HUTCHMED (China) Limited (HCM) Q2 2020 Earnings Report, Transcript and Summary

Okay. This is Christian Hogg, CEO of Chi-Med. Welcome to the Interim 2020 First Half Results. On the line today, we have myself. I have Dr. Wei-guo Su, our Chief Scientific Officer, and I have Johnny Cheng, our Chief Financial Officer. So, if we go straight to the presentation. What I'm going to do is spend maybe 25, 30 minutes on the presentation and then leave half an hour for questions at the end. So, starting on page 3. The overall strategy of the business remains very well established, but I think page 3 sums it up very clearly, even more so than perhaps in the last couple of years. We are obviously trying to build a global science-focused biopharmaceutical company from our established base in China. But, really, the two key focus areas are realizing the global potential of our novel oncology assets, so building out our global team to maximize the potential of those programs. And then, the second area is really building out our fully integrated oncology business in China. So, as we go through the presentation, you'll see how we are working on both of these areas. Really, we're one of very few companies in China aspiring to bring their homegrown innovations from China to the global market. So, I think that sets us apart very significantly from many of the biotechs in China today. If you go to page 4. High level look at the strengths of Chi-Med that have been built up over the last 20 years. They are all self-explanatory. But I think in the top left-hand corner, there are world-class discovery development organization led by Wei-guo. It's now up to over 550 full-time people in our scientific team in Shanghai, Suzhou. And we have, as you see on the top right-hand side there, been able over the last 15-or-so years to create a highly differentiated portfolio of global assets, nine of which are in clinical trials at the moment. We just started with our IDH 1/2 dual inhibitor just last week in Phase I in China. And our three lead assets, as most of you know, are either approved or at NDA filing. I think the bottom right-hand corner, and we'll talk about it later with regards to the announcement we made yesterday around our increased role in the commercialization of Elunate in China, but our commercial platform in China is extremely strong. Very deep and great know-how. You'll see we've now built out our oncology team to over 320 people in readiness for both taking over that commercial activity on Elunate as well as launching surufatinib late this year. And then, in the bottom left-hand corner, you can see the team, and we'll talk about the team a bit later. But the median tenure with Chi-Med of the 14-person senior management team is 11 years. It's a very stable, large team. It's expanding quickly as we grow, but a very powerful group of people that are very committed to developing this business. And in terms of governance, we've been listed for 14 years and we have a very strong track record of corporate governance. So, moving to page 5. The pipeline chart, starting with savolitinib. So, savolitinib, it's a very important next sort of 6 to 12 months for savolitinib. You can see all those red boxes in proof-of-concept and registration intent studies. The red boxes are all global studies and you can see we're very active in papillary renal cell carcinoma and in non-small cell lung cancer. And I'll obviously talk about these programs later in this presentation. But probably the biggest step that's been taken recently on savolitinib is the submission of the NDA in China for MET Exon 14 skipping non-small cell lung cancer. That was filed in May. We just received priority review status a week or so ago – not even a week or so ago, actually a few days ago. And we're very excited to have that first NDA submitted, accepted and now being processed. And we hope to see savolitinib become the first selective c-MET inhibitor approved in China sometime early next year, hopefully. Moving down, surufatinib. It's been a very active past six months on surufatinib. You see the red box with the yellow arrow there, pNET and non-pNET. That's essentially, as we've announced recently, that the US FDA has aligned and confirmed with Chi-Med that they will accept the clinical data that we have on hand at the moment to support a US NDA. So, our two big China Phase IIIs as well as our bridging study in the United States, and that data set is compelling and is, from a clinical standpoint, sufficient to support the NDA. So, we will be targeting to submit the NDA for surufatinib in the United States late this year. You can see the blue boxes underneath that. So, non-pancreatic NET, we continue to work on the NDA inspection process in China. For non-pancreatic NET, we continue to target that to be completed before the end of the year, so that we can launch surufatinib in China before the end of the year. And the second blue box there, pancreatic NET, SANET-p, we'll present the clinical data from that pancreatic NET Phase III study at ESMO in a month or two and the NDA has been submitted. It's in the process of being accepted. Usually, it takes about a month or two from submission to acceptance. So, that process is ongoing, but that will be the second NDA in China for surufatinib. Moving down to Elunate. Obviously, the big news yesterday was the agreement that we reached with Eli Lilly for Chi-Med and our commercial organization to take on all medical detailing, promotion, regional and local marketing activities in China, starting on October 1. We are in now a two-month transition period where the Chi-Med commercial team is working hand-in-hand with the Lilly commercial team and essentially transitioning those responsibilities over to Chi-Med. So, we're extremely excited about this. The number of reps that will be out detailing fruquintinib is going to multiply pretty significantly and we feel strongly we're going to see some great results there. That said, we'll continue to work with Lilly closely. They've been a good partner, and we actually have a continued collaboration closely on national marketing, and Lilly retains the principal role and is able to as a result consolidate sales of fruquintinib, et cetera. So, continued relationship with Lilly in managing fruquintinib and getting the most out of that product in China by using the resources of both parties as best we can. The gastric cancer study, the FRUTIGA study, we mentioned that that had gone through a second interim analysis recently, and now we look towards the end of the year or early next year to complete enrollment. Before I move on from fruquintinib, I should mention FRESCO-2, which is the third-line colorectal cancer study. It's a red box, so it's a