UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-Q
____________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 20222023
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period fromto
______ to ______
Commission File Number:
001-38205
____________________
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
____________________
Cayman Islands | 98-1144595 | |||||
(State or Incorporation or | (I.R.S. Employer Identification No.) | |||||
4560 Jinke Road Bldg. 1, Fourth Floor, Shanghai | 201210 | |||||
314 Main Street 4th Floor, Suite 100 Cambridge, MA, USA | 02142 | |||||
| (Address of | (Zip Code) | |||||
+86 21 6163216163 2588
+1 857 706 2604
(Registrant’s Telephone Number, Including Area Code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||
American Depositary Shares, each representing 10 Ordinary | ZLAB | The Nasdaq Global Market | ||||||||||||||
Ordinary Shares, par value $0.000006 per share* | 9688 | The Stock Exchange of Hong Kong Limited | ||||||||||||||
*Included in connection with the registration of the American Depositary Shares with the Securities and Exchange Commission. The ordinary shares are not registered or listed for trading in the United States but are listed for trading on The Stock Exchange of Hong Kong Limited.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation(§ (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
S-T
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2
of the Exchange Act.| Large accelerated filer | x | Accelerated filer | ||||||||||||||
| Non-accelerated filer | o | |||||||||||||||
| Smaller reporting company | ||||||||||||||||
| Emerging growth company | o | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒As of May 5, 2022,3, 2023, 979,087,430 ordinary shares of the registrant, par value $0.000006 per share, were outstanding, of which 729,604,650743,576,320 ordinary shares were held in the form of American Depositary Shares.
Zai Lab Limited
Quarterly Report on Form
10-Q
For the First Quarter of 2023
| Page | ||||||||||||
SPECIAL NOTES REGARDING THE COMPANY
Forward-Looking Statements
This Quarterly Report on Form 10-Qreport 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,“potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these terms or similar expressions. Such statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 theyor 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 those discussedthe following:
• The effects of the COVID-19 pandemic, 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;
• Actions the Chinese government may take to intervene in or influence our operations;
• Economic, political, and social conditions in mainland China, as well as governmental policies;
• Uncertainties in the Chinese legal system, including with respect to the Counter-Espionage Law, the Data Security Law, the Cyber Security Law, the Cybersecurity Review Measures, the Personal Information Protection Law, the Regulation on the Administration of Human Genetic Resources, the Biosecurity Law, the Measures on Security Assessment of Cross-Border Data Transfer (the “Security Assessment Measures”), and other future laws and regulations or amendments to such laws and regulations;
• Approval, filing, or procedural requirements imposed by the China Securities Regulatory Commission (“CSRC”) or other Chinese regulatory authorities in connection with issuing securities to foreign investors under Chinese law;
• Any violation or liability under the U.S. Foreign Corrupt Practices Act (“FCPA”) or Chinese anti-corruption laws;
• Restrictions on currency exchange;
• Limitations on the ability of our Chinese subsidiaries to make payments to us;
• Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies by residents in mainland China;
• Chinese regulations regarding acquisitions of companies based in mainland China by foreign investors;
• Any issues that our Chinese manufacturing facilities may have with operating in conformity with established Good Manufacturing Practices (“GMPs”) and international best practices, and with passing U.S. Food and Drug Administration (“FDA”), China National Medical Products Administration (“NMPA”), and European Medicines Agency inspections;
• Expiration of, or changes to, financial incentives or discretionary policies granted by local governments in mainland China;
• Restrictions or limitations on the ability of overseas regulators to conduct investigations or collect evidence within mainland China;
• 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;
• Failure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, fines, other legal or administrative sanctions, and/or harm to our business or reputation;
• Review by the U.S. Committee on Foreign Investment (“CFIUS”) in our investments or other delays or obstacles for closing transactions;
• Any inability to renew our current leases on desirable terms or otherwise locate desirable alternatives for our leased properties;
• Our ability to generate revenues from our approved commercial 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; and
• Any inability to obtain or maintain sufficient patent protection for our products and product candidates.
These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K for the year ended December 31, 2021,2022 filed with the U.S. Securities and Exchange Commission (SEC)(“SEC”) on March 1, 20222023 (the “2021“2022 Annual Report”) and in this Quarterly Report on Form 10-Q.report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form 10-Q,report, speak only as of their date. We anticipate that subsequent events and developments will cause our expectations and assumptions to change, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
report.
Usage of Terms
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Qreport to “Greater China” refer to mainland China, Hong Kong Special Administrative Region (“HKSAR”Hong Kong” or “Hong Kong”“HK”), Macau Special Administrative Region (“Macau SAR” or “Macau”Macau”), and Taiwan, collectively; and 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; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors are purchasinghold their interest.
Our operating subsidiaries consist of Zai Lab (Hong Kong) Limited, domiciled in Hong Kong; Zai Auto Immune (Hong Kong) Limited, domiciled in Hong Kong; Zai Anti Infectives (Hong Kong) Limited, domiciled in Hong Kong; Zai Lab (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab International Trading (Shanghai) Co., Ltd., domiciled in mainland China; Zai Lab (Suzhou) Co., Ltd., domiciled in mainland China; Zai Biopharmaceutical (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab Trading (Suzhou) Co., Ltd., domiciled in mainland China; Zai Lab (Taiwan) Limited, domiciled in Taiwan; Zai Lab (AUST) Pty. Ltd., domiciled in Australia; and Zai Lab (US) LLC, domiciled in the United States. Additionally, asAs of the date of this Quarterly Report on Form 10-Q,report, Zai Anti Infectives (Hong Kong) Limited has non-substantial business operations.
We own various registered trademarks, trademark applications, and unregistered trademarks and service marks, including various forms of the “ZAI LAB” and “再鼎医药” brands, as well as domain names incorporating some or all of these trademarks and our corporate logo. All other trade names, trademarks, and service marks of other companies appearing in this report are the property of their respective holders. Solely for convenience, some of the trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of, any other company.
Disclosures Relating to Our Chinese Operations
Zai Lab Limited is an exempted company incorporated in the Cayman Islands on March 28, 2013 with limited liability. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. We have substantial operations in mainland China. Below is a summary of certain risks related to our Chinese operations. For more information on these risks and other risks relating to our ADSs and ordinary shares (considered individually or together, “our securities”) and for material regulations that may affect our business and an investment in our securities, see Item 1A. Risk Factors and Item 1. Business – Government Regulation in our 2022 Annual Report.
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 willOur investors do 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 or VIEs.(“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.implemented, that may affect our business or an investment in our business. 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”) or ordinary sharessecurities may decline or become worthless.
There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including thatwith respect to 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, that may materially and adversely affect our business, financial condition, results of operations, ability to raise capital or continue to offer our securities, and the market price of our ADSs or ordinary shares.securities.
There are significant legal and operational risks associated with conducting a substantial portion of our operations in mainland China, including thatwith respect to 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. For example, geopolitical events, such as developments with respect to Taiwan, continue to cause heightened tensions between the United States and China. In addition, new laws and regulations, including the Counter-Espionage Law, Personal Information Protection Law, Data Security Law, Cyber Security Law and Cybersecurity Review Measures, Measures on Security Assessment of Cross-Border Data Transfer, and regulations and guidelines relating to the multi-level protection scheme, have imposed, and may continue to impose, additional restrictions or obligations and compliance-related costs on our business. In addition, our business, or our directors or employees, may be subject to enforcement actions or penalties if it is determined that we, or they, have not complied with applicable laws and regulations. Such legal and operational risks may materially and adversely affect our business, financial condition, results of operations, ability to raise capital or continue to offer our securities, and the market price of our ADSssecurities.
We are or ordinary shares. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our ADSs or ordinary shares to investors and could cause the value of our ADSs or ordinary shares to significantly decline or become worthless. Recent statements made and regulatory actions undertaken by the Chinese government, including the recent enactment of China’s Data Security Law, as well as our obligations to comply with China’s new Cybersecurity Review Measures (which became effective on February 15, 2022), regulations and guidelines relating to the multi-level protection scheme, Personal Information Protection Law, or PIPL 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 example, 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 policies will be interpreted or implemented, we could be subject to additional 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.
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.
Although we are not currently required to obtain prior approval or permission from the United States. In addition, the U.S. Senate and U.S. House of Representatives have each passed bills, which, if enacted, would decrease the number of non-inspection years from three consecutive yearsCSRC or any other Chinese regulatory authority to two, thus reducing the time period beforeissue our securities to foreign investors, the CSRC has promulgated a new set of regulations that consists of the Trial Administrative Measures for Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which became effective on March 31, 2023. Pursuant to the Trial Measures, we may be prohibited from trading on a U.S. securities exchange or delisted from Nasdaq. The foregoing could adversely affectrequired to submit filings to the market priceCSRC following the submission of future overseas listings and the completion of future offerings of our ordinary shares and/or ADSs andequity securities to foreign investors. If we are not able to complete the necessary filings for future securities offerings, our ability to raise capital effectively.
PART I – FINANCIAL INFORMATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Qreport and the audited consolidated financial information and the accompanying notes included in our 20212022 Annual Report.
1
Item 1. Financial
Statements.
