Drug research and development business

Hutchison MediPharma is dedicated to transforming scientific discoveries into innovative therapies for cancer and auto-immune diseases.

Chi-Med’s Drug R&D revenue grew almost four-fold during 2007 to $0.9 million (2006: $0.2 million) from payments by Merck KGaA, Procter & Gamble and Eli Lilly. Its operating loss rose to -$10.1 million (2006: -$6.0 million) as a result of increased investment in Hutchison MediPharma’s discovery organisation and programmes, as well as the cost of clinical trial programmes in the US and China.

Overall, 2007 was a highly productive year for Hutchison MediPharma in which the two major achievements were the landmark strategic alliance with Eli Lilly and the positive Phase II POC results on the Group’s lead product, HMPL-004 thereby proving the Group’s preclinical hypothesis and validating its scientific capability.

We believe Hutchison MediPharma is now generally accepted as one of the leaders in China’s Pharmaceutical drug discovery arena. Going forward, the Group’s target is for it to continue to build strategic alliances with multi-national pharmaceutical groups; identify global partners with which to co-develop our lead candidates; and advance our in-house preclinical programs into clinical POC studies taking advantage of China’s low cost R&D structure and vast patient population.

It is focused on the following portfolio of products and technology platforms:

• Two candidates in clinical development in both the US and China: HMPL-002, a radiosensitiser, for both head and neck and non-small cell lung cancer ("NSCLC"), in Phase I/II in the US and in proof of concept in China; and HMPL-004, an inhibitor to a group of inflammatory cytokines, for treatment of inflammatory bowel diseases ("IBD"), including Crohn's Disease ("CD") and Ulcerative Colitis ("UC"), in Phase II in the US and in proof of concept in China.
• A pipeline of discovery projects in the auto-immune/inflammatory diseases and oncology therapeutic areas which have shown activity against clinically validated targets.
• A number of technology platforms including molecular and cell biology, high throughput screening, genomics and informatics, to enable and support drug research and development projects.
• A number of patents and patent applications globally to protect existing preclinical and clinical candidates against potential generic competition.

The Directors believe that Hutchison MediPharma's competitive advantages lie in the following areas:

• An experienced research and development team, many of whom are Western-trained, with a track record of success and expertise in Western and Chinese pharmaceutical development providing the basis for innovative and high quality research.
• A sustainable tripartite discovery chemistry strategy (based on new botanical drugs, semi-synthetic natural product drugs and synthetic single chemical entity drugs) aimed at creating a diversified portfolio.
• The ability to carry out faster and lower cost human proof of concept studies in China thereby reducing the risk of failure in subsequent US trials.
• The ability to leverage HWL's presence in China to negotiate collaborations and obtain in-licensing opportunities, thereby providing access to external drug candidates and proprietary technologies and data, including unique botanical composition samples.

Hutchison MediPharma's research and development operations are carried out in a 5,000 square metre research and development facility based in Shanghai's Zhang Jiang High Tech Park, including a 500 square metre Chinese certified animal facility. The in-house pharmaceutical research facilities provide specialised equipment for most aspects of drug research and development.

Hutchison MediPharma has built drug discovery technologies, including molecular and cell biology, high throughput screening, genomics and informatics, to enable and support research and development projects. To date, multiple proprietary drug discovery platforms have been created. These include gene-targeted and cell-based screening assays, ligand-dependent screening assays and signal transduction pathway screening assays in addition to conventional cytotoxicity, protein assays and enzymatic assays, receptor tyrosine kinase assays, primary cell culture assays, recombinant DNA technologies, gene-chip technologies, recombinant protein expression technologies, and retroviral-mediated gene transfer technologies.

Botanical candidate screening is being expanded to include upfront assays in addition to cytotoxicity for cancer and chemokines/gene regulators/enzymes for inflammation. The semi-synthetic candidate R&D activity aims to identify active components of natural products that are amenable to chemical modifications. This semi-synthetic research activity is generally intended to be an extension of existing botanical drug candidate research. In addition, synthetic single chemical entity approaches against clinically validated targets for cancer and autoimmune diseases are under development.

Hutchison MediPharma's research and development team includes Western-trained former research executives of international pharmaceutical and biotechnology companies, key R&D management, as well as advisory committees whose members include highly reputable members of the medical community in the US and China in the fields of medicinal chemistry, pharmacology, oncology, cardiovascular and respiratory diseases, and antiviral treatments.

Hutchison MediPharma's regulatory and clinical team, and its network of world-renowned advisers and clinical research organisations, enable the Group to design protocols and conduct clinical trials in both the US and China.

Hutchison MediPharma's strategy is to out-license all products once they have reached a late stage of development, typically prior to Phase III clinical trials as appropriate. Hutchison MediPharma expects to generate revenues through milestone payments and royalties on product sales.

Hutchison MediPharma has formed research and strategic collaborations with the University of California at Los Angeles, Shanghai Institute of Materia Medica, the Genetic and Cell Biology Institute of North-Eastern Normal University, Hong Kong Chinese University, the University of Maryland and Cambridge University. The Directors expect these partnerships to provide Hutchison MediPharma with novel drug targets, assays, compound libraries and clinical expertise to improve the speed and quality of Hutchison MediPharma's research programmes. Hutchison MediPharma will continue to investigate and discuss other potential alliances with appropriate organisations.

Overall, through these multiple layers of innovation, coupled with a proprietary quality control system, manufacturing know-how, the high degree of difficulty in demonstrating bio-equivalence for multi-component botanical drugs and lack of regulatory guidelines for generic botanical products, the Directors believe that Hutchison MediPharma’s botanical pipeline enjoys strong product protection.

Under the Eli Lilly partnership agreement, Hutchison MediPharma scientists and an Eli Lilly team will collaborate on the discovery and development of pharmaceutical compounds focused on targets in oncology and inflammation. The research partnership leverages the strengths and expertise of the two companies while taking advantage of the unique opportunities available in China to expedite the drug discovery process and reduce overall cost. Eli Lilly will provide Hutchison MediPharma an upfront payment, annual R&D support fees, potential discovery and development milestone payments, and royalties on worldwide sales of any commercialised products resulting from the collaboration. Potential discovery and development milestone payments will total from $20 million to $29 million per candidate. It is expected that Hutchison MediPharma will be delivering multiple candidates in the next several years.

The Eli Lilly deal is the first such kind of deal in China Pharmaceutical R&D history and represents a new model for innovative drug discovery and development partnership. Furthermore, to the best of our knowledge, never before has a major global pharmaceutical group injected its own in-house drug discovery programmes into a China based R&D company. It is a direct reflection of the business model of the Group and the quality of our China drug R&D operations.

Hutchison MediPharma will continue to seek additional strategic alliances to further enhance our discovery and development pipeline and to bring in short term revenue, as well as setting up the basis for major long term value creation through milestones and royalties on successful projects.

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