Member Info for Warwis16

The commercial division largely underpins the valuation of the business as a whole and ads a high minimum value to this company if the innovation fails. I would have thought this was rare in a relatively new drug company where the base is usually nil if the drugs fail. Mark Slater effectively described the company as “substantially de-risked”. He also discussed what he described as “the blue sky potential of this company being thrown in for very little cost.” Obviously it is very difficult to arrive at valuations on new drugs sales and profitability. Thanks Davey for your brave stab at a valuation. I have not been brave enough to perform such an exercise. Is your valuation of $1.5bn potential sales just for Savolitinib, Fruquintinib & Sulfatinib? I assume it incorporates the sharing arrangements for Savolitinib and Fruquintinib. I would be interested to hear. Just randomly pulling off the top nine holdings in the Biotech Growth Trust reveals all what I think are all American companies – with the following valuations – Amgen $121bn, Biogen $55bn, Celgene $81bn, Gilead $108bn, Alexion $81bn, Incyte $16bn, Vertex $22bn, Illumina $21bn,Regeneron $40bn. I am sure I could find another twenty American companies with similar valuations. As far as I am aware Hutchinson China is China’s most advanced drug company and has a valuation of $1.5bn. It gives some idea of the journey to travel and the potential out there. As China continues its policy of encouraging the new industries rather than the old heavy industries, they will give every encouragement and help they can to their nascent drug industry.

Thanks Davey for posting that excellent link. It made really interesting reading and nice to confirm an update that drug progress seems well on target. Looking just at the equity earning (HCM’s share of post tax income from its joint ventures from selling prescription drugs and over counter medicines) this income has gone from $10.9m in 2013 to $15.1m in 2014 to $22.6m in 2015 (growth rate of nearly 45%p.a.). If we extrapolate forward (always dangerous) then we could expect post tax earnings of just over $30m in 2016 from drug / over the counter sales, and if we then apply a PE ratio of 35 (very reasonable given the growth rate) then we have a valuation of £1bn from selling (exc research). I find it hard to believe that all its main research based assets (and cash) are only worth $0.5bn. If we find in 2017 all the research proves one massive folly (certainly not looking that way), then extrapolating forward to 2017 we could expect profits from sales of drugs and prescriptions to be $45m and using a PE ratio of 35 then it would not be impossible to expect the valuation to very quickly recover to its existing valuation. I remain invested.

I have always enjoyed reading your intelligent posts over the years Davey. Had I been able to attend the AGM I would also have asked exactly the same question about % of royalties on drug sales from shared drugs. HCM does still seem to be struggling to make real headway in the US. I do wonder whether this is in part to do with a dislike of the 60% controlling interest by Hutchinson Whampoa. This to me is an advantage. I have been in a couple of AIM companies where the Directors have regularly voted themselves obscene amounts of unearned share options at the shareholders expense. (Some of these Directors have been high profile Directors who are in the public eye). This is all too easy to do in AIM companies. I have also heard Mark Salter in a 2014 meeting state that he was happy with this 60% Hutchinson Whampoa control. He stated words to the effect that the Hutchinson group was always spinning off businesses for sale and as a consequence was paranoid about reputation. In these circumstances I see their control as a clear advantage. Others may see it as preventing an advantageous takeover taking place. Circumstances can always change but at present I see this as a company for the long haul.

I visited the QE2 Centre in London to listen to Mark Slater on April 30 2016. I had originally bought a relatively large holding Hutchinson China at £6.11 over 2 years ago on a buy recommendation from him. He has held HCM shares as a major holding in his funds for many years. I was really interested to hear his current views on the company. He discussed Hutchinson China first in the section where he discussed shares he had been buying recently. My take on his presentation was as follows: HCM did dual listing on Nasdaq – probably intend full listing. Did it at a time when little appetite for health care. Did it at a large discount. Irritating. Indigestion will pass. It is a profitable health care business with a tailwind. It has cash and surplus property still to sell. Drug pipeline extremely underpriced. Major news expected at end of year / early 2017. It is substantially de-risked. Very interesting.