UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-Q
____________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 20212024
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period fromto
______ to ______
Commission File Number:
001-38205
____________________
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
____________________
| Cayman Islands | 98-1144595 | |||||
(State or Incorporation or | (I.R.S. Employer Identification No.) | |||||
4560 Jinke Road Bldg. 1, Fourth Floor, Shanghai | 201210 | |||||
314 Main Street 4th Floor, Suite 100 Cambridge, MA, USA | 02142 | |||||
| (Address of | (Zip Code) | |||||
+86 21 6163216163 2588
+1 857 706 2604
(Registrant’s Telephone Number, Including Area Code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||
American Depositary Shares, each representing | ||||||||||||||||
10 Ordinary Shares, par value | ZLAB | The Nasdaq Global Market | ||||||||||||||
| Ordinary Shares, par value $0.000006 per share* | 9688 | The Stock Exchange of Hong Kong Limited | ||||||||||||||
*Included in connection with the registration of the American Depositary Shares with the Securities and Exchange Commission. The ordinary shares are not registered or listed for trading in the United States but are listed for trading on The Stock Exchange of Hong Kong Limited.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. days. Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation(§ (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
S-T
.
Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2
of the Exchange Act.| Large accelerated filer | x | Accelerated filer | ||||||||||||||
| Non-accelerated filer | o | Smaller reporting company | ||||||||||||||
| Emerging growth company | o | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule☒
12b-2
of the Exchange Act). Yes ☐ No ☒
As of April 30, 2021,
May 2, 2024, 992,087,430 ordinary shares of the registrant, par value $0.00006$0.000006 per share, were outstanding, of which
758,101,320 ordinary shares were held in the form of American Depositary Shares.
Zai Lab Limited
Quarterly Report on Form
10-Q
For the First Quarter of 2024
Page | ||||||||||||
SPECIAL NOTES REGARDING THE COMPANY
Forward-Looking Statements
This report contains certain forward-looking statements, including statements relating to our strategy and plans; potential of Contentsand expectations for our business, commercial products, and pipeline programs; the market for our commercial and pipeline products; capital allocation and investment strategy; clinical development programs and related clinical trials; clinical trial data, data readouts, and presentations; risks and uncertainties associated with drug development and commercialization; regulatory discussions, submissions, filings, and approvals and the timing thereof; the potential benefits, safety, and efficacy of our products and product candidates and those of our collaboration partners; the anticipated benefits and potential of investments, collaborations, and business development activities; our profitability and timeline to profitability; and our future financial and operating results. All statements, other than statements of historical fact, included in this report are forward-looking statements, and can be identified by words such as “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these terms or similar expressions. Such statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees or assurances of future performance. Forward-looking statements are based on our expectations and assumptions as of the date of this report and are subject to inherent uncertainties, risks, and changes in circumstances that may differ materially from those contemplated by the forward-looking statements. We may not actually achieve the plans, carry out the intentions, or meet the expectations or projections disclosed in our forward-looking statements, and you should not place undue reliance on these forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to the following:
• Our ability to successfully commercialize and generate revenue from our approved products;
• Our ability to obtain funding for our operations and business initiatives;
• The results of our clinical and pre-clinical development of our product candidates;
• The content and timing of decisions made by the relevant regulatory authorities regarding regulatory approvals of our product candidates;
• Changes in U.S. and China trade policies and relations, as well as relations with other countries, and/or changes in regulations and/or sanctions;
• Actions the Chinese government may take to intervene in or influence our operations;
• Economic, political, and social conditions in mainland China, as well as governmental policies;
• Uncertainties in the Chinese legal system, including with respect to the anti-corruption enforcement efforts in China and the Counter-Espionage Law, the Data Security Law, the Cyber Security Law, the Cybersecurity Review Measures, the Personal Information Protection Law, the Regulation on the Administration of Human Genetic Resources, the Biosecurity Law, the Measures on Security Assessment of Cross-Border Data Transfer (the “Security Assessment Measures”), and other future laws and regulations or amendments to such laws and regulations;
• Approval, filing, or procedural requirements imposed by the China Securities Regulatory Commission or other Chinese regulatory authorities in connection with issuing securities to foreign investors under Chinese law;
• Any violation or liability under the U.S. Foreign Corrupt Practices Act (“FCPA”) or Chinese anti-corruption laws;
• Restrictions on currency exchange;
• Limitations on the ability of our Chinese subsidiaries to make payments to us;
• Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies;
• Chinese regulations regarding acquisitions of companies based in mainland China by foreign investors;
• Any issues that our Chinese manufacturing facilities may have with operating in conformity with established Good Manufacturing Practices (“GMPs”) and international best practices, and with passing U.S. Food and Drug Administration (“FDA”), China National Medical Products Administration (“NMPA”), and European Medicines Agency (“EMA”) inspections;
• Expiration of, or changes to, financial incentives or discretionary policies granted by local governments in mainland China;
• Restrictions or limitations on the ability of overseas regulators to conduct investigations or collect evidence within mainland China;
• Business disruptions caused by pandemics such as COVID-19, international war or conflict such as the Russia/Ukraine and Israel/Hamas wars, natural disasters, extreme weather events, and other significant disruptions outside of our control;
• Unfavorable tax consequences to us and our non-Chinese shareholders or American Depositary Share (“ADS”) holders if we were to be classified as a Chinese resident enterprise for Chinese income tax purposes;
• Failure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, fines, other legal or administrative sanctions, and/or harm to our business or reputation;
• Review by the U.S. Committee on Foreign Investment (“CFIUS”) in our investments or other delays or obstacles for closing transactions;
• Any inability to renew our current leases on desirable terms or otherwise locate desirable alternatives for our leased properties;
• Any inability of third parties on whom we rely to conduct our pre-clinical and clinical trials to successfully carry out their contractual duties or meet expected deadlines; and
• Any inability to obtain or maintain sufficient patent protection for our products and product candidates.
These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”), and this report. Forward-looking statements are based on our management’s beliefs and assumptions and information currently available to our management. These statements, like all statements in this report, speak only as of their date. We anticipate that subsequent events and developments will cause our expectations and assumptions to change, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this report.
Usage of Terms
Unless the context requires otherwise, references in this report to “Greater China” refer to mainland China, Hong Kong Special Administrative Region (“Hong Kong” or “HK”), Macau Special Administrative Region (“Macau”), and Taiwan, collectively; references to “Zai Lab,” the “Company,” “we,” “us,” and “our” refer to Zai Lab Limited, a holding company, and its subsidiaries, on a consolidated basis; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors hold their interest.
Our operating subsidiaries consist of Zai Lab (Hong Kong) Limited, domiciled in Hong Kong; Zai Auto Immune (Hong Kong) Limited, domiciled in Hong Kong; Zai Anti Infectives (Hong Kong) Limited, domiciled in Hong Kong; Zai Lab (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab International Trading (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab (Suzhou) Co., Ltd., domiciled in mainland China; Zai Biopharmaceutical (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab Trading (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab (Taiwan) Limited, domiciled in Taiwan; Zai Lab (AUST) Pty. Ltd., domiciled in Australia; and Zai Lab (US) LLC, domiciled in the United States. As of the date of this report, Zai Anti Infectives (Hong Kong) Limited has non-substantial business operations.
We own various trademarks, including various forms of the Zai Lab brand (in English and Chinese), as well as several domain names that incorporate such trademarks. Trademarks and trade names of other companies appearing in this report are the property of their respective holders. Solely for convenience, some of the trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of, any other company.
PART I—I – FINANCIAL INFORMATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form10-Qreport and the audited consolidated financial information and the accompanying notes thereto included in our 2023 Annual Report on Form10-Kfor the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or SEC, on March 1, 2021.