global study. That study has started already. We are in patient screening. We've opened sites all over the world. And we expect our first patient to be dosed very soon. It's a very large study covering over 130 clinical sites, well over 500 patients. And we expect to enroll it quite rapidly. So, we expect to enroll that FRESCO-2 study before the end of next year. Last thing I'll say about this chart on page 5 is the PD-1 combo activities that we have going on in partnership with Junshi with their PD-1 Tuoyi. We have the combination with Tyvyt, Innovent's PD-1, and we have the combination now that we will start working on with BeiGene and tislelizumab. So, the Tuoyi-surufatinib combo, I'll talk a bit about that later, but that's moving quite nicely and we're now in Phase II, looking at a number of solid tumor indications, eight to be precise. And Tyvyt-fruquintinib combo is now moving into Phase II, looking at five solid tumor settings. So, the life cycle indications that follow the first approvals will be significant and there will be a lot of immunotherapy combos with our VGFR inhibitors. Moving to page 6. I'll just talk briefly. 523, our Syk inhibitor, and 689, our PI3K-delta inhibitor, are moving nicely. You can see that we're indicating there that we're hoping to move into registration intent studies later this year. I think that's more likely on 689. 523 may need a little bit more time, but we are increasingly clear on the direction for both of those assets. So, we are increasingly confident about their future. We also have, on 523, the Syk inhibitor, we have a study in ITP that is enrolling now quite well and we'd hope to complete our dose escalation section of that study by the end of this year. 453, our FGFR inhibitor, is in a Phase II in mesothelioma. We intend to start a second Phase II in cholangiocarcinoma over the second half of this year. And 306, our IDH 12 inhibitor, just started in Phase I in China last week, and we are targeting to get into Phase I in the US later this year. So, we want to develop 306 in parallel in China and the US at the same time. Page 7, very briefly just lays out the full pipeline and shows the four other assets that we have coming through late preclinical and regulatory talks. We have four assets. We've not disclosed the MOAs yet. We will when they go into the clinic. But those four assets should enter into clinical trials over the next, call it, 6 to 12 to 18 months. And you'll see there's one large molecule in there, HMPL-A83. So, now you start to see Chi-Med's large molecule program starting to come through. And that comes after many years of work by Wei-guo and the team. Moving on to page 8. No need to spend too much time on this, but deep management team, expanding rapidly in many areas, both inside and outside of China. And we just feel that we have a very strong foundation as a company in terms of people, in terms of our share register, in terms of our partnerships. So, moving on to savolitinib on page 10. So, overall, it's about getting a fast monotherapy approval globally in papillary renal cell carcinoma and in China on Exon 14 mutation non-small cell lung cancer. And then, working hard on the combos – the PD-L1 combo, the Imfinzi combo in kidney cancer primarily, and then the big one obviously is the Tagrisso combination with savo in EGFR TKI-resistant non-small cell lung cancer. Page 11 just shows the pipeline on savolitinib. Obviously, the NDA being accepted is probably the most notable matter to talk about. The savolitinib-Tagrisso combo, we've just been through our first interim analysis on that combination last week. Data is being assessed and reviewed as we speak. So, it's a bit premature to talk about that, but that's a very important program for the company. And all the other programs are at various stages of development. So, moving on to page 12, the chart that we always talk about. What I'm going to focus on today is the first-line setting or the treatment-naive setting, the MET-positive, 6% there in that first pie chart. Half of those patients – roughly half of those patients are MET Exon 14 skipping patients. So, if you look at page 13, you can see the results of our registration study in China. In efficacy of evaluable patients, we saw a 49% response rate, disease control rate of 93%. So, these are terrific levels of efficacy for these patients who have very limited treatment options. Box number 3 is very important. And I think a lot of you when we had our announcement on this data around ASCO, you asked for comparisons versus the other selective MET inhibitors out there at the moment, tepotinib from Merck Serono and capmatinib from Novartis. So, box number 3 is important because it basically shows that the savolitinib registration study, despite delivering such strong efficacy, was heavily loaded with more aggressive subtype patients with pulmonary sarcomatoid carcinoma, PSC. So, we have 36% of patients in that registration study, had pulmonary sarcomatoid carcinoma, which was vastly more than the competitive products. And as a result, you would expect – well, first of all, I think the main thing you can take away from that is it's very difficult to compare study to study. But savolitinib did extremely well and this is the basis for the NDA submission in China. Safety in box number 2 was very manageable and PFS was very positive. Actually, there, you can see the difference between non-small cell lung cancer, Exon 14 skipping and PSC Exon 14 skipping. You see on the Kaplan–Meier chart in box number 4, other non-small cell lung cancer, 9.7-month median PFS. Pulmonary sarcomatoid carcinoma, only 5.5-month median PFS. It's a very aggressive subtype and we have 36% of patients with that aggressive subtype. So, moving on, page 14, the SAVANNAH study. As I said, the interim was conducted last week. Enrollment really continues at speed on the SAVANNAH study. I guess what I can say is that this initial interim analysis was primarily focused on the top half of that pictorial there. In other words, patients that were being treated in the third line or above setting, patients that have failed on Iressa, Tarceva and then failed on Tagrisso and then went on to the combination. So, the majority of the patients – actually, the vast majority of the patients were that type in the interim. And the reason for that is because, obviously, Tagrisso has been approved in the second line setting for a long time, and so there were more patients failing on Tagrisso in the second line setting. The lower section of that chart where the combo of savo and Tagrisso was used in patients that failed on Tagrisso in the first line setting, there were very few patients in the interim from that patient population just because Tagrisso