bill
the customer, which is generally when research and development
services are rendered.
(ii) Commercial Platform
The Commercial Platform reportable segment principally generates
revenue from (1) sales of goods, which are the manufacture or
purchase and distribution of drug, healthcare and consumer
products, and (2) sales of services, which are the provision of
sales, distribution and marketing services to pharmaceutical
manufacturers. These contracts include prescription drug products
and consumer health products.
Revenue from sales of goods is recognized when the customer
takes possession of the goods. This usually occurs upon completed
delivery of the goods to the customer site. The amount of revenue
recognized is adjusted for expected sales incentives as stipulated
in the contract, which are generally issued to customers as direct
discounts at the point--of--sale or indirectly in the form of
rebates. Sales incentives are estimated using the expected value
method. 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 is recognized when the benefits
of the services transfer to the customer over time.
Deferred revenue is recognized if consideration is received in
advance of transferring control of the goods or rendering of
services. Accounts receivable is recognized if the Group has an
unconditional right to bill the customer, which is generally when
the customer takes possession of the goods or services are
rendered. Payment terms differ by subsidiary and customer, but
generally range from 45 to 180 days from the invoice date.
Recent Accounting Pronouncements
Refer to the recent accounting pronouncements in the annual
audited consolidated financial statements for the preceding fiscal
year. The following includes updates and new accounting
pronouncements since the issuance of the annual audited
consolidated financial statements.
In February 2016, the Financial Accounting Standards Board
("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. 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 starting from January 1, 2017,
subject to further implementation guidance issued by the FASB. The
Group is continuing to evaluate the impact of the new guidance, but
expects a gross up to the consolidated balance sheets on the date
of adoption primarily related to the Group's various factories and
offices under non-cancellable lease agreements (Note 13) and are
currently accounted off-balance sheet as operating leases under
Accounting Standard Codification 840, Leases (Topic 840).
Additionally, the Group expects limited impact to the consolidated
statements of operations after adoption as the pattern of rental
expense recognition should not change materially for such operating
leases.
In June 2018, the FASB issued ASU 2018-07, Improvements to
Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), which
simplifies the accounting for share-based payments granted to
nonemployees for goods and services. Under the ASU, most of the
guidance on such payments to nonemployees would be aligned with the
requirements for share-based payments granted to employees. ASU
2018-07 is effective for fiscal years and interim periods within
those years beginning after December 15, 2018. The Group shall
adopt the guidance on January 1, 2019, but does not expect a
significant impact upon adoption as there have been no nonemployee
stock option grants during any periods presented.
Other amendments that have been issued by the FASB or other
standards--setting bodies that do not require adoption until a
future date are not expected to have a material impact on the
Group's consolidated financial statements upon adoption.
3. Cash and Cash Equivalents
June 30, December 31,
2018 2017
--------- -------------
(in US$'000)
Cash at bank and on hand 57,209 30,018
Bank deposits maturing in three months or less (note (a)) 18,120 55,247
--------- -------------
75,329 85,265
========= =============
Denominated in:
United States dollar ("US$") (note (b)) 55,761 66,381
Renminbi ("RMB") (note (b)) 15,186 15,140
UK Pound Sterling ("GBP") (note (b)) 725 295
Hong Kong dollar ("HK$") 3,657 3,449
--------- -------------
75,329 85,265
========= =============
Notes:
(a) The weighted average effective interest rate on bank
deposits for the six months ended June 30, 2018 and for the year
ended December 31, 2017 was 1.76% per annum and 1.06% per annum
respectively (with maturity ranging from 7 to 90 days).
(b) Certain cash and bank balances denominated in RMB, US$ and
GBP were deposited with banks in the PRC. The conversion of these
balances into foreign currencies is subject to the rules and
regulations of foreign exchange control promulgated by the PRC
government.
4. Short--term Investments
June 30, December 31,
2018 2017
--------- -------------
(in US$'000)
Bank deposits maturing over three months (note)
Denominated in:
US$ 246,791 272,659
HK$ 374 372
--------- -------------
247,165 273,031
========= =============
Note: The weighted average effective interest rate on bank
deposits maturing over three months for the six months ended June
30, 2018 and for the year ended December 31, 2017 was 1.93% per
annum and 1.32% per annum respectively (with maturity ranging from
91 to 100 days, and 91 to 183 days respectively).
5. Accounts Receivable-Third Parties
June 30, December 31,
2018 2017
--------- -------------
(in US$'000)
Accounts receivable, gross 44,722 38,668
Allowance for doubtful accounts (303) (258)
--------- -------------
Accounts receivable, net 44,419 38,410
========= =============
Substantially all the accounts receivable are denominated in
RMB, US$ and HK$ and are due within one year from the end of the
reporting period. The carrying values of accounts receivable
approximate their fair values due to their short--term
maturities.
