Zai Lab Limited — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars in millions unless stated otherwise. Zai Lab is a commercial-stage biopharmaceutical company focused on oncology, autoimmune disorders, infectious diseases and neuroscience, with substantial operations in Greater China and the United States.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $46.7 | $20.1; up 132% |
| Net product revenue | $46.1 | $20.1; up 129% |
| Net loss | $(82.4) | $(232.9) |
| Loss per ordinary share | $(0.09) | $(0.26) |
| Loss per ADS | $(0.86) | $(2.64) |
| Operating cash flow | $(87.1) | $(169.5) |
| Cash, cash equivalents and restricted cash, quarter-end | $847.8 | $964.9 at December 31, 2021 |
| Short-term investments, quarter-end | $465.3 | $445.0 at December 31, 2021 |
Cost of sales was $15.6 million, yielding an approximate gross margin of 66.5% on total revenue. R&D expense was $53.9 million and SG&A was $57.0 million; operating loss was $79.8 million. The net loss margin was approximately 176% of revenue. Total current assets were $1,393.3 million and current liabilities $154.9 million, a current ratio of about 9.0. The filing reports no borrowings; total liabilities were $192.9 million, including $17.9 million of operating lease liabilities and $26.9 million of deferred income. Cash, cash equivalents, restricted cash and short-term investments totaled approximately $1,313.0 million.
Cash used in investing activities was $30.1 million, principally reflecting $120.3 million of short-term investment purchases, partly offset by $100.0 million of maturities, plus $9.7 million of property and equipment purchases. Financing activities provided $0.3 million. The company reported $22.3 million of contracted property and equipment commitments, expected within one year.
Material changes versus Q1 2021
- Revenue growth was led by ZEJULA, whose net sales rose to $29.6 million from $12.6 million; Optune rose to $12.8 million from $7.1 million, and QINLOCK to $3.0 million from $0.4 million. NUZYRA contributed $0.7 million.
- Product rebates and returns were $7.2 million, down from $26.5 million. The company attributed much of the prior-period rebate burden to compensation for ZEJULA sales made before National Reimbursement Drug List price changes.
- R&D expense fell to $53.9 million from $203.9 million, primarily because Q1 2021 included $171.3 million of licensing fees. Personnel and clinical-trial-related costs increased in Q1 2022.
- SG&A increased 59% to $57.0 million, mainly due to higher personnel, professional-service and commercial operating costs.
- Operating cash use declined to $87.1 million from $169.5 million, largely reflecting lower licensing payments. Q1 2021 investing cash flow was unusually high because of short-term investment maturities.
Outlook, developments and risks
- Management expects available cash, cash equivalents, restricted cash and short-term investments to fund operating expenses and capital expenditure for at least the next 12 months. It also states that further funding will ultimately be needed to achieve its R&D objectives. No specific revenue or earnings guidance is provided.
- The company had four commercialized products and twelve late-stage development programs. Management expects substantial R&D and commercialization spending to continue and results to fluctuate with product sales and development costs.
- Q1 and subsequent clinical developments included NMPA acceptance of the margetuximab NDA, Breakthrough Therapy Designation for repotrectinib, and positive Phase 3 PRIME results for ZEJULA. These are development updates, not guarantees of approval or commercial success.
- COVID-19 restrictions, including a full lockdown in Shanghai from late March 2022, could disrupt product access, distribution, sales activity, supply chains and clinical-trial enrollment.
- The SEC identified the company under the HFCAA in March 2022 because its then-auditor was not subject to PCAOB inspection. The Audit Committee approved engagement of PCAOB-inspected KPMG for 2022, subject to completion of procedures and relevant approvals; continued audit-access issues could put U.S. trading at risk.
- Other material exposures include Chinese regulatory, data-security and human-genetic-resource requirements; currency controls and RMB exchange-rate movements; geopolitical and capital-market uncertainty; reliance on licensors and third parties; and potential future milestone and royalty payments. The filing estimates up to approximately $5.59 billion in contingent future milestone payments across agreements, dependent on specified events.
- The company reported no material legal proceedings and concluded disclosure controls were effective at a reasonable assurance level. A one-for-ten share subdivision and corresponding ADS ratio change took effect March 30, 2022; per-share figures were retrospectively adjusted.
Investor facts to verify
- How sustainable are product-sales gains, particularly ZEJULA growth, after rebate effects and reimbursement pricing changes?
- Reconcile the R&D expense disclosure of no licensing fees in its Q1 2022 expense table with notes describing $25 million of argenx and $6 million of Paratek milestone payments recorded in R&D.
- Monitor cash burn, planned R&D and capital spending, and whether the stated 12-month funding runway remains adequate.
- Confirm KPMG’s engagement and required Hong Kong approvals, and track developments under the HFCAA and Chinese audit/data rules.
- Assess the operational and financial effects of Shanghai COVID-19 restrictions and the timing and terms of future contingent milestone obligations.