Item 1. Financial Statements
Zai Lab Limited
Unaudited condensed consolidated balance sheets
(Inin thousands of U.S. dollars (“$”), except for number of shares and per share data)
| Notes | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | 3 | 650,780 | 790,151 | ||||||||||||||
| Restricted cash, current | 100,000 | — | |||||||||||||||
| Short-term investments | — | 16,300 | |||||||||||||||
| Accounts receivable (net of allowance for credit losses of $18 and $17 as of March 31, 2024 and December 31, 2023, respectively) | 60,422 | 59,199 | |||||||||||||||
| Notes receivable | 15,363 | 6,134 | |||||||||||||||
| Inventories, net | 4 | 37,851 | 44,827 | ||||||||||||||
| Prepayments and other current assets | 24,224 | 22,995 | |||||||||||||||
| Total current assets | 888,640 | 939,606 | |||||||||||||||
| Restricted cash, non-current | 1,114 | 1,113 | |||||||||||||||
| Long term investments | 14,109 | 9,220 | |||||||||||||||
| Prepayments for equipment | 89 | 111 | |||||||||||||||
| Property and equipment, net | 5 | 52,386 | 53,734 | ||||||||||||||
| Operating lease right-of-use assets | 15,187 | 14,844 | |||||||||||||||
| Land use rights, net | 3,034 | 3,069 | |||||||||||||||
| Intangible assets, net | 12,398 | 13,389 | |||||||||||||||
| Long-term deposits | 1,480 | 1,209 | |||||||||||||||
| Total assets | 988,437 | 1,036,295 | |||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Accounts payable | 88,121 | 112,991 | |||||||||||||||
| Current operating lease liabilities | 7,536 | 7,104 | |||||||||||||||
| Short-term debts | 9 | 48,273 | — | ||||||||||||||
| Other current liabilities | 10 | 48,176 | 82,972 | ||||||||||||||
| Total current liabilities | 192,106 | 203,067 | |||||||||||||||
| Deferred income | 26,297 | 28,738 | |||||||||||||||
| Non-current operating lease liabilities | 7,540 | 8,047 | |||||||||||||||
| Other non-current liabilities | 325 | 325 | |||||||||||||||
| Total liabilities | 226,268 | 240,177 | |||||||||||||||
| Commitments and contingencies (Note 15) | |||||||||||||||||
| Shareholders’ equity | |||||||||||||||||
| Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 978,197,710 and 977,151,270 shares issued as of March 31, 2024 and December 31, 2023, respectively; 973,285,510 and 972,239,070 shares outstanding as of March 31, 2024 and December 31, 2023, respectively) | 6 | 6 | |||||||||||||||
| Additional paid-in capital | 2,993,282 | 2,975,302 | |||||||||||||||
| Accumulated deficit | (2,249,451) | (2,195,980) | |||||||||||||||
| Accumulated other comprehensive income | 39,168 | 37,626 | |||||||||||||||
| Treasury Stock (at cost, 4,912,200 shares as of both March 31, 2024 and December 31, 2023) | (20,836) | (20,836) | |||||||||||||||
| Total shareholders’ equity | 762,169 | 796,118 | |||||||||||||||
| Total liabilities and shareholders’ equity | 988,437 | 1,036,295 | |||||||||||||||
As of | ||||||||||||
March 31, 2021 | December 31, 2020 | |||||||||||
Notes | $ | $ | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 3 | 1,013,420 | 442,116 | |||||||||
Short-term investments | 5 | — | 744,676 | |||||||||
Accounts receivable (net of allowance of $2 and $1 as of March 31, 2021 and 2020, respectively) | 8,815 | 5,165 | ||||||||||
Inventories | 6 | 12,629 | 13,144 | |||||||||
Prepayments and other current assets | 14,321 | 10,935 | ||||||||||
Total current assets | 1,049,185 | 1,216,036 | ||||||||||
Restricted cash, non-current | 4 | 743 | 743 | |||||||||
Investments in equity investees | 7 | 1,473 | 1,279 | |||||||||
Prepayments for equipment | 244 | 274 | ||||||||||
Property and equipment, net | 8 | 29,016 | 29,162 | |||||||||
Operating lease right-of-use | 16,652 | 17,701 | ||||||||||
Land use rights, net | 7,784 | 7,908 | ||||||||||
Intangible assets, net | 1,585 | 1,532 | ||||||||||
Long term deposits | 910 | 862 | ||||||||||
Value added tax recoverable | 23,698 | 22,141 | ||||||||||
Total assets | 1,131,290 | 1,297,638 | ||||||||||
Liabilities and shareholders’ equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | 41,415 | 62,641 | ||||||||||
Current operating lease liabilities | 5,602 | 5,206 | ||||||||||
Other current liabilities | 11 | 45,639 | 30,196 | |||||||||
Total current liabilities | 92,656 | 98,043 | ||||||||||
Deferred income | 16,657 | 16,858 | ||||||||||
Non-current operating lease liabilities | 12,307 | 13,392 | ||||||||||
Total liabilities | 121,620 | 128,293 | ||||||||||
Commitments and contingencies (Note 18) | 0 | 0 | ||||||||||
Shareholders’ equity | ||||||||||||
Ordinary shares (par value of $0.00006 per share; 500,000,000 shares authorized, 88,519,172 and 74,666,725 shares issued and outstanding as of March 31, 2021 and 2020, respectively) | 5 | 5 | ||||||||||
Additional paid-in capital | 1,967,802 | 1,897,467 | ||||||||||
Accumulated deficit | (946,513 | ) | (713,603 | ) | ||||||||
Accumulated other comprehensive loss | 15 | (11,624 | ) | (14,524 | ) | |||||||
Total shareholders’ equity | 1,009,670 | 1,169,345 | ||||||||||
Total liabilities and shareholders’ equity | 1,131,290 | 1,297,638 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of operations
(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| Notes | 2024 | 2023 | |||||||||||||||||||||||||||
| Revenue | 6 | 87,149 | 62,797 | ||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||
| Cost of sales | (33,619) | (21,337) | |||||||||||||||||||||||||||
| Research and development | (54,645) | (48,472) | |||||||||||||||||||||||||||
| Selling, general, and administrative | (69,194) | (62,510) | |||||||||||||||||||||||||||
| Loss from operations | (70,309) | (69,522) | |||||||||||||||||||||||||||
| Interest income | 9,658 | 10,232 | |||||||||||||||||||||||||||
| Interest expenses | (113) | — | |||||||||||||||||||||||||||
| Foreign currency (losses) gains | (2,068) | 8,912 | |||||||||||||||||||||||||||
| Other income, net | 13 | 9,361 | 1,234 | ||||||||||||||||||||||||||
| Loss before income tax | (53,471) | (49,144) | |||||||||||||||||||||||||||
| Income tax expense | 7 | — | — | ||||||||||||||||||||||||||
| Net loss | (53,471) | (49,144) | |||||||||||||||||||||||||||
| Loss per share - basic and diluted | 8 | (0.05) | (0.05) | ||||||||||||||||||||||||||
| Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | 973,145,760 | 961,444,780 | |||||||||||||||||||||||||||
Three Months Ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
Notes | $ | $ | |||||||||
Revenue | 9 | 20,103 | 8,218 | ||||||||
Expenses: | |||||||||||
Cost of sales | (7,505 | ) | (2,084 | ) | |||||||
Research and development | (203,852 | ) | (33,742 | ) | |||||||
Selling, general and administrative | (35,838 | ) | (18,714 | ) | |||||||
Loss from operations | (227,092 | ) | (46,322 | ) | |||||||
Interest income | 214 | 1,655 | |||||||||
Interest expenses | — | (59 | ) | ||||||||
Other expense net, | (6,227 | ) | (3,125 | ) | |||||||
Loss before income tax and share of gain (loss) from equity method investment | (233,105 | ) | (47,851 | ) | |||||||
Income tax expense | 10 | 0— | — | ||||||||
Share of gain (loss) from equity method investment | 195 | (137 | ) | ||||||||
Net loss | (232,910 | ) | (47,988 | ) | |||||||
Net loss attributable to ordinary shareholders | (232,910 | ) | (47,988 | ) | |||||||
Loss per share - basic and diluted | 12 | (2.64 | ) | (0.66 | ) | ||||||
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | 88,374,928 | 72,956,538 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of comprehensive loss
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Net loss | (232,910 | ) | (47,988 | ) | ||||
Other comprehensive income, net of tax of NaN: | ||||||||
Foreign currency translation adjustments | 2,900 | 3,539 | ||||||
Comprehensive loss | (230,010 | ) | (44,449 | ) | ||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||
| Net loss | (53,471) | (49,144) | |||||||||||||||||||||||||||
| Other comprehensive income, net of tax of nil: | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 1,542 | (8,413) | |||||||||||||||||||||||||||
| Comprehensive loss | (51,929) | (57,557) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Zai Lab Limited
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
(in thousands of $, except for number of shares)
| Ordinary Shares | Additional paid in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 977,151,270 | 6 | 2,975,302 | (2,195,980) | 37,626 | (4,912,200) | (20,836) | 796,118 | |||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | 1,046,440 | 0 | 0 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 17,980 | — | — | — | — | 17,980 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (53,471) | — | — | — | (53,471) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | 1,542 | — | — | 1,542 | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | 978,197,710 | 6 | 2,993,282 | (2,249,451) | 39,168 | (4,912,200) | (20,836) | 762,169 | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 962,455,850 | 6 | 2,893,120 | (1,861,360) | 25,685 | (2,236,280) | (11,856) | 1,045,595 | |||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | 732,040 | 0 | 0 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Exercise of share options | 4,009,460 | 0 | 1,673 | — | — | — | — | 1,673 | |||||||||||||||||||||||||||||||||||||||
| Receipt of shares netted to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | (1,272,330) | (5,130) | (5,130) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 16,661 | — | — | — | — | 16,661 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (49,144) | — | — | — | (49,144) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | (8,413) | — | — | (8,413) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 967,197,350 | 6 | 2,911,454 | (1,910,504) | 17,272 | (3,508,610) | (16,986) | 1,001,242 | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
5
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of shareholders’ (deficit) equity
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | (53,471) | (49,144) | |||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Allowance for credit losses | 1 | 1 | |||||||||
| Inventory write-down | 37 | 377 | |||||||||
| Depreciation and amortization expenses | 3,012 | 2,657 | |||||||||
| Amortization of deferred income | (840) | (582) | |||||||||
| Share-based compensation | 17,980 | 16,661 | |||||||||
| Gain from fair value changes of equity investment with readily determinable fair value | (4,889) | (441) | |||||||||
| Losses on disposal of property and equipment | 407 | 64 | |||||||||
| Noncash lease expenses | 2,069 | 2,464 | |||||||||
| Debt issuance costs | 700 | — | |||||||||
| Foreign currency remeasurement impact | 2,068 | (8,912) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (1,328) | (2,852) | |||||||||
| Notes receivable | (9,239) | (8,599) | |||||||||
| Inventories | 6,818 | (6,686) | |||||||||
| Prepayments and other current assets | (1,253) | (6,470) | |||||||||
| Long-term deposits | (271) | 72 | |||||||||
| Accounts payable | (13,370) | (327) | |||||||||
| Other current liabilities | (34,204) | (15,593) | |||||||||
| Operating lease liabilities | (2,783) | (2,141) | |||||||||
| Deferred income | (1,550) | 9,839 | |||||||||
| Other non-current liabilities | — | 325 | |||||||||
| Net cash used in operating activities | (90,106) | (69,287) | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of short-term investments | — | (100,000) | |||||||||
| Proceeds from maturity of short-term investment | 16,300 | 49,450 | |||||||||
| Purchases of property and equipment | (974) | (3,513) | |||||||||
| Proceeds from the sale of property and equipment | — | 112 | |||||||||
| Acquisition of intangible assets | (12,034) | (3) | |||||||||