Movements on the allowance for doubtful accounts:
2018 2017
------- ------
(in US$'000)
As at January 1 258 2,720
Increase in allowance for doubtful accounts 279 6
Decrease in allowance due to subsequent collection (235) (7)
Write-off (1) -
Exchange difference 2 48
------- ------
As at June 30 303 2,767
======= ======
6. Other Receivables, Prepayments and Deposits
Other receivables, prepayments and deposits consisted of the
following:
June 30, December 31,
2018 2017
--------- -------------
(in US$'000)
Prepayments 4,961 2,565
Purchase rebates 184 284
Other service receivables - 490
Deposits 1,326 932
Value-added tax receivables 6,595 5,436
Interest receivables 634 506
Others 615 1,083
--------- -------------
14,315 11,296
========= =============
7. Inventories
Inventories, net of provision for excess and obsolete
inventories, consisted of the following:
June 30, December 31,
2018 2017
--------- -------------
(in US$'000)
Raw materials 639 314
Finished goods 9,149 11,475
--------- -------------
9,788 11,789
========= =============
Movements on the provision for excess and obsolete inventories
are as follows:
2018 2017
-------- -----
(in US$'000)
As at January 1 121 160
Increase in provision for excess and obsolete inventories 79 -
Decrease in provision due to subsequent sale or recovery (124) (13)
Exchange difference 3 3
-------- -----
As at June 30 79 150
======== =====
8. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
Furniture and
fixtures, other
Leasehold Plant and equipment and Construction in
Buildings improvements equipment motor vehicles progress Total
--------- ---------------- ---------------- ---------------- ---------------- ------
(in US$'000)
Cost
As at January
1, 2018 2,372 9,057 2,568 15,154 2,558 31,709
Additions - 80 2 492 1,021 1,595
Disposals - - - (68) - (68)
Transfers - 209 748 208 (1,165) -
Exchange
differences 40 141 38 243 45 507
--------- ---------------- ---------------- ---------------- ---------------- ------
As at June 30,
2018 2,412 9,487 3,356 16,029 2,459 33,743
--------- ---------------- ---------------- ---------------- ---------------- ------
Accumulated
depreciation
As at January
1, 2018 1,141 5,296 499 10,553 - 17,489
Depreciation 56 569 159 851 - 1,635
Disposals - - - (62) - (62)
Exchange
differences 18 79 6 162 - 265
--------- ---------------- ---------------- ---------------- ---------------- ------
As at June 30,
2018 1,215 5,944 664 11,504 - 19,327
--------- ---------------- ---------------- ---------------- ---------------- ------
Net book value
As at June 30,
2018 1,197 3,543 2,692 4,525 2,459 14,416
========= ================ ================ ================ ================ ======
Furniture and
fixtures, other
Leasehold Plant and equipment and Construction in
Buildings improvements equipment motor vehicles progress Total
--------- ---------------- ---------------- ---------------- ---------------- ------
(in US$'000)
Cost
As at January
1, 2017 2,232 6,296 86 13,976 1,760 24,350
Additions - 228 39 509 2,269 3,045
Disposals - - - (12) - (12)
Transfers - 128 1,300 (847) (581) -
Exchange
differences 40 113 3 247 44 447
--------- ---------------- ---------------- ---------------- ---------------- ------
As at June 30,
2017 2,272 6,765 1,428 13,873 3,492 27,830
--------- ---------------- ---------------- ---------------- ---------------- ------
Accumulated
depreciation
As at January
1, 2017 971 4,249 71 9,105 - 14,396
Depreciation 52 410 55 746 - 1,263
Disposals - - - (11) - (11)
Transfers - - 239 (239) - -
Exchange
differences 18 77 1 162 - 258
--------- ---------------- ---------------- ---------------- ---------------- ------
As at June 30,
2017 1,041 4,736 366 9,763 - 15,906
--------- ---------------- ---------------- ---------------- ---------------- ------
Net book value
As at June 30,
2017 1,231 2,029 1,062 4,110 3,492 11,924
========= ================ ================ ================ ================ ======
9. Investments in Equity Investees
Investments in equity investees consisted of the following:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Hutchison Whampoa Guangzhou Baiyunshan
Chinese Medicine Company Limited ("HBYS") 62,146 55,308
Shanghai Hutchison Pharmaceuticals
Limited ("SHPL") 74,276 69,417
Nutrition Science Partners Limited
("NSPL") 24,792 19,201
Other 375 311
--------- ---------
161,589 144,237
========= =========
All of the equity investees are private companies and there are
no quoted market prices available for their shares.
Summarized financial information for the significant equity
investees is as follows:
(i) Summarized balance sheets
Commercial Platform Innovation Platform
--------------------------------------------------- ------------------------
Consumer Health Prescription Drugs Drug R&D
HBYS SHPL NSPL
------------------------ ------------------------- ------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2018 2017 2018 2017 2018 2017
--------- ------------- ---------- ------------- --------- -------------
(in US$'000)
Current assets 121,229 101,570 134,355 129,535 20,627 9,640
Non--current assets 108,263 107,226 103,468 103,477 30,000 30,000
Current liabilities (82,693) (75,787) (87,274) (91,665) (1,044) (1,239)
Non--current liabilities (18,839) (18,748) (8,202) (8,616) - -
--------- ------------- ---------- ------------- --------- -------------
Net assets 127,960 114,261 142,347 132,731 49,583 38,401
Non--controlling interests (3,668) (3,645) - - - -
--------- ------------- ---------- ------------- --------- -------------
124,292 110,616 142,347 132,731 49,583 38,401
========= ============= ========== ============= ========= =============
(ii) Summarized statements of operations
Commercial Platform Innovation Platform
---------------------------------------------------------- ----------------------------
Consumer Health Prescription Drugs Drug R&D
HBYS SHPL NSPL
---------------------------- ---------------------------- ----------------------------
Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------- ----------------------------
2018 2017 2018 2017 2018 2017
------------- ------------- ------------- ------------- ------------- -------------
(in US$'000)
Revenue 118,983 123,408 152,717 129,718 - -
============= ============= ============= ============= ============= =============
Gross profit 59,155 45,933 108,802 94,964 - -
============= ============= ============= ============= ============= =============
Interest income 37 79 407 498 43 -
============= ============= ============= ============= ============= =============
Finance cost (135) (58) - - - -
============= ============= ============= ============= ============= =============
Profit/(loss)
before taxation 14,306 13,525 45,942 43,727 (4,818) (4,749)
Income tax
expense (note) (2,362) (1,942) (7,127) (5,984) - -
------------- ------------- ------------- ------------- ------------- -------------
Net income/(loss) 11,944 11,583 38,815 37,743 (4,818) (4,749)
Non--controlling
interests 39 (61) - - - -
------------- ------------- ------------- ------------- ------------- -------------
Net income/(loss)
attributable to
the shareholders
of equity
investee 11,983 11,522 38,815 37,743 (4,818) (4,749)
============= ============= ============= ============= ============= =============
Note: HBYS and SHPL have been granted the High and New
Technology Enterprise ("HNTE") status. Accordingly, the companies
were eligible to use a preferential income tax rate of 15% for the
six months ended June 30, 2018 and 2017.
