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 September 30, 20222023
OR
| | | | | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number: 001-38205
____________________
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
____________________
| | | | | |
| Cayman Islands | 98-1144595 |
(State or other jurisdictionOther Jurisdiction of
incorporationIncorporation or organization)Organization) | (I.R.S. Employer
Identification No.) |
| |
4560 Jinke Road Bldg. 1, Fourth Floor, Pudong Shanghai China | 201210 |
314 Main Street
4th Floor, Suite 100
Cambridge, MA, USA | 02142 |
(Address of principal executive offices)Principal Executive Offices) | (Zip Code) |
| |
+86 216163 2588
+1 857 706 2604
(Registrant’s Telephone Number, Including Area Code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| American Depositary Shares, each representing 10 Ordinary Shares, par value $0.000006 per share | | 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 x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | x | | Accelerated filer | o |
| Non-accelerated filer | o | | Smaller reporting company | o |
| 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. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
As of November 3, 2022, 979,087,4301, 2023, 988,387,430 ordinary shares of the registrant, par value $0.000006 per share, were outstanding, of which 743,576,320754,401,320 ordinary shares were held in the form of American Depositary Shares.
Zai Lab Limited
Quarterly Report on Form 10-Q
For the Third Quarter of 2023
SPECIAL NOTES REGARDING THE COMPANY
Forward-Looking Statements
This Quarterly Report on Form 10-Qreport contains certain forward-looking statements, that involveincluding statements relating to our strategy and plans; potential of and expectations for our business and pipeline programs; capital allocation and investment strategy; clinical development programs and related clinical trials; clinical trial data, data readouts, and presentations; risks and uncertainties. Theseuncertainties associated with drug development and commercialization; regulatory discussions, submissions, filings, and approvals and the timing thereof; the potential benefits, safety, and efficacy of our products and product candidates and those of our collaboration partners; the anticipated benefits and potential of investments, collaborations, and business development activities; and our future financial and operating results. All statements, other than statements of historical fact, included in this report are forward-looking statements, include, without limitation, statements containingand can be identified by 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 theseForward-looking statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information, that are not statements of historical facts, nor are they guarantees or assurances of future performance. These forward-lookingForward-looking statements relate toare based on our future plans, objectives, expectations intentions, and financial performanceassumptions as of the date of this report 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 orstatements. We may not occuractually achieve the plans, carry out the intentions, or meet the expectations or projections disclosed in the future.our forward-looking statements, and you should not place undue reliance on these forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to the following:
• Our ability to obtain funding for our operations and business initiatives;
• The effectsresults of our clinical and pre-clinical development of our product candidates;
• The content and timing of decisions made by the COVID-19 pandemic, including any government actions and lockdown measures taken in response, particularly in mainland China whererelevant regulatory authorities regarding regulatory approvals of our operations and product markets are primarily located;candidates;
• Changes in United States and China trade policies and relations, as well as relations with other countries, and/or changes in regulations and/or sanctions that may adversely impact our business, operating results, ability to raise capital, and market price of our ordinary shares and/or our ADSs;sanctions;
• Actions the Chinese government may take to intervene in or influence our operations, which could result in a material change in our operations and significantly and adversely impact the value of our ADSs and ordinary shares, including potentially making those ADSs or ordinary shares worthless;operations;
• Economic, political, and social conditions in mainland China, as well as governmental policies, that could affect the business environment and financial markets in mainland China and our ability to operate our business, liquidity, and access to capital;policies;
• Uncertainties in the Chinese legal system, that could materiallyincluding with respect to the anti-corruption enforcement efforts in China and adversely affect us; includingthe 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 Measures,of Cross-Border Data Transfer (the “Security Assessment Measures”), and any other future laws and regulations which may entail significant expenses for compliance or otherwise materially affect our business;amendments to such laws and regulations;
• Any approval,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, which could affect our ability to raise capital;law;
• Any violation or liability under the U.S. Foreign Corrupt Practices Act (“FCPA”) or Chinese anti-corruption laws, which could have a material adverse effect on our business or reputation;laws;
• Restrictions on currency exchange that could limit our ability to receive and use financing in foreign currencies effectively;exchange;
• Any limitationLimitations on the ability of our Chinese subsidiaries to make payments to us that could have a material and adverse effect on our ability to conduct our business or fund our cash and financing requirements;us;
• Chinese requirements on the ability of residents in mainland China to establish offshore special purpose companies by residents in mainland China, which may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or otherwise adversely affect us;companies;
• Chinese regulations regarding acquisitions of companies based in mainland China based companies by foreign investors which could make it more difficult for us to pursue growth through acquisitions in mainland China;investors;
• Any issues that our Chinese manufacturing facilities may have with operating in conformity with established GMPsGood Manufacturing Practices (“GMPs”) and international best practices, and with passing FDA,U.S. Food and Drug Administration (“FDA”), China National Medical Products Administration (“NMPA”), and EMA inspections, which could result in a longer and costlier GMP inspection and approval process by the FDA, NMPA, or EMA for our Chinese manufacturing processes and third-party contract manufacturers;European Medicines Agency inspections;
• Expiration of, or changes to, financial incentives or discretionary policies granted by local governments that could have an adverse effectin mainland China;
• Restrictions or limitations on the ability of overseas regulators to conduct investigations or collect evidence within mainland China;
• Business disruptions caused by pandemics such as COVID-19, international war or conflict such as the Russia/Ukraine and Israel/Hamas wars, natural disasters, extreme weather events, and other significant disruptions outside of our results of operations;control;
• Any difficulty for overseas regulators to conduct investigations or collect evidence within mainland China that could adversely affect our business, compliance with regulatory requirements, ability to raise capital, and share price of our ordinary shares and/or ADSs;
• Any unfavorableUnfavorable tax consequences to us and our non-Chinese shareholders or ADS holders if we were to be classified as a Chinese resident enterprise for Chinese income tax purposes;
• Any failureFailure to comply with applicable Chinese, U.S., and Hong Kong regulations that could lead to government enforcement actions, subject us to fines, and other legal or administrative sanctions, and/or otherwise adversely affectharm to our business financial condition, and results of operations;or reputation;
• Any reviewReview by the U.S. Committee on Foreign Investment in the United States(“CFIUS”) in our investments which may delay or block a transaction from closing;other delays or obstacles for closing transactions;
• FailureAny inability to renew our current leases on desirable terms or otherwise locate desirable alternatives for our leased properties which could adversely affect our business;properties;
• Our ability to generate revenues from our four 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 that could adversely affect our ability to obtain regulatory approval for, or commercialize, our products or product candidates;deadlines; and
• Any inability to obtain or maintain sufficient patent protection for our products and product candidates that could adversely affect our business by allowing third parties to compete directly against us.
These factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2022 (the “2021“2022 Annual Report”), our Quarterly Report on Form 10-Q for the first quarter ended March 31, 2022 filed with the SEC on May 10, 2022of 2023 (the “Q1 20222023 Form 10-Q”), our Quarterly Report on Form 10-Q for the second quarter ended June 30, 2022 filed with the SEC on August 9, 2022of 2023 (the “Q2 20222023 Form 10-Q”), and 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.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.
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 (“Hong Kong” or “HK”), Macau Special Administrative Region (“Macau”), and Taiwan, collectively; references to “Zai Lab,” the “Company,” “we,” “us,” and “our” refer to Zai Lab Limited, a holding company, and its subsidiaries, on a consolidated basis; and references to “Zai Lab Limited” refer to Zai Lab Limited, a holding company. Zai Lab Limited is the entity in which investors 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. As of the date of this Quarterly Report on Form 10-Q,report, Zai Anti Infectives (Hong Kong) Limited has non-substantial business operations.
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 (“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”) and/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 that changes in the legal, political, and economic policies of the Chinese government, the relations between mainland China and the United States, or Chinese or U.S. regulations may materially and adversely affect our business, financial condition, results of operations, and the market price of our ADSs and/or ordinary shares.
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 and/or ordinary shares. Any such changes could significantly limit or completely hinder our ability to offer or continue to offer our ADSs and/or ordinary shares to investorssecurities.
There are significant legal and could cause the valueoperational risks associated with conducting a substantial portion of our ADSsoperations in mainland China, including with respect to changes in the legal, political, and economic policies of the Chinese government, relations between mainland China and the United States, or ordinary shares to significantly declineChinese or become worthless.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, which could have potential adverse effects on our business, results of operations, ability to raise capital or raise capital on favorable terms, or the market price of our ordinary shares and/or ADSs.China. In addition, our obligations to comply withnew laws and regulations, including the Counter-Espionage Law, Personal Information Protection Law, the Data Security Law, the Cyber Security Law theand Cybersecurity Review Measures, (which became effective on February 15, 2022), the Measures on Security Assessment of Cross-Border Data Transfer, (which became effective on September 1, 2022) (the “Security Assessment Measures”),and regulations and guidelines relating to the multi-level protection scheme, have imposed, and any other futuremay 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 regulationsregulations. Such legal and operational risks may require us to incur significant expensesmaterially and could materiallyadversely affect our business, financial condition, results of operations, ability to conduct our business, accept foreign investments,raise capital or continue to be listed on a U.S. or foreign stock exchange.
For more information on these risksoffer our securities, and other risks relating tothe market price of our ADSs and ordinary shares, see “Item 1A. Risk Factors” in our 2021 Annual Report and in this Quarterly Report on Form 10-Q.
We are or may be required to obtain certain permissions from Chinese authorities to operate in mainland China, issue our securities to foreign investors, and transfer certain scientific data.
We are required to obtain certain permissions from Chinese authorities to operate in mainland China, issue securities to foreign investors, and transfer certain scientific data. The Chinese government has exercised, and may continue to exercise, substantial influence or control over virtually every sector of the Chinese economy through regulation and state ownership. Our abilityAs a result, we are or may be required to obtain certain approvals or permissions from Chinese authorities to operate in mainland China, may be undermined iftransfer certain scientific data, and issue our Chinese subsidiaries are not able to obtain or maintain approvals to operate in mainland China. The central or local governments could impose new, stricter regulations or interpretations of existing regulations that could require additional expenditures and efforts on our part to comply with such regulations or interpretations.
As of the date of this Quarterly Report on Form 10-Q, we are not currently required to obtain approval or prior permission from the CSRC or any other Chinese regulatory authority under the Chinese laws and regulations currently in effect to issue securities to foreign investors. However, in January 2022, the CSRC released for public comment draft rules titled Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (together, the “Draft Rules”). If the Draft Rules are adopted in their current form,
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.
