Edison Issues ADR Outlook on Hutchison China MediTech (HCM)

Despite a strong run over the last 12 months, our increased valuation of $2.7bn suggests the market overlooks HCM's full R&D potential. Multiple catalysts are on the horizon in 2017/18; notably the China FDA filing for fruquintinib in CRC (full Phase III CRC data [China] at ASCO) and overall survival data from the savolitinib Phase II trial in c-Met-driven PRCC (could support a US NDA submission). Further progress of the early to mid-stage pipeline over time should retain investors focus. Ultimately, HCM's move to commercialize its innovative pipeline in its domestic market (and longer term in international territories) could provide a major source of uplift.

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We have increased our SOTP valuation to $2.7bn ($22.6/ADS) from $2.4bn ($20.1/ADS), in the main due to progress in the R&D pipeline and upgrades to our CP forecasts after a stronger than anticipated FY16. The Innovation Platform is valued at $1,948.6m from $1,789m and placing CP's 2017e share of net profit on a 23.6x rating gives $788.8m ($6.5/ADS). Adding December 2016 net cash and netting out unallocated costs results in a value of $2.7bn. Approval(s), clinical data and/or deals should increase our risk-adjusted valuation.

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