For the six months ended June 30, 2018 and 2017, other
immaterial equity investees had net income of approximately
US$120,000 and US$22,000 respectively.
(iii) Reconciliation of summarized financial information
Reconciliation of the summarized financial information presented
to the carrying amount of investments in equity investees is as
follows:
Commercial Platform Innovation Platform
------------------------------------------ ----------------------
Consumer Health Prescription Drugs Drug R&D
HBYS SHPL NSPL
------------------- --------------------- ----------------------
2018 2017 2018 2017 2018 2017
-------- --------- ---------- --------- ---------- ----------
(in US$'000)
Opening net assets after
non-controlling interests as at
January 1 110,616 127,072 132,731 150,134 38,401 33,611
Net income/(loss) attributable to the
shareholders of equity investee 11,983 11,522 38,815 37,743 (4,818) (4,749)
Dividends declared - (14,615) (31,538) (70,619) - -
Other comprehensive income 1,693 2,330 2,339 2,889 - -
Investments - - - - 16,000 14,000
-------- --------- ---------- --------- ---------- ----------
Closing net assets after
non-controlling interests as at June
30 124,292 126,309 142,347 120,147 49,583 42,862
======== ========= ========== ========= ========== ==========
Group's share of net assets 62,146 63,154 71,173 60,074 24,792 21,431
Goodwill - - 3,103 2,923 - -
-------- --------- ---------- --------- ---------- ----------
Carrying amount of investments as at
June 30 62,146 63,154 74,276 62,997 24,792 21,431
======== ========= ========== ========= ========== ==========
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
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Not later than 1 year 1,272 1,282
Between 1 to 2 years 595 400
Between 2 to 3 years 391 151
Between 3 to 4 years 137 141
Between 4 to 5 years - 47
--------- ---------
Total minimum lease payments 2,395 2,021
========= =========
(b) The equity investees had the following capital commitments:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Property, plant and equipment
Contracted but not provided for 1,368 1,034
========= =========
10. Accounts Payable
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Accounts payable-third parties 13,430 17,095
Accounts payable-non-controlling shareholders
of subsidiaries (Note 18 (iv)) 5,878 7,250
Accounts payable-related party (Note
18 (ii)) - 20
--------- ---------
19,308 24,365
========= =========
Substantially all the accounts payable are denominated in RMB
and US$ 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.
11. Other Payables, Accruals and Advance Receipts
Other payables, accruals and advance receipts consisted of the
following:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Accrued salaries and benefits 7,904 9,295
Accrued research and development expenses 23,908 14,613
Accrued selling expenses and rebates 5,524 4,121
Accrued administrative and other general
expenses 4,843 4,729
Deferred government incentives 1,936 1,790
Loan from a non-controlling shareholder
of a subsidiary (Note 18 (iv)) 1,550 1,550
Deposits (note) 1,386 1,282
Others 2,618 3,573
--------- ---------
49,669 40,953
========= =========
Note: As at December 31, 2017, this balance included payments in
advance from customers of US$0.7 million, which were reclassified
to deferred revenue after the adoption of ASC 606 on January 1,
2018.
12. Bank Borrowings
Bank borrowings consisted of the following:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Current - 29,987
Non-current 26,692 -
--------- ---------
26,692 29,987
========= =========
The weighted average interest rate for outstanding bank
borrowings for the six months ended June 30, 2018 and the year
ended December 31, 2017 was 2.33% per annum and 1.90% per annum
respectively. In addition, the Group incurred guarantee fees of nil
and US$320,000 for the six months ended June 30, 2018 and the year
ended December 31, 2017 respectively, which was nil and 0.76% per
annum respectively of the weighted average outstanding bank
borrowings. The carrying amounts of the Group's bank borrowings are
all denominated in HK$.
3-year term loan and 18-month revolving loan facilities
In November 2017, the Group through its subsidiary, entered into
facility agreements 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 and an upfront fee of HK$1,575,000
(US$202,000). The revolving loan facility bears interest at 1.25%
over HIBOR per annum. The term loan was drawn in May 2018 and is
due in November 2020. Accordingly, the term loan is recorded under
long-term bank borrowings as at June 30, 2018. As at June 30, 2018
and December 31, 2017, no amount has been drawn from the revolving
loan facility. These credit facilities are guaranteed by the
Company.
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 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
loans from the first and second credit facilities were repaid and
terminated in May 2018. As at June 30, 2018 and December 31, 2017,
no amount has been drawn from either of the revolving loan
facilities which are guaranteed by the Company.
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$2,564,000) was drawn from
this facility and the amount was fully repaid in March 2017. As at
June 30, 2018 and December 31, 2017, there were no amounts due
under this loan.
The Group's bank borrowings are repayable as from the dates
indicated as follows:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Not later than 1 year - 30,000
Between 1 to 2 years - -
Between 2 to 3 years 26,923 -
--------- ---------
26,923 30,000
========= =========
As at June 30, 2018 and December 31, 2017, the Group had
unutilized bank borrowing facilities of HK$736,000,000
(US$94,359,000) and HK$946,000,000 (US$121,282,000)
respectively.
13. Commitments and Contingencies
(i) Lease commitments
The Group leases various factories and offices under
non--cancellable operating lease agreements. Future aggregate
minimum payments under non--cancellable operating leases as from
the dates indicated are as follows:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Not later than 1 year 3,544 3,330
Between 1 to 2 years 2,725 2,875
Between 2 to 3 years 1,232 2,132
Between 3 to 4 years 285 345
Between 4 to 5 years 52 161
Later than 5 years 4 17
--------- ---------
Total minimum lease payments 7,842 8,860
========= =========
(ii) Capital commitments
The Group's capital commitments as from the dates indicated are
as follows:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Property, plant and equipment
Contracted but not provided for 2,248 161
========= =========
In addition, the Group has also undertaken to provide the
necessary additional funds for NSPL to finance its ongoing
operations. The Group does not have any other significant
commitments or contingencies.