We will be required to obtain approval from the Cyberspace Administration of China (“CAC”) when the transfers out of mainland China of certain data that is determined to be important data or personal data falls into any of the scenarios requiring a security assessment by the CAC specified in the Security Assessment Measures. The cross-border transfer out of mainland China of data requiring such a security assessment will not be allowed if the CAC does not approve the security assessment filing. In addition, the disclosure, sharing, or exporting to a foreign entity by a Chinese-owned entity of any data derived from human organs, tissues, or cells of Chinese individuals that contain human genetic materials requires a project-level approval by or a separate notification to the Human Genetic Resources Administration of China (“HGRAC”). The HGRAC also requires submission of a copy of the data to be exported. If our Chinese subsidiaries intend
to receive certain clinical or personal data from Chinese-owned entities or transfer certain clinical or personal data out of mainland China, they will need to first evaluate whether a security assessment by the CAC or a clearance from the HGRAC will be triggered by such data transfer, pass the security assessment, make the necessary notification filings, or obtain the necessary project-level approvals for such data transfer.
If our Chinese subsidiaries do not receive or maintain approvals or inadvertently conclude that approvals needed for their business are not required, or if there are changes in applicable laws (including regulations) or interpretations of laws and our Chinese subsidiaries are required but unable to obtain approvals in the future, then such changes or need for approvals (if not obtained) could adversely affect the operations of our Chinese subsidiaries, including limiting or prohibiting the ability of our Chinese subsidiaries to operate, and the value of our ADSs and/or ordinary shares could significantly decline or become worthless.
For more information on these required permissions, see “Item 1A. Risk Factors” in our 2021 Annual Report.
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 (“SAMR”).
To operate our general business activities currently conducted in mainland China, each of our Chinese subsidiaries is required to obtain a business license from the local counterpart of the SAMR. Each of our Chinese subsidiaries has obtained such a valid business license from the local counterpart of the SAMR, and no application for any such license has been denied.license. Our Chinese subsidiaries are also required to obtain certain licenses and permits, including but not limited to the following material licenses and permits:following: Pharmaceutical Manufacturing Permits, Pharmaceutical Distribution Permits, and Medical Device Distribution Permits to manufacture and/or distribute drugs and/or applicable medical devices. No application for any such material license or permit has been denied.
BecauseFurther, we are required to obtain certain approvals from Chinese authorities before transferring certain scientific data abroad or to foreign parties or entities established or controlled by those foreign parties. In addition, we may be subject to additional such requirements pursuant to the Security Assessment Measures, which may affect our Chinese subsidiaries or clinical trials. The Security Assessment Measures may require us to complete security assessments for certain cross-border data transfers, obtain prior auditor, which filed an audit report withapproval from the Cyberspace Administration of China (“CAC”) for transfers out of mainland China of certain important or personal data, or obtain prior clearance or approval from the Human Genetic Resources Administration Office of China (“HGRAC”) for certain transfers of data derived from human organs, tissues, or cells of Chinese individuals that contain human genetic materials. If we are not able to obtain or maintain the necessary permissions or approvals, our last annual report, was locatedability to operate in mainland China a jurisdiction wheremay be restricted or prohibited, and the U.S. Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of restrictions imposed by Chinese authorities, SEC staff conclusively identified us under the Holding Foreign Companies Accountable Act (“HFCAA”) in March 2022. Because the Company subsequently engaged KPMG LLP (“KPMG”), a U.S. auditor that is subject to inspection and review by the PCAOB, to be our independent registered public accounting firm for the fiscal year ending December 31, 2022 and because the Company has a principal executive office, significant operations, and a majorityvalue of our Board members and executives in the United States, we believe we have mitigated our risk of delisting pursuant to the HFCAA. However, if we were to fail to meet the audit requirements of the HFCAA for three consecutive years (or two years, if bills passed by the U.S. Senatesecurities could significantly decline or House of Representatives are enacted), we may be prohibited from listing our securities on a national securities exchange or over-the-counter market in the United States and delisted from the Nasdaq Global Market (“Nasdaq”). The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital effectively.
In recent years, the U.S. Congress and regulatory authorities have expressed concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in mainland China, and in December 2020, the United States enacted the HFCAA. The HFCAA requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). The PCAOB has issued a Determination Report, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions, and in March 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer because our prior auditor, which filed an audit report with our 2021 Annual Report, was located in mainland China.
Under the HFCAA, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for three consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including over-the-counter markets in the United States. If either the Accelerating Holding Foreign Companies Accountable Act passed by the U.S. Senate in June 2021 or the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022 passed by the U.S. House of Representatives in February 2022 are enacted, the number of non-inspection years would be reduced from three years to two years. It is unclear if or when either of these bills will be signed into law.
In May 2022 the Company engaged KPMG, an auditor located in the United States that is inspected by the PCAOB, as our independent registered public accounting firm for the fiscal year ending December 31, 2022. In addition, we have abecome worthless.
principal executive office, significant operations,Although we are not currently required to obtain prior approval or permission from the CSRC or any other Chinese regulatory authority to issue 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 a majorityListing by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which became effective in March 2023. Pursuant to the Trial Measures, we may be required to submit filings to the CSRC following the submission of future overseas listings and the completion of future offerings of our Board members and executive officers inequity securities to foreign investors. If we are not able to complete the United States. As a result, we believe that we have mitigated our risk of delisting pursuant to the HFCAA. However, if we were to fail to meet the audit requirements of the HFCAAnecessary filings for three consecutive years (or two years if the number of non-inspection years is reduced by legislation), ourfuture securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges, and this ultimately could result in our ADSs being delisted. Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. The foregoing could adversely affect the market price of our ordinary shares and/or ADSs andofferings, our ability to raise capital effectively. may be adversely affected.
The market pricecentral or local governments could impose new, stricter regulations or interpretations of existing regulations that could impose additional requirements, require additional approvals or permissions in the future, and result in additional related expenditures and efforts on our ordinary shares and/part to comply with such regulations or ADSs alsointerpretations. Also, 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, our business and an investment in our securities could be adversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and regardless of our actual operating performance.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC governing inspections and investigations of audit firms based in mainland China and Hong Kong, which marks the first time it has received such detailed and specific commitments from China that China would allow PCAOB inspection and investigations meeting U.S. standards. However, it is uncertain whether the PCAOB will determine that it has sufficient access to inspect and review the work papers of Chinese auditors of U.S. listed companies and whether or how this recent development will affect the SEC’s designation of issuers under the HFCAA.
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.
Item 1. Financial Statements.
Zai Lab Limited
Unaudited condensed consolidated balance sheetsCondensed Consolidated Balance Sheets
(Inin thousands of U.S. dollars (“$”), except for number of shares and per share data)
| | | | | | | | | | | | | | | | | |
| Notes | | September 30,
2022 | | December 31,
2021 |
| | | $ | | $ |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | 3 | | 1,119,476 | | | 964,100 | |
| Short-term investments | | | — | | | 445,000 | |
| Accounts receivable (net of allowance for credit loss of $8 and $11 as of September 30, 2022 and December 31, 2021, respectively) | | | 27,736 | | | 47,474 | |
| Notes receivable | | | 10,251 | | | 7,335 | |
| Inventories, net | 4 | | 29,131 | | | 18,951 | |
| Value added tax recoverable - current | | | 1,080 | | | — | |
| Prepayments and other current assets | | | 22,157 | | | 18,021 | |
| Total current assets | | | 1,209,831 | | | 1,500,881 | |
| Restricted cash, non-current | | | 803 | | | 803 | |
| Long term investments (including the fair value measured investment of $3,316 and $15,383 as of September 30, 2022 and December 31, 2021, respectively) | | | 3,316 | | | 15,605 | |
| Prepayments for equipment | | | 4,068 | | | 989 | |
| Property and equipment, net | 5 | | 50,528 | | | 43,102 | |
| Operating lease right-of-use assets | | | 20,269 | | | 14,189 | |
| Land use rights, net | | | 6,824 | | | 7,811 | |
| Intangible assets, net | | | 1,540 | | | 1,848 | |
| Long-term deposits | | | 1,329 | | | 870 | |
| Value added tax recoverable | | | 6 | | | 23,858 | |
| Total assets | | | 1,298,514 | | | 1,609,956 | |
| Liabilities and shareholders’ equity | | | | | |
| Current liabilities: | | | | | |
| Accounts payable | | | 90,112 | | | 126,163 | |
| Current operating lease liabilities | | | 6,980 | | | 5,927 | |
| Other current liabilities | 8 | | 58,456 | | | 60,811 | |
