Zentalis Pharmaceuticals, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited financial statements. Zentalis is a clinical-stage oncology drug developer with no approved products and no product-sales revenue.
Financial performance and position
| Metric | Q2 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Revenue | No product-sales revenue | No product-sales revenue |
| Research and development expense | $43.8 million | $89.9 million |
| General and administrative expense | $19.6 million | $31.4 million |
| Operating loss | $63.5 million | $121.3 million |
| Net loss attributable to Zentalis | $68.4 million | $127.4 million |
| Net loss per share, basic and diluted | $1.34 | $2.64 |
| Net cash used in operating activities | $93.2 million |
At June 30, 2022, cash and cash equivalents were $55.1 million and available-for-sale marketable securities were $400.1 million, totaling $455.2 million. Total assets were $567.9 million, total liabilities $95.0 million, and total equity $472.8 million. The company reported no indebtedness. Operating lease liabilities totaled $46.8 million.
Cash, cash equivalents and restricted cash declined $4.8 million during the first half. Investing activities used $122.3 million, largely reflecting purchases of marketable securities; financing activities provided $210.7 million, primarily from equity offerings. The company reported no off-balance-sheet arrangements. Operating margins are not meaningful given the absence of product revenue and continuing development-stage losses.
Changes versus prior comparable periods
- Q2 net loss attributable to Zentalis increased from $54.6 million to $68.4 million year over year; first-half net loss increased from $104.5 million to $127.4 million.
- Q2 R&D expense declined $0.9 million year over year, while first-half R&D expense rose $6.8 million. Management attributed the first-half increase principally to clinical-trial costs and personnel, partly offset by lower drug-manufacturing costs, licensing milestones and Zentera cost-sharing expense.
- G&A expense rose $9.3 million in Q2 and $9.1 million for the first half, driven in part by higher share-based compensation and other compensation costs.
- The company recorded equity-method investment losses of $5.3 million in Q2 and $7.1 million in the first half, primarily relating to its investment in Zentera; there was no comparable loss in 2021.
- In April and May 2022, Zentalis raised approximately $25.0 million gross from a direct stock offering to Pfizer and $200.2 million gross in a follow-on offering. The offerings increased shares outstanding and diluted existing holders.
Outlook, management commentary and risks
- Management estimated that June 30 cash, cash equivalents and marketable securities would fund operating expenses and capital expenditures into the first quarter of 2025. This is an estimate based on assumptions; the filing says available funds would not cover all activities needed to complete product development, and additional capital may be required.
- Management expects expenses and operating losses to increase as clinical development advances. The company has no products approved for sale and expects no product-sales revenue in the foreseeable future.
- Pipeline: ZN-c3 (Wee1 inhibitor) was in multiple trials, including a Phase 2 monotherapy study in uterine serous carcinoma; management expected initial osteosarcoma combination-trial results in the second half of 2022. ZN-d5 (BCL-2 inhibitor) was in Phase 1 development, with a Phase 1/2 amyloidosis trial initiated in early 2022.
- Zentalis planned to discontinue clinical development of ZN-c5 and ZN-e4 after completing ongoing trials, both closed to accrual. It reported initial ZN-c5 combination-trial results in Q2 and expected ZN-e4 trial results in 2022.
- COVID-19 had caused or contributed to trial-site and enrollment delays, supply-chain difficulties and delays in laboratory and research-stage programs. Management expected continued effects, with the extent uncertain. The company also cited inflation, global supply-chain issues and the Russia-Ukraine conflict as potential business and financing risks.
- Clinical, regulatory, manufacturing and financing risks remain significant. The company relies on third parties for trials and manufacturing, including some manufacturing in China; it also depends on the success of lead candidates and may need to raise further capital on uncertain terms.
- Unusual accounting item: $4.2 million of Pfizer’s offering proceeds was treated as a premium over the fair value of the shares and recorded as accrued R&D expense, to be recognized as a reduction of R&D expense over the collaboration term.
- The company said it was not party to material legal proceedings and had no legal matter requiring a loss liability. Management concluded disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Confirm the cash runway assumptions behind management’s estimate through Q1 2025, given ongoing losses and the stated need for additional capital to complete development.
- Track clinical-trial progress, safety and efficacy data for ZN-c3 and ZN-d5, as well as completion plans and results for ZN-c5 and ZN-e4.
- Reconcile the filing’s inconsistent MD&A wording: one overview passage reports $68.4 million as the six-month 2022 net loss, while the financial statements report $127.6 million consolidated net loss and $127.4 million attributable to Zentalis for the six months. The $68.4 million figure is the Q2 attributable loss.
- Assess the impact of the 2022 equity offerings, share-based compensation and potential future financing on dilution and capital needs.
- Monitor Zentera’s development and financial performance, Zentalis’s 40.3% equity interest, and the accounting impact of its equity-method investment losses.