14. Ordinary Shares
The Company is authorized to issue 75,000,000 ordinary shares. A
summary of ordinary share transactions (in thousands) is as
follows:
2018 2017
------- -------
As at January 1 66,447 60,706
Share option exercises 86 31
------- -------
As at June 30 66,533 60,737
======= =======
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.
15. 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 197,080 ordinary shares. As at June 30, 2018, the number
of shares authorized but unissued was 8,467,317 ordinary
shares.
Share options granted are generally subject to a four--year
vesting schedule, depending on the nature and the purpose of the
grant. Share options subject to 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.
A summary of the Company's share option activity and related
information is as follows:
Weighted average
Weighted average remaining Aggregate intrinsic
Number of share exercise price in GBP contractual life value
options per share (years) (in GBP'000)
--------------------- --------------------- -------------------- ---------------------
Outstanding at
January 1, 2017 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
Granted 949,626 46.78
Exercised (85,646) 6.10
---------------------
Outstanding at June
30, 2018 1,990,392 32.07 7.72 28,530
=====================
Vested and
exercisable at
December 31, 2017 951,412 15.52 5.81 38,508
Vested and
exercisable at
June 30, 2018 928,266 17.13 5.46 26,702
In estimating the fair value of share options granted, the
following assumptions were used in the Polynomial model for awards
granted in the periods indicated:
Six Months Ended
Year Ended December 31, June 30,
2011 2013 2016 2017 2018
-------- -------- -------- ------ ------------------
Weighted average grant date fair value of
share options (in GBP per share) 1.84 3.15 8.99 12.69 16.71
Significant inputs into the valuation model
(weighted average):
Exercise price (in GBP per share) 4.41 6.10 19.70 31.05 46.78
Share price at effective date of grant (in
GBP per share) 4.33 6.10 19.70 31.05 46.57
Expected volatility (note (a)) 46.6% 36.0% 39.0% 36.3% 37.7%
Risk--free interest rate (note (b)) 3.13% 3.16% 1.00% 1.17% 1.47%
Contractual life of share options (in
years) 10 10 8 10 10
Expected dividend yield (note (c)) 0% 0% 0% 0% 0%
Notes:
(a) The Company calculated its expected volatility with
reference to the historical volatility prior to the issuances of
share options.
(b) 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.
(c) 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.
The Company will issue new shares to satisfy share option
exercises. The following table summarizes the Company's share
option exercises:
Six Months Ended June
30,
------------------------
2018 2017
----------- -----------
(in US$'000)
Cash received from share options exercised 720 174
Total intrinsic value of share options
exercised 4,817 1,049
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:
Six Months Ended June
30,
------------------------
2018 2017
------------ ----------
(in US$'000)
Research and development expenses 2,616 565
Administrative expenses 175 -
------------ ----------
2,791 565
============ ==========
As at June 30, 2018, the total unrecognized compensation cost
was US$20,937,000 and will be recognized on a graded vesting
approach over the weighted average remaining service period of 3.75
years.
(ii) 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 American
depositary shares ("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$0.4 million in aggregate that did not stipulate
performance targets. Shares under such LTIP awards vested one
business day after the publication date of the annual report for
the 2017 financial year.
The Trustee has been set up solely for the purpose of purchasing
and holding the Awarded Shares during the vesting period on behalf
of the Group using funds provided by the Group. On the
determination date, if any, the Company will determine the cash
amount, based on the actual achievement of each annual performance
target, for the Trustee to purchase the Awarded Shares. The Awarded
Shares will then be held by the Trustee until they are vested.
The Trustee's assets include treasury shares and funds for
additional treasury shares, trustee fees and expenses. The number
of treasury shares (in the form of ordinary shares or ADS of the
Company) purchased and held by the Trustee are as follows:
Number
of
treasury Cost in
shares US$'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
Purchased 79,500 5,451
Vested (23,375) (731)
---------- ---------
As at June 30, 2018 112,103 6,677
========== =========
For the six months ended June 30, 2018, US$93,000 of the
determined LTIP awards have been forfeited.
The following table presents the share--based compensation
expenses recognized under the LTIP awards:
Six Months Ended June
30,
------------------------
2018 2017
----------- -----------
(in US$'000)
Research and development expenses 878 691
Selling and administrative expenses 723 578
----------- -----------
1,601 1,269
=========== ===========
Recorded with a corresponding credit
to:
Liability 789 594
Additional paid--in capital 812 675
----------- -----------
1,601 1,269
=========== ===========
For the six months ended June 30, 2018 and 2017, US$1,770,000
and US$451,000 was reclassified from liability to additional
paid--in capital respectively upon LTIP awards reaching the
determination date. As at June 30, 2018 and December 31, 2017,
US$1,260,000 and US$2,241,000 was recorded as liability
respectively for LTIP awards prior to the determination date.
As at June 30, 2018, the total unrecognized compensation cost
was approximately US$6,679,000, which considers expected
performance targets and the amount expected to vest, and will be
recognized over the requisite periods.
16. Revenues
The following table presents revenue disaggregated by customers
and major product lines, and reconciles disaggregated revenue with
reportable segments:
Six Months Ended June 30, 2018
-----------------------------------
Innovation Commercial
Platform Platform Total
------------ ----------- --------
(in US$'000)
Customers
Third parties 8,548 85,116 93,664
Related parties (Note 18
(i)) 5,076 3,449 8,525
------------ ----------- --------
13,624 88,565 102,189
============ =========== ========
Major product lines (note)
Goods - 82,912 82,912
Services 13,624 5,653 19,277
------------ ----------- --------
13,624 88,565 102,189
============ =========== ========
Note: Sales of goods are recognized at a point-in-time and sales
of services are recognized over time. The implementation of the
two-invoice system in China has resulted in a shift from a gross
sales of goods revenue model to a net fee-for-service revenue model
in the Group's Commercial Platform, as we do not obtain control of
the goods for distribution for relevant transactions.