| Total current liabilities | | | 155,548 | | | 192,901 | |
| Deferred income | | | 23,205 | | | 27,486 | |
| Non-current operating lease liabilities | | | 13,892 | | | 9,613 | |
| Total liabilities | | | 192,645 | | | 230,000 | |
| Commitments and contingencies (Note 14) | | | | | |
| Shareholders’ equity | | | | | |
| Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 961,829,720 and 955,363,980 shares issued as of September 30, 2022 and December 31, 2021, respectively; 959,724,940 and 954,981,050 shares outstanding as of September 30, 2022 and December 31, 2021, respectively) | | | 6 | | | 6 | |
| Additional paid-in capital | | | 2,877,361 | | | 2,825,948 | |
| Accumulated deficit | | | (1,799,591) | | | (1,418,074) | |
| Accumulated other comprehensive income (loss) | | | 39,549 | | | (23,645) | |
| Treasury Stock (at cost, 2,104,780 and 382,930 shares as of September 30, 2022 and December 31, 2021, respectively) | | | (11,456) | | | (4,279) | |
| Total shareholders’ equity | | | 1,105,869 | | | 1,379,956 | |
| Total liabilities and shareholders’ equity | | | 1,298,514 | | | 1,609,956 | |
| | | | | | | | | | | | | | | | | |
| Notes | | September 30,
2023 | | December 31,
2022 |
| | | | | |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | 3 | | 788,806 | | | 1,008,470 | |
| Short-term investments | | | 31,600 | | | — | |
| Accounts receivable (net of allowance for credit loss of $12 and $11 as of September 30, 2023 and December 31, 2022, respectively) | | | 41,596 | | | 39,963 | |
| Notes receivable | | | 23,679 | | | 8,608 | |
| Inventories, net | 4 | | 44,229 | | | 31,621 | |
| Prepayments and other current assets | | | 29,821 | | | 35,674 | |
| Total current assets | | | 959,731 | | | 1,124,336 | |
| Restricted cash, non-current | | | 1,792 | | | 803 | |
| Long term investments | | | 4,466 | | | 6,431 | |
| Prepayments for equipment | | | 144 | | | 1,396 | |
| Property and equipment, net | 5 | | 55,282 | | | 57,863 | |
| Operating lease right-of-use assets | | | 16,398 | | | 19,512 | |
| Land use rights, net | | | 3,057 | | | 6,892 | |
| Intangible assets, net | | | 1,568 | | | 1,511 | |
| Long-term deposits | | | 1,256 | | | 1,396 | |
| | | | | |
| Total assets | | | 1,043,694 | | | 1,220,140 | |
| Liabilities and shareholders’ equity | | | | | |
| Current liabilities: | | | | | |
| Accounts payable | | | 55,020 | | | 65,974 | |
| Current operating lease liabilities | | | 6,886 | | | 7,050 | |
| Other current liabilities | 8 | | 62,990 | | | 66,818 | |
| Total current liabilities | | | 124,896 | | | 139,842 | |
| Deferred income | | | 27,686 | | | 21,360 | |
| Non-current operating lease liabilities | | | 9,808 | | | 13,343 | |
| Other non-current liabilities | | | 325 | | | — | |
| Total liabilities | | | 162,715 | | | 174,545 | |
| Commitments and contingencies (Note 15) | | | | | |
| Shareholders’ equity | | | | | |
| Ordinary shares (par value of $0.000006 per share; 5,000,000,000 shares authorized; 973,930,280 and 962,455,850 shares issued as of September 30, 2023 and December 31, 2022, respectively; 969,037,150 and 960,219,570 shares outstanding as of September 30, 2023 and December 31, 2022, respectively) | | | 6 | | | 6 | |
| Additional paid-in capital | | | 2,954,362 | | | 2,893,120 | |
| Accumulated deficit | | | (2,100,551) | | | (1,861,360) | |
| Accumulated other comprehensive income | | | 47,952 | | | 25,685 | |
| Treasury Stock (at cost, 4,893,130 and 2,236,280 shares as of September 30, 2023 and December 31, 2022, respectively) | | | (20,790) | | | (11,856) | |
| Total shareholders’ equity | | | 880,979 | | | 1,045,595 | |
| Total liabilities and shareholders’ equity | | | 1,043,694 | | | 1,220,140 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of operationsOperations
(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| Notes | | 2022 | | 2021 | | 2022 | | 2021 |
| | | $ | | $ | | $ | | $ |
| Revenues: | | | | | | | | | |
| Product revenue, net | 6 | | 56,963 | | | 43,103 | | | 150,633 | | | 100,141 | |
| Collaboration revenue | 6 | | 577 | | | — | | | 1,806 | | | — | |
| Total revenues | | | 57,540 | | | 43,103 | | | 152,439 | | | 100,141 | |
| Expenses: | | | | | | | | | |
| Cost of sales | | | (20,044) | | | (12,162) | | | (53,094) | | | (30,535) | |
| Research and development | | | (99,524) | | | (55,144) | | | (219,462) | | | (401,220) | |
| Selling, general, and administrative | | | (66,555) | | | (59,002) | | | (186,947) | | | (149,254) | |
| Loss from operations | | | (128,583) | | | (83,205) | | | (307,064) | | | (480,868) | |
| Interest income | | | 3,872 | | | 713 | | | 5,235 | | | 1,171 | |
| Other income (expenses), net | | | (36,479) | | | (13,580) | | | (79,467) | | | (12,401) | |
| Loss before income tax and share of loss from equity method investment | | | (161,190) | | | (96,072) | | | (381,296) | | | (492,098) | |
| Income tax expense | 7 | | — | | | — | | | — | | | — | |
| Share of loss from equity method investment | | | — | | | (340) | | | (221) | | | (548) | |
| Net loss | | | (161,190) | | | (96,412) | | | (381,517) | | | (492,646) | |
| Net loss attributable to ordinary shareholders | | | (161,190) | | | (96,412) | | | (381,517) | | | (492,646) | |
| Loss per share - basic and diluted | 9 | | (0.17) | | | (0.10) | | | (0.40) | | | (0.53) | |
| Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | | | 959,085,960 | | | 950,354,320 | | | 957,439,910 | | | 921,748,380 | |
| Loss per American Depositary Shares (“ADS”) - basic and diluted | | | (1.68) | | | (1.01) | | | (3.98) | | | (5.34) | |
| Weighted-average ADSs used in calculating net loss per ADS - basic and diluted | | | 95,908,596 | | | 95,035,432 | | | 95,743,991 | | | 92,174,838 | |
Note: All the numbers of ordinary shares and per share data in these unaudited condensed consolidated financial statements have been retrospectively adjusted as a result of the Share Subdivision and the ADS Ratio Change that became effective on March 30, 2022. The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company. Refer to Note 2(a) for a detailed discussion. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Notes | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | |
| Revenues: | | | | | | | | | |
| Product revenue, net | 6 | | 69,228 | | | 56,963 | | | 200,889 | | | 150,633 | |
| Collaboration revenue | | | — | | | 577 | | | — | | | 1,806 | |
| Total revenues | | | 69,228 | | | 57,540 | | | 200,889 | | | 152,439 | |
| Expenses: | | | | | | | | | |
| Cost of sales | | | (25,479) | | | (20,044) | | | (70,579) | | | (53,094) | |
| Research and development | | | (58,767) | | | (99,524) | | | (183,920) | | | (219,462) | |
| Selling, general, and administrative | | | (68,552) | | | (66,555) | | | (198,982) | | | (186,947) | |
| Gain on sale of intellectual property | | | — | | | — | | | 10,000 | | | — | |
| Loss from operations | | | (83,570) | | | (128,583) | | | (242,592) | | | (307,064) | |
| Interest income | | | 9,172 | | | 3,872 | | | 29,493 | | | 5,235 | |
| Foreign currency gain (loss) | | | 4,852 | | | (40,442) | | | (26,315) | | | (73,052) | |
| Other income (expense), net | 13 | | 394 | | | 3,963 | | | 223 | | | (6,415) | |
| Loss before income tax and share of loss from equity method investment | | | (69,152) | | | (161,190) | | | (239,191) | | | (381,296) | |
| Income tax expense | 7 | | — | | | — | | | — | | | — | |
| Share of loss from equity method investment | | | — | | | — | | | — | | | (221) | |
| Net loss | | | (69,152) | | | (161,190) | | | (239,191) | | | (381,517) | |
| Net loss attributable to ordinary shareholders | | | (69,152) | | | (161,190) | | | (239,191) | | | (381,517) | |
| Loss per share - basic and diluted | 9 | | (0.07) | | | (0.17) | | | (0.25) | | | (0.40) | |
| Weighted-average shares used in calculating net loss per ordinary share - basic and diluted | | | 968,767,730 | | | 959,085,960 | | | 965,060,570 | | | 957,439,910 | |
| Loss per American Depositary Shares (“ADS”) - basic and diluted | | | (0.71) | | | (1.68) | | | (2.48) | | | (3.98) | |
| Weighted-average ADSs used in calculating net loss per ADS - basic and diluted | | | 96,876,773 | | | 95,908,596 | | | 96,506,057 | | | 95,743,991 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of comprehensive lossComprehensive Loss
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)$)
| | | Three Months Ended September 30, | | Nine Months Ended
September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | $ | | $ | | $ | | $ | |
| Net loss | Net loss | | (161,190) | | | (96,412) | | | (381,517) | | | (492,646) | | Net loss | | (69,152) | | | (161,190) | | | (239,191) | | | (381,517) | |
| Other comprehensive income (loss), net of tax of nil: | | |
| Other comprehensive income, net of tax of nil: | | Other comprehensive income, net of tax of nil: | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | | 35,062 | | | 1,741 | | | 63,194 | | | (600) | | Foreign currency translation adjustments | | (4,228) | | | 35,062 | | | 22,267 | | | 63,194 | |
| Comprehensive loss | Comprehensive loss | | (126,128) | | | (94,671) | | | (318,323) | | | (493,246) | | Comprehensive loss | | (73,380) | | | (126,128) | | | (216,924) | | | (318,323) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of shareholders’ equityShareholders’ Equity
(Inin thousands of U.S. dollars (“$”)$, except for number of shares and per share data)shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 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 | |
| Issuance of ordinary shares upon vesting of restricted shares | 683,700 | | | 0 | | 0 | | — | | | — | | | — | | | — | | | — | |
| Exercise of shares options | 2,801,000 | | | 0 | | 4,322 | | | — | | | — | | | — | | | — | | | 4,322 | |
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (1,627,230) | | | (6,782) | | | (6,782) | |
| Share-based compensation | — | | | — | | | 14,225 | | | — | | | — | | | — | | | — | | | 14,225 | |
| Net loss | — | | | — | | | — | | | (137,933) | | | — | | | — | | | — | | | (137,933) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 30,325 | | | — | | | — | | | 30,325 | |
| Balance at June 30, 2022 | 960,520,140 | | | 6 | | | 2,857,202 | | | (1,638,401) | | | 4,487 | | | (2,025,310) | | | (11,129) | | | 1,212,165 | |
| Issuance of ordinary shares upon vesting of restricted shares | 230,250 | | | 0 | | 0 | | — | | | — | | | — | | | — | | | — | |
| Exercise of shares options | 1,079,330 | | | 0 | | 1,052 | | | — | | | — | | | — | | | — | | | 1,052 | |
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (79,470) | | | (327) | | | (327) | |
| Share-based compensation | — | | | — | | | 19,107 | | | — | | | — | | | — | | | — | | | 19,107 | |
| Net loss | — | | | — | | | — | | | (161,190) | | | — | | | — | | | — | | | (161,190) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 35,062 | | | — | | | — | | | 35,062 | |
| Balance at September 30, 2022 | 961,829,720 | | | 6 | | | 2,877,361 | | | (1,799,591) | | | 39,549 | | | (2,104,780) | | | (11,456) | | | 1,105,869 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 share options | 4,009,460 | | | 0 | | 1,673 | | | — | | | — | | | — | | | — | | | 1,673 | |