Zai Lab Limited
Unaudited condensed consolidated balance sheets
Condensed Consolidated Balance Sheets(Inin thousands of U.S. dollars (“$”), except for number of shares and per share data)
| Notes | March 31, 2023 | December 31, 2022 | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | 3 | 879,844 | 1,008,470 | ||||||||||||||
| Short-term investments | 50,550 | — | |||||||||||||||
| Accounts receivable (net of allowance for credit loss of $13 and $11 as of March 31, 2023 and December 31, 2022, respectively) | 43,346 | 39,963 | |||||||||||||||
| Notes receivable | 17,381 | 8,608 | |||||||||||||||
| Inventories, net | 4 | 38,405 | 31,621 | ||||||||||||||
| Prepayments and other current assets | 42,772 | 35,674 | |||||||||||||||
| Total current assets | 1,072,298 | 1,124,336 | |||||||||||||||
| Restricted cash, non-current | 1,003 | 803 | |||||||||||||||
| Long term investments (including the fair value measured investment of $6,872 and $6,431 as of March 31, 2023 and December 31, 2022, respectively) | 6,872 | 6,431 | |||||||||||||||
| Prepayments for equipment | 1,721 | 1,396 | |||||||||||||||
| Property and equipment, net | 5 | 58,309 | 57,863 | ||||||||||||||
| Operating lease right-of-use assets | 20,148 | 19,512 | |||||||||||||||
| Land use rights, net | 6,920 | 6,892 | |||||||||||||||
| Intangible assets, net | 1,479 | 1,511 | |||||||||||||||
| Long-term deposits | 1,324 | 1,396 | |||||||||||||||
| Total assets | 1,170,074 | 1,220,140 | |||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | 66,361 | 65,974 | |||||||||||||||
| Current operating lease liabilities | 7,318 | 7,050 | |||||||||||||||
| Other current liabilities | 8 | 50,881 | 66,818 | ||||||||||||||
| Total current liabilities | 124,560 | 139,842 | |||||||||||||||
| Deferred income | 30,968 | 21,360 | |||||||||||||||
| Non-current operating lease liabilities | 12,979 | 13,343 | |||||||||||||||
| Other non-current liabilities | 325 | — | |||||||||||||||
| Total liabilities | 168,832 | 174,545 | |||||||||||||||
| Commitments and contingencies (Note 15) | |||||||||||||||||
| Shareholders’ equity | |||||||||||||||||
| Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 967,197,350 and 962,455,850 shares issued as of March 31, 2023 and December 31, 2022, respectively; 963,688,740 and 960,219,570 shares outstanding as of March 31, 2023 and December 31, 2022, respectively) | 6 | 6 | |||||||||||||||
| Additional paid-in capital | 2,911,454 | 2,893,120 | |||||||||||||||
| Accumulated deficit | (1,910,504) | (1,861,360) | |||||||||||||||
| Accumulated other comprehensive income | 17,272 | 25,685 | |||||||||||||||
| Treasury Stock (at cost, 3,508,610 and 2,236,280 shares as of March 31, 2023 and December 31, 2022, respectively) | (16,986) | (11,856) | |||||||||||||||
| Total shareholders’ equity | 1,001,242 | 1,045,595 | |||||||||||||||
| Total liabilities and shareholders’ equity | 1,170,074 | 1,220,140 | |||||||||||||||
As of | ||||||||||||
Notes | March 31, 2022 | December 31, 2021 | ||||||||||
$ | $ | |||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
| Cash and cash equivalents | 3 | 846,957 | 964,100 | |||||||||
| Short-term investments | 465,274 | 445,000 | ||||||||||
| Accounts receivable (net of allowance for credit loss of $10 and $11 as of March 31, 2022 and December 31, 2021, respectively) | 33,394 | 47,474 | ||||||||||
| Notes receivable | 10,848 | 7,335 | ||||||||||
| Inventories | 4 | 20,288 | 18,951 | |||||||||
| Prepayments and other current assets | 16,490 | 18,021 | ||||||||||
| Total current assets | 1,393,251 | 1,500,881 | ||||||||||
Restricted cash, non-current | 803 | 803 | ||||||||||
| Long term investments (including the fair value measured investment of $8,444 and $15,383 as of March 31, 2022 and December 31, 2021, respectively) | 8,444 | 15,605 | ||||||||||
| Prepayments for equipment | 4,978 | 989 | ||||||||||
| Property and equipment, net | 5 | 45,227 | 43,102 | |||||||||
| Operating lease right-of-use assets | 16,986 | 14,189 | ||||||||||
| Land use rights, net | 7,774 | 7,811 | ||||||||||
| Intangible assets, net | 1,745 | 1,848 | ||||||||||
| Long-term deposits | 941 | 870 | ||||||||||
| Value added tax recoverable | 20,766 | 23,858 | ||||||||||
Total assets | 1,500,915 | 1,609,956 | ||||||||||
Liabilities and shareholders’ equity | ||||||||||||
Current liabilities: | ||||||||||||
| Accounts payable | 98,161 | 126,163 | ||||||||||
| Current operating lease liabilities | 6,795 | 5,927 | ||||||||||
| Other current liabilities | 8 | 49,956 | 60,811 | |||||||||
| Total current liabilities | 154,912 | 192,901 | ||||||||||
| Deferred income | 26,896 | 27,486 | ||||||||||
Non-current operating lease liabilities | 11,099 | 9,613 | ||||||||||
Total liabilities | 192,907 | 230,000 | ||||||||||
Commitments and contingencies (Note 1 4 ) | 0 | 0 | ||||||||||
Shareholders’ equity | ||||||||||||
Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 957,035,440 and 955,363,980shares issued as of March 31, 2022 and December 31, 2021, respectively; 956,637,360 and 954,981,050 shares outstanding as of March 31, 2022 and December 31, 2021, respectively) | 6 | 6 | ||||||||||
Additional paid-in capital | 2,838,655 | 2,825,948 | ||||||||||
| Accumulated deficit | (1,500,468 | ) | (1,418,074 | ) | ||||||||
| Accumulated other comprehensive loss | (25,838 | ) | (23,645 | ) | ||||||||
| Treasury Stock (at cost, 398,080 and 382,930 shares as of March 31, 2022 and December 31, 2021, respectively) | (4,347 | ) | (4,279 | ) | ||||||||
Total shareholders’ equity | 1,308,008 | 1,379,956 | ||||||||||
Total liabilities and shareholders’ equity | 1,500,915 | 1,609,956 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of operations
Operations(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)
| Three Months Ended March 31, | |||||||||||||||||
| Notes | 2023 | 2022 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Product revenue, net | 6 | 62,797 | 46,095 | ||||||||||||||
| Collaboration revenue | — | 629 | |||||||||||||||
| Total revenues | 62,797 | 46,724 | |||||||||||||||
| Expenses: | |||||||||||||||||
| Cost of sales | (21,337) | (15,643) | |||||||||||||||
| Research and development | (48,472) | (53,854) | |||||||||||||||
| Selling, general, and administrative | (62,510) | (56,991) | |||||||||||||||
| Loss from operations | (69,522) | (79,764) | |||||||||||||||
| Interest income | 10,232 | 188 | |||||||||||||||
| Foreign currency gain | 8,912 | 2,285 | |||||||||||||||
| Other income (expenses), net | 13 | 1,234 | (4,882) | ||||||||||||||
| Loss before income tax and share of loss from equity method investment | (49,144) | (82,173) | |||||||||||||||
| Income tax expense | 7 | — | — | ||||||||||||||
| Share of loss from equity method investment | — | (221) | |||||||||||||||
| Net loss | (49,144) | (82,394) | |||||||||||||||
| Net loss attributable to ordinary shareholders | (49,144) | (82,394) | |||||||||||||||
| Loss per share - basic and diluted | 9 | (0.05) | (0.09) | ||||||||||||||
| Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | 961,444,780 | 955,499,030 | |||||||||||||||
| Loss per American Depositary Shares (“ADS”) - basic and diluted | (0.51) | (0.86) | |||||||||||||||
| Weighted-average ADSs used in calculating net loss per ADS - basic and diluted | 96,144,478 | 95,549,903 | |||||||||||||||
Three Months Ended March 31, | ||||||||||||
Notes | 2022 | 2021 | ||||||||||
$ | $ | |||||||||||
| Revenues: | ||||||||||||
Product revenue , net | 6 | 46,095 | 20,103 | |||||||||
Collaboration revenue | 6 | 629 | — | |||||||||
Total revenues | 46,724 | 20,103 | ||||||||||
| Expenses: | ||||||||||||
| Cost of sales | (15,643 | ) | (7,505 | ) | ||||||||
| Research and development | (53,854 | ) | (203,852 | ) | ||||||||
| Selling, general and administrative | (56,991 | ) | (35,838 | ) | ||||||||
| Loss from operations | (79,764 | ) | (227,092 | ) | ||||||||
| Interest income | 188 | 214 | ||||||||||
| Other expenses, net | (2,597 | ) | (6,227 | ) | ||||||||
Loss before income tax and share of income (loss) from equity method investment | (82,173 | ) | (233,105 | ) | ||||||||
| Income tax expense | 7 | 0— | 0 | |||||||||
Share of income (loss) from equity method investment | (221 | ) | 195 | |||||||||
| Net loss | (82,394 | ) | (232,910 | ) | ||||||||
| Net loss attributable to ordinary shareholders | (82,394 | ) | (232,910 | ) | ||||||||
| Loss per share - basic and diluted | 9 | (0.09 | ) | (0.26 | ) | |||||||
| Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | 955,499,030 | 883,749,280 | ||||||||||
| Loss per American Depositary Shares (“ADS“)- basic and diluted | (0.86 | ) | (2.64 | ) | ||||||||
Weighted-average ADS s used in calculating net loss perADS - basic and diluted | 95,549,903 | 88,374,928 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of comprehensive loss
Comprehensive Loss(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
| Net loss | (82,394 | ) | (232,910 | ) | ||||
| Other comprehensive (loss) income, net of tax of NaN: | ||||||||
| Foreign currency translation adjustments | (2,193 | ) | 2,900 | |||||
| Comprehensive loss | (84,587 | ) | (230,010 | ) | ||||
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Net loss | (49,144) | (82,394) | |||||||||||||||
| Other comprehensive income (loss), net of tax of nil: | |||||||||||||||||
| Foreign currency translation adjustments | (8,413) | (2,193) | |||||||||||||||
| Comprehensive loss | (57,557) | (84,587) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of shareholders’ equity
(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)
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 | 878,110,260 | 5 | 1,897,467 | (713,603 | ) | (14,524 | ) | — | — | 1,169,345 | ||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | 816,000 | 0 | 0 | — | — | — | — | 0 | ||||||||||||||||||||||||
Exercise of shares option s | 583,640 | 0 | 702 | — | — | — | — | 702 | ||||||||||||||||||||||||
Issuance of ordinary shares in connection with collaboration and license arrangement (Note 1 2 ) | 5,681,820 | 0 | 62,250 | — | — | — | — | 62,250 | ||||||||||||||||||||||||
| Issuance cost adjustment for secondary listing | — | — | 65 | — | — | — | — | 65 | ||||||||||||||||||||||||
| Share-based compensation | — | — | 7,318 | — | — | — | — | 7,318 | ||||||||||||||||||||||||
| Net loss | — | — | — | (232,910 | ) | — | — | — | (232,910 | ) | ||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | 2,900 | — | — | 2,900 | ||||||||||||||||||||||||
| Balance at March 31, 2021 | 885,191,720 | 5 | 1,967,802 | (946,513 | ) | (11,624 | ) | — | — | 1,009,670 | ||||||||||||||||||||||
Balance at December 31, 2021 | 955,363,980 | 6 | 2,825,948 | | (1,418,074 | ) | (23,645 | ) | (382,930 | ) | (4,279 | ) | 1,379,956 | |||||||||||||||||||
Issuance of ordinary shares upon vesting of restricted shares | 514,800 | 0 | 0 | — | — | — | — | — | ||||||||||||||||||||||||
