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Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

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Beyond Spring (BYSI US) A potential challenger to Neulasta, and more

■ Beyond Spring is a clinical-stage pharmaceutical company with a

lead late-stage pipeline asset, Plinabulin, which has the potential of

challenging Neulasta’s standard-of-care position in Chemotherapy-

induced Neutropenia (CIN, US$6bn market globally), and becoming

a PD-1 combo candidate

■ Management acquired Plinabulin in 2013, and had since then

discovered its mechanism of action, re-designed the clinical trials,

executed a dual-market strategy to leverage on US/China’s clinical

resources and external capabilities (KOLs, CROs, CMOs, etc.), and

raised US$54mn in 2017 IPO to fund the studies

■ Based on the results of two studies to establish Plinabulin’s non-

inferiority/superiority to Neulasta, and one study to establish its

cancer treating efficacy (two of them presented Ph I/II results in last

week’s ASCO-SITC), Company expected to submit Plinabulin NDA

filing in late 2018 (in CN) and early 2019 (in the US), and to have a

quick uptake to reach blockbuster sales potential after approvals

Lead asset Plinabulin is being validated for treating Neutropenia Different from Neulasta, Plinabulin reverses the chemotherapy-induced blockade of neutrophil in bone marrow, thus lessening bone pain by five-fold; it is also administered 0.5-1h after chemotherapy (vs after 24h), thus reducing hospital visits. In last week’s ASCO-SITC, the phase II data of Study 105 proved non-inferiority of Plinabulin with Neulasta in CIN after meeting the primary endpoint (DSN: 0.38d vs 0.14d) and secondary endpoint (grade 4 Neutropenia incidence: 15% vs 14%) in 55 patients. Company also expected the first phase II data readout of Study 106 in March, which aims to study its non-inferiority/superiority to Neulasta in high-risk patients.

Plinabulin can also be a good I/O combo candidate

Meanwhile, the phase I data in NSCLC for Plinabulin/PD-1 showed no immune-related adverse events (IRAEs) – IRAEs have been a major setback in current PD-1/CTLA-4 combo trials. On the back of this, Company initiated two trials on triple combos (PD-1/CTLA-4/Plinabulin and PD-1/chemo/Plinabulin) in 2/3L NSCLC setting. Further efficacy data from the on-going Study 103 (Plinabulin/Docetaxel on NSCLC, first Ph III data readout in 3Q18e) can also strengthen its cancer-treating credential, and thus improving the approval and commercial outlook for Plinabulin in Neutropenia.

Financials US$ mn 2014 2015 2016 3Q17

Consolidated revenue 0 0 0 0

% YoY change n.a. n.a. n.a. n.a.

Adjusted net profit (3) (7) (12) (80)

% YoY change n.a. n.a. n.a. n.a.

EPS Fully diluted (HK$) n.a. n.a. n.a. n.a.

PER adj (x) n.a. n.a. n.a. n.a.

PBR (x) n.a. n.a. n.a. n.a.

Sources: Company data, CMS (HK)

Su ZHANG Hayden ZHANG, CFA

(852) 3189 6357

suzhang@cmschina.com.hk

(852) 3189 6354

haydenzhang@cmschina.com.hk

Non-rated report

NON RATED

Price US$28.00

Price Performance

Source: Bigdata

% 1m 6m 12m

BYSI US (0.5) (24.6) 71.8 IBB 8.3 13.1 19.3

Sector: Pharmaceutical & Healthcare

Hang Seng Index 32967

HSCEI 13660

Key Data

52-week range (US$) 16.55-48.49

Market cap (US$ mn) 659mn

Avg. daily value (US$ mn) 0.1

BVPS (US$) 1.71

Shareholding Structure Dr. Lan Huang 59.0%

Nereus Trust 9.3%

Sangel VC 9.3%

Free float 22.4%

-50%

0%

50%

100%

150%

200%

Jan/17 Mar/17 Apr/17 Jun/17 Jul/17 Sep/17 Oct/17 Nov/17 Jan/18

BYSI.US NASDAQ Biotechnology Index

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Focus charts Figure 1: Global G-CSF market size (US$ mn) Figure 2: Global NSCLC market size (US$ mn)