| Receipt of shares netted to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (1,272,330) | | | (5,130) | | | (5,130) | |
| Share-based compensation | — | | | — | | | 16,661 | | | — | | | — | | | — | | | — | | | 16,661 | |
| Net loss | — | | | — | | | — | | | (49,144) | | | — | | | — | | | — | | | (49,144) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (8,413) | | | — | | | — | | | (8,413) | |
| Balance at March 31, 2023 | 967,197,350 | | | 6 | | | 2,911,454 | | | (1,910,504) | | | 17,272 | | | (3,508,610) | | | (16,986) | | | 1,001,242 | |
| Issuance of ordinary shares upon vesting of restricted shares | 6,117,040 | | | 0 | | 0 | | — | | | — | | | — | | | — | | | — | |
| Exercise of share options | 41,000 | | | 0 | | 88 | | | — | | | — | | | — | | | — | | | 88 | |
| Receipt of shares netted to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (1,280,500) | | | (3,540) | | | (3,540) | |
| Share-based compensation | — | | | — | | | 20,511 | | | — | | | — | | | — | | | — | | | 20,511 | |
| Net loss | — | | | — | | | — | | | (120,895) | | | — | | | — | | | — | | | (120,895) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 34,908 | | | — | | | — | | | 34,908 | |
| Balance at June 30, 2023 | 973,355,390 | | | 6 | | | 2,932,053 | | | (2,031,399) | | | 52,180 | | | (4,789,110) | | | (20,526) | | | 932,314 | |
| Issuance of ordinary shares upon vesting of restricted shares | 394,890 | | | 0 | | | 0 | | | — | | | — | | | — | | | — | | | — | |
| Exercise of share options | 180,000 | | | 0 | | | 317 | | | — | | | — | | | — | | | — | | | 317 | |
| Receipt of shares netted to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (104,020) | | | (264) | | | (264) | |
| Share-based compensation | — | | | — | | | 21,992 | | | — | | | — | | | — | | | — | | | 21,992 | |
| Net loss | — | | | — | | | — | | | (69,152) | | | — | | | — | | | — | | | (69,152) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (4,228) | | | — | | | — | | | (4,228) | |
| Balance at September 30, 2023 | 973,930,280 | | | 6 | | | 2,954,362 | | | (2,100,551) | | | 47,952 | | | (4,893,130) | | | (20,790) | | | 880,979 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | — | | | — | | | — | | | — | | | — | |
| Exercise of shares options | 583,640 | | | 0 | | 702 | | | — | | | — | | | — | | | — | | | 702 | |
| Issuance of ordinary shares in connection with collaboration and license arrangement | 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 | |
| Issuance of ordinary shares upon vesting of restricted shares | 321,000 | | | 0 | | 0 | | — | | | — | | | — | | | — | | | — | |
| Exercise of shares option | 4,905,170 | | | 0 | | 3,289 | | | — | | | — | | | — | | | — | | | 3,289 | |
| Issuance of ordinary shares upon follow-on public offering, net of issuance cost of $879 | 57,164,000 | | | 1 | | | 817,995 | | | — | | | — | | | — | | | — | | | 817,996 | |
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (60,860) | | | (924) | | | (924) | |
| Share-based compensation | — | | | — | | | 10,232 | | | — | | | — | | | — | | | — | | | 10,232 | |
| Net loss | — | | | — | | | — | | | (163,324) | | | — | | | — | | | — | | | (163,324) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (5,241) | | | — | | | — | | | (5,241) | |
| Balance at June 30, 2021 | 947,581,890 | | | 6 | | | 2,799,318 | | | (1,109,837) | | | (16,865) | | | (60,860) | | | (924) | | | 1,671,698 | |
| Issuance of ordinary shares upon vesting of restricted shares | 540,500 | | | 0 | | 0 | | — | | | — | | | — | | | — | | | — | |
| Exercise of shares option | 4,613,500 | | | 0 | | 2,916 | | | — | | | — | | | — | | | — | | | 2,916 | |
| Issuance cost adjustment for follow-on public offering | — | | | — | | | 40 | | | — | | | — | | | — | | | — | | | 40 | |
| Receipt of employees’ shares to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (216,360) | | | (2,609) | | | (2,609) | |
| Share-based compensation | — | | | — | | | 10,556 | | | — | | | — | | | — | | | — | | | 10,556 | |
| Net loss | — | | | — | | | — | | | (96,412) | | | — | | | — | | | — | | | (96,412) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 1,741 | | | — | | | — | | | 1,741 | |
| Balance at September 30, 2021 | 952,735,890 | | | 6 | | | 2,812,830 | | | (1,206,249) | | | (15,124) | | | (277,220) | | | (3,533) | | | 1,587,930 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Shares | | Additional
paid
in capital | | Accumulated
deficit | | Accumulated
other
comprehensive
income (loss) | | Treasury Stock | | Total |
| Number
of
Shares | | Amount | | | | | Shares | | Amount | |
| | | | | | | | | | | | | | | |
| 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 share options | 1,156,660 | | | 0 | | 297 | | | — | | | — | | | — | | | — | | | 297 | |
| Receipt of shares netted 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 | |
| Issuance of ordinary shares upon vesting of restricted shares | 683,700 | | | 0 | | 0 | | — | | | — | | | — | | | — | | | — | |
| Exercise of share options | 2,801,000 | | | 0 | | 4,322 | | | — | | | — | | | — | | | — | | | 4,322 | |
| Receipt of shares netted to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (1,627,230) | | | (6,782) | | | (6,782) | |
| Share-based compensation | — | | | — | | | 14,225 | | | — | | | — | | | — | | | — | | | 14,225 | |
| Net loss | — | | | — | | | — | | | (137,933) | | | — | | | — | | | — | | | (137,933) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 30,325 | | | — | | | — | | | 30,325 | |
| Balance at June 30, 2022 | 960,520,140 | | | 6 | | | 2,857,202 | | | (1,638,401) | | | 4,487 | | | (2,025,310) | | | (11,129) | | | 1,212,165 | |
| Issuance of ordinary shares upon vesting of restricted shares | 230,250 | | | 0 | | | 0 | | | — | | | — | | | — | | | — | | | — | |
| Exercise of share options | 1,079,330 | | | 0 | | | 1,052 | | | — | | | — | | | — | | | — | | | 1,052 | |
| Receipt of shares netted to satisfy tax withholding obligations related to share-based compensation | — | | | — | | | — | | | — | | | — | | | (79,470) | | | (327) | | | (327) | |
| Share-based compensation | — | | | — | | | 19,107 | | | — | | | — | | | — | | | — | | | 19,107 | |
| Net loss | — | | | — | | | — | | | (161,190) | | | — | | | — | | | — | | | (161,190) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 35,062 | | | — | | | — | | | 35,062 | |
| Balance at September 30, 2022 | 961,829,720 | | | 6 | | | 2,877,361 | | | (1,799,591) | | | 39,549 | | | (2,104,780) | | | (11,456) | | | 1,105,869 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. “0” in above table means less than 1,000 dollars.
Zai Lab Limited
Unaudited condensed consolidated statementsCondensed Consolidated Statements of cash flowsCash Flows
(Inin thousands of U.S. dollars (“$”) except for number of shares and per share data)$)
| | | Nine Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | $ | | $ | |
| Operating activities | | |
| Cash flows from operating activities | | Cash flows from operating activities | | | |
| Net loss | Net loss | (381,517) | | | (492,646) | | Net loss | (239,191) | | | (381,517) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Allowance for credit (gain) loss | (3) | | | 5 | | |
| Allowance for credit loss (gain) | | Allowance for credit loss (gain) | 1 | | | (3) | |
| Inventory write-down | Inventory write-down | 480 | | | 402 | | Inventory write-down | 746 | | | 480 | |
| Depreciation and amortization expenses | Depreciation and amortization expenses | 6,100 | | | 4,612 | | Depreciation and amortization expenses | 6,570 | | | 6,100 | |
| Amortization of deferred income | Amortization of deferred income | (2,041) | | | (234) | | Amortization of deferred income | (2,547) | | | (2,041) | |
| Share-based compensation | Share-based compensation | 45,742 | | | 28,106 | | Share-based compensation | 59,164 | | | 45,742 | |
| Noncash research and development expenses | — | | | 62,250 | | |
| Share of loss from equity method investment | Share of loss from equity method investment | 221 | | | 548 | | Share of loss from equity method investment | — | | | 221 | |
| Loss from fair value changes of equity investment with readily determinable fair value | Loss from fair value changes of equity investment with readily determinable fair value | 12,067 | | | 9,930 | | Loss from fair value changes of equity investment with readily determinable fair value | 1,965 | | | 12,067 | |
| (Gain) loss on disposal of property and equipment | (11) | | | 12 | | |
| Loss (gain) on disposal of property and equipment | | Loss (gain) on disposal of property and equipment | 139 | | | (11) | |
| Gain on disposal of land use right | | Gain on disposal of land use right | (408) | | | — | |
| Noncash lease expenses | Noncash lease expenses | 5,820 | | | 4,595 | | Noncash lease expenses | 6,630 | | | 5,820 | |
| Gain from sale of intellectual property | | Gain from sale of intellectual property | (10,000) | | | — | |
| Foreign currency remeasurement loss | Foreign currency remeasurement loss | 73,052 | | | 2,838 | | Foreign currency remeasurement loss | 26,315 | | | 73,052 | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | | | |
| Accounts receivable | Accounts receivable | 16,483 | | | (15,858) | | Accounts receivable | (2,823) | | | 16,483 | |
| Notes receivable | Notes receivable | (3,861) | | | — | | Notes receivable | (15,563) | | | (3,861) | |
| Inventories | Inventories | (13,235) | | | 248 | | Inventories | (14,408) | | | (13,235) | |
| Prepayments and other current assets | Prepayments and other current assets | (5,860) | | | (6,142) | | Prepayments and other current assets | 5,126 | | | (5,860) | |
| Long-term deposits | Long-term deposits | (459) | | | (39) | | Long-term deposits | 140 | | | (459) | |
| Value added tax recoverable | Value added tax recoverable | 21,432 | | | (1,249) | | Value added tax recoverable | — | | | 21,432 | |
| Accounts payable | Accounts payable | (28,850) | | | (11,235) | | Accounts payable | (9,494) | | | (28,850) | |
| Other current liabilities | Other current liabilities | 1,628 | | | 20,591 | | Other current liabilities | 227 | | | 1,628 | |
| Operating lease liabilities | Operating lease liabilities | (6,008) | | | (3,834) | | Operating lease liabilities | (5,794) | | | (6,008) | |
| Deferred income | Deferred income | 470 | | | 863 | | Deferred income | 9,619 | | | 470 | |
| Other non-current liabilities | | Other non-current liabilities | 325 | | | — | |
| Net cash used in operating activities | Net cash used in operating activities | (258,350) | | | (396,237) | | Net cash used in operating activities | (183,261) | | | (258,350) | |
| Cash flows from investing activities: | | | | |
| Cash flows from investing activities | | Cash flows from investing activities | | | |
| Purchases of short-term investments | Purchases of short-term investments | (260,274) | | | (170,000) | | Purchases of short-term investments | (134,000) | | | (260,274) | |
| Proceeds from maturity of short-term investment | Proceeds from maturity of short-term investment | 705,274 | | | 743,902 | | Proceeds from maturity of short-term investment | 102,400 | | | 705,274 | |
| Purchase of property and equipment | Purchase of property and equipment | (20,172) | | | (11,917) | | Purchase of property and equipment | (6,990) | | | (20,172) | |