| Net cash provided by (used in) investing activities | 3,292 | (53,954) | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from short-term debts | 48,248 | — | |||||||||
| Payments of debt issuance costs | (700) | — | |||||||||
| Proceeds from exercises of stock options | — | 1,197 | |||||||||
| Taxes paid related to settlement of equity awards | — | (5,083) | |||||||||
| Net cash provided by (used in) financing activities | 47,548 | (3,886) | |||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (104) | (1,299) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (39,370) | (128,426) | |||||||||
| Cash, cash equivalents and restricted cash - beginning of period | 791,264 | 1,009,273 | |||||||||
| Cash, cash equivalents and restricted cash - end of period | 751,894 | 880,847 | |||||||||
| Supplemental disclosure on non-cash investing and financing activities | |||||||||||
| Payables for purchase of property and equipment | 2,481 | 4,232 | |||||||||
| Payables for acquisition of intangible assets | 78 | 268 | |||||||||
| Receivables for stock option exercise under equity incentive plans | — | 476 | |||||||||
| Right-of-use asset acquired under operating leases | 2,395 | 2,662 | |||||||||
| Receivables for disposal of property and equipment | — | 10 | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid for interest | 45 | — | |||||||||
Ordinary shares | Additional | Accumulated other | ||||||||||||||||||||||
Number of Shares | Amount | paid in capital | Accumulated deficit | comprehensive (loss) income | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||||||
Balance at December 31, 2020 | 87,811,026 | 5 | 1,897,467 | (713,603 | ) | (14,524 | ) | 1,169,345 | ||||||||||||||||
Issuance of ordinary shares upon vesting of restricted shares | 81,600 | 0 | 0 | — | — | 0 | ||||||||||||||||||
Exercise of shares option | 58,364 | 0 | 702 | — | — | 702 | ||||||||||||||||||
Issuance of ordinary shares in connection with collaboration and license arrangement (Note 16) | 568,182 | 0 | 62,250 | — | — | 62,250 | ||||||||||||||||||
Issuance cost adjustment for secondary listing | — | — | 65 | — | — | 65 | ||||||||||||||||||
Share-based compensation | — | — | 7,318 | — | — | 7,318 | ||||||||||||||||||
Net loss | — | — | — | (232,910 | ) | — | (232,910 | ) | ||||||||||||||||
Foreign currency translation | — | — | — | — | 2,900 | 2,900 | ||||||||||||||||||
Balance at March 31, 2021 | 88,519,172 | 5 | 1,967,802 | (946,513 | ) | (11,624 | ) | 1,009,670 | ||||||||||||||||
Balance at December 31, 2019 | 68,237,247 | 4 | 734,734 | (444,698 | ) | 4,620 | 294,660 | |||||||||||||||||
Issuance of ordinary shares upon vesting of restricted shares | 80,200 | 0 | 0 | — | — | 0 | ||||||||||||||||||
Exercise of shares option | 49,278 | 0 | 346 | — | — | 346 | ||||||||||||||||||
Issuance of ordinary shares upon follow-on public offering, net of issuance cost of $740 | 6,300,000 | 0 | 280,568 | — | — | 280,568 | ||||||||||||||||||
Share-based compensation | — | — | 6,463 | — | — | 6,463 | ||||||||||||||||||
Net loss | — | — | — | (47,988 | ) | — | (47,988 | ) | ||||||||||||||||
Foreign currency translation | — | — | — | — | 3,539 | 3,539 | ||||||||||||||||||
Balance at March 31, 2020 | 74,666,725 | 4 | 1,022,111 | (492,686 | ) | 8,159 | 537,588 | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Zai Lab Limited
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Operating activities | ||||||||
Net loss | (232,910 | ) | (47,988 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Allowance for doubtful accounts | 1 | 1 | ||||||
Inventory write-down | 14 | — �� | ||||||
Depreciation and amortization expenses | 1,448 | 1,070 | ||||||
Amortization of deferred income | (78 | ) | (78 | ) | ||||
Share-based compensation | 7,318 | 6,463 | ||||||
Noncash research and development expenses | 62,250 | — | ||||||
Share of (gain) loss from equity method investment | (195 | ) | 137 | |||||
Loss on disposal of property and equipment | 4 | — | ||||||
Noncash lease expenses | 1,322 | 1,062 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,651 | ) | (296 | ) | ||||
Inventories | 502 | (45 | ) | |||||
Prepayments and other current assets | (3,386 | ) | (1,375 | ) | ||||
Long term deposits | (47 | ) | (349 | ) | ||||
Value added tax recoverable | (1,558 | ) | (1,156 | ) | ||||
Accounts payable | (21,226 | ) | 4,495 | |||||
Other current liabilities | 21,707 | (1,408 | ) | |||||
Operating lease liabilities | (893 | ) | (663 | ) | ||||
Deferred income | (122 | ) | 289 | |||||
Net cash used in operating activities | (169,500 | ) | (39,841 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from maturity of short-term investments | 743,902 | 50,000 | ||||||
Purchase of property and equipment | (1,683 | ) | (1,043 | ) | ||||
Purchase of intangible assets | (214 | ) | (5 | ) | ||||
Net cash used in investing activities | 742,005 | 48,952 | ||||||
Cash flows from financing activities: | ||||||||
Repayment of short-term borrowings | — | (1,430 | ) | |||||
Proceeds from exercises of stock options | 702 | 346 | ||||||
Proceeds from issuance of ordinary shares upon public offerings | — | 281,295 | ||||||
Payment of public offering costs | (973 | ) | (727 | ) | ||||
Net cash (used in) provided by financing activities | (271 | ) | 279,484 | |||||
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (930 | ) | (947 | ) | ||||
Net increase in cash, cash equivalents and restricted cash | 571,304 | 287,648 | ||||||
Cash, cash equivalents and restricted cash - beginning of period | 442,859 | 76,442 | ||||||
Cash, cash equivalents and restricted cash - end of period | 1,014,163 | 364,090 | ||||||
Supplemental disclosure on non-cash investing and financing activities: | ||||||||
Payables for purchase of property and equipment | 439 | 280 | ||||||
Payables for intangible assets | 26 | 11 | ||||||
Payables for public offering costs | 26 | — | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash and cash equivalents | 1,013,420 | 363,580 | ||||||
Restricted cash, non-current | 743 | 510 | ||||||
Total cash and cash equivalents and restricted cash | 1,014,163 | 364,090 | ||||||
Interest paid | — | 67 | ||||||
Notes to the unaudited condensed consolidated financial statements
1. Organization and principal activitiesPrincipal Activities
Zai Lab Limited (the “Company”) was incorporated on March 28, 2013 in the Cayman Islands as an exempted company with limited liability under the Companies LawAct of the Cayman Islands. The CompanyIslands (as amended). Zai Lab Limited and its subsidiaries (collectively referred to as the “Group”“Company”) are focused on discovering, developing, and commercializing therapiesproducts that address medical conditions with significant unmet medical needs including, in particular,the areas of oncology, autoimmune disorders, infectious disease, and infectious diseases.neuroscience.
The Group’sCompany’s principal operations and geographic markets are in mainland China (hereinafter referred to as “China”), Hong Kong, Macau and Taiwan (hereinafter collectively referred to as “Greater China”).Greater China. The GroupCompany has a substantial presence in Greater China and the United States.
2. Basis of presentationPresentation and consolidationConsolidation and significant accounting policiesSignificant Accounting Policies
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form10-Qand Article 10 of RegulationS-X.Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”). InThe December 31, 2023 condensed consolidated balance sheet data included in this report were derived from the opinion of management, theseaudited financial statements in the 2023 Annual Report.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments and accrualsthat are necessary to present fairly the results for a fair statement of the Company’s unaudited condensed consolidated financial statements for such periods. Theinterim periods presented. Interim results of operations for any interim period are not necessarily indicative of the results for the full year. Theyear ending December 31, 2020 condensed consolidated balance sheets data were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form10-K2024.for the year ended December 31, 2020.
(b) Principles of consolidationConsolidation
The unaudited condensed consolidated financial statements include the financial statementsaccounts of the CompanyZai Lab Limited and its subsidiaries.subsidiaries, which are wholly owned. All intercompany transactions and balances among the Group and its subsidiaries are eliminated upon consolidation.
(c) Use of estimatesEstimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful livesaccrual of long-lived assets, estimating the current expected credit losses for financial assets, assessing the impairmentrebates, recognition of long-lived assets, discount rate of operating lease liabilities, revenue recognition, allocation of the research and development service expenses, to the appropriate financial reporting period based on the progressfair value of the research and development projects, share-based compensation expenses, and recoverability of deferred tax assetsassets. These estimates, judgments, and a lack of marketability discount ofassumptions can affect the ordinary shares issued in connection with collaboration and license arrangement(Note 16). Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying valuesreported amounts of assets and liabilities.liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(d) Fair Value Measurements
Financial instruments of the GroupCompany primarily include cash and cash equivalents, current restricted cash, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, non-current restricted cash, accounts payable, short-term debts, and other current liabilities. As of March 31, 2024 and December 31, 2023, the carrying values of cash and cash equivalents, current restricted cash, short-term investments, accounts receivable, prepayments and other current assets, accounts payable, and other payables. As of March 31, 2021 and December 31, 2020, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, prepaymentsdebts, and other current assets, accounts payable and other payableliabilities approximated their fair values due to the short-term maturity of these instruments, and the carrying value of notes receivable and non-current restricted cash approximates itsapproximated their fair value based on the nature of the assessment of the ability to recover these amounts.
(e) Recent accounting pronouncements
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). This ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. This ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is permitted. This ASU will result in additional disclosure in the consolidated financial statements, once adopted. The Company is currently evaluating the impact of this update should be applied retrospectively or modified retrospectively, all other amendments should be applied prospectively. ASU and expects to adopt it for the year ending December 31, 2025.
The Group adopted this standard on January 1, 2021. There was noCompany did not adopt any new accounting standards in the first quarter of 2024 that had a material impact toon the Group’s financial position or results of operations upon adoption.
Consolidated Financial Statements. For a more complete discussion ofadditional information on the Company’s significant accounting policies, and other information,refer to the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction withto the consolidated financial statements included in the Company’s2023 Annual Report on Form10-Kfor the year ended December 31, 2020..
