Earnings Call Transcript - HCM Q4 2022

Mark Lee, SVP Corporate Finance and Development

Good day and thank you for standing by. Welcome to HUTCHMED 2022 Full Year Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation there'll be question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Mark Lee, SVP Corporate Finance and Development of HUTCHMED. Please go ahead, sir.

Weiguo Su, CEO and Chief Scientific Officer

Okay, thank you very much, Mark. Good morning. Good afternoon. Good evening, everyone. Welcome again to our HUTCHMED 2022 full year results conference call. A few hours ago, we announced our 2022 full year results. Mark, can you show the next slide please? Thank you. During 2022, HUTCHMED made significant strategic changes to allow us to better deal with adverse external conditions and to focus on getting to profitability sooner. On the pipeline, we made significant progress, including the positive Phase 2 global registration study FRESCO-2 for fruquintinib, and based on strong data, NDA submissions are planned for 2023 starting from the U.S., followed by EU and Japan. In parallel, our second wave of products, including Sovleplenib, Amdizalisib, and Tazemetostat in registration trials in China, also made significant progress. China NDA submissions are planned for 2023 and 2024. Finally, on the China commercial front, despite all the challenges associated with COVID and unfavorable exchange rates, our China commercial team delivered strong numbers for our three approved products. Now I'll pass it to Mr. Chan Hong, Chief Commercial Officer of China Commercial, to provide an update on the China commercial operation. Next slide, Mark, for Chan Hong.

Hong Chen, Chief Commercial Officer

Thank you, Weiguo. Hello, everyone. I'm glad to present the 2022 China Commercial achievements of our three novel products. Just as Weiguo said, 2022 was the most difficult year during the last three years due to the impacts of COVID. Furthermore, the foreign exchange rate was unfavorable. Even though our three marketed products showed continued growth, we achieved significant sales growth. Firstly, I would like to update you on HUTCHMED's commercial infrastructure and capabilities. From this slide, we can see there are more than 900 dedicated and experienced commercial staff covering more than 33,000 oncologist specialists and 3,000 care hospitals. With this, the hospital pharmacies increased 100% to more than 800 in 2022. In order to mitigate the COVID challenges, numerous effective academic events were held online to cover more expertise. Annually, we aim to continue growing. The sales revenue was up to $93.5 million in marketing sales, reflecting a 32% growth. About 32,000 new patients were treated with ELUNATE, and we can see ELUNATE continues to lead in the CRC market with a 44% patient share according to the latest study. 2022 was the first year for SULANDA’s inclusion in the NRDL, and despite a 52% price reduction, SULANDA still achieved 178% revenue growth, treating around 17,000 new patients, with recommendations from important studies such as FRESCO. The patient share revenue has placed it as the second in the market since Q3 last year, even surpassing later launches. ORPATHYS, as the first-in-class MET inhibitor in China, achieved a 160% growth in its full commercial year, with in-market sales valued at up to $41 million. It is recommended by five important guidelines, including NHC, and we anticipate its relaunch on March 1, with modest price reductions. Overall, despite the COVID challenges, we continue to make good progress for all three marketed products. Along with the return to normalcy, we are confident about stronger momentum in 2023.

Johnny Cheng, Chief Financial Officer

Thank you, Chan Hong. On slide number nine, as you can see, our total revenue in the oncology business reached $164 million, up 37% from the prior year, in line with our guidance for 2022. For 2023, our revenue guidance for the oncology business, subject to the closing of the Takeda deal, is projected at $450 million to $550 million. This includes partial recognition of the $400 million upfront income from Takeda, and we continue to target high double-digit growth in our product sales. Moving on to slide 10, we have over $613 million in cash and short-term investments, along with $140 million of unutilized banking facilities. Additionally, we expect to receive $400 million of upfront income from Takeda at closing. Overall, we have very strong cash resources. On slide 11, a summary of our operating performance shows a consolidated revenue increase of 20% to $426 million. Our oncology revenue rose 37% to $164 million, while our R&D investment increased by 29% to $387 million, primarily focused on over 15 registration enabling trials. Our joint venture net income contribution grew by 11% to $50 million, although the net loss of the company increased to $361 million, partly due to a one-time gain from the previous year's divestment.