Exercise of shares options | 1,156,660 | 0 | 297 | — | — | — | — | 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, 2022 | 957,035,440 | 6 | 2,838,655 | (1,500,468 | ) | (25,838 | ) | (398,080 | ) | (4,347 | ) | 1,308,008 | ||||||||||||||||||||
| Ordinary Shares | Additional paid in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 962,455,850 | 6 | 2,893,120 | (1,861,360) | 25,685 | (2,236,280) | (11,856) | 1,045,595 | |||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | 732,040 | 0 | 0 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Exercise of shares options | 4,009,460 | 0 | 1,673 | — | — | — | — | 1,673 | |||||||||||||||||||||||||||||||||||||||
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | — | — | — | — | (1,272,330) | (5,130) | (5,130) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 16,661 | — | — | — | — | 16,661 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (49,144) | — | — | — | (49,144) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | (8,413) | — | — | (8,413) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 967,197,350 | 6 | 2,911,454 | (1,910,504) | 17,272 | (3,508,610) | (16,986) | 1,001,242 | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 955,363,980 | 6 | 2,825,948 | (1,418,074) | (23,645) | (382,930) | (4,279) | 1,379,956 | |||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares upon vesting of restricted shares | 514,800 | 0 | 0 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Exercise of shares options | 1,156,660 | 0 | 297 | — | — | — | — | 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, 2022 | 957,035,440 | 6 | 2,838,655 | (1,500,468) | (25,838) | (398,080) | (4,347) | 1,308,008 | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
5
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of cash flows
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | (49,144) | (82,394) | |||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Allowance for credit loss (gain) | 1 | (1) | |||||||||
| Inventory write-down | 377 | 138 | |||||||||
| Depreciation and amortization expenses | 2,657 | 2,013 | |||||||||
| Amortization of deferred income | (582) | (708) | |||||||||
| Share-based compensation | 16,661 | 12,410 | |||||||||
| Share of loss from equity method investment | — | 221 | |||||||||
| (Gain) Loss from fair value changes of equity investment with readily determinable fair value | (441) | 6,939 | |||||||||
| Loss (gain) on disposal of property and equipment | 64 | (11) | |||||||||
| Non-cash lease expenses | 2,464 | 2,017 | |||||||||
| Foreign currency remeasurement gain | (8,912) | (2,285) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (2,852) | 14,080 | |||||||||
| Notes receivable | (8,599) | (3,513) | |||||||||
| Inventories | (6,686) | (1,475) | |||||||||
| Prepayments and other current assets | (6,470) | 1,531 | |||||||||
| Long-term deposits | 72 | (71) | |||||||||
| Value added tax recoverable | — | 3,092 | |||||||||
| Accounts payable | (327) | (28,002) | |||||||||
| Other current liabilities | (15,593) | (8,837) | |||||||||
| Operating lease liabilities | (2,141) | (2,389) | |||||||||
| Deferred income | 9,839 | 118 | |||||||||
| Other non-current liabilities | 325 | — | |||||||||
| Net cash used in operating activities | (69,287) | (87,127) | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of short-term investments | (100,000) | (120,274) | |||||||||
| Proceeds from maturity of short-term investment | 49,450 | 100,000 | |||||||||
| Disposal of property and equipment | 112 | 25 | |||||||||
| Purchases of property and equipment | (3,513) | (9,743) | |||||||||
| Purchases of intangible assets | (3) | (152) | |||||||||
| Net cash used in investing activities | (53,954) | (30,144) | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from exercises of stock options | 1,197 | 297 | |||||||||
| Employee taxes paid related to settlement of equity awards | (5,083) | (39) | |||||||||
| Net cash (used in) provided by financing activities | (3,886) | 258 | |||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (1,299) | (130) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (128,426) | (117,143) | |||||||||
| Cash, cash equivalents and restricted cash - beginning of period | 1,009,273 | 964,903 | |||||||||
| Cash, cash equivalents and restricted cash - end of period | 880,847 | 847,760 | |||||||||
| Supplemental disclosure on non-cash investing and financing activities | |||||||||||
| Payables for purchase of property and equipment | 4,232 | 668 | |||||||||
| Payables for intangible assets | 268 | 73 | |||||||||
| Payables for treasury stock | — | 55 | |||||||||
| Receivables for stock option exercise under equity incentive plans | 476 | — | |||||||||
| Right-of-use asset acquired under operating leases | 2,662 | 4,596 | |||||||||
| Receivables for dispose of property and equipment | 10 | — | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash and cash equivalents | 879,844 | 846,957 | |||||||||
| Restricted cash, non-current | 1,003 | 803 | |||||||||
| Total cash and cash equivalents and restricted cash | 880,847 | 847,760 | |||||||||
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
Operating activities | ||||||||
| Net loss | (82,394 | ) | (232,910 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Allowance for credit loss | (1 | ) | 1 | |||||
| Inventory write-down | 138 | 14 | ||||||
| Depreciation and amortization expenses | 2,013 | 1,448 | ||||||
| Amortization of deferred income | (708 | ) | (78 | ) | ||||
| Share-based compensation | 12,410 | 7,318 | ||||||
| Noncash research and development expenses | 0 | 62,250 | ||||||
| Share of (income) loss from equity method investment | 221 | (195 | ) | |||||
| Loss from fair value changes of equity investment with readily determinable fair value | 6,939 | 0 | ||||||
| (Gain) loss on disposal of property and equipment | (11 | ) | 4 | |||||
| Noncash lease expenses | 2,017 | 1,322 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 14,080 | (3,651 | ) | |||||
| Notes receivable | (3,513 | ) | 0 | |||||
| Inventories | (1,475 | ) | 502 | |||||
| Prepayments and other current assets | 1,531 | (3,386 | ) | |||||
Long - term deposits | (71 | ) | (47 | ) | ||||
| Value added tax recoverable | 3,092 | (1,558 | ) | |||||
| Accounts payable | (28,002 | ) | (21,226 | ) | ||||
| Other current liabilities | (11,122 | ) | 21,707 | |||||
| Operating lease liabilities | (2,389 | ) | (893 | ) | ||||
| Deferred income | 118 | (122 | ) | |||||
| Net cash used in operating activities | (87,127 | ) | (169,500 | ) | ||||
Cash flows from investing activities: | ||||||||
| Purchases of short-term investments | (120,274 | ) | 0 | |||||
| Proceeds from maturity of short-term investment | 100,000 | 743,902 | ||||||
| Disposal of property and equipment | 25 | — | ||||||
| Purchase of property and equipment | (9,743 | ) | (1,683 | ) | ||||
| Purchase of intangible assets | (152 | ) | (214 | ) | ||||
Net cash (used in) provided by investing activities | (30,144 | ) | 742,005 | |||||
Cash flows from financing activities: | ||||||||
| Proceeds from exercises of stock options | 297 | 702 | ||||||
| Payment of public offering costs | 0 | (973 | ) | |||||
| Employee taxes paid related to net share settlement of equity awards | (39 | ) | — | |||||
Net cash provided by (used in) financing activities | 258 | (271 | ) | |||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (130 | ) | (930 | ) | ||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (117,143 | ) | 571,304 | |||||
| Cash, cash equivalents and restricted cash - beginning of period | 964,903 | 442,859 | ||||||
| Cash, cash equivalents and restricted cash - end of period | 847,760 | 1,014,163 | ||||||
Supplemental disclosure on non-cash investing and financing activities: | ||||||||
| Payables for purchase of property and equipment | 668 | 439 | ||||||
| Payables for intangible assets | 73 | 26 | ||||||
| Payables for public offering costs | 0 | 26 | ||||||
Payables for treasury stock | 55 | — | ||||||
Supplemental disclosure of cash flow information: | ||||||||
| Cash and cash equivalents | 846,957 | 1,013,420 | ||||||
Restricted cash, non-current | 803 | 743 | ||||||
| Total cash and cash equivalents and restricted cash | 847,760 | 1,014,163 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
1. Organization and principal activitiesPrincipal Activities
Zai Lab Limited was incorporated on March 28, 2013 in the Cayman Islands as an exempted company with limited liability under the Companies LawAct of the Cayman Islands (as amended). Zai Lab Limited and its subsidiaries (collectively referred to as the “Company”) are focused on discovering, developing, and commercializing therapiesproducts and product candidates that address medical conditions with significant unmet medical needs, including in particular,the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience.
The Company’s principal operations and geographic markets are in mainland China, Hong Kong, Macau and Taiwan (hereinafter collectively referred to as “Greater China”).Greater China. The Company has a substantial presence in Greater China and the United States.
The accompanying unaudited condensed consolidated financial statements are the financial statements of the CompanyCompany.
2. Basis of Presentation and Consolidation and Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form10-Qand Article 10 of RegulationS-X.Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, 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 report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023 (the “2022 Annual Report”). The December 31, 2022 condensed consolidated balance sheet data included in this report were derived from the audited financial statements included in the 2022 Annual Report.
In the opinionthird quarter of management, these2022, we began to separately present the amount of foreign currency remeasurement gain (loss) on our statements of cash flows. This amount was previously included in changes in other current liabilities. This change did not have any impact on net cash used in operating activities. Corresponding amount in the prior period of the condensed consolidated financial statement has been presented to conform to the current period presentation.
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, 2021 condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form10-K2023.for the year ended December 31, 2021.Interim results are not necessarily indicative of full year results and the unaudited condensed consolidated financial statements may not be indicative of the Company’s future performance.
(b) Principles of consolidationConsolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries.Company. All intercompany transactions and balances among the Company and its subsidiaries are eliminated upon consolidation.