Sources: Evaluate Sources: GlobalData

Figure 3: Plinabulin’s efficacy in reducing Neutropenia (Study 103)

Figure 4: Plinabulin+PD-1+CTLA-4’s tumour inhibition (MC38 colon cancer model)

Sources: Company data Sources: Company data

Figure 5: Multiple near-term milestones

Sources: Company data

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Company background

Beyond Spring (BYSI US, NR) is a clinical-stage pharmaceutical company with a lead late-stage pipeline asset, Plinabulin. It acquired this asset from Nereus in 2013. In 2012, Nereus completed phase II trial in advanced NSCLC for Plinabulin/Docetaxel vs Docetaxel monotherapy (Study 101). Despite showing durable response (DOR 12.7m vs 1m, P<0.05) and benefits in Neutropenia (more details later), the study failed to show statistical significance in the mOS difference (p=0.29).

Figure 6: Study 101 Phase 2 Data Read-out

Advanced NSCLC Docetaxel (D) Plinabulin+ Docetaxel (DN)

No of patients (N) 38 38

mOS 6.7M 11.3M

P=0.29

DOR 1.0M 12.7M

P<0.05

ORR 10.5% 18.4%

PFS 2.9M 3.7M

Sources: ASCO-SITC

However, Dr. Huang Lan (the founder/CEO) saw the potential in this asset and bought its China right for US$6mn and put it under the newly founded Beyond Spring. Nereus later converted the drug’s ex-China right to 10% stake (pre-NASDAQ IPO) in Beyond Spring. As a New Chemical Entity (NCE), the drug has the compound patent to expire in 2025 (can extend to 2030), the crystal form patent to expire in 2036 and the structure patent to expire in 2038.

Plinabulin’s mechanism of action

Plinabulin belongs to a class of tubulin inhibitors which are derivatives of a natural compound (like vinctristine and pactalitaxel, etc.). Researchers recently found (Kashayap A et Al, Key Note Meetng March 2017) that Plinabulin has different beta-tubulin binding pockets compared to other micro-tubulin drug candidates, which allows it to generate immune response via activating GEF-H1. GEF-H1 then activates downstream transduction pathways, leading to the activation of the protein c-Jun. Activated c-Jun enters the nucleus of dendritic cells to up-regulate immune-related genes, which contributes to the up-regulation of a series of genes leading to dendritic cell maturation, T-cell activation and other effects that prevent neutropenia. This mechanism allows Plinabulin to show no cardio-related safety issue like other microtubule-disrupting agents (MDAs).

Figure 7: Plinabulin’s mechanism of action

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Sources: Company

Plinabulin showed numerous benefits over G-CSF In retrospective studies

Plinabulin has a very different mechanism from Neulasta/Neupogen and all the follow-on G-CSFs. It reverses the chemotherapy-induced blockade of neutrophil in bone marrow. This allows it to sustain neutrophil levels within the normal range and lessen bone pain (a frequent side effect of G-CSF) by five-fold. In addition, Plinabulin can be administered in 0.5-1h after chemotherapy, versus after 24h in G-CSF, thus reducing hospital visits and hospitalization cost. Neulasta is also currently limited to high-risk febrile neutropenia patients due to side effects, while Plinabulin has potential to target medium-risk patients. Lastly, Plinabulin is a chemical drug which is cheaper and easier to manufacture compared to G-CSF being biologics.

Figure 8: Plinabulin’s vs G-CSF Figure 9: Plinabulin’s vs G-CSF (cont’d)

Sources: Company Sources: Company

Notes: *BYSI have not completed head-to-head trials of G-CSF and Plinabulin in combination with docetaxel for the prevention of docetaxel-

induced grade 3 and 4 neutropenia. As a result, the data derived from these separate clinical trials may not be comparable and would not form a

basis for marketing Plinabulin, if submitted for regulatory approval.

