Hutchmed scores U.S. success with cancer drug, but profits still dip

Key Takeaways:

• Hutchmed’s U.S. sales jumped nearly 53% in the second quarter from the previous three months, boosted by uptake of the cancer drug Fruzaqla
• The company plans to focus on innovative drugs and said it might give up its traditional Chinese medicine business

By Molly Wen

Among the many Chinese drug companies to venture into overseas markets, Hong Kong’s Hutchmed (China) Ltd. HCM stands out as a success story. Its main anti-cancer medicine has been cleared for sale in the United States and Europe, and the company boasts a track record of licensing deals with multinationals.

The flagship cancer drug, sold under the brand name Fruzaqla, put in a strong U.S. sales performance  in the first half of the year, according to the company’s latest earnings report released on July 31. However, Hutchmed’s net profits fell nearly 85% to $25.8 million, skewed by a high base effect after a lucrative licensing rights deal was struck in the same period a year earlier.

Last year’s down payment of $259 million from Japan’s Takeda Pharmaceutical (4502.JP) for exclusive rights to market Fruzaqla outside of China pushed Hutchmed into the black in the first half of 2023, when the company logged profits of $169 million. Without the partnership revenue, Hutchmed would have posted a loss this time last year.

Fruzaqla sales in the U.S. market have started to flow through to the bottom line after the drug launched there in November last year, helping the company stay in profit, though at a reduced level, in the latest half year. Hutchmed’s overall revenues amounted to $310 million in the first half of the year, with $169 million of that coming from the oncology business. Within that total, product sales rose 64% to $128 million. Meanwhile, income from the Takeda partnership fell 87% to $33.80 million and revenues from serving third-party pharmaceutical firms through Hutchmed’s Chinese distribution and sales networks fell 18% to $137 million, hit by lower Covid-related drug sales.

Fruzaqla, a treatment for colorectal cancer, is one of three Hutchmed oncology products on the market. Overseas sales of the drug came in at $131 million in the half year, compared to just $61 million in China, where growth has hit a plateau six years after the drug was approved for domestic use. Chinese sales growth for the drug slowed to just 8% in the first half, a far cry from the fast pace of 111% in 2021.

The other two products are only available in the Chinese market for now. Surufatinib, known as Sulanda in China, is a treatment for neuroendocrine tumors that generated $25.40 million in the first half, 12% more than in the corresponding period of last year. U.S. regulators granted the drug orphan status in 2019, setting it on a path for a U.S. launch ahead of Fruzaqla. But the U.S. drugs watchdog ultimately rejected a marketing application in 2022, citing a lack of data from studies on U.S. patients, derailing plans for overseas sales.

Sales of the third drug, savolitinib, rose 18% to $25.90 million in the half year. Known by the name Orpathys in China, the drug targets lung and renal cancer and is undergoing trials for use overseas.

Despite the growth in underlying drug sales, investors gave the results a lukewarm reception. Hutchmed shares suffered modest losses in the two days after the earnings came out, possibly because the market had already factored in a U.S. sales bounce for the core product. The company’s Japanese drugs partner had already included data on Fruzaqla sales in an earnings release on July 31.

Sales went from 2.2 billion yen ($14.90 million) in the third quarter of 2023 to 7.8 billion yen in the fourth quarter. On a sequential basis, the figure jumped nearly 53% to 11.9 billion yen in the three months to the end of June, Takeda’s first fiscal quarter. As the drug developer, Hutchmed enjoyed a share price boost when those figures came out, rising as much as 5.8% during the session. But the Chinese sales figures, with only modest growth, could not ignite another rally.

Overseas push

Hutchmed’s profits for the period were achieved with the help of rigorous cost controls, as it cut back on operating expenses. The cost of revenue fell 14% to $180 million while sales & administrative expenses sank 15% to $57.80 million. R&D expenses were slashed by 34% to $95.30 million, mainly via a rethink of priorities outside of China.  Clinical and regulatory expenses in the U.S. and Europe fell from $55.60 million in the first half of last year to $14.90 million in the first six months of 2024. After its belt-tightening, company is sitting on an ample pile of around $800 million in cash and cash equivalents.

The company said it would focus on innovative drugs going forward and was considering various options, including divestment, for a joint venture specializing in traditional Chinese medicine, Shanghai Hutchison Pharmaceuticals.

Hutchmed’s three oncology drugs are all covered by China’s state healthcare insurance scheme. The program provides an important sales channel, but it also means lower prices and thinner profits. For example, a Fruzaqla pack of 21 capsules each containing 5 milligrams of the drug is priced at $25,200 in the United States, more than 20 times the price in China, at around 7,541 yuan. The drug gained European approval in June for use against metastatic colorectal cancer, which could widen its access to overseas markets.

The company predicted its oncology drugs could deliver as much as $300 million to $400 million in revenue this year. Analysts from the brokerage SPDB International said Fruzaqla might be able to beat a 2025 profit timeline in light of the strong overseas sales growth, tight cost controls and the prospect of higher milestone revenue in the second half.

Hutchmed’s price-to-sales (P/S) ratio stands at around 5.6 times, against about 7.3 times for Shanghai Junshi Biosciences (1877.HK), another drug company expanding into the U.S. market. Hutchmed’s valuation sits in the middle to lower end of the industry range, but growing sales of its key cancer drug could be a prescription for stable revenue growth in the longer term.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.