(c) Use of estimatesEstimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, estimating the current expected credit losses for financial assets, assessing the impairment of long-lived assets, discount rate of operating lease liabilities, accrual of rebate, allocationrebates, recognition of the research and development service expenses to the appropriate financial reporting period based on the progress of the research and development projects, fair value of share-based compensation expenses, and recoverability of deferred tax assetsassets. These estimates, judgments, and a lack of marketability discount ofassumptions can affect the ordinary shares issued in connection with collaboration and license arrangements (Note 12). Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying valuesreported amounts of assets and liabilities.liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
7
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(d) Fair Value Measurements
Equity investments with readily determinable fair value measurements
Description | Fair Value as of March 31, 2022 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 | 8,444 | 8,444 | ||||||
Description | Fair Value as of December 31, 202 1 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 | 15,383 | 15,383 | ||||||
Financial instruments of the Company primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, accounts payable, and other current liabilities. As of March 31, 20222023 and December 31, 2021,2022, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, notes receivable, prepayments and other current assets, 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 approximatesapproximated its fair value based on the nature of the assessment of the ability to recover these amounts.
(e) Recent accounting pronouncements
(f) Significant accounting policiesAccounting 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’s2022 Annual Report on Form10-Kfor the year ended December 31, 2021.
3. Cash and Cash Equivalents
The following table presents the Company’s cash and cash equivalents
($ in thousands):As of | ||||||||
March 31, 2022 | December 31, 2021 | |||||||
$ | $ | |||||||
| Cash at bank and in hand | 547,259 | 663,472 | ||||||
| Cash equivalents (i) | 299,698 | 300,628 | ||||||
| 846,957 | 964,100 | |||||||
| Denominated in: | ||||||||
| US$ | 782,295 | 932,888 | ||||||
| RMB (ii) | 58,569 | 23,791 | ||||||
| Hong Kong dollar (“HK$”) | 5,551 | 6,674 | ||||||
| Australian dollar (“A$”) | 495 | 475 | ||||||
| Taiwan dollar (“TW$”) | 47 | 272 | ||||||
| 846,957 | 964,100 | |||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Cash at bank and in hand | 878,786 | 1,007,423 | |||||||||
| Cash equivalents (i) | 1,058 | 1,047 | |||||||||
| 879,844 | 1,008,470 | ||||||||||
| Denominated in: | |||||||||||
| US$ | 836,981 | 957,824 | |||||||||
| RMB (ii) | 38,278 | 45,486 | |||||||||
| Hong Kong dollar (“HK$”) | 3,864 | 4,378 | |||||||||
| Australian dollar (“A$”) | 588 | 598 | |||||||||
| Taiwan dollar (“TW$”) | 133 | 184 | |||||||||
| 879,844 | 1,008,470 | ||||||||||
(i)Cash equivalents represent short-term and highly liquid investments in a money market fund.
(ii)Certain cash and bank balances denominated in RMB were deposited with banks in mainland China. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the Chinese government.
4. Inventories, Net
The Company’s net inventory balance of $20,288was $38.4 million and $18,951$31.6 million as of March 31, 20222023 and December 31, 2021,2022, respectively, and mainly consisted of finished goods purchased from Tesaro Inc., now, and from Deciphera Pharmaceuticals, LLC (“Deciphera”) for distribution in Hong Kong, mainland China and Taiwan, as well as finished goods and certain raw materials for ZEJULA
GlaxoSmithKline (“GSK”), for distribution in Hong Kong, and from NovoCure Limited (“NovoCure”) for distribution in Hong Kong and mainland China,
and NUZYRA
commercialization inmainland
China.8
As of | ||||||||
March 31, 2022 | December 31, 2021 | |||||||
$ | $ | |||||||
| Finished goods | 4,733 | 5,632 | ||||||
| Raw materials | 15,555 | 13,231 | ||||||
| Work in Progress | 0 | 88 | ||||||
| Inventories | 20,288 | 18,951 | ||||||
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The following table presents the Company’s inventories, net ($ in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Finished goods | 17,832 | 12,156 | |||||||||
| Raw materials | 20,521 | 19,029 | |||||||||
| Work in Progress | 52 | 436 | |||||||||
| Inventories, net | 38,405 | 31,621 | |||||||||
The Company writes down inventory for any excess or obsolete inventories or when the Company believes that the net realizable value of inventories is less than the carrying value. During the three months ended March 31, 2022 and 2021, theThe Company recorded write-downs of $138 and $43, in cost of revenues,sales of $0.4 million and $0.1 million for the first quarter of 2023 and 2022, respectively.
The following table presents the components of Contents
| March 31, 2023 | December 31, 2022 | ||||||||||
| Office equipment | 998 | 977 | |||||||||
| Electronic equipment | 8,315 | 7,416 | |||||||||
| Vehicle | 205 | 202 | |||||||||
| Laboratory equipment | 19,491 | 18,726 | |||||||||
| Manufacturing equipment | 16,763 | 17,055 | |||||||||
| Leasehold improvements | 11,470 | 11,300 | |||||||||
| Construction in progress | 25,546 | 24,251 | |||||||||
| 82,788 | 79,927 | ||||||||||
| Less: accumulated depreciation | (24,479) | (22,064) | |||||||||
| Property and equipment, net | 58,309 | 57,863 | |||||||||
As of | ||||||||
March 31, 2022 | December 31, 2021 | |||||||
$ | $ | |||||||
| Office equipment | 838 | 836 | ||||||
| Electronic equipment | 5,932 | 5,036 | ||||||
| Vehicle | 222 | 220 | ||||||
| Laboratory equipment | 18,130 | 17,069 | ||||||
| Manufacturing equipment | 14,721 | 14,600 | ||||||
| Leasehold improvements | 10,506 | 10,432 | ||||||
| Construction in progress | 13,126 | 11,334 | ||||||
| 63,475 | 59,527 | |||||||
| Less: accumulated depreciation | (18,248 | ) | (16,425 | ) | ||||
| Property and equipment, net | 45,227 | 43,102 | ||||||
Depreciation expensesexpense was $2.5 million and $1.9 million for the threemonths ended March 31,first quarter of 2023 and 2022, and 2021 were $1,869 and $1,340, respectively.
6. Revenue
Product revenue, net
Revenue
The Company’ssalesales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. The table below presents the Company’s net product sales for the three months ended March 31, 2022 and 2021.revenue ($ in thousands):
product
revenue is primarily derived from the | Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Product revenue - gross | 71,212 | 53,310 | |||||||||
| Less: Rebates and sales returns | (8,415) | (7,215) | |||||||||
| Product revenue - net | 62,797 | 46,095 | |||||||||
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
| Product revenue - gross | 53,310 | 46,555 | ||||||
| Less: Rebate and sales return | (7,215 | ) | (26,452 | ) | ||||
| Product revenue - net | 46,095 | 20,103 | ||||||
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.Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
| ZEJULA | 29,597 | 12,606 | ||||||
| Optune | 12,797 | 7,130 | ||||||
| QINLOCK | 2,959 | 367 | ||||||
| NUZYRA | 742 | 0 | ||||||
| Product revenue - net | 46,095 | 20,103 | ||||||
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ZEJULA | 42,680 | 29,597 | |||||||||
| Optune | 13,342 | 12,797 | |||||||||
| QINLOCK | 1,306 | 2,959 | |||||||||
| NUZYRA | 5,469 | 742 | |||||||||
| Product revenue - net | 62,797 | 46,095 | |||||||||
7. Income Tax
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 March 31,2022 2023 and December 31, 2021. NaN2022. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
8. Other current liabilities
| March 31, 2023 | December 31, 2022 | ||||||||||
| Payroll | 11,472 | 31,689 | |||||||||
| Accrued professional service fee | 7,148 | 4,080 | |||||||||
| Payables for purchase of property and equipment | 4,232 | 5,269 | |||||||||
| Accrued rebate to distributors | 11,536 | 8,443 | |||||||||
| Tax payables | 13,001 | 13,283 | |||||||||
| Others (i) | 3,492 | 4,054 | |||||||||
| Total | 50,881 | 66,818 | |||||||||
(i)Others mainly include accrued travel and business-related expenses.
9. Loss Per Share
The following table presents the computation of the following:
As of | ||||||||
March 31, 2022 | December 31, 2021 | |||||||
$ | $ | |||||||
| Payroll | 16,318 | 25,685 | ||||||
| Accrued professional service fee | 5,170 | 4,319 | ||||||
| Payables for purchase of property and equipment | 668 | 2,568 | ||||||
| Accrued rebate to distributors | 14,625 | 15,001 | ||||||
| Tax payables | 9,931 | 8,817 | ||||||
| Others (note (i)) | 3,244 | 4,421 | ||||||
| Total | 49,956 | 60,811 | ||||||
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
| Numerator: | ||||||||
| Net loss attributable to ordinary shareholders | (82,394 | ) | (232,910 | ) | ||||
| Denominator: | ||||||||
| Weighted average number of ordinary shares- basic and diluted | 955,499,030 | 883,749,280 | ||||||
| Net loss per share - basic and diluted | (0.09 | ) | (0.26 | ) | ||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to ordinary shareholders | (49,144) | (82,394) | |||||||||
| Denominator: | |||||||||||
| Weighted average number of ordinary shares - basic and diluted | 961,444,780 | 955,499,030 | |||||||||
| Net loss per share - basic and diluted | (0.05) | (0.09) | |||||||||
As
a result of the Company’s net loss for the three months ended March
non-vested
restricted shares outstanding in the respective periods were excluded from the calculation of diluted loss per share as their inclusion
10
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
would have been anti-dilutive.
| March 31 | |||||||||||
| 2023 | 2022 | ||||||||||
| Share options | 86,242,060 | 80,514,330 | |||||||||
| Non-vested restricted shares | 32,154,670 | 9,846,360 | |||||||||
As of | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
| Share options | 80,514,330 | 86,932,740 | ||||||
Non-vested restricted shares | 9,846,360 | 4,800,100 | ||||||
10. Related party transactions
The table below sets forth the major related party and the relationship with the Company as of March 31, 2021:
expenses for product research and development services provided by
MEDx (Suzhou) Translational Medicine Co., LtdThe 2017 Plan providesprovided 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. Accordingly, on January 1,
On June 22, 2022, at the number2022 Annual General Meeting of shares reserved under the 2017 Plan
The options granted have a contractual term of ten years and generally vest ratably over a five-year period, with 20% of the awards vesting beginningon each anniversary of the grant date, subject to continued employment with the Company on the vesting date. The restricted shares granted generally vest ratably over a specified period on the anniversary date one year afterof the grant date.