has a lot shorter period in the market as an approved therapy in the first line setting and, also it has a pretty long median PFS. So, you tend to find fewer patients failing on Tagrisso in the first-line setting. But that's the focus area for the continued enrollment of SAVANNAH, and we expect to build up our patient – our data set in those patients over the balance of this year. I think we'll probably complete enrollment of SAVANNAH by around the end of this year, but it's moving very rapidly. Page 15, you've got SAVOIR, the 60-patient data. This, unfortunately, is a case of a study that – as the discussions at ASCO stated in his presentation that he felt that this should not have been stopped and you can see why. The response rates for savo compared to sunitinib, 27% response versus sunitinib, only 7% response. You see very tolerable drug. 42% AEs of grade 3 or above for savo and 81% AEs grade 3 and above for sunitinib, so much more tolerable rather than sunitinib in this case. And then, the most compelling reason why it shouldn't have been stopped is shown in the box on the bottom right, which is the Kaplan-Meier chart for overall survival where you can see savolitinib with a very important gap between those curves, between sunitinib and savolitinib and a hazard ratio even of only 60 patients – a 60-patient study, a hazard ratio of 0.51. So, highly compelling. So, obviously, we've stated before, we're actively evaluating, progressing here in further clinical work and results. So, moving on to surufatinib, page 17. I won't go through it again. Looking for the fast approval in China and the United States behind NET and also working on combos, PD-1 combos with BeiGene and with Innovent and with Junshi. So, with all three players, we are looking at – with all three PD-1 players, we're looking at combos with surufatinib. Moving on to page 18. So, you see all of the NDAs either filed or soon to be accepted – sorry, soon to be formally accepted. And obviously, the preparation of the NDA in the red bar at the top of the chart on page 18. That's preparing the US NDA for late this year. So, very active now on the regulatory side for surufatinib, both inside China and outside of China. Just a brief kind of jogging of the memory on NET and the potential, if you go to page 19. In the treatment landscape for NET, the area that we're most focused on is this grade 1/2 advanced NET space where patients have a median OS of about 8.3 years. That's where all of our Phase IIIs have been conducted. The patients to the right, the grade 3 NET or NEC patients, these patients, there are no treatments for these patients. And what we're seeing, and I'll touch on it in a moment, is great efficacy from the PD-1 surufatinib combo in these grade 3 NET and NEC patients. So, that's the landscape and we think surufatinib has a – it will play a great role in it. Page 20. So, this chart, it's a good chart because it covers a lot of the subsections, subsegments of NET, all of the treatments that are available. And the most important thing here is to note that there are a lot of unmet medical needs in neuroendocrine tumors. And the positive Phase IIIs for surufatinib in non-pancreatic NET and pancreatic NET really make surufatinib a treatment that has potential utility across all of these subtypes. So, a broad spectrum usage relative to any available therapies today. And actually, the other thing to remember is that surufatinib, from a mechanism of action standpoint, is unique in that mTOR – everolimus is an mTOR inhibitor. Surufatinib is primarily VGFR and CSF-1R inhibitor. I suppose you could argue that sunitinib is closest to surufatinib, but it's only approved in the narrow pancreatic NET indication. So, the point is, as we now plan the launch and get our commercial mind – our commercial plan sort of established for next year for launching surufatinib in the US, we think it will be a relatively straightforward launch, in that we're bringing a therapy to the market that acts in a different manner to what's already there. Page 21 is actually support for what I've just said. If you look at the swimmer plot on the left-hand side of page 21, you can see strong efficacy for surufatinib in patients that have progressed on everolimus and sunitinib. So, that's where the different mechanism of action can really help patients. Moving on to page 22. The last thing I'll show. This data we shared at ASCO – sorry, at AACR earlier this year, just shows very exciting preliminary Phase I dose-finding data for the PD-1 combo with surufatinib in those grade 3 NET and NEC patients. All of these patients aren't NET and NEC, but many of them are. And some of the efficacy that we're seeing there in these very difficult patients is extremely exciting. So, surufatinib is very much on track. Fruquintinib, page 24, again, similar strategy of getting approval in a monotherapy setting as quickly as we can and follow it up with combinations with PD-1s and with chemotherapy is the example with the FRUTIGA study. Page 25 shows those activities. Obviously, third-line colorectal cancer is approved and marketed. And now, we will take on those activities ourselves. And obviously, we've been on the NRDL since the beginning of the year, so that's had an impact. I'll talk about that in a moment. But beyond CRC, the big program is gastric cancer and the PD-1 combos as well as the top line on that chart which is now the start of the global registration study on fruquintinib in colorectal cancer. So, we're talking about US, Europe and Japan, 10 countries, 130 sites worldwide with fast track designation granted in the US, as we also had on surufatinib. So, page 26, just high level, I think the chart down in the bottom left of page 26 is worth having a look at. Based on the number of cycles that were prescribed during the first half of this year and based on the average usage, we treated around 3,800 patients in the first half and that represents about 14% penetration. This is a rough estimate. But based on all the sensible assumptions we can make, we expect that penetration is about 14% roughly. With sales of $14 million, that would give you a sense that the total market here could be probably around $200 million if you had 100% penetration. $14 million is obviously just one half a year of sales. So, we've got a lot of upside here, a long way to go. And if we look at page 27, you can see that we are now in my view starting to get on a pathway to try to increase that penetration and to get a broader share of treatment in those third-line colorectal cancer patients. Obviously, sales increased to $14 million in the first half, which was up versus last year, but coming on to the NRDL, we took a 62% price reduction to broaden access