HCM - HUTCHMED Deserves An Upgrade After U.S. FDA Approval Of Cancer Drug

2023-12-01 10:35:40 ET

Summary

• HUTCHMED (China)'s partner, Takeda, received FDA approval for the sale of FRUZAQLA in the US, leading to a milestone payment of $35 million for HUTCHMED (China).
• The approval opens up the US market for HUTCHMED (China), which was previously focused on selling its products in China.
• The price of FRUZAQLA in the US is significantly higher than in China, potentially leading to better margins for HutchMed China.

Investment thesis

In our previous analysis of the China-based biopharmaceutical company HUTCHMED (China) (HCM), we continued to take a stance of Hold as we preferred to get more clarity around the margins they can achieve on their medicine for the treatment of cancer and immunological diseases.

By reading our last article, readers will get a grasp of the product, its potential, and the collaboration with the Japanese pharmaceutical company Takeda (TAK) which has the exclusive worldwide license to further develop, commercialize, and manufacture Fruquintinib outside of mainland China, Hong Kong, and Macau. This is a drug that was developed with the goal of treating metastatic colorectal cancer.

A big breakthrough came on the 9th of November when HCM's partner TAK received approval from the U.S. Federal Drug Administration for sale in the U.S. of FRUZAQLA, which is the name it will be marketed under.

It will not take long before HCM starts to benefit from this breakthrough, as TAK will have to pay HCM US$35 million as a milestone payment once FDA approves FRUZAQLA.

Bigger market

Up to this announcement, HCM has been selling the bulk of its products in China for the last five years. Earlier we argued that the sheer size of that market would be big enough for any company, providing profits per unit is acceptable.

So far, the U.S. market was not open to them. That is why this approval on the 9th of November was such an important step.

According to the announcement by HCM on the 9th of November 2023:

Colorectal cancer, or CRC, is a cancer that starts in either the colon or rectum. According to the International Agency for Research on Cancer, CRC is the third most prevalent cancer worldwide, associated with more than 935,000 deaths in 2020. In the U.S., it is estimated that 153,000 patients will be diagnosed with CRC and 53,000 deaths from the disease will occur in 2023. In Europe, CRC was the second most common cancer in 2020, with approximately 520,000 new cases and 245,000 deaths. In Japan, CRC was the most common cancer, with an estimated 148,000 new cases and 60,000 deaths in 2020".

After this approval in the U.S., one would hope that an approval by the European Medicines Agency will follow shortly.

Better margins

As we described in our previous article, the price of medicine is highly regulated in China, as they use a central organization to negotiate and buy all medicine for hospitals and pharmacies.

Good for patients, and society, but not so good for pharmaceutical companies. Anyone, who is interested in this space, knows how costly it is to do research and development before a product can get the necessary approvals for manufacturing and sales.

Even for HCM, since its inception in 2000, it has been bleeding cash with losses every year. If such companies are not allowed to make a decent profit once they finally get products to the market, it will discourage investments in the sector and, in the end, not benefit society either.

We knew that anything to do with healthcare in the U.S. was more expensive than most countries. However, we did not know that medicine there was 25 to 30 times more expensive than what it is in China.

According to an article in SCMP on the 29th of November, one box of 21 pills each containing 5 mg of FRUZAQLA is sold in China for around US$1,050, according to Chinese medical news site Medical Valley. According to a TAK prescribing document, the US wholesale price will be US$25,200 for the same amount of medication. That is 24 times more expensive than in China.

Conclusion

Since the announcement of the U.S. FDA Approval of FRUZAQLA, the share price has not moved much.

The share price is only up $1.19 since the announcement.

Su Weiguo, HCM's CEO and chief scientific officer, recently stated that he believes that 2024 is going to be the last year they will lose money .

It will certainly be a game changer if they turn profitable in 2025 and onwards.

Patience is still required, but we believe this new development is big enough to change our stance from a Hold to a Buy.

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