The following table presents balances from contracts with
customers:
June 30, December 31,
2018 2017
--------- -------------
(in US$'000)
Innovation Platform
Receivables-included in accounts receivable 6,483 6,535
Deferred revenue-current portion (note (a)) (1,999) (1,295)
Deferred revenue-noncurrent portion (note (a)) (924) (809)
========= =============
Commercial Platform
Receivables-included in accounts receivable 40,486 35,735
Deferred revenue-current portion (note (b)) (1,754) -
========= =============
Notes:
(a) Innovation Platform deferred revenue relates to the
unamortized upfront and milestone payments and advance
consideration received for cost reimbursements, which are
attributed to research and development services that have not yet
been rendered as at the reporting date.
(b) Commercial Platform deferred revenue relates to payments in
advance from customers for goods that have not been transferred and
services that have not been rendered to the customer as at the
reporting date.
For the six months ended June 30, 2018, revenue of US$1.2
million was recognized that was included in the deferred revenue
balance as at January 1, 2018 (which includes US$2.1 million
deferred revenue as at December 31, 2017, US$0.7 million of
payments in advance from customers reclassified from other
payables, accruals and advance receipts (Note 11) and US$1.1
million cumulative adjustment upon adoption of ASC 606). Estimated
deferred revenue to be recognized over time as from the date
indicated is as follows:
June 30, 2018
--------------
(in US$'000)
Not later than 1 year 3,753
Between 1 to 2 years 661
Between 2 to 3 years 253
Between 3 to 4 years 10
--------------
Total deferred revenue 4,677
==============
Innovation Platform
Innovation Platform 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 ("Lilly Agreement"), a
targeted oncology therapy for the treatment of various types of
solid tumors. Under the terms of the Lilly Agreement, the Group is
entitled to receive a series of payments up to US$86.5 million,
including upfront payments and development and regulatory approval
milestones. Should fruquintinib be successfully commercialized in
China, the Group would receive tiered royalties from 15% to 20% on
all sales in China. Development costs after the first development
milestone are shared between the Group and Lilly.
Upfront and milestone payments in the Lilly Agreement are
summarized as follows:
(in US$'000)
Upfront payment 6,500
Development milestone payments achieved as
at June 30, 2018 25,000
Remaining development and regulatory approval
milestone payments 55,000
-------------
86,500
=============
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 determined at the inception of the contract to have minimal
value. As at June 30, 2018, the option has not been exercised.
The Group adopted ASC 606 on January 1, 2018 and reassessed the
Lilly Agreement under the new standard, which resulted in US$0.1
million recognition of previously deferred revenue as a cumulative
adjustment to opening accumulated losses as at January 1, 2018,
summarized as follows (in US$ millions).
ASC 605 ASC 606
----------------- ---------------
December 31, 2017 Opening Adjustments January 1, 2018
----------------- ------------------- ---------------
Cumulative amounts recognized to accumulated losses
from:
Upfront payment (note (a)) 5.7 0.5 6.2
Milestone payments (note (b)) 23.7 (0.4) 23.3
----------------- ------------------- ---------------
29.4 0.1 29.5
================= =================== ===============
Notes:
(a) Upfront payment amounts deferred under ASC 605, but was
allocated to the license to fruquintinib transferred at inception
under ASC 606, resulting in additional revenue recognition on
adoption.
(b) Milestone payments had been fully recognized under ASC 605's
milestone method, but was allocated to the portion of research and
development services that had not been performed under ASC 606,
resulting in deferral of revenue on adoption.
Under ASC 606, the Group identified the following performance
obligations under the Lilly Agreement: (1) the license to
fruquintinib and (2) the research and development services for the
specified indications. The transaction price includes the upfront
payment, research and development cost reimbursements, milestone
payments and sales-based royalties. Milestone payments were not
included in the transaction price until it became probable that a
significant reversal of revenue would not occur, which is generally
when the specified milestone is achieved. The allocation of the
transaction price to each performance obligation was based on the
relative standalone selling prices of each performance obligation
determined at the inception of the contract. Based on this
estimation, proportionate amounts of transaction price to be
allocated to the license to fruquintinib and the research and
development services were 90% and 10% respectively. Control of the
license to fruquintinib transferred at the inception date of the
agreement and consequently, amounts allocated to this performance
obligation were recognized at inception. Conversely, research and
development services for each specified indication are performed
over time and amounts allocated are recognized over time using the
prior and estimated future development costs for fruquintinib as a
measure of progress.
Under ASC 606, the Group recognized US$5.7 million, US$0.1
million and US$0.2 million revenue during the six months ended June
30, 2018 for research and development cost reimbursements, the
amortization of the upfront payment and the amortization of the
milestone payments respectively.
Under ASC 605, the Group recognized US$6.0 million, US$0.5
million and US$4.5 million revenue during the six months ended June
30, 2017 for research and development services, amortization of the
upfront payment and the achievement of the milestone in relation to
the acceptance of a new drug application by the China Food and Drug
Administration (now the China National Drug Administration) for
fruquintinib as a treatment of patients with advanced colorectal
cancer respectively.
License and collaboration agreement with AstraZeneca
On December 21, 2011 (as amended on August 1, 2016), 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 AZ Agreement, the Group is
entitled to receive a series of payments including upfront payments
and development, first-sale and commercial sale milestones. Should
savolitinib be successfully commercialized outside China, the Group
would receive tiered royalties from 14% to 18% on all sales outside
of China. After total aggregate sales of savolitinib have reached
US$5 billion, this royalty will step down over a two-year period to
an ongoing tiered royalty rate from 10.5% to 14.5%. Should
savolitinib be successfully commercialized in China, the Group
would receive fixed royalties of 30% based on all sales in China.
