Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-Q
____________________
FORM
10-Q
(Mark One)
☒
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
OR
☐
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
______ to ______
to
Commission File Number:
001-38205
____________________
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
____________________
Cayman Islands
98-1144595
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
4560 Jinke Road
Bldg. 1, Fourth Floor,
Pudong
Shanghai
Shanghai, China
201210
314 Main Street
4th Floor, Suite 100
Cambridge, MA, USA
02142
(Address of principal executive offices)
(Zip Code)
+86 21 6163216163 2588
(Registrant’s Telephone Number, Including Area Code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Trading
Symbol(s)
Name of each exchange
on which registered
American Depositary Shares, each representing 1 Ordinary Share, par value $0.00006 per share
ZLAB
The Nasdaq Global Market
10 Ordinary Shares, par value $0.00006$0.000006 per share*
share
9688
ZLAB
The Nasdaq Global Market
Ordinary Shares, par value $0.000006 per share*9688The 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.
*
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. Yes ☒x No ☐
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐o
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 Rule 12b-2 of the Exchange Act.
Large accelerated filerx☒Accelerated filer☐o
Non-accelerated filero
Non-accelerated
filer		☐Smaller reporting company☐o
Emerging growth companyo☐
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. ☐
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐o No ☒x
As of October 31, 2021, 96,408,743November 3, 2022, 979,087,430 ordinary shares of the registrant, par value $0.00006$0.000006 per share, were outstanding, of which 68,893,502743,576,320 ordinary shares were held in the form of American Depositary Shares.

Table of Contents
Zai Lab Limited
Quarterly Report on Form
10-Q
Page
4
1
5
1
Condensed Consolidated Balance Sheets as of September 30, 20212022 and December 31, 20202021
5
1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 20212022 and 20202021
6
2
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 20212022 and 20202021
7
3
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 20212022 and 20202021
8
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20212022 and 20202021
9
6
Notes to the Unaudited Condensed Consolidated Financial Statements
10
7
26
17
41
30
42
PART II.
OTHER INFORMATION31
42
33
42
33
42
33
53
33
53
33
53
33
53
33
54
34
55
35

Table of Contents

SPECIAL NOTES REGARDING THE COMPANY

Forward-Looking Statements

This Quarterly Report on Form
10-Q
contains certain forward-looking statements that involve risks and uncertainties. These forward-looking statements include, without limitation, statements containing words such as “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “possible,” “potentially,” “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. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information, that are not statements of historical facts, nor are they guarantees or assurances of future performance. These forward-looking statements relate to our future plans, objectives, expectations, intentions, and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to inherent uncertainties, risks, and changes in circumstances that may differ materially from those contemplated by the forward-looking statements because they relate to events and depend on circumstances that may or may not occur in the future. 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 risk factors discussedfollowing:

•    The effects of the COVID-19 pandemic, including any government actions and lockdown measures taken in response, particularly in mainland China where our operations and product markets are primarily located;
•    Changes in United States and China trade policies and relations, as well as relations with other countries, and/or changes in regulations and/or sanctions that may adversely impact our business, operating results, ability to raise capital, and market price of our ordinary shares and/or our ADSs;
•    Actions the Chinese government may take to intervene in or influence our operations, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs and ordinary shares, including potentially making those ADSs or ordinary shares worthless;
•    Economic, political, and social conditions in mainland China, as well as governmental policies, that could affect the business environment and financial markets in mainland China and our ability to operate our business, liquidity, and access to capital;
•    Uncertainties in the “Risk Factors” sectionChinese legal system that could materially and adversely affect us; including 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 Security Assessment Measures, and any other future laws and regulations, which may entail significant expenses for compliance or otherwise materially affect our business;
•    Any approval, filing, or procedural requirements by the China Securities Regulatory Commission (“CSRC”) or other Chinese regulatory authorities in connection with issuing securities to foreign investors under Chinese law, which could affect our ability to raise capital;
•    Any violation or liability under the U.S. Foreign Corrupt Practices Act or Chinese anti-corruption laws, which could have a material adverse effect on our business or reputation;
•    Restrictions on currency exchange that could limit our ability to receive and use financing in foreign currencies effectively;
•    Any limitation on the ability of our Chinese subsidiaries to make payments to us that could have a material and adverse effect on our ability to conduct our business or fund our cash and financing requirements;
•    Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies by residents in mainland China, which may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or otherwise adversely affect us;
•    Chinese regulations regarding acquisitions of mainland China based companies by foreign investors which could make it more difficult for us to pursue growth through acquisitions in mainland China;
•    Any issues that our Chinese manufacturing facilities have with operating in conformity with established GMPs and international best practices, and passing FDA, National Medical Products Administration (“NMPA”), and EMA inspections, which could result in a longer and costlier GMP inspection and approval process by the FDA, NMPA, or EMA for our Chinese manufacturing processes and third-party contract manufacturers;
•    Expiration of, or changes to, financial incentives or discretionary policies granted by local governments that could have an adverse effect on our results of operations;


•    Any difficulty for overseas regulators to conduct investigations or collect evidence within mainland China that could adversely affect our business, compliance with regulatory requirements, ability to raise capital, and share price of our ordinary shares and/or ADSs;
•    Any unfavorable tax consequences to us and our non-Chinese shareholders or ADS holders if we were to be classified as a Chinese resident enterprise for Chinese income tax purposes;
•    Any failure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, subject us to fines and other legal or administrative sanctions, or otherwise adversely affect our business, financial condition, and results of operations;
•    Any review by the Committee on Foreign Investment in the United States in our investments, which may delay or block a transaction from closing;
•    Failure to renew our current leases or locate desirable alternatives for our leased properties which could adversely affect our business;
•    Our ability to generate revenues from our four approved products;
•    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 that could adversely affect our ability to obtain regulatory approval for, or commercialize, our products or product candidates; and
•    Any inability to obtain or maintain sufficient patent protection for our products and product candidates that could adversely affect our business by allowing third parties to compete directly against us.

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, 2020,2021 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2022 (the “2021 Annual Report”), our Quarterly Report on Form 10-Q for the additional risk factors discussed inquarter ended March 31, 2022 filed with the “Risk Factors” section in Part II, Item 1A ofSEC on May 10, 2022 (the “Q1 2022 Form 10-Q”), our Quarterly Report on Form 10-Q for the quarter ended June 30, 20212022 filed with the SEC on August 9, 2022 (the “Q2 2022 Form 10-Q”), and this Quarterly Report on Form 10-Q. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management.available. These statements, like all statements in this Quarterly Report on Form
10-Q,
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 Quarterly Report on Form
10-Q.
We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Usage of Terms

Unless the context requires otherwise, references in this Quarterly Report on Form
10-Q
to “Greater China” refersrefer to mainland China, Hong Kong Special Administrative Region (“Hong Kong”), Macau Special Administrative Region (“Macau”), and Taiwan, and “China” refers to mainland China andcollectively; references in this Quarterly Report on Form
10-Q
to “Zai Lab,” the “Company,” “we,” “us,” and “our” refer to Zai Lab Limited, a holding company and its subsidiaries, on a consolidated basis. basis; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors are purchasing their interest.

Our operating subsidiaries compriseconsist 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. Additionally, asAs of the date of this Quarterly Report on Form 10-Q, Zai Auto Immune (Hong Kong) Limited and Zai Anti Infectives (Hong Kong) Limited havehas non-substantial business operations.

Disclosures Relating to Our Chinese Operations

Zai Lab Limited is not a Chinese operating company, but a holding company incorporated in the Cayman Islands.

Zai Lab Limited is not a Chinese operating company, but a holding company incorporated in the Cayman Islands. As a holding company, we conduct a substantial portion of our operations through wholly owned subsidiaries based in mainland China. Investors will not hold direct investments in our Chinese operating companies. In July 2021, the Chinese government provided new guidance on Chinese companies raising capital outside of mainland China, including through arrangements called variable interest entities (“VIEs”). Currently, our corporate structure contains no VIEs, and the life sciences industry in which we operate is not subject to foreign ownership limitations in mainland China. However, there are uncertainties with respect to the Chinese legal system, and there may be changes in laws, regulations, and policies, including how those laws, regulations, and policies will be interpreted or implemented. If, in the future, the Chinese


government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently, the value of our American Depositary Shares (“ADSs”) and/or ordinary shares may decline or become worthless.

There are significant legal and operational risks associated with having the majorityconducting a substantial portion of our operations in mainland China, including that changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or United StatesU.S. regulations may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs and/or ordinary shares.

There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including that changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or U.S. regulations may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs and/or ordinary shares. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our ADSs and/or ordinary shares to investors and could cause the value of our ADSs or ordinary shares to significantly decline or become worthless. Recent statements madeFor example, geopolitical events, such as developments with respect to Taiwan, continue to cause heightened tensions between the United States and regulatory actions undertaken by China’s government, includingChina, which could have potential adverse effects on our business, results of operations, ability to raise capital or raise capital on favorable terms, or the recent enactmentmarket price of China’s new Data Security Law, as well asour ordinary shares and/or ADSs. In addition, our obligations to comply with China’sthe Personal Information Protection Law, the Data Security Law, the Cyber Security Law, the Cybersecurity Review Measures (Revised Draft for Comment)(which became effective on February 15, 2022), the Measures on Security Assessment of Cross-Border Data Transfer (which became effective on September 1, 2022) (the “Security Assessment Measures”), regulations and guidelines relating to the multi-level protection scheme, Personal Information Protection Law and any other future laws and regulations may require us to incur significant expenses and could materially affect our ability to conduct our business, accept foreign investments, or continue to be listed on a U.S. or foreign stock exchange.

For more information on these risks and other risks relating to our ADSs and ordinary shares, see the risk factors discussed“Item 1A. Risk Factors” in the “Risk Factors” section of our 2021 Annual Report on Form
10-K
for the year ended December 31, 2020 and the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and this Quarterly Report on Form 10-Q.

1
We are required to obtain certain permissions from Chinese authorities to operate in mainland China, issue securities to foreign investors, and transfer certain scientific data.

TableWe are required to obtain certain permissions from Chinese authorities to operate in mainland China, issue securities to foreign investors, and transfer certain scientific data. The Chinese government has exercised, and may continue to exercise, substantial influence or control over virtually every sector of Contentsthe Chinese economy through regulation and state ownership. Our ability to operate in mainland China may be undermined if our Chinese subsidiaries are not able to obtain or maintain approvals to operate in mainland China. The central or local governments could impose new, stricter regulations or interpretations of existing regulations that could require additional expenditures and efforts on our part to comply with such regulations or interpretations.

As of the date of this Quarterly Report on Form
10-Q,
we are not currently required to obtain approval or prior permission from the China Securities Regulatory CommissionCSRC or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, asin January 2022, the CSRC released for public comment draft rules titled Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (together, the “Draft Rules”). If the Draft Rules are adopted in their current form, we would likely be required to submit filings to the CSRC in connection with the future issuance of our equity securities to foreign investors. As there are uncertainties with respect to the Chinese legal system and changes in laws, regulations, and policies, including how those laws, regulations, and regulationspolicies will be interpreted or implemented, there can be no assurance that we will notcould be subject to suchadditional requirements, approvals, or permissions in the future. We are required to obtain certain approvals from Chinese authorities in order to operate our Chinese subsidiaries. We are also required to obtain certain approvals from Chinese authorities before transferring certain scientific data abroad or to foreign parties or entities established or actually controlled by them.

We will be required to obtain approval from the Cyberspace Administration of China (“CAC”) when the transfers out of mainland China of certain data that is determined to be important data or personal data falls into any of the scenarios requiring a security assessment by the CAC specified in the Security Assessment Measures. The cross-border transfer out of mainland China of data requiring such a security assessment will not be allowed if the CAC does not approve the security assessment filing. In addition, the disclosure, sharing, or exporting to a foreign entity by a Chinese-owned entity of any data derived from human organs, tissues, or cells of Chinese individuals that contain human genetic materials requires a project-level approval by or a separate notification to the Human Genetic Resources Administration of China (“HGRAC”). The HGRAC also requires submission of a copy of the data to be exported. If our Chinese subsidiaries intend


to receive certain clinical or personal data from Chinese-owned entities or transfer certain clinical or personal data out of mainland China, they will need to first evaluate whether a security assessment by the CAC or a clearance from the HGRAC will be triggered by such data transfer, pass the security assessment, make the necessary notification filings, or obtain the necessary project-level approvals for such data transfer.

If our Chinese subsidiaries do not receive or maintain approvals or inadvertently conclude that approvals needed for their business are not required, or if there are changes in applicable laws (including regulations) or interpretations of laws and our Chinese subsidiaries are required but unable to obtain approvals in the future, then such changes or need for approvals (if not obtained) could adversely affect the operations of our Chinese subsidiaries, including limiting or prohibiting the ability of our Chinese subsidiaries to operate, and the value of our ADSs and/or ordinary shares could significantly decline or become worthless.

For more information on these required permissions, see the “Recent Legal and Regulatory Developments” section below“Item 1A. Risk Factors” in Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operation), the risk factors discussed in the “Risk Factors” section of our 2021 Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and this Quarterly Report on Form 10-Q.Report.
Business Licenses for Chinese Subsidiaries
To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the State Administration for Market Regulation or(“SAMR”).

To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the SAMR. Each of our Chinese subsidiaries has obtained a valid business license from the local counterpart of the SAMR, and no application for any such license has been denied. Our Chinese subsidiaries are also required to obtain certain licenses and permits, including but not limited to the following material licenses and permits: DrugPharmaceutical Manufacturing Permits, DrugPharmaceutical Distribution Permits, and Medical Device Distribution Permits to manufacture and/or distribute drugs andand/or applicable medical devices, and nodevices. No application for any such material license or permit has been denied.

Because our prior auditor, which filed an audit report with our last annual report, was located in mainland China, a jurisdiction where the U.S. Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of restrictions imposed by Chinese authorities, SEC staff conclusively identified us under the Holding Foreign Companies Accountable Act (“HFCAA”) in March 2022. Because the Company subsequently engaged KPMG LLP (“KPMG”), a U.S. auditor that is subject to inspection and review by the PCAOB, to be our independent registered public accounting firm for the fiscal year ending December 31, 2022 and because the Company has a principal executive office, significant operations, and a majority of our Board members and executives in the United States, we believe we have mitigated our risk of delisting pursuant to the HFCAA. However, if we were to fail to meet the audit requirements of the HFCAA for three consecutive years (or two years, if bills passed by the U.S. Senate or House of Representatives are enacted), we may be prohibited from listing our securities on a national securities exchange or over-the-counter market in the United States and delisted from the Nasdaq Global Market (“Nasdaq”). The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital effectively.

In recent years, the U.S. Congress and regulatory authorities have expressed concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in mainland China, and in December 2020, the United States enacted the HFCAA. The HFCAA requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). The PCAOB has issued a Determination Report, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions, and in March 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer because our prior auditor, which filed an audit report with our 2021 Annual Report, was located in mainland China.

Under the HFCAA, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for three consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including over-the-counter markets in the United States. If either the Accelerating Holding Foreign Companies Accountable Act passed by the U.S. Senate in June 2021 or the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022 passed by the U.S. House of Representatives in February 2022 are enacted, the number of non-inspection years would be reduced from three years to two years. It is unclear if or when either of these bills will be signed into law.

In May 2022 the Company engaged KPMG, an auditor located in the United States that is inspected by the PCAOB, as our independent registered public accounting firm for the fiscal year ending December 31, 2022. In addition, we have a
Dividends

principal executive office, significant operations, and Other Distributions
We are a holding company,majority of our Board members and executive officers in the United States. As a result, we believe that we have mitigated our risk of delisting pursuant to the HFCAA. However, if we were to fail to meet the audit requirements of the HFCAA for three consecutive years (or two years if the number of non-inspection years is reduced by legislation), our securities may relybe prohibited from trading on dividendsthe Nasdaq or other U.S. stock exchanges, and other distributions on equity paid bythis ultimately could result in our Chinese subsidiaries forADSs being delisted. Delisting of our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders orADSs would force holders of our ADSs to sell their ADSs or to service any debt we may incur. If anyconvert them into our ordinary shares. The foregoing could adversely affect the market price of our Chinese subsidiaries incur debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us. To date, there have not been any such dividends ordinary shares and/or other distributions from our Chinese subsidiaries to our subsidiaries located in or outside of China. In addition, as of the date of this Quarterly Report on Fo
r
m
10-Q,
none of our subsidiaries have ever issued any dividends or distributions to us or their respective shareholders in or outside of China, and neither we nor any of our subsidiaries have ever directly or indirectly paid dividends or made distributions to U.S. investors. Zai Lab (Shanghai) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received $266.5 million in capital contributions via twenty-two separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of China, from 2014 to 2021, to fund its business operations in China. Zai Lab International Trading (Shanghai) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received RMB1.0 million in capital contributions via contributions from Zai Lab (Shanghai) Co., Ltd., its sole shareholder, in 2019 to fund its business operations in China. Zai Lab (Suzhou) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received RMB166.5 million in capital contributions via ten separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of China, from 2015 to 2019 to fund its business operations in China. Zai Lab Trading (Suzhou) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received RMB1.0 million in capital contributions via contributions from Zai Lab (Suzhou) Co., Ltd., its sole shareholder, in 2020 to fund its business operations in China. Zai Biopharmaceutical (Suzhou) Co., Ltd., an operating subsidiary of ours that is domiciled in China, received $15.0 million in capital contributions via four separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of China, from 2017 to 2018 to fund its business operations in China. In the future, cash proceeds raised from our overseas financing activities may be transferred by us to our Chinese subsidiaries via capital contribution or shareholder loans or intercompany loans, as the case may be.
2
Table of Contents
According to the Foreign Investment Law of the People’s Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in accordance with other applicable laws, freely transfer into or out of China its contributions, profits, capital earnings, income from asset disposal, intellectual property rights, royalties acquired, compensation or indemnity legally obtained, and income from liquidation, made or derived within the territory of China in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount and frequency. According to the Company Law of the People’s Republic of China and other Chinese laws and regulations, our Chinese subsidiaries may pay dividends only out of their respective accumulated profits as determined in accordance with Chinese accounting standards and regulations. In addition, each of our Chinese subsidiaries is required to set aside at least 10% of its accumulated
after-tax
profits, if any, each year to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Where the statutory reserve fund is insufficient to cover any loss the Chinese subsidiary incurred in the previous financial year, its current financial year’s accumulated
after-tax
profits shall first be used to cover the loss before any statutory reserve fund is drawn therefrom. Such statutory reserve funds and the accumulated
after-tax
profits that are used for covering the loss cannot be distributed to us as dividends. At their discretion, our Chinese subsidiaries may allocate a portion of their
after-tax
profits based on Chinese accounting standards to a discretionary reserve fund.
Renminbi is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our Chinese subsidiaries to use their potential future Renminbi revenues to pay dividends to us. The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in availability of foreign currency may then restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to our offshore entities for our offshore entities to pay dividends or make other payments or otherwise to satisfy our foreign-currency-denominated obligations. Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and foreign debt (which may be denominated in foreign currency or Renminbi), including loans we may secure for our Chinese subsidiaries. Currently, our Chinese subsidiaries may purchase foreign currency for settlement of current account transactions, including payment of dividends to us, without the approval of the State Administration of Foreign Exchange of China (SAFE) by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes may be instituted by SAFE for cross-border transactions falling under both the current account and the capital account. Any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of China or pay dividends in foreign currencies to holders of our securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries. See the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and this Quarterly Report on Form 10-Q for a detailed discussion of the Chinese legal restrictions on the payment of dividendsADSs and our ability to transfer cash within our group and the potential for our ADS holders and holdersraise capital effectively. The market price of our ordinary shares toand/or ADSs also could be subject to Chinese taxes on dividends paid by usadversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the event weUnited States, regardless of whether such actions are deemedimplemented and regardless of our actual operating performance.

On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC governing inspections and investigations of audit firms based in mainland China and Hong Kong, which marks the first time it has received such detailed and specific commitments from China that China would allow PCAOB inspection and investigations meeting U.S. standards. However, it is uncertain whether the PCAOB will determine that it has sufficient access to inspect and review the work papers of Chinese resident enterprise for Chinese tax purposes.
auditors of U.S. listed companies and whether or how this recent development will affect the SEC’s designation of issuers under the HFCAA.
3

Table of Contents
PART I-FINANCIALI – 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 Form
10-Q
and the audited consolidated financial information and the accompanying notes thereto included in our 2021 Annual Report on Form
10-K
for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or SEC, on March 1, 2021.Report.
4

Table of Contents

Item 1. Financial Statement
Statements.
Zai Lab Limited
Unaudited condensed consolidated balance sheets
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
NotesSeptember 30,
2022		December 31,
2021
$$
Assets
Current assets:
Cash and cash equivalents31,119,476 964,100 
Short-term investments— 445,000 
Accounts receivable (net of allowance for credit loss of $8 and $11 as of September 30, 2022 and December 31, 2021, respectively)27,736 47,474 
Notes receivable10,251 7,335 
Inventories, net429,131 18,951 
Value added tax recoverable - current1,080 — 
Prepayments and other current assets22,157 18,021 
Total current assets1,209,831 1,500,881 
Restricted cash, non-current803 803 
Long term investments (including the fair value measured investment of $3,316 and $15,383 as of September 30, 2022 and December 31, 2021, respectively)3,316 15,605 
Prepayments for equipment4,068 989 
Property and equipment, net550,528 43,102 
Operating lease right-of-use assets20,269 14,189 
Land use rights, net6,824 7,811 
Intangible assets, net1,540 1,848 
Long-term deposits1,329 870 
Value added tax recoverable6 23,858 
Total assets1,298,514 1,609,956 
Liabilities and shareholders’ equity  
Current liabilities:  
Accounts payable90,112 126,163 
Current operating lease liabilities6,980 5,927 
Other current liabilities858,456 60,811 
Total current liabilities155,548 192,901 
Deferred income23,205 27,486 
Non-current operating lease liabilities13,892 9,613 
Total liabilities192,645 230,000 
Commitments and contingencies (Note 14)  
Shareholders’ equity  
Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 961,829,720 and 955,363,980 shares issued as of September 30, 2022 and December 31, 2021, respectively; 959,724,940 and 954,981,050 shares outstanding as of September 30, 2022 and December 31, 2021, respectively)6 6 
Additional paid-in capital2,877,361 2,825,948 
Accumulated deficit(1,799,591)(1,418,074)
Accumulated other comprehensive income (loss)39,549 (23,645)
Treasury Stock (at cost, 2,104,780 and 382,930 shares as of September 30, 2022 and December 31, 2021, respectively)(11,456)(4,279)
Total shareholders’ equity1,105,869 1,379,956 
Total liabilities and shareholders’ equity1,298,514 1,609,956 
       
As of
 
   
Notes
   
September 30,
2021
  
December 31,

2020
 
            
       
$
  
$
 
Assets
              
Current assets:
              
Cash and cash equivalents
   3    1,398,498   442,116 
Short-term investments
   5    170,000   744,676 
Accounts receivable (net of allowance
for credit loss
of $6 and $1 as of September 30, 2021 and December 31, 2020, respectively)
        21,018   5,165 
Inventories
   6    12,494   13,144 
Prepayments and other current assets
        17,077   10,935 
        
 
 
  
 
 
 
Total current assets
        1,619,087   1,216,036 
Restricted cash,
non-current
   4    743   743 
Long
-
term investments
 
(including the fair value measured investment of $20,070 and NaN as of September 30, 2021 and December 31, 2020, respectively)
   7    20,801   1,279 
Prepayments for equipment
        1,129   274 
Property and equipment, net
   8    37,087   29,162 
Operating lease right-of-use assets
        15,514   17,701 
Land use rights, net
        7,749   7,908 
Intangible assets, net
        1,678   1,532 
Long-term deposits
        901   862 
Value added tax recoverable
        23,390   22,141 
        
 
 
  
 
 
 
Total assets
       
 
1,728,079
 
 
 
1,297,638
 
        
 
 
  
 
 
 
Liabilities and shareholders’ equity
              
Current liabilities:
              
Accounts payable
        51,406   62,641 
Current operating lease liabilities
        6,312   5,206 
Other current liabilities
   11    54,292   30,196 
        
 
 
  
 
 
 
Total current liabilities
        112,010   98,043 
Deferred income
        17,487   16,858 
Non-current
operating lease liabilities
        10,652   13,392 
        
 
 
  
 
 
 
Total liabilities
       
 
140,149
 
 
 
128,293
 
        
 
 
  
 
 
 
Commitments and contingencies (Note 17)
        0    0  
Shareholders’ equity
              
Ordinary shares (par value of $0.00006 per share; 500,000,000 shares authorized, 95,273,589 and 87,811,026 shares issued and outstanding as of September 30,
 
2021 and December 31, 2020, respectively)
        6   5 
Additional
paid-in
capital
        2,812,830   1,897,467 
Accumulated deficit
        (1,206,249)   (713,603) 
Accumulated other comprehensive loss
        (15,124)   (14,524) 
Treasury Stock (at cost, 27,722 and 0nil shares as of September 30, 2021 and December 31, 2020, respectively)
        (3,533)   —   
        
 
 
  
 
 
 
Total shareholders’ equity
       
 
1,587,930
 
 
 
1,169,345
 
        
 
 
  
 
 
 
Total liabilities and shareholders’ equity
       
 
1,728,079
 
 
 
1,297,638
 
        
 
 
  
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
1
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of operations
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
Three Months Ended September 30,Nine Months Ended
September 30,
Notes2022202120222021
$$$$
Revenues:
Product revenue, net656,963 43,103 150,633 100,141 
Collaboration revenue6577 — 1,806 — 
Total revenues57,540 43,103 152,439 100,141 
Expenses:  
Cost of sales(20,044)(12,162)(53,094)(30,535)
Research and development(99,524)(55,144)(219,462)(401,220)
Selling, general, and administrative(66,555)(59,002)(186,947)(149,254)
Loss from operations(128,583)(83,205)(307,064)(480,868)
Interest income3,872 713 5,235 1,171 
Other income (expenses), net(36,479)(13,580)(79,467)(12,401)
Loss before income tax and share of loss from equity method investment(161,190)(96,072)(381,296)(492,098)
Income tax expense7— — — — 
Share of loss from equity method investment— (340)(221)(548)
Net loss(161,190)(96,412)(381,517)(492,646)
Net loss attributable to ordinary shareholders(161,190)(96,412)(381,517)(492,646)
Loss per share - basic and diluted9(0.17)(0.10)(0.40)(0.53)
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted 959,085,960 950,354,320 957,439,910 921,748,380 
Loss per American Depositary Shares (“ADS”) - basic and diluted(1.68)(1.01)(3.98)(5.34)
Weighted-average ADSs used in calculating net loss per ADS - basic and diluted 95,908,596 95,035,432 95,743,991 92,174,838 
Note: All the numbers of ordinary shares and per share data in these unaudited condensed consolidated financial statements have been retrospectively adjusted as a result of the Share Subdivision and the ADS Ratio Change that became effective on March 30, 2022. The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company. Refer to Note 2(a) for a detailed discussion.
       
