Zai Lab Limited — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited U.S. GAAP results; amounts below are U.S. dollars. Zai Lab is a commercial-stage biopharmaceutical company focused on oncology, autoimmune disorders, infectious disease, and neuroscience, with principal operations in Greater China and a presence in the United States.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $69.2M | $57.5M | $200.9M | $152.4M |
| Product revenue, net | $69.2M | $57.0M | $200.9M | $150.6M |
| Gross profit, calculated as revenue less cost of sales | $43.7M | $37.5M | $130.3M | $99.3M |
| Gross margin, calculated | 63.2% | 65.2% | 64.9% | 65.1% |
| Research and development expense | $58.8M | $99.5M | $183.9M | $219.5M |
| Selling, general, and administrative expense | $68.6M | $66.6M | $199.0M | $186.9M |
| Operating loss | $83.6M | $128.6M | $242.6M | $307.1M |
| Net loss | $69.2M | $161.2M | $239.2M | $381.5M |
| Net loss per ADS | $0.71 | $1.68 | $2.48 | $3.98 |
Product sales were led by ZEJULA ($41.6M in Q3; $127.2M for nine months). Q3 revenue also included Optune $11.6M, QINLOCK $5.7M, NUZYRA $5.5M, and VYVGART $4.9M. VYVGART was launched in China in September 2023.
- Cash flow: Net cash used in operating activities was $183.3M for the first nine months, compared with $258.4M in the prior-year period. Investing activities used $25.2M, versus $424.4M provided in 2022, largely reflecting lower proceeds from short-term investment maturities. Financing activities used $6.8M.
- Liquidity: At September 30, cash and cash equivalents were $788.8M, short-term investments $31.6M, and restricted cash $1.8M; together, $822.2M. Management expects these resources to fund operations and capital needs for at least the next 12 months under its current operating plan, while noting that additional funding may ultimately be needed.
- Debt: The balance sheet does not report borrowings or other debt; lease liabilities are reported separately. Total liabilities were $162.7M and shareholders’ equity was $881.0M.
Material changes and drivers
- Net product revenue increased 22% in Q3 and 33% for the first nine months year over year, driven by higher sales volumes, VYVGART’s launch, and recovery from COVID-related access constraints. Management said China’s industry-wide anti-corruption enforcement efforts affected hospital and physician practices and slowed growth.
- NUZYRA and QINLOCK growth benefited from NRDL inclusion; ZEJULA remained the leading PARP inhibitor in hospital sales for ovarian cancer in mainland China. Nine-month revenue included $5.2M of rebates related to NRDL price reductions.
- R&D expense fell 41% in Q3 and 16% year to date, mainly because of lower licensing fees and, year to date, partner compensation for clinical trials. This reflects timing and mix of payments, not necessarily a sustained reduction in development investment.
- Net loss narrowed substantially, but comparisons were influenced by foreign-exchange movements: Q3 included a $4.9M gain versus a $40.4M loss in Q3 2022; the nine-month foreign-exchange loss was $26.3M versus $73.1M. Higher interest income also helped, while Q3 gross margin was lower than the prior-year quarter.
Outlook, developments, and risks
- Management expects substantial ongoing R&D and commercial spending, with future results likely to fluctuate. Profitability depends on commercial execution, product and indication expansion, and development and commercialization of pipeline candidates; the filing provides no numerical revenue or earnings guidance.
- VYVGART launched for eligible adults with generalized myasthenia gravis; NRDL inclusion discussions were ongoing. Efgartigimod SC received China Breakthrough Therapy Designation for CIDP. Repotrectinib received China Breakthrough Therapy Designation for NTRK-fusion solid tumors, and its ROS1-positive NSCLC application was under priority review in China.
- The company terminated internal development of ZL-1211 after reviewing competition and market opportunity. A Phase III ovarian-cancer trial of TTFields conducted by partner NovoCure did not meet its primary overall-survival endpoint; Zai Lab did not participate in that study.
- Unusual/non-recurring items included a $10.0M gain on sale of intellectual property in the first half of 2023 and $3.9M proceeds from disposal of a land-use right. The company paid $3.0M and $5.0M development milestones in Q3 under its SUL-DUR and repotrectinib agreements. It may owe up to $1.34B in aggregate development and regulatory milestones and $2.41B in sales-based milestones, plus royalties, contingent on product performance.
- Principal risks include clinical and regulatory uncertainty, commercial uptake and reimbursement, China regulatory and data-transfer requirements, currency conversion and restrictions on moving funds from China, geopolitical and policy changes, and dependence on external collaborators. Cash held in RMB is subject to foreign-exchange controls. No material legal proceedings were reported; management said there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether VYVGART’s launch and NRDL negotiations, and growth in existing products, translate into durable net sales after rebates and price adjustments.
- Whether lower R&D spending reflects payment timing and partner reimbursements, and how upcoming trials and milestone obligations affect cash burn.
- Progress and outcomes for priority pipeline programs, including repotrectinib, efgartigimod SC, and late-stage oncology candidates; clinical results and regulatory timing remain uncertain.
- Cash runway under actual operating needs, investment maturities, foreign-exchange movements, and restrictions on transferring funds from Chinese subsidiaries.
- Exposure to China’s evolving data, human genetic resources, securities-filing, and other regulatory requirements, as well as the effect of anti-corruption enforcement on commercial access.