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
| Selling, general and administrative | 4,069 | 3,259 | ||||||
| Research and development | 3,138 | 2,290 | ||||||
| Total | 7,207 | 5,549 | ||||||
During the first quarter of 2023, the Company granted 92,640 share options and 266,570 non-vested restricted shares will vestunder the 2022 Plan. The share options were granted at an exercise price of $3.99 per share. The share options granted were valued using the Black-Scholes model, and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Company for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
11
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The Company measuredfollowing table presents the fair value of thenon-vestedrestricted shares as of respective grant dates and recognized the amount asstock-based compensation expense overthat has been reported in the deemed service period using a graded vesting attribution model on a straight-line basis.Company’s condensed consolidated statements of operations and comprehensive loss as follows ($ in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Selling, general and administrative | 10,063 | 6,992 | |||||||||
| Research and development | 6,598 | 5,418 | |||||||||
| Total | 16,661 | 12,410 | |||||||||
As of March 31, 2022,2023, there was $68,292 of total unrecognized share-based compensation expense related tonon-vestedrestricted shares. The Company recorded compensation expense related to the unvested share options and unvested restricted shares of$5,203 $90.9 million and $1,769 for the three months ended March 31, 2022 and 2021,$117.6 million, respectively, which were classified in the accompanying unaudited condensed consolidated statementsCompany expects to recognize over a weighted-average period of operations as follows:3.39 years and 3.38 years, respectively.
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
| Selling, general and administrative | 2,923 | 1,211 | ||||||
| Research and development | 2,280 | 558 | ||||||
| Total | 5,203 | 1,769 | ||||||
12. LicensesLicense and collaborative arrangements pursuantCollaboration Agreements
The Company may enter into collaboration agreements with third parties to which milestone payments were made
13. Other Income (Expenses), Net
The following table presents the Company’s other income (expenses), net ($ in future contingent milestone payments dependent upon the achievement of contractually specified development milestones, such as regulatory approval for the product candidates, which may be before the Company 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 not occur.
thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Government grants | — | 1,576 | |||||||||
| Gain (loss) on equity investments with readily determinable fair value | 441 | (6,939) | |||||||||
| Others miscellaneous gain | 793 | 481 | |||||||||
| Total | 1,234 | (4,882) | |||||||||
The Company’s ability to pay dividends may depend on the Company receiving distributions of funds from its Chinese subsidiaries. Relevant Chinese laws and regulations permit payments of dividends by the Company’s Chinese subsidiaries only out of its retained earnings, if any, as determined in accordance with Chinese 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 Company’s Chinese subsidiaries.
after-tax
profit until such reserve has reached 50%of its respective registered capital based on the enterprise’s Chinese statutory accounts. A domestic enterprise may provide discretionary surplus reserve, at the discretion of the Board of Directors, from the profits determined in accordance with the enterprise’s Chinese statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Company’s Chinese subsidiaries were established as domestic enterprises and therefore are subject to the above-mentioned restrictions on distributable profits.
12
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
As a result of these Chinese laws and regulations, subject to the limits discussed above that require annual appropriations of 10% ofassets to the Company.assets.
after-tax
profit to be set aside, prior to payment of dividends, as a general reserve fund, the Company’s Chinese subsidiaries are restricted in their ability to transfer out a portion of their net Foreign exchange and other regulation in mainland China may further restrict the Company’s Chinese subsidiaries from transferring out funds to the Company in the form of dividends, loans, and advances. As of March 31, 20222023 and December 31, 2021,2022, amounts restricted are the$406,010.$456.0 million.
paid-in
capital of the Company’s Chinese subsidiaries, which both amounted to (a) Purchase commitments
(b) ContingenciesLegal Proceedings
The Company is not currently a party to or assigneeany material legal proceedings.
(c) Indemnifications
In the normal course of license and collaborationbusiness, the Company enters into agreements that indemnify others for certain liabilities that may require itarise in connection with a transaction or certain events and activities. To date, the Company has not paid any claims or been required to make future payments relatingdefend any action related to milestone fees and royalties on future sales of licensed products (Note 12).
its indemnification obligations.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 2022 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes included in “Item 1. Financial Statements” in this report.
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 focused on discovering, developing, and commercializing innovative products that targetaddress medical conditions with significant unmet needs affecting patients in Greater China and worldwide, particularly in the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience. As of May 5, 2022, weWe intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide. We currently have four commercializedcommercial products – ZEJULA, Optune, QINLOCK, and NUZYRA – that have received marketing approval in one or more territories in Greater China and twelvethirteen 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 toin our research and development activities over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. Our ability to generate profits and to generate positive cash flow from operations over the next several years depends upon our ability to successfully market our four commercial products – ZEJULA, Optune, QINLOCK and NUZYRA –to successfully expand the indications for these products and 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 commercialsales-based milestones as well as certain royalties at tiered royaltiespercentage rates based on theannual net sales of the licensed products. These upfront payments and milestone payments uponproducts in the achievementlicensed territories. We recorded $1.0 million of certain development and regulatory milestones are recorded in research and development expense in our unaudited condensed consolidated financial statements. We did not accrue any such paymentsrelated to upfront license fees and development milestones during the three months ended March 31, 2022.first quarter of 2023. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
Recent Developments
Commercial Products
•National Drug Reimbursement List (NRDL) Implementation: In January 6, 2022, we announced that2023, QINLOCK was included in the NMPA accepted the new drug application (NDA)NRDL for margetuximab, an investigational,Fc-engineeredmonoclonal antibody that targets HER2. The margetuximab NDA isfourth-line treatment of advanced gastrointestinal stromal tumor patients and NUZYRA was included for the treatment of adult patientsadults with community-acquired bacterial pneumonia and acute bacterial skin and skin structure infections. The updated NRDL officially took effect on March 1, 2023.
•Supplemental Insurance Plan Coverage: As of March 31, 2023, Optune was listed in 96 regional customized health insurance plans guided by provincial or municipal governments throughout mainland China, or supplemental insurance plans, up from 87 as of December 31, 2022 and 37 as of March 31, 2021.
14
Product Candidates
We continued to advance our product candidates through our research and development and commercial operations, including the following developments with respect to our clinical trials, regulatory approvals, and commercialization efforts:
Oncology
•TIVDAK® (Tisotumab Vedotin, Antibody Drug Conjugate (“ADC”)): In April 2023, Zai Lab partner Seagen Inc. (“Seagen”) presented the interim analysis for the Phase II innovaTV 207 study in head and neck cancer at the 2023 American Association of Cancer Research (“AACR”) Annual Meeting. At data cutoff (November 28, 2022), confirmed objective response rate (“ORR”) was 40% (95% confidence interval (“CI”): 16.3, 67.7), with 1 complete response and 5 partial responses. The safety profile was generally consistent with that observed across TIVDAK monotherapy clinical studies. In addition, in February 2023, Seagen completed global target patient enrollment for the Phase III confirmatory innovaTV 301 study in second- or third-line recurrent or metastatic HER2-positive breast cancer who have received two or more prior anti-HER2 regimens, at least one of which was for metastatic disease,cervical cancer. We are participating in combination with chemotherapy.
•KRAZATI® (Adagrasib, KRASG12C): In April 2023 and May 2023, our partner Mirati Therapeutics, Inc. (“Mirati”) announced the inclusion of adagrasib as the only KRAS inhibitor in thePANOVA-3trial, a Phase 3 pivotal trial of Tumor Treating Fields in patients with pancreatic cancer.PANOVA-3is a global, open-label, randomized Phase III trial evaluating the efficacy of TTFields administered concomitantly with gemcitabine andnab-paclitaxelas front-line treatment National Comprehensive Cancer Network (“NCCN”) Guidelines for Central Nervous System (“CNS”) Cancers for patients with unresectable, locally advancedKRASG12C-mutated non-small cell lung cancer (“NSCLC”) with CNS metastases and for KRASG12C-mutation positive pancreatic cancer. The primary endpoint is overall survival. Secondary endpoints include progression-free survival, local progression-free survival, objective response rate,one-yearsurvival rate, qualityadenocarcinoma cancer patients, respectively. Also, in April 2023, Mirati presented updated clinical data for adagrasib as a targeted treatment for pancreatic ductal adenocarcinoma, biliary tract cancer, and other solid tumors harboring a KRASG12C mutation at the 2023 American Society of life, pain-free survival, resectability rateClinical Oncology (“ASCO”) Plenary series. Data was concurrently published in the Journal of Clinical Oncology.
•Bemarituzumab (FGFR2b): In March 2023, we obtained Clinical Trial Application (“CTA”) approval for the Phase III FORTITUDE-101 study of bemarituzumab plus chemotherapy, versus placebo plus chemotherapy, in first-line gastric cancer with FGFR2b overexpression.
•Odronextamab (CD20xCD3): In March 2023, we completed enrollment in China for the registrational global Phase II ELM-2 trial in B-cell non-Hodgkin lymphoma.
•ZL-2313 (BLU-945, EGFR): In April 2023, our partner Blueprint Medicines Corporation (“Blueprint”) presented novel real-world data showing first-line osimertinib had worse outcomes in EGFR L858R+ vs. ex19del+ NSCLC at the 2023 AACR Annual Meeting. Data also demonstrated additive effects of ZL-2313 with osimertinib in preclinical models of tumor progression, reinforcing the clinical need addressed by the SYMPHONY study in first-line EGFR L858R+ NSCLC.
•ZL-1211 (Claudin18.2, Global Rights): In April 2023, we presented new data including a translational and toxicity.biomarker data analysis at the 2023 AACR Annual Meeting.
Autoimmune Disorders, Infectious Diseases, and Neuroscience
•Sulbactam-Durlobactam (SUL-DUR, Asia Pacific Rights):In February 2022,April 2023, our partner Entasis Therapeutics, Inc. (“Entasis”), a wholly owned subsidiary of Innoviva, Inc., announced that the CenterFDA’s Antimicrobial Drugs Advisory Committee unanimously voted in support of approval of its New Drug Application (“NDA”) for Drug Evaluation (CDE)SUL-DUR based on a favorable benefit-risk assessment of the NMPA granted Breakthrough Therapy Designation for repotrectinibSUL-DUR for the treatment of patientsadults with ROS1-positive metastatic NSCLC who have not been treated with a ROS1 TKI. The breakthrough therapy designation was supportedhospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia caused by the initial data from both global and ChineseTKI-naïveROS1-positive NSCLC patients enrolledsusceptible strains of Acinetobacter baumannii-calcoaceticus complex (“Acinetobacter”). We participated in the global Phase I/IITRIDENT-1study. We plan to participateIII registrational ATTACK trial in all cohorts ofGreater China, and the globalTRIDENT-1study.NMPA accepted our NDA in February 2023, after granting priority review in January 2023.