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, except for Phase III clinical trial
costs related to developing savolitinib for papillary renal cell
carcinoma which the Group shall pay for up to a maximum of US$50
million.
Upfront and milestone payments in the AZ Agreement are
summarized as follows:
(in US$'000)
Upfront payment 20,000
Development milestone payments achieved as
at June 30, 2018 25,000
Remaining development and first-sale milestone
payments (note) 95,000
140,000
=============
Note: The AZ Agreement also contains possible significant future
commercial sale milestones.
The Group adopted ASC 606 on January 1, 2018 and reassessed the
AZ Agreement under the new standard, which resulted in US$1.2
million deferral of previously recognized revenue as a cumulative
adjustment to opening accumulated losses as at January 1, 2018,
summarized as follows (in US$ millions).
ASC 605 ASC 606
----------------- ---------------
December 31, 2017 Opening Adjustments January 1, 2018
----------------- ------------------- ---------------
Cumulative amounts recognized to accumulated losses
from:
Upfront payment (note (a)) 19.6 (0.3) 19.3
Milestone payments (note (b)) 24.9 (0.9) 24.0
----------------- ------------------- ---------------
44.5 (1.2) 43.3
================= =================== ===============
Notes:
(a) Upfront payment amounts allocated to research and
development services recognized under ASC 606 differed from ASC 605
due to a different basis in measuring progress on adoption,
resulting in deferral of revenue.
(b) Milestone payments had been fully recognized under ASC 605's
milestone method, but was allocated to the portion of research and
development services that had not been performed under ASC 606,
resulting in deferral of revenue on adoption.
Under ASC 606, the Group identified the following performance
obligations under the AZ Agreement: (1) the license to savolitinib
and (2) the research and development services for the specified
indications. The transaction price includes the upfront payment,
research and development cost reimbursements, milestone payments
and sales-based royalties. Milestone payments were not included in
the transaction price until it became probable that a significant
reversal of revenue would not occur, which is generally when the
specified milestone is achieved. The allocation of the transaction
price to each performance obligation was based on the relative
standalone selling prices of each performance obligation determined
at the inception of the contract. Based on this estimation,
proportionate amounts of transaction price to be allocated to the
license to savolitinib and the research and development services
were 95% and 5% respectively. Control of the license to savolitinib
transferred at the inception date of the agreement and
consequently, amounts allocated to this performance obligation were
recognized at inception. Conversely, research and development
services for each specified indication are performed over time and
amounts allocated are recognized over time using the prior and
estimated future development costs for savolitinib as a measure of
progress.
Under ASC 606, the Group recognized US$2.4 million, US$0.1
million and US$0.1 million revenue during the six months ended June
30, 2018 for research and development cost reimbursements, the
amortization of the upfront payment and the amortization of
milestone payments respectively.
Under ASC 605, the Group recognized US$1.8 million,
approximately US$0.1 million and US$5.0 million revenue during the
six months ended June 30, 2017 for research and development
services, amortization of the upfront payment and the achievement
of the milestone in relation to the Phase III initiation for the
secondary indication papillary renal cell carcinoma
respectively.
17. Research and Development Expenses
Research and development expenses are summarized as follows:
Six Months Ended June
30,
------------------------
2018 2017
----------- -----------
(in US$'000)
Clinical trial related costs 40,244 16,473
Personnel compensation and related
costs 17,282 11,875
Other research and development expenses 2,527 3,218
----------- -----------
60,053 31,566
=========== ===========
18. 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:
Six Months Ended June
30,
------------------------
2018 2017
----------- -----------
(in US$'000)
Sales to:
Indirect subsidiaries of CK Hutchison 3,449 3,908
=========== ===========
Revenue from research and development
services from:
Equity investees 5,076 4,883
=========== ===========
Purchases from:
Equity investees 1,197 494
=========== ===========
Rendering of marketing services from:
Indirect subsidiaries of CK Hutchison 256 241
An equity investee 6,561 5,125
----------- -----------
6,817 5,366
=========== ===========
Rendering of management services from:
An indirect subsidiary of CK Hutchison 455 448
=========== ===========
Interest paid to:
An indirect subsidiary of CK Hutchison - 65
=========== ===========
Guarantee fee on bank borrowing to:
An indirect subsidiary of CK Hutchison - 234
=========== ===========
(ii) Balances with related parties included in:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Accounts receivable-related parties
Indirect subsidiaries of CK Hutchison
(note (a)) 1,738 2,761
Equity investees (note (a)) 812 1,099
--------- ---------
2,550 3,860
========= =========
Accounts payable
An equity investee (note (a)) - 20
========= =========
Amounts due from related parties
An indirect subsidiary of CK Hutchison
(note (a)) - 23
Equity investees (note (a)) 1,110 893
Dividend receivable from an equity
investee - 7,628
--------- ---------
1,110 8,544
========= =========
Amounts due to related parties
An indirect subsidiary of CK Hutchison
(note (b)) 285 454
An equity investee (note (a)) 10,402 6,567
--------- ---------
10,687 7,021
========= =========
Other deferred income
An equity investee (note (c)) 1,558 1,648
========= =========
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 an indirect subsidiary of CK Hutchison are
unsecured and repayable on demand. For the year ended December 31,
2017, such amounts were interest-bearing. For the six months ended
June 30, 2018, such amounts were interest-free.
(c) Other deferred income represents amounts recognized from
granting of promotion and marketing rights.