As of | ||||||||
March 31, 2021 | December 31, 2020 | |||||||
$ | $ | |||||||
Cash at bank and in hand | 1,012,587 | 441,283 | ||||||
Cash equivalents | 833 | 833 | ||||||
| 1,013,420 | 442,116 | |||||||
Denominated in: | ||||||||
US$ | 186,078 | 297,813 | ||||||
RMB (note (i)) | 37,732 | 23,898 | ||||||
Hong Kong dollar (“HK$”) | 789,029 | 119,695 | ||||||
Australian dollar (“A$”) | 581 | 710 | ||||||
| 1,013,420 | 442,116 | |||||||
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The Group’s restrictedfollowing table presents the Company’s cash balanceand cash equivalents ($ in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Cash | 649,666 | 789,051 | |||||||||
| Cash equivalents (i) | 1,114 | 1,100 | |||||||||
| 650,780 | 790,151 | ||||||||||
| Denominated in: | |||||||||||
| US$ | 630,583 | 762,436 | |||||||||
| Renminbi (“RMB”) (ii) | 17,878 | 25,093 | |||||||||
| Hong Kong dollar (“HK$”) | 1,513 | 1,974 | |||||||||
| Australian dollar (“A$”) | 557 | 587 | |||||||||
| Taiwan dollar (“TW$”) | 249 | 61 | |||||||||
| 650,780 | 790,151 | ||||||||||
(i)Cash equivalents represent short-term and highly liquid investments in a money market fund.
(ii)Certain cash and bank balances denominated in RMB were deposited with banks in mainland China. The conversion of $743these RMB-denominated balances into foreign currencies is subject to the rules and $743
The Group’s inventory balance of $12,629 and $13,144following table presents the Company’s inventories, net ($ in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Finished goods | 19,076 | 22,702 | |||||||||
| Raw materials | 16,675 | 17,655 | |||||||||
| Work in progress | 2,100 | 4,470 | |||||||||
| Inventories, net | 37,851 | 44,827 | |||||||||
As of | ||||||||
March 31, 2021 | December 31, 2020 | |||||||
$ | $ | |||||||
Finished goods | 2,703 | 3,041 | ||||||
Raw materials | 9,588 | 10,103 | ||||||
Work in process | 338 | 0 | ||||||
Inventories | 12,629 | 13,144 | ||||||
The Group write-downCompany writes down inventory for any excess or obsolete inventories or when the Group believeCompany believes that the net realizable value of inventories is less than the carrying value. During the three months ended March 31, 2021 and 2020, the GroupThe Company recorded write-downs of $43 and $NaN, respectively,in inventory, which were included in cost of revenues.
sales, of insignificant amount and $0.4 million in the first quarter of 2024 and 2023, respectively.Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
| March 31, 2024 | December 31, 2023 | ||||||||||
| Office equipment | 1,046 | 1,047 | |||||||||
| Electronic equipment | 9,315 | 9,161 | |||||||||
| Vehicle | 198 | 199 | |||||||||
| Laboratory equipment | 20,162 | 20,140 | |||||||||
| Manufacturing equipment | 17,658 | 17,680 | |||||||||
| Leasehold improvements | 11,361 | 11,371 | |||||||||
| Construction in progress | 24,834 | 24,272 | |||||||||
| 84,574 | 83,870 | ||||||||||
| Less: accumulated depreciation | (32,188) | (30,136) | |||||||||
| Property and equipment, net | 52,386 | 53,734 | |||||||||
Depreciation expense was $2.2 million and $2.5 million in the first quarter of the following:
2024 and 2023, respectively.As of | ||||||||
March 31, 2021 | December 31, 2020 | |||||||
$ | $ | |||||||
Office equipment | 428 | 430 | ||||||
Electronic equipment | 2,876 | 2,646 | ||||||
Vehicle | 194 | 143 | ||||||
Laboratory equipment | 12,357 | 11,933 | ||||||
Manufacturing equipment | 12,116 | 12,198 | ||||||
Leasehold improvements | 9,642 | 9,641 | ||||||
Construction in progress | 2,915 | 2,423 | ||||||
| 40,528 | 39,414 | |||||||
Less: accumulated depreciation | (11,512 | ) | (10,252 | ) | ||||
Property and equipment, net | 29,016 | 29,162 | ||||||
The Group’sCompany’s revenue is primarily derived from the salesales of ZEJULA and Optuneits commercial products primarily in China and Hong Kong.mainland China. The table below presents the Group’sCompany’s gross and net product sales for the three months ended March 31, 2021 and 2020.
revenue ($ in thousands):| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Product revenue - gross | 93,112 | 71,212 | |||||||||||||||||||||
| Less: Rebates and sales returns | (5,963) | (8,415) | |||||||||||||||||||||
| Product revenue - net | 87,149 | 62,797 | |||||||||||||||||||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Product revenue - gross | 46,555 | 8,937 | ||||||
Less: Rebate | (26,452 | ) | (719 | ) | ||||
Product revenue - net | 20,103 | 8,218 | ||||||
Sales rebates are offered to distributors in mainland China, and the amounts are recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes, and level of distributor inventories.
The following table disaggregatespresents the Company’s net revenue by product for($ in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| ZEJULA | 45,501 | 42,680 | |||||||||||||||||||||
| OPTUNE | 12,480 | 13,342 | |||||||||||||||||||||
| QINLOCK | 6,093 | 1,306 | |||||||||||||||||||||
| NUZYRA | 9,913 | 5,469 | |||||||||||||||||||||
| VYVGART | 13,162 | — | |||||||||||||||||||||
| Product revenue - net | 87,149 | 62,797 | |||||||||||||||||||||
10
Zai Lab Limited
Notes to the three months ended March 31, 2021 and 2020:unaudited condensed consolidated financial statements
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
$ | $ | |||||||
ZEJULA | 12,606 | 6,345 | ||||||
Optune | 7,130 | 1,873 | ||||||
Others | 367 | — | ||||||
Total product revenue - net | 20,103 | 8,218 | ||||||
No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries areis in a cumulative loss positionsposition for all the periods presented.
The Company recorded a full valuation allowance against deferred tax assets of all its consolidated entities because all entities were in a cumulative loss position as of March 31, 20212024 and December 31, 2020. NaN2023. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
8. Loss Per Share
As of | ||||||||
March 31, 2021 | December 31, 2020 | |||||||
$ | $ | |||||||
Payroll | 7,694 | 13,694 | ||||||
Professional service fee | 3,274 | 3,128 | ||||||
Payables for purchase of property and equipment | 439 | 788 | ||||||
Advance from customers | 3,280 | — | ||||||
Accrued rebate to distributors | 23,166 | 7,067 | ||||||
Others (note (i)) | 7,786 | 5,519 | ||||||
Total | 45,639 | 30,196 | ||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | (53,471) | (49,144) | |||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average number of ordinary shares - basic and diluted | 973,145,760 | 961,444,780 | |||||||||||||||||||||
| Net loss per share - basic and diluted | (0.05) | (0.05) | |||||||||||||||||||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Numerator: | ||||||||
Net loss attributable to ordinary shareholders | (232,910 | ) | (47,988 | ) | ||||
Denominator: | ||||||||
Weighted average number of ordinary shares- basic and diluted | 88,374,928 | 72,956,538 | ||||||
Net loss per share-basic and diluted | (2.64 | ) | (0.66 | ) | ||||
As a result of the Group’sCompany’s net loss forin the three months ended March 31, 2021first quarter of 2024 and 2020,2023, share options and
non-vested
restricted shares outstanding in the respective periods were excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.| March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Share options | 104,244,590 | 86,242,060 | |||||||||
| Non-vested restricted shares | 29,893,540 | 32,154,670 | |||||||||
As of | ||||||||
March 31, 2021 | March 31, 2020 | |||||||
Share options | 8,693,274 | 9,903,396 | ||||||
Non-vested restricted shares | 480,010 | 725,068 | ||||||
9. Borrowings
Weighted average interest rate per annum | March 31, 2024 | ||||||||||
| Bank of China Working Capital Loan | 2.95 | % | 34,179 | ||||||||
| SPD Bank Working Capital Loan | 3.45 | % | 14,094 | ||||||||
| Total short-term debts | 3.10 | % | 48,273 | ||||||||
Bank of China Working Capital Loan Facility
11
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
SPD Bank Working Capital Loan Facility
On February 6, 2024, the Group incurred $103 and $55 research and development expenseCompany entered into a maximum-amount guarantee contract with MEDx (Suzhou) Translational Medicinethe Shanghai Pudong Development Bank Co., Ltd. Zhangjiang Hi-Tech Park Sub-branch (the “SPD Bank”) pursuant to which the Company will guarantee working capital loans of up to RMB300.0 million (approximately $42.0 million) from SPD Bank to Zai Lab Shanghai over a three-year period. In the first quarter of 2024, Zai Lab Shanghai has entered into working capital loan contracts with SPD Bank under this debt facility for product research and development services, respectively. Allan aggregate principal amount of the transactions are carried out with normal businessRMB100.0 million (approximately $14.1 million). These working capital loans have one-year terms and are on arms’ length basis.
subject to a fixed interest rate of 3.45%.On March 5, 2015,February 6, 2024, the BoardCompany’s wholly-owned subsidiary, Zai Lab (Suzhou) Co., Ltd. (“Zai Lab Suzhou”), entered into a maximum credit contract with Bank of DirectorsNingbo Co., Ltd. Suzhou Sub-branch (“Ningbo Bank”) as well as an Electronic Commercial Draft Discounting Master Agreement and Online Working Capital Loan Master Agreement (collectively, the “Ningbo Bank Agreements”). The Ningbo Bank Agreements permit Zai Lab Suzhou to utilize, including through discounting or working capital loan agreements and subject to the terms and conditions in related master agreements, up to RMB230.3 million (approximately $32.4 million), of which the Company approved an Equity Incentive Plan (the “2015 Plan”) which is administered by the Board of Directors. Under the 2015 Plan, the Board of Directors may grant optionsauthorized to purchase ordinary sharesutilize up to management including officers, directors, employees and individual advisors who render services to the Group to purchase an aggregate of no more than 4,140,945 ordinary shares of the Group (“Option Pool”)RMB160.0 million (approximately $22.5 million). Subsequently, the Board of Directors approved the increase in the Option Pool to 7,369,767 ordinary shares.