•KarXT (Xanomeline-Trospium, M1/M4-Preferring Muscarinic Acetylcholine Receptor): In March 2022, we presented2023, our partner Karuna Therapeutics, Inc. announced positive results from the Phase 3 PRIME studyIII EMERGENT-3 trial of ZEJULA (niraparib) as maintenance therapy at the Society of Gynecologic Oncology (SGO) 2022 Annual Meeting. ZEJULA demonstratedKarXT in schizophrenia. The trial met its primary endpoint, with KarXT demonstrating a statistically significant and clinically meaningful improvement8.4-point reduction in progression-free survival (PFS)Positive and Negative Syndrome Scale (PANSS) total score compared to placebo (-20.6 KarXT vs. -12.2 placebo; p<0.0001) at Week 5 (Cohen’s d effect size of 0.60). Consistent with prior trials, KarXT demonstrated an early and sustained statistically significant reduction of symptoms from Week 2 (p<0.05) through the end of the trial as assessed by PANSS total score. The pharmacokinetic (“PK”) study in mainland China is ongoing, and the CTA for a registrational bridging study in mainland China was approved in January 2023.
15
Corporate Updates
We continued to enhance our portfolio through strategic partnerships and to strengthen our organizational structure to support the evolving needs of our business:
•Business Development: In April 2023, we entered into a strategic partnership and global license agreement with MediLink Therapeutics (Suzhou) Co., Ltd. (“MediLink”). Through this collaboration, we expanded our lung cancer franchise and global oncology pipeline with a tolerable safety profilenext generation DLL3 ADC program, ZL-1310. DLL3 is an inhibitor of the Notch ligand that is overexpressed in Chinese patients with newly diagnosed advanced epithelial ovarian, fallopian tube, or primary peritonealsmall cell lung cancer (collectively termed as ovarian cancer) followingand neuroendocrine tumors. ZL-1310 has demonstrated an encouraging pre-clinical profile. ZL-1310 is progressing to the clinical stage, and we plan to focus on advancing its global development.
•Organizational Update: As we enter into a responsestage of further growth, productivity, and global opportunities, we have promoted Joshua Smiley to platinum-based chemotherapy, regardlessthe role of biomarker status. InPresident and Chief Operating Officer, effective April 1. Mr. Smiley joined the PRIME study, median PFS was significantly longer for patients treated with niraparib compared to placebo: 24.8 months versus 8.3 months, hazard ratio (HR), 0.45; p<0.001.
The Draft Archives Rules require that, in relation to the overseas securities offering and listing activities of Chinese domestic enterprises, such domestic enterprises, as well as securities companies and securities service institutions providing relevant securities services, are required to strictly comply with the relevant requirements on confidentiality and archives management, establish a sound confidentiality and archives system and take necessary measures to implement their confidentiality and archives management responsibilities.
In February 2023, the SAMR issued the Measures for Comment), or the Draft Implementing Rules, which closely scrutinizes all HGRs-related activity from upstream collection of HGR materials to downstream exploitation and external provision of the HGR materials and data derived therefrom (“HGR data”). The Draft Implementing Rules are intended to provide operational details and clarify questions that have emerged in the past few years after the Regulation on the Administration of Internet Advertising, which became effective on May 1, 2023 (the “Internet Advertising Measures”). The Internet Advertising Measures reiterate requirements under the PRC Advertising Law for advance approval from local administrative authorities to advertise pharmaceutical products and impose additional restrictions on the form and content of advertisements for pharmaceutical products.
Measures on Ethics Review for Life Sciences and Medical Research Involving Human Genetic Resources became effective. UnderSubjects
In February 2023, the Draft Implementing Rules, clinical studies conductedNational Health Commission, together with three other government agencies, jointly released the Measures on Ethics Review for purpose of obtaining marketing authorizationLife Sciences and Medical Research Involving Human Subjects (the “Ethics Review Measures”). The Ethics Review Measures set forth criteria and specific steps for drugsethics reviews for life sciences and medical devices inresearch involving human subjects carried out by medical institutions, colleges and universities, or scientific research institutes located within mainland China if not involvingand elaborate the export of HGR materials, will be eligiblecontent requirements for a notification filing (as opposedinformed consent forms. Clinical trials carried out by PRC clinical trial sites and sponsored by us are generally subject to the advance approval) if the HGR materials are collected by sites, and processed by sites or an onshore third-party lab specified in the clinical trial protocol. Ethics Review Measures.
The Draft Implementing Rules provide clearer guidance on how to allocate the intellectual property derived from a Sino-foreign cooperative research utilizing China-Sourced HGRs. The Draft Implementing Rules enumerate situations where a security review is required for external provision or utilization in an open manner of HGR data, such as external provision or utilization in an open manner of HGR data about important genetic pedigrees, HGR data from specific regions, and exome sequencing and genome sequencing information of over 500 individuals.
Regulations for the Administration of the Imported Urgently Needed Drugs and Medical Devices or Order 739,in Bo’ao
In March 2023, the People’s Government of Hainan Province published the Regulations for the Administration of the Imported Urgently Needed Drugs and Medical Devices in the Hainan Bo’ao Lecheng International Medical Tourism Pilot Zone (the “BMTPZ”), which became effective on JuneMay 1, 2021. Thistop-level2023. In accordance with these regulations, medical device administrative regulation contains a numberinstitutions in the BMTPZ meeting certain qualifications may apply to use our products that meet specified requirements, including drugs or medical devices that address specific urgent clinical needs that cannot be met with existing approved products. Such medical institution would bear the primary responsibilities for the safety risks associated with the use of important changes, the practical effects of which will be implemented in corresponding auxiliary regulationssuch urgently needed drugs and rules. Recently, a series of regulations have been amended accordingly to support the implementation of Order 739 in terms of the production, distribution and clinical trials of medical devices.
16
Counter-Espionage Law
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.research and development, including internal discovery activities. 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 March 31, 2022.
2023.We have financed our activities primarily through private placements, our initial public offering on Nasdaq in September 2017 and multipleaour secondary listing and initial public offering on the Hong Kong Stock Exchange in September 2020. Through March 31, 2022,2023, we have raised approximately $164.6 million from private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us from our initial public offering,follow-onofferings and secondary listing.follow-on offerings. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $87.1$69.3 million and $169.5$87.1 million for the three months ended March 31,first quarter of 2023 and 2022, and 2021, respectively. We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our twelvethirteen late-stage clinical product candidates, research and develop our clinical- and
follow-on
offerings on Nasdaq and 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 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;
•facilities and other expenses, which include office leases and other overhead expenses;
•costs associated with
andpre-clinical
activities and regulatory operations;•expenses associated with the construction and maintenance of our manufacturing facilities; and
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 discover, develop, commercialize, develop and manufacture our products and assets. These increases will likely include expanded infrastructure as well as increased headcount, increasedand share-based compensation, charges, increased product distribution, promotion, and promotion costs, expanded infrastructure and increased costs for insurance.insurance costs. We also anticipate to incurincurring additional legal, compliance, accounting, and investor and public relations expenses associated with being a public company.
company listed on both Nasdaq and the Hong Kong Stock Exchange.Our Ability to Commercialize Our Product Candidates
As of March 31, 2022, twelveMay 3, 2023, thirteen of our product candidates are in late-stage clinical development and various others are in clinical andnevernot occur. Certain of our product candidates may require additional
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 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 results of operations have been, and we expect them to continue to be, affected by our licensing,license and 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 commercialsales-based milestones for the relevant products under these agreements as well as certain royalties at tiered royaltiespercentage rates 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 in our unaudited condensed consolidated financial statementsrelated to upfront license fees and totaleddevelopment milestones of $1.0 million and nil and $171.3 million for the three months ended March 31,first quarter of 2023 and 2022, respectively. We may be obligated to pay up to an additional aggregate amount of approximately $5,299.4 million in development, regulatory, and March 31, 2021, respectively.sales-based milestone payments as well as certain royalties at tiered percentage rates on annual net sales. These milestones may occur before the Company has commercialized or received any revenue from the licensed product or they may not occur at all. If these milestones do occur, we view related payments as positive because they signify that the product is advancing toward potential commercial launch or achieving higher sales levels.
The COVID-19 Pandemic
Our results of operations have been adversely affected by the COVID-19 pandemic, including government actions and quarantine measures taken in response in the first quarter of 2022 or increased infection rates in the first quarter of 2023 after COVID restrictions were lifted or eased, particularly in mainland China where our operations and product markets are primarily located. For example, the pandemic adversely affected our net product revenues in the first quarter of 2023 and 2022 through decreased patient access to our products, such as through reduced hospital access during periods of lockdown or high infection rates, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. The pandemic has also adversely affected our manufacturing and supply chain and our research and development, sales, marketing, and clinical trial activities. The operations of our suppliers, CROs, CMOs, and other contractors and third parties on which we rely also have been adversely affected.