Three Months Ended September 30,
  
Nine Months Ended September 30,
 
   
Notes
   
2021
  
2020
  
2021
  
2020
 
                  
       
$
  
$
  
$
  
$
 
Revenue
   9    43,103   14,651��  100,141   33,864 
Expenses:
       
Cost of sales
     
(12,162
)  (4,934)   (30,535)   (9,914) 
Research and development
     (55,144)   (58,100)   (401,220)   (160,149) 
Selling, general and administrative
     (59,002)   (27,874)   (149,254)   (70,346) 
    
 
 
  
 
 
  
 
 
  
 
 
 
Loss from operations
     (83,205)   (76,257)   (480,868)   (206,545) 
Interest income
     713   866   1,171   3,748 
Interest expenses
     —     (43)   —     (157) 
Other (expense
s
) income, net
     (13,580)   11,958   (12,401)   11,267 
    
 
 
  
 
 
  
 
 
  
 
 
 
Loss before income tax and share of loss from equity method investment
     (96,072)   (63,476)   (492,098)   (191,687) 
Income tax expense
   10    0—     —     0—     —   
Share of loss from equity method investment
     (340)   (265)   (548)   (671) 
    
 
 
  
 
 
  
 
 
  
 
 
 
Net loss
     (96,412)   (63,741)   (492,646)   (192,358) 
    
 
 
  
 
 
  
 
 
  
 
 
 
Net loss attributable to ordinary shareholders
     (96,412)   (63,741)   (492,646)   (192,358) 
    
 
 
  
 
 
  
 
 
  
 
 
 
Loss per share - basic and diluted
   12    (1.01)   (0.84)   (5.34)   (2.59) 
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted
     95,035,432   75,436,646   92,174,838   74,381,115 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
2
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of comprehensive loss
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)

Three Months Ended September 30,Nine Months Ended
September 30,
2022202120222021
$$$$
Net loss(161,190)(96,412)(381,517)(492,646)
Other comprehensive income (loss), net of tax of nil:
Foreign currency translation adjustments35,062 1,741 63,194 (600)
Comprehensive loss(126,128)(94,671)(318,323)(493,246)
   
Three Months Ended September 30,
  
Nine Months Ended September 30,
 
   
2021
  
2020
  
2021
  
2020
 
              
   
$
  
$
  
$
  
$
 
Net loss
   (96,412)   (63,741)   (492,646)   (192,358) 
Other comprehensive income (loss), net of tax of NaN:
                 
Foreign currency translation adjustments
   1,741   (9,901)   (600)   (7,535) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive loss
   (94,671)   (73,642)   (493,246)   (199,893) 
   
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
3
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of shareholders’ equity
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)

Ordinary SharesAdditional
paid
in capital		Accumulated
deficit		Accumulated
other
comprehensive
(loss) income		Treasury StockTotal
Number
of
Shares		AmountSharesAmount
$$$$$$
Balance at December 31, 2021955,363,980 6 2,825,948 (1,418,074)(23,645)(382,930)(4,279)1,379,956 
Issuance of ordinary shares upon vesting of restricted shares514,800 00— — — ��� — 
Exercise of shares options1,156,660 0297 — — — — 297 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (15,150)(68)(68)
Share-based compensation— — 12,410 — — — — 12,410 
Net loss— — — (82,394)— — — (82,394)
Foreign currency translation— — — — (2,193)— — (2,193)
Balance at March 31, 2022957,035,440 6 2,838,655 (1,500,468)(25,838)(398,080)(4,347)1,308,008 
Issuance of ordinary shares upon vesting of restricted shares683,700 00— — — — — 
Exercise of shares options2,801,000 04,322 — — — — 4,322 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (1,627,230)(6,782)(6,782)
Share-based compensation— — 14,225 — — — — 14,225 
Net loss— — — (137,933)— — — (137,933)
Foreign currency translation— — — — 30,325 — — 30,325 
Balance at June 30, 2022960,520,140 6 2,857,202 (1,638,401)4,487 (2,025,310)(11,129)1,212,165 
Issuance of ordinary shares upon vesting of restricted shares230,250 00— — — — — 
Exercise of shares options1,079,330 01,052 — — — — 1,052 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (79,470)(327)(327)
Share-based compensation— — 19,107 — — — — 19,107 
Net loss— — — (161,190)— — — (161,190)
Foreign currency translation— — — — 35,062 — — 35,062 
Balance at September 30, 2022961,829,720 6 2,877,361 (1,799,591)39,549 (2,104,780)(11,456)1,105,869 




4

Ordinary SharesAdditional
paid
in capital		Accumulated
deficit		Accumulated
other
comprehensive
(loss) income		Treasury StockTotal
Number
of
Shares		AmountSharesAmount
$$$$$$
Balance at December 31, 2020878,110,260 5 1,897,467 (713,603)(14,524)— — 1,169,345 
Issuance of ordinary shares upon vesting of restricted shares816,000 00— — — — — 
Exercise of shares options583,640 0702 — — — — 702 
Issuance of ordinary shares in connection with collaboration and license arrangement5,681,820 062,250 — — — — 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, 2021885,191,720 5 1,967,802 (946,513)(11,624)— — 1,009,670 
Issuance of ordinary shares upon vesting of restricted shares321,000 00— — — — — 
Exercise of shares option4,905,170 03,289 — — — — 3,289 
Issuance of ordinary shares upon follow-on public offering, net of issuance cost of $87957,164,000 1 817,995 — — — — 817,996 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (60,860)(924)(924)
Share-based compensation— — 10,232 — — — — 10,232 
Net loss— — — (163,324)— — — (163,324)
Foreign currency translation— — — — (5,241)— — (5,241)
Balance at June 30, 2021947,581,890 6 2,799,318 (1,109,837)(16,865)(60,860)(924)1,671,698 
Issuance of ordinary shares upon vesting of restricted shares540,500 00— — — — — 
Exercise of shares option4,613,500 02,916 — — — — 2,916 
Issuance cost adjustment for follow-on public offering— — 40 — — — — 40 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation— — — — — (216,360)(2,609)(2,609)
Share-based compensation— — 10,556 — — — — 10,556 
Net loss— — — (96,412)— — — (96,412)
Foreign currency translation— — — — 1,741 — — 1,741 
Balance at September 30, 2021952,735,890 6 2,812,830 (1,206,249)(15,124)(277,220)(3,533)1,587,930 
   
Ordinary Shares
   
Additional

paid

in capital
  
Accumulated

deficit
  
Accumulated
other

comprehensive

(loss) income
  
Treasury Stock
  
Total
 
   
Number
of

Shares
   
Amount
  
Shares
  
Amount
 
                            
       
$
   
$
  
$
  
$
     
$
  
$
 
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   —     —     —     —     —   
Exercise of shares option
   58,364    0    702   —     —     —     —     702 
Issuance of ordinary shares in connection with collaboration and license arrangement (Note 15)
   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 translatio
n
   —      —      —     —     2,900   —     —     2,900 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at March 31, 2021
   88,519,172    5    1,967,802   (946,513)   (11,624)   —     —     1,009,670 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
   32,100    0    0   —     —     —     —     0 
Exercise of shares option
   490,517    0    3,289   —     —     —     —     3,289 
Issuance of ordinary shares upon
follow-on
public offering, net of issuance cost of $879
   5,716,400    1    817,995   —     —     —     —     817,996 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation
   —      —      —     —     —     (6,086)   (924)   (924) 
Share-based compensation
   —      —      10,232   —     —     —     —     10,232 
Net loss
   —      —      —     (163,324)   —     —     —     (163,324) 
Foreign currency translation
   —      —      —     —     (5,241)   —     —     (5,241) 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at June 30, 2021
   94,758,189    6    2,799,318   (1,109,837)   (16,865)   (6,086)   (924)   1,671,698 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
   54,050    0    0   —     —     —     —     0 
Exercise of shares option
   461,350    0    2,916   —     —     —     —     2,916 
Issuance cost adjustment for
follow-on
public offering
   —      —      40   —     —     —     —     40 
Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation
   —      —      —     —     —     (21,636)   (2,609)   (2,609) 
Share-based compensation
   —      —      10,556   —     —     —     —     10,556 
Net loss
   —      —      —     (96,412)   —     —     —     (96,412) 
Foreign currency translation
   —      —      —     —     1,741   —     —     1,741 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2021
   95,273,589    6    2,812,830   (1,206,249)   (15,124)   (27,722)   (3,533)   1,587,930 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
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   —     —     —     —     —   
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 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
   36,000    0    0   —     —     —     —     0 
Exercise of shares option
   179,613    0    2,729   —     —     —     —     2,729 
Issuance cost adjustment for
follow-on
public offering
   —      —      (13)   —     —     —     —     (13) 
Share-based compensation
   —      —      6,964   —     —     —     —     6,964 
Net loss
   —      —      —     (80,629)   —     —     —     (80,629) 
Foreign currency translation
   —      —      —     —     (1,173)   —     —     (1,173) 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at June 30, 2020
   74,882,338    4    1,031,791   (573,315)   6,986   —     —     465,466 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Issuance of ordinary shares upon vesting of restricted shares
   90,468    0    0   —     —     —     —     0 
Exercise of shares option
   560,662    0    1,008   —     —     —     —     1,008 
Issuance of ordinary shares upon secondary listing, net of issuance cost of $5,634
   10,564,050    1    739,232   —     —     —     —     739,233 
Issuance cost adjustment for
follow-on
public offering
   —      —      (2)   —     —     —     —     (2) 
Share-based compensation
   —      —      6,978   —     —     —     —     6,978 
Net loss
   —      —      —     (63,741)   —     —     —     (63,741) 
Foreign currency translation
   —      —      —     —     (9,901)   —     —     (9,901) 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 00030, 2020
   86,097,518    5    1,779,007   (637,056)   (2,915)   —     —     1,139,041 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
8
5
Table of Contents

Zai Lab Limited
Unaudited condensed consolidated statements of cash flows
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
Nine Months Ended
September 30,
20222021
$$
Operating activities
Net loss(381,517)(492,646)
Adjustments to reconcile net loss to net cash used in operating activities:  
Allowance for credit (gain) loss(3)5 
Inventory write-down480 402 
Depreciation and amortization expenses6,100 4,612 
Amortization of deferred income(2,041)(234)
Share-based compensation45,742 28,106 
Noncash research and development expenses— 62,250 
Share of loss from equity method investment221 548 
Loss from fair value changes of equity investment with readily determinable fair value12,067 9,930 
(Gain) loss on disposal of property and equipment(11)12 
Noncash lease expenses5,820 4,595 
Foreign currency remeasurement loss73,052 2,838 
Changes in operating assets and liabilities:  
Accounts receivable16,483 (15,858)
Notes receivable(3,861)— 
Inventories(13,235)248 
Prepayments and other current assets(5,860)(6,142)
Long-term deposits(459)(39)
Value added tax recoverable21,432 (1,249)
Accounts payable(28,850)(11,235)
Other current liabilities1,628 20,591 
Operating lease liabilities(6,008)(3,834)
Deferred income470 863 
Net cash used in operating activities(258,350)(396,237)
Cash flows from investing activities:  
Purchases of short-term investments(260,274)(170,000)
Proceeds from maturity of short-term investment705,274 743,902 
Purchase of property and equipment(20,172)(11,917)
Purchase of intangible assets(439)(539)
Payment for investment in equity investee— (30,000)
Net cash provided by investing activities424,389 531,446 
Cash flows from financing activities:  
Proceeds from exercises of stock options5,640 6,907 
Proceeds from issuance of ordinary shares upon public offerings— 818,874 
Payment of public offering costs— (1,836)
Employee taxes paid related to net share settlement of equity awards(7,171)(3,467)
Net cash (used in) provided by financing activities(1,531)820,478 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash(9,132)695 
Net increase in cash, cash equivalents and restricted cash155,376 956,382 
Cash, cash equivalents and restricted cash - beginning of period964,903 442,859 
Cash, cash equivalents and restricted cash - end of period1,120,279 1,399,241 
Supplemental disclosure on non-cash investing and financing activities:  
Payables for purchase of property and equipment3,234 1,797 
Payables for intangible assets32 24 
Payables for treasury stock32 — 
Receivables for stock option exercise under equity incentive plans31 — 
Right-of-use asset acquired under operating leases12,861 — 
Supplemental disclosure of cash flow information:  
Cash and cash equivalents1,119,476 1,398,498 
Restricted cash, non-current803 743 
Total cash and cash equivalents and restricted cash1,120,279 1,399,241 
   
Nine Months Ended

September 30,
 
   
2021
  
2020
 
        
   
$
  
$
 
Operating activities
         
Net loss
   (492,646)   (192,358) 
Adjustments to reconcile net loss to net cash used in operating activities:
         
Allowance for doubtful accounts
   5   2 
Inventory write-down
   402   —   
Depreciation and amortization expenses
   4,612   3,253 
Amortization of deferred income
   (234)   (234) 
Share-based compensation
   28,106   20,405 
Noncash research and development expenses (Note 15)
   62,250   —   
Share of loss from equity method investment
   548   671 
Loss from fair value changes of equity investment with readily determinable fair value
   9,930   0   
Loss on disposal of property and equipment
   12   1 
Noncash lease expenses
   4,595   3,251 
Changes in operating assets and liabilities:
        
Accounts receivable
   (15,858)   (3,704) 
Inventories
   248   (3,631) 
Prepayments and other current assets
   (6,142)   (3,564) 
Long
-
term deposits
   (39)   (474) 
Value added tax recoverable
   (1,249)   (6,845) 
Accounts payable
   (11,235)   5,217 
Other current liabilities
   23,429   (4,981) 
Operating lease liabilities
   (3,834)   (2,335) 
Deferred income
   863   13,606 
   
 
 
  
 
 
 
Net cash used in operating activities
   (396,237)   (171,720) 
   
 
 
  
 
 
 
Cash flows from investing activities:
         
Purchases of short-term investments
   (170,000)   (749,676) 
Proceeds from maturity of short-term investment
   743,902   —   
Payment for investment in equity investee
   (30,000)   —   
Disposal of property and equipment
   3   —   
Purchase of property and equipment
   (11,920)   (4,835) 
Purchase of intangible assets
   (539)   (370) 
   
 
 
  
 
 
 
Net cash provided by (used in) investing activities
   531,446   (754,881) 
   
 
 
  
 
 
 
Cash flows from financing activities:
         
Repayment of short-term borrowings
   —     (4,292) 
Proceeds from exercises of stock options
   6,907   4,083 
Proceeds from issuance of ordinary shares upon public offerings
   818,874   1,025,970 
Payment of public offering costs
   (1,836)   (1,275) 
Employee taxes paid related to net share settlement of equity awards
   (3,467)   —   
   
 
 
  
 
 
 
Net cash provided by financing activities
   820,478   1,024,486 
   
 
 
  
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
   695   2,062 
   
 
 
  
 
 
 
Net increase in cash, cash equivalents and restricted cash
   956,382   99,947 
Cash, cash equivalents and restricted cash - beginning of period
   442,859   76,442 
   
 
 
  
 
 
 
Cash, cash equivalents and restricted cash - end of period
   1,399,241   176,389 
   
 
 
  
 
 
 
Supplemental disclosure on
non-cash
investing and financing activities:
         
Payables for purchase of property and equipment
   1,797   2,334 
Payables for intangible assets
   24   21 
Payables for public offering costs
   —     4,909 
Supplemental disclosure of cash flow information:
         
Cash and cash equivalents
   1,398,498   175,879 
Restricted cash,
non-current
   743   510 
   
 
 
  
 
 
 
Total cash and cash equivalents and restricted cash
   1,399,241   176,389 
   
 
 
  
 
 
 
Interest paid
   —     157 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
6
Table of Contents

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements

(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
1. Organization and principal 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 Law of the Cayman Islands. The CompanyIslands (as amended). Zai Lab Limited and its subsidiaries (collectively referred to as the “Group”“Company”) are focused on developing and commercializing therapiesproducts and product candidates that address medical conditions with unmet medical needs, including in particular,the areas of oncology, autoimmune disorders, infectious diseases, and infectious diseases.
neurological disorders.

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 presentation and consolidation and significant 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 Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, shareholders’ equity and cash flows in conformity with U.S. generally accepted accounting principles in the United States (“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 Quarterly Report on Form 10-Q 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, 2021 filed with the SEC on March 1, 2022 (the “2021 Annual Report”). InThe December 31, 2021 condensed consolidated balance sheet data included in this Quarterly Report on Form 10-Q were derived from the opinion of management, theseaudited financial statements included in the 2021 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, 20202022.
Effective as of March 30, 2022, the Company subdivided each of its issued and unissued ordinary shares into ten ordinary shares (the “Share Subdivision”). Following the Share Subdivision, the Company’s authorized share capital became $30,000 divided into 5,000,000,000 shares with a par value of $0.000006 per share. The numbers of issued and unissued ordinary shares and per share data as disclosed elsewhere in these unaudited 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 containedare presented on a basis after taking into account the effects of the Share Subdivision and have been retrospectively adjusted, where applicable. In connection with the Share Subdivision, the conversion ratio of our ADSs to ordinary shares changed from one ADS to one ordinary share to a new ratio of one ADS to ten ordinary shares (the “ADS Ratio Change”). The Share Subdivision and ADS Ratio Change did not result in any change to the Company’s Annual Report on Formnumber of outstanding ADSs of the Company.
10-K
A reclassification has been made within the condensed consolidated statement of cash flow for the yearnine months ended December 31, 2020. Interim results areSeptember 30, 2021 to conform to the current period presentation. The Company reclassified $2.8 million from other current liabilities into foreign currency remeasurement loss. The net cash used in operating activities did not necessarily indicativechange as a result of full year results and the unaudited condensed consolidated financial statements may not be indicative of the
Group’sreclassification.
future performance.
(b) Principles of consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.
(c) Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
7

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
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 lives of long-lived assets, estimating the current expected credit losses for financial assets, and assessing the impairment of long-lived assets, discount rate of operating lease liabilities, accrual of rebate,rebates, allocation of the research and development service expenses to the appropriate financial reporting period based on the progress of the research and development projects, share-based compensation expenses, recoverability of deferred tax assets, and a lack of marketability discount of the ordinary shares issued in connection with license and collaboration and license arrangementarrangements (Note 15)12). Management bases theits 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 values of assets and liabilities. Actual results could differ from these estimates.
(d)
Long-term
investments
Long-term investments represent equity-method investments and equity investments with readily determinable fair values.
The Group accounts for equity investment in entities with significant influence under equity-method accounting. Under this method, the Group’s pro rata share of income (loss) from investment is recognized in the consolidated statements of comprehensive income. Dividends received reduce the carrying amount of the investment. When the Group’s share of loss in an equity-method investee equals or exceeds its carrying value of the investment in that entity, the Group continues to report its share of equity method losses in the statements of comprehensive income to the extent and as an adjustment to the carrying amount of its other investments in the investee. Equity-method investment is reviewed for impairment by assessing if the decline in market value of the investment below the carrying value is other-than-temporary. In making this determination, factors are evaluated in determining whether a loss in value should be recognized. These include consideration of the intent and ability of the Group to hold investment and the ability of the investee to sustain an earnings capacity, justifying the carrying amount of the investment. Impairment losses are recognized in other expense when a decline in value is deemed to be other-than-temporary.
Investments in equity securities that have readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured at fair value, with unrealized gains and losses from fair value changes recognized in other (expenses) income, net in the unaudited condensed consolidated statements of operations.
10
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
(e) Fair value measurements
The Group applies ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
The Group did not have any assets or liabilities that were measured at fair value on a recurring basis prior to 2021. As of September 30, 2022 and December 31, 2021, information about inputs into the fair value measurement of the Group’sCompany’s assets that are measured at a fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
follows (in thousands):
DescriptionFair Value as of
September 30, 2022
$
Fair Value Measurement at Reporting
Date Using Quoted Prices in Active
Markets
for Identical
Assets (Level 1)
US$
Equity Investments with Readily Determinable Fair Value3,316 3,316 
DescriptionFair Value as of
December 31, 2021
$
Fair Value Measurement at Reporting
Date Using Quoted Prices in Active
Markets
for Identical
Assets (Level 1)
US$
Equity Investments with Readily Determinable Fair Value15,383 15,383 
The Company did not have assets or liabilities measured at fair value on a nonrecurring basis during the periods presented.
Description
  
Fair Value as of
September 30, 2021
US$
   
Fair Value Measurement at Reporting
Date Using Quoted Prices in Active
Markets
for Identical
Assets (Level 1)
US$
 
Equity Investments with Readily Determinable Fair Value
   20,070    20,070 
Financial instruments of the GroupCompany primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, long-term investments, accounts payable, and other current
liabilities
.
liabilities. As of September 30, 20212022 and December 31, 2020,2021, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, accounts payable, and other payablecurrent liabilities approximated their fair values due to the short-term maturity of these instruments, and the carrying value of restricted cash approximatesapproximated its fair value based on the nature of the assessment of the ability to recover these amounts.
(e) Recent accounting pronouncements
Adopted accounting standards
In November 2021, the FASB issued ASU2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance. The amendments in this ASU require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this ASU are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this standard as of January 1, 2022. There was no material impact on the Company’s financial position or results of operations upon the adoption.
118
Table of Contents

