Zai Lab Limited — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results are prepared under U.S. GAAP; amounts below are U.S. dollars unless stated otherwise. Zai Lab is a commercial-stage biopharmaceutical company focused on oncology, autoimmune disorders and infectious diseases, with operations primarily in Greater China and the United States.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $43.1 million | $14.7 million | $100.1 million | $33.9 million |
| Cost of sales | $12.2 million | $4.9 million | $30.5 million | $9.9 million |
| Gross profit / margin | $30.9 million / 71.8% | $9.7 million / 66.3% | $69.6 million / 69.5% | $24.0 million / 70.7% |
| Research and development | $55.1 million | $58.1 million | $401.2 million | $160.1 million |
| Selling, general and administrative | $59.0 million | $27.9 million | $149.3 million | $70.3 million |
| Operating loss | $83.2 million | $76.3 million | $480.9 million | $206.5 million |
| Net loss | $96.4 million | $63.7 million | $492.6 million | $192.4 million |
| Basic and diluted loss per share | $1.01 | $0.84 | $5.34 | $2.59 |
| Net cash used in operating activities | Not provided separately | Not provided separately | $396.2 million | $171.7 million |
Revenue by product: Q3 net sales were ZEJULA $28.2 million, Optune $10.7 million and QINLOCK $4.3 million. Nine-month net sales were $64.1 million, $27.3 million and $8.7 million, respectively.
Balance sheet at September 30, 2021: Cash and cash equivalents were $1.398 billion, short-term investments $170.0 million, and restricted cash $0.7 million. Combined cash, cash equivalents, restricted cash and short-term investments were $1.569 billion. Current assets were $1.619 billion versus current liabilities of $112.0 million. Total liabilities were $140.1 million; the filing reports no short-term borrowings outstanding and no interest expense in 2021. Shareholders’ equity was $1.588 billion.
Changes versus prior comparable periods
- Q3 revenue increased 194% year over year; nine-month revenue increased 196%. ZEJULA and Optune grew, while QINLOCK sales expanded from a small prior-year base.
- Nine-month net loss widened to $492.6 million from $192.4 million, principally reflecting R&D expense growth of $241.1 million. This included $274.3 million of licensing fees and upfront or milestone payments, versus $77.6 million in the prior-year period.
- Q3 R&D expense declined by $3.0 million year over year, mainly because licensing fees were lower, partly offset by higher personnel, clinical-service and other costs.
- Nine-month SG&A more than doubled, rising $78.9 million, primarily from increased personnel and commercialization costs, as well as public-company professional fees.
- Q3 net loss also reflected $13.6 million of other expense, compared with $12.0 million of other income in Q3 2020. Management attributed the reversal mainly to foreign-exchange losses and a $9.9 million fair-value loss on the MacroGenics investment.
Cash flows, outlook and material items
- For the first nine months, investing activities provided $531.4 million, mainly due to maturities of short-term investments; financing activities provided $820.5 million, including $818.9 million from share offerings before offering costs. Cash, cash equivalents and restricted cash increased by $956.4 million.
- Management said cash and cash equivalents as of November 9, 2021, together with its operating plan, were expected to fund operating expenses and capital expenditures for at least the following 12 months. The company expects substantial continuing R&D and commercialization spending and stated that additional funding will ultimately be needed to achieve its development objectives.
- Management reported three commercialized products and thirteen late-stage programs as of November 9, 2021. It cautioned that profitability and positive operating cash flow depend on successful commercialization; timing and results of approvals and launches are uncertain.
- Licensing agreements carry potential contingent milestone payments of approximately $4.879 billion in aggregate, plus royalties. These payments depend on specified milestones and are not fixed or recorded as current liabilities. Contracted property-and-equipment purchases totaled $24.2 million, expected within one year.
- ZEJULA net revenue for the first nine months included $22.0 million of distributor compensation for inventory sold at pre-NRDL prices; there was no such compensation in Q3. This reduced reported revenue.
- Subsequent events: In November 2021, Zai Lab entered agreements for BLU-701/BLU-945 and KarXT, with upfront fees of $25 million and $35 million, respectively, and additional potential milestone obligations. Also after quarter-end, Deciphera reported that the QINLOCK INTRIGUE Phase 3 trial did not meet its primary endpoint; management said it did not expect a material effect on current operations.
Risks and contingencies
- Major risks include clinical, regulatory and commercialization uncertainty; competition and pricing or reimbursement pressure; reliance on licensors and third parties; and the possibility of significant future milestone and royalty payments.
- The filing highlights evolving Chinese data, cybersecurity, personal-information and cross-border transfer rules, including the Data Security Law and Personal Information Protection Law. Required reviews or restrictions could increase costs or delay clinical work and data transfers.
- Changes in China-U.S. relations, Chinese regulatory interpretation, foreign-exchange controls and limits on moving funds from China may affect operations, financing or the value of securities. The company said it was not then required to obtain CSRC pre-approval to issue securities to foreign investors, but future requirements were uncertain.
- The filing warns that the company’s auditor was not then inspected by the PCAOB, creating potential U.S. listing and delisting risk under the HFCA Act and related requirements.
- Management reported effective disclosure controls as of September 30, 2021. It reported no material legal proceedings and no material changes in internal control over financial reporting during the period.
Investor verification points
- Verify the durability and mix of product-sales growth, including the effects of ZEJULA rebates and NRDL-related distributor compensation.
- Assess whether R&D and SG&A spending, including large license payments, can be supported by product growth and available capital; monitor operating cash burn against management’s stated runway.
- Track clinical, regulatory and commercial milestones, particularly developments relevant to QINLOCK following the subsequent Phase 3 result.
- Review the terms, timing and potential cumulative impact of the approximately $4.879 billion in contingent milestone payments, royalties and the later-announced license agreements.
- Monitor China data-transfer, cybersecurity, foreign-listing and cash-mobility rules, and PCAOB inspection and Nasdaq/HFCA Act developments.