18
Results of Operations
The following table presents our results of operations ($ in thousands):
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Product revenue, net | 62,797 | 46,095 | 16,702 | 36 | % | |||||||||||||||||||||
| Collaboration revenue | — | 629 | (629) | (100) | % | |||||||||||||||||||||
| Total revenues | 62,797 | 46,724 | 16,073 | 34 | % | |||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Cost of sales | (21,337) | (15,643) | (5,694) | 36 | % | |||||||||||||||||||||
| Research and development | (48,472) | (53,854) | 5,382 | (10) | % | |||||||||||||||||||||
| Selling, general, and administrative | (62,510) | (56,991) | (5,519) | 10 | % | |||||||||||||||||||||
| Loss from operations | (69,522) | (79,764) | 10,242 | (13) | % | |||||||||||||||||||||
| Interest income | 10,232 | 188 | 10,044 | 5343 | % | |||||||||||||||||||||
| Foreign currency gain | 8,912 | 2,285 | 6,627 | 290 | % | |||||||||||||||||||||
| Other income (expenses), net | 1,234 | (4,882) | 6,116 | (125) | % | |||||||||||||||||||||
| Loss before income tax and share of loss from equity method investment | (49,144) | (82,173) | 33,029 | (40) | % | |||||||||||||||||||||
| Income tax expense | — | — | — | — | % | |||||||||||||||||||||
| Share of loss from equity method investment | — | (221) | 221 | (100) | % | |||||||||||||||||||||
| Net loss | (49,144) | (82,394) | 33,250 | (40) | % | |||||||||||||||||||||
| Net loss attributable to ordinary shareholders | (49,144) | (82,394) | 33,250 | (40) | % | |||||||||||||||||||||
Revenues
Product Revenue
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||
| Product revenue - gross | $ | 71,212 | $ | 53,310 | $ | 17,902 | 34 | % | ||||||||||||||||||
| Less: Rebates and sales return | (8,415) | (7,215) | (1,200) | 17 | % | |||||||||||||||||||||
| Product revenue - net | 62,797 | 46,095 | 16,702 | 36 | % | |||||||||||||||||||||
Three months ended March 31, | ||||||||||||||||
(in thousands) | 2022 | % | 2021 | % | ||||||||||||
Revenues: | ||||||||||||||||
Product revenue, net | $ | 46,095 | 98.7 | $ | 20,103 | 100.0 | ||||||||||
Collaboration revenue | 629 | 1.3 | — | — | ||||||||||||
Total | $ | 46,724 | 100.0 | $ | 20,103 | 100.0 | ||||||||||
Our product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong. The amountKong, net of sales returns and rebates to distributors in mainland China with respect to the sales of these products. Our net product revenue increased by $16.7 million in the first quarter of ZEJULA2023, primarily driven by increased sales volumes. Although our sales volumes increased, these volumes were negatively affected by the effects of the COVID-19 pandemic, which decreased patient access to our products, such as through reduced hospital access during periods of lockdown or high infection rates, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. Our product revenue for the three months ended March 31, 2022 and March 31, 2021, respectively, was adjusted by the normal process in mainland Chinafirst quarter of 2023 included a negative $3.9 million adjustment to compensate distributors for products recently soldsales of QINLOCK and NUZYRA at prices prior to the price reductions made in connection with their addition to the NRDL implementation. in the first quarter of 2023. Such sales rebates to distributors on previously purchased products are customary in our industry to compensate those distributors for the new NRDL selling price.
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The following table disaggregatespresents net revenue by product for the three months ended March 31, 2022 and 2021, respectively:($ in thousands):
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||
| ZEJULA | $ | 42,680 | $ | 29,597 | $ | 13,083 | 44 | % | ||||||||||||||||||
| Optune | 13,342 | 12,797 | 545 | 4 | % | |||||||||||||||||||||
| QINLOCK | 1,306 | 2,959 | (1,653) | (56) | % | |||||||||||||||||||||
| NUZYRA | 5,469 | 742 | 4,727 | 637 | % | |||||||||||||||||||||
| Total product revenue, net | $ | 62,797 | $ | 46,095 | $ | 16,702 | 36 | % | ||||||||||||||||||
(in thousands) | Three months ended March 31, | |||||||||||||||
2022 | % | 2021 | % | |||||||||||||
ZEJULA | $ | 29,597 | 64.2 | $ | 12,606 | 62.7 | ||||||||||
Optune | 12,797 | 27.8 | 7,130 | 35.5 | ||||||||||||
QINLOCK | 2,959 | 6.4 | 367 | 1.8 | ||||||||||||
NUZYRA | 742 | 1.6 | — | — | ||||||||||||
Total product revenue, net | $ | 46,095 | 100.0 | $ | 20,103 | 100.0 | ||||||||||
Cost of Sales
Cost of sales increased by $8.1$5.7 million to $15.6$21.3 million forin the three months ended March 31, 2022 from $7.5 million for the three months ended March 31, 2021first quarter of 2023 primarily due to increasing sales volume, product costsvolumes and higher royalties during the three months ended March 31, 2022.royalties.
Research and Development Expenses
The following table sets forthpresents the components of our research and development expenses for the respective period indicated.
($ in thousands):(in thousands) | Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||
2022 | % | 2021 | % | |||||||||||||||||||||||||||||||||||||||
Research and development expenses: | ||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||
Personnel compensation and related costs | $ | 24,802 | 46.1 | $ | 12,697 | 6.2 | Personnel compensation and related costs | $ | 28,655 | $ | 24,802 | $ | 3,853 | 16 | % | |||||||||||||||||||||||||||
Licensing fees | — | — | 171,282 | 84.0 | Licensing fees | 1,000 | — | 1,000 | 100 | % | ||||||||||||||||||||||||||||||||
CROs/CMOs/Investigators expenses | 23,550 | 43.7 | 15,526 | 7.6 | CROs/CMOs/Investigators expenses | 12,439 | 23,550 | (11,111) | (47) | % | ||||||||||||||||||||||||||||||||
Other costs | 5,502 | 10.2 | 4,347 | 2.2 | Other costs | 6,378 | 5,502 | 876 | 16 | % | ||||||||||||||||||||||||||||||||
Total | $ | 53,854 | 100.0 | $ | 203,852 | 100.0 | Total | $ | 48,472 | $ | 53,854 | $ | (5,382) | (10) | % | |||||||||||||||||||||||||||
Research and development expenses decreased by $150.0$5.4 million to $53.9 million forin the three months ended March 31, 2022 from $203.9 million for the three months ended March 31, 2021 first quarter of 2023 primarily due to:
•a decrease of $171.3$11.1 million in licensing fees in connection with the upfront and milestone fee paid for licensing agreementCROs/CMOs/Investigators expenses due to no new licensing for the three months ended March 31, 2022;compensation from collaboration partners related to our clinical trials; partially offset by
•an increase of $12.1$3.9 million in personnel compensation and related costs primarily attributable to increased employee compensation costs due to headcount growth during the three months ended March 31, 2022 and the grants of new share options and restricted shares and the continued vesting of option and restricted shares to certain employees,share awards; and
•an increase of $8.0$1.0 million in CROs/CMOs/Investigators expenseslicensing fees in the three months ended March 31, 2022 as we advanced our drug candidate pipeline.connection with a milestone payment for a collaboration agreement.
The following table summarizespresents our research and development expenses by program for the three months ended March 31, 2022 and 2021, respectively:
($ in thousands):| Three Months Ended March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||
| Clinical programs | $ | 12,528 | $ | 22,852 | $ | (10,324) | (45) | % | ||||||||||||||||||
| Pre-clinical programs | 2,481 | 2,565 | (84) | (3) | % | |||||||||||||||||||||
| Unallocated research and development expenses | 33,463 | 28,437 | 5,026 | 18 | % | |||||||||||||||||||||
| Total | $ | 48,472 | $ | 53,854 | $ | (5,382) | (10) | % | ||||||||||||||||||
(in thousands) | Three months ended March 31, | |||||||||||||||
2022 | % | 2021 | % | |||||||||||||
Research and development expenses: | ||||||||||||||||
Clinical programs | $ | 22,852 | 42.4 | $ | 186,256 | 91.4 | ||||||||||
Pre-clinical programs | 2,565 | 4.8 | 2,500 | 1.2 | ||||||||||||
Unallocated research and development expenses | 28,437 | 52.8 | 15,096 | 7.4 | ||||||||||||
Total | $ | 53,854 | 100.0 | $ | 203,852 | 100.0 | ||||||||||
Research and development expenses attributable to clinical programs decreased by $163.4 million from $186.3$10.3 million during the three months ended March 31, 2021 (which included the licensing feesfirst quarter of $171.3 million)2023 primarily driven by decreased CROs/CMOs/Investigators expenses due to $22.9 million during the three months ended March 31, 2022. Research and development expenses attributablecompensation from collaboration partners related to our clinical trials.
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Selling, General, and Administrative Expenses
The following table sets forth the components ofpresents our selling, general and administrative expenses for the respective period indicated.
by program ($ in thousands):| Three Months Ended March 31, | Change | |||||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||
| Personnel compensation and related costs | $ | 40,914 | $ | 38,203 | $ | 2,711 | 7 | % | ||||||||||||||||||
| Professional service fees | 11,983 | 7,433 | 4,550 | 61 | % | |||||||||||||||||||||
| Other costs | 9,613 | 11,355 | (1,742) | (15) | % | |||||||||||||||||||||
| Total | $ | 62,510 | $ | 56,991 | $ | 5,519 | 10 | % | ||||||||||||||||||
(in thousands) | Three months ended March 31, | |||||||||||||||
2022 | % | 2021 | % | |||||||||||||
Selling, General and Administrative Expenses: | ||||||||||||||||
Personnel compensation and related costs | $ | 38,203 | 67.0 | $ | 23,412 | 65.3 | ||||||||||
Professional service fees | 7,433 | 13.0 | 3,583 | 10.0 | ||||||||||||
Other costs | 11,355 | 20.0 | 8,843 | 24.7 | ||||||||||||
Total | $ | 56,991 | 100.0 | $ | 35,838 | 100.0 | ||||||||||
Selling, general and administrative expenses increased by $21.2$5.5 million to $57.0 million forin the three months ended March 31, 2022 from $35.8 million for the three months ended March 31, 2021first quarter of 2023, primarily due to:
•an increase of $14.8 million in personnel compensation and related costs which was primarily attributable to increased commercial and administrative personnel costs due to headcount growth during the three months ended March 31, 2022 and the grants and vesting of share options and restricted shares to certain employees;
•an increase of $2.5$2.7 million in personnel compensation and related costs which was primarily driven by headcount growth, particularly in commercial and administrative personnel, and grants of share options and restricted shares and the continued vesting of option and restricted share awards; partially offset by
•a decrease of $1.7 million in other costs mainly includingrelated to selling, rental, and administrative expenses primarily attributable to thefor commercial operationoperations in mainland China, Hong Kong, and Taiwan.
Interest Income
Interest income were $0.2 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.
Foreign Currency Gain
Foreign currency gain increased by $6.6 million forto $8.9 million in the three months ended March 31, 2021,first quarter of 2023 primarily as a resultdriven by increased remeasurement gain due to depreciation of an increasethe U.S. dollar against the Renminbi (“RMB”).
Other Income (Expenses), Net
Other income, net was $1.2 million in foreign exchange gain and governmental subsidiesthe first quarter of 2023, compared to other expense, net of $4.9 million in the first quarter of 2022, primarily due to the shift from $6.9 million in loss to $0.4 million in gain on equity investment lossinvestments with readily determinable fair value.