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
(f) Recent accounting pronouncements
Adopted Accounting Standards
In December 2019, the Financial Accounting Standard Board (“FASB”) issued ASU
2019-12,
Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes
. This update simplifies the accounting for income taxes as part of the FASB’s overall initiative to reduce complexity in accounting standards. The amendments include removal of certain exceptions to the general principles of ASC 740,
Income taxes
, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The update is effective in fiscal years beginning after December 15, 2020, and interim periods therein, and early adoption is permitted. Certain amendments in this update should be applied retrospectively or modified retrospectively, all other amendments should be applied prospectively. The Group adopted this standard on January 1, 2021. There was no material impact to the Group’s financial position or results of operations upon adoption.
(g) Significant accounting policies
For a more complete discussion of the Company’s significant accounting policies, and other information, the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements included in the Company’s2021 Annual Report on Form
10-K
for the year ended December 31, 2020.
12
Report.
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
3. Cash and cash equivalents
   
As of
 
     
   
September 30, 2021
   
December 31, 2020
 
         
   
$
   
$
 
Cash at bank and in hand
   1,097,430    441,283 
Cash equivalents (note (i))
   301,068    833 
   
 
 
   
 
 
 
    1,398,498    442,116 
   
 
 
   
 
 
 
Denominated in:
          
US$
   762,209    297,813 
RMB (note (ii))
   28,802    23,898 
Hong Kong dollar (“HK$”)
   607,323    119,695 
Australian dollar (“A$”)
   134    710 
Taiwan dollar (“TW$”)
   30    —   
   
 
 
   
 
 
 
    1,398,498    442,116 
   
 
 
   
 
 
 
Note
s
:
(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 China. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the government of the People’s Republic of China (“PRC”).
4. Restricted cash,
non-current
The Group’s restrictedfollowing table presents the Company’s cash balance of $743 and $743cash equivalents as of September 30, 20212022 and December 31, 2020, respectively, was long-term2021 (in thousands):
September 30, 2022December 31, 2021
$$
Cash at bank and in hand818,407 663,472 
Cash equivalents (i)301,069 300,628 
 1,119,476 964,100 
Denominated in:  
US$1,072,376 932,888 
RMB (ii)41,138 23,791 
Hong Kong dollar (“HK$”)5,035 6,674 
Australian dollar (“A$”)579 475 
Taiwan dollar (“TW$”)348 272 
1,119,476 964,100 
(i)Cash equivalents represent short-term and highly liquid investments in a money market fund.
(ii)Certain cash and bank deposits held as collateral for issuancebalances denominated in RMB were deposited with banks in mainland China. The conversion of lettersthese RMB denominated balances into foreign currencies is subject to the rules and regulations of credit. These deposits will be released when the related letters of credit are settledforeign exchange control promulgated by the Group.
Chinese government.
5. Short-term investments
Short-term investments are primarily comprised of time deposits with original maturities between three months and one year.
4. Inventories, net

The Group’s short-term investments consisted entirelyCompany’s net inventory balance of short-term held to maturity debt instruments with high credit ratings, which were determined to have remote risk of expected credit loss. Accordingly, 0 allowance for credit loss was recorded$29.1 million and $19.0 million as of September 30, 20212022 and December 31, 2020, respectively.
13
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
6. Inventories
The Group’s inventory balance of $12,494 and $13,144 as of September 30, 2021, and December 31, 2020, respectively, mainly consisted of finished goods purchased from Tesaro Inc., now GlaxoSmithKline (GSK)(“GSK”), for distribution in Hong Kong, and from NovoCure Limited (“NovoCure”) for distribution in Hong Kong and mainland China, and from Deciphera Pharmaceuticals, LLC (“Deciphera”) for distribution in Hong Kong, mainland China and China,Taiwan, as well as finished goods and certain raw materials for ZEJULA and NUZYRA commercialization in mainland China.
The following table presents the Company’s inventories, net, as of September 30, 2022 and December 31, 2021 (in thousands):
September 30, 2022December 31, 2021
$$
Finished goods8,703 5,632 
Raw materials20,397 13,231 
Work in Progress31 88 
Inventories, net29,131 18,951 

   
As of
 
     
   
September

30, 2021
   
December

31, 2020
 
         
   
$
   
$
 
Finished goods
   5,298    3,041 
Raw materials
   7,196    10,103 
   
 
 
   
 
 
 
Inventories
   12,494    13,144 
   
 
 
   
 
 
 
The GroupCompany writes down inventory for any excess or obsolete inventories or when the GroupCompany believes that the net realizable value of inventories is less than the carrying value. DuringThe Company recorded write-downs in cost of sales of $0.3 million and $0.5 million during the three and nine months ended September 30, 2022, respectively, and of $0.1 million and $0.4 million during the three and nine months ended September 30, 2021, respectively.
9

Zai Lab Limited
Notes to the Group recorded write-downsunaudited condensed consolidated financial statements

5. Property and equipment, net
The following table presents the components of
$112 the Company’s property and $402,
in costequipment, net as of revenues, respectively. During the three and nine months ended September 30, 2020, the Group recorded reverses2022 and write-downs of
$7 and NaN,
in cost of revenues, respectively.
7. Long-term investments
In June 2017, the Group entered into an agreement with 3
third-parties
to launch JING Medicine Technology (Shanghai) Ltd. (“JING”), an entity which provides services for product discovery and development, consultation and transfer of pharmaceutical technology. The capital contribution by the Group was RMB26,250 in cash, which was paid by the Group in 2017 and 2018, representing 20% and 18% of the equity interest of JING as of December 31, 20202021 (in thousands):
September 30, 2022December 31, 2021
$
$
Office equipment818 836 
Electronic equipment6,744 5,036 
Vehicle198 220 
Laboratory equipment18,673 17,069 
Manufacturing equipment14,366 14,600 
Leasehold improvements10,160 10,432 
Construction in progress19,882 11,334 
70,841 59,527 
Less: accumulated depreciation(20,313)(16,425)
Property and equipment, net50,528 43,102 

Depreciation expense was $2.1 million and September 30, 2021 respectively. The Group accounts for this investment using the equity method of accounting due to the fact that the Group can exercise significant influence on the investee. The Group recorded its gain on deemed disposal in this investee of NaN and $463 for the three months and nine months ended September 30, 2021, and recorded loss of $340 and $1,011 for its portion of JING’s net loss for the three months and nine months ended September 30, 2021, respectively. The Group recorded share of loss in this investee of $265 and $671$5.7 million for the three and nine months ended September 30, 2020, respectively.
In July 2021, the Group made an equity investment in MacroGenics Inc. (“MacroGenics”), a biopharmaceutical company focused on developing2022, respectively, and commercializing innovative monoclonal antibody-based therapeutics for the treatment of cancer, in a private placement with total contributions of
$30,000$1.5 million and obtained 958,467 newly issued common shares of MacroGenics at $31.30
per share (see Note 15). The Group recorded this investment at acquisition cost and subsequently measured at fair value, with the changes in fair value recognized in the statement of operations. The Group recognized its fair value loss of
$9,930
and $9,930 for the three and nine months ended September 30, 2021.
14
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
8. Property and equipment, net
Property and equipment consist of the following:
   
As of
 
     
   
September 30,
2021
   
December 31,

2020
 
         
   
$
   
$
 
Office equipment
   802    430 
Electronic equipment
   3,771    2,646 
Vehicle
   217    143 
Laboratory equipment
   15,274    11,933 
Manufacturing equipment
   13,313    12,198 
Leasehold improvements
   9,909    9,641 
Construction in progress
   8,306    2,423 
   
 
 
   
 
 
 
    51,592    39,414 
Less: accumulated depreciation
   (14,505)    (10,252) 
   
 
 
   
 
 
 
Property and equipment, net
   37,087    29,162 
   
 
 
   
 
 
 
Depreciation expenses$4.3 million for the three and nine months ended September 30, 2021, were $1,510 and $4,257, respectively. Depreciation expenses for the three and nine months ended September 30, 2020 were $1,061 and $3,035, respectively.
9.6. Revenue
Product revenue, net
The Group’sCompany’s product revenue is primarily derived from the salesales of ZEJULA, Optune, QINLOCK, and QINLOCKNUZYRA in mainland China and Hong Kong. The table below presents the Group’sCompany’s net product sales for the three and nine months ended September 30, 2022 and 2021 and 2020.
(in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
$
$
$
$
Product revenue - gross60,446 47,555 168,095 135,490 
Less: Rebate and sales return(3,483)(4,452)(17,462)(35,349)
Product revenue - net56,963 43,103 150,633 100,141 

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
         
   
2021
   
2020
   
2021
   
2020
 
                 
   
$
   
$
   
$
   
$
 
Product revenue - gross
   47,555    17,152    135,490    37,567 
Less: Rebate and sales return
   (4,452)    (2,501)    (35,349)    (3,703) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Product revenue - net
   43,103    14,651    100,141    33,864 
   
 
 
   
 
 
   
 
 
   
 
 
 
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 sales rebates included NaN and $22,009 compensation to distributors for those products previously sold at the price prior10

Zai Lab Limited
Notes to the National Reimbursement Drug List (“NRDL”) implementation, due to the first-time inclusion of ZEJULA in the NRDL, for the three and nine months ended September 30, 2021. There was 0 such compensation for the three and nine months ended September 30, 2020.unaudited condensed consolidated financial statements
The following table disaggregatespresents net revenue by product for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
$$$$
ZEJULA39,214 28,162 102,863 64,134 
Optune10,662 10,653 35,051 27,318 
QINLOCK5,541 4,288 9,123 8,689 
NUZYRA1,546 — 3,596 — 
Product revenue - net56,963 43,103 150,633 100,141 
Collaboration revenue
The Company’s collaboration revenue was $0.6 million and 2020:
$1.8 million for the three and nine months ended September 30, 2022, respectively, and nil for the three and nine months ended September 30, 2021. This collaboration revenue was from the Company’s collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd.
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
         
   
2021
   
2020
   
2021
   
2020
 
                 
   
$
   
$
   
$
   
$
 
ZEJULA
   28,162    8,503    64,134    22,294 
Optune
   10,653    5,950    27,318    11,372 
QINLOCK
   4,288    198    8,689    198 
   
 
 
   
 
 
   
 
 
   
 
 
 
Product revenue - net
   43,103    14,651    100,141    33,864 
   
 
 
   
 
 
   
 
 
   
 
 
 
10.7. Income Taxtax
No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries are in cumulative loss positions 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 September 30, 20212022 and December 31, 2020. NaN2021. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
8. Other current liabilities
The following table presents the Company’s other current liabilities as of September 30, 2022 and December 31, 2021 (in thousands):
September 30,
2022		December 31,
2021
$$
 Payroll25,208 25,685 
 Accrued rebate to distributors8,843 15,001 
 Tax payables10,405 8,817 
 Accrued professional service fee5,927 4,319 
 Other (i)4,839 4,421 
 Payables for purchase of property and equipment3,234 2,568 
Total58,456 60,811 
(i)Other primarily consists of tax withholding related to share-based compensation and accrued travel and business entertainment expenses.
9. Loss per share

The following table presents the computation of the basic and diluted net loss per share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except share and per share data):
1511
Table of Contents

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements

(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
$$$$
Numerator:
Net loss attributable to ordinary shareholders(161,190)(96,412)(381,517)(492,646)
Denominator:
Weighted average number of ordinary shares - basic and diluted959,085,960 950,354,320 957,439,910 921,748,380 
Net loss per share - basic and diluted(0.17)(0.10)(0.40)(0.53)
11. Other current liabilities
Other current liabilities consist of the following:
   
As of
 
   
September 30,
2021
   
December 31,

2020
 
         
   
$
   
$
 
Payroll
   18,926    13,694 
Accrued professional service fee
   3,607    3,128 
Payables for purchase of property and equipment
   1,797    788 
Accrued rebate to distributors
   10,803    7,067 
Tax payable
   10,989    952 
Others (note (i))
   8,170    4,567 
   
 
 
   
 
 
 
Total
   54,292    30,196 
   
 
 
   
 
 
 
Note:
(i)
Others are mainly payables to employees for exercising the share-based compensations, payables related to travel and business entertainment expenses.
12. Loss per share
Basic and diluted net loss per share for each of the period presented are calculated as follows:
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
                 
   
$
   
$
   
$
   
$
 
Numerator:
                    
Net loss attributable to ordinary shareholders
   (96,412)    (63,741)    (492,646)    (192,358) 
Denominator:
                    
Weighted average number of ordinary shares- basic and diluted
   95,035,432    75,436,646    92,174,838    74,381,115 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loss per share - basic and diluted
   (1.01)    (0.84)    (5.34)    (2.59) 
   
 
 
   
 
 
   
 
 
   
 
 
 
As a result of the Group’sCompany’s net loss for the three and nine months ended September 30, 20212022 and 2020,2021, 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.
September 30,
2022		September 30,
2021
Share options90,511,530 81,801,570 
Non-vested restricted shares34,103,830 6,366,190 
   
As of
 
   
September 30,

2021
   
September 30,

2020
 
         
Share options
   8,180,157    9,093,582 
Non-vested
restricted shares
   636,619    597,850 
16
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
13.10. Related party transactions

The table below sets forthCompany incurred research and development expenses for product research and development services provided by MEDx (Suzhou) Translational Medicine Co., Ltd (“MEDx”), over which an immediate family member of our Chief Executive Officer and Chairperson of the major related partyBoard held significant influence. The Company incurred development expenses with MEDx of an insignificant amount and $0.3 million during the relationship with the Group as ofthree and nine months ended September 30, 2021:
Company Name
Relationship with the Group
MEDx (Suzhou) Translational Medicine Co., Ltd.Significant influence held by Samantha Du’s (Director, Chairwoman and Chief Executive Officer of the Company) immediate family
For2022, respectively, and $0.1 million and $0.3 million, during the three and nine months ended September 30, 2021, the Group incurred $96 and $303
in
research and development expense with MEDx (Suzhou) Translational Medicine Co., Ltd. for product research and development services, respectively. The Group incurred $233 and $417
in research and development expense for the three and nine months ended September 30, 2020, respectively. All of the transactions are carried out with normal business terms and are on arms’ length basis.
14.11. Share-based compensation
Share options
OnIn March 5, 2015, the Board of Directors of the Company approved an Equity Incentive Plan (the “2015 Plan”), pursuant to which is administered by the Board of Directors. Under the 2015 Plan, the Board of Directors maycould grant options to purchase ordinary shares to management including officers, directors, employees, and individual advisors who renderrendered services to the Group to purchase an aggregate of no more than 4,140,945 ordinary shares of the Group (“Option Pool”). Subsequently, the Board of Directors approved the increaseCompany. In August 2017, in the Option Pool to 7,369,767 ordinary shares.
In connection with the completion of the initial public offering (the “IPO”), of the Company, the Board of Directors approved the 2017 Equity Incentive Plan (the “2017 Plan”) and all. All equity-based awards subsequent to the IPO would be granted under the 2017 Plan. The 2017 Plan provided for an automatic annual increase to the number of ordinary shares reserved under the 2017 Plan on each January 1st between January 1, 2018 and January 1, 2027 equal to the lesser of 4% of the number of ordinary shares outstanding as of the close of business on the immediately prior December 31st or such number as approved by the Board on or prior to such date each year. The aggregate number of shares reserved and available for issuance under the 2017 Plan as of April 1, 2022 was 75,562,170.
On June 22, 2022, at the 2022 Annual General Meeting of Shareholders of the Company (the “Annual General Meeting”), the Company’s shareholders approved the 2022 Equity Incentive Plan (the “2022 Plan”), which was previously approved by the Company’s Board of Directors on April 20, 2022, conditioned on and subject to (i) the dual primary listing of the Company on the Main Board of The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) and (ii) the granting of a waiver on Note 1 to Rule 17.03(9) of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. The Company’s voluntary conversion of its secondary listing status to primary listing status on the Hong Kong Stock Exchange became effective on June 27, 2022, and the waiver was granted to the Company in connection with the primary conversion. As such, the 2022 Plan became effective on June 27, 2022, and the aggregate number of shares that may be delivered in satisfaction of awards under the 2022 Plan is 97,908,743 ordinary shares as of June 22, 2022. No new grants will be made under the 2015 Plan or the 2017 Plan as of the effective date of the 2022 Plan.
12

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
For the nine months ended September 30, 2020,2022, the GroupCompany granted 1,059,43119,357,640 share options and 28,320,790 non-vested restricted shares to certain management employees and individual advisorsemployees of the GroupCompany under the 2017 Plan. The share options were granted at thean exercise price ranging from $44.94$2.95 to $82.50$6.29 per share. The share underoptions granted were valued using the 2017 Plan. TheseBlack-Scholes model, and the weighted-average grant-date fair value was $2.84 per share.

The options granted have a contractual term of ten years and generally vest over a five- or three-year period, with 20% or 33.3% of the awards vesting beginning on the anniversary date one year after the grant date.
For the nine months ended September 30, 2021, the Group granted 553,198 share options to certain management and employees of the Group at the exercise price ranging from $130.96 to $180.00 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vestratably over a five-year period, with 20% of the awards vesting beginning on theeach anniversary date one year afterof the grant date.
The weighted-average grant-date fair valuenon-vested restricted shares granted vest ratably over a five- or four-year period, with 20% or 25% of the options granted inawards vesting on each anniversary of the nine months ended September 30, 2021 and 2020 were $82.21and $34.91 per share, respectively. The Group recorded compensation expense related to the options of $ 19,951 and $ 15,718 for the nine months ended September 30, 2021 and 2020, respectively, which were classified in the accompanying unaudited condensed consolidated statements of operations as follows:
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2021
   
2020
   
2021
   
2020
 
                 
   
$
   
$
   
$
   
$
 
Selling, general and administrative
   4,119    2,952    11,501    8,500 
Research and development
   3,056    2,411    8,450    7,218 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   7,175    5,363    19,951    15,718 
   
 
 
   
 
 
   
 
 
   
 
 
 
17
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
As of September 30, 2021, there was $ 93,248 of total unrecognized compensation expense related to unvested share options granted. That cost is expected to be recognized over a weighted-average period of 1.39 years which is determined based on the number of shares and unrecognized years.
Non-vested restricted shares
For the nine months ended September 30, 2020, 50,000 ordinary shares were authorized for grant to the independent directors.date. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement.once they vest. Upon termination of the independent directors’award holders’ service with the GroupCompany for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
forfeited unless otherwise set forth in an agreement between the Company and the award holder.

For the nine months ended September 30, 2020, 71,250 ordinary shares were authorized for grant to certain management. One fifth of the restricted shares will vest and be released from the restrictions onUpon each yearly anniversary from thesettlement date of the agreement. Upon terminationshare awards, shares were withheld to cover the required withholding tax, which was based on the value of a share on the settlement date as determined by the closing price of the certain management’s service withADSs on the Grouptrading day of the applicable settlement date. The remaining shares after the withholding were delivered to the recipient. The amount remitted to the tax authorities for any reason, anyemployee tax obligations was reflected as a financing activity on the condensed consolidated statements of cash flows. These shares that are outstandingwithheld by the Company as a result of the net settlement were accounted for as treasury stock and not yet vested will be immediately forfeited.
considered issued and outstanding.
For the nine months ended September 30, 2021, 19,260 ordinary shares were authorized for grant to the independent directors. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement. Upon termination of the independent directors’ service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.

For the nine months ended September 30, 2021, 271,509 ordinary shares were authorized for grant to certain management. One fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
The Group measured the fair value of the
non-vested
restricted shares as of respective grant dates and recognized the amount asStock-based compensation expense overhas been reported in the deemed service period using a graded vesting attribution model on a straight-line basis.Company’s condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
$$$$
Selling, general and administrative11,298 6,147 27,221 16,579 
Research and development7,809 4,409 18,521 11,527 
Total19,107 10,556 45,742 28,106 

As of September 30, 2021,2022, there was $46,885 of total unrecognized share-based compensation expense of $111.9 million related to unvested share options which the Company expects to recognize over a weighted-average period of 3.47 years.
non-vested
restricted shares. The Group recorded
As of September 30, 2022, there was unrecognized share-based compensation expense of $143.0 million related to theunvested restricted shares which the Company expects to recognize over a weighted-average period of $8,155 and $4,687 for the nine months ended September 30, 2021 and 2020, respectively, which were classified in the accompanying unaudited condensed consolidated statements of operations as follows:3.70 years.
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2021
   
2020
   
2021
   
2020
 
                 
   
$
   
$
   
$
   
$
 
Selling, general and administrative
   2,028    1,065    5,078    3,179 
Research and development
   1,353    550    3,077    1,508 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   3,381    1,615    8,155    4,687 
   
 
 
   
 
 
   
 
 
   
 
 
 