Karen Atkin, Chief Operating Officer

Thank you, Johnny. Let's go to Slide 12, please. Our partnership strategy focuses on three main activities. Firstly, we maintain a very successful longstanding partnership with other territories worldwide. For fruquintinib, we have already launched in China in partnership with Eli Lilly, and we recently decided to revise our commercial partnership strategy to plan a launch with a single global commercial partner outside China. We moved quickly to announce the licensing agreement in January with Takeda for the global development, manufacturing, and commercialization of fruquintinib in all territories apart from China, Hong Kong, and Macau, where we will lead commercialization. The inclusion of the U.S. alongside other territories in our partnership scope has attracted significant interest. We are delighted to have selected Takeda as a strong partner. Moving forward, we will also seek partners for some of our earlier stage assets, as you can see here for all territories outside of China. Regarding China partnerships, we are also actively seeking additional late-stage products to utilize our 100-plus oncology commercial team. Can we go to Slide 13, please? Our partnership with AstraZeneca for Sovleplenib was announced back in 2011 at a very early stage of development and has grown significantly since then, with seven registration studies ongoing. AstraZeneca is leading the clinical development outside of China. The nearest NDA submission opportunity is in late 2024 in the U.S., subject to positive readouts from the SAVANNAH study in non-small cell lung cancer and alignment with the FDA on possible accelerated approval. Our newest global partnership with Takeda, announced on January 23 for fruquintinib, is also progressing very well. We chose Takeda for their strong oncology commercial capabilities, especially in the U.S., but also in Japan and Europe. They demonstrated how they would leverage their recent U.S. product launch experiences, together with their knowledge of the CRC market in Japan, to maximize the potential of fruquintinib for patients with refractory colorectal cancer and develop it further beyond CRC. Takeda is eager for a major oncology product like fruquintinib, and they impressed us with their launch plans. This is a high-profile landmark deal for us, and subject to regulatory clearances, we expect to receive an upfront payment of $400 million, with the potential to earn up to an additional $730 million in development and sales-related milestones. We have already started the rolling U.S. FDA submission and expect to complete it in a few months.

Mike Shi, Chief Medical Officer and Head of R&D

Thank you, Karen. Slide 14, please. This slide illustrates HUTCHMED's extensive pipeline advancing in the clinic. These compounds cover a wide range of hematology oncology indications. The first three products mentioned by Karen are on the market, two of which are within global partnership. Our next wave of compounds, including Amdizalisib and Sovleplenib, both have CD breakthroughs designation and are entering the final stages of clinical enrollment. The FGFR inhibitor, our IDH1/2 inhibitor, our third-generation BTK inhibitor, and the CSF-1R inhibitor are all progressing rapidly, each potentially entering pivotal trial stages this year. Colorectal cancer is the third most common cancer worldwide, responsible for over 900,000 deaths annually, and the 35-year survival rate remains poor. Many treatments for late-stage metastatic CRC lack options, with bevacizumab having served as the approved third-line therapy for almost a decade. Our first global MRCP FRESCO-2 trial presented at ASCO last year demonstrated a statistically significant and clinically meaningful increase in the primary endpoint of progression-free survival compared to placebo in late-line CRC patients. Fruquintinib stands out due to its efficacy and well-characterized safety profile. We've started enrolling for the NDA submission in the U.S., with plans to follow up with submissions to the EU and Japan. In November 2022, we announced successful results from a fruquintinib Phase 3 trial in second-line gastric cancer. Gastric cancer is the fifth most common diagnosis worldwide, with over a million new cases annually. China alone accounts for about 44% of global cases. This trial met its primary endpoints and demonstrated a significant PFS improvement. We are preparing to file a supplementary NDA with NMPA in the first half of this year. Our MET inhibitor Sovleplenib's registration trials are ongoing, led by AstraZeneca globally and four trials led by HUTCHMED. We are excited about our favorable Phase 1/2 results for Sovleplenib in ITP and have completed enrollment for the Phase 3 registration trial in ESLIM-01, preparing for the potential data readout and filing in China later this year. Amdizalisib showcases a promising PI3K Delta inhibitor with two ongoing single-arm Phase 2 registration studies in China, demonstrating efficacy with a favored safety profile relative to other compounds. We are looking forward to NDA filings for this trial later this year.

Weiguo Su, CEO and Chief Scientific Officer

Okay, thanks Mike. To sum it up, HUTCHMED took the necessary steps in 2020 to focus on getting to profitability and becoming self-sustaining. We have a lot to execute and deliver on our pipeline. We believe the launches of new products will continue to enhance our growth in the China commercial sector. We anticipate starting to receive royalties from our ex-China sales of our partner products, Sovleplenib and fruquintinib. We believe these changes will help us navigate tough market conditions and also ensure we emerge a stronger company. Thank you for your attention. The management team is available to take questions.