| Proceeds from the sale of property and equipment | | Proceeds from the sale of property and equipment | 122 | | | — | |
| Purchase of intangible assets | Purchase of intangible assets | (439) | | | (539) | | Purchase of intangible assets | (658) | | | (439) | |
| Payment for investment in equity investee | — | | | (30,000) | | |
| Net cash provided by investing activities | 424,389 | | | 531,446 | | |
| Cash flows from financing activities: | | | | |
| Proceeds from sale of intellectual property | | Proceeds from sale of intellectual property | 10,000 | | | — | |
| Proceeds from disposal of land use right | | Proceeds from disposal of land use right | 3,893 | | | — | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (25,233) | | | 424,389 | |
| Cash flows from financing activities | | Cash flows from financing activities | | | |
| Proceeds from exercises of stock options | Proceeds from exercises of stock options | 5,640 | | | 6,907 | | Proceeds from exercises of stock options | 1,899 | | | 5,640 | |
| Proceeds from issuance of ordinary shares upon public offerings | — | | | 818,874 | | |
| Payment of public offering costs | — | | | (1,836) | | |
| Employee taxes paid related to net share settlement of equity awards | (7,171) | | | (3,467) | | |
| Net cash (used in) provided by financing activities | (1,531) | | | 820,478 | | |
| Taxes paid related to settlement of equity awards | | Taxes paid related to settlement of equity awards | (8,725) | | | (7,171) | |
| Net cash used in financing activities | | Net cash used in financing activities | (6,826) | | | (1,531) | |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (9,132) | | | 695 | | Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (3,355) | | | (9,132) | |
| Net increase in cash, cash equivalents and restricted cash | 155,376 | | | 956,382 | | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | (218,675) | | | 155,376 | |
| Cash, cash equivalents and restricted cash - beginning of period | Cash, cash equivalents and restricted cash - beginning of period | 964,903 | | | 442,859 | | Cash, cash equivalents and restricted cash - beginning of period | 1,009,273 | | | 964,903 | |
| Cash, cash equivalents and restricted cash - end of period | Cash, cash equivalents and restricted cash - end of period | 1,120,279 | | | 1,399,241 | | Cash, cash equivalents and restricted cash - end of period | 790,598 | | | 1,120,279 | |
| Supplemental disclosure on non-cash investing and financing activities: | | | | |
| Supplemental disclosure on non-cash investing and financing activities | | Supplemental disclosure on non-cash investing and financing activities | | | |
| Payables for purchase of property and equipment | Payables for purchase of property and equipment | 3,234 | | | 1,797 | | Payables for purchase of property and equipment | 2,625 | | | 3,234 | |
| Payables for intangible assets | Payables for intangible assets | 32 | | | 24 | | Payables for intangible assets | 98 | | | 32 | |
| Payables for treasury stock | Payables for treasury stock | 32 | | | — | | Payables for treasury stock | 31 | | | 32 | |
| Receivables for stock option exercise under equity incentive plans | Receivables for stock option exercise under equity incentive plans | 31 | | | — | | Receivables for stock option exercise under equity incentive plans | — | | | 31 | |
| Right-of-use asset acquired under operating leases | Right-of-use asset acquired under operating leases | 12,861 | | | — | | Right-of-use asset acquired under operating leases | 3,296 | | | 12,861 | |
| Supplemental disclosure of cash flow information: | | | | |
| Supplemental disclosure of cash flow information | | Supplemental disclosure of cash flow information | | | |
| Cash and cash equivalents | Cash and cash equivalents | 1,119,476 | | | 1,398,498 | | Cash and cash equivalents | 788,806 | | | 1,119,476 | |
| Restricted cash, non-current | Restricted cash, non-current | 803 | | | 743 | | Restricted cash, non-current | 1,792 | | | 803 | |
| Total cash and cash equivalents and restricted cash | Total cash and cash equivalents and restricted cash | 1,120,279 | | | 1,399,241 | | Total cash and cash equivalents and restricted cash | 790,598 | | | 1,120,279 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
1. Organization and principal 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 products and product candidates that address medical conditions with significant unmet needs, including in the areas of oncology, autoimmune disorders, infectious diseases,disease, and neurological disorders.
The Company’s principal operations and geographic markets are in 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 Company.
2. Basis of presentationPresentation and consolidationConsolidation and significant accounting policiesSignificant Accounting Policies
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Qreport should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022 (the “2021“2022 Annual Report”). The December 31, 20212022 condensed consolidated balance sheet data included in this Quarterly Report on Form 10-Qreport were derived from the audited financial statements included in the 20212022 Annual Report.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results for the year ending December 31, 2022.
Effective as of March 30, 2022, the Company subdivided each of its issued and unissued ordinary shares into ten ordinary shares (the “Share Subdivision”). Following the Share Subdivision, the Company’s authorized share capital became $30,000 divided into 5,000,000,000 shares with a par value of $0.000006 per share. The numbers of issued and unissued ordinary shares and per share data as disclosed elsewhere in these unaudited condensed consolidated financial statements and notes thereto are presented on a basis after taking into account the effects of the Share Subdivision and have been retrospectively adjusted, where applicable. In connection with the Share Subdivision, the conversion ratio of our ADSs to ordinary shares changed from one ADS to one ordinary share to a new ratio of one ADS to ten ordinary shares (the “ADS Ratio Change”). The Share Subdivision and ADS Ratio Change did not result in any change to the number of outstanding ADSs of the Company.
A reclassification has been made within the condensed consolidated statement of cash flow for the nine months ended September 30, 2021 to conform to the current period presentation. The Company reclassified $2.8 million from other current liabilities into foreign currency remeasurement loss. The net cash used in operating activities did not change as a result of the reclassification.2023.
(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
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, estimating the current expected credit losses for financial assets, and assessing the impairment of long-lived assets, discount rate of operating lease liabilities, accrual of rebates, allocationrecognition of research and development 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 assets,assets. These estimates, judgments, and a lack of marketability discount ofassumptions can affect the ordinary shares issued in connection with license and collaboration arrangements (Note 12). Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying valuesreported amounts of assets and liabilities.liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(d) Fair Value Measurements
Equity investments with readily determinable fair value measurements
Asare measured using level 1 inputs and were $4.5 million and $6.4 million as of September 30, 20222023 and December 31, 2021, information about inputs into the2022, respectively. The unrealized gains and losses from fair value measurementchanges are recognized in other income (expenses), net in the condensed consolidated statements of the Company’s assets that are measured at a fair value on a recurring basis in periods subsequent to their initial recognition is as follows (in thousands):
| | | | | | | | | | | |
| Description | Fair Value as of
September 30, 2022
$ | | Fair Value Measurement at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) US$ |
| Equity Investments with Readily Determinable Fair Value | 3,316 | | | 3,316 | |
| | | |
| Description | Fair Value as of
December 31, 2021
$ | | Fair Value Measurement at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) US$ |
| Equity Investments with Readily Determinable Fair Value | 15,383 | | | 15,383 | |
The Company did not have assets or liabilities measured at fair value on a nonrecurring basis during the periods presented.operations.
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 September 30, 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 approximated its fair value based on the nature of the assessment of the ability to recover these amounts.
(e) Recent accounting pronouncementsAccounting Pronouncements
AdoptedThe Company has not adopted any new accounting standards
In November 2021, the FASB issued ASU2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance. The amendments in this ASU require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this ASU are effective for all entities within their scope for financial statements issued for annual periods beginning after since December 15, 2021. The Company adopted this standard as of January 1,31, 2022. There was no material impact on the Company’s financial position or results of operations upon the adoption.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(f) Significant accounting policies
For a more complete discussion of the Company’s significant accounting policies, see the unaudited condenseddiscussion in Note 2 above and the notes to the consolidated financial statements and notes thereto should be read in conjunction with the 20212022 Annual Report.
3. Cash and cash equivalentsCash Equivalents
The following table presents the Company’s cash and cash equivalents as of September 30, 2022 and December 31, 2021 (in($ in thousands):
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| | $ | | $ | |
| Cash at bank and in hand | 818,407 | | | 663,472 | | |
| Cash | | Cash | 787,725 | | | 1,007,423 | |
| Cash equivalents (i) | Cash equivalents (i) | 301,069 | | | 300,628 | | Cash equivalents (i) | 1,081 | | | 1,047 | |
| | | 1,119,476 | | | 964,100 | | | 788,806 | | | 1,008,470 | |
| Denominated in: | Denominated in: | | | | Denominated in: | | | |
| US$ | US$ | 1,072,376 | | | 932,888 | | US$ | 764,765 | | | 957,824 | |
| RMB (ii) | RMB (ii) | 41,138 | | | 23,791 | | RMB (ii) | 21,056 | | | 45,486 | |
| Hong Kong dollar (“HK$”) | Hong Kong dollar (“HK$”) | 5,035 | | | 6,674 | | Hong Kong dollar (“HK$”) | 2,352 | | | 4,378 | |
| Australian dollar (“A$”) | Australian dollar (“A$”) | 579 | | | 475 | | Australian dollar (“A$”) | 553 | | | 598 | |
| Taiwan dollar (“TW$”) | Taiwan dollar (“TW$”) | 348 | | | 272 | | Taiwan dollar (“TW$”) | 80 | | | 184 | |
| | 1,119,476 | | | 964,100 | | | 788,806 | | | 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 denominatedRMB-denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the Chinese government.