18
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”)12. License and Renminbi (“RMB”) except for number of shares and per share data)collaboration arrangements
15. Licenses and collaborative arrangement
The following is a description of the Group’s significant ongoinglicense and collaboration agreements for which the Company recorded expenses or made payments related to upfront or milestone fees during the three and nine months ended September 30, 2021.2022.
License and collaboration agreement with GSK
In September 2016, the GroupCompany entered into a collaboration, development, and license agreement with Tesaro, Inc,Inc., a company later acquired by GSK, pursuant to which itthe Company obtained an exclusive sublicense under certain patents and
know-how
of GSK (including such patents and
know-how
licensed from Merck, Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., and AstraZeneca UK Limited) to develop, manufacture, and commercialize GSK’s proprietary PARP inhibitor, niraparib, in mainland China, Hong Kong, and Macau for the diagnosis and prevention of any human diseases or conditions (other than prostate cancer). The Group also obtained the right of first negotiation to obtain a license to develop and commercialize certain
follow-on
compounds of niraparib being developed by GSK in the licensed territory. Under the agreement, the Group agreed not to research, develop or commercialize certain competing products, and the Group also granted GSK the right of first refusal to license certain immuno-oncology assets developed by us. In February 2018, the Group entered into an amendment with GSK that eliminated GSK’s option to
co-market
niraparib in the licensed territory.
Under the terms of the agreement, in the Groupthird quarter of 2022, the Company made an upfront payment of $15,000 and 1 milestone payment of $1,000, and accrued 1a development milestone payment of $3,500 to GSK. On top$3.5 million which was accrued in the fourth quarter of those, if2019 and a sales-based milestone payment of $8.0 million which was accrued in the Group achieves other specified regulatory,fourth quarter of 2021, and accrued another development and commercialization milestones, the Group may be additionally required to pay further milestone payments up to $36,000 to GSK. In addition, if the Group successfully develops and commercializes the licensed products, the Group will pay GSK tiered royalties on the net sales of the licensed products, until the later of the expiration of the
last-to-expire
licensed patent covering the licensed product, the expiration of regulatory exclusivity for the licensed product, or the tenth anniversary of the first commercial sale of the licensed product, in each case on a
product-by-product
and
region-by-region
basis.
The Group has the right to terminate this agreement at any time by providing written notice of termination.
$4.0 million.
License and collaboration agreements with MacroGenics13
In November 2018, the Group entered into a collaboration agreement with MacroGenics, pursuant to which it obtained an exclusive license under certain patents and
know-how
of MacroGenics to develop and commercialize margetuximab, tebotelimab
(MGD-013)
and an undisclosed multi-specific TRIDENT molecule in
pre-clinical
development, each as an active ingredient in all human fields of use, except to the extent limited by any applicable third party agreement of MacroGenics in Greater China.
Under the terms of the agreement, the Group paid an upfront license fee of $25,000 and 2 milestone payments in total of $4,000 to MacroGenics. The Group also agreed to pay certain development and regulatory-based milestone payments up to an aggregate of $136,000, and tiered royalties at percentage rates for net sales of Margetuximab, tebotelimab and TRIDENT molecule in the territory.
The Group has the right to terminate this agreement at any time by providing written notice of termination to MacroGenics.
In June 2021, the Group entered into a collaboration and license agreement with MacroGenics, pursuant to which the Group and MacroGenics made four collaboration programs involving up to four immuno-oncology molecules. The first collaboration program covers a lead research molecule that incorporates MacroGenics’ DART platform and binds CD3 and an undisclosed target that is expressed in multiple solid tumors. The second collaboration program will cover a target to be designated by MacroGenics. For both molecules, the Group received commercial rights in Greater China, Japan, and Korea and MacroGenics received commercial rights in all other territories. For the lead molecule, the Group receives an option upon reaching a predefined clinical milestone to convert the regional arrangement into a global 50/50 profit share. The Group also obtained exclusive, global licenses from MacroGenics to develop, manufacture and commercialize 2 additional molecules. For these four programs, each company will contribute intellectual property to generate either
CD3-
or CD47-based bispecific antibodies.
Under the terms of the agreement, the Group paid an upfront payment of $25,000 to MacroGenics. In addition, MacroGenics is also eligible to receive up to $1,386,000 in potential development, regulatory and commercial milestone payments for the 4 programs. If products from the collaboration are commercialized, MacroGenics would also receive royalties on annual net sales in the Group’s territories.
19
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
Pursuant to the collaboration and license agreement, the Group also made an equity investment of $30,000 in MacroGenics’ common stock at $31.30 per share
 in
J
uly 2021
(see Note 7).
The Group has the right to terminate this agreement at any time by providing written notice of termination to MacroGenics.
20
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
License and collaboration agreement with Deciphera
In June 2019, the Group entered into a license agreement with Deciphera, pursuant to which it obtained an exclusive license under certain patents and
know-how
of Deciphera to develop and commercialize products containing ripretinib in the field of the prevention, prophylaxis, treatment, cure or amelioration of any disease or medical condition in humans in Greater China.
Under the terms of the agreement, the Group paid Deciphera an upfront license fee of $20,000 and 3 milestone payments of $12,000. The Group also agreedCompany may be required to pay certainan additional aggregate amount of up to $28.0 million in development, regulatory, and commercial milestone payments upsales-based milestones as well as certain royalties at tiered percentages rates ranging from mid- to an aggregate of $173,000, and certain tiered royalties (from
low-to-high
teenshigh-teens on a percentage basis and subject to certain reductions) based on theannual net sales of the licensed products in the licensed territory.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Deciphera.
License agreements with Turning Point Therapeutics Inc (“Turning Point”)
In July 2020, the Group entered into an exclusive license agreement with Turning Point pursuant to which Turning Point exclusively licensed to the Group the rights to develop and commercialize products containing repotrectinib as an active ingredient in all human therapeutic indications, in Greater China.
Under the terms of the agreements, the Group paid an upfront payment of $25,000 and 1 milestone payment of $2,000, and accrued 2 milestone payments totaling $3,000 to Turning Point. Turning Point is also eligible to receive up to $146,000 in development, regulatory and sales milestones. Turning Point will also be eligible to receive certain tiered royalties (from
mid-to-high
teens on a percentage basis and subject to certain reductions) based on annual net sales of repotrectinib in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Turning Point.
In January 2021, the Group entered into a license agreement with Turning Point, which expanded their collaboration. Under the terms of the new agreement, the Group obtained exclusive rights to develop and commercialize
TPX-0022,
Turning Point’s MET, SRC and CSF1R inhibitor, in Greater China.
The Group paid an upfront license fee in the amount of $25,000 to Turning Point. The Group also agreed to pay certain development, regulatory and commercial milestone payments up to an aggregate of $336,000. Turning Point will also be eligible to receive certain tiered royalties (from
mid-teens
to
low-twenties
on a percentage basis and subject to certain reductions) based on annual net sales of
TPX-0022
in Greater China. In addition, Turning Point will have the right of first negotiation to develop and commercialize an oncology product candidate discovered by the Group.
License and collaboration agreement with Five Prime Therapeutics, Inc.Paratek Bermuda Ltd. (“Five Prime”Paratek”)
In DecemberApril 2017, the GroupCompany entered into a license and collaboration agreement with Five Prime (a company later acquired by Amgen Inc.),Paratek, pursuant to which itthe Company obtained both an exclusive license under certain patents and
know-how
of Five PrimeParatek and an exclusive sub-license under certain intellectual property that Paratek licensed from Tufts University to develop, manufacture, and commercialize products containing Five Prime’s proprietary afucosylated FGFR2b antibody known as bemarituzumab (FPA144)omadacycline (ZL-2401) as an active ingredient in Greater China in the treatment or preventionfield of any disease or condition in humans in Greater China.all human therapeutic and preventative uses other than biodefense.
Under the terms of the agreement, in the Groupfirst quarter of 2022, the Company made an upfronta milestone payment of $5,000$6.0 million which was accrued in the fourth quarter of 2021 related to the regulatory approval of omadacycline for the treatment of adults with Acute Bacterial Skin and a milestone payment of $2,000 to Five Prime. Additionally, the Group also agreedSkin Structure Infections and Community-Acquired Bacterial Pneumonia in mainland China in December 2021.
The Company may be required to pay further development and regulatory milestone paymentsan additional aggregate amount of up to an aggregate of $37,000 to Five Prime and certain tiered royalties (from high-teens to
low-twenties
on a percentage basis and subject to certain reductions) based on the number of patients the Group enrolls in the bemarituzumab study.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Five Prime.
21
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
License agreement with Cullinan Pearl Corp. (“Cullinan”)
In December 2020, the Group entered into a license agreement with Cullinan, a subsidiary of Cullinan Management, Inc., formerly Cullinan Oncology, LLC, pursuant to which it obtained an exclusive license under certain patents and
know-how
of Cullinan to develop, manufacture and commercialize products containing
CLN-081
as an active ingredient in all uses in humans and animals in Greater China.
Under the terms of the agreement, the Group paid an upfront payment of $20,000 to Cullinan. Cullinan is also eligible to receive up to $211,000$40.5 million in development regulatory and sales-based milestone payments. Cullinan is also eligiblemilestones as well as certain royalties at tiered percentages rates ranging from low- to receive certain tiered royalties (from high-single-digit to
low-teen
tiered royalties on a percentage basis and subject to certain reductions) basedmid-teens on annual net sales of
CLN-081
in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Cullinan.
License agreement with Takeda Pharmaceutical Company Limited (“Takeda”)
In December 2020, the Group entered into an exclusive license agreement with Takeda. Under the terms of the license agreement, Takeda exclusively licensed to the Group the right to exploit products in the licensed field during the term.territory.
Under the terms of the agreement, the Group paid an upfront payment of $6,000 to Takeda. Takeda is also eligible to receive up to $481,500 in development, regulatory and sales-based milestone payments. Takeda is also eligible to receive certain tiered royalties (from high-single-digit to
low-teen
tiered royalties on a percentage basis and subject to certain reductions) based on net sales of each product sold by selling party during each year of the applicable royalty term.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Takeda.
Collaboration and license agreement with argenx BV (“argenx”)
In January 2021, the GroupCompany entered into a collaboration and license agreement with argenx. The Groupargenx pursuant to which the Company received an exclusive license to develop and commercialize products containing argenx’s proprietary antibody fragment, known as efgartigimod, in Greater China. The Group is responsible for the development of the licensed compound and licensed product and will have the right to commercialize such licensed product in the territory.
Pursuant to the collaboration and license agreement, a share issuance agreement was entered into between the GroupCompany and argenx. As the upfront payment to argenx, the GroupCompany issued 568,1825,681,820 ordinary shares of the Company to argenx with a par value $0.00006of $0.000006 per share to argenx on the closing date of January 13, 2021. In determining the fair value of the ordinary shares at closing, the Company considered the closing price of the ordinary shares on the closing date and included a lack of marketability discount because the shares arewere subject to certain restrictions. The fair value of the shares on the closing date was determined to be $62,250$62.3 million in the aggregate. The Group recorded this upfront payment in research and development expenses.
In addition, the GroupCompany made a
non-creditable,
non-refundable
development cost-sharing payment of $75,000$75.0 million to argenx. Argenx is also eligible to receiveargenx during the first quarter of 2021.
Under the terms of the agreement, the Company made a cashmilestone payment of $25,000 upon$25.0 million in the first quarter of 2022 which was accrued in the fourth quarter of 2021 related to the first regulatory approval of afor the licensed product by the U.S. Food and Drug Administration for myasthenia gravis and(“FDA”) in December 2021.
The Company may be required to pay certain royalties at tiered royalties (from
percentages rates ranging from mid-teen
to
low-twenties
on a percentage basis and subject to certain reductions) basedlow-twenties on annual net sales of all licensed productproducts in the licensed territory.
Collaboration and license agreement with Mirati Therapeutics, Inc. (“Mirati”)

In May 2021, the GroupCompany entered into a collaboration and license agreement with Mirati. The GroupMirati pursuant to which the Company obtained the right to research, develop, manufacture, and exclusively commercialize adagrasib in Greater China. The Group will support accelerated enrollment in key global, registration-enabling clinical trials of adagrasib in patients with cancer who have a KRASG12C mutation. Mirati has an option to
co-commercialize
in Greater China and retains full and exclusive rights to adagrasib in all countries outside of Greater China.
22
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)

Under the terms of the agreement, the Group paidCompany made an upfront payment of $65,000$65.0 million to Mirati. Mirati is also eligiblein the second quarter of 2021. In the third quarter of 2022, the Company made a development milestone payment of $5.0 million which was accrued in the second quarter of 2022 and accrued a development milestone payment of $5.0 million.

The Company may be required to receivepay an additional aggregate amount of up to $273,000$263.0 million in development, regulatory, and sales-based milestone payments. Mirati is also eligiblepayments as well as certain royalties at tiered percentage rates ranging from high-teens to receive high-teen- to
low-twenties-percent
tiered royalties based on annual net sales of adagrasib in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Mirati.
2314
Table of Contents

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
License agreement with Karuna Therapeutics, Inc. (“Karuna”)
(In thousandsNovember 2021, the Company entered into a license agreement with Karuna for the development, manufacturing, and commercialization of U.S. dollars (“$”)KarXT (xanomeline-trospium) in Greater China.
Under the terms of the agreement, the Company made an upfront payment of $35.0 million to Karuna in the fourth quarter of 2021. The Company also made a development milestone payment of $5.0 million in the third quarter of 2022 which was accrued in the second quarter of 2022.
The Company may be required to pay an additional aggregate amount of up to $147.0 million in development, regulatory, and Renminbi (“RMB”) except for numbersales-based milestone payments as well as certain royalties at tiered percentage rates ranging from low- to high-teens on annual net sales of shares and per share data)licensed products in Greater China.
Collaboration and license agreement with Schrödinger,Seagen Inc. (“Schrödinger”Seagen”)

In
July
2021, September 2022, the GroupCompany entered into a global discovery, developmentcollaboration and commercialization collaborationlicense agreement with Schrödinger,Seagen, pursuant to which the parties will jointly conduct a research program focused on a novel DNA damage repair programCompany and Seagen agreed to collaboratively develop and commercialize TIVDAK® (tisotumab vedotin). Under the agreement, the Company obtained an exclusive license to develop and commercialize TIVDAK in Greater China.
Under the terms of the agreement, the Company accrued an upfront payment of $30.0 million in the areathird quarter of oncology. Following2022. The Company may be required to pay an additional aggregate amount of up to $263.0 million in development, regulatory, and sales-based milestone payments as well as certain royalties at tiered percentage rates ranging from mid-teens to low-twenties on annual net sales of licensed products in Greater China, subject to reduction under specified circumstances.
The agreement will remain in effect, unless earlier terminated, until the selectionexpiration of the last-to-expire royalty term for the last licensed product. The agreement contains customary provisions for termination by either party, including in the event of a development candidate,material breach by the Group will assume primary responsibilityother party that remains uncured, by the Company for global development, manufacturingconvenience, for certain bankruptcy events, and commercializationby Seagen upon a challenge of the program.
licensed patent rights.
Full details of the licenses and collaborative arrangements, other than the agreement with Seagen which we entered into during the third quarter of 2022, are included in the notes to the financial statements in our 2021 Annual Report on Form
10-K
for the year ended December 31, 2020 as filed with the SEC on March 1, 2021 and this Quarterly Report on Form
10-Q.
Report. As noted above, the GroupCompany has entered into various license and collaboration agreements with third party licensors to develop and commercialize product candidates. Based on the terms of these agreements, the GroupCompany is contingently obligated to make additional material payments upon the achievement of certain contractually defined milestones. Based on management’s evaluation of the progress of each project noted above, the licensors will be eligible to receive from the GroupCompany up to an aggregate of approximately $4,878,738
$5,830.7 million in future contingent development and sales-based milestone payments dependent upon the achievement of contractually specifiedas well as certain royalties at tiered percentage rates on annual net sales. The development milestones, such as regulatory approval for the product candidates, which may beoccur before the GroupCompany has commercialized the product or received any revenue from sales of such product candidate. These milestone payments are subject to uncertainties and contingencies and may n
ot
not occur.
16.13. Restricted net assets
The Group’sCompany’s ability to pay dividends may depend on the GroupCompany receiving distributions of funds from its Chinese subsidiar
ies
.subsidiaries. Relevant PRC statutoryChinese laws and regulations permit payments of dividends by the Group’s PRC subsidiar
ies
Company’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 subsidiar
ies
.
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 annual
after-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 PRC
15

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
Chinese statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Group’sCompany’s Chinese subsidiaries were established as domestic invested enterpriseenterprises and therefore are subject to the above-mentioned restrictions on distributable profits.
During the three and nine months ended September 30, 2022 and 2021, and 2020, 0no appropriation to statutory reserves was made because the Chinese subsidiar
ies
subsidiaries 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% of
after-tax
income profit to be set aside, prior to payment of dividends, as general reserve fund, the Group’sCompany’s Chinese subsidiar
ies
subsidiaries are
restricted in their ability to transfer a portion of their net assets to the Group.Company.
Foreign exchange and other regulation in mainland China may further restrict the Group’sCompany’s Chinese subsidiar
ies
subsidiaries from transferring funds to the GroupCompany in the form of dividends, loans, and advances. As of September 30, 20212022 and December 31, 2020,2021, amounts restricted are the
paid-in
capital of the Group’sCompany’s Chinese subsidiaries, which both amounted to $306,010 and $255,858, respectively.$406.0 million.
17.14. Commitments and Contingencies
(a) Purchase commitments
As of September 30, 2021,2022, the Group’sCompany’s commitments related to purchase of property and equipment contracted but not yet reflected in the unaudited condensed consolidated financial statementstatements were $24,191 which is$13.8 million and were expected to be incurred within one year.
(b) Contingencies
The GroupCompany is a party to, or assignee of, license and collaboration agreements that may require it to make future payments relating to milestone fees and royalties on future sales of licensed products (Note 15)12).
15. Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date financial statements were issued. The Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.

24
16
Table of Contents
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
18. Subsequent Event
In November 2021, the Group and Blueprint Medicines Corporation (“Blueprint”) entered into a license and collaboration agreement, pursuant to which the Group obtained from Blueprint an exclusive license to develop, perform medical affairs for, manufacture and commercialize BLU-701 and BLU-945 in Greater China. Pursuant to the terms of the agreement, the Group will pay to Blueprint an upfront fee of $25,000 plus milestone payments of up to an aggregate of $590,000 upon the achievement of specified clinical, regulatory and sales milestones. Blueprint will also be eligible to receive certain royalties at tiered percentage rates ranging from the low to mid teens percent on annual net sales of licensed products in Greater China, subject to reduction under specified circumstances.
In November 2021, the Group and Karuna Therapeutics, Inc (“Karuna”) ente
r
ed into a license agreement, pursuant to which the Group obtained from Karuna an exclusive license to develop, manufacture and commercialize KarXT in Greater China. Pursuant to the terms of the agreement, the Group will pay to Karuna an upfront fee of $35,000 plus milestone payments of up to an aggregate of $152,000 upon the achievement of specified clinical, regulatory and sales milestones. Karuna will also be eligible to receive certain royalties at tiered percentage rates ranging from the low to high teens percent on annual net sales of licensed products in Greater China, subject to reduction under specified circumstances.
In October and November 2021, the Group granted 60,066 share options to certain management and employees of the Group at the exercise price from $102.75 to $104.42 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vest over a five-year period, with 20% of the awards vesting beginning on the anniversary date one year after the grant date.
In November 2021, the Group granted 92,700 share options to certain management and employees of the Group at the exercise price of $104.42 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vest over a four-year period, with 25% of the awards vesting beginning on the anniversary date one year after the grant date.
In October and November 2021, 41,415 ordinary shares were authorized for grant to certain management and employees of the Group. One-fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
In November 2021, 36,640 ordinary shares were authorized for grant to certain management and employees of the Group. One-fourth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
In October 2021, 7,345 ordinary shares were authorized for grant to independent directors of the Group. O
ne-third of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain directors’ service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
25
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 2021 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes included in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q.
Overview
We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States. We are discovering, developing, and commercializing innovative products that target medical conditions with unmet needs affecting patients in Greater China and worldwide, particularly in the areas of oncology, autoimmune disorders, infectious diseases, and infectious diseases.neurological disorders. As of November 9, 2021,3, 2022, we have threefour commercialized products that have received marketing approval in one or more territories in Greater China and thirteen programs in late-stage product development.

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 general and administrative costs associated with our operations. Developing high quality product candidates requires a significant investment related to 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 threefour commercial products – ZEJULA, Optune, QINLOCK, and QINLOCKNUZYRA – and to successfully develop and commercialize our other product candidates that we are able to successfully commercialize.candidates. We expect to continue to incur substantial expenses 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 theannual 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 unaudited condensed consolidated financial statements and totaled $274.3 million forDuring the nine months ended September 30, 2021.2022, we recorded $50.2 million of research and development expense related to upfront license fees and development milestones payments. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
Furthermore, as we pursue our strategy of growth and development, we anticipate that our financial results will fluctuate from quarter to quarter based upon the balance between the successful marketing of our commercial products and our significant research and development expenses. We cannot predict whether or when new products or new indications for marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable.
Recent Developments

Recent BusinessProduct Developments
On August 25, 2021, we announced that
Commercial Products

ZEJULA (Niraparib). Throughout this year, the Hong Kong Department of HealthFDA has approved our post-approval variation for ZEJULA, an oral, once-daily poly
ADP-ribose
polymerase (PARP) 1/2 inhibitor,been reviewing data on PARP inhibitors, and other companies have issued Dear HCP Letters in the U.S. as a maintenance treatmentresult of ongoing discussions with the FDA. In September 2022, GSK disclosed that it was in discussions with the FDA to discuss overall survival (“OS”) data from GSK’s ENGOT-OV16/NOVA phase III clinical trial for adult patients with high grade serous epithelialrecurrent ovarian cancer who areirrespective of the gBRCA mutation. We do not expect the FDA’s discussions with GSK to impact our approval from the NMPA for ZEJULA in China. The NMPA’s full approval of ZEJULA in the recurrent ovarian cancer setting is based on a complete response or partial response to first-line platinum-based chemotherapy. Unlike other PARP inhibitors approved in Hong Kong for this setting,separate study, the NORA study, which is a Phase 3 randomized, double-blind, placebo-controlled study of ZEJULA does not require BRCA mutation or other biomarker testing prior to administration.
On September 1, 2021, we announced that the Taiwan FoodCompany independently conducted in China. While the NORA study is not fully mature, to date, favorable trends have been observed in OS irrespective of gBRCA mutation status. We expect to present this data at a future scientific congress. As a result, we do not anticipate that our second-line all-comer label in China will be affected by the FDA’s discussions with GSK. We also do not expect a change in our first-line label for ZEJULA; the FDA’s discussions with GSK do not apply to this indication.

Optune (Tumor Treating Fields or TTFields). As of September 30, 2022, Optune has been listed in 72 regional customized commercial health insurance plans guided by provincial or municipal governments (or “supplemental insurance plans”) since its commercial launch in China in the third quarter of 2020, compared to 25 supplemental insurance plans as of September 30, 2021.

QINLOCK. In August 2022, the recommendation level of QINLOCK for second-line treatments for advanced gastrointestinal stromal tumor (“GIST”) patients was advanced from Level III to Level II (1A evidence) in the Chinese
17

Society of Clinical Oncology (“CSCO”) Guidelines for Diagnosis and Drug AdministrationTreatment of GIST 2022. As of September 30, 2022, QINLOCK has approvedbeen listed in 96 supplemental insurance plans since its commercial launch in mainland China in May 2021, compared to 28 supplemental insurance plans as of September 30, 2021. We are seeking inclusion of QINLOCK in the NRDL for a fourth-line gastrointestinal stromal tumor indication.

NUZYRA. We are seeking inclusion of NUZYRA in the NRDL for community-acquired bacterial pneumonia (“CABP”) and acute bacterial skin and skin structure infections (“ABSSSI”) indications.

Product Candidates – Oncology

Adagrasib. In September 2022, our New Drugpartner Mirati presented results from KRYSTAL-1, a multicohort Phase 1/2 study evaluating adagrasib with or without cetuximab in patients with advanced colorectal cancer (“CRC”) harboring a KRASG12C mutation at the European Society for Medical Oncology Congress 2022. Of the evaluable patients in the adagrasib monotherapy cohort (n=43), the investigator assessed confirmed objective response rate (“ORR”) was 19% (8/43), and the disease control rate (“DCR”) was 86% (37/43). The median duration of response (“DOR”) was 4.3 months (95% CI, 2.3–8.3), and median PFS was 5.6 months (95% CI, 4.1–8.3). Of the evaluable patients in the adagrasib plus cetuximab combination cohort (n=28), the investigator assessed confirmed ORR was 46% (13/28), and the DCR was 100% (28/28). The median DOR was 7.6 months (95% CI 5.7–NE), and median PFS was 6.9 months (95% CI, 5.4–8.1). The prognosis for patients with CRC has historically been poor in later lines of therapy with response rates of approximately 1-2% and median PFS of approximately 2 months in patients with late-line CRC; patients with KRASG12C-mutated CRC tend to have even worse outcomes than the broader CRC patient population. In the overall subset of patients with KRASG12C-mutated CRC evaluated in this study, adagrasib was found to be well-tolerated as a monotherapy and in combination with cetuximab. The majority of observed treatment-related adverse events (“TRAEs”) were grade 1-2 (59%); no grade 5 TRAEs were observed.

In addition, in August 2022, we treated the first patient in Greater China for the global Phase 2 KRYSTAL-7 study of adagrasib in combination with pembrolizumab in first-line KRASG12C-mutated non-small cell lung cancer (“NSCLC”) patients.

Bemarituzumab. Our partner Amgen continues to enroll patients in several studies of bemarituzumab, including: FORTITUDE-101, a Phase 3 study of bemarituzumab plus chemotherapy, versus placebo plus chemotherapy in first-line gastric cancer with FGFR2b overexpression, and FORTITUDE-102, the Phase 3 portion of the 1b/3 study of bemarituzumab plus chemotherapy and nivolumab versus chemotherapy and nivolumab in first-line gastric cancer with FGFR2b overexpression.

Repotrectinib. In October 2022, our partner Turning Point Therapeutics (a wholly owned subsidiary of Bristol Myers Squibb Company) provided a clinical data update from the global, registrational Phase 1/2 TRIDENT-1 study of repotrectinib at the 34th EORTC-NCI-AACR (“ENA”) Symposium 2022. Repotrectinib continued to demonstrate meaningful clinical activity in patients with ROS1+ advanced NSCLC, who were tyrosine kinase inhibitor (“TKI”)-naïve or TKI-pretreated, including with ROS1 G2032R resistance mutation. Durable responses and intracranial efficacy were observed in both TKI-naïve and TKI-pretreated patients. Repotrectinib also continued to show clinical activity in patients with NTRK+ advanced solid tumors who were TKI-naïve or TKI-pretreated, and responses were seen across diverse tumor types. Safety is well characterized, manageable with known protocols, and signals potential compatibility with long-term use. Also in October 2022, we completed enrollment in China in all cohorts of the registrational Phase 1/2 TRIDENT-1 study.

BLU-945. In November 2022, our partner Blueprint Medicines Corporation presented an update on the Phase 1/2 SYMPHONY trial data supporting plans to develop BLU-945 in combination with osimertinib in first-line epidermal growth factor receptor (“EGFR”) L858R mutation-positive NSCLC.

Global R&D Oncology Programs. In November 2022, we presented data from our internal oncology pipeline at the Society for Immunotherapy of Cancer (“SITC”) Annual Meeting in Boston, Mass. These presentations focus on two key global discovery programs: ZL-1211, an anti-CLDN18.2 antibody, and ZL-1218, an anti-CCR8 antibody.