to patients in China to get on the NRDL. And you can see the benefit of getting on the NRDL the middle box there. Total cycles prescribed, 18,800 28-day cycles prescribed, up 174% versus last year same time. The last box, the 2020 Lilly amendment. I've mentioned it. We'll start on October 1, take over medical detailing. Lilly will pay up between 70% and 80% of sales in the form of royalty, manufacturing costs and service payments, and there was no upfront payment made by Chi-Med or Eli Lilly around this transaction. So, we didn't buy back these rights. This was a win-win agreement that really was devised to maximize the potential of fruquintinib and Elunate over the coming years. Page 28, you can see the market in the VGFR space in China. These are just the small molecules. So, obviously, you've got bevacizumab, which is, I guess, around $500 million now. And you've got all the bevacizumab biosimilars that are arriving as well. But the VGFR space is big in China. And there are some big case studies of products that have grown very rapidly. And I think we see this as a major opportunity, not just for fruquintinib, but also for surufatinib as well. So, moving on to page 30, the commercial team. I've been talking about this for the last six months, how we're building out the team. We said we'd get up to about 350 by mid-year. We're at 320 and that team is extremely excited now to get involved in the marketing of Elunate and getting very prepared for surufatinib at the end of the year. We'll cover 95% of the top 1,300 oncology centers in China. And I expect, as you can see in the chart on the right hand side of page 30, we will build that team up very aggressively. I think perhaps even more aggressively than is shown on this chart, but it will depend on performance. Page 31 just details some of the other assets, which I won't talk about because we already have. So, the Syk inhibitor, the PI3K-delta, the FGFR and the IDH 1/2 dual inhibitor. So, I won't say anymore on that. Page 32. What's next from discovery? Just multiple programs. As I said earlier on in the presentation, there are four assets that we believe will be hitting the clinic in the next probably 6 to 12 to 18 months latest. So, our pipeline is expanding very rapidly on the small molecule and large molecule side. Finally, before I open it up for questions, the results, page 34, the half-year results. As expected, the Innovation Platform increases its investment on the pipeline. The Commercial Platform did extremely well in the first half despite COVID. You can see, at constant exchange rates, our Commercial Platform net profit, it was up 19% in the first half. So, that's a testament to the flexibility, adaptability of our commercial team in China, dealing with all the restrictions that we got hit with on COVID and coming out with very strong results. So, we're very proud of that. But, overall, the net loss for the first half, around $50 million, which considering everything we're doing is a relatively low number, and it's made low because of the cash that we get from our partners as well as the profits that we make in our commercial business. Page 31, we have about $400 million in cash and available resources. At the end of June, we had $281 million in cash. We then did the pipe deal with General Atlantic, raising $100 million. The deal was signed at the end of June, but the cash arrived and was completed 2nd of July, I think it was. So, that's not – that $100 million is not included in the $281 million. So, it should be $281 million plus $100 million, $381 million in cash. We have various bank facilities that are unutilized, and our JVs have a lot of cash in them at the moment because of the land that we handed back to the Guangzhou government that is now generating a lot of cash coming into our JVs, which will, in the second half, be paid out to the Chi-Med group level in the form of dividend. So, page 35. On the right hand side, you see the guidance. We haven't changed the guidance. You can see that the first half, as far as R&D spend, operating loss, $81 million versus our guidance. So, you'll see an acceleration in the second half behind the global Phase III on fruquintinib, the NDA submission, et cetera. So, we will probably hit that guidance of $180 million to $200 million of Innovation operating loss. On the cash flows, you can see the cash burn in the first half was very low, $32.5 million. The reason for that was, we received very high levels of dividends from our commercial business during the first half, much higher, double what we received last year just because the businesses have been performing so well and we are just paid out more dividends from our JVs to Chi-Med levels. But we will reach that total net cash burn of around $140 million to $160 million over the balance of the year. We've got expanding clinical activities. We are going to break ground on a large oncology manufacturing facility in Shanghai in the second half of the year. And obviously, all the investment on the commercial side will impact our need for cash. So, a lot of activities in the second half. Finally, on page 37, I won't go through it in detail. It's laid out very clearly in our announcement, but maybe touch on the major upcoming events, maybe the ones with stars on them. So, anticipated decisions around registration studies in lung cancer and kidney cancer on savolitinib, the NDA submission on surufatinib, the approval of that NDA in America, the approval in China and then, hopefully, early next year, the approval of savo in China. So, some big events on the horizon. And then, finally, page 38, the kind of key targets for the balance of the year. So, surufatinib, a big launch in China. Savo, getting the NDA in and processing that, the inspections, et cetera. Completing enrollment on SAVANNAH, hopefully, this year, early next year. Getting endorsement for Phase III activity in lung cancer. And obviously, our registration strategy on savolitinib in kidney cancer. Elunate, it's about taking control of the commercial activities on the ground, working closely with Lilly and really maximizing the benefit of being on the NRDL. And then, outside of China, it's the NDA submission on surufatinib, the global Phase III on fruquintinib and progressing the Syk and the PI3K-delta programs. Finally, on the M&A side, on the large molecule side, we are now working with certain partners to accelerate our large molecule activities, unlikely to be through acquisition, but probably through collaboration, seems to be the most appropriate manner. And non-core assets, we continue to look to sell off some of our non-core assets. So, that's Chi-Med. I went a little bit longer than I expected, but maybe now I can open it up for questions.

