As a "value stabilizer" product after sorafenib, fritinib has become a key driving force for hutchmed's (00013) stock price in recent years since taking over the "handover baton" of going global from sorafenib.

According to the observation of the wisdom and finance app, there have been three waves of upward trends in hutchmed's shares since 2023. And they corresponded to the $1.13 billion BD between hutchmed and takeda, fritinib's FDA approval, and the Q1 2024 sales data disclosure of the drug. Therefore, the key trend of fritinib gradually becomes the market investment and hutchmed's wind vane. However, sometimes the wind vane is not responsive enough.

On June 24th, hutchmed announced that fritinib has been approved by the European Commission for the treatment of previously treated metastatic colorectal cancer.

The successful launch in the European Union made fritinib not only the first innovative targeted therapy approved for the treatment of metastatic colorectal cancer in the European Union for over a decade, but also the first original innovative drug in Shanghai to enter the international markets of Europe and America.

However, this milestone event did not cause many ripples in the secondary market. On June 24th, after the opening of trading, hutchmed's Hong Kong stocks rose to 4.43% and quickly fell back and even turned down. The lowest price reached HKD 28.05, which surprised the market, because this is clearly not the performance that a core product should get after successfully entering the second global head market. Moreover, since reaching HKD 35.9 on May 14th, hutchmed's Hong Kong stocks have fallen by 20.5% in 40 days.

Does the milestone wind vane fail?

Back to the 2023 annual report performance, hutchmed's revenue was USD 838 million, an increase of 97% year-on-year; at the same time, the company's net income was USD 101 million, achieving a significant turnaround from the net loss of USD 361 million in 2022.

However, the one-time nature of hutchmed's turnaround in this case is obvious. Because the total sales revenue of the company's oncology products in 2023 was only USD 164 million, an increase of only 32% year-on-year, far lower than the total revenue growth of 97%. What mainly supported hutchmed's performance were its upfront and milestone income. For example, in the first half of 2023, nearly half of hutchmed's revenue came from upfront and milestone income, which was USD 259 million, and other business income reached USD 174 million. The above two business incomes accounted for 81.24% of hutchmed's proportion in the first half of the year. Hutchmed also acknowledged that the growth in 2023 performance was largely driven by milestone income.

From the perspective of product sales, in the first half of last year, hutchmed's domestic innovative drug business had begun to decline. Specifically, by product, in the first half of 2023, fritinib's sales revenue was USD 56.3 million, an increase of 12% year-on-year; sorafenib's revenue was USD 22.6 million, an increase of 66% year-on-year; savolitinib's revenue was USD 22 million, a decrease of 5%, mainly affected by the relatively late effect of the national medical insurance drug catalog and a reduction of about 38%.

It's not hard to see that compared with the same period in 2022, hutchmed's fritinib and savolitinib sales in the domestic market have slowed down. The overall income structure is still dragged down by "other businesses". In this context, the successful going global of fritinib has become one of hutchmed's few stock price catalysts.

On May 9th, takeda pharmaceutical disclosed its Q1 2024 financial report. The data showed that fritinib achieved JPY 10.1 billion in sales during the reporting period, corresponding to USD 50-55 million in sales, and its sales volume far exceeded market expectations. This was also an important reason why hutchmed's Hong Kong stock price rose by 7.27% on the same day and reached a high of HKD 35.9 within two trading days.

After the Q1 sales data disclosure of fritinib, there are still two key milestone events for the drug in 2024, namely EU approval in the first half of the year and Japanese approval in the second half of the year, and they are expected to replicate the over-expected sales increases in the United States.

According to the International Agency for Research on Cancer (IARC) / World Health Organization (WHO), colorectal cancer is the third most common cancer worldwide. In 2022, there were estimated to be more than 1.9 million new cases and over 900,000 deaths. In Europe, colorectal cancer is the second most common cancer, with about 538,000 new cases and 248,000 deaths in 2022. As the second global head market entered by fritinib, it is expected to replicate the over-expected sales increases in the United States under the layout of takeda pharmaceutical.

However, Hutchmed's stock price did not experience a rapid rise under the guidance of the announcement indicator. From the trend, the market sentiment is obviously becoming more conservative, which may be related to the upcoming semi-annual report of the company.

Will recent stock price fluctuations depend on the performance of China's innovative drugs?

Although Hutchmed's revenue has increased significantly in the first half of 2023, the income growth of its core anti-tumor products is average, and most of the revenue comes from licensing fees and other business income, which are all one-time revenues.

By 2024, for Hutchmed to continue to maintain profitability or even achieve sustained high revenue growth based on the same period of the previous year, it still depends on the performance of the company's core innovative drug products.

However, as mentioned above, Hutchmed's domestic innovative drug business has begun to decline in the first half of last year. For example, although colorectal cancer is a common cancer, the market competition is also very fierce. According to Drugsintel, there are 925 clinical trials for colorectal cancer in China, which shows how intense the market competition is.

In addition, Hutchmed's Fruquintinib is also used for third-line or later-line systemic treatment of colorectal cancer, greatly compressing the market space. In addition to colorectal cancer, Fruquintinib has also been developed for indications such as breast cancer, triple-negative breast cancer, solid tumors, gastric cancer, NSCLC, and is now in the application phase for second-line endometrial cancer and second-line gastric cancer treatment. Although the indications are numerous, they are mostly popular indications, and the market competition is fierce. And from the application progress, it is almost expected that the approval process of these indications will not be obtained until next year. Therefore, in the first half of this year, Fruquintinib's sales performance mainly depends on Hutchmed's channel layout. The possibility of a significant increase in domestic revenue of this drug before the approval of new indications is not high. From this perspective, Fruquintinib's overseas revenue sharing situation will be the biggest highlight of Hutchmed's interim report.

In addition to the weak growth of domestic innovative drugs, the heavy proportion of 'other businesses' in revenue also drags down the gross margin of Hutchmed, which is one of the problems the company is currently facing.

According to the data mentioned above, in the first half of 2023, if the down payments and milestone revenue are excluded, the tumor/immunity business revenue of Hutchmed is only USD 100 million, an increase of only 32% year-on-year. However, the revenue from other businesses during the same period was as high as USD 174 million, which is 72.84% higher than its innovative drug business revenue. It can be seen that other businesses are the core source of revenue for Hutchmed.

However, compared with the gross margin of over 70% for the tumor/immunity business in 2023, the gross margin of other businesses mainly consisting of sales and circulation is only 5.4%, which obviously drags down the company's current comprehensive gross margin. The current PS valuation of the company is only 3.8 times, which indirectly reflects the market's wait-and-see attitude towards its subsequent sustained growth. However, from the perspective of market rationality, the listing of Fruquintinib in Europe is indeed a major favorable factor for Hutchmed. However, when this favorable factor will be realized may still depend on the subsequent performance of the company's interim report.