Product Candidates – Autoimmune Disorders

VYVGART (Efgartigimod). In September 2022, our partner argenx announced the submission of a Biologics License Application (NDA)to the FDA for QINLOCKsubcutaneous efgartigimod for the treatment of generalized myasthenia gravis (“gMG”) in adult patients and that the European Commission has granted marketing authorization for VYVGART as an add-on to standard therapy for the treatment of adult patients with advanced gastrointestinal stromal tumors (GIST)gMG who have received prior treatment with three or more kinase inhibitors, including imatinib. QINLOCK targets the broad spectrumare anti-acetylcholine receptor antibody positive. As of KIT and PDGFRα mutations known to drive GIST.
November 1, 2022, VYGART has been listed in 10 supplemental insurance plans in China.
On September 9, 2021, our partner, Novocure, announced that the United States Food and Drug Administration (FDA) granted breakthrough designation to the NovoTTF-200T System, a Tumor Treating Fields delivery system, for use with atezolizumab and bevacizumab for the first-line treatment of patients with unresectable or metastatic liver cancer.
26
Table of Contents
On18

ZL-1102. In September 14, 2021,2022, we announced that the Center for Drug Evaluation of the National Medical Products Administration granted Breakthrough Therapy Designation for bemarituzumab for first-line treatment for patients with
FGFR2b- overexpressing
and human epidermal growth factor receptor (HER2)-negative metastatic and locally advanced gastric and gastroesophageal junction (GEJ) cancers in combination with modified FOLFOX6 (fluoropyrimidine, leucovorin, and oxaliplatin).
On September 19, 2021, our partner, Mirati, announcedpresented results from a cohort of the Phase 1/2 KRYSTAL-11 proof-of-concept study for ZL-1102 at the 2022 European Academy of Dermatology and Venereology Congress in Milan, Italy.

Product Candidates – Neuroscience

KarXT. In September 2022, we obtained agreement from the NMPA on the development plan of a bridging study in schizophrenia in China. In October 2022, we started patient enrollment for a pharmacokinetic (“PK”) study of KarXT in China.

In the third quarter of 2022, our partner Karuna initiated the Phase 3 ADEPT-1 study evaluating adagrasibKarXT as a treatment for psychosis in Alzheimer’s disease, and in the fourth quarter of 2022, Karuna completed enrollment in the Phase 3 EMERGENT-3 trial in schizophrenia. In addition, in October 2022, Karuna announced that data from the Phase 3 EMERGENT-2 trial of KarXT in schizophrenia was shared at the 600mg BID dose35th European College of Neuropsychopharmacology Congress in Vienna, Austria. A poster presentation and symposium included previously reported efficacy and safety data, as both monotherapy and in combination with cetuximab in patients with heavily pretreated colorectal cancer harboring a KRAS G12C mutation. Results showed that adagrasib alone and with cetuximab demonstrated significant clinical activity and broad disease control in these patients.
On September 20, 2021, our partner, Mirati, announced positive topline resultswell as new additional safety data from the potentially registrational Phase 2trial.
KRYSTAL-1
study, evaluating adagrasib
Recent Business Developments

In September 2022, we entered into a collaboration and license agreement with Seagen for the development and commercialization of TIVDAK (tisotumab vedotin) in a patient cohort with advanced
non-small
cell lung cancer harboringGreater China. TIVDAK is the KRAS G12C mutation following prior systemic therapy.
On October 4, 2021, we announced in a joint press release with our partner, Novocure, that the final patient has been enrolledfirst and only anti-body drug conjugate (“ADC”) approved in the phase 2 pilot trial of Tumor Treating Fields in combination with chemotherapy as a first-line treatment in patients with gastric adenocarcinoma. Final data collection is expected in the first half of 2022.
On October 4, 2021, our partner, Turning Point, announced the FDA granted a Breakthrough Therapy Designation to repotrectinibUnited States for the treatment of adult patients with advanced solid tumors that have an NTRK gene fusion who have progressed following treatmentrecurrent or metastatic cervical cancer with onedisease progression on or two prior TRK tyrosine kinase inhibitors, with or without priorafter chemotherapy and is an important addition to our oncology portfolio.

In the second half of 2022, we have no satisfactory alternative treatments.
continued to enhance our global leadership team. For example, Dr. Peter Huang joined the Company from Zentalis Pharmaceuticals in November as Chief Scientific Officer. Dr. Huang brings to the Company an extensive scientific background and strong leadership and research and development experience, including over 16 years working within the biopharmaceutical industry. Dr. Huang will be a key member of the Company’s executive management team and is responsible for leading and overseeing the Company’s discovery efforts and translational medicine. In addition, Alette Verbeek joined the Company from Novartis in October as SVP, Head of Global Strategic Partnering. She is our first employee based in Europe and is responsible, among other things, for leading our European business development efforts.

On October 5, 2021, we announced thatIn November 2022, The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) approved the bridging studyCompany’s transition from a listing under Chapter 18A of margetuximab plus chemotherapy in advanced, previously treated HER2+ breast cancer met its primary endpoint, with acceptable safetythe Listing Rules of the Hong Kong Stock Exchange (Biotech Companies) to a general listing under Rule 8.05(3) of the Listing Rules (Qualifications for Listing), as the Company has satisfied applicable revenue and tolerability. The study showed that efficacymarket capitalization requirements for listing outside of Chapter 18A. As a result of this combination in Chinese patients was consistent with that seen inapproval, the global population in the SOPHIA trial conducted by Zai Lab’s partner MacroGenics.
On October 19, 2021, we, together with our partner Entasis Therapeutics Holdings Inc., announced positive topline readout of the global registrational Phase 3 ATTACK clinical trial in Acinetobacter infections. NDA submission to the FDA is planned for mid-2022. Acinetobacter baumannii.
On October 20, 2021, we announced ZL-1102 achieved
proof-of-concept
in the Phase 1b psoriasis study. Topical therapy with ZL-1102 resulted in clinical improvement in local PASI score, erythema and scaling, target lesion size and responder rates in patients with mild-to-moderate chronic plaque psoriasis. Consistent improvement was seen over time.
On October 25, 2021, we announced first patient treated in the Greater China portion of the global, potentially pivotal Phase 2 program of odronextamab.
On November 5, 2021, Deciphera Pharmaceuticals, Inc., our partner, issued a press release announcing top-line results“B” marker will be removed from the INTRIGUE Phase 3 clinical study of QINLOCK in patients with gastrointestinal stromal tumor (GIST) previously treated with imatinib. The INTRIGUE Phase 3 clinical study is a randomized, global, multicenter, open-label study to evaluate the efficacy and safety of QINLOCK compared to sunitinib in patients with GIST previously treated with imatinib. The study did not meet the primary endpoint of improved progression-free survival (PFS) compared with the standard of care sunitinib. We do not anticipate that the INTRIGUE study results will have a material effectCompany’s stock short name on the current operations of the Company.
On November 9, 2021, we announced that we entered into a license and collaboration agreement with Blueprint Medicines Corporation (“Blueprint”), pursuant to which we agreed to collaboratively develop BLU-701 and BLU-945 in China, Macau, Hong Kong and Taiwan. Under the agreement, the Company obtained from Blueprint an exclusive license to develop, perform medical affairs for, manufacture and commercialize BLU-701 and BLU-945 in the licensed territory.
Stock Exchange, effective November 11, 2022.
On November 9, 2021, we also announced that we entered into a license agreement with Karuna Therapeutics, Inc. (“Karuna”), pursuant to which we agreed to collaboratively develop KarXT in China, Macau, Hong Kong, and Taiwan. Under the agreement, the Company obtained from Karuna an exclusive license to develop, manufacture and commercialize KarXT in the licensed territory.
Recent Legal and Regulatory Developments

Measures on Security Assessment of Cross-Border Data Transfer
Potential CSRC Approval Required

On July 6, 2021,7, 2022, the relevant Chinese government authorities publishedCAC issued the Opinions on Strictly Cracking Down Illegal Securities Activities“Security Assessment Measures”, which sets out a security assessment framework for cross-border data transfers out of mainland China as well as ground rules for a security assessment filing for cross-border data transfers which was stipulated in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and increased supervision of overseas listings by China-based companies, and propose to take effective measures, such as promoting the construction of relevant regulatory systems to regulate the risks and incidents faced by China-based overseas-listed companies. To date, no official guidance or related implementation rules have been issued in relation to these recently issued opinionsCybersecurity Law and the interpretation and implementationPersonal Information Protection Law.

A security assessment will be triggered if a cross-border data transfer out of these opinions remain unclear at this stage. Based on existing Chinese laws and regulations, we are currently not required to obtainmainland China falls into any
pre-approval
from the CSRC to issue our ADSs or ordinary shares to foreign investors, subject to interpretation of the existing Chinese laws and regulationsfollowing scenarios: (i) transfer of important data by the Chinese government authorities. However, as there are uncertainties with respect to the Chinese legal system and changes in laws, regulations and policies, including how those laws and regulations will be interpreted or implemented, there can be no assurance that we will not be subject to such requirements, approvals or permissions in the future.
27
Tabledata processors; (ii) transfer of Contents
Proposed Cybersecurity Measures
On July 10, 2021, the Cyberspace Administration of China published the draft amendment to the Cybersecurity Review Measures (Revised Draft for Comment), which is expected to replace the current Cybersecurity Review Measures after it is adopted and becomes effective. The draft measures stipulate that, among other items, if an issuer is classified as a “criticalpersonal information (“PI”) by critical information infrastructure operator” or a “data processing operator” as defined thereinoperators (“CIIOs”) and such issuer possesses the personal informationdata processors that process PI of more than one million usersindividuals; (iii) transfer of PI by data processors that have transferred either PI of over 100,000 individuals or sensitive PI of over 10,000 individuals abroad since January 1 of the preceding year; and intends(iv) other situations as determined by the CAC. According to statements by the CAC, a cross-border data transfer includes (i) an outbound transfer and overseas storage of data collected and generated during a data processor’s operation in mainland China; and (ii) a remote access or use of data collected and generated by a data processor stored within mainland China by overseas institutions, organizations, and individuals.

Prior to applying for a security assessment with the CAC, data processors are required to carry out a self-risk assessment, which needs to be listedpresented to the CAC along with an application filing and other required materials for a security assessment. During a security assessment, the CAC will primarily focus on a securities exchange in a foreign country, it must complete a cybersecurity review. Alternatively, relevant governmental authorities in China may initiate a cybersecurity review if such governmental authorities determine an operator’s cyber products or services, data processing or potential listing in a foreign country affect or may affectrisks to national security. The draft measures were released forsecurity, public comment only,interests, and the draft provisionslegitimate rights and anticipated adoptioninterests of individuals or effective date are subject to changes and thus its interpretation and implementation remain substantially uncertain. We cannot predict the impactorganizations that such cross-border data transfer may
19

cause. A cross-border data transfer of the draft measures, if any, on the operations of our Company at this stage, and we will closely monitor and assess any development in the rule-making process.
The exact scope of “critical information infrastructure operators” and “data processing operators” under the draft measures and the current regulatory regime remains unclear, and the Chinese government authorities may have wide discretion in the interpretation and enforcement of these laws. Currently, the draft measures have not materially affected our business and operations. We maintain personally identifiable health information of patients in China in limited situations. As of the date of this Quarterly Report on Form
10-Q,
we have not been informed by any relevant Chinese government authorities that we are identified as or considered a “critical information infrastructure operator” or “data processing operator.” We are also not aware of any requirement that we should file for a cybersecurity review, nor have we received any inquiry, notice, warning, sanction in such respect or any regulatory objections. However, in anticipation of the strengthened implementation of cybersecurity laws and regulations, there can be no assurance that wedata will not be deemedallowed if the CAC does not approve the security assessment filing. Once the CAC approves the security assessment filing, such approval will remain valid for two years and may be renewed. An application for security assessment needs to be re-submitted if there is a change in the cross-border data transfer that may affect the security of the exported data, such as changes in the purpose, method, scope, and type of the exported data and changes in the purpose and method of the processing of the exported data by overseas recipients.

The Security Assessment Measures have retroactive effect for cross-border data transfers out of mainland China of relevant data conducted prior to their effective date on September 1, 2022. If a Data Processor fails to complete its security assessment for any of its cross-border data transfers of relevant data out of mainland China prior to the effective date of the Security Assessment Measures, it needs to rectify the failure within six months after the effective date of the Security Assessment Measures.

Proposed Amendments to the Cybersecurity Law of the People’s Republic of China

On September 14, 2022, the CAC published a draft amendment to China’s Cybersecurity Law for public comment. According to the CAC, the draft revisions were formulated to align the Cybersecurity Law with several new laws that were released after the Cybersecurity Law came into effect in June 2017. These new laws include the Administrative Punishment Law of the People’s Republic of China, the Data Security Law of the People’s Republic of China, and the Personal Information Protection Law of the People’s Republic of China, all of which were adopted or amended in 2021.

The draft amendment mainly proposes revisions to Chapter VI of the Cybersecurity Law on legal responsibility which adjust the types and ranges of administrative penalties for violating the Cybersecurity Law that endanger network security and strengthens the network security responsibilities of CIIOs. Generally, the fines and penalties available to be imposed by Chinese regulators have been significantly increased and expanded. The proposed revisions also defer to the legal liability provisions under relevant laws or administrative regulations with respect to violations of the Cybersecurity Law provisions relating to the illegal use of networks, overseas transfers of data by critical information infrastructure operator oroperations, and personal information protection.

Guide to Applications for Security Assessment of Outbound Data Transfers (First Edition)

On August 31, 2022, the CAC promulgated the first edition of the Guide to Applications for Security Assessment of Outbound Data Transfers (the “Guide”). The Guide provides practical guidance to the implementation of the Security Assessment Measures, which sets out a security assessment framework for cross-border data processing operatortransfers out of mainland China.

The Guide reiterates the timeline and procedures for applications for security assessment of outbound data transfers under the Chinese cybersecurity lawsSecurity Assessment Measures. The Guide specifies the dossier requirements for applications for security assessment and regulations inprovides templates for some required documents. Prior to submitting an application for security assessment, the future, or thatapplicant must first conclude an outbound data transfer contract with the draft measures will not be further amended or other laws or regulations will not be promulgated to subject us tooverseas recipient of the cybersecurity review or other compliance requirements. In such case, we may face challenges in addressing such enhanced regulatory requirements.
Multi-Level Protection Scheme
The Cyber Security Law of China provides that China adoptsdata transfer and conduct a multi-level protection scheme (MLPS), under which network operators are required to perform obligations of security protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered. Under the MLPS, an entity’s operating information system must have a thorough assessmentself-assessment of the risks andof the conditionsoutbound data transfer. Additionally, the Guide clarifies that the application of their information and network systemssecurity assessment shall be submitted to determineprovincial branches of the level to which the entity’s information and network system belong—from the lowest Level 1CAC, who will forward it to the highest Level 5 pursuantCAC for further review and assessment.

The Guide also clarifies that a cross-border data transfer out of mainland China includes where a data processor stores data collected or generated in its operations in mainland China to an overseas recipient, and where a data processor allows an overseas entity, organization, or individual to access, retrieve, download, or export data the data processor collects or generates and stores in mainland China.

Measures for the Supervision and Administration of Online Drug Sales

On September 1, 2022, the SAMR announced the Measures for the Graded ProtectionSupervision and Administration of Online Drug Sales (the “Measures”), which will take effect as of 1 December 2022. The Measures set out a comprehensive regulatory framework for the online sale of drugs, including the online sale of prescription drugs and the Guidelinesregulation of trading platforms that engage in the online sale of drugs.

The Measures include six chapters and 42 articles. The main sections include: (i) the obligations, qualifications, and responsibilities of online drug sellers; (ii) the responsibilities of trading platforms for Gradingonline drug sales; (iii) the supervision and management of Classified Protectiononline sales of Cyber Security. The grading result will determineprescription drugs; (iv) the setdivision of security protection obligations that entities must comply with. Entities classifiedresponsibilities of drug regulators at all levels in the supervision of online drug sales; and (v) the legal liability for illegal online drug sales. Notably, both drug marketing authorization holders and drug distributors can qualify as Level 2 or above should report the grade to the relevant government authority for examination and approval. In August and September 2021, Zai Lab (Shanghai) Co., Ltd. received Level 2 registration certificates for its WeChat mini-program and
e-order
system from the Shanghai Municipal Public Security Bureau.
28
Tableonline drug sellers. Online sale of Contentsprescription drugs is permitted,
20

but drug retailers and providers of trading platforms for the online sale of prescription drugs must abide by the regulatory requirements specified in the Measures.

PRC Personal Information ProtectionAnti-Monopoly Law

On August 20, 2021,June 24, 2022, the Standing Committee of the National People’s Congress promulgatedpublished amendments to the PRC Personal Information ProtectionAnti-Monopoly Law (PIPL)(the “AML”), which became effectivecame into effect on NovemberAugust 1, 2021.2022. The PIPL establishesamended AML formally implements China’s latest anti-monopoly policies by, among other things, improving regulatory rules for anti-competitive agreements, expressly addressing monopoly issues in the platform economy, and substantially increasing the penalties for violating the law.

The improvements of the regulatory rules for anti-competitive agreements made by the amended AML mainly includes: (i) expressly stipulating that an agreement which fixes or limits resale prices, that is, a comprehensive frameworkvertical anti-competitive agreement, is not prohibited if relevant business operators can prove that such agreement does not have the effect of eliminating or restricting competition; (ii) formally provides the “safe harbor” regime which stipulates that a vertical anti-competitive agreement is not prohibited, if the parties’ market share in the relevant market is lower than the market share percentage set by the anti-monopoly enforcement agency and other conditions established by the anti-monopoly enforcement agency are met; (iii) codifies that business operators shall not organize other business operators to reach a monopoly agreement or provide substantial assistance for other business operators to reach a monopoly agreement.

The amended AML formally extends the anti-monopoly regulatory regime to the platform economy by outlining the general principal that business operators shall not engage in monopolistic activities, such as by taking advantage of data privacy and protection requirementsalgorithms, technology, capital advantage, and obligationsplatform rules. The amended AML also specifically prohibits business operators from abusing market dominance, such as by using data and algorithms, technology, and platform rules.

Penalties for the processing of personal information, which not only targets the processing of personal information within the territory of China, but also governs the exterritorial processing of Chinese personal information if such processing is for the purpose of providing products or services to persons in China, or to analyze or evaluate behaviors of persons in China. The PIPL provides that any entity that processes personal information shall take various measures to prevent the disclosure, modification or losingviolation of the personal information processedAML have been substantially increased by such entity, including, but not limited to, formulating a related internal management system and standard of operation, conducting classified management of personal information, taking safety technology measures to encrypt and
de-identify
the processed personal information, providing regular safety training and education for staff and formulating a personal information safety emergency accident plan. The PIPL, the Cyber Security Law, together with other industry-specific laws and regulations, require us to obtain consent from clinical trial subjects, customers, employees, and other individuals before collecting their personal information, including personal health information, take measures to keep such personal information secure and confidential, and promptly report security breaches involving personal informationamended AML. For example, according to the appropriate Chinese regulators. The PIPL further provides thatamended AML, if a personal information processer shall conductcompany completes a prior evaluationconcentration of business in violation of the impactAML that will have or is likely to have the effect of personal information protection before the occurrenceeliminating or restricting competition, in addition to other remedial measures, a fine of various situations, including, but not limitedup to processing of sensitive personal information (personal information that, once leaked or illegally used, may lead to discrimination against an individual or serious harm to an individual’s personal or property safety, including information on an individual’s race, ethnicity, religious beliefs, personal biological characteristics, medical health information, financial accounts, or personal whereabouts), using personal information to make automated decisions and providing personal information to any overseas entity. Violations10% of the PIPLlast year’s sales revenue may trigger significant penalties, including butbe imposed. If the concentration of business in violation of the AML completed by the company does not limited to fineshave the effect of eliminating or restricting competition, a fine of up to RMB 505 million or 5% of the annual revenues of the prior year, and/or revocation of the entity’s business license and/or relevant permits ifmay be imposed. In the case is serious.that the aforementioned violation has particularly serious circumstances, bad impact, or consequences, the fine imposed may be further increased to between two and five times the aforementioned fine amount.
Measures on Security Assessment of Cross-Border Data Transfer (Draft for Comment)
On October 29, 2021, the Cyberspace Administration of China published the Measures on Security Assessment of Cross-border Data Transfer (Draft for Comment) (the “Draft Measures”). The Draft Measures are enacted in accordance with the Cyber Security Law, the Data Security Law and the PIPL. Under the Draft Measures, a data processor would be subject to mandatory security assessment for transfers of data out of China under any of the following circumstances: (i) the cross-border transfer is of personal information and important data collected and generated by critical information infrastructure operators; (ii) the cross-border transfer includes important data; (iii) the cross-border transfer includes personal information of more than one million individuals; and (iv) the cross-border transfer includes personal information of cumulatively more than 100,000 individuals or sensitive personal information of more than 10,000 individuals.
Factors Affecting ourOur Results of Operations
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, and a core part of our strategy is to continue making sustained investments in this area. As a result of this commitment, our pipeline of product candidates has been steadily advancing and expanding, with twelvethirteen late-stage clinical product candidates being investigated as of September 30, 2021.
2022.
To date, weWe have financed our activities primarily through private placements, our initial public offering on Nasdaq in September 2017, multiple follow-on offerings, and a secondary listing on the Hong Kong Stock Exchange of Hong Kong and multiple
follow-on
offerings.in September 2020. Through September 30, 2021,2022, we have raised approximately $164.6 million infrom private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us infrom our initial public offering, ourfollow-on offerings, and secondary listing and our
follow-on
offerings.listing. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $396.2$258.4 million and $171.7$396.2 million for the nine months ended September 30, 20212022 and September 30, 2020,2021, respectively. We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our thirteen late-stage clinical product candidates, and continue research and development ofdevelop our clinicalclinical- and
pre-clinical-
stage pre-clinical-stage product candidates, and initiate additional clinical trials of, and seek regulatory approval for, these and other future product candidates. We review such expenditures for prioritization and efficiency purposes. These expenditures include:
•expenses incurred for payments to contract research organizations (CROs)(“CROs”), contract manufacture organizations (CMOs)(“CMOs”), investigators, and clinical trial sites that conduct our clinical studies;
•employee compensation related expenses, including salaries, benefits, and equity compensation expenses;
•expenses for licensors;
•the cost of acquiring, developing, and manufacturing clinical study materials;
21

•facilities and other expenses, which include office leases and other overhead expenses;
29
Table of Contents
•costs associated with
pre-clinical
activities and regulatory operations;
•expenses associated with the construction and maintenance of our manufacturing facilities; and
•costs associated with operating as a public company.
The Company is in the process of evaluating its development programs and is developing a series of recommendations for prioritizing these programs to concentrate our resources on programs that have the greatest potential to beneficially impact patients, strengthen our global competitiveness, and provide long-term sustainability.
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, 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 periods to support increases in 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 shareshare-based compensation charges, increased product distribution and promotion costs, expanded infrastructure, and increased costs for insurance. We also incur increasedanticipate incurring additional legal, compliance, accounting, and investor and public relations expenses associated with being a public company.
Our Ability to Commercialize Our Product Candidates
As of September 30, 2021, twelveNovember 3, 2022, thirteen of our product candidates are in late-stage clinical development and various others are in clinical and
pre-clinical
development in Greater China and the United States. Our ability to generate revenue from our product candidates is dependent on our receipt of regulatory approvals for and successful commercialization of such products, which may nevernot occur. Certain of our product candidates may require additional
pre-clinical
and/or clinical development, regulatory approvals in multiple jurisdictions, manufacturing supply, substantial investment, and significant marketing efforts before we generate any revenue from product sales.
Our License Arrangements
Our results of operations have been, and we expect them to continue to be, affected by our licensing, collaboration, and development agreements. We are required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and commercial milestones for the relevant products under these agreements as well as tiered royalties based on theannual net sales of the licensed products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones areWe recorded in research and development expense related to upfront license fees and development milestone payments of $39.8 million and $50.2 million for the three and nine months ended September 30, 2022, respectively, and $5.1 million and $274.3 million for the three and nine months ended September 30, 2021, respectively.

