Zai Lab Limited — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited U.S. GAAP consolidated results; amounts below are U.S. dollars. Zai Lab is a Cayman Islands holding company focused on developing and commercializing biopharmaceutical products, with principal operations and markets in Greater China.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $57.5m | $43.1m | $152.4m | $100.1m |
| Net product revenue | $57.0m | $43.1m | $150.6m | $100.1m |
| Cost of sales | $20.0m | $12.2m | $53.1m | $30.5m |
| Gross profit / margin | $37.5m / 65.2% | $30.9m / 71.8% | $99.3m / 65.2% | $69.6m / 69.5% |
| Research and development | $99.5m | $55.1m | $219.5m | $401.2m |
| Selling, general and administrative | $66.6m | $59.0m | $186.9m | $149.3m |
| Operating loss | $128.6m | $83.2m | $307.1m | $480.9m |
| Net loss | $161.2m | $96.4m | $381.5m | $492.6m |
| Operating cash flow | Not separately provided | Not separately provided | $(258.4)m | $(396.2)m |
Q3 basic and diluted loss per ordinary share was $0.17, versus $0.10 a year earlier; nine-month loss per share was $0.40, versus $0.53. No income tax expense was recorded. The filing reports no borrowings; liabilities primarily comprise payables, accrued liabilities, deferred income and operating lease obligations.
Liquidity and balance sheet
- At September 30, 2022, cash and cash equivalents were $1,119.5m, with $0.8m of restricted cash. Short-term investments were nil, down from $445.0m at December 31, 2021.
- Current assets were $1,209.8m and current liabilities were $155.5m. Total liabilities were $192.6m; shareholders’ equity was $1,105.9m.
- Cash, cash equivalents and restricted cash increased $155.4m in the first nine months. Investing cash flow was positive $424.4m, largely reflecting maturities of short-term investments; financing cash flow was negative $1.5m.
- Management expects current cash, cash equivalents, restricted cash and short-term investments to fund operating expenses and capital expenditures for at least 12 months under its current operating plan, but says additional funding will ultimately be needed to achieve its R&D objectives.
Material changes and operating drivers
- Revenue rose 33% in Q3 and 52% for the nine-month period. Management attributed product growth to higher sales volumes and lower rebates, partly offset by COVID-related restrictions and reduced patient access in China. Cost of sales grew faster than revenue, and gross margin declined year over year.
- ZEJULA was the largest product, with nine-month net revenue of $102.9m, up 60%. Optune generated $35.1m, up 28%; QINLOCK generated $9.1m, up 5%; and newly launched NUZYRA generated $3.6m.
- Q3 R&D expense increased 80%, principally from licensing and milestone costs, higher personnel expense and clinical-trial activity. Nine-month R&D expense fell 45% because the comparable 2021 period included substantially higher upfront and milestone license fees.
- Nine-month net loss narrowed 23%, while Q3 net loss widened 67%. Other expenses, net were $36.5m in Q3 and $79.5m for nine months, reflecting higher foreign-exchange losses; the nine-month foreign currency remeasurement loss was $73.1m.
- Cash used in operations improved to $258.4m from $396.2m year over year. The prior-year period included $818.9m of public-offering proceeds, while no comparable offering proceeds were reported in 2022.
Outlook, developments and risks
- The company had four commercialized products and 13 late-stage development programs as of November 3, 2022. Management expects continued substantial R&D spending and anticipates SG&A expense may increase as commercial and development activities expand. No specific revenue or earnings guidance was provided.
- In September 2022, Zai Lab licensed TIVDAK for Greater China from Seagen and accrued a $30m upfront payment. The agreement includes up to $263m in additional contingent milestones plus royalties. Other licensing agreements also carry potential milestone and royalty costs; aggregate future contingent development and sales milestones were approximately $5.83bn, subject to uncertainties and not necessarily payable.
- COVID-19 disruptions may continue to affect patient access, supply chains, sales and clinical activities. Other significant risks include China regulatory and data-transfer requirements, government intervention and policy changes, currency controls and foreign-exchange movements, reliance on partners and third parties, and product-development and commercialization uncertainty.
- The company disclosed that its prior auditor led to SEC identification under the HFCAA in March 2022. It engaged U.S.-based KPMG for fiscal 2022 and said it believes this mitigates delisting risk; the effect of PCAOB access arrangements with China remained uncertain.
- Purchase commitments for property and equipment were $13.8m, expected within one year. Management reported no material legal proceedings and no subsequent events requiring adjustment or disclosure.
Most important facts for investors to verify
- Whether product growth can continue despite China COVID-related access constraints, and how NRDL negotiations or price changes affect sales and rebates.
- Whether product costs, royalties and rebates pressure gross margin as revenue expands.
- The pace and prioritization of R&D spending, milestone payments and clinical progress, including the potential scale and timing of contingent license obligations.
- Cash burn, investment maturities and management’s stated minimum 12-month liquidity runway, especially if operating needs or development plans change.
- Foreign-exchange exposure and the impact of China’s currency, data, regulatory and cross-border capital restrictions; also monitor HFCAA/PCAOB inspection developments.
- Potential dilution: ordinary shares outstanding were approximately 959.7m at September 30, 2022, with substantial outstanding options and unvested restricted shares.