4. Inventories, netNet
The Company’s net inventory balance of $29.1 million and $19.0 million as of September 30, 2022 and December 31, 2021, respectively, mainly consisted of finished goods purchased from Tesaro Inc., now GlaxoSmithKline (“GSK”), for distribution in Hong Kong, from NovoCure Limited (“NovoCure”) for distribution in Hong Kong and mainland China, and from Deciphera Pharmaceuticals, LLC (“Deciphera”) for distribution in Hong Kong, mainland China and Taiwan, as well as finished goods and certain raw materials for ZEJULA and NUZYRA commercialization in mainland China. The following table presents the Company’s inventories, net as of September 30, 2022 and December 31, 2021 (in($ in thousands):
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| | $ | | $ | |
| Finished goods | Finished goods | 8,703 | | | 5,632 | | Finished goods | 21,417 | | | 12,156 | |
| Raw materials | Raw materials | 20,397 | | | 13,231 | | Raw materials | 22,812 | | | 19,029 | |
| Work in Progress | 31 | | | 88 | | |
| Work in progress | | Work in progress | — | | | 436 | |
| Inventories, net | Inventories, net | 29,131 | | | 18,951 | | Inventories, net | 44,229 | | | 31,621 | |
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
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. The Company recorded write-downs in inventory, which were included in cost of sales, of $0.1 million and $0.7 million during the three and nine months ended September 30, 2023, respectively, and $0.3 million and $0.5 million during the three and nine months ended September 30, 2022 respectively, and of $0.1 million and $0.4 million during the three and nine months ended September 30, 2021, respectively.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
5. Property and equipment, netEquipment, Net
The following table presents the components of the Company’s property and equipment, net as of September 30, 2022 and December 31, 2021 (in($ in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| $ | | $ |
| Office equipment | 818 | | | 836 | |
| Electronic equipment | 6,744 | | | 5,036 | |
| Vehicle | 198 | | | 220 | |
| Laboratory equipment | 18,673 | | | 17,069 | |
| Manufacturing equipment | 14,366 | | | 14,600 | |
| Leasehold improvements | 10,160 | | | 10,432 | |
| Construction in progress | 19,882 | | | 11,334 | |
| 70,841 | | | 59,527 | |
| Less: accumulated depreciation | (20,313) | | | (16,425) | |
| Property and equipment, net | 50,528 | | | 43,102 | |
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| | | |
| Office equipment | 1,024 | | | 977 | |
| Electronic equipment | 8,757 | | | 7,416 | |
| Vehicle | 196 | | | 202 | |
| Laboratory equipment | 19,858 | | | 18,726 | |
| Manufacturing equipment | 16,865 | | | 17,055 | |
| Leasehold improvements | 11,153 | | | 11,300 | |
| Construction in progress | 25,019 | | | 24,251 | |
| 82,872 | | | 79,927 | |
| Less: accumulated depreciation | (27,590) | | | (22,064) | |
| Property and equipment, net | 55,282 | | | 57,863 | |
Depreciation expense was $1.8 million and $6.1 million for the three and nine months ended September 30, 2023, respectively, and $2.1 million and $5.7 million for the three and nine months ended September 30, 2022, respectively, and $1.5 million and $4.3 million for the three and nine months ended September 30, 2021, respectively.
6. Revenue
Product revenue, netRevenue
The Company’s product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, NUZYRA, and NUZYRAVYVGART in mainland China and Hong Kong. The table below presents the Company’s net product sales for the three and nine months ended September 30, 2022 and 2021 (inrevenue ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | | $ | | $ | | $ |
| Product revenue - gross | 60,446 | | | 47,555 | | | 168,095 | | | 135,490 | |
| Less: Rebate and sales return | (3,483) | | | (4,452) | | | (17,462) | | | (35,349) | |
| Product revenue - net | 56,963 | | | 43,103 | | | 150,633 | | | 100,141 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| Product revenue - gross | 74,018 | | | 60,446 | | | 220,240 | | | 168,095 | |
| Less: Rebates and sales returns | (4,790) | | | (3,483) | | | (19,351) | | | (17,462) | |
| Product revenue - net | 69,228 | | | 56,963 | | | 200,889 | | | 150,633 | |
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.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The following table presents the Company’s net revenue by product for the three and nine months ended September 30, 2022 and 2021 (in($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | | $ | | $ | | $ |
| ZEJULA | 39,214 | | | 28,162 | | | 102,863 | | | 64,134 | |
| Optune | 10,662 | | | 10,653 | | | 35,051 | | | 27,318 | |
| QINLOCK | 5,541 | | | 4,288 | | | 9,123 | | | 8,689 | |
| NUZYRA | 1,546 | | | — | | | 3,596 | | | — | |
| Product revenue - net | 56,963 | | | 43,103 | | | 150,633 | | | 100,141 | |
Collaboration revenue
The Company’s collaboration revenue was $0.6 million and $1.8 million for the three and nine months ended September 30, 2022, respectively, and nil for the three and nine months ended September 30, 2021. This collaboration revenue was from the Company’s collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| ZEJULA | 41,593 | | | 39,214 | | | 127,230 | | | 102,863 | |
| Optune | 11,562 | | | 10,662 | | | 38,596 | | | 35,051 | |
| QINLOCK | 5,702 | | | 5,541 | | | 14,535 | | | 9,123 | |
| NUZYRA | 5,483 | | | 1,546 | | | 15,588 | | | 3,596 | |
| VYVGART | 4,888 | | | — | | | 4,940 | | | — | |
| Product revenue - net | 69,228 | | | 56,963 | | | 200,889 | | | 150,633 | |
7. Income taxTax
No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries areis in a cumulative loss positionsposition for the periods presented.
The Company recorded a full valuation allowance against deferred tax assets of all its consolidated entities because all entities were in a cumulative loss position as of September 30, 20222023 and December 31, 2021.2022. No unrecognized tax benefits and related interest and penalties were recorded in the periods presented.
8. Other current liabilitiesCurrent Liabilities
The following table presents the Company’s other current liabilities as of September 30, 2022 and December 31, 2021 (in($ in thousands):
| | | September 30,
2022 | | December 31,
2021 | | September 30, 2023 | | December 31, 2022 |
| | $ | | $ | |
| Payroll | Payroll | 25,208 | | | 25,685 | | Payroll | 26,046 | | | 31,689 | |
| Accrued professional service fee | | Accrued professional service fee | 9,578 | | | 4,080 | |
| Payables for purchase of property and equipment | | Payables for purchase of property and equipment | 2,625 | | | 5,269 | |
| Accrued rebate to distributors | Accrued rebate to distributors | 8,843 | | | 15,001 | | Accrued rebate to distributors | 8,121 | | | 8,443 | |
| Tax payables | Tax payables | 10,405 | | | 8,817 | | Tax payables | 13,792 | | | 13,283 | |
| Accrued professional service fee | 5,927 | | | 4,319 | | |
| Other (i) | 4,839 | | | 4,421 | | |
| Payables for purchase of property and equipment | 3,234 | | | 2,568 | | |
| Others (i) | | Others (i) | 2,828 | | | 4,054 | |
| Total | Total | 58,456 | | | 60,811 | | Total | 62,990 | | | 66,818 | |
(i)Other primarily consists of tax withholding related to share-based compensation andOthers mainly include accrued travel and business entertainmentbusiness-related expenses.
9. Loss per share
The following table presents the computation of the basic and diluted net loss per share for the three and nine months ended September 30, 2022 and 2021 (in($ in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| Numerator: | | | | | | | |
| Net loss attributable to ordinary shareholders | (69,152) | | | (161,190) | | | (239,191) | | | (381,517) | |
| Denominator: | | | | | | | |
| Weighted average number of ordinary shares - basic and diluted | 968,767,730 | | | 959,085,960 | | | 965,060,570 | | | 957,439,910 | |
| Net loss per share - basic and diluted | (0.07) | | | (0.17) | | | (0.25) | | | (0.40) | |
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | | $ | | $ | | $ |
| Numerator: | | | | | | | |
| Net loss attributable to ordinary shareholders | (161,190) | | | (96,412) | | | (381,517) | | | (492,646) | |
| Denominator: | | | | | | | |
| Weighted average number of ordinary shares - basic and diluted | 959,085,960 | | | 950,354,320 | | | 957,439,910 | | | 921,748,380 | |
| Net loss per share - basic and diluted | (0.17) | | | (0.10) | | | (0.40) | | | (0.53) | |
As a result of the Company’s net loss for the three and nine months ended September 30, 20222023 and 2021,2022, share options and non-vested restricted shares outstanding in the respective periods were excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive. | | | | | | | | | | | | | September 30, |
| | September 30,
2022 | | September 30,
2021 | | 2023 | | 2022 |
| Share options | Share options | 90,511,530 | | | 81,801,570 | | Share options | 107,249,960 | | | 90,511,530 | |
| Non-vested restricted shares | Non-vested restricted shares | 34,103,830 | | | 6,366,190 | | Non-vested restricted shares | 32,359,260 | | | 34,103,830 | |
10. Related party transactions
The Company incurred research and development expenses for product research and development services provided by MEDx (Suzhou) Translational Medicine Co., Ltd (“MEDx”), over which an immediate family member of our Chief Executive Officer and Chairperson of the Board held significant influence. The Company incurred development expenses with MEDx of nil and an insignificant amount during the three and nine months ended September 30, 2023 and an insignificant amount and $0.3 million during the three and nine months ended September 30, 2022, respectively, and $0.1 million and $0.3 million, duringrespectively.
11. Share-Based Compensation
During the three and nine months ended September 30, 2021, respectively.
11. Share-based compensation
In March 2015, the Board of Directors of2023, the Company approved an Equity Incentive Plan (the “2015 Plan”), pursuant to which the Board of Directors could grantgranted share options to purchase up to 23,768,090 ordinary shares and restricted shares representing 8,836,580 ordinary shares under the 2022 Plan. The share options granted have a contractual term of ten years. Share options granted since April 2023 generally vest ratably over a four-year period, and share options granted prior to management including officers, directors, employees, and individual advisors who rendered services to the Company. In August 2017, in connectionApril 2023 generally vest ratably over a five-year period, with the completion25% or 20% of the initial public offering (the “IPO”)awards vesting on each anniversary of the Company, the Board of Directors approved the 2017 Equity Incentive Plan (the “2017 Plan”). All equity-based awards subsequent to the IPO would be granted under the 2017 Plan. The 2017 Plan provided for an automatic annual increase to the number of ordinary shares reserved under the 2017 Plan on each January 1st between January 1, 2018 and January 1, 2027 equal to the lesser of 4% of the number of ordinary shares outstanding as of the close of business on the immediately prior December 31st or such number as approved by the Board on or prior to suchgrant date, each year. The aggregate number of shares reserved and available for issuance under the 2017 Plan as of April 1, 2022 was 75,562,170.
On June 22, 2022, at the 2022 Annual General Meeting of Shareholders of the Company (the “Annual General Meeting”), the Company’s shareholders approved the 2022 Equity Incentive Plan (the “2022 Plan”), which was previously approved by the Company’s Board of Directors on April 20, 2022, conditioned on andrespectively, subject to (i) the dual primary listing ofcontinued employment with the Company on the Main Board ofvesting date. The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) and (ii)restricted shares granted generally vest ratably over a specified period on the granting of a waiver on Note 1 to Rule 17.03(9)anniversary of the Rules Governinggrant date, subject to continued employment/service with the Listing of Securities on The Stock Exchange of Hong Kong Limited. The Company’s voluntary conversion of its secondary listing status to primary listing statusCompany on the Hong Kong Stock Exchange became effectivevesting date. For a description of the Company’s equity incentive plans and more details on June 27,the terms of the share-based awards, see Note 15 to our 2022 Annual Report.