In connection with the completionarrangements described in the Ningbo Bank Agreements, Zai Lab Suzhou agreed to pledge interests in certain real property it owns in Suzhou. As of March 31, 2024, Zai Lab Suzhou has not entered into any discounting arrangements or working capital loans under this Ningbo Bank working capital loan facility.
10. Other Current Liabilities
The following table presents the initial public offering (the “IPO”), the Board of Directors has approved the 2017 Equity Incentive Plan (the “2017 Plan”)Company’s other current liabilities ($ in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Accrued payroll | 11,920 | 33,711 | |||||||||
| Accrued professional service fee | 3,478 | 7,520 | |||||||||
| Payables for purchase of property and equipment | 2,481 | 2,474 | |||||||||
| Accrued rebate to distributors | 20,593 | 16,926 | |||||||||
| Tax payables | 6,910 | 16,988 | |||||||||
| Other (i) | 2,794 | 5,353 | |||||||||
| Total | 48,176 | 82,972 | |||||||||
(i)Other mainly includes accrued travel and all equity-based awards subsequent to the IPO would be granted under the 2017 Plan.
business-related expenses.Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Selling, general and administrative | 3,259 | 2,744 | ||||||
Research and development | 2,290 | 2,177 | ||||||
Total | 5,549 | 4,921 | ||||||
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
11. Share-Based Compensation
The following table presents the share-based compensation expense that has been reported in the Company’s condensed consolidated statements of operations and comprehensive loss as follows ($ in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Selling, general and administrative | 11,036 | 10,063 | |||||||||||||||||||||
| Research and development | 6,944 | 6,598 | |||||||||||||||||||||
| Total | 17,980 | 16,661 | |||||||||||||||||||||
As of March 31, 2021,2024, there was $67,009 of total unrecognized share-based compensation expense related to unvested share options granted. That cost is expectedand unvested restricted shares of $93.2 million and $92.0 million, respectively, which the Company expects to be recognizedrecognize over a weighted-average period of 1.41
2.54 years, respectively.2.89 years which is determined based on the number of shares and unrecognized years.
The Group measured the fair value of thenon-vestedrestricted shares as of respective grant dates and recognized the amount as compensation expense over the deemed service period using a graded vesting attribution model on a straight-line basis.
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Selling, general and administrative | 1,211 | 1,068 | ||||||
Research and development | 558 | 474 | ||||||
Total | 1,769 | 1,542 | ||||||
For a description of the material terms of thesethe Company’s significant license and collaboration agreements, the Group is contingently obligated to make additional material payments upon the achievement of certain contractually defined milestones. Based on management’s evaluationsee Note 16 of the progress2023 Annual Report. In the first quarter of each project noted above,2024, the licensors will be eligible to receive fromCompany did not enter into any new significant license and collaboration agreements or incur any milestone fees under our existing significant license and collaboration agreements.
13. Other Income, Net
The following table presents the Group up to an aggregate of approximately
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Government grants | 2,791 | — | |||||||||||||||||||||
| Gain on equity investments with readily determinable fair value | 4,889 | 441 | |||||||||||||||||||||
| Others miscellaneous gain | 1,681 | 793 | |||||||||||||||||||||
| Total | 9,361 | 1,234 | |||||||||||||||||||||
The Group’sCompany’s ability to pay dividends may depend on the GroupCompany receiving distributions of funds from its Chinese subsidiary.subsidiaries. Relevant PRC statutoryChinese laws and regulations permit payments of dividends by the Group’s PRC subsidiaryCompany’s Chinese subsidiaries only out of its retained earnings, if any, as determined in accordance with PRCChinese accounting standards and
regulations. The results of operations reflected in the unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Group’s PRC subsidiary.Company’s Chinese subsidiaries.
In accordance with the Company Law of the PRC,People’s Republic of China, a domestic enterprise is required to provide statutory reserves of at least
10% of its annualafter-tax
profit until such reserve has reached 50%of its respective registered capital based on the enterprise’s PRCChinese statutory accounts. A domestic enterprise is also required tomay provide discretionary surplus reserve, at the discretion of the Board of Directors, from the profits determined in accordance with the enterprise’s PRCChinese statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Group’sCompany’s Chinese subsidiary wassubsidiaries were established as domestic invested enterpriseenterprises and therefore isare subject to the above-mentioned restrictions on distributable profits.
No appropriation to statutory reserves was made in the first quarter of 2024 and 2023 because the Chinese subsidiarysubsidiaries had substantial losses during such periods.
As a result of these PRCChinese laws and regulations, subject to the limitlimits discussed above that require annual appropriations of 10% ofincome profit to be set aside, prior to payment of dividends, as a general reserve fund, the Group’sCompany’s Chinese subsidiary issubsidiaries are restricted in their ability to transfer out a portion of their net assets to the Group.assets.
after-tax
Foreign exchange and other regulation in mainland China may further restrict the Group’s Chinese subsidiaryCompany’s subsidiaries in mainland China from transferring out funds to the Group in the form of dividends, loans, and advances. As of March 31, 20212024 and December 31, 2020,2023, amounts restricted arewere the paid-in capital of the Group’s ChineseCompany’s subsidiaries in mainland China, which both amounted to
(a) Purchase commitments
(b) Legal Proceedings
The Company is not currently a party to any material legal proceedings.
(c) Indemnifications
In the normal course of business, the Company enters into agreements that indemnify others for certain liabilities that may arise in connection with a transaction or certain events and within oneactivities. To date, the Company has not paid any claims or been required to two years, respectively.
defend any action related to its indemnification obligations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our 2023 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes for the first quarter of 2024 included in Item 1. Financial Statements.
Overview
We are a commercial stage,patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States. We are focused on discovering, developing, and commercializing innovative products that targetaddress medical conditions with significant unmet needs affecting patients in China and worldwide, particularly in the areas of oncology, autoimmune disorders, infectious disease, and infectious diseases. As of May 10, 2021, weneuroscience. We intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide. We currently have three commercializedfive commercial products – ZEJULA®, OPTUNE, QINLOCK®, NUZYRA®, and VYVGART® – that have received marketing approval and eleventhat we have commercially launched in one or more territories in Greater China. OPTUNE refers to Tumor Treating Fields devices marketed under various brand names, including OPTUNE GIO® for glioblastoma multiforme (“GBM”). We also have multiple programs in late-stage product development.development and a number of ongoing pivotal trials across our portfolio.
Since our inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses have resulted from funding our research and development programs and selling, general and administrative costs associated with our operations. Developing high quality product candidates requires a significant investment related toin our research and development activities over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. Our ability to generate profits and to generate positive cash flow from operations over the next several years depends upon our ability to successfully market our current three commercial products ZEJULA, Optune and QINLOCK®,to successfully expand the indications for these products and develop and commercialize our other product candidates thatcandidates. As discussed further below, we are able to successfully commercialize. We expect to continue to incur substantial expensescosts related to our research and development activities. In particular, our licensing and collaboration agreements require us to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory and commercial milestones as well as tiered royalties based on the net sales of the licensed products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones are recorded in research and development expense in our consolidated financial statements and totaled $171.3 million for the three months ended March 31, 2021. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
activities.Recent Developments
Commercial Products
Product Candidates
We continued to advance our product candidates through our research and development activities, including the agreement, we have agreedfollowing developments with respect to fund and undertake allour clinical developmenttrials and regulatory submissions in the territories, participate in certain global studies, and plan to launch and commercialize the licensed product once approved. argenx received a $75.0 million (before a lack of marketability discount) upfront payment in the form of 568,182 newly issued our ordinary shares calculated at a price of $132.00 per share, and received $75.0 million as a guaranteednon-creditable,approvals:non-refundabledevelopment cost-sharing payment, and will receive an additional $25.0 million milestone payment upon approval of efgartigimod in the United States. argenx is also eligible to receive tieredroyalties (mid-teen to low-twenties ona percentage basis) based on annual net sales of efgartigimod in the licensed territories.Oncology
•Tumor Treating Fields: In March 2021, we received approval from2024, our partner NovoCure Limited (“NovoCure”) announced that the China National Medical Products Administration (NMPA)Phase III METIS clinical trial met its primary endpoint, demonstrating a statistically significant improvement in time to intracranial progression for our New Drug Application for QINLOCK for the treatment of adult patients treated with advanced gastrointestinal stromal tumors who have received prior treatment with three or more kinase inhibitors, including imatinib.
14
demonstrated 21.9 months median time to intracranial progression for patients treated with Tumor Treating Fields and also as a monotherapysupportive care compared to 11.3 months for patients treated with supportive care alone. We are participating in the METIS trial.
•Tisotumab Vedotin: In April 2024, our partner Pfizer Inc. and Genmab A/S announced that the U.S. Food and Drug Administration approved the supplemental Biologics License Application granting full approval for tisotumab vedotin (or TIVDAK®) for the treatment of patients with recurrent GBM. Optune is regulatedor metastatic cervical cancer with disease progression on or after chemotherapy. We are participating in the global Phase III innovaTV 301 trial and extension study in Greater China.
•Adagrasib: We are evaluating the clinical data of the global Phase III KRYSTAL-12 study evaluating adagrasib in previously treated patients with KRASG12C-mutated NSCLC as we decide on next steps in the development of this product across indications.
•Early-Stage Global Oncology Pipeline: We are currently enrolling patients in the United States and Greater China in the global Phase I study of ZL-1310 (DLL3 ADC) for relapsed and refractory second-line small cell lung cancer who have progressed after platinum-based treatment. We are also enrolling patients in the United States, Europe, and Greater China in the global Phase I study of ZL-1218 (CCR8) as a Class III imported medical devicesingle agent and in China,combination with pembrolizumab in patients with advanced solid tumor malignancies.