[Operator Instructions]. And our first question is Louise Chen from Cantor.

Hi. Thanks for the questions here. So, I have a few here. First one I wanted to ask you was, could you give more color, please, on your penetration rate for Elunate in China and how you plan to get beyond that 14% that you noted earlier in the call? And then, secondly, just on your go-to-market strategies for surufatinib, any color you can provide there? Marketing message, reimbursement and the synergy with Elunate? And the last question is on something that you had also mentioned, on the collaboration of assets versus an outright acquisition and then spinning out non-core assets, what's the timing on that and what could we see there in terms of collaborations that you're interested in? Thank you.

Okay. Thanks, Louise. Okay, on the 14% on fruquintinib or Elunate, now that we are getting ready to take on these commercial activities, we are being clear. We've got 320 people on the ground at the moment. I think, by the end of the year, it will be up to 400 people. That is essentially triple the level of medical sales reps that have been in place over the last 12 months. So, it's about going deeper. It's about going broader. And it's deepening the investment. Chi-Med wanted to invest more in the development of fruquintinib. And Eli Lilly are very capable people, but they have a lot of priorities. For Chi-Med, fruquintinib and the launch of Elunate is our number 1 priority from a commercial standpoint. So, we're going to essentially triple plus the medical sales team. We're going to go a lot deeper. And I think that 14%, I'd like to see it up in the sort of 40s before too long. But that's going to take a while and our team is new to this. So, I expect next year – throughout the balance of this year and next year, we'll see an acceleration of growth. And I think we'll be able to get ourselves up to that kind of level within two or three years. We should be able to do that relatively easily. As far as surufatinib is concerned, there's going to be a lot of synergies with the commercial team. One of the great benefits of doing this deal with Eli Lilly is that we can now have more than one product to be out there marketing and there will be synergies. And that will allow us to broaden the scale of the commercial organization rapidly and really make the most of this opportunity. So, I think that surufatinib, the team has actually been working on the launch of surufatinib in China full on for the last six months and we're really ready for it when it comes. So, I think our expectations on that launch are pretty significant, although remember that neuroendocrine tumors, it is a relatively niche indication. That's on the negative side. On the positive side, these patients do tend to have very long periods of progression-free survival on surufatinib and tend to live with this disease for a very long time. So, we're getting ready to go very hard on surufatinib to educate clinicians about the benefits of surufatinib, to try to increase the level of diagnosis in China, all of these things, and that's our advantage. On the collaborations on the large molecule side, right now, we talked maybe six months ago or over the last six months about the potential for acquisitions in this space. We've looked. And what we've seen has been kind of overpriced and unattractive. So, the team is working hard with a few key players to identify efficient ways of bringing our large molecule innovations into the clinic. And so, that first one that I mentioned earlier on the pipeline, that one, we hope to be seeing into the clinic late this year or maybe next year sometime. And to do that, we will be building out these collaborations on the large molecule manufacturing side with one or more potential partners. And maybe a more efficient way to bring these assets to market or at least our first ones until such time as we build out our own large molecule capability in this new Shanghai factory. The new Shanghai factory is a big facility for us. Our current Suzhou facility can see us through probably the next three years – three, maybe four years of growth on fruquintinib and surufatinib. It can maybe help support the launch of some of the Syk inhibitor and PI3K-delta. But come three or four years from now, we're going to need some pretty significant manufacturing capacity. And that's why we're building out this Shanghai facility. It's large enough to enable us space to build out large molecule operations as well. So, that's what we would intend to do down the road. And the spin-off of the existing businesses, yeah, we've been talking about it for a while, about maybe the non-core OTC business, for example. That's not really central to where Chi-Med is going, trying to build an integrated oncology company. So, the idea of non-dilutive financing through spinning off or selling off some non-core assets is attractive. We're close on that OTC business, but we are facing challenges with the – certainly, we were close earlier in the year, but then COVID hit and that caused challenges. So, we're negotiating and we'll see where we go. We are in no hurry. But if the right buyer comes along at the right price, we'll consider it.

Okay, thank you.

So, hopefully, that answers the questions.

Yeah. Thank you very much.

Thanks, Louise.

Our next question is from Alec Stranahan from Bank of America.

Hey, guys. Thanks for taking the questions. And congrats on all the progress. So, my first question is on the recently amended agreement with Lilly for Elunate. Could you touch on the rationale for bringing the marketing activities in-house? For example, did you feel that Lilly was not giving the launch enough attention or was it more of boots on the ground type of discussion? And how do you see the increased economic interest offsetting the additional SG&A spend? And then, I have a follow-up.