The following table presents the share-based compensation expense that has been reported in the Company’s condensed consolidated statements of operations and the waivercomprehensive loss as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| Selling, general and administrative | 14,041 | | | 11,298 | | | 35,880 | | | 27,221 | |
| Research and development | 7,951 | | | 7,809 | | | 23,284 | | | 18,521 | |
| Total | 21,992 | | | 19,107 | | | 59,164 | | | 45,742 | |
As of September 30, 2023, there was grantedunrecognized share-based compensation expense related to unvested share options and unvested restricted shares of $114.6 million and $115.4 million, respectively, which the Company in connectionexpects to recognize over a weighted-average period of 3.24 years and 2.98 years, respectively.
12. License and Collaboration Agreements
The Company has entered into various license and collaboration agreements with the primary conversion. As such, the 2022 Plan became effective on June 27, 2022,third parties to develop and the aggregate number of shares that may be delivered in satisfaction of awards under the 2022 Plan is 97,908,743 ordinary shares as of June 22, 2022. No new grants will be made under the 2015 Plan or the 2017 Plan ascommercialize product candidates.
Significant License and Collaboration Arrangements
For a description of the effective datematerial terms of the Company’s significant license and collaboration agreements, see Note 16 to our 2022 Plan.Annual Report. During the nine months ended September 30, 2023, the Company did not enter into any new significant license or collaboration agreements. The following includes a description of payments or accruals related to
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
Forupfront or milestone fees under our significant license and collaboration agreements during the nine months ended September 30, 2022, the Company granted 19,357,640 share options and 28,320,790 non-vested restricted shares to certain management and employees of the Company under the 2017 Plan. The share options were granted at an exercise price ranging from $2.95 to $6.29 per share. The share options granted were valued using the Black-Scholes model, and the weighted-average grant-date fair value was $2.84 per share.
The options granted have a contractual term of ten years and generally vest ratably over a five-year period, with 20% of the awards vesting on each anniversary of the grant date. The non-vested restricted shares granted vest ratably over a five- or four-year period, with 20% or 25% of the awards vesting on each anniversary of the grant date. The restricted shares will be released from the restrictions once they vest. Upon termination of the award holders’ service with the Company for any reason, any shares that are outstanding and not yet vested will be immediately forfeited unless otherwise set forth in an agreement between the Company and the award holder.
Upon each settlement date of the share awards, shares were withheld to cover the required withholding tax, which was based on the value of a share on the settlement date as determined by the closing price of the ADSs on the trading day of the applicable settlement date. The remaining shares after the withholding were delivered to the recipient. The amount remitted to the tax authorities for employee tax obligations was reflected as a financing activity on the condensed consolidated statements of cash flows. These shares withheld by the Company as a result of the net settlement were accounted for as treasury stock and not considered issued and outstanding.
Stock-based compensation expense has been reported in the Company’s condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | | $ | | $ | | $ |
| Selling, general and administrative | 11,298 | | | 6,147 | | | 27,221 | | | 16,579 | |
| Research and development | 7,809 | | | 4,409 | | | 18,521 | | | 11,527 | |
| Total | 19,107 | | | 10,556 | | | 45,742 | | | 28,106 | |
As of September 30, 2022, there was unrecognized share-based compensation expense of $111.9 million related to unvested share options which the Company expects to recognize over a weighted-average period of 3.47 years.
As of September 30, 2022, there was unrecognized share-based compensation expense of $143.0 million related to unvested restricted shares which the Company expects to recognize over a weighted-average period of 3.70 years.
12. License and collaboration arrangements
The following is a description of the license and collaboration agreements for which the Company recorded expenses or made payments related to upfront or milestone fees during the three and nine months ended September 30, 2022.2023.
License and collaboration agreementCollaboration Agreement with GSK
In September 2016, the Company entered into a collaboration, development, and license agreement with Tesaro,Entasis Therapeutics Holdings Inc., a company later acquired by GSK, pursuant to which the Company obtained an exclusive sublicense under certain patents and know-how of GSK to develop, manufacture, and commercialize GSK’s proprietary PARP inhibitor, niraparib, in mainland China, Hong Kong, and Macau for the diagnosis and prevention of any human diseases or conditions (other than prostate cancer).(“Entasis”) (SUL-DUR)
Under the terms of our license and collaboration agreement with Entasis for SUL-DUR, the agreement,Company paid a $3.0 million development milestone in the third quarter of 2022, the Company made a development milestone payment of $3.5 million2023, which was accrued in the fourthsecond quarter of 2019 and a sales-based milestone payment2023. As of $8.0 million which was accrued inSeptember 30, 2023, the fourth quarter of 2021, and accrued another development milestone of $4.0 million.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
The Company may be required to pay an additional aggregate amount of up to $28.0$88.6 million in development, regulatory, and sales-based milestones as well as certain royalties at tiered percentages rates ranging from mid- to high-teens on annual net sales of the licensed products in the licensed territory.milestones.
License and collaboration agreementAgreement with Paratek Bermuda Ltd.BMS (Formerly Turning Point Therapeutics Inc (“Paratek”Turning Point”)
In April 2017, the Company entered into a license and collaboration agreement with Paratek, pursuant to which the Company obtained both an exclusive license under certain patents and know-how of Paratek and an exclusive sub-license under certain intellectual property that Paratek licensed from Tufts University to develop, manufacture, and commercialize products containing omadacycline (ZL-2401) as an active ingredient in Greater China in the field of all human therapeutic and preventative uses other than biodefense.) (Repotrectinib)
Under the terms of our license agreement with BMS for reprotrectinib, the agreement,Company paid a $5.0 million development milestone in the firstthird quarter of 2022, the Company made a milestone payment of $6.0 million2023, which was accrued in the fourthsecond quarter of 2021 related to2023. As of September 30, 2023, the regulatory approval of omadacycline for the treatment of adults with Acute Bacterial Skin and Skin Structure Infections and Community-Acquired Bacterial Pneumonia in mainland China in December 2021.
The Company may be required to pay an additional aggregate amount of up to $40.5$141.0 million in development, regulatory, and sales-based milestones as well as certain royalties at tiered percentages rates ranging from low- to mid-teens on annual net sales of licensed products in the licensed territory.milestones.
Other License and Collaboration and license agreement with argenx BV (“argenx”)
In January 2021, the Company entered into a collaboration and license agreement with argenx pursuant to which the Company received an exclusive license to develop and commercialize products containing argenx’s proprietary antibody fragment, known as efgartigimod, in Greater China.
Pursuant to the collaboration and license agreement, a share issuance agreement was entered into between the Company and argenx. As the upfront payment to argenx, the Company issued 5,681,820 ordinary shares of the Company with a par value of $0.000006 per share to argenx on the closing date of January 13, 2021. In determining the fair value of the ordinary shares at closing, the Company considered the closing price of the ordinary shares on the closing date and included a lack of marketability discount because the shares were subject to certain restrictions. The fair value of the shares on the closing date was determined to be $62.3 million in the aggregate. In addition, the Company made a non-creditable, non-refundable development cost-sharing payment of $75.0 million to argenx during the first quarter of 2021.
Under the terms of the agreement, the Company made a milestone payment of $25.0 million in the first quarter of 2022 which was accrued in the fourth quarter of 2021 related to the first regulatory approval for the licensed product by the U.S. Food and Drug Administration (“FDA”) in December 2021.Arrangements That Are Not Individually Significant
The Company may be required to pay certain royalties at tiered percentages rates ranging from mid-teen to low-twenties on annual net sales of licensed products in the licensed territory.
Collaboration and license agreement with Mirati Therapeutics, Inc. (“Mirati”)
In May 2021, the Company entered into a collaboration and license agreement with Mirati pursuant to which the Company obtained the right to research, develop, manufacture, and exclusively commercialize adagrasib in Greater China.
Under the terms of the agreement, the Company made an upfront payment of $65.0$10.0 million to Mirati in the second quarter of 2021. In the third quarter of 2022, the Company made2023 for a development milestone payment of $5.0 million which was accrued in the second quarter of 2022new strategic partnership and accrued a development milestone payment of $5.0 million.
The Company may be required to pay an additional aggregate amount of up to $263.0 million in development, regulatory, and sales-based milestone payments as well as certain royalties at tiered percentage rates ranging from high-teens to low-twenties on annual net sales of adagrasib in Greater China.
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
License agreement with Karuna Therapeutics, Inc. (“Karuna”)
In November 2021, the Company entered into aglobal license agreement with KarunaMediLink Therapeutics (Suzhou) Co., Ltd. for the development, manufacturing, and commercialization of KarXT (xanomeline-trospium) in Greater China.
Under the terms of the agreement, the Company made an upfront payment of $35.0 million to Karuna in the fourth quarter of 2021. The Company also made a development milestone payment of $5.0 million in the third quarter of 2022 which was accrued in the second quarter of 2022.
The Company may be required to pay an additional aggregate amount of up to $147.0 million in development, regulatory, and sales-based milestone payments as well as certain royalties at tiered percentage rates ranging from low- to high-teens on annual net sales of licensed products in Greater China.
Collaboration and license agreement with Seagen Inc. (“Seagen”)
In September 2022, the Company entered into a collaboration and license agreement with Seagen, pursuant to which the Company and Seagen agreed to collaboratively develop and commercialize TIVDAK® (tisotumab vedotin). Under the agreement, the Company obtained an exclusive license to develop and commercialize TIVDAK in Greater China.
Under the terms of the agreement, the Company accrued an upfront payment of $30.0 million in the third quarter of 2022. The Company may be required to pay an additional aggregate amount of up to $263.0 million in development, regulatory, and sales-based milestone payments as well as certain royalties at tiered percentage rates ranging from mid-teens to low-twenties on annual net sales of licensed products in Greater China, subject to reduction under specified circumstances.
The agreement will remain in effect, unless earlier terminated, until the expiration of the last-to-expire royalty term for the last licensed product. The agreement contains customary provisions for termination by either party, including in the event of a material breach by the other party that remains uncured, by the Company for convenience, for certain bankruptcy events, and by Seagen upon a challenge of the licensed patent rights.
Full details of the licenses and collaborative arrangements, other than the agreement with Seagen which we entered into during the third quarter of 2022, are included in the notes to the financial statements in our 2021 Annual Report. As noted above, the Company has entered into various license and collaboration agreements with third party licensors to develop and commercialize product candidates. Based on the terms of these agreements, the Company is contingently obligated to make additional material payments upon the achievement of certain contractually defined milestones. Based on management’s evaluation of the progress of each project noted above, the licensors will be eligible to receive from the Company up to an aggregate of approximately $5,830.7 million in future contingent development and sales-based milestone payments as well as certain royalties at tiered percentage rates on annual net sales. The development milestones, such as regulatory approval for the product candidates, may occur before the Company has commercialized the product or received any revenue from sales of such product candidate. These milestone payments are subject to uncertainties and contingencies and may not occur.early-stage next generation DLL3 ADC program, ZL-1310.