(iii) Transactions with non--controlling shareholders of subsidiaries:
Six Months Ended June
30,
------------------------
2018 2017
------------ ----------
(in US$'000)
Sales 10,506 7,037
============ ==========
Purchases 8,113 9,485
============ ==========
Interest expense 39 32
============ ==========
Dividend paid - 37
============ ==========
(iv) Balances with non--controlling shareholders of subsidiaries included in:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Accounts receivable-third parties 4,865 1,846
========= =========
Accounts payable 5,878 7,250
========= =========
Other payables, accruals and advance
receipts
Loan 1,550 1,550
Interest payable 119 80
--------- ---------
1,669 1,630
========= =========
Other non--current liabilities
Loan 579 579
========= =========
19. Income Taxes
(i) Income tax expense
Six Months Ended June
30,
------------------------
2018 2017
----------- -----------
(in US$'000)
Current tax
HK (note (a)) 289 244
PRC (note (b)) 1,010 355
Other 104 -
Deferred income tax 1,277 1,247
----------- -----------
Income tax expense 2,680 1,846
=========== ===========
Notes:
(a) The Company, two subsidiaries 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 June 30, 2018 and December
31, 2017, 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:
Six Months Ended June 30,
----------------------------
2018 2017
------------- -------------
(in US$'000)
Loss before income taxes and equity in earnings of equity investees (50,495) (16,738)
============= =============
Tax calculated at the statutory tax rate of the Company (8,332) (2,762)
Tax effects of:
Different tax rates available in different jurisdictions 893 537
Tax valuation allowance 10,231 3,881
Preferential tax deduction (1,763) (845)
Expenses not deductible for tax purposes 690 261
Utilization of previously unrecognized tax losses (2) (97)
Withholding tax on undistributed earnings of PRC entities 1,323 1,307
Others (360) (436)
------------- -------------
Income tax expense 2,680 1,846
============= =============
(ii) Deferred tax assets and liabilities
The significant components of deferred tax assets and
liabilities are as follows:
December
June 30, 31,
2018 2017
--------- ---------
(in US$'000)
Deferred tax assets
Tax losses 41,647 31,028
Others 1,448 1,267
--------- ---------
Total deferred tax assets 43,095 32,295
Less: Valuation allowance (42,414) (31,662)
--------- ---------
Deferred tax assets 681 633
========= =========
Deferred tax liabilities
Undistributed earnings from PRC entities 4,937 4,332
Others 115 120
--------- ---------
Deferred tax liabilities 5,052 4,452
========= =========
The movements in deferred tax assets and liabilities are as
follows:
2018 2017
-------- --------
(in US'000)
As at January 1 (3,819) (4,989)
Utilization of previously recognized withholding tax on undistributed earnings 788 2,140
(Charged)/Credited to the consolidated statements of operations
Withholding tax on undistributed earnings of PRC entities (1,323) (1,307)
Deferred tax on amortization of intangible assets 10 9
Deferred tax on provision for assets 36 51
Exchange differences (63) (96)
-------- --------
As at June 30 (4,371) (4,192)
======== ========
The deferred tax assets and liabilities are offset when there is
a legally enforceable right to set off and when the deferred income
taxes relate to the same fiscal authority.
The table below summarizes changes in the deferred tax valuation
allowance:
2018 2017
------- -------
(in US$'000)
As at January 1 31,662 20,145
Charged to consolidated statements of operations 10,231 3,881
Utilization of previously unrecognized tax losses (2) (97)
Others 259 (965)
Exchange differences 264 280
------- -------
As at June 30 42,414 23,244
======= =======
The Group recognizes interest and penalties, if any, under
income tax payable on its condensed consolidated balance sheets and
under other expenses in its condensed consolidated statements of
operations. As at June 30, 2018 and December 31, 2017, the Group
did not have any material unrecognized uncertain tax positions.
(iii) Income tax payable
2018 2017
-------- --------
(in US$'000)
As at January 1 979 274
Current tax 1,403 599
Withholding tax upon dividend declaration from PRC entities 788 2,140
Tax paid (2,020) (2,458)
Exchange difference 17 2
-------- --------
As at June 30 1,167 557
======== ========
20. (Losses)/Earnings per Share
(i) Basic (losses)/earnings per share
Basic (losses)/earnings per share is calculated by dividing the
net (loss)/income attributable to the Company by the weighted
average number of ordinary shares in issue during the period.
Treasury shares held by the Trustee are excluded from the weighted
average number of outstanding ordinary shares in issue for purposes
of calculating basic (losses)/earnings per share.
Six Months Ended June 30,
----------------------------
2018 2017
------------- -------------
Weighted average number of outstanding ordinary shares in issue 66,389,454 60,660,846
============= =============
Net (loss)/income attributable to the Company (US$'000) (32,691) 1,682
(Losses)/earnings per share attributable to the Company (US$ per share) (0.49) 0.03
(ii) Diluted (losses)/earnings per share
Diluted (losses)/earnings per share is calculated by dividing
net (loss)/income attributable to the Company by the weighted
average number of ordinary and dilutive ordinary share equivalents
outstanding during the period. Dilutive ordinary share equivalents
include shares issuable upon the exercise or settlement of share
option and LTIP awards issued by the Company using the treasury
stock method.
Six Months Ended June 30,
----------------------------
2018 2017
------------- -------------
Weighted average number of outstanding ordinary shares in issue 66,389,454 60,660,846
Adjustment for share options and LTIP - 473,693
------------- -------------
66,389,454 61,134,539
============= =============
Net (loss)/income attributable to the Company (US$'000) (32,691) 1,682
(Losses)/earnings per share attributable to the Company (US$ per share) (0.49) 0.03
For the six months ended June 30, 2018, the share options and
LTIP awards issued by the Company were not included in the
calculation of diluted losses per share because of their
anti--dilutive effect.