The COVID-19 Pandemic

Our results of operations have been, and we expect them to continue to be, adversely affected by the effects of the COVID-19 pandemic, including government actions and quarantine measures taken in response, particularly in mainland China where our unaudited condensed consolidated financial statementsoperations and totaled $274.3product markets are primarily located. For example, the COVID-19 pandemic has adversely affected patient access to our products, such as through reduced hospital patient load, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. The COVID-19 pandemic has also adversely affected our manufacturing and supply chain and our research and development, sales, marketing, and clinical trial activities. The operations of our suppliers, CROs, CMOs, and other contractors and third parties on which we rely also have been, and may continue to be, adversely affected. Although our net product revenues increased in the three and nine months ended September 30, 2022, as compared to the same periods in the prior year, these revenue increases were negatively affected by the effects of the pandemic, and we expect some additional residual revenue impacts in the fourth quarter of 2022 and perhaps beyond.
22

Results of Operations

The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):

Three Months Ended
September 30,		ChangeNine Months Ended
September 30,		Change
20222021$%20222021$%
Revenues:
Product revenue, net56,963 43,103 13,860 32 %150,633 100,141 50,492 50 %
Collaboration revenue577 — 577 100 %1,806 — 1,806 100 %
Total revenues57,540 43,103 14,437 33 %152,439 100,141 52,298 52 %
Expenses:
Cost of sales(20,044)(12,162)(7,882)65 %(53,094)(30,535)(22,559)74 %
Research and development(99,524)(55,144)(44,380)80 %(219,462)(401,220)181,758 (45)%
Selling, general, and administrative(66,555)(59,002)(7,553)13 %(186,947)(149,254)(37,693)25 %
Loss from operations(128,583)(83,205)(45,378)55 %(307,064)(480,868)173,804 (36)%
Interest income3,872 713 3,159 443 %5,235 1,171 4,064 347 %
Other income (expenses), net(36,479)(13,580)(22,899)169 %(79,467)(12,401)(67,066)541 %
Loss before income tax and share of loss from equity method investment(161,190)(96,072)(65,118)68 %(381,296)(492,098)110,802 (23)%
Income tax expense— — — — %— — — — %
Share of loss from equity method investment— (340)340 (100)%(221)(548)327 (60)%
Net loss(161,190)(96,412)(64,778)67 %(381,517)(492,646)111,129 (23)%
Net loss attributable to ordinary shareholders(161,190)(96,412)(64,778)67 %(381,517)(492,646)111,129 (23)%

Revenues
Product Revenue, Net

The table below presents the components of the Company’s product revenue, net for the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three Months Ended
September 30,		ChangeNine Months Ended
September 30,		Change
20222021$%20222021$%
Product revenue - gross$60,446 $47,555 $12,891 27 %$168,095 $135,490 32,605 24 %
Less: Rebate and sales return(3,483)(4,452)969 (22)%(17,462)(35,349)17,887 (51)%
Product revenue - net56,963 43,103 13,860 32 %150,633 100,141 50,492 50 %

Our product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. Our net product revenue increased by $13.9 million and $50.5 million in the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, respectively. These net revenue increases were driven by increased sales volumes, although these increased volumes were negatively affected by the effects of the COVID-19 pandemic, including government restrictions or lockdown measures in mainland China, which negatively affected patient access to our products. These net revenue increases were also driven by a decrease in sales rebates related to product price reductions.

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 Company lowered the selling price of ZEJULA in December 2020 when it was included in the NRDL and again in December 2021 as a result of an extension in ZEJULA’s indications. Accordingly, the Company accrued nil and $2.8 million for sales rebates as compensation to distributors in mainland China for those products previously sold at the price prior to the NRDL implementation during the three and nine months ended September 30, 2022, respectively, and nil and $22.0 million during the three and nine months ended September 30, 2021, respectively.

23

The Company is scheduled to enter into negotiations with the National Healthcare Security Administration regarding potential inclusion of QINLOCK and NUZYRA in the NRDL, and in June 2022, the Company lowered the selling price for these products. Accordingly, the Company accrued nil and $2.4 million for sales rebates as compensation to distributors previously sold at the price prior to the reduction for QINLOCK during the three and nine months ended September 30, 2022, respectively, and nil and $0.2 million for NUZYRA during the three and nine months ended September 30, 2022, respectively.

The following table presents net revenue by product for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):

Three Months Ended
September 30,		ChangeNine Months Ended
September 30,		Change
20222021$%20222021$%
ZEJULA$39,214 $28,162 $11,052 39 %$102,863 $64,134 38,729 60 %
Optune10,662 10,653 9 — %35,051 27,318 7,733 28 %
QINLOCK5,541 4,288 1,253 29 %9,123 8,689 434 5 %
NUZYRA1,546 — 1,546 — %3,596 — 3,596 — %
Total product revenue, net$56,963 $43,103 $13,860 32 %$150,633 $100,141 $50,492 50 %
Collaboration Revenue
Collaboration revenue increased by $0.6 million to $0.6 million for the three months ended September 30, 2022 from nil for the three months ended September 30, 2021. Collaboration revenue increased by $1.8 million for the nine months ended September 30, 2021 and $5.12022 from nil for the nine months ended September 30, 2021. These increases were due to our collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd.
Cost of Sales
Cost of sales increased by $7.9 million to $20.0 million for the three months ended September 30, 2021. The upfront payments and milestone payments are recorded in research and development expense and was $77.62022 from $12.2 million for the nine months ended September 30, 2020 and $25.9 million for the three months ended September 30, 2020.
Key Components of Results of Operations
Taxation
Cayman Islands
Zai Lab Limited is incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on profits, income, gains or appreciation earned by individuals or corporations. In addition, our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands. For more information, see “Taxation-Material Cayman Islands Taxation” in our Annual Report on Form
10-K
for the year ended December 31, 2020.
People’s Republic of China
Our subsidiaries incorporated in China are governed by the EIT Law and regulations. Under the EIT Law, the standard EIT rate is 25% on taxable profits as reduced by available tax losses. Tax losses may be carried forward to offset any taxable profits for up to following five years. For more information, see “Taxation-Material People’s Republic of China Taxation” in our Annual Report on Form
10-K
for the year ended December 31, 2020.
30
Table of Contents
Hong Kong
Our subsidiaries incorporated in Hong Kong are subject to
two-tiered
tax rates for the nine months ended September 30, 2021 and 2020 on assessable profits earned in Hong Kong where the profits tax rate for the first HK$2 million of assessable profits is subject to profits tax rate of 8.25% and the assessable profits above HK$2 million is subject to profits tax rate of 16.5%. Our subsidiaries incorporated in Hong Kong did not have assessable profit for the nine months ended September 30, 2021 and 2020.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for 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 indicative of the results that may be expected for any future period.
   
Three months Ended September 30,
   
Nine Months Ended September 30,
 
   
2021
   
2020
   
2021
   
2020
 
(in thousands, except share and per share data)
                
Comprehensive Loss Data:
        
Revenue
  $43,103   $14,651   $100,141   $33,864 
Expenses:
        
Cost of sales
   (12,162)    (4,934)    (30,535)    (9,914) 
Research and development
   (55,144)    (58,100)    (401,220)    (160,149) 
Selling, general and administrative
   (59,002)    (27,874)    (149,254)    (70,346) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
  $(83,205)   $(76,257)   $(480,868)   $(206,545) 
Interest income
   713    866    1,171    3,748 
Interest expenses
   —      (43)    —      (157) 
Other (expenses) income, net
   (13,580)    11,958    (12,401)    11,267 
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income tax and share of loss from equity method investment
  $(96,072)   $(63,476)   $(492,098)   $(191,687) 
Income tax expense
   —      —      —      —   
Share of loss from equity method investment
   (340)    (265)    (548)    (671) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to ordinary shareholders
  $(96,412)   $(63,741)   $(492,646)   $(192,358) 
Weighted-average shares used in calculating net loss per ordinary share, basic and diluted
   95,035,432    75,436,646    92,174,838    74,381,115 
Net loss per share, basic and diluted
  $(1.01)   $(0.84)   $(5.34)   $(2.59) 
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Revenue
Our revenue is primarily derived from the sale of ZEJULA, Optune and QINLOCK in China and Hong Kong. The following table disaggregates net revenue by product for the three months ended September 30, 2021, and 2020:increased by $22.6 million to $53.1 million for the nine months ended September 30, 2022 from $30.5 million for the nine months ended September 30, 2021. These increases were primarily due to increasing sales volume, higher product costs, and higher royalties.
   
Three Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
ZEJULA
  $28,162    65.3%  $8,503    58.0% 
Optune
   10,653    24.7%   5,950    40.6% 
QINLOCK
   4,288    10.0%   198    1.4% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total product revenue—Net
  $43,103    100.0%  $14,651    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Research and Development Expenses
The following table sets forth the components of our research and development expenses for the periods indicated.
three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):
  
Three Months Ended September 30,
 Three Months Ended
September 30,		ChangeNine Months Ended
September 30,		Change
(in thousands)
  
2021
   
%
 
2020
   
%
 
Research and Development Expenses:
       
20222021$%20222021$%
Research and development expenses:Research and development expenses:
Personnel compensation and related costs
  $20,564    37.3%  $12,204    21.0% Personnel compensation and related costs$28,478 $20,564 $7,914 38 %$80,325 $50,543 $29,782 59 %
Licensing fees
   5,051    9.2%  25,911    44.6% Licensing fees39,769 5,051 34,718 687 %50,205 274,299 (224,094)(82)%
Payment to CROs/CMOs/Investigators
   17,102    31.0%  14,414    24.8% 
CROs/CMOs/Investigators expensesCROs/CMOs/Investigators expenses23,407 17,102 6,305 37 %70,325 52,246 18,079 35 %
Other costs
   12,427    22.5%  5,571    9.6% Other costs7,870 12,427 (4,557)(37)%18,607 24,132 (5,525)(23)%
  
 
   
 
  
 
   
 
 
Total
  $55,144    100.0%  $58,100    100.0% Total$99,524 $55,144 $44,380 80 %$219,462 $401,220 $(181,758)(45)%
  
 
   
 
  
 
   
 
 
31
Table of Contents
Research and development expenses decreasedincreased by $3.0$44.4 million to $55.1$99.5 million for the three months ended September 30, 2022 from $55.1 million for the three months ended September 30, 2021 from $58.1 primarily due to:
•an increase of $34.7 million for the three months ended September 30, 2020. The decrease in research and development expenses included the following:
$20.9 million for decreased licensing fees in connection with the increased upfront and milestone payments for new licensing agreements as well as certain milestone fees;our license and partially offset by,
collaboration agreements;
$8.4•an increase of $7.9 million for increasedin personnel compensation and related costs which was primarily attributable to increased employee compensation costs, due to hiring of more personnel during the three months ended September 30, 2021headcount growth and the grants of new share options and restricted shares and the continued vesting of restricted shares to certain employees;
those awards;
24

•an increase of $6.3 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials.
Research and development expenses decreased by $2.7181.8 million to $219.5 million for increased payment to CROs, CMOs and investigators in the threenine months ended September 30, 2021 as we advanced our drug candidate pipeline; and
2022 from $6.8401.2 million for increased lab consumables and other costs in the threenine months ended September 30, 2021.
2021 primarily due to:
•a decrease of $224.1 million in licensing fees in connection with decreased upfront payments for new license and collaboration agreements as well as decreased milestone payments; partially offset by
•an increase of $29.8 million in personnel compensation and related costs primarily due to headcount growth and the grants of new share options and restricted shares and the continued vesting of those awards;
•an increase of $18.1 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials.
The following table summarizes our research and development expenses by program for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):
Three Months Ended
September 30,		ChangeNine Months Ended
September 30,		Change
20222021$%20222021$%
Research and development expenses:
Clinical programs$63,324 $20,248 $43,076 213 %$119,468 $299,937 $(180,469)(60)%
Pre-clinical programs2,965 9,988 (7,023)(70)%7,487 41,033 (33,546)(82)%
Unallocated research and development expenses33,235 24,908 8,327 33 %92,507 60,250 32,257 54 %
Total$99,524 $55,144 $44,380 80 %$219,462 $401,220 $(181,758)(45)%
Research and 2020, respectively:
   
Three Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
Research and Development Expenses:
       
Clinical programs
  $20,248    36.7%  $39,736    68.4% 
Pre-clinical
programs
   9,988    18.1%   2,728    4.7% 
Unallocated research and development expenses
   24,908    45.2%   15,636    26.9% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $55,144    100.0%  $58,100    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Duringdevelopment expenses attributable to clinical programs increased by $43.1 million to $63.3 million for the three months ended September 30, 2022 from $20.2 million during the three months ended September 30, 2021 36.7%related to ongoing and 18.1% of our total researchnewly initiated clinical trials. Research and development expenses were attributable to clinicalpre-clinical programs and
pre-clinical
programs, respectively. Duringdecreased by $7.0 million for the three months ended September 30, 2020, 68.4%2022 and 4.7% of our total researchby $33.5 million for the nine months ended September 30, 2022, compared to the same periods in 2021, primarily driven by decreased license fees.
Research and development expenses were attributable to clinical programs decreased by $180.5 million to $119.5 million for the nine months ended September 30, 2022 from $299.9 million during the nine months ended September 30, 2021. Research and
development expenses attributable to pre-clinical
programs respectively. decreased by $33.5 million to $7.5 million for the nine months ended September 30, 2022 from $41.0 million during the nine months ended September 30, 2021. Those decreases were driven by decreased license fees.
Although we manage our external research and development expenses by program, we do not allocate our internal research and development expenses by program because our employees and internal resources may be engaged in projects for multiple programs at any given time.
25

Selling, General, and Administrative Expenses
The following table sets forth the components ofsummarizes our selling, general and administrative expenses by program for the periods indicated.
three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):
Three Months Ended
September 30,		ChangeNine Months Ended
September 30,		Change
20222021$%20222021$%
Selling, General and Administrative Expenses:
Personnel compensation and related costs$41,859 $34,088 $7,771 23 %$121,382 $87,560 $33,822 39 %
Professional service fees9,381 6,194 3,187 51 %24,886 14,583 10,303 71 %
Other costs15,315 18,720 (3,405)(18)%40,679 47,111 (6,432)(14)%
Total$66,555 $59,002 $7,553 13 %$186,947 $149,254 $37,693 25 %
   
Three Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
Selling, General and Administrative Expenses:
       
Personnel compensation and related costs
  $34,088    57.8%  $15,869    56.9% 
Professional service fees
   6,194    10.5%   2,258    8.1% 
Other costs
   18,720    31.7%   9,747    35.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $59,002    100.0%  $27,874    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
32
Table of Contents
Selling, general, and administrative expenses increased by $31.1$7.6 million to $66.6 million for the three months ended September 30, 2022 from $59.0 million for the three months ended September 30, 2021 from $27.9primarily due to:
•an increase of $7.8 million for the three months ended September 30, 2020. The increase in general and administrative expenses included the following:
$18.2 million for increased personnel compensation and related costs which was primarily attributabledue to increasedheadcount growth, particularly in commercial and administrative personnel, costs, due to hiring of more personnel during the three months ended September 30, 2021 and the grants of new share options and restricted shares and the continued vesting of restricted shares to certain employees;
those awards;
$3.9•an increase of $3.2 million for increasedin professional service fees mainly attributable to our increased legal, compliance, accounting, and investor and public relations expenses associated with being a public company;company and
in connection with sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong after our commercial launch of these four commercialized products; those increases were partially offset by
$9.0•a decrease of $3.4 million for increasedin other costs mainly includingrelated to selling, rental, and administrative expenses primary attributable tofor commercial operations in mainland China, Hong Kong, and China.
Taiwan.
Interest Income
Interest income decreased by $0.2 million, to $0.7 million for the three months ended September 30, 2021, from $0.9 million for the three months ended September 30, 2020, primarily due to the decrease in both short-term investment balancesSelling, general, and interest rates.
Interest Expenses
Interest expenses are nil for the three months ended September 30, 2021, compared to $42.5 thousand for the three months ended September 30, 2020, as all the short-term borrowings were repaid in December 2020.
Other (Expenses) Income, net
Other expenses were $13.6 million for the three months ended September 30, 2021, as compared to other income of $12.0 million for the three months ended September 30, 2020, primarily as a result of the foreign exchange loss for the three months ended September 30, 2021, compared with foreign exchange gain for the three months ended September 30, 2020, and the fair value loss of $9.9 million for the equity investment in MacroGenics.
Share of loss from equity method investment
In June 2017, we entered into an agreement with three third-parties to launch JING, an entity which provides services for product discovery and development, consultation and transfer of pharmaceutical technology. We recorded a loss of $0.3 million and $0.3 million for our portion of this investee’s net loss for the three months ended September 30, 2021 and 2020, respectively.
Net Loss Attributable to Ordinary Shareholders
As a result of the foregoing, we had net loss attributable to ordinary shareholders of $96.4 million for the three months ended September 30, 2021 compared to net loss attributable to ordinary shareholders of $63.7 million for the three months ended September 30, 2020.
33
Table of Contents
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Revenue
Our revenue is primarily derived from the sale of ZEJULA, Optune and QINLOCK in China and Hong Kong. The amount of revenue from ZEJULA for the nine months ended September 30, 2021 was adjusted in accordance with the normal process in China to compensate distributors for products recently sold at prices prior to the NRDL implementation. The following table disaggregates net revenue by product for the nine months ended September 30, 2021 and 2020:
   
Nine Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
ZEJULA
  $64,134    64.0%  $22,294    65.8% 
Optune
   27,318    27.3%   11,372    33.6% 
QINLOCK
   8,689    8.7%   198    0.6% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total product revenue—Net
  $100,141    100.0%  $33,864    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Research and Development Expenses
The following table sets forth the components of our research and development expenses for the periods indicated.
   
Nine Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
Research and Development Expenses:
       
Personnel compensation and related costs
  $50,543    12.6%  $33,804    21.1% 
Licensing fees
   274,299    68.4%   77,631    48.5% 
Payment to CROs/CMOs/Investigators
   52,246    13.0%   34,226    21.4% 
Other costs
   24,132    6.0%   14,488    9.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $401,220    100.0%  $160,149    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Research and developmentadministrative expenses increased by $241.1$37.7 million to $401.2$186.9 million for the nine months ended September 30, 20212022 from $160.1 million for the nine months ended September 30, 2020. The increase in research and development expenses included the following:
$16.7 million for increased personnel compensation and related costs which was primarily attributable to increased employee compensation costs, due to hiring of more personnel during the nine months ended September 30, 2021 and the grants of new share options and vesting of restricted shares to certain employees;
$196.7 million for increased licensing fees in connection with the upfront payments for new licensing agreements as well as certain milestone fees;
$18.0 million for increased payment to CROs, CMOs and investigators in the nine months ended September 30, 2021 as we advanced our drug candidate pipeline; and
$9.7 million for increased lab consumables and other costs in the nine months ended September 30, 2021.
The following table summarizes our research and development expenses by program for the nine months ended September 30, 2021 and 2020, respectively:
   
Nine Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
Research and Development Expenses:
       
Clinical programs
  $299,937    74.8%  $112,071    70.0% 
Pre-clinical
programs
   41,033    10.2%   5,643    3.5% 
Unallocated research and development expenses
   60,250    15.0%   42,435    26.5% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $401,220    100.0%  $160,149    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
34
Table of Contents
During the nine months ended September 30, 2021, 74.8% and 10.2% of our total research and development expenses were attributable to clinical programs and
pre-clinical
programs, respectively. During the nine months ended September 30, 2020, 70.0% and 3.5% of our total research and development expenses were attributable to clinical programs and
pre-clinical
programs, respectively. Although we manage our external research and development expenses by program, we do not allocate our internal research and development expenses by program because our employees and internal resources may be engaged in projects for multiple programs at any given time.
Selling, General and Administrative Expenses
The following table sets forth the components of our selling, general and administrative expenses for the periods indicated.
   
Nine Months Ended September 30,
 
(in thousands)
  
2021
   
%
  
2020
   
%
 
Selling, General and Administrative Expenses:
       
Personnel compensation and related costs
  $87,560    58.7%  $42,951    61.1% 
Professional service fees
   14,583    9.8%   6,828    9.7% 
Other costs
   47,111    31.5%   20,567    29.2% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $149,254    100.0%  $70,346    100.0% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Selling, general and administrative expenses increased by $78.9 million to $149.3 million for the nine months ended September 30, 2021 from $70.4primarily due to:
•an increase of $33.8 million for the nine months ended September 30, 2020. The increase in general and administrative expenses included the following:
$44.6 million for increased personnel compensation and related costs which was primarily attributabledue to increasedheadcount growth, particularly in commercial and administrative personnel, costs, due to hiring of more personnel during the nine months ended September 30, 2021 and the grants of new share options and restricted shares and the continued vesting of restricted shares to certain employees;
those awards;
$7.8•an increase of $10.3 million for increasedin professional service fee,fees mainly attributable to our increased legal, compliance, accounting, and investor and public relations expenses associated with being a public company;company and
in connection with sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong after our commercial launch of these four commercialized products; those increases were partially offset by
$26.5•a decrease of $6.4 million for increasedin other costs mainly includingrelated to selling, rental, and administrative expenses primary attributable toprimarily for the commercial operation in mainland China, Hong Kong, and China.Taiwan.
Interest Income
Interest income decreasedincreased by $2.5$3.2 million to $3.9 million from $0.7 million for the three months ended September 30, 2022 and 2021, and increased by $4.1 million to $5.2 million from $1.2 million for the nine months ended September 30, 2022 and 2021, due to increased interest rates during the third quarter of 2022.
Other Income (Expenses), Net
Other expenses, net increased by $22.9 million to $36.5 million for the three months ended September 30, 2022 from $3.7$13.6 million for the three months ended September 30, 2021 primarily as a result of an increase in foreign exchange loss of $36.7 million partially offset by an increase in equity investment gain in MacroGenics, Inc. (“MacroGenics”) of $10.4 million and an increase in subsidy income of $3.4 million.
Other expenses, net increased by $67.1 million to $79.5 million for the nine months ended September 30, 2020, primarily due to both the decrease in short-term investment balances and interest rates.
Interest Expenses
Interest expenses are nil for the nine months ended September 30, 2021, compared to $0.2 million for the nine months ended September 30, 2020, as all the short-term borrowings were repaid in December 2020.
35
Table of Contents
Other (Expenses) Income, net
Other expenses were2022 from $12.4 million for the nine months ended September 30, 2021 as compared to other income of $11.3 million for the nine months ended September 30, 2020, primarily as a result of thean increase in foreign exchange loss for the nine months ended September 30, 2021, compared with the foreign exchange gain for the nine months ended September 30, 2020,of
26

$70.2 and the fair value loss of $9.9 million for thean increase in equity investment in MacroGenics.
Share of loss from equity method investment
In June 2017, we entered into an agreement with three third-parties to launch an entity that will provide services for product discovery and development, consultation and transfer of pharmaceutical technology. We recorded the gain on deemed disposal in this investee of $0.5 million and share of loss of $1.0 million for the nine months ended September 30, 2021, and recorded our share of loss in this investeeMacroGenics of $0.7$2.1 million, for the nine months ended September 30, 2020.
partially offset by an increase in subsidy income of $4.9 million.
Net Loss Attributable to Ordinary Shareholders
As a result of the foregoing, we had net loss attributable to ordinary shareholders of $492.6 million for the nine months ended September 30, 2021 compared to net loss attributable to ordinary shareholders of $192.4 million for the nine months ended September 30, 2020.
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates, and assumptions. We continuallyperiodically evaluate these judgments, estimates, and assumptions based on the most recently available information, our own historical experiences, and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, 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.
The selection of critical accounting policies, the judgments, and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition
Description
In 2018, we adopted ASC Topic 606 (“ASC 606”),
Revenue from Contracts with Customers,
in recognition of revenue. Under ASC 606, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the
five-step
model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied.
Our revenue is primary from product sales. We recognize revenue from product sales when we have satisfied the performance obligation by transferring control of the product to the customers. Control of the product generally transfers to the customers when the delivery is made and when title and risk of loss transfers to the customers. Cost of sales mainly consists of the acquisition cost of products and royalty fees.
36
Table of Contents
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. Our product revenues were primarily generated from the sale of ZEJULA, Optune and QINLOCK to customers.
Inmainland China, we sell theour products to distributors, who ultimately sell the products to healthcare providers. Based on the nature of the arrangements, the performance obligations are satisfied upon the product’s delivery to distributors.
Judgments and Uncertainties
Rebates are offered to distributors, consistent with pharmaceutical industry practices. The estimated amount of unpaid or unbilled rebates, if any, is recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes, and level of distributor inventories. We regularly review the information related to these estimates and adjust the amount accordingly.
Sensitivity of Estimate to Change
In Hong Kong,Actual amounts of rebates ultimately paid or billed may differ from our estimates. We will reassess estimates for rebates periodically. If actual results in the future vary from our estimates, we sellwill adjust these estimates, which would affect net product revenue and earnings in the productsperiod such variances become known.
Research and Development Expenses
Description
Research and development expenses are charged to customers, whichexpense as incurred when these expenditures relate to our research and development services and have no alternative future uses.
Pre-clinical and clinical trial costs are typically healthcare providers such as oncology centers.a significant component of our research and development expenses. We utilizehave a history of contracting with third party for warehousing services. Basedparties that perform various pre-clinical and clinical trial activities on our behalf in the natureongoing development of our product candidates. Expenses related to pre-clinical and clinical trials are accrued based on our estimates of the arrangement,actual services performed by the third parties for the respective period.
Judgments and Uncertainties
The process of estimating our research and development expenses involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated costs incurred for the services when we have determinednot yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule, or when contractual milestones are met; however, some require advanced payments. We make estimates of our expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.
27

