HCM - Our Update On Hutchmed China's Progress

2023-05-07 08:46:26 ET

Summary

• Losses at this small pharmaceutical company keep piling up.
• The market potential for cancer drugs is still very good.
• There are uncertainties as to how long time it will take before the company will be profitable.

Investment thesis

In our last article in February on Hutchmed (China) Limited ( HCM ), we had some concerns that they might have to issue more shares to fund their losses in the development period of their new products.

To get a better understanding of HUTCHMED's business please read our previous article.

As they have delivered FY 2022 financial results, we will in this analysis investigate if there is any progress in reversing losses and becoming profitable in the near future.

2022 FY Financial Results

The revenue increased by 11% from FH to SH 2022 as it came in at $224.4 million.

However, their losses in SH of 2022 increased by 21.5% to -$197.9 million over that same period.

Four consecutive years of losses with no reversal of trend in sight does not sit well with us. It leaves us asking how long it will take before the company can be profitable.

Let us look at their balance sheet again.

Cash, Cash Equivalents, and Short-Term Investments were $631 million as of 31st December 2022, compared to $1,011.7 million as of the end of the previous year.

The net cash flows, excluding financing activities, in 2022 were -$297.9 million

Although their bank debt is much less than their cash on hand at just $18.1 million as of the end of 2022, it is more alarming that they have liabilities of $264.6 million in accruals and advance receipts. That is up from $233.6 million at the end of FH 2022. The accruals are mainly R&D, salaries, marketing, and administration costs.

We pointed out earlier that Hutchmed is authorized to issue 1.5 billion new shares.

In our last article, we did have some concerns that HutchMed could be issuing new shares which would be dilutive. Fortunately, in 2022 they did not issue any new shares.

Risks to the Thesis and Conclusion

The risks remain the same as we pointed out in February.

Earlier Hutchmed had faced difficulties in getting approvals from the U.S. FDA so they could gain access to the U.S. market for their product Surufatinib. The FDA wanted a multi-regional clinical trial that includes subjects more representative of the U.S. population and aligned with current U.S. medical practice.

It seems that they have deprioritized testing candidates for early-stage products outside of China at this moment in time and rather focused their internal resources on its later-stage drug candidates.

They do intend to continue to run early-phase development programs for selected drug candidates in the U.S., EU, and Japan where they believe they can differentiate from a global perspective.

Our thoughts are still that the market in China with its 1.4 billion population should be big enough to make money for Hutchmed if the products they want to sell are effective. Their pricing power there might be less attractive than it is in more developed markets.

We concluded in our last article that HUTCHMED could become a much bigger company than it is today. The problem is still that it is difficult to gauge the probability of that happening and how long time it may take.

The share price has not developed positively. It is down almost 11% since we covered HCM back in February.

We believe there is a good chance that this deterioration in price will continue for some time

However, we are not prepared to downgrade our stance to a Sell. As such we maintain our stance of a Hold.

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