Zai Lab Limited — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited, U.S. GAAP. Unless otherwise stated, amounts are U.S. dollars. Financial statement amounts below are in millions.
Business context
Zai Lab is a commercial-stage biopharmaceutical company focused on oncology, autoimmune disorders and infectious diseases, with operations primarily in Greater China and a substantial U.S. presence. Q1 product revenue was mainly from ZEJULA and Optune. Management reported three commercialized products and eleven late-stage programs as of May 10, 2021; QINLOCK received China NMPA approval in March.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net revenue | $20.1 million | $8.2 million; up 145% |
| Cost of sales | $7.5 million | $2.1 million |
| Gross profit / margin | $12.6 million / 62.7% | $6.1 million / 74.6% |
| Research and development | $203.9 million | $33.7 million |
| Selling, general and administrative | $35.8 million | $18.7 million |
| Operating loss | $227.1 million | $46.3 million |
| Net loss | $232.9 million | $48.0 million |
| Basic and diluted loss per share | $2.64 | $0.66 |
| Cash used in operating activities | $169.5 million | $39.8 million |
ZEJULA net sales were $12.6 million and Optune $7.1 million; other product revenue was $0.4 million. Gross product revenue was $46.6 million, offset by $26.5 million in rebates. ZEJULA revenue included adjustments to compensate distributors for sales at pre-National Reimbursement Drug List prices.
At March 31, cash and cash equivalents were $1,013.4 million, with no short-term investments (versus $744.7 million at year-end 2020). Current assets were $1,049.2 million and current liabilities $92.7 million. Total liabilities were $121.6 million, including operating lease liabilities; the filing reports no short-term borrowings and no interest expense for Q1. Cash, cash equivalents and restricted cash totaled $1,014.2 million. Investing cash inflow of $742.0 million was primarily proceeds from maturities of short-term investments, not operating cash generation.
In April, the company completed an offering that generated approximately $818.1 million net proceeds. Management said cash and cash equivalents as of May 10 were expected to fund operating expenses and capital requirements for at least the next 12 months.
Material changes and notable items
- Revenue grew substantially year over year, but rebates and lower gross margin reduced the benefit of higher gross product sales.
- R&D expense rose by $170.1 million. Licensing fees were $171.3 million, including substantial upfront and milestone payments; the filing identifies $62.3 million of noncash R&D expense related to shares issued to argenx. The company also made a $75 million development cost-sharing payment to argenx and paid Turning Point $25 million for TPX-0022 rights.
- Higher R&D and commercial operating costs drove the increase in operating and net losses. Management expects continued substantial R&D spending and higher commercialization costs, with results likely to fluctuate quarter to quarter.
- After quarter-end, the April equity offering raised approximately $818.1 million net. The filing also disclosed a May 7 leadership change: Tao Fu became Chief Strategy Officer and resigned as President, COO and director.
Outlook, risks and contingencies
- Management expects ongoing investment in eleven late-stage clinical candidates and other pipeline programs, and says additional funding will ultimately be needed to achieve its R&D objectives; future funding is not assured.
- Licensing agreements may require up to approximately $2.87 billion in aggregate future milestone payments, contingent on specified development, regulatory and commercial achievements, plus royalties on licensed-product sales. These conditional amounts are not included in the balance sheet or contractual-obligations table.
- Contractual obligations included $22.5 million in purchase obligations and $18.2 million in operating lease obligations. Purchase commitments comprised $17.0 million due within one year and $5.5 million within one to two years.
- Key risks include successful commercialization and regulatory approval, clinical and development outcomes, pricing and reimbursement, competition, licensing obligations, funding needs, supply and manufacturing, COVID-19 impacts, China-U.S. tensions, foreign-exchange exposure and PRC restrictions on transferring funds. Management reported no material change to the prior 10-K risk factors.
- The company reported no material legal proceedings and stated that disclosure controls were effective at the reasonable-assurance level. RMB conversion and transfers from China are subject to regulatory restrictions.
Important facts for investors to verify
- How much of the $26.5 million Q1 rebate accrual was a one-time NRDL price adjustment, and how rebates affect future net sales and margins.
- The cash versus noncash components and timing of Q1 licensing and collaboration expenses, particularly the argenx and Turning Point arrangements.
- Whether operating cash burn remains elevated as pipeline spending and product commercialization expand, and how long post-offering liquidity will last.
- The progress, approval prospects and potential economics of QINLOCK and the late-stage pipeline, alongside conditional milestone and royalty obligations.
- The practical availability of cash held in different currencies and jurisdictions, including PRC foreign-exchange and dividend-transfer constraints.