Income Tax Expense
There was no change in MacroGenics.
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 periodically 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.
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Revenue recognitionRecognition
Description
In mainland China, we sell our 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. EstimatedWe estimate 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
Actual amounts of rebates ultimately paid or billed may differ from our estimates. We will reassessregularly review the factors and judgments underlying these estimates forand adjust the amounts of rebates periodically.accordingly. If actual results in the future vary from our estimates, we willalso adjust these estimates accordingly, which would affect net product revenue and earnings in the period such variances become expected or known.
Research and Development Expenses
Description
Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development services and have no alternative future uses.
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 not 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 research and development expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.Sensitivity of Estimate to Change
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual 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 our prior estimates of research and development expenses.
Share-Based Compensation
Description
To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expensesexpense relating to those awards are reversed.
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Judgments and Uncertainties
We determine the fair value of the stock options granted to employees using the Black-Scholes option valuation model. Using this model, fair value is 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 ADS,ADSs, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the options’ expected lives.lives of the options. Expected volatility has been estimated based on actual movements in some comparable companies’ stock pricesprice over the most recent historical periods equivalent to the options’ expected lives. Expected livesThe expected term of the share options represents the average period the share options are principally based on ourexpected to remain outstanding. As the Company does not have sufficient historical information since its IPO to develop reasonable expectations about future exercise experience with previous option grants.patterns and post-vesting employment termination behavior, the expected term of options granted is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future.
Sensitivity of Estimate to Change
The assumptions used in this method to determine the fair value of ordinaryour option shares consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the determination of fair value of the stock options.option shares. If factors change or different assumptions are used, theour share-based compensation expenses could be materially different for any period.
Income Taxes
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
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.
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 and 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 March 31, 20222023 and 2021,2022, we did not have any significant unrecognized uncertain tax positions.
23
equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us fromin our initial public offering secondary listing and subsequentofferings.
follow-on
offerings on Nasdaq and our initial public offering on the Hong Kong Stock Exchange. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $87.1$69.3 million and $169.5$87.1 million for the three months endedfirst quarter of 2023 and 2022, respectively. As of March 31, 2022 and 2021, respectively. We2023, we have commitments for capital expenditureexpenditures of $22.3$6.0 million, as of March 31, 2022, mainly for the purpose of plant construction and installation. We currently are not awareFor information on our research and development activities and expenditures see the Research and Development Expenses, License and Collaboration Arrangements, and Results of any events that are reasonably likely to cause a material changeOperations sections in the relationship between costs and revenues.MD&A above.
As of March 31, 2022,2023, we had cash and cash equivalents, restricted cash, and short-term investmentinvestments of $1,313.0$931.4 million. Our expenditures are principally focused on research and development and are largely discretionary. As such, we believe that our current losses and cash used in operations do not present going concern issues. Based on our current operating plan, we expect that our cash, cash equivalents, restricted cash, and short-term investments as of May 9, 2023, will enable us to fund our operating expenses and capital expendituresexpenditure requirements for at least the next 12 months. However, in order to bring to fruition our research and development objectives, we willmay ultimately need additional funding sources, and there can be no assurances that theysuch funding will be made available.available to us on acceptable terms or at all.
The following table providespresents information regarding our cash flows for the three months ended March 31, 2022 and 2021:
($ in thousands):Three months ended March 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Net cash used in operating activities | $ | (87,127 | ) | $ | (169,500 | ) | ||
Net cash (used in) provided by investing activities | (30,144 | ) | 742,005 | |||||
Net cash provided by (used in) financing activities | 258 | (271 | ) | |||||
Effect of foreign exchange rate changes | (130 | ) | (930 | ) | ||||
Net (decreases) increases in cash, cash equivalents and restricted cash | $ | (117,143 | ) | $ | 571,304 | |||
| Three Months Ended March 31, | Change | |||||||||||||||||||
| 2023 | 2022 | $ | ||||||||||||||||||
| Net cash used in operating activities | $ | (69,287) | $ | (87,127) | $ | 17,840 | ||||||||||||||
| Net cash used in investing activities | (53,954) | (30,144) | (23,810) | |||||||||||||||||
| Net cash (used in) provided by financing activities | (3,886) | 258 | (4,144) | |||||||||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (1,299) | (130) | (1,169) | |||||||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (128,426) | $ | (117,143) | $ | (11,283) | ||||||||||||||
Net Cash Used in Operating Activities
Net cash used in operating activities
Net cash (used in) provided by investing activitiesCash Used in Investing Activities
Net cash used in investing activities was $30.1increased by $23.8 million to $54.0 million for the three months ended March 31, 2022first quarter of 2023. The increase was primarily due to a decrease of $50.6 million in proceeds from the maturity of short-term investments, partially offset by a decrease of $20.3 million in purchases of short-term investments and a decrease of $6.2 million in purchases of property and equipment.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $3.9 million for the first quarter of 2023 compared to net cash provided by investing activities of $742.0 million for the three months ended March 31, 2021. The decrease in cash provided by investing activities was primarily due to the decrease of proceeds from maturity of short-term investments during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Recently Issued Accounting Standards
For more information regarding recently issued accounting standards, please see “ItemPart II – Item 8. Financial Statements and Supplementary Data-Recent accounting pronouncements”Data – Recent Accounting Pronouncements in our 20212022 Annual 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 liquidityinflation risk.
24
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 the Company included aggregated amounts of RMB 371.8RMB263.0 million and RMB 151.7RMB316.8 million, which were denominated in RMB, representing 7%4% and 2%5% of the cash and cash equivalents as of March 31, 20222023 and December 31, 2021,2022, 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 significant direct foreign exchange risk and have not used 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 and ordinary shares will be affected by the exchange rate between the U.S. dollar and the RMB and between the HK dollar and the RMB, respectively, because the value of our business is effectively denominated in RMB, while ADSs will beand ordinary shares are traded in U.S. dollars.
dollars and HK dollars, respectively.The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Greater China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, the 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 the 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.The value of our ADSs and our ordinary shares will 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 assets denominated in HK dollars will be adversely affected. Additionally, if the HKMA were to repeg the HK dollar to, for example, the RMB rather than the U.S. dollar, or otherwise restrict the conversion of HK dollars into other currencies, then our assets denominated in HK dollars will be adversely affected.
Credit Risk
Financial instruments that are potentially subject to significant concentration of credit risk consist of cash and cash equivalents, short-term investments, accounts receivable, and notes receivable.
The carrying amounts of cash and cash equivalents and short-term investments represent the maximum amount of loss due to credit risk. WeAs of March 31, 2023 and December 31, 2022, we had cash and cash equivalents of $847.0$879.8 million and $964.1$1,008.5 million and short-term investments of $465.3$50.6 million and $445.0 million, as of March 31, 2022 and December 31, 2021,nil, respectively. As of March 31, 20222023 and December 31, 2021,2022, 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 continually monitor thecontinued credit worthiness of these financial institutions.worthiness.
Accounts receivable are typically unsecured and are derived from product sales and collaborative arrangement.arrangements. We manage credit risk ofrelated to our accounts receivable through ongoing monitoring of the outstanding balances and limitlimiting the amount of credit extended based upon payment history and the debtor’s current credit worthiness. Historically, we have collected the receivables
25
from customers within the credit terms with no significant credit losses incurred. As of March 31, 2022,2023, our two largest debtorscustomers accounted for approximately 39%29% of our total accounts receivable collectively.
non-interest
bearing and due within six months. These notes receivable were used to collect the receivables based on an administrative convenience, given these notes are readily convertible to known amounts of cash. 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 Risk
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 mainland China.
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
Changes in Internal Control over Financial Reporting
13a-15(f)
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.
This Quarterly Report on Form10-Qreport should be read in conjunction with our 20212022 Annual Report, which describes various material risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, results of operations, financial condition, liquidity, or cash flows, and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make. We believe the risks described in this section of our Quarterly Report on Form10-Qand our 2021 Annual Report are the most significant we face; however, these are not the only risks we face. We face additional risks and uncertainties not currently known to us or that we currently believe are not material.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table presents acquisitions of the Company’s ADSs to satisfy tax withholding obligations due in connection with exercise of option shares or vesting of restricted shares during the first quarter of 2023:
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||
| January 1 – 31, 2023 | 2,661 | $ | 30.70 | — | — | |||||||||
| February 1 – 28, 2023 | 914 | $ | 42.50 | — | — | |||||||||
| March 1 – 31, 2023 | 123,658 | $ | 40.51 | — | — | |||||||||
| Total | 127,233 | |||||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
On May 9, 2023, we announced in our earnings release for the first quarter of 2023 the promotion of Joshua Smiley to President and Chief Operating Officer, effective April 1, 2023. Mr. Smiley, 53, joined the Company as our Chief Operating Officer in August 2022 following the completion of his leave with his prior employer. Mr. Smiley brings to the Company over 26 years of experience working in the biopharmaceutical industry, including experience leading finance, corporate strategy, business development, venture capital, and global business services operations. He is responsible for our corporate strategy and for overseeing our commercial, manufacturing, business development, finance, human resources, information technology, and corporate affairs functions.
27
development, and capital markets activities, including Senior Vice President and Chief Financial Officer from January 2018 to February 2021. Prior to joining Lilly, he worked in investment banking and consulting. Mr. Smiley received a B.A. in History from Harvard University.
In connection with Mr. Smiley’s promotion to President and Chief Operating Officer, and to better align his compensation with the market, the Compensation Committee of the Company’s Board of Directors has increased Mr. Smiley’s annual base salary to $650,000 and annual target bonus percentage to 60%, effective April 1, 2023.
Item 6. Exhibits.
Exhibit Index
Exhibit Number | Exhibit Title | |||||||
| 10.1# | ||||||||
| 10.2# | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 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* | ||||||||
| Inline XBRL Taxonomy Extension Schema Document | ||||||||
| 101.CAL* | ||||||||
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||
| 101.LAB* | ||||||||
| Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||
| 101.PRE* | ||||||||
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||
| 101.DEF* | ||||||||
| Inline XBRL Taxonomy Extension Definitions Linkbase Document | ||||||||
| 104* | ||||||||
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||||
# Management contract or compensatory plan, contract, or arrangement.