Autoimmune Disorders, Infectious Disease, and Neuroscience
•Efgartigimod: In April 2024, we act as the Chinese legal agent for our collaboration partner, Novocure, who is the foreign marketing authorization holder (MAH) for Optune in China. We are preparing to submitsubmitted a supplemental Biologics License Application to the NMPA a Marketing Authorization Application for Optune Luaefgartigimod alfa injection (subcutaneous injection) (“efgartigimod SC”) for the treatment of unresectable, locally advanced or metastatic malignant pleural mesothelioma.
patients with chronic inflammatory demyelinating polyneuropathy (“CIDP”).Corporate Updates
In April 2024, Andrew Zhu joined Zai Lab as our Chief Commercial Officer in Greater China. Mr. Zhu’s rich experience in building innovative business models and resource integration will assume a lesser degree of liability compared to the foreign device MAHs. If local appointees fail to perform the statutory responsibilitieshelp us further enhance our commercial operations and obligations on behalf of the MAHs, they will be subject to administrative fines up to RMB 0.5 million,drive sales and their responsible personnel will only be subject to a five-year debarment. In comparison, foreign MAHs who refuse to fulfill the administrative penalties can result in a ten-year import ban.
Factors Affecting ourOur Results of Operations
Our Commercial Products
We generate product revenue through the sale of our commercial products in Greater China, net of any related sales returns and rebates to distributors. Our cost of sales mainly consists of the costs of manufacturing ZEJULA and NUZYRA, costs of purchasing OPTUNE, QINLOCK, and VYVGART from our collaboration partners, any royalty fees incurred as a result of sales of our commercial products under our license and collaboration agreements, and amortization of any sales-based milestone fees incurred under our license and collaboration agreements. We expect our revenue to increase in coming years as we continue to focus on increasing patient access to our existing commercial products, such as through NRDL listing or increased supplemental insurance coverage in the private-pay market. For example, in the first quarter of
15
2023, QINLOCK for fourth-line GIST and NUZYRA for the IV treatment of adult patients with CABP and ABSSSI were added to the NRDL. In the first quarter of 2024, VYVGART (efgartigimod alfa injection) for gMG and NUZYRA for the oral treatment of adult patients with CABP and ABSSSI were added to the NRDL. We also expect revenue to increase in coming years as a result of our launch of additional commercial products, if and when we obtain required regulatory approvals. We expect our cost of sales to increase as the volume of products sold increases.
Research and Development Expenses
We believe our ability to successfully develop product candidates will be the primary factor affecting our long-term competitiveness, as well as our future growth and development. Developing high quality product candidates requires a significant investment of resources over a prolonged period of time,time. We are committed to advancing and expanding our pipeline of potential best-in-class and first-in-class products, such as through clinical and pre-clinical trials and business development activities. As a core part of our strategy isresult, we expect to continue making sustainedsignificant investments in this area. As a result of this commitment, our pipeline of product candidates has been steadily advancing and expanding, with eleven late-stage clinical product candidates being investigated.
Elements of our clinicalresearch and pre-clinical-stage product candidatesdevelopment expenditures primarily include:
•payroll and initiate additionalother related costs of personnel engaged in research and development activities;
•in-licensed patent rights fees of exclusive development rights of products granted to the Company;
•costs related to pre-clinical testing of the Company’s technologies and clinical trials, of, and seek regulatory approval for, these and other future product candidates. These expenditures include:
Selling, General, and Administrative Expenses
Our selling, general, and administrative expenses consist primarily of personnel compensation and related costs, including share-based compensation for commercial and administrative personnel. Other selling, general, and administrative expenses include product distribution and promotion costs, and professional service fees for legal, intellectual property, consulting, auditing, and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies used in selling, general, and administrative activities. We anticipate that our selling, general and administrative expenses will increase in future periodsexpect these costs to continue to be significant to support increases insales of our commercial and research and development activities and as we continue to commercialize, develop, and manufacture our products and assets. These increases will likely include increased headcount, increased share compensation charges, increasedpreparation to launch and subsequent sales of additional product distributioncandidates if and promotion costs, expanded infrastructure and increased costs for insurance. We also incur increased legal, compliance, accounting and investor and public relations expenses associated with being a public company.
Our Ability to Commercialize Our Product Candidates
Our results of operations have been, and we expect them towill continue to be, affected by our licensing,license and collaboration and development agreements. We areIn accordance with these agreements, we may be required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and commercialsales-based milestones for the relevant product under these agreementsproducts as well as certain royalties at tiered royaltiespercentage rates based on theannual net sales of the licensed products. These upfront payments and milestone payments uponproducts in the achievementlicensed territories. As of certainMarch 31, 2024, we may be required to pay development and regulatory milestones are recorded in research and development expense in our unaudited condensed consolidated financial statements and totaled $171.3 million and $9.2milestone payments of up to an additional aggregate amount of $303.5 million for our current clinical programs and $665.2 million for other programs that are contingent on the three months endedprogress of our product candidates prior to commercialization. As of March 31, 2021 and 2020, respectively.
2024, we also may beResults of Operations
The following table sets forth a summary ofpresents our consolidated results of operations for($ in thousands):
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | 87,149 | 62,797 | 24,352 | 39 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | (33,619) | (21,337) | (12,282) | 58 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Research and development | (54,645) | (48,472) | (6,173) | 13 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | (69,194) | (62,510) | (6,684) | 11 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Loss from operations | (70,309) | (69,522) | (787) | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Interest income | 9,658 | 10,232 | (574) | (6) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Interest expenses | (113) | — | (113) | NM | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency (losses) gains | (2,068) | 8,912 | (10,980) | (123) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Other income, net | 9,361 | 1,234 | 8,127 | 659 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Loss before income tax | (53,471) | (49,144) | (4,327) | 9 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | — | — | — | — | % | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | (53,471) | (49,144) | (4,327) | 9 | % | |||||||||||||||||||||||||||||||||||||||||||||
NM - Not Meaningful
Revenue
The following table presents the periods indicated. This information should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. Our operating results in any period are not necessarily indicativecomponents of the results that may be expected for any future period.
Company’s product revenue ($ in thousands):| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Product revenue - gross | 93,112 | 71,212 | 21,900 | 31 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Less: Rebates and sales returns | (5,963) | (8,415) | 2,452 | (29) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Product revenue - net | 87,149 | 62,797 | 24,352 | 39 | % | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except share and per share data) | Three months ended March 31, | |||||||
2021 | 2020 | |||||||
Comprehensive Loss Data: | ||||||||
Revenue | $ | 20,103 | $ | 8,218 | ||||
Expenses: | ||||||||
Cost of sales | (7,505 | ) | (2,084 | ) | ||||
Research and development | (203,852 | ) | (33,742 | ) | ||||
Selling, general and administrative | (35,838 | ) | (18,714 | ) | ||||
Loss from operations | $ | (227,092 | ) | $ | (46,322 | ) | ||
Interest income | 214 | 1,655 | ||||||
Interest expenses | — | (59 | ) | |||||
Other expense, net | (6,227 | ) | (3,125 | ) | ||||
Loss before income tax and share of loss from equity method investment | $ | (233,105 | ) | $ | (47,851 | ) | ||
Income tax expense | — | — | ||||||
Share of gain (loss) from equity method investment | 195 | (137 | ) | |||||
Net loss attributable to ordinary shareholders | $ | (232,910 | ) | $ | (47,988 | ) | ||
Weighted-average shares used in calculating net loss per ordinary share, basic and diluted | 88,374,928 | 72,956,538 | ||||||
Net loss per share, basic and diluted | $ | (2.64 | ) | $ | (0.66 | ) | ||
Our product revenue is primarily derived from the salesales of ZEJULAour commercial products primarily in mainland China, net of sales returns and Optunerebates to distributors with respect to the sales of these products.
Our net product revenue increased by $24.4 million in Chinathe first quarter of 2024 primarily driven by increased sales volumes, the launch of VYVGART, and Hong Kong. The amountdecreased sales rebates to distributors resulting from price reductions in connection with NRDL listings for certain products. In terms of revenue growth by product, ZEJULA, which was renewed with NRDL as a maintenance treatment in the first quarter of ZEJULA2024, continued being the leading PARP inhibitor in hospital sales for ovarian cancer in mainland China; VYVGART for gMG was commercially launched in mainland China in September 2023 and was included in the three months ended March 31, 2021, was adjustedNRDL in the first quarter of 2024; increased sales for QINLOCK were supported by its inclusion in the NRDL in the first quarter of 2023; and increased sales for NUZYRA were supported by the normal processinclusion in China to compensate distributorsthe NRDL for products recently sold at prices priorits IV formulation in the first quarter of 2023 and for its oral formulation in the first quarter of 2024. Although revenue declined for OPTUNE, it increased compared to the National Reimbursement Drug List (“NRDL”) implementation. fourth quarter of 2023 as patient volume recovered.
17
In the first quarter of 2023, our sales rebates to distributors resulting from price reductions in connection with NRDL listings was $3.9 million, which was driven by price reductions for QINLOCK and NUZYRA in connection with their NRDL listings in the first quarter of 2023. Such sales rebates were immaterial in the first quarter of 2024.
The following table disaggregatespresents net revenue by product for($ in thousands):
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| ZEJULA | 45,501 | 42,680 | 2,821 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||
| OPTUNE | 12,480 | 13,342 | (862) | (6) | % | |||||||||||||||||||||||||||||||||||||||||||||
| QINLOCK | 6,093 | 1,306 | 4,787 | 367 | % | |||||||||||||||||||||||||||||||||||||||||||||
| NUZYRA | 9,913 | 5,469 | 4,444 | 81 | % | |||||||||||||||||||||||||||||||||||||||||||||
| VYVGART | 13,162 | — | 13,162 | NM | ||||||||||||||||||||||||||||||||||||||||||||||
| Total product revenue, net | 87,149 | 62,797 | 24,352 | 39 | % | |||||||||||||||||||||||||||||||||||||||||||||
NM - Not Meaningful
Cost of Sales
Cost of sales increased by $12.3 million to $33.6 million in the three months ended March 31, 2021first quarter of 2024, primarily due to increasing sales volumes and 2020:shifts in product sales mix.
