Zai Lab Limited — FY2018 Form 20-F
Reporting period: Year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide separate Q4 financial results. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Zai Lab is a China-focused biopharmaceutical company developing and commercializing licensed and internally discovered therapies. In December 2018, it launched ZEJULA and Optune in Hong Kong; mainland China sales were not yet established. The NMPA accepted ZEJULA’s new drug application in December 2018. The company reported eight clinical-stage drug candidates and more than 20 ongoing or planned clinical trials.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $0.129 million | None reported |
| Cost of sales / gross profit | $0.044 million / $0.086 million | None reported |
| Research and development expense | $120.3 million | $39.3 million |
| Selling, general and administrative expense | $21.6 million | $12.0 million |
| Operating loss | $141.8 million | $51.4 million |
| Net loss | $139.1 million | $50.4 million |
| Net loss per ordinary share, basic and diluted | $2.64 | $2.32 |
| Net cash used in operating activities | $97.5 million | $32.4 million |
| Cash and cash equivalents at year-end | $63.0 million | $229.7 million |
| Short-term investments at year-end | $200.4 million | None reported |
Revenue was immaterial relative to expenses; the reported gross margin was about 66%, but is not meaningful as an indicator of established product economics at this early commercial stage. R&D spending rose about 206%, including licensing fees of $59.2 million versus $7.9 million, and higher clinical-trial costs. SG&A rose about 79%, reflecting increased staffing and commercialization activity.
Cash plus short-term investments totaled $263.3 million at year-end. Current liabilities were $48.8 million, including $3.6 million of short-term borrowings; total liabilities were $50.9 million and shareholders’ equity was $251.1 million. Investing cash outflow of $212.6 million largely reflected $200.4 million in short-term investment purchases, as well as facility construction and other investments. Financing provided $144.1 million, principally from the September 2018 follow-on offering, which generated approximately $140.3 million net proceeds.
Outlook, commentary and risks
- Management said year-end cash, cash equivalents and short-term investments were expected to fund operating and capital needs for at least 12 months after issuance of the financial statements. It cautioned that estimates depend on assumptions and that additional funding will ultimately be needed to meet R&D objectives.
- No quantitative revenue, earnings or product-sales guidance is provided in the filing. Management expected losses and expenses to continue increasing as it advances clinical programs and builds commercialization capabilities.
- ZEJULA and Optune were launched in Hong Kong late in 2018; successful commercialization, reimbursement, supply, market acceptance and regulatory approval in additional markets remained uncertain. ZEJULA’s China NDA acceptance was not an approval.
- Key risks include clinical-trial failure or delay, regulatory uncertainty in China, competition and pricing pressure, dependence on licensors and third-party manufacturers, intellectual-property disputes, and the need for additional capital. Contingent future license milestones and royalties are not included in contractual-obligations totals; the filing reports potential aggregate milestone payments of up to approximately $1.118 billion.
- The company discontinued the ZL-3101 (Fugan) program after its Phase II study did not show efficacy versus placebo. In February 2019, MacroGenics reported positive top-line Phase III margetuximab results; this was a subsequent development, not FY2018 revenue or an approval for Zai Lab.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2018. As an emerging growth company, Zai Lab did not include an auditor attestation on internal controls.
Important facts for investors to verify
- Confirm the cash runway assumptions against ongoing operating cash burn, milestone obligations and planned clinical and commercial spending.
- Track NMPA decisions and China clinical-trial progress for ZEJULA and other lead candidates, as well as product uptake and reimbursement in Hong Kong.
- Review the terms, timing and potential dilution of future financing, and the scale and conditions of contingent licensing payments.
- Reconcile the filing’s share-count disclosures: the cover reports 58,355,903 ordinary shares outstanding at December 31, 2018, while the audited balance sheet reports 58,006,967.
- Assess the dependence on licensors, CROs and manufacturers, and the potential effects of clinical, safety, supply, pricing and regulatory setbacks.