Zai Lab Limited — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results are presented in U.S. dollars. Zai Lab is a Cayman Islands holding company focused on developing and commercializing therapies, with principal operations in Greater China. It reported four commercialized products and 12 late-stage development programs.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars unless otherwise noted.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $48.2 | $36.9 | $94.9 | $57.0 |
| Product revenue, net | $47.6 | $36.9 | $93.7 | $57.0 |
| Cost of sales | $17.4 | $10.9 | $33.1 | $18.4 |
| Research and development | $66.1 | $142.2 | $119.9 | $346.1 |
| Selling, general and administrative | $63.4 | $54.4 | $120.4 | $90.3 |
| Operating loss | $(98.7) | $(170.6) | $(178.5) | $(397.7) |
| Net loss | $(137.9) | $(163.3) | $(220.3) | $(396.2) |
| Net loss per ADS | $(1.44) | $(1.76) | $(2.30) | $(4.37) |
Q2 gross margin was approximately 63.9%, compared with 70.6% a year earlier, as cost of sales grew faster than revenue. The company recorded no income tax expense; it said its entities were in cumulative loss positions and maintained full valuation allowances against deferred tax assets.
Cash flow and balance sheet: Operating cash use was $132.0 million for the first half, versus $235.3 million in 2021. Investing activities used $143.9 million, compared with $737.8 million provided in 2021; financing activities used $2.2 million, versus $820.9 million provided, which included the prior-year public offering. Cash, cash equivalents and restricted cash decreased by $283.3 million to $681.6 million. Short-term investments were $575.3 million, bringing cash, restricted cash and short-term investments to approximately $1.257 billion. Management said these resources were expected to fund operating expenses and capital expenditures for at least 12 months, while noting that further funding will ultimately be needed to achieve development objectives.
At June 30, current assets were $1.336 billion and current liabilities were $168.9 million. Total liabilities were $206.6 million, including operating lease liabilities; the filing reports no borrowings. Shareholders’ equity was $1.212 billion, down from $1.380 billion at year-end 2021. Capital expenditure purchase commitments were $19.5 million, expected within one year.
Material changes and drivers
- Revenue rose 30% in Q2 and 66% in the first half year over year. ZEJULA and Optune drove growth; QINLOCK revenue declined 85% in Q2 to $0.6 million. NUZYRA contributed $1.3 million in Q2, its first comparable-year period in the product table.
- R&D expense fell 54% in Q2 and 65% in the first half, mainly because the prior-year periods included substantial licensing fees and upfront payments. Personnel and clinical-trial costs increased. The company accrued $10.4 million of R&D expense for partner development milestones in the first half of 2022.
- SG&A rose 17% in Q2 and 33% in the first half, principally from headcount, compensation and professional-service costs.
- Other income and expense swung to a net expense of $40.4 million in Q2, from $7.4 million of income a year earlier, primarily due to a $42.2 million increase in foreign-exchange losses and a $5.6 million loss on the MacroGenics equity investment. First-half net other expense was $43.0 million, including $12.6 million of equity-investment loss.
- Net sales include distributor rebates. In June, the company reduced QINLOCK and NUZYRA selling prices and accrued related rebates; ZEJULA pricing had also been reduced following NRDL inclusion. It said the March–May 2022 COVID-related restrictions modestly affected Q2 revenue, with residual effects expected in the second half.
Outlook, developments and risks
No specific revenue, earnings or other numerical full-year guidance was provided. Management expects substantial R&D and commercialization spending to continue, and financial results may fluctuate with product sales and development costs. It is evaluating programs to prioritize resources. The filing reports termination of enrollment in the simurosertib study and deprioritization of ZL-1201 for internal development, with out-licensing being pursued.
Recent developments included NMPA acceptance in July of the efgartigimod application for generalized myasthenia gravis, and partner-reported positive Phase 3 topline results for KarXT in schizophrenia in August. The company also converted its Hong Kong listing to primary status in June and appointed KPMG LLP, a U.S.-based PCAOB-inspected auditor, for 2022. Management believes this mitigates HFCAA delisting risk, but does not eliminate risks from future regulatory developments.
Key risks include continued or renewed COVID-19 restrictions affecting patient access, sales, supply and clinical trials; China-related legal, regulatory, data-transfer and foreign-exchange controls; geopolitical and U.S.–China tensions; potential audit-inspection and listing requirements; reliance on licensors, contract manufacturers and clinical-trial partners; and the uncertain approval and commercial success of products and candidates. The company disclosed up to approximately $5.576 billion of potential future contingent development and sales milestones under license and collaboration agreements, which are uncertain and may not become payable. It reported no material legal proceedings and no subsequent events requiring financial-statement adjustment or disclosure.
Important facts for investors to verify
- Whether revenue growth, especially from ZEJULA and Optune, is sustainable after pricing changes, distributor rebates and COVID-related access disruptions.
- How operating cash use and the stated minimum 12-month liquidity runway evolve, including the timing and amount of any additional financing need.
- Whether the large reduction in reported R&D expense reflects timing of licensing payments rather than a durable decrease in underlying development spending.
- The causes and potential recurrence of foreign-exchange and equity-investment losses, and the sensitivity of results to currency movements.
- Clinical, regulatory and commercial progress across the pipeline, as well as the potential costs, royalties and milestone obligations under licensing agreements.
- Implementation of China data-transfer and other regulatory requirements, and continued compliance with U.S. audit-inspection and listing rules.