So, Eli Lilly is one of the world's largest pharmaceutical companies. These guys know how to sell products. But the reason we pushed very hard to convince them to allow Chi-Med to kind of step in and take over on-the-ground activities from October 1 is because it's our prime asset. It's our first asset. It's the one that we – it's the first oncology drug – home-grown oncology drug discovered in China all the way through – taken all the way through to unconditional approval and launch. And so, we just want to push it as hard as is physically possible. And you can see in terms of -- as I've just said, the size of the medical detailing team that we will have on it will be 3 times that – that was on it when Lilly was handling it. So, I think that it's all about focus for us. And it's about pushing this asset that we deeply believe in as aggressively as we can. But don't, in any way, come away from this feeling that Eli Lilly is giving up on fruquintinib. Not at all. We're still working extremely closely with them. They're deeply involved in the strategic thinking around fruquintinib. And the way I think you can think about what Chi-Med is going to be doing here is we're going to be executing on the ground. And as far as the economics are concerned, we are going to be investing significant resources – financial and human – into the expansion of fruquintinib. And as a result, we need to be receiving a greater portion of the economics on fruquintinib. And so, when we talk about the 70% to 80% of all sales will be paid to Chi-Med in the form of revenues, either royalty manufacturing costs or service fees, that's a really sizable portion of the economics. And I think that it's a win-win for Lilly. It derisks the fruquintinib business for them. They continue to earn a good return on fruquintinib. We step in, invest a higher amount and, if successful, we'll see a really material financial reward. Plus the synergies, as I've said. You've got synergies with the balance of our oncology assets that are coming through. So, I think it's just a win-win for everybody. All I can say is the proof will be in the pudding. So, let's just see how we do over the next 3, 6, 9, 12 months on fruquintinib. And if I'm sitting here in a year and we've grown at a disappointing level, I might have to eat my presentation. But I don't think that will be the case. I think we will see some great progress now.

Great. And then, my last question is on the planned US NDA submission for surufatinib. Could you talk a bit about how the clinical data, both from the SANET studies and the NET bridging study, gives you confidence as you put together the submission package and also the US launch plans? And do you think the US FDA is looking for approval in China first as a component of their review? Thanks.

Maybe I'll ask Wei-guo to answer that question. Wei-Guo, would you?

Well, basically, we had a pre-NDA discussion with the US FDA and shared the data, of course. And they came away very much impressed actually. And they're considering the unmet medical needs for this particular disease and also the strength of overall data, including what we've done outside China as well. They felt quite positive and showed affirmative basis to support an NDA filing. In terms of timing, clearly, in the SANET-ep, the NDA we filed last year, it should be approved well ahead of the US for sure. So, I think those clearly are not linked basically. They're completely independent of each other.

Alec, you had a question on the Commercial. So, can you repeat that?

Right. So, in terms of – how does the bulk of the clinical data sort of gives you confidence as you're maybe putting together how you will launch and approach physicians in the US

I got you. I kind of touched on that in the core of the presentation, in that surufatinib has a different mechanism of action to the existing therapies in the neuroendocrine tumor space in the US, makes it quite differentiated. We are studying very closely the type of commercial organization that we will need to cover the vast majority of these patients in the US. It's actually a relatively modest team that will be necessary to cover the key centers for NET in the US. So, yeah, I think we'll have a highly differentiated product and a relatively straightforward commercial exercise, in that it's quite contained and straightforward. So, that's what we're planning. I think we all have quite a high degree of confidence that we'll be quite successful.

Great. Thanks.

Sure.

Our next question is from Paul Choi from Goldman Sachs.

Hi. Thank you. And good evening. And thank you for taking our questions. I have a few here. Maybe starting with 306 and – for either Wei-guo or Christian. Can you maybe help us understand what you've seen so far in the preclinical characteristics and what you're seeing that's differentiated on the IDH versus the, for instance, let's take the Agios assets? And where do you see 306 in terms of your US development plans fitting either pre or post Mylotarg or just understanding whether it's relapsed/refractory and where in the treatment paradigm you're targeting? And is the plan – now that you're already starting with the US IND here, does this reflect a shift in your development philosophy to just start and go global from the get-go there? So, that's question one. On question two, with regard to the surufatinib PD-1 combinations, I know you've listed the BeiGene PD-1. But as you think about the US development plan for combination therapy, are you looking to go maybe to a PD-1 agnostic approach and consider some of the other commercial stage PD-1 assets? And last one is just a quick one for Johnny. How should we think about the CapEx for the new building here and how much of the cash burn in the second half here will be driven by CapEx versus operational expense changes? Thank you.

Great. Thanks, Paul. What I'll do is I'll talk a little bit about the development philosophy, then I'll hand it over to Wei-guo to talk 306 and we'll go from there. I think that the shift in philosophy around development, it's a practical shift. We've built a fantastic team of people in the United States on the clinical regulatory side that give us – give the company the capability of bringing our – particularly our more innovative assets to the global market quickly. So, that's a conscious decision to say on 306 on the IDH inhibitor. We want to go, in parallel, China and the US, no longer in series, China first then the US. And we have the capability and the resources to do that now. So, I think you'll see us doing that more and more in the future, trying to bring these great novel innovations to a broader patient population as possible as quickly as possible. So, Wei-guo, maybe I hand over to you to talk about 306 and where it sits, in your mind, relative to competition, et cetera.

So, Paul, as you know, I think the main rationale here to looking at doing is a lot of the IDH mutant tumors, they tend to be highly heterogeneous. Some patients would harbor both IDH1 and IDH2. So, a selective inhibitor, obviously. The efficacy would be reduced. It's also noted that the mutation switch tend to be also a resistance pathway, which could be acquired or could be pre-existing, but, clearly, it would affect the PFS. So, we think by targeting – by shutting down both IDH1 and IDH2, I think both in AML and in solid tumors, we would see an improved ORR but, more importantly, improved PFS and OS. So, that's really the main rationale. With regarding to timing, we are in Phase I in China. And US, we are targeting very shortly to file an IND. We have a lot of groundwork done, led by Marek and his team in New Jersey in terms of leading PIs and sites and so forth. So, should be in few months, fairly soon.