Figure 10: Plinabulin’s effect in preventing grade 4 and grade 3 neutropenia is persistent

Sources: Company Sources: Company

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Clinical roadmap to establish Plinabulin’s non-inferiority/superiority to Neulasta (SOC)

The Company currently mainly advances Plinabulin in two main indications – Neutropenia and NSCLC, with plans to initiate studies on small cell lung cancer and pancreatic cancer in 2018.

Figure 11: Pipeline overview

Sources: Company, Study 203/204 were announced last week and not included

In Neutropenia, Company’s strategy is to establish Plinabulin’s non-inferiority to Neulasta via Study 105 and non-inferiority/superiority to Neulasta via Study 106, and its cancer-treatment efficacy via Study 103, so as to strengthen the approval prospect (mainly for Neutropenia, but it may also get the NSCLC label especially in China) and commercial profile (easier to convince doctors to prescribe).

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Below are the trial designs of Study 105 and 106. The primary endpoint is DSN (duration of severe neutropenia), which was oked by FDA and used previously in Zarxio’s approval. Study 105 has completed patient and Study 106 will complete enrollment in 1-2 months per management. Thanks to the short duration of the trial (one chemotherapy cycle DSN will suffice), Study 105 reported top-line data on its phase II portion last week at ASCO-SITC, and Study 106 will have its first read out in 1H18.

Figure 12: Study 105 design

Sources: Company

Figure 13: Study 106 design

Sources: Company

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On Jan 26, 2018, Beyond Spring presented Phase II portion of Plinabulin’s global Phase II/III clinical trial (Study 105) data at ASCO-SITC. The non-inferiority head-to-head result showed similar DSN data (0.38d vs 0.14d, within the non-inferiority margin). Further, incidences of grade 4 Neutropenia were similar. The topline data from the Phase II portion of Study 105 are summarized below. Meanwhile, Company also noted faster-than-expected Phase III patient enrollment in the back of strong interest within the medical community participating in this trial.

Figure 14: Summary of the topline data from Phase II Study 105

Neulasta Plinabulin

Dosage 6 mg 5 mg/m2 10 mg/m

2 20 mg/m

2

No of patients 14 14 14 13

Grade 4 Incidence % 14% 23% 21% 15%

DSN (Days) 0.14 0.46 0.43 0.38

Sources: Company

Below is the trial design of Study 103 for NSCLC. Note the screen criteria (one priori platinum-based chemotherapy) and the patient composition (75-80% from China) should make its China NDA application easier. At the same time the SAP plan should allow it some flexibility should PD-1 quickly occupy earlier lines of treatment in China.

Figure 15: Study 103 design

Sources: Company

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Clinical roadmap to establish Plinabulin as a PD-1 combo candidate

Here Company’s strategy is mainly to quickly establish in dual I/O combo trials Plinabulin’s benefit in immune-related adverse events (IRAEs) – IRAEs has been one of the main handicaps in current PD-1/CTLA-4 combo trials – and then to use triple I/O combo trials to potentially advance the treatment in 1L NSCLC setting.

Here are the clinical trials that the company has initiated or is initiating:

- Dual I/O combo: Plinabulin + Opdivo for NSCLC (Study 201/202)

- Triple I/O combo: Plinabulin + PD-1 + Chemotherapy (Study 203) and Plinabulin + PD-1 +CTLA-4 (Study 204) for NSCLC

Here is what the management hoped the clinical roadmap in I/O would eventually become, after adding SCLC and pancreatic cancer at later time:

Figure 16: Plinabulin’s future as a platform drug in cancer treatment

Source: Company

Current cash run-way should cover 2018 research milestones

As with most clinical stage biopharmaceutical companies, Beyond Spring had no revenues and incurred significant losses due to R&D expenses. As of 3Q17, the company had US$38mn cash on hand and has a cash burn rate of c.US$30mn a year. The near-term cash deployment priorities will be:

1. Completion of Plinabulin Phase II/IIIStudy 105 and Study 106 for CIN and regulatory filing

2. Completion of Plinabulin Phase III Study 103 for NSCLC and regulatory filing

3. Near-term pre-commercialization costs in China

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Appendix

Figure 17: BYSI’s management summary

Sources: Company data

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Financial Summary

Balance Sheet

US$ mn 2014 2015 2016 3Q17

Non-current assets 0 0 0 0

PP&E - 0 0 0

Intangible assets - - - -

Goodwill - - - -

Deferred tax assets - - - -

Others - - 0 0

Current assets 1 11 15 44

Others 0 0 2 3

Loan and account receivables 1 0 1 2

Total cash and cash equivalents 0 11 12 38

Total assets 1 11 15 44

Current liabilities 3 1 3 3

Trade and bills payables 0 0 0 1

Other payables - - 1 1

Due to a related party 2 0 0 0

Income tax payable - - - -

ST bank debt - - - -

Non-current liabilities 8 0 0 0

Due to a related party 8 - - -

Deferred tax liabilities - - - -

LT bank loans - - - -

Capital notes - - - -

Others - - - -

Shareholders' funds (9) 9 12 39

Minorities - 1 0 1

Total liability and equity 1 11 15 44

Cashflow Statement US$ mn 2014 2015 2016 3Q17

Cash flow from operating (1) (7) (14) (19)

Pretax profit (3) (8) (13) (80)

Operating profit before WC chgs (2) (6) (13) (19)

Net working capital change 1 0 (1) 0

Income tax paid 0 0 0 0

Interest paid 0 0 0 0

Cash flow from investing (1) 0 0 (3)

Purchase of PPE - 0 0 0

Purchase of intangible assets - - - -

Purchase/disposal of subsidiaries - - - -

Purchase/disposal of JV&Asso. - - - -

Interest received - - - -

Others (1) 0 (0) (3)

Cash flow from financing 2 17 15 48

Issue share capital - 16 14 48

Repurchase/ cancellation of shares - - - -

Dividends Paid To MI - - - -

Bank borrowings, net - - - -

Others 2 1 0 -

Beginning cash 0 0 11 12

Forex (0) (0) (0) (0)

End cash 0 11 12 38

Profit & Loss Statement

US$ mn 2014 2015 2016 3Q17

Consolidated revenue 0 0 0 0

Cost of goods sold 0 0 0 0

Gross profit (0) (0) (0) (0)

( – ) Total SG&A expense (0) (1) (2) (7)

Administrative expenses (0) (1) (2) (7)

Selling and distribution costs - - - -

( – ) R&D expense (2) (6) (10) (74)

( +/– ) Other income/expense - - - -

EBITDA (2) (7) (12) (81)

Stock-Based Compensation - - - -

Total Depreciation and amortisation - - - -

EBIT (2) (7) (12) (81)

( +/– ) Finance (expense)/income - net (1) (1) 0 0

( +/– ) Other income/expense, net (0) (0) 0 8

Profit before tax (3) (8) (13) (80)

( – ) Tax 0 0 0 0

Net Profit (3) (8) (13) (80)

( +/– ) Minority interest - (1) (1) (4)

NP attri. to shareholders (3) (7) (12) (76)

Financial Ratios 2014 2015 2016 3Q17

Growth (%)

Consolidated revenue n.a. n.a. n.a. n.a.

Gross profit n.a. n.a. n.a. n.a.

Adjusted net profit n.a. n.a. n.a. n.a.

Profitability (%)

Gross margin (%) n.a. n.a. n.a. n.a.

Adj. net profit margin (%) n.a. n.a. n.a. n.a.

ROE (year end) n.a. n.a. n.a. n.a.

ROA n.a. n.a. n.a. n.a.

Efficiency

Inventory days n.a. n.a. n.a. n.a.

Accounts receivable days n.a. n.a. n.a. n.a.

Accounts payable days n.a. n.a. n.a. n.a.

Cash cycle days n.a. n.a. n.a. n.a.

Liquidity

FCF (HK$ mn) n.a. n.a. n.a. n.a.

Net gearing (%) Net

cash Net

cash Net

cash Net

cash

Sources: Company data, CMS (HK) estimates

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Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

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recommendations or views expressed in this research report.

Regulatory Disclosure

Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html or http://www.cmschina.com.hk/Research/Disclosure.

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