(in thousands) | Three months ended March 31, | |||||||||||||||
2021 | % | 2020 | % | |||||||||||||
ZEJULA | $ | 12,606 | 62.7 | $ | 6,345 | 77.2 | ||||||||||
Optune | 7,130 | 35.5 | 1,873 | 22.8 | ||||||||||||
Others | 367 | 1.8 | — | — | ||||||||||||
Total product revenue—Net | $ | 20,103 | 100.0 | $ | 8,218 | 100.0 | ||||||||||
Research and Development Expenses
The following table sets forthpresents the components of our research and development expenses for the periods indicated.
($ in thousands):| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Personnel compensation and related costs | 28,008 | 28,655 | (647) | (2) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Licensing fees | — | 1,000 | (1,000) | (100) | % | |||||||||||||||||||||||||||||||||||||||||||||
| CROs/CMOs/Investigators expenses | 19,904 | 12,439 | 7,465 | 60 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Other costs | 6,733 | 6,378 | 355 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Total | 54,645 | 48,472 | 6,173 | 13 | % | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Three months ended March 31, | |||||||||||||||
2021 | % | 2020 | % | |||||||||||||
Research and development expenses: | ||||||||||||||||
Personnel compensation and related costs | $ | 12,697 | 6.2 | $ | 10,004 | 29.6 | ||||||||||
Licensing fees | 171,282 | 84.0 | 9,240 | 27.4 | ||||||||||||
Payment to CROs/CMOs/Investigators | 15,526 | 7.6 | 9,830 | 29.1 | ||||||||||||
Other costs | 4,347 | 2.2 | 4,668 | 13.9 | ||||||||||||
Total | $ | 203,852 | 100.0 | $ | 33,742 | 100.0 | ||||||||||
Research and development expenses increased by $170.2$6.2 million in the first quarter of 2024, primarily due to:
•an increase of $7.5 million in CROs/CMOs/Investigators expenses related to $203.9newly initiated studies and progress of existing studies; partially offset by
•a decrease of $1.0 million for the three months ended March 31, 2021 from $33.7 million for the three months ended March 31, 2020. The increase in research and development expenses included the following:
The following table summarizespresents our research and development expenses by program for the three months ended March 31, 2021 and 2020, respectively:
($ in thousands):(in thousands) | Three months ended March 31, | |||||||||||||||||||||||||||||
2021 | % | 2020 | % | |||||||||||||||||||||||||||
Research and development expenses: | ||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||
| 2024 | ||||||||||||||||||||||||||||||
| 2024 | ||||||||||||||||||||||||||||||
| 2024 | ||||||||||||||||||||||||||||||
| Clinical programs | ||||||||||||||||||||||||||||||
| Clinical programs | ||||||||||||||||||||||||||||||
Clinical programs | $ | 186,256 | 91.4 | $ | 20,332 | 60.3 | ||||||||||||||||||||||||
Pre-clinical programs | 2,500 | 1.2 | 688 | 2.0 | ||||||||||||||||||||||||||
| Pre-clinical programs | ||||||||||||||||||||||||||||||
| Pre-clinical programs | ||||||||||||||||||||||||||||||
Unallocated research and development expenses | 15,096 | 7.4 | 12,722 | 37.7 | ||||||||||||||||||||||||||
| Unallocated research and development expenses | ||||||||||||||||||||||||||||||
| Unallocated research and development expenses | ||||||||||||||||||||||||||||||
Total | $ | 203,852 | 100.0 | $ | 33,742 | 100.0 | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||
18
existing studies. Research and development expenses were attributable to clinicalpre-clinical programs decreased by $0.4 million in the first quarter of 2024 primarily due to a decrease in milestone fees for our license and collaboration agreements.
Selling, General, and Administrative Expenses
The following table sets forth the components ofpresents our selling, general and administrative expenses for the periods indicated.
by program ($ in thousands):| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Personnel compensation and related costs | 45,894 | 40,914 | 4,980 | 12 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Professional service fees | 4,103 | 8,555 | (4,452) | (52) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Other costs | 19,197 | 13,041 | 6,156 | 47 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Total | 69,194 | 62,510 | 6,684 | 11 | % | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Three months ended March 31, | |||||||||||||||
2021 | % | 2020 | % | |||||||||||||
Selling, General and Administrative Expenses: | ||||||||||||||||
Personnel compensation and related costs | $ | 23,412 | 65.3 | $ | 13,042 | 69.7 | ||||||||||
Professional service fees | 3,583 | 10.0 | 2,027 | 10.8 | ||||||||||||
Other costs | 8,843 | 24.7 | 3,645 | 19.5 | ||||||||||||
Total | $ | 35,838 | 100.0 | $ | 18,714 | 100.0 | ||||||||||
Selling, general, and administrative expenses increased by $17.1$6.7 million in the first quarter of 2024, primarily due to:
•an increase of $6.2 million in other costs, mainly related to $35.8higher general selling expenses for VYVGART which was launched in September 2023 and higher promotional fees for NUZYRA due to increased sales.
•an increase of $5.0 million for the three months ended March 31, 2021 from $18.7 million for the three months ended March 31, 2020. The increase in general and administrative expenses included the following:
•a decrease of more personnel during the three months ended March 31, 2021 and the grants of new share options and vesting of restricted shares to certain employees;
Interest Income
Interest income decreased by $1.5$0.6 million to $0.2$9.7 million forin the three months ended March 31, 2021, from $1.7 million for the three months ended March 31, 2020 primaryfirst quarter of 2024 primarily due to the decrease of short-term investments balance.decreased cash and cash equivalents.
Interest Expenses
Interest expenses is nil for the three months ended March 31, 2021, compared toincreased by $0.1 million forin the three months ended March 31, 2020, as all thefirst quarter of 2024 primarily due to interest expenses on short-term borrowings were repaid in 2020.
Foreign Currency (Losses) Gains
Foreign currency losses was $2.1 million in the first quarter of 2024, primarily driven by remeasurement losses due to launch JING Medicine Technology (Shanghai) Ltd., or JING, an entity that will provide services for drug discovery and development, consultation and transfer of pharmaceutical technology. We account for our investment using the equity method of accounting because we do not control the investee but have the ability to exercise significant influence over the operating and financial policiesdepreciation of the investee. The c
Other Expense, netIncome, Net
Other expense,income, net increased by $3.1$8.1 million forto $9.4 million in the three months ended March 31, 2021 and 2020first quarter of 2024, primarily due to an increase of $4.4 million in gain of our equity investment in MacroGenics, Inc as a result of a decreasechanges in governmental subsidiesits stock price and an increase of $2.8 million in foreign exchange loss.government grants.
Income Tax Expense
Income tax expense was nil in the first quarter of 2024 and 2023.
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Net Loss Attributable
Net loss was $53.5 million in the first quarter of 2024, or a loss per ordinary share attributable to Ordinary Shareholders
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our financial statements in conformity with U.S. GAAP, which requires usmanagement to make judgments, estimates, and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe toaffect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actualsubjective and complex. Actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.
Revenue recognitionRecognition
We have applied the practical expedients under ASC 606 with regard to assessment of financing components and concluded that there is no significant financing component given that the period between delivery of goods and payment is generally one year or less. We have generated product sales revenue since 2018. For the three months ended March 31, 2021 and 2020,sell our product revenues were primarily generated from the sale of ZEJULA (niraparib) and OPTUNE (Tumor Treating Fields) to customers.
We offer rebates to our distributors to compensate the distributors consistent with pharmaceutical industry practices. We are required to establish a provision for rebates in the same period the related product sales are recognized. The estimated amount of unpaid or unbilled rebates, if any, is recorded as a reduction of revenue. Estimated rebates
Significant judgments are determined based onrequired in making these estimates. In determining the appropriate accrual amount, we consider our contracted rates, sales volumes, and levellevels of distributor inventories. inventories, and historical experiences and trends. If actual results vary from our estimates or our expectations change, we will adjust these estimates accordingly, which would affect net product revenue and earnings in the period such variances become expected or known.
Research and Development Expenses
We regularly reviewhave a significant amount of research and development expenses, including with respect to pre-clinical and clinical trials for our product candidates. Such costs are expensed as incurred when they have no alternative future uses.
We contract with third parties to perform various pre-clinical and clinical trial activities on our behalf in the informationongoing development of our product candidates. Expenses related to thesepre-clinical and clinical trial activities are accrued based on the Company’s estimates and adjustof the amount accordingly.
Significant judgments are required in estimating the actual services performed by the third parties for the respective period and the related expense accruals. In determining the appropriate accrual, we consider a third party for warehousing services. Based onvariety of factors, including contractual requirements with respect to services to be provided, related rates, and our assessment of services performed during the nature of the arrangement,period and progress with respect to any contractual milestones when we have determined that we are a principal innot yet been invoiced or otherwise notified by third parties of actual costs. If the transaction since we are primarily responsible for fulfilling the promise to provide the products to the customers, maintain inventory risk until delivery to the customersactual status and have latitude in establishing the price. Revenue is recognized at the amount to which we expect to be entitled in exchangetiming of services performed vary from our estimates, our reported expenses and earnings for the sale of the products, which is the sales price agreed with the customers. Consideration paid to the third party is recognized in operating expenses.corresponding period may be affected.
Share-Based Compensation
We grant share-based awards, including share options andnon-vestedrestricted shares, to eligible employees, managementnon-employees, and directors and account for these share-based awards in accordance with ASC 718,Compensation-Stock Compensation. Employees’directors. Such share-based awards are measured at the grant date fair value of the awards and recognized as expenses (1) immediately at grant date if no vesting conditionsvalue.
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Significant assumptions are required; or (2) using graded vesting method over the requisite service period, which is the vesting period. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. We determineddetermining the fair value of the stockshare options, granted to employeeswhich we estimate using the Black-Scholes option valuation model.
Income Taxes
Income Taxes.
We recognize in our financial statements the benefit of a tax position if the tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We estimate our liability for unrecognized tax benefits which are periodically assessed and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and the expiration of the applicable statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and, in some cases, appeal or litigation process.