Kelly Shi, Analyst

Thank you for taking my questions and congratulations on the progress here. Regarding HUTCHMED's commercial infrastructure for the oncology franchise, have you achieved optimal targets in terms of the number of covered hospitals and healthcare providers? What areas will you focus on in 2023 to grow sales further? Also, could you discuss when you expect a company to become profitable?

Weiguo Su, CEO and Chief Scientific Officer

Thanks, Kelly, for the questions. Regarding our commercial structure, we currently have about 900 FTEs supporting fruquintinib and Surufatinib, and we expect higher coverage as we add more indications for these two products. For our expansion, we plan to establish a specialty team to support our next wave of compounds in hematologic indications. Regarding our profitability timeline, we are targeting 2025. We need to continue growing our China commercial to increase revenues, but also, the timing of royalties from ex-China products, like Sovleplenib and fruquintinib, will be critical. We believe they will start contributing in late 2024 and certainly in 2025.

Hong Chen, Chief Commercial Officer

Thank you, Weiguo. Our commercial infrastructure is optimal for the current product launches and indications. We will keep improving efficiency in our team and seizing market opportunities as we prepare for more products to come.

Louise Chen, Analyst

Thank you, and congratulations on all the progress this quarter. I wanted to follow up on Kelly's question about profitability. Are you expecting profitability for the full year 2025? Also, can you outline the most important readouts or approvals you're looking forward to this year? Lastly, how do you anticipate operating expenses will trend year over year?

Johnny Cheng, Chief Financial Officer

Yes, from our perspective, 2025 remains our consistent target for breakeven profitability, communicated over the past few years. As for OpEx in 2023, we anticipate operating expenses will remain largely consistent with 2022, as we continue to grow our China commercial. However, we expect synergies and reduced costs in the U.S. due to the Takeda partnership.

Alec Stranahan, Analyst

Hey, thanks for taking our questions. First, regarding the rolling submission for fruquintinib, can you remind us whether you'll handle the submission entirely or if it's a combination with Takeda? Additionally, for amdizalisib's follicular lymphoma readout this year, is the timeline due to enrollment pace or trial prioritization? Also, regarding portfolio prioritization, can you elaborate on your process?

Mike Shi, Chief Medical Officer and Head of R&D

For fruquintinib's submission, we have started rolling submissions due to having bridge fast track designations. The Takeda deal hasn't been finalized, so we're pushing forward independently. As for amdizalisib's readout, we just completed Phase 2 follicular lymphoma enrollment and anticipate reporting later this year. We prioritize development for portfolio growth towards profitability by 2025.

Weiguo Su, CEO and Chief Scientific Officer

To clarify on the filing strategy, we will prioritize filing for follicular lymphoma separately from Marginal Zone Lymphoma to ensure we capitalize on each opportunity distinctly. We plan for an R&D day later this year to provide more context on our prioritization.

Yang Huang, Analyst

Thanks. Management guided for this year’s oncology revenue at $450 to $550 million, partially influenced by the Takeda upfront payment. Can you elaborate on how you're recognizing this partial payment? Also, how does the commercial prospect for gastric cancer compare with CRC?

Johnny Cheng, Chief Financial Officer

Regarding the $400 million upfront income, accounting recognition is based on performance obligations under our licensing agreement. Despite receiving the payment in full, we cannot recognize it entirely this year due to obligations extending into 2024. For product sales, we anticipate high double-digit growth which we think will align with our overall oncology revenue targets.

Mike Shi, Chief Medical Officer and Head of R&D

For gastric cancer, it is a substantial indication, especially in Asia where treatments are highly integrated. The positive meeting PFS as our primary endpoint aligns with traditional practice in Asia, and we believe we will successfully submit for this filing based on our trial data.

Weiguo Su, CEO and Chief Scientific Officer

In conclusion, we believe the targeting of second-line gastric cancer patients offers a larger market opportunity compared to CRC. We are focused on preparedness ahead of our submission timeline.

Mark Lee, SVP Corporate Finance and Development

I would like to thank all the participants for attending this call. Weiguo, would you like to make any closing remarks?

Weiguo Su, CEO and Chief Scientific Officer

Thank you for attending. In 2022, we underwent significant strategic changes, positioning ourselves for execution towards profitability. We anticipate numerous launches and a strengthened commercial team to drive our growth in the coming years. We have emerged stronger from a challenging year, and I appreciate your attention.

Operator, Operator

Thank you. This concludes today's conference call. You may now disconnect.