Hutchison China MediTech: Innovation to drive future growth; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Health Care Pharmaceuticals / Biotechnology Company Hutchison China MediTech Date 3 June 2016 Initiation of Coverage Innovation to drive future growth; initiating with Buy Reuters Bloomberg Exchange Ticker HCM.OQ HCM US NSM HCM Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (USDm) 87.3 178.2 202.0 265.0 331.6 Reported NPAT (USDm) -32.8 -35.0 10.8 -14.8 8.6 DB EPS FD(USD) -0.33 -0.32 -0.17 -0.12 0.07 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close An innovative biotech firm focusing on China and ex-China opportunities ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 2 Jun 2016 (USD) 13.58 Price target - 12mth (USD) 15.00 52-week range (USD) 13.80 - 12.32 S & P 500 – Jack Hu, Ph.D Research Analyst (+852 ) 2203 6208 jack.hu@db.com Linc Yiu Research Associate (+852 ) 2203 6248 linc.yiu@db.com Bo Yu Research Associate (+852 ) 2203 5928 bo.yu@db.com Price/price relative 12.012.412.813.213.614.03/16Hutchison China MediS & P 500 (Rebased) Performance (%) 1m 3m 12m Absolute 4.9 – – S & P 500 1.1 6.0 -0.2 Source: Deutsche Bank As an innovative biotech company, HCM differentiates itself with a rich pipeline of tyrosine kinase inhibitors (TKIs) targeting various cancer indications and a few autoimmune diseases. HCM has two compounds in phase 3 and 5 drugs at various clinical stages, while it partners with Eli Lilly and AstraZeneca on its two most advanced compounds. Additionally, HCM has a commercial platform that focuses on traditional Chinese medicine (TCM) and cardiovascular-based Western medicine. We initiate coverage with a Buy rating and a target price of USD15.0. High probability of success for fruquintinib third-line CRC study We expect positive results for an ongoing phase 3 study of fruquintinib in treating third-line colorectal cancer (CRC) patients, primarily due to the proven efficacy of VEGF inhibitors in treating CRC patients. In May 2016, the study completed the enrollment of 416 patients, who are randomized into two treatment groups: fruquintinib/chemo vs. chemo alone. The phase 3 study design duplicates the phase 2 trial, which suggested meaningful clinical benefits. Management guided that the study will be unblinded in YE16 or early 2017. We expect product approval as early as 2H18, and expanded off-label usage on product launch. We estimate a peak sales opportunity of RMB2.5bn. Savolitinib tested in MET-high patients Despite numerous high-profile failures of c-Met inhibitor studies, HCM is advancing its c-Met inhibitor, savolitinib, to a phase 2 study in a niche indication, papillary renal cancer carcinoma (PRCC). The company believes savolitinib differentiates itself from previous c-Met inhibitors in reduced toxicity. In our view, none of the past failed studies was conducted in a biomarker-driven study or with a MET-high patient population. Thus, this compound might have a chance in selective indications where c-Met is active. HCM has indicated that it will announce data from the ongoing phase 2 study at the European Society for Medical Oncology (ESMO) in September. Initiating coverage with Buy and a target price of USD15.0; risks Our target price is based on sum-of-the-parts. For the innovation platform, we used a probability adjusted DCF approach to savolitinib, fruquintinib, sulfatinib, HMPL-523, and epitinib. For the commercial platform, we used a PE-multiple based approach with a target PE of 21x on 2016E EPS. We believe 21x is justified as its peers are trading at 17x with 14.3% growth in 2017E (vs. 18% for HCM). Key downside risks include pipeline failure and delays in clinical trials. 3 June 2016 Pharmaceuticals / Biotechnology Hutchison China MediTech Page 2 Deutsche Bank AG/Hong Kong Model updated:31 May 2016 Running the numbers Asia China Pharmaceuticals / Biotechnology Hutchison China MediTech Reuters: HCM.OQ Bloomberg: HCM US Buy Price (2 Jun 16) USD 13.58 Target Price USD 15.00 52 Week range USD 12.32 - 1