Sensitivity of Estimate to Change
Although we are a principal indo not expect our estimates to be materially different from amounts actually incurred, our understanding of the transaction since we are primarily responsible for fulfilling the promise to provide the productsstatus and timing of services performed relative to the customers, maintain inventory risk until deliveryactual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period. To date, we have not made any material adjustments to the customersour prior estimates of research and have latitude in establishing the price. Revenue is recognized at the amount to which we expect to be entitled in exchange for the sale of the products, which is the sales price agreed with the customers. Consideration paid to the third party is recognized in operatingdevelopment expenses.
We did not recognize any contract assets and contract liabilities as of September 30, 2021 and December 31, 2020.
Share-Based Compensation
Description
We grant share options and
non-vested
restricted shares to eligible employees, management and directors and accountShare-based awards for these share-based awards in accordance with ASC 718,
Compensation-Stock Compensation
. Employees’ share-based awardsour employees are measured at the grant date fair value of the awards and recognized as expenses (1) immediately at grant date if no vesting conditions 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 expenses relating to those awards are reversed. We determined the fair value of the stock options granted to employees using the Black-Scholes option valuation model.
We also grant share options to eligible
non-employees
and account for these
share-based
awards in accordance with ASC 718,
Compensation- Stock Compensation
.
Non-employees’
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 conditions are required; or (2) using graded vesting method over the requisite service period, which is the vesting period. All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expenseexpenses relating to those awards are reversed.
Judgments and Uncertainties

We determineddetermine the fair value of the stock options granted to
non-employees
employees using the Black-Scholes option valuation model.
Fair Value Measurements
We apply ASC Topic 820,
Fair Value Measurements and Disclosures
, or ASC 820, in measuring fair value. ASC 820 defines Using this model, fair value establishes a frameworkis calculated based on assumptions with respect to (i) the expected volatility of our ADS price, (ii) the periods of time over which grantees are expected to hold their options prior to exercise (expected lives), (iii) the expected dividend yield on our ADSs, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for measuring fair valuesecurities with maturities approximating the expected lives of the options. Expected volatility has been estimated based on actual movements in the stock prices of certain comparable companies over the most recent historical periods equivalent to the options’ expected lives. Expected lives are principally based on our historical exercise experience with previous option grants. The expected dividend yield is zero as we have never paid dividends and requires disclosuresdo not currently anticipate paying any in the foreseeable future.
Sensitivity of Estimate to be provided on fair value measurement.Change

37
Table of Contents
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputsThe assumptions used in measuring fair value as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches, for example,this method to measuringdetermine the fair value of assetsour ordinary shares consider historical trends, macroeconomic conditions, and liabilities: (1) market approach, (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts toprojections consistent with the Company’s operating strategy. Changes in these estimates can have a single present value amount. The measurement is basedsignificant impact on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
We did not have any assets or liabilities that were measured atdetermination of fair value on a recurring basis prior to 2021. As of September 30, 2021, information about inputs into the fair value measurement of our assets that are measured at a fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
Description
  
Fair Value as of
September 30,
2021
   
Fair Value Measurement at Reporting Date
Using Quoted Prices in Active Markets
for Identical
Assets (Level 1)
 
(in thousands)
Equity Investments with Readily Determinable Fair Value
  $20,070   $20,070 
Financial instruments of our company primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, prepayments and other current assets, long-term investments, accounts payable and other current liabilities. As of each reporting date, the carrying values of cash and cash equivalents, short-term investment, accounts receivable, prepayments and other current assets, short-term borrowings, accounts payable and other current liabilities approximated their fair values due to the short-term maturity of these instruments, and the carrying value of restricted cash approximates its fair value based on the nature of and the assessment of the ability to recover these amounts.stock options. If factors change or different assumptions are used, our share-based compensation expenses could be materially different for any period.
Income Taxes
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. We follow the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities by applying enacted statutory tax rates that will be in effect in the period in which the temporary differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in our consolidated financial statements in the period of change.
Description
In accordance with the provisions of ASC 740,
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 expiration of the 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.
Judgments and Uncertainties
38
Table of Contents
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, 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 upon the level 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.
28

Sensitivity of Estimate to Change
The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements in the period in which the audit is concluded. Additionally, in future periods, changes in facts, circumstances and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. As of September 30, 20212022 and December 31, 2020,2021, we did not have any significant unrecognized uncertain tax positions.
B. Liquidity and Capital Resources
To date, weWe have financed our activities primarily through private placements, our September 2017 initial public offering on the Nasdaq, stock exchange,various follow-on offerings, and our September 2020 secondary listing on the Hong Kong Stock Exchange of Hong Kong and multiple
follow-on
offerings.our ordinary shares and/or ADSs. Through September 30, 2021,2022, we have raised approximately $164.6 million infrom private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us infrom our initial public offering, secondary listing and subsequent follow-on offerings, and our secondary listing. offerings.
Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $396.2$258.4 million and $171.7$396.2 million for the nine months ended September 30, 2022 and 2021, respectively. We have commitments for capital expenditure of $13.8 million as of September 30, 2022, mainly for the purpose of plant construction and 2020, respectively.
installation. We currently are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and revenues.

As of September 30, 2021,2022, we had cash, cash equivalents, restricted cash and short-term investment of $1,569.2$1,120.3 million. Our expenditures as a companyare principally focused on research and development and are largely discretionary and as such our current losses and cash used in operations do not present immediate going concern issues.discretionary. Based on our current operating plan, we expect that our existingcash, cash equivalents, restricted cash and cash equivalents as of November 9, 2021,short-term investments will enable us to fund our operating expenses and capital expenditures requirements for at least the next 12 months after the date that the unaudited condensed financial statements included in this Quarterly Report are issued.months. However, in order to bring to fruition our research and development objectives, we will ultimately need additional funding sources, and there can be no assurances that they will be made available.available to us on acceptable terms or at all.
The following table provides information regarding our cash flows for the nine months ended September 30, 2022 and 2021 and 2020:
(in thousands):
   
Nine months ended
September 30,
 
(in thousands)
  
2021
   
2020
 
Net cash used in operating activities
  $(396,237)   $(171,720) 
Net cash provided by (used in) investing activities
   531,446    (754,881) 
Net cash provided by financing activities
   820,478    1,024,486 
Effect of foreign exchange rate changes
   695    2,062 
   
 
 
   
 
 
 
Net increases in cash, cash equivalents and restricted cash
  $956,382   $99,947 
   
 
 
   
 
 
 
Nine Months Ended
September 30,		Change
20222021$
Net cash used in operating activities$(258,350)$(396,237)$137,887 
Net cash provided by investing activities424,389 531,446 (107,057)
Net cash (used in) provided by financing activities(1,531)820,478 (822,009)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash(9,132)695 (9,827)
Net increase in cash, cash equivalents and restricted cash$155,376 $956,382 $(801,006)
Net Cash Used in Operating Activities
NetDuring the nine months ended September 30, 2022, our operating activities used $258.4 million of cash, which resulted from our net loss of $381.5 million and cash used in our operating activities
assets and liabilities of $18.3 million, partially offset by non-cash charges of $141.4 million.
During the nine months ended September 30, 2021, our operating activities used $396.2 million of cash, which resulted principally from our net loss of $492.6 million, adjusted for
non-cash
charges of $110.2 million and cash used in our operating assets and liabilities of $13.8$16.7 million, partially offset by non-cash charges of $113.1 million. Our net
non-cashNet Cash Provided by Investing Activities
charges during
Net cash provided by investing activities decreased by $107.1 million to $424.4 million for the nine months ended September 30, 2021 primarily consisted of $62.3 million
non-cash
research and development expenses, a $4.6 million depreciation and amortization expenses, a $28.1 million
share-based
compensation expense, a $9.9 million loss2022 from fair value changes of equity investment with readily determinable fair value and a $4.6 million
non-cash
lease expense.
39
Table of Contents
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $531.4 million for the nine months ended September 30, 2021 compared2021. The decrease was primarily due to netan increase of $90.3 million in purchases of short-term investments, a decrease of $38.6 million in proceeds from
29

maturity of short-term investment, and an increase of $8.3 million in purchase of property and equipment, offset by a decrease of $30.0 million in payment for investment in equity investee.
Net Cash (Used In) Provided by Financing Activities

Net cash used in investingfinancing activities of $754.9was $1.5 million for the nine months ended September 30, 2020. The increase in cash provided by investing activities was primarily due2022 compared to the proceeds from maturity of short-term investments.
Netnet cash provided by financing activities
Net cash provided by financing activities was of $820.5 million for the nine months ended September 30, 2021 compared to $1,024.5 million for the nine months ended September 30, 2020.2021. The decrease inshift from cash provided by to cash used in financing activities was primarily due to the reducedbecause we had proceeds of $818.9 million from theour issuance of ADSs in our
follow-on
offeringordinary shares upon public offerings during the nine months ended September 30, 2021 compared with our secondary listing inwhile there were no such transactions during the nine months ended September 2020.30, 2022.
C. Research and Development Activities and Expenditures, Including Patents and Licenses etc.
Full details of our research and development activities and expenditures are provided in the “Research and Development Expenses” and “Results of Operations” sections above.
D. Trend Information
Other than as described elsewhere in this Quarterly Report on Form
10-Q,
we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material adverse effect on our revenue, income from continuing operations, profitability, liquidity, or capital resources, or that would cause our reported financial information not necessarily to be indicative of future operation results or financial condition.
E.
Off-balance
Sheet Arrangements
We currently do not engage in trading activities involving
non-exchange
traded contracts or interest rate swap transactions or foreign currency forward contracts. In the ordinary course of our business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating
off-balance
sheet arrangements or other contractually narrow or limited purposes.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of September 30, 2021. Amounts we pay in future periods may vary from those reflected in the table.
(in thousands)
  
Total
   
Less than
1 year
   
1 to
3 years
   
3 to
5 years
   
More than
5 years
 
Purchase Obligations
  $24,191   $24,191   $—     $—     $—   
Operating Lease Obligations
   17,497    6,573    5,349    4,160    1,415 
We also have obligations to make future payments to third party licensors that become due and payable on the achievement of certain development, regulatory and commercial milestones as well as tiered royalties on net sales. We have not included these commitments on our balance sheet or in the table above because the commitments are cancellable if the milestones are not complete and achievement and timing of these obligations are not fixed or determinable.
40
Table of Contents
Recently Issued Accounting Standards
For more information regarding recently issued accounting standards, please see “Part II—Item 8—“Item 8. Financial Statements and Supplementary Data—RecentData-Recent accounting pronouncements” in our 2021 Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on March 1, 2021.Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk including foreign exchange risk, 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)(“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 RMB 186.8RMB292.1 million and RMB 155.9RMB151.7 million, which were denominated in RMB, as of September 30, 2021 representing 4%and December 31, 2020, respectively, representing 2% and 5% of the cash and cash equivalents as of September 30, 20212022 and December 31, 2020,2021, respectively.
Our business mainly operates in mainland China with a significant portion of our transactions settled in RMB, and our financial statements are presented in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our exposure to such risk. Although, in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the RMB because the value of our business is effectively denominated in RMB, while ADSs will be traded in U.S. dollars.
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, Chinathe Chinese government changed its
decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the RMB against the U.S. dollar in the following three years. Between July 2008 and June 2010, this appreciation halted, and the exchange rate between the RMB and U.S. dollar remained within a narrow band. In June 2010, the PBOC announced that China’sthe Chinese government would increase the flexibility of the exchange rate, and thereafter allowed the RMB to appreciate slowly against the U.S. dollar within the narrow band fixed by the PBOC. However, in August 2015, the PBOC significantly devalued the RMB.
A significant portion of our cash is kept in Hong Kong dollars (HK dollars) as well as U.S. dollars.
30

The value of our ADSs and our ordinary shares will therefore, be affected by the foreign exchange rates between U.S. dollars, HK dollars and the RMB. For example, to the extent that we need to convert U.S. dollars or HK dollars into RMB for our operations or if any of our arrangements with other parties are denominated in U.S. dollars or HK dollars and need to be converted into RMB, appreciation of the RMB against the U.S. dollar or the HK dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars or HK dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar or the HK dollar against the RMB would have a negative effect on the conversion amounts available to us.
Since 1983, the Hong Kong Monetary Authority (HKMA)(“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 group’s 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 group’s assets denominated in HK dollars will be adversely affected.
Credit Risk
OurFinancial instruments that are potentially subject to significant concentration of credit risk is primarily attributable to the carrying amountsconsist of cash and cash equivalents, short-term investments, accounts receivable, and short-term investment. notes receivable.
The carrying amounts of cash and cash equivalents and short-term investmentinvestments represent the maximum amount of loss due to credit risk. We had cash and cash equivalents of $1,119.5 million and $964.1 million and short-term investments of nil and $445.0 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 20212022 and December 31, 2020,2021, 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 arrangement. We manage credit risk of accounts receivable through ongoing monitoring of the outstanding balances and limit the amount of credit extended based upon payment history and the debtor’s current credit worthiness. Historically, we have collected these receivables from customers within the credit worthinessterms with no significant credit losses incurred. As of September 30, 2022, our two largest debtors accounted for approximately 38% of our total accounts receivable collectively.
Certain accounts receivable balances are settled in the form of notes receivable. As of September 30, 2022, such notes receivable included bank acceptance promissory notes that are non-interest bearing and due within six months. These notes receivable were used to collect the receivables based on an administrative convenience, given these financial institutions.
41
Tablenotes are readily convertible to known amounts of Contentscash. In accordance with the sales agreements, whether to use cash or bank acceptance promissory notes to settle the receivables is at our discretion, and this selection does not impact the agreed contractual purchase prices.
Inflation
In recent years, mainland China has not experienced significant inflation. Although the global economy, including the U.S. economy, has experienced rising inflation in recent quarters, which can increase the costs of our products and thusproduct candidates purchased from third parties and, as a result, adversely affect our results of operations, inflation has not had a material impact on our results of operations. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.
mainland China or in other countries in which our third-party partners operate.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2)
31

accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As of September 30, 2021,2022, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended)Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of September 30, 2021,2022, our disclosure controls and procedures were effective at thea reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the ninethree months ended September 30, 2021,2022, there have not been any changes in our internal controls over financial reporting (as such item is defined in Rules
13a-15(f)
and
15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended)Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART
II-OTHER32
INFORMATION

PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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.

There have been no material changes from the risk factors set forth in our Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on March 1, 2021, except as set forth in ourThis Quarterly Report on Form
10-Q
for the quarterly period ended June 30, should be read in conjunction with our 2021 Annual Report, Q1 2022 Form 10-Q, and as set forth below:
Changes in United StatesQ2 2022 Form 10-Q, which describe various material risks and China relations, as well as relations with other countries, and/or regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our ordinary shares and/or our ADSs.
The U.S. government, including the SEC, has made statements and taken certain actions that led to changes to United States and international relations, and will impact companies with connections to the United States or China, including imposing several rounds of tariffs affecting certain products manufactured in China, imposing certain sanctions and restrictions in relation to China and issuing statements indicating enhanced review of companies with significant China-based operations. It is unknown whether and to what extent new legislation, executive orders, tariffs, laws or regulations will be adopted, or the effect that any such actions would have on companies with significant connections to the U.S. or to China, our industry or on us. We conduct preclinical and clinical activities and have business operations both in the United States and China. Any unfavorable government policies on cross-border relations and/or international trade, including increased scrutiny on companies with significant China-based operations, capital controls or tariffs, may affect the competitive position of our drug products, the hiring of scientists and other research and development personnel, the demand for our drug products, the import or export of raw materials in relation to drug development, our ability to raise capital, the market price of our ordinary shares and/or our ADSs or prevent us from selling our drug products in certain countries.
42
Table of Contents
Furthermore, the SEC has issued statements primarily focused on companies with significant China-based operations, such as us. For example, on July 30, 2021, Gary Gensler, Chairman of the SEC, issued a Statement on Investor Protection Related to Recent Developments in China, pursuantuncertainties to which Chairman Gensler stated that he has asked the SEC staff to engage in targeted additional reviews of filings for companies with significant China-based operations. The statement also addressed risks inherent in companies with a Variable Interest Entity, or a VIE, structure. We do not have a VIE structure andwe are not in an industry that is subject to foreign ownership limitations in China. Further, we believe that we have robust disclosures relating to our operations in China, including the relevant risks noted in Chairman Gensler’s statement. However, the Company’s periodic reports and other filings with the SEC may be subject to enhanced review by the SEC and this additional scrutiny could affect our ability to effectively raise capital in the United States.
If any new legislation, executive orders, tariffs, laws and/or regulations are implemented, if existing trade agreements are renegotiated or if the U.S. or Chinese governments take retaliatory actions due to the recent U.S.-China tension, such changes could have an adverse effect on our business, financial condition and results of operations, our ability to raise capital and the market price of our ordinary shares and/or our ADSs.
The audit report included in our annual reports are prepared by an auditor who is not inspected by the U.S. Public Company Accounting Oversight Board, or the PCAOB, and as such, you are deprived of the benefits of such inspection, we may be subject to additional Nasdaq listing criteria or other penalties and our ADSs may be delisted from the U.S. stock market.
Auditors of companies that are registered with the SEC and traded publicly in the United States, including the independent registered public accounting firm of our company, must be registered with the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because a substantial portion of our operations are within China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB.
Inspections of auditors conducted by the PCAOB outside China have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors are deprived of the benefits of PCAOB inspections and may lose confidence in our reported financial information and procedures and the quality of our financial statements.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate the audit work performed by a foreign public accounting firm completely. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on Our Exchanges Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges, such as the Nasdaq, of issuers included on the SEC’s list for three consecutive years. It is unclear if this proposed legislation will be enacted.
43
Table of Contents
Furthermore, there have been recent deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act (HFCA Act), which includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed
by a non-U.S. authority in
the auditor’s local jurisdiction and to prohibit the securities of such issuers that have has three
consecutive non-inspection years
from being traded on U.S. national securities exchanges such as the Nasdaq. The U.S. House of Representatives passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020.
Additionally, in July 2020, the U.S. President’s Working Group on Financial Markets issued recommendations for actions that can be taken by the executive branch, the SEC, the PCAOB or other federal agencies and departments with respect to Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the United States. In response, on November 23, 2020, the SEC issued guidance highlighting certain risks (and their implications to U.S. investors) associated with investments in China-based issuers and summarizing enhanced disclosures the SEC recommends China-based issuers make regarding such risks.
On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (AHFCA Act), which amends the requirements of the HFCA Act to require that the SEC identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by
any non-U.S. authority
and to prohibit the securities of such issuers that have had two
consecutive non-inspection years
from being traded on U.S. national securities exchanges such as the Nasdaq.
On September 22, 2021, the PCAOB adopted PCAOB Rule 6100,
Board Determinations Under the Holding Foreign Companies Accountable Act
, implementing the HFCA Act, which provides a framework for the PCAOB to determine that it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. PCAOB Rule 6100 establishes the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such determinations; and the process by which the PCAOB will reaffirm, modify or vacate any such determinations. Chairman Gensler emphasized, in his October 5, 2021 testimony before the House Committee on Financial Services, that the PCAOB’s adoption of Rule 6100 was “an important step to meet its requirements under the [HFCA Act] to protect U.S. investors;” that “we remain on track to finalize its required rulemaking before the end of the year;” and that “it is critical that the [Securities and Exchange] Commission and the PCAOB work together to ensure that the audits of foreign companies accessing U.S. capital markets play by the same rules.” On November 5, 2021, the SEC announced that it has approved Rule 6100.
Under the HFCA Act (and, if enacted into law, the AHFCA Act), our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years (or, if the AHFCA Act is passed, two consecutive years), and this ultimately could result in our ADSs being delisted, which would materially adversely affect the Company.
Additionally, in October 2021, Nasdaq adopted additional listing criteria applicable to companies that primarily operate in jurisdictions where local regulators impose secrecy laws, national security laws or other laws that restrict U.S. regulators from accessing information relating to the issuer, or a Restrictive Market. Under the new rule, whether a jurisdiction permits PCAOB inspection would be a factor in determining whether a jurisdiction is deemed by the Nasdaq to be a Restrictive Market. And China will likely be determined to be a Restrictive Market and, as a result, the Nasdaq may impose on us additional listing criteria or deny continued listing of our securities on the Nasdaq.
44
Table of Contents
There can be no assurance that we or our auditor will be able to comply with the requirements imposed by Nasdaq or the U.S. regulators. We are evaluating, designing, and implementing additional business processes and control changes to meet the requirements of the HFCA Act which we believe will enable us to engage an independent public accounting firm that satisfies the PCAOB inspection requirements for the audit of our consolidated financial statements, subject to compliance with SEC and other requirements prior to the three-year (or
two-year
under the AHFCA Act) deadline of the HFCA Act. However, any business processes and control changes that we may implement may not be sufficient or may take time for us to implementbecome subject. These risks and they ultimately may not be successful. We may also be subject to enforcement under the HFCA Act, the rules implementing the act that may be adopted by the SEC, and any other similar legislation that may be enacted into lawuncertainties could, directly or executive orders that may be adopted in the future. Although we are committed to complying with the rules and regulations applicable to listed companies in the United States, we are currently unable to predict the potential impact on our listed status by the rules that may be adopted by the SEC under the HFCA Act (or, if enacted into law, the AHFCA Act). Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. Although our ordinary shares are listed in Hong Kong, investors may face difficulties in converting their ADSs into ordinary shares and migrating the ordinary shares to Hong Kong or may incur increased costs or suffer losses in order to do so. The market price of our ADSs could be materiallyindirectly, adversely affected as a result of anticipated negative impacts of these rules and executive, regulatory or legislative actions upon, as well as negative investor sentiment towards, companies with significant operations in China that are listed in the United States, regardless of whether these rules and executive, regulatory or legislative actions are implemented and regardless of our actual operating performance. Failure to adopt effective contingency plans may also have a material adverse impact on our business and the price of our ADSs and ordinary shares.
Our failure to comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of personal information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Regulatory authorities in virtually every jurisdiction in which we operate in Greater China and other Asian markets have implemented and are considering a number of legislative and regulatory proposals concerning personal data protection.
Regulatory authorities in China have implemented and are considering a number of legislative and regulatory proposals concerning data protection. For example, the Cyber Security Law of the People’s Republic of China, or the Cyber Security Law, which became effective in June 2017, created China’s first national-level data protection regime for “network operators,” which may include all organizations in China that provide services over the internet or another information network.
We maintain personally identifiable health information of patients in China in limited situations. We also collect and maintain
de-identified
or psuedonymized health data for clinical trials in compliance with local regulations. This data could be deemed as personal data or important data. With China’s growing emphasis of its sovereignty over data derived from China, the outbound transmission of
de-identified
or psuedonymized health data for clinical trials may be subject to the new national security legal regime, including the Cyber Security Law, the Data Security Law (as defined below), the Personal Information Protection Law (as defined below), and various implementing regulations and standards.
Under the Cyber Security Law and the Measures on Standard, Safety and Service of the National Medical Care Big Data (Tentative), or the Measures on Health and Medical Big Data, the transmission of certain personal information, important data and health and medical care big data outside of China is only permitted upon the completion of a security assessment conducted by or as determined by the Chinese government. Certain draft regulations, including the Measures for Security Assessment for Cross-border Transfer of Personal Information and Important Data (Draft for Comment), published in 2017, and the Measures for Security Assessment for Cross-border Transfer of Personal Information (Draft for Comment), published in 2019, have been proposed by the Chinese government that specify the procedures and stipulate more detailed compliance requirements relating to such assessment, and in certain circumstances, government approval, prior to the transmission of such information and data outside of China.
45
Table of Contents
In addition, the Standing Committee of the National People’s Congress of the People’s Republic of China, or the SCNPC, promulgated the Data Security Law of the People’s Republic of China, or the Data Security Law, on June 10, 2021, which became effective on September 1, 2021. The Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data processing activities and introduces a data classification and hierarchical protection system. The classification of data is based on its importance in economic and social development, as well as the degree of harm expected to be caused to national security, public interests, or legitimate rights and interests of individuals or organizations if such data is tampered with, destroyed, leaked, or illegally acquired or used. The security assessment mechanism was also included in the PIPL which was promulgated in August 2021 and became effective on November 1, 2021, for the Chinese government to supervise certain cross-border transfers of personal information.
Under the Cyber Security Law and Data Security Law, we are required to establish and maintain a comprehensive data and network security management system that will enable us to monitor and respond appropriately to data security and network security risks. We will need to classify and take appropriate measures to address risks created by our data processing activities and use of networks. We will be obligated to notify affected individuals and appropriate Chinese regulators of and respond to any data security and network security incidents. Establishing and maintaining such systems takes substantial time, effort and cost, and we may not be able to establish and maintain such systems fully as needed to ensure compliance with our legal obligations. Despite our investment, such systems may not fully guard us or enable us to appropriately respond to or mitigate all data security and network security risks or incidents we face. Furthermore, under the Data Security Law, data categorized as “important data,” which will be determined by governmental authorities in the form of catalogs, is to be processed and handled with a higher level of protection. The notion of important data is not clearly defined by the Cyber Security Law or the Data Security Law. In order to comply with the statutory requirements, we will need to determine whether we possess important data, monitor the important data catalogs that are expected to be published by local governments and departments, perform risk assessments and ensure we are complying with reporting obligations to applicable regulators. We may also be required to disclose to regulators business-sensitive or network security-sensitive details regarding our processing of important data, and may need to pass the government security review or obtain government approval in order to share important data with offshore recipients, which can include foreign licensors, or share data stored in China with judicial and law enforcement authorities outside of China. If judicial and law enforcement authorities outside China require us to provide data stored in China, and we are not able to pass any required government security review or obtain any required government approval to do so, we may not be able to meet the foreign authorities’ requirements. The potential conflicts in legal obligations could have adverse impact on our operations in and outside of China.
Furthermore, in July 2021, the Cybersecurity Administration of China, China’s top cyberspace regulator, issued a proposed amendment to the Cybersecurity Review Measures, or the Cybersecurity Review Measures, which have been in effect since June 1, 2020. Under the proposed amendment, the scope of entities required to undergo cybersecurity review to assess national security risks that arise from data processing activities would be expanded to include all critical information infrastructure operators who purchase network products and services and all data processors carrying out data processing activities that affect or may affect national security. In addition, the draft amendment proposed that all such entities that maintain or store the personal information of more than 1 million users and undertake a public listing of securities in a foreign country would be required to pass cybersecurity review, which would focus on the potential risk of core data, important data, or a large amount of personal information being stolen, leaked, destroyed, illegally used or exported out of China, or critical information infrastructure being affected, controlled or maliciously used by foreign governments after such a listing.
On October 29, 2021, the Cyberspace Administration of China (“CAC”) published the Measures on Security Assessment of Cross-border Data Transfers (Draft for Comment) (the “Draft Measures”). The Draft Measures are enacted in accordance with the Cyber Security Law, the Data Security Law and the PIPL. Under the Draft Measures, a data processor would be subject to mandatory security assessment for transfers of data out of China under any of the following circumstances: (i) the cross-border transfer is of personal information and important data collected and generated by critical information infrastructure operators; (ii) the cross-border transfer includes important data; (iii) the cross-border transfer includes personal information of more than one million individuals; and (iv) the cross-border transfer includes personal information of cumulatively more than 100,000 individuals or sensitive personal information of more than 10,000 individuals.
The national security legal regime imposes stricter data localization requirements on personal information and human health-related data and requires us to undergo cybersecurity or other security review, obtain government approval or certification, or put in place certain contractual protections before transferring personal information and human health-related data out of China. As a result, personal information, important data and health and medical data that we or our customers, vendors, clinical trial sites, pharmaceutical partners and other third parties collect, generate or process in China may be subject to such data localization requirements and heightened regulatory oversight and controls. To comply with these requirements, maintaining local data centers in China, conducting security assessments or obtaining the requisite approvals from the Chinese government for the transmission outside of China of such controlled information and data could significantly increase our operating costs or cause delays or disruptions in our business operations in and outside China. We expect that the evolving regulatory interpretation and enforcement of the national security legal regime will lead to increased operational and compliance costs and will require us to continually monitor and, where necessary, make changes to our operations, policies, and procedures. If our operations, or the operations of our CROs, licensees or partners, are found to be in violation of these requirements, we may suffer loss of use of data, suffer a delay in obtaining regulatory approval for our products, be unable to transfer data out of China, be unable to comply with our contractual requirements, suffer reputational harm or be subject to penalties, including administrative, civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. If any of these were to occur, it could adversely affect our ability to operate our business and our financial results.
46
Table of Contents
The General Office of the State Council passed the Scientific Data Administrative Measures in March 2018, which provides a regulatory framework for the collection, submission, retention, exploitation, confidentiality and security of scientific data. Scientific data is defined as data generated from basic research, applied research, experiments and developments in the fields of natural sciences, engineering and technology. It also includes the original and derived data by means of surveillance, monitoring, field studies, examination and testing that are used in scientific research activities. All scientific data generated by research entities, including research institutions, higher education institutions and enterprises that is created or managed with government funds, or funded by any source that concerns state secrets, national security, or social and public interests, must be submitted to data centers designated by the Chinese government for consolidation. Disclosure of scientific data will be subject to regulatory scrutiny.
The definition of scientific data is quite broad, but the Chinese government has not issued further guidance to clarify if clinical study data would fall within the definition of scientific data. To our understanding, the Chinese government has not required life sciences companies to upload clinical study data to any government-designated data centers, or prevented the cross-border transmission and sharing of clinical study data. We plan to closely monitor legal and regulatory developments in this area to see how scientific data is interpreted, and we may be required to comply with additional regulatory requirements for sharing clinical study data with our licensors or foreign regulatory authorities, although the scope of such requirements, if any, is currently unknown.
In addition, certain industry-specific laws and regulations affect the collection and transfer of personal data in China. For example, the Regulation on the Administration of Human Genetic Resources, or the HGR Regulation, promulgated by the State Council of the People’s Republic of China, or the State Council, which became effective on July 1, 2019, applies to activities that involve collection; biobanking; use of HGR, which includes the genetic materials with respect to organs, tissues, cells and other materials that contain the human genome, genes and other genetic substance and derived data in China, (collectively, the China-Sourced HGR), and provision of such items to foreign parties or entities established or actually controlled by them. The HGR Regulation prohibits both onshore and offshore entities established or actually controlled by foreign entities and individuals from collecting or biobanking any China-Sourced HGR in China, as well as providing such China-Sourced HGR out of China. Chinese parties are required to seek an advance approval for the collection and biobanking of all China-Sourced HGR. Approval for any export or cross-border transfer of China-Sourced HGR in the form of biospecimens is required, and transfer of derived data by Chinese parties to foreign parties or entities established or actually controlled by them also requires the Chinese parties to file, before the transfer, a copy of the data with the Human Genetic Resources Administration of China (“HGRAC”) for record and obtain a notification filing number in order to transfer. The HGR Regulation also requires that foreign parties or entities established or actually controlled by them ensure the full participation of Chinese parties in international collaborations and share all records and data with the Chinese parties.
If the Chinese parties fail to comply with data privacy and cybersecurity laws, regulations and practice standards, and our research data is obtained by unauthorized persons, used or disclosed inappropriately or destroyed, we may lose our confidential information and be subject to litigation and government enforcement actions. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our or our collaborators’ practices, potentially resulting in suspension of relevant ongoing clinical trials or delays in the initiation of new trials, confiscation of China-Sourced HGR, administrative fines, disgorgement of illegal gains or temporary or permanent debarment of our or our collaborators’ entities and responsible persons from further clinical trials and, consequently, a
de-facto
ban on the debarred entities from initiating new clinical trials in China. So far, the HGRAC has disclosed a number of HGR violation cases. In one case, the sanctioned party was the Chinese subsidiary of a multinational pharmaceutical company that was found to have illegally transferred certain biospecimens to CROs for conducting certain unapproved research. In addition to a written warning and confiscation of relevant HGR materials, the Chinese subsidiary of the multinational pharmaceutical company was requested by the HGRAC to take rectification measures and was also banned by the HGRAC from submitting any clinical trial applications until the HGRAC was satisfied with the rectification results, which rendered it unable to initiate new clinical trials in China until the ban was lifted. In another case, the CRO engaged by the Chinese subsidiary of a multinational pharmaceutical company was found to have forged an ethics committee approval in order to accelerate the HGRAC approval. Both the Chinese subsidiary of the multi-national pharmaceutical company and the CRO were debarred from initiating new applications for a period of 6 to 12 months, respectively.
47
Table of Contents