Okay. Then the surufatinib PD-1 combos. And you're talking about PD-1 agnostic, Paul. Wei-guo, do you want to talk about that?

No. I think Paul was asking US versus China.

I've moved on to the second question, the one about suru and PD-1s.

Right. Yeah. I think the PD-1s, all the collaborations we signed into, they are all global collaborations. So, all three partners will be doing this globally, basically.

And then, Johnny...

Do you think about using other PD-1s besides the BeiGene one, I guess, is my question here and being PD-1 agnostic?

Yeah. I think it depends. PD-1s are PD-1s. Even though they hit the same target, but they are slightly different. So, I think it will be driven by the data at both – actually, all three players, as a matter of fact, BeiGene, Junshi and also Innovent, they all have global aspirations, and so do we. So, I think a lot of data coming out of China proof-of-concept will drive the future activities and registration pathways both in China and also outside.

Okay. Johnny, do you want to talk about the CapEx for Shanghai?

Okay. So, the CapEx for Shanghai, we are planning to spend about $20 million for the second half of this year. And as the project is going to go over the next three to four years, we do plan to potentially mortgage that piece of land and also the project to the local bank, so that we can get some smart financing. And the government would be able to potentially subsidize us in terms of the interest. So, we will substantially derisk ourselves in terms of any financial constraint for this project. So, in total, we estimate it to be over $100 million, maybe $110 million to $130 million, for the whole project.

Okay. Paul, does that answer your questions?

Yes. Thank you very much.

Okay, great. Thanks.

Our next question is Tony Ren from CLSA.

Hi. Thank you for taking my question and congrats on the progress you guys are making. I just want to go back to Elunate, again. I think, Christian, when you were addressing one of the earlier questions, you mentioned going deeper. Could you clarify that a little bit? Does that mean that they're going to tier 3 or 4 cities? And also, we are starting to see some pricing pressure in China again. So, do you see any further pricing pressure for Elunate for the remainder of the year? Is there going to be another round of price cuts going into the negotiation again? Yeah, thank you.

Thank you, Tony. As far as how deep we're going to go, we'll go, obviously, the top 1,300 oncology centers in China. And they vary from class III hospitals all the way down to county town cancer clinics basically. So, you're covering a broad area of China. And we can do that with the commercial team we have in place. So, that's how deep we'll go, about 1,300 clinical centers. On the pricing, no. I don't foresee any pricing activities on Elunate this year or next. We'll, obviously, have to get into discussion next year around renewal of our position on the NRDL. And we've seen for the various oncology assets that were included in the 2017 NRDL, when they were renewed two years later on the 2019 NRDL, they, in general, took further reductions, but they were much more modest reductions, and that's what I would expect to see for Elunate over time. So, yeah, I don't worry about pricing too much because the process is renewal every two years and a sensible fact-based reduction or discussion at that time. So, nothing this year, and there'll be discussions next year, but nothing will kick in until early 2022.

Got it. Okay, thank you very much.

Sure.

Our next question is Sean Wu from Morgan Stanley.

Hi, Christian and everybody. Thank you, management, for taking my question. And congratulations on your great progress. I still have a bit of question about Elunate and, of course, [indiscernible]. Your relationship with kind of Lilly has been longstanding and clearly, I would say, they have provided the business support in the early stage. But your kind of license agreement with them have been modified not once but twice. And from today's announcement, it's clear you have much more economic interest than they have. I'm just kind of curious why they get to consolidate the whole sales. It means, as for you, don't get to consolidate the whole sales of Elunate in China. That's number one. And number two, the question is, you mentioned that you had 14% kind of market share now and you would like to go to 40% next year. What gave you the confidence? And what are the patients being treated there for the 86% now and how many of those patients are getting treated with [indiscernible] at an off-label setting [indiscernible]? Those are the questions I have for now. And also, you mentioned about like people with the neurocrine type of tumor, either nonpancreatic or pancreatic, have long kind of progression-free survival. So they will stick to their drug for a long while. But if they don't get treated with an alternative kind of treatment, what kind of progression-free survival they will have? And which kind of advantages we are providing in terms of kind of prolonging their progression-free survival? Thank you very much.

Okay. Thank you, Sean. So, yeah, you're right on Elunate. It is a significant modification of the agreement. When you strike a license and collaboration agreement, as we did with Eli Lilly back in 2013, seven years is a long time and many things change during that period. It is common to see amendments being agreed along the way as people change, as markets change and as companies change. And so, this was an agreement -- an amendment that actually we've been working on for some time. Eli Lilly had been very supportive of it. They like the idea of Chi-Med coming in and bringing more resource to the story. And so, it made a lot of sense to them and us. As I said, it's a win-win transaction. Yes, our share of the economics increased significantly as a result. But that's only because we're taking more financial risk. And so, that's only justified. So, I think it's a very sensible deal. As the next 6 to 12 months plays out, I think we'll be shown to have made a good move there. You mentioned I said 14% penetration going to 40% next year. I didn't quite say that. I said I'd like to see – to get up to sort of 40% over the next couple of years, two or three years. I don't really know, to be honest with you, Sean. I think when we are on the ground and the team is commercializing Elunate, I think by the end of the year, we'll have a very good sense of what kind of penetration targets we should be setting ourselves. But I do believe that we should be able to increase from 14% to really take over the dominant position in third-line colorectal cancer because we've got the cleanest, most tolerable VGFR inhibitor in the space. And with approval, specifically in third-line colorectal cancer. So I think we've got the best option for patients. And now being on the NRDL, it's actually economically the best option as well. So, there's no reason why we can't build our penetration dramatically from where it is today. As far as what our patients today being treated with, maybe I'll ask Wei-guo to answer that. Today, what are the other 86% of patients being treated with, in your view, Wei-guo?

