Zai Lab Limited — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars in millions unless stated otherwise.
Business context
Zai Lab is a commercial-stage biopharmaceutical company focused on oncology, autoimmune disorders and infectious diseases, with substantial operations in Greater China and the United States. It reported three commercialized products—ZEJULA, Optune and QINLOCK—and 12 late-stage clinical programs as of June 30, 2021. Revenue came from product sales in China and Hong Kong.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $36.9 | $11.0 | $57.0 | $19.2 |
| Cost of sales | $10.9 | $2.9 | $18.4 | $5.0 |
| Gross profit / margin | $26.1 / 70.6% | $8.1 / 73.7% | $38.7 / 67.8% | $14.2 / 74.1% |
| Research and development | $142.2 | $68.3 | $346.1 | $102.0 |
| Selling, general and administrative | $54.4 | $23.8 | $90.3 | $42.5 |
| Operating loss | $(170.6) | $(84.0) | $(397.7) | $(130.3) |
| Net loss | $(163.3) | $(80.6) | $(396.2) | $(128.6) |
| Basic and diluted loss per share | $(1.76) | $(1.08) | $(4.37) | $(1.74) |
| Cash used in operating activities | — | $(235.3) | $(92.3) |
Q2 net sales by product were ZEJULA $23.4 million, Optune $9.5 million and QINLOCK $4.0 million. For the first half, product revenue was ZEJULA $36.0 million, Optune $16.7 million and QINLOCK $4.4 million. First-half ZEJULA revenue included adjustments to compensate distributors for sales at prices before National Reimbursement Drug List implementation.
At June 30, cash and cash equivalents were $1,766.6 million and restricted cash was $0.7 million; short-term investments were nil, versus $744.7 million at December 31, 2020. Total current assets were $1,808.6 million and current liabilities $193.9 million. Total liabilities were $223.5 million, including operating lease liabilities; the filing reports no short-term borrowings at period end. Shareholders’ equity was $1,671.7 million.
Changes versus comparable periods
- Q2 revenue rose about 236% year over year; first-half revenue rose about 197%. QINLOCK contributed sales in 2021 but none in the 2020 comparison.
- Losses widened: Q2 net loss increased to $163.3 million from $80.6 million; first-half net loss increased to $396.2 million from $128.6 million.
- R&D expense rose sharply, principally from licensing fees: $269.2 million in the first half of 2021 versus $51.7 million in 2020. The filing attributes much of the increase to new license upfront and milestone payments; it also records $62.3 million of noncash R&D expense related to argenx consideration.
- SG&A increased with commercial and administrative hiring, public-company costs and expanded China and Hong Kong commercial activity. Gross margin declined year over year in both comparisons.
- Cash increased substantially following the April global offering, which generated $818.9 million of net financing cash proceeds. Operating cash use also increased. Investing cash inflow largely reflected maturity of short-term investments.
Outlook, commentary and risks
- Management expects substantial R&D and commercialization spending to continue and financial results to fluctuate. It gives no specific revenue or earnings forecast.
- Based on its operating plan, management stated that cash and cash equivalents as of August 9, 2021 were expected to fund operating expenses and capital expenditures for at least 12 months after the filing’s issuance. It also said additional funding will ultimately be needed to achieve R&D objectives, with no assurance it will be available.
- Licensing agreements create contingent future milestone and royalty obligations. Management estimated up to approximately $4.54 billion of potential future milestone payments across agreements; amounts depend on specified milestones and may never become payable. These commitments are generally not included in the balance sheet or contractual-obligations table because timing and achievement are uncertain and obligations may be cancellable if milestones are not met.
- Other disclosed obligations included $28.2 million of purchase commitments, mostly due within one year, and $18.8 million of operating lease obligations.
- Key risks include clinical and regulatory outcomes, successful commercialization and reimbursement/pricing, dependence on licensors and third-party manufacturers, and continued cash consumption. The filing highlights evolving China data-security and cybersecurity requirements, U.S.-China regulatory and capital-market tensions, and the risk that limits on PCAOB audit inspections could lead to additional listing requirements or eventual ADS delisting.
- PRC foreign-exchange controls may restrict conversion or transfer of RMB funds. The company also notes that some assets in its Chinese subsidiaries are restricted from transfer; restricted net assets were $306.0 million at June 30, 2021.
- No material legal proceedings were reported. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether product growth—particularly ZEJULA after rebate and NRDL-related adjustments, and QINLOCK’s early contribution—can support improving gross margins and offset rising commercial costs.
- The nature, timing and cash impact of the unusually high 2021 licensing expense, including the $62.3 million noncash argenx charge, and the scale and conditions of potential milestone and royalty obligations.
- Cash-burn trajectory and management’s stated 12-month funding runway, including sensitivity to clinical spending, launches and further licensing commitments.
- Clinical-trial progress and regulatory milestones across the 12 late-stage programs, as well as the commercial prospects of the three marketed products.
- Developments in China data, cybersecurity and cross-border rules, U.S.-China relations, PCAOB inspection access and any resulting effects on operations or U.S. listing status.