Zentalis Pharmaceuticals, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Zentalis is a clinical-stage oncology drug developer with no approved products and no product-sales revenue.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $54.0m | $24.7m | $137.2m | $55.4m |
| General and administrative | $8.9m | $10.1m | $31.2m | $23.2m |
| Operating loss | $62.9m | $34.8m | $168.3m | $78.5m |
| Consolidated net loss | $10.5m | $34.7m | $116.0m | $78.2m |
| Net loss attributable to Zentalis | $4.2m | $34.6m | $108.7m | $77.5m |
| Loss per share, basic and diluted | $0.09 | $0.91 | $2.59 | $3.21 |
Loss per share is shown as a loss. Q3 2021 consolidated net loss included a $51.6m gain on deconsolidating Zentera, which substantially reduced the reported loss; the operating loss better reflects ongoing operating costs. Nine-month operating cash use was $117.1m, versus $59.5m in 2020. Investing activities used $61.4m and financing activities provided $166.3m, primarily from the July 2021 share offering.
At September 30, 2021, cash and cash equivalents were $40.8m and available-for-sale marketable securities were $326.0m, or $366.8m combined. Total assets were $435.1m, total liabilities $41.1m, and accumulated deficit $309.5m. The company reported no indebtedness. Management expects existing cash, cash equivalents and marketable securities to fund operating expenses and capital expenditure requirements into Q3 2023, subject to assumptions that may prove inaccurate.
Material changes and unusual items
- R&D expense more than doubled year over year for both the quarter and nine-month period, reflecting expanded clinical and preclinical work, manufacturing and study costs, and increased staffing. Q3 also included an $8.8m impairment of Kalyra in-process research and development after Kalyra discontinued its lead candidate’s clinical trial.
- In July, Zentera’s Series B financing diluted Zentalis’s interest below a majority. Zentalis ceased consolidating Zentera, recorded a retained equity-method investment of $39.3m (40.3% ownership), and recognized the $51.6m deconsolidation gain. Subsequent Zentera-related development costs include a $2.9m reimbursement recorded as a reduction of R&D expense.
- G&A decreased in Q3 from the comparable quarter, partly due to reallocating overhead to R&D and lower legal fees; nine-month G&A increased, mainly from employee-related costs and stock-based compensation.
- The July 2021 follow-on offering generated $162.2m net proceeds from 3.565m shares. A $200m at-the-market program was available but had not been used as of the filing.
Pipeline, outlook and risks
- ZN-c3: In multiple trials, including Phase 2 monotherapy for recurrent or persistent uterine serous carcinoma. The FDA concurred in principle that the proposed global study design may support an accelerated-approval pathway. A Phase 1/2 osteosarcoma combination trial began in Q3; initial results were expected in H2 2022. The company also planned a biomarker-selected Phase 2 trial, subject to FDA feedback, and a niraparib combination trial.
- ZN-c5: Combination trials with palbociclib and abemaciclib continued; initial results were expected in H1 2022. Management cited early safety and tolerability data as supportive of further evaluation, not proof of efficacy.
- ZN-d5: Phase 1 monotherapy enrollment expanded to include acute myeloid leukemia; initial results were expected in H1 2022.
- ZN-e4: Phase 1/2 trial in advanced non-small cell lung cancer continued; initial results were expected in Q4 2021.
- Management expects R&D spending and operating losses to increase as trials progress. The company will need substantial additional capital before product revenue, and future equity or other financing may dilute shareholders or impose restrictions. It stated there was no substantial doubt about its ability to continue as a going concern within one year after issuance of the interim financial statements.
- COVID-19 had caused or could cause clinical-site, enrollment, laboratory, supply-chain and trial delays and additional costs. Other key risks include clinical and regulatory uncertainty, reliance on CROs and contract manufacturers (including manufacturing in China), competition, intellectual-property protection and dependence on lead candidates.
- Two additional real-estate leases, not yet commenced at September 30, carried approximately $74.6m of minimum payments and were expected to begin in Q4 2021, with 10- and 11-year terms. The filing reported no material legal proceedings. Management concluded disclosure controls were effective.
Investor verification points
- Track clinical-trial enrollment, safety and efficacy data, regulatory feedback, and whether the stated data timelines are met.
- Assess the assumptions behind the Q3 2023 cash runway, including rising trial costs, capital spending and the impact of COVID-19.
- Review the Zentera deconsolidation valuation, ongoing equity-method results and related-party collaboration economics.
- Monitor the impact and commencement of the $74.6m lease commitments, and any use of the unused ATM facility or other financing.
- Distinguish recurring operating performance from the one-time Zentera gain and Kalyra impairment when evaluating reported losses.