We consider positive and negative evidence when determining whether some portion or all of our deferred tax assets will not be realized. This assessment considers among other matters,various factors, including the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our historical results of operations, and our tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based uponOur estimates may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the levelstatute of our historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will not realize the deferred tax assets resulted from the tax loss carried forward in the future periods.
To date, we have financed our activities primarily through private placements, our September 2017 initial public offering and various follow-on offerings on the Nasdaq, stock exchange,and our September 2020 secondary listing and initial public offering on the Stock Exchange of Hong Kong and multiple follow-on offerings. Through March 31, 2021,Stock Exchange. In addition, we have raised approximately $164.6 million in private equity financing and approximately $1,644.6$2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us in our initial public offering and subsequentsecondary listing.initial public offering on the Hong Kong Stock Exchange. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $169.5$90.1 million and $39.8$69.3 million in the first quarter of 2024 and 2023, respectively. For information on our research and development activities and related expenditures see the Research and Development Expenses, Selling, General, and Administrative Expenses, License and Collaboration Arrangements, and Results of Operations sections in above. In addition, as of March 31, 2024, we had commitments for capital expenditures of $1.1 million, mainly for the three months ended March 31, 2021purpose of plant construction and 2020, respectively.installation.
follow-on
offerings on Nasdaq and our 21
As of March 31, 2021,2024, we had cash, cash equivalents and restricted cash of $1,014.2 million. Our expenditures as a company principally focused on research and development, are largely discretionary and as such our current losses and cash used in operations do not present immediate going concern issues. Based on our current operating plan, we expect that our existing cash and cash equivalents, ascurrent restricted cash, and short-term investments of May 10, 2021,$750.8 million, which we expect will enable us to fundmeet our cash requirements including the funding of operating expenses, and capital expenditures, requirementsand debt obligations for at least the next 12 months.
Although we believe that we have sufficient capital to fund our operations for at least the next twelve months, after the datewe may, from time to time, identify opportunities to access capital through debt arrangements on favorable commercial terms. In February 2024, we entered into three such debt arrangements with Chinese financial institutions that the financial statements includedallow certain of our subsidiaries to borrow up to approximately $164.5 million (or RMB1,171.7 million) to support our working capital needs in this Quarterly Report are issued. However, in ordermainland China. As of March 31, 2024, we have short-term debts of approximately $48.3 million (or RMB342.5 million) pursuant to these debt arrangements. These debt arrangements will provide us with additional capital capacity that gives us enhanced flexibility to execute on our corporate strategic goals. For more information, see Note 9.
We may consider, or we may ultimately need, additional funding sources to bring to fruition ouror research and development objectives we will ultimately need additional funding sourcesor otherwise, and there can be no assurances that theysuch funding will be made available.available to us on acceptable terms or at all.
The following table providespresents information regarding our cash flows for the three months ended March 31, 2021 and 2020:
($ in thousands):(in thousands) | Three months ended March 31, | |||||||
2021 | 2020 | |||||||
Net cash used in operating activities | $ | (169,500 | ) | $ | (39,841 | ) | ||
Net cash provided by investing activities | 742,005 | 48,952 | ||||||
Net cash (used in) provided by financing activities | (271 | ) | 279,484 | |||||
Effect of foreign exchange rate changes | (930 | ) | (947 | ) | ||||
Net increases in cash, cash equivalents and restricted cash | $ | 571,304 | $ | 287,648 | ||||
| Three Months Ended March 31, | Change | |||||||||||||||||||
| 2024 | 2023 | $ | ||||||||||||||||||
| Net cash used in operating activities | (90,106) | (69,287) | (20,819) | |||||||||||||||||
| Net cash provided by (used in) investing activities | 3,292 | (53,954) | 57,246 | |||||||||||||||||
| Net cash provided by (used in) financing activities | 47,548 | (3,886) | 51,434 | |||||||||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (104) | (1,299) | 1,195 | |||||||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | (39,370) | (128,426) | 89,056 | |||||||||||||||||
Net Cash Used in Operating Activities
Net cash used in operating activities
Net cash providedCash Provided by investing activities(Used in) Investing Activities
Net cash provided by investing activities was $742.0$3.3 million forin the three months ended March 31, 2021first quarter of 2024, compared to $49.0 million for the three months ended March 31, 2020. The increasenet cash used in cash provided by investing activities of $54.0 in the first quarter of 2023. This shift was primaryprimarily due to thea decrease of $100.0 million in purchases of short-term investments, a decrease of $2.5 million in purchases of property and equipment, partially offset by a decrease of $33.2 million in proceeds from the maturity of short-term investments.
investments, and an increase of $12.0 million from acquisition of intangible assets as we made a sales-based milestone payment which was capitalized as intangible assets in the fourth quarter of 2023.Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities
(in thousands) | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||
Purchase Obligations | $ | 22,498 | $ | 16,991 | $ | 5,507 | $ | — | $ | — | ||||||||||
Operating Lease Obligations | 18,232 | 5,573 | 6,228 | 4,379 | 2,052 | |||||||||||||||
Recently Issued Accounting Standards
For more information regarding recently issued accounting standards, please see “Part II—Part II – Item 8—8. Financial Statements and Supplementary Data—Data – Recent accounting pronouncements”Accounting Pronouncements in our 2023 Annual Report on Form 10-K for the year endedReport. The Company has not adopted any new accounting standards since December 31, 2020, as filed with the SEC on March 1, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk including foreign exchange risk and credit risk, cash flow interest rate risk and liquidity risk.
Foreign Exchange Risk
Renminbi, or RMB, is not a freely convertible currency. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China (“PBOC”), controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of our companythe Company included aggregated amounts of RMB247.9$17.9 million and RMB155.9$25.1 million, which were denominated in RMB, as of March 31, 2021 and December 31, 2020, respectively, representing 4% and 5%3% of the cash and cash equivalents as of both March 31, 20212024 and December 31, 2020,2023, respectively.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Greater China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, China changed
Since 1983, the Hong Kong Monetary Authority (“HKMA”) has pegged the HK dollar to the U.S. dollar at the rate of approximately HK$7.80 to US$1.00. However, there is no assurance that the HK dollar will continue to be pegged to the U.S. dollar or that the HK dollar conversion rate will remain at HK$7.80 to US$1.00. If the HK dollar conversion rate against the U.S. dollar changes and the value of the HK dollar depreciates against the U.S. dollar, our assets denominated in HK dollars will be adversely affected. Additionally, if the HKMA were to repeg the HK dollar to, for example, the RMB rather than the U.S. dollar, or otherwise restrict the conversion of HK dollars into other currencies, then our assets denominated in HK dollars will be adversely affected.
Credit Risk
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The carrying amounts of cash and cash equivalents and short-term investmentinvestments represent the maximum amount of losslosses due to credit risk. As of March 31, 20212024 and December 31, 2020,2023, we had cash and cash equivalents of $650.8 million and $790.2 million, and short-term investments of nil and $16.3 million, respectively. As of March 31, 2024 and December 31, 2023, all of our cash and cash equivalents and short-term investments were held by major financial institutions located in mainland China and international financial institutions outside of mainland China which we believe are of high credit quality and for which we will continually monitor continued credit worthiness.
Accounts receivable are typically unsecured and are derived from product sales and collaborative arrangements. We manage credit risk related to our accounts receivable through ongoing monitoring of outstanding balances and limiting the amount of credit extended based upon payment history and credit worthiness. Historically, we have collected receivables from customers within the credit worthinessterms with no significant credit losses incurred. As of these financial institutions.
March 31, 2024, our two largest customers accounted for approximately 21% of our total accounts receivable collectively.Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
Changes in Internal Control over Financial Reporting
13a-15(f)
PART II—II - OTHER INFORMATION
Item 1. Legal ProceedingsProceedings.
We may be, from time to time, subject to claims and suits arising in the ordinary course of business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial position or on our results of operations. We are not currently a party to nor is our property the subject of, any actual or threatened material legal or administrative proceedings.
Item 1A. Risk Factors
We are subject to risks and uncertainties that could, directly or indirectly, adversely affect our business, results of operations, financial condition, liquidity, cash flows, strategies, and/or prospects. There have been no material changes from thein our risk factors set forthfrom those disclosed in our Annual Report on Form10-Kfor the year ended December 31, 2020, as filed with the SEC on March 1, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.
None.
Item 3. Defaults Upon Senior SecuritiesSecurities.
None.
Item 4. Mine Safety DisclosuresDisclosures.
None.
Item 5. Other Information
On February 23, 2024, William Lis, one of the Company and from his position asCompany’s directors, adopted a directornew written Rule 10b5-1 trading arrangement for the disposition of up to 10,397 of the Company, effective immediately. In his new role as Chief Strategy OfficerCompany’s ADSs, each representing ten of the Company’s ordinary shares, to cover tax obligations in connection with the vesting of a previously granted restricted stock award. This Rule 10b5-1 trading arrangement is scheduled to terminate no later than July 31, 2024.
In addition, in the 2023 Annual Report, the Company Tao Fu will focus inadvertently omitted disclosure regarding the adoption of a new written Rule 10b5-1 trading arrangement on December 13, 2023 by F. Ty Edmondson, the Company’s corporate developmentChief Legal Officer, for the sale of up to 40,000 ADSs. This Rule 10b5-1 trading arrangement is scheduled to terminate no later than November 29, 2024. In addition, the Rule 10b5-1 trading arrangement adopted by Rafael Amado, the Company’s President, Head of Global Oncology Research and other strategic objectives.
Development, on December 15, 2023 is for the sale of up to 15,750 ADSs, rather than 94,500 ADSs as previously disclosed in our 2023 Annual Report.Item 6. Exhibits.
Exhibit Index
# Management contract or compensatory plan, contract, or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZAI LAB LIMITED | |||||||||||||
| Dated: May | By: | /s/ | |||||||||||
| Name: | |||||||||||||
| Title: | Chief Financial Officer | ||||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||||