21. Segment Reporting
The Group determines its operating segments from both business
and geographic perspectives as follows:
(i) Innovation Platform: 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 expense 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:
Six Months Ended June 30, 2018
--------------------------------------------------------------------------
Innovation
Platform Commercial Platform
---------- -------------------------------------
Prescription Consumer
Drug R&D Drugs Health
---------- ------------ -------------
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
---------- ------------ ----- ------ -------- ----------- --------
(in US$'000)
Revenue from external
customers 13,624 67,950 6,559 14,056 88,565 - 102,189
---------- ------------ ----- ------ -------- ----------- --------
Adjusted (LBIT)/EBIT (50,718) 3,457 456 1,584 5,497 (7,619) (52,840)
Interest income 26 23 7 32 62 2,701 2,789
Equity in earnings of
equity investees, net of
tax (2,349) 19,408 5,991 - 25,399 - 23,050
---------- ------------ ----- ------ -------- ----------- --------
Operating (loss)/profit (53,041) 22,888 6,454 1,616 30,958 (4,918) (27,001)
Interest expense - - - 39 39 405 444
Income tax expense 20 813 124 264 1,201 1,459 2,680
Net (loss)/income
attributable to the
Company (52,930) 20,768 5,497 649 26,914 (6,675) (32,691)
Depreciation/amortization 1,584 68 12 10 90 14 1,688
Additions to non--current
assets (other than
financial instrument and
deferred tax assets) 1,564 5 7 14 26 5 1,595
========== ============ ===== ====== ======== =========== ========
June 30, 2018
--------------------------------------------------------------------------
Innovation
Platform Commercial Platform
---------- --------------------------------------
Prescription Consumer
Drug R&D Drugs Health
---------- ------------ --------------
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
---------- ------------ ------ ------ -------- ----------- -------
(in US$'000)
Total assets 95,668 133,674 65,482 14,882 214,038 268,237 577,943
Property, plant and
equipment 14,147 135 57 33 225 44 14,416
Leasehold land 1,264 - - - - - 1,264
Goodwill - 2,949 407 - 3,356 - 3,356
Other intangible asset - 403 - - 403 - 403
Investments in equity
investees 25,167 74,276 62,146 - 136,422 - 161,589
========== ============ ====== ====== ======== =========== =======
Six Months Ended June 30, 2017
--------------------------------------------------------------------------
Innovation
Platform Commercial Platform
---------- -------------------------------------
Prescription Consumer
Drug R&D Drugs Health
---------- ------------ -------------
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
---------- ------------ ----- ------ -------- ----------- --------
(in US$'000)
Revenue from external
customers 22,726 85,759 4,423 13,676 103,858 - 126,584
---------- ------------ ----- ------ -------- ----------- --------
Adjusted (LBIT)/EBIT (12,467) 1,523 99 1,519 3,141 (6,846) (16,172)
Interest income 19 17 5 3 25 207 251
Equity in earnings of
equity investees, net of
tax (2,363) 18,871 5,761 - 24,632 - 22,269
---------- ------------ ----- ------ -------- ----------- --------
Operating (loss)/profit (14,811) 20,411 5,865 1,522 27,798 (6,639) 6,348
Interest expense - - - 32 32 785 817
Income tax expense 14 441 (179) 243 505 1,327 1,846
Net (loss)/income
attributable to the
Company (14,790) 19,421 5,093 644 25,158 (8,686) 1,682
Depreciation/amortization 1,232 52 6 9 67 13 1,312
Additions to non--current
assets (other than
financial instrument and
deferred tax assets) 3,017 6 1 1 8 20 3,045
========== ============ ===== ====== ======== =========== ========
December 31, 2017
--------------------------------------------------------------------------
Innovation
Platform Commercial Platform
---------- --------------------------------------
Prescription Consumer
Drug R&D Drugs Health
---------- ------------ --------------
Hong
PRC PRC PRC Kong Subtotal Unallocated Total
---------- ------------ ------ ------ -------- ----------- -------
(in US$'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
========== ============ ====== ====== ======== =========== =======
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 nil
and US$708,000 for the six months ended June 30, 2018 and 2017
respectively. Sales between segments are carried out at mutually
agreed terms.
There was one customer who accounted for over 10% of the Group's
revenue for the six months ended June 30, 2018 and nil customers
for the six months ended June 30, 2017.
Unallocated expenses mainly represent corporate expenses which
include corporate employee benefit expenses and the relevant
share--based compensation expenses. Unallocated assets mainly
comprise cash and cash equivalents and short--term investments.
A reconciliation of Adjusted LBIT to net (loss)/income is as
follows:
Six Months Ended June
30,
------------------------
2018 2017
----------- -----------
(in US$'000)
Adjusted LBIT (52,840) (16,172)
Interest income 2,789 251
Equity in earnings of equity investees,
net of tax 23,050 22,269
Interest expense (444) (817)
Income tax expense (2,680) (1,846)
----------- -----------
Net (loss)/income (30,125) 3,685
=========== ===========
22. Note to Condensed Consolidated Statements of Cash Flows
Reconciliation of net (loss)/income for the period to net cash
(used in)/generated from operating activities:
Six Months Ended June 30,
----------------------------
2018 2017
------------- -------------
(in US$'000)
Net (loss)/income (30,125) 3,685
Adjustments to reconcile net (loss)/income to net cash used in/ generated from
operating activities
Depreciation and amortization 1,688 1,312
Share--based compensation expense-share options 2,791 664
Share--based compensation expense-LTIP 1,601 1,269
Equity in earnings of equity investees, net of tax (23,050) (22,269)
Dividends received from equity investees 23,526 42,617
Other adjustments 990 (772)
Changes in working capital
Accounts receivable-third parties (6,053) (2,699)
Accounts receivable-related parties 1,310 1,804
Other receivables, prepayments and deposits (3,266) (3,448)
Amounts due from related parties (194) 71
Inventories 2,041 2,148
Accounts payable (5,057) (2,875)
Other payables, accruals and advance receipts 10,215 (4,320)
Deferred revenue 1,490 (533)
Amounts due to related parties 3,666 2,844
Other changes in working capital (169) (76)
------------- -------------
Total changes in working capital 3,983 (7,084)
------------- -------------
Net cash (used in)/generated from operating activities (18,596) 19,422
============= =============
23. 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.
24. Subsequent Events
The Group evaluated subsequent events through July 27, 2018,
which is the date when the interim unaudited condensed consolidated
financial statements were issued.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR EAPXKAAAPEFF
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