Obviously, in China, regorafenib is also on the market for this particular population, but also you got cycling with the chemos, participating clinical trials on IOs and other targeted therapies as well. So, there are I think a lot of clinical trials going on in China and also probably a great majority are still struggling with chemos. So, I think if you look at what Lilly has been doing, focusing on tier 1 cities, just by territory, you're not even covering probably that much, right, comparing to just the geographies. So, I think then those patients who don't have access to fruquintinib today, if they are enrolling in NRDL, they might be getting a regorafenib. And also TAS-102 is in China as well, doing a lot of trials as well and IO trials too. So, I think both geography and also other available therapies, cycling through chemos and also participating in clinical trials, I guess. First things first, I think we need to expand the geography first to make sure that all the patients have access to fruquintinib.

Okay, thanks. And your last question, Sean, was around neuroendocrine tumors. I'd mentioned that patients live with neuroendocrine tumors for a long time. So, those grade 1/2 neuroendocrine tumor patients, the median overall survival on the chart I showed in the presentation, it's around – it's over eight years. So, their median overall survival is quite long. As far as PFS is concerned, in the non-pancreatic NET patient population, you see median PFS on surufatinib of over nine months compared to less than four months on a placebo basically. So, it's a reasonably long PFS. We will present also our pancreatic NET Phase III data at ESMO. And similar, you'll see a really meaningful PFS benefit to patients. So, I think that – yeah, that's why we're getting – looking at fruquintinib in colorectal cancer, the PFS is around four months. So, surufatinib in NET, it's sort of double that, if not more, just because of that type of solid tumor. So, we expect to see patients on surufatinib for long periods of time.

Okay. Thank you very much.

Sure.

There is a time constraint. Our last question is John Newman from Canaccord.

Hey, good morning, Christian. Thanks for taking my question. I just had two quick questions. The first one is when I speak with US investors on Chi-Med, one of the first questions they always ask me is about the company's progress towards getting assets approved in the United States. And that's why I think the work that you're doing with surufatinib in neuroendocrine tumors is so interesting and exciting. Just curious if you could talk about how you see surufatinib fitting in with some of the other agents in that market. Second question I had is, regarding the changes in the partnership with Lilly, I just wondered if you could talk about some of the success that other large western players have had partnering with a local company in China. I feel that sometimes investors forget that Chi-Med has been operating a commercial pharmaceutical business for two decades in China. I'm just curious if that was some of what played into the decision by Lilly to change the agreement. Thanks.

Thanks, John. Thanks. Okay. So, the first thing is, yeah, I think that now becomes something quite unique that Chi-Med is doing. Obviously, BeiGene has been successful getting their BTK inhibitor approved in the US, but next along will be surufatinib with our NDA this year. So, I think, for US investors, looking at Chi-Med, they will be looking at a company that actually has global aspirations. Yes, obviously, China is our home and that's where there's a very big unmet medical need that we're trying to help address. But our assets are designed to be competitive globally and that's what we're trying to do. So, as far as how surufatinib fits into the treatment landscape in neuroendocrine tumors in the US, I kind of talked about that a little bit on the landscape slide in the presentation. It's a different mechanism of action. Its broader spectrum neuroendocrine tumor patients benefit across all subgroups in neuroendocrine tumors as opposed to, in most cases, the approved therapies are approved in quite narrow subsegments of NET patients. So, there are multiple points of differentiation that gives surufatinib advantage. And we're looking forward to taking advantage of that. With regards to Lilly, actually, the most interesting – talking about other companies partnering with local Chinese companies, the best example is Innovent and Lilly. This is a collaboration on the PD-1 space and Eli Lilly has been working closely with Innovent over the last few years. Now, the difference in the launch of sintilimab, the PD-1 from Innovent, and fruquintinib is that Innovent launched sintilimab themselves and Lilly took the back seat, whereas, with fruquintinib, Lilly took the front seat and we took the backseat. Now Innovent has done such a fantastic job launching sintilimab and has invested so deeply in building out their commercial infrastructure and making a success of it, that's one of the main reasons Lilly said actually maybe it would be a good idea to let Chi-Med get involved in this because we have that same capability that Innovent has to invest heavily in fruquintinib and make the most of it. And so, I think Lilly kind of learned from their own example, not from examples of others to say, yeah, let's let Chi-Med have a shot at this and raise the level of investment in fruquintinib. But there are other examples and – BeiGene is doing a great job commercializing various products for various multinationals. And local Chinese biotechs, really on the ground, have the resources these days to be very aggressive. And I think that fruquintinib will really benefit from this amendment now.

Okay, great. Thanks, Christian.

Thanks.

So, I think that's where we come to an end. But thanks, everybody, for joining the call. And we look forward to speaking to you all in due course. Thanks very much.

And this concludes our conference call. You may disconnect now. Goodbye.