To further tighten the control of China-Sourced HGR, the SCNPC issued the Eleventh Amendment to the Criminal Law of the People’s Republic of China on December 26, 2020, which became effective on March 1, 2021, criminalizing the illegal collection of China-Sourced HGR and the illegal transfer of China-sourced biospecimens outside of China. An individual who is convicted of any of these violations may be subject to public surveillance, criminal detention, a fixed-term imprisonment of up to seven years and/or a criminal fine. In October 2020, the SCNPC adopted the Biosecurity Law of the People’s Republic of China, or the PRC Biosecurity Law, which became effective on April 15, 2021. The PRC Biosecurity Law will establish an integrated system to regulate biosecurity-related activities in China, including, among others, the security regulation of HGR and biological resources. The PRC Biosecurity Law for the first time expressly declares that China has sovereignty over its HGR, and further endorsed the HGR Regulation by recognizing the fundamental regulatory principles and systems established by it over the utilization of China-Sourced HGR by foreign parties or entities established or actually controlled by them in China. Though the PRC Biosecurity Law does not provide any specific new regulatory requirements on HGR, as it is a law adopted by China’s highest legislative authority, it gives China’s major regulator of HGR, the Ministry of Science and Technology, or MOST, significantly more power and discretion to regulate HGR and it is expected that the overall regulatory landscape for China-Sourced HGR will evolve and become even more rigorous and sophisticated. In addition, the interpretation and application of data protection laws in China and elsewhere are often uncertain and in flux.
In addition, in the United States, at both the federal and state levels, and in territories outside of China where we have rights to and plan to develop and commercialize our
in-licensed
product candidates, we are subject to laws and regulations that address privacy, personal information protection and data security. Numerous laws and regulations, including security breach notification laws, health information privacy laws and consumer protection laws, govern the collection, use, disclosure and protection of health-related and other personal information. Given the variability and evolving state of these laws, we face uncertainty as to the exact interpretation of the new requirements, and we may be unsuccessful in implementing all measures required by regulators or courts in their interpretation.
We expect that these data privacy and cybersecurity laws and regulations will receive greater attention and focus from regulators going forward, and we will continue to face uncertainty as to whether our efforts to comply with evolving obligations under data protection, privacy and security laws in Greater China, the United States and other countries where we plan or conduct business will be sufficient. Any failure or perceived failure by us to comply with applicable laws and regulations could result in reputational damage or proceedings or actions against us by governmental entities, individuals or others. These proceedings or actions could subject us to significant civil or criminal penalties and negative publicity, result in the delayed or halted transfer or confiscation of certain personal information, result in the suspension of ongoing clinical trials or ban on initiation of new trials, require us to change our business practices, increase our costs and materially harm our business, prospects, financial condition and results of operations. In addition, our current and future relationships with customers, vendors, pharmaceutical partners and other third parties could be negatively affected by any proceedings or actions against us or current or future data protection obligations imposed on them under applicable law, including without limitation the European Union General Data Protection Regulation, Cyber Security Law, Data Security Law and HGR Regulation. In addition, a data breach affecting personal information, including health information, or a failure to comply with applicable requirements could result in significant management resources, legal and financial exposure and reputational damage that could potentially have a material adverse effect on our business and results of operations.
48
Table of Contents
China’s economic, political and social conditions, as well as governmental policies or regulatory actions, could affect the business environment and financial markets in China, our ability to operate our business, our liquidity and our access to capital.
Our substantial operations (including our commercial operations) are conducted in China. Accordingly, our business, results of operations, financial condition, liquidity, or cash flows and prospects may be influencedcould cause our actual results to a significant degreediffer materially from our past results or the results contemplated by economic, political, legal and social conditionsany forward-looking statements we make. We believe the risks described in China as well as China’s economic, political, legal and social conditions in relation to the rest of the world. China’s economy differs from the economies of developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past 40 years, growth has been uneven across different regions and among various economic sectors of China. China’s government has implemented various measures to encourage economic development, data protection and allocation of resources. Some of these measures may benefit the overall economy in China but may have a negative effect on us. Our financial condition and results of operations may be adversely affected by government control, perceived government interference and/or changes in tax, cyber and data security, capital investments, cross-border transaction and other regulations that are currently or may in the future be applicable to us. Recently, Chinese regulators have announced regulatory actions aimed at providing China’s government with greater oversight over certain sectors of China’s economy, including
the for-profit
education sector and technology platforms that have a quantitatively significant number of users located in China. Although the biotech industry is already highly regulated in China and while there has been no indication to date that such actions or oversight would apply to companies that are similarly situated as us and that are pursuing similar portfolios of drug products and therapies as us, China’s government may in the future take regulatory actions that materially adversely affect the business environment and financial markets in China as they relate to us, our ability to operate our business, our liquidity and our access to capital.
The uncertainties in the China legal system could materially and adversely affect us.
On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to enhance its enforcement against illegal activities in the securities markets and promote the high-quality development of the capital markets, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight
of law-enforcement
and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the Chinese securities laws. Since this document is relatively new, uncertainties exist in relation to how soon legislative or administrative regulation-making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on companies like us.
It is especially difficult for us to accurately predict the potential impact on the Company of new legal requirements in China because the China legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the China legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the China legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations and rules involves uncertainties. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us. Furthermore, the China legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
49
Table of Contents
If the Chinese government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently in the future, the value of our ADSs and ordinary shares may decline in value or become worthless.
In July 2021, the Chinese government provided new guidance on China-based companies raising capital outside of China, including through arrangements called variable interest entities, or VIEs. Currently, our corporate structure contains no variable interest entities and we are not in an industry that is subject to foreign ownership limitations in China. However, there are uncertainties with respect to the Chinese legal system and there may be changes in laws, regulations and policies, including how those laws and regulations will be interpreted or implemented. If in the future the Chinese government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently, the value of our ADSs and ordinary shares may decline in value or become worthless.
We are not currently required to obtain approval or prior permission from the China Securities Regulatory Commission or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, as there are uncertainties with respect to the Chinese legal system and changes in laws, regulations and policies, including how those laws and regulations will be interpreted or implemented, there can be no assurance that we will not be subject to such requirements, approvals or permissions in the future. We are required to obtain approvals and permissions from Chinese authorities in connection with our general business activities currently conducted in China.
As of the date of this Quarterly Report on Form
10-Q,
we are not required to obtain approval or prior permission from the China Securities Regulatory Commission or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, as there are uncertainties with respect to the Chinese legal system and changes in laws, regulations and policies, including how those laws and regulations will be interpreted or implemented, there can be no assurance that we will not be subject to such requirements, approvals or permissions in the future.
To operate our general business activities currently conducted in China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the State Administration for Market Regulation, or SAMR. Each of our Chinese subsidiaries has obtained a valid business license from the local counterpart of the SAMR, and no application for any such license has been denied.
We are also required to obtain certain approvals from Chinese authorities before transferring certain scientific data abroad or to foreign parties or entities established or actually controlled by them. For more information on these required permissions, see the “Recent Legal and Regulatory Developments” section above in Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operation) and the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, and the additional risk factors discussed in the “Risk Factors” section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30,and our 2021 and this Quarterly Report on Form 10-Q.
Other Risk Factors
The following is a summary of significant risk factors and uncertainties that may affect our business which are discussed in more details above and in our Annual Report, onQ1 2022 Form
10-K
for 10-Q, and Q2 2022 Form 10-Q are the year ended December 31, 2020:
our ability to successfully commercialize ZEJULA, Optune, QINLOCK and any other products and product candidates thatmost significant we may obtain regulatory approval for;
face; however, these are not the anticipated amount, timing and accounting of revenues; contingent, milestone, royalty and other payments under licensing, collaboration, and acquisition agreements; tax positions and contingencies; collectability of receivables;
pre-approval
inventory; cost of sales; research and development costs;
50
Table of Contents
compensation and other selling, general and administrative expenses; amortization of intangible assets; foreign currency exchange risk; estimated fair value of assets and liabilities; and impairment assessments;
expectations, plans and prospects relating to sales, pricing, growth and launch of our marketed and pipeline products;
the potential impact of increased product competition in the markets in whichonly risks we compete, including increased competition from new originator therapies, generics, prodrugs and biosimilars of existing products and products approved under abbreviated regulatory pathways, including generic or biosimilar versions of our products;
patent terms, patent term extensions, patent office actions and expected availability and any period of regulatory exclusivity;
the timing, outcome and impact of administrative, regulatory, legal or other proceedings related to our patents and other proprietary and intellectual property rights, tax audits, assessments and settlements, pricing matters, sales and promotional practices, product liability and other matters;
the drivers for growing our business, including our plans and intention to commit resources relating to discovery, research and development programs and business development opportunities as well as the potential benefits and results of certain business development transactions;
our ability to finance our operations and business initiatives and obtain funding for such activities;
the expectations, development plans and anticipated timelines, including costs and timing of potential clinical trials, filings and approvals of our products, product candidates and pipeline programs, including collaborations with third-parties, as well as the potential therapeutic scope of the development and commercialization of our and our collaborators’ pipeline products;
reputational or financial harm to our business arising from adverse safety events, including product liability claims or lawsuits affecting our or any of our licensors’ marketed products, generic or biosimilar versions of our or any of our licensors’ marketed products or any other products from the same class as one of our or any of our licensors’ products;
unexpected impacts on our business operations including sales, expenses, supply chain, manufacturing, cyber-attacks or other privacy or data security incidents, research and development costs, clinical trials and employees;
the potential impact of measures being taken worldwide designed to reduce healthcare costs and limit the overall level of government expenditures, including the impact of pricing actions and reduced reimbursement for our products;
our manufacturing capacity, use of third-party contract manufacturing organizations, plans and timing relating to changes in our manufacturing capabilities or activities in new or existing manufacturing facilities;
lease commitments, purchase obligations and the timing and satisfaction of other contractual obligations;
the impact of new laws, regulatory requirements, judicial decisions and accounting standards;
the disruption of our business relationships with our licensors;
the direct and indirect impact of the
COVID-19
pandemic on our business and operations, our and our partners’ ability to effectively travel, as needed, during the
COVID-19
pandemic, and the duration and impact of
COVID-19
or any of its variants that may affect, precipitate or exacerbate one or more of any of theface. We face additional risks and uncertainties mentioned in this section;
our abilitynot currently known to effectively manage our growth;
51
Table of Contents
the disruption in the capitalus or credit markets which may adversely impact our ability to obtain necessary capital or credit market financing;
the geopolitical tensions that exist between China and the United States may adversely affect our business, our ability to grow, and our access to necessary capital or credit markets;
our ability to retain key executives and to attract, retain and motivate personnel;
changes in United States and China relations, as well as relations with other countries, and/or regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our ordinary shares and/or our ADSs;
compliance with China’s new Data Security Law, Cybersecurity Review Measures (Revised Draft for Comment), Personal Information Protection Law regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business;
the audit report included in our annual reports are prepared by an auditor who is not inspected by the U.S. Public Company Accounting Oversight Board, or the PCAOB, and as such, you are deprived of the benefits of such inspection, we may be subject to additional Nasdaq listing criteria or other penalties and our ADSs may be delisted from the U.S. stock market;
our failure to comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results;
China’s economic, political and social conditions, as well as governmental policies or regulatory actions, could affect the business environment and financial markets in China, our ability to operate our business, our liquidity and our access to capital;
the uncertainties in the China legal system could materially and adversely affect us;
if the Chinese government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently in the future, the value of our ADSs and our ordinary shares may decline in value or become worthless;
wecurrently believe are not currently required to obtain approval or prior permission from the China Securities Regulatory Commission or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, as there are uncertainties with respect to the Chinese legal system and changes in laws, regulations and policies, including how those laws and regulations will be interpreted or implemented, there can be no assurance that we will not be subject to such requirements, approvals or permissions in the future. We are required to obtain approvals and permissions from Chinese authorities in connection with our general business activities currently conducted in China;
material.
the Chinese government may intervene in or influence our operations at any time, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs;
both recent and future economic, political and social conditions, as well as governmental policies and regulatory actions implemented in China, could affect our ability to operate our business. The Chinese government has provided new guidance on China-based companies raising capital outside of China. Due to our extensive operations in China, any future Chinese, U.S. or other rules and regulations that place restrictions on capital raising or other activities by companies with extensive operations in China could adversely affect our business, results of operations and the market price of our ADSs;
changes in the legal, political and economic policies of the Chinese government, the relations between China and the United States, or Chinese or United States regulations may materially and adversely affect our business, financial condition, results of operations and the market price of our ADSs, which could cause the value of our ADSs to significantly decline or to become worthless. Any such changes may take place quickly and with very little notice. Recent statements made and regulatory actions undertaken by China’s government, including the recent enactment of China’s new Data Security Law, as well as our obligations to comply with China’s Cybersecurity Review Measures (Revised Draft for Comment), regulations and guidelines relating to the multi-level protection scheme, Personal Information Protection Law and any other future laws and regulations may require us to incur significant expenses and could materially affect our ability to conduct our business, accept foreign investments or list on a U.S. or foreign stock exchange; and
other risks and uncertainties, including those listed under “Part
I-Item
1A-Risk
Factors” in our Annual Report on Form
10-K
for the year ended December 31, 2020.
52
Table of Contents
These factors should not be construed as exhaustive and should be read with the other cautionary statements and other information in our Annual Report on Form
10-K
for the year ended December 31, 2020 and our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.

None.
None.
53
33
Table of Contents

Item 6. Exhibits.
Exhibit Index
Exhibit

Number
Exhibit
Title
10.1*^
10.2*#
3.1
10.3*#
10.4*#
3.2Fifth Amended and Restated Articles of Association of Zai Lab Limited (incorporated by reference to Exhibit 3.1 to our Current Report on Form
4.1Form of DepositNon-Statutory Stock Option Award Agreement (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on September 1, 2017)
31.1*
4.2Form of American Depositary Receipt (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our Registration Statement on Form
4.3Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.3 to our Quarterly Report on Form 10-Q (File No. 001-38205) filed with the SEC on August 9, 2021).
4.4Third Amended and Restated Shareholders Agreement between Zai Lab Limited and other parties named therein dated June 26, 2017 (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on August 15, 2017)
4.5Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act (incorporated by reference to Exhibit 4.5 to our Annual Report on Form 10-K (File No. 001-38205) filed with the SEC on March 1, 2021)
10.1*#Non-Employee Director Compensation Policy
31.1*Certification of Chief Executive Officer Required by Exchange Act Rule 13a-14(a)
31.2*
31.2*
32.1**
32.1**
32.2**
32.2**
101.INS*
101.INS*Inline XBRL Instance
Document-the
instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
101.DEF*Inline XBRL Taxonomy Extension Definitions Linkbase Document
104*
104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith
** Furnished herewith
# Management contract or compensatory plan
^ Certain confidential information contained in this exhibit has been omitted because it (i) is not material and (ii)
would be competitively harmful if publicly disclosed.

*
Filed herewith
**
Furnished herewith
#
Management contract or compensatory plan or arrangement
^
Certain confidential information contained in this exhibit has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.

54
34
Table of Contents

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: November 9, 20212022By:By:
/s/ Samantha Du
Billy Cho
Name:Name:Samantha DuBilly Cho
Title:Title:Chief Financial Officer
Chief Executive Officer(Principal Financial and Accounting Officer)
5535