13. Other Income (Expenses), Net
The following table presents the Company’s other income (expenses), net ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Government grants | 671 | | | 3,422 | | | 754 | | | 5,048 | |
| Loss on equity investments with readily determinable fair value | (661) | | | 489 | | | (1,965) | | | (12,067) | |
| Others miscellaneous gain | 384 | | | 52 | | | 1,434 | | | 604 | |
| Total | 394 | | | 3,963 | | | 223 | | | (6,415) | |
14. Restricted net assetsNet Assets
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.
In accordance with the Company Law of the People’s Republic of China, a domestic enterprise is required to provide statutory reserves of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s 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
Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
Chinese statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Company’s Chinese subsidiaries were established as domestic enterprises and therefore are subject to the above-mentioned restrictions on distributable profits.
DuringNo appropriation to statutory reserves was made during the three and nine months ended September 30, 20222023 and 2021, no appropriation to statutory reserves was made2022 because the Chinese subsidiaries had substantial losses during such periods.
As a result of these Chinese laws and regulations, subject to the limits discussed above that require annual appropriations of 10% of 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 assets to the Company.assets.
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 September 30, 20222023 and December 31, 2021,2022, amounts restricted arewere the paid-in capital of the Company’sCompany's Chinese subsidiaries, which both amounted to $406.0 million.were $506.0 million and $456.0 million, respectively.
14.15. Commitments and Contingencies
(a) Purchase commitmentsCommitments
As of September 30, 2022, theThe Company’s commitments related to purchase of property and equipment contracted but not yet reflected in the unaudited condensed consolidated financial statements were $13.8$2.5 million as of September 30, 2023 and were expected to be incurred within one year.
(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 it to make future payments relating to milestone fees and royalties on future sales of licensed products (Note 12).
15. Subsequent Events
The Company evaluated subsequentarise in connection with a transaction or certain events and transactions that occurred afteractivities. To date, the balance sheet date upCompany has not paid any claims or been required to the date financial statements were issued. The Company did not identifydefend any subsequent events that would have required adjustment or disclosure in the financial statements.
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 20212022 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes for the three and nine months ended September 30, 2023 included in “ItemItem 1. Financial Statements” in this Quarterly Report on Form 10-Q.Statements.
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, in the areas of oncology, autoimmune disorders, infectious diseases,disease, and neurological disorders. As of November 3, 2022, weneuroscience. We intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide. We currently have four commercializedfive products – ZEJULA®, Optune®, QINLOCK®, NUZYRA®, and VYVGART® – that have received marketing approval and that we have commercially launched in one or more territories in Greater China and thirteen(our “commercial products”). We also have several 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 selling, general and administrative costs associated with our operations. Developing high quality product candidates requires a significant investment related toin our research and development activities over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. Our ability to generate profits and 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 – and to successfully expand the indications for these products and develop and commercialize our other product candidates. We expect to continue to incur substantial expenses related to our research and development activities. In particular,For example, our licensing and collaboration agreements may 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 annual net sales of the licensed products. Duringproducts in the nine months ended September 30, 2022, we recorded $50.2 million of research and development expense related to upfront license fees and development milestones payments.licensed territories. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
Furthermore, asAs we pursue our strategy of growth and development, we anticipate that our financial results will fluctuate from quarter to quarter based uponand year to year depending in part on the balance between the successful marketingsuccess of our commercial products and the level of our significant research and development expenses. We cannot predict whether or when new products orin our pipeline, including new indications for marketedour current commercial products, will receive regulatory approval. Further, if we receive such regulatory approval, we cannot predict whether or if any such approval is received, whetherwhen we willmay be able to successfully commercialize such product(s) andproduct or whether or when theysuch product may become profitable.
Recent Developments
Recent Product Developments
Commercial Products
•ZEJULA (Niraparib). Throughout this year, the FDA has been reviewing data on PARP inhibitors, and other companies have issued Dear HCP Letters in the U.S. as a result of ongoing discussions with the FDA.(niraparib, PARP): In September 2022, GSK disclosed that it was in discussions with2023, we conducted the FDA to discussfinal overall survival (“OS”) data from GSK’s ENGOT-OV16/NOVA phaseanalysis for the Phase III clinical trialNORA study in Chinese patients with platinum-sensitive recurrent ovarian cancer, which supports the NMPA’s full approval of ZEJULA for adult patients with recurrent ovarian cancer irrespective of the gBRCA mutation. We do not expect the FDA’s discussions with GSK to impact our approval from the NMPA for ZEJULA in China. The NMPA’s full approval of ZEJULAfinal OS results showed that niraparib maintenance treatment in the recurrent ovarian cancer setting is based onprovides a separate study, the NORA study, which is a Phase 3 randomized, double-blind, placebo-controlled study of ZEJULA that the Company independently conducted in China. While the NORA study is not fully mature, to date, favorable trends have been observedtrend in OS irrespective of gBRCA mutation status. We expect to present this data at a future scientific congress. As a result, we do not anticipate that our second-line all-comer label in China will be affected by the FDA’s discussionsstatus compared with GSK. We also do not expect a change in our first-line label for ZEJULA; the FDA’s discussions with GSK do not apply to this indication.
Optune (Tumor Treating Fields or TTFields). As of September 30, 2022, Optune has been listed in 72 regional customized commercial health insurance plans guided by provincial or municipal governments (or “supplemental insurance plans”) since its commercial launch in China in the third quarter of 2020, compared to 25 supplemental insurance plans as of September 30, 2021.
QINLOCK. In August 2022, the recommendation level of QINLOCK for second-line treatments for advanced gastrointestinal stromal tumor (“GIST”) patients was advanced from Level III to Level II (1A evidence) in the Chineseplacebo.
SocietyProduct 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 and regulatory approvals:
Oncology
•ZEJULA (niraparib, PARP): In July 2023, we announced the publication in JAMA Oncology of Clinical Oncologydata from the pivotal Phase III PRIME study evaluating ZEJULA as a first-line maintenance therapy in Chinese patients with newly diagnosed advanced ovarian cancer and demonstrating that an individual starting dose (“CSCO”ISD”) Guidelines for Diagnosisof 200 or 300mg based on baseline bodyweight and Treatmentplatelet count can bring significant benefit to patients with an improved safety and tolerability profile of GIST 2022. As of September 30, 2022, QINLOCK has been listed in 96 supplemental insurance plans since its commercial launch in mainland China in May 2021,ZEJULA compared to 28 supplemental insurance plans asa fixed 300mg starting dose. The data demonstrated that maintenance treatment with ZEJULA can significantly extend progression-free survival (“PFS”) versus a placebo and can reduce the risk of September 30, 2021. We are seeking inclusiondisease progression or death by 55% among patients with newly diagnosed advanced ovarian cancer, regardless of QINLOCKpostoperative residual disease or biomarker status. For example, with a median follow-up of 27.5 months, median PFS (“mPFS”) with ZEJULA versus placebo in the NRDL forintention-to-treat (“ITT”) population was 24.8 versus 8.3 months (hazard ratio (“HR”), 0.45; 95% confidence internal (“CI”), 0.34–0.60; p<.001). At the time of data cut-off, OS data were not yet mature in the ITT population. Utilization of an individual starting dose demonstrated a fourth-line gastrointestinal stromal tumor indication.
NUZYRA•. We are seeking inclusionTumor Treating Fields (TTFields or Optune):
◦Pancreatic Cancer: In July 2023, NovoCure Limited (“NovoCure”) announced the results of NUZYRAa pre-specified interim analysis for the Phase III PANOVA-3 clinical trial evaluating the safety and efficacy of TTFields therapy together with nab-paclitaxel and gemcitabine for the treatment of patients with unresectable, locally advanced pancreatic cancer. An independent data monitoring committee (“DMC”) reviewed the safety and efficacy data for all patients in the NRDL for community-acquired bacterial pneumonia (“CABP”) and acute bacterial skin and skin structure infections (“ABSSSI”) indications.fully enrolled clinical trial. The interim analysis resulted in a DMC recommendation that the clinical trial proceed to final analysis. Zai Lab participated in the Greater China portion of the study.
Product Candidates – Oncology
Adagrasib•.KRAZATI® (Adagrasib, KRASG12C):
◦First-Line Non-Small Cell Lung Cancer (“NSCLC”): In September 2022,October 2023, our partner Mirati presentedTherapeutics, Inc. (“Mirati”) announced updated results from KRYSTAL-1, a multicohortthe KRYSTAL-7 Phase 1/2II study evaluating adagrasib with or without cetuximab in patients with advanced colorectal cancer (“CRC”) harboring a KRASG12C mutation at the European Society for Medical Oncology Congress 2022. Of the evaluable patients in the adagrasib monotherapy cohort (n=43), the investigator assessed confirmed objective response rate (“ORR”) was 19% (8/43), and the disease control rate (“DCR”) was 86% (37/43). The median duration of response (“DOR”) was 4.3 months (95% CI, 2.3–8.3), and median PFS was 5.6 months (95% CI, 4.1–8.3). Of the evaluable patients in the adagrasib plus cetuximab combination cohort (n=28), the investigator assessed confirmed ORR was 46% (13/28), and the DCR was 100% (28/28). The median DOR was 7.6 months (95% CI 5.7–NE), and median PFS was 6.9 months (95% CI, 5.4–8.1). The prognosis for patients with CRC has historically been poor in later lines of therapy with response rates of approximately 1-2% and median PFS of approximately 2 months in patients with late-line CRC; patients with KRASG12C-mutated CRC tend to have even worse outcomes than the broader CRC patient population. In the overall subset of patients with KRASG12C-mutated CRC evaluated in this study, adagrasib was found to be well-tolerated as a monotherapy and in combination with cetuximab. The majority of observed treatment-related adverse events (“TRAEs”) were grade 1-2 (59%); no grade 5 TRAEs were observed.
In addition, in August 2022, we treated the first patient in Greater China for the global Phase 2 KRYSTAL-7 study of adagrasib in combinationcombined with pembrolizumab in first-line KRASG12C-mutated non-small cell lung cancerNSCLC at the European Society of Medical Oncology Congress (“NSCLC”ESMO”) patients.2023. The results demonstrate a manageable safety profile and early signs of durability of adagrasib in combination with a checkpoint inhibitor in the first-line NSCLC setting. We are participating in the study in Greater China.
◦Bemarituzumab.Second-line+ NSCLC: In September 2023, Mirati presented two-year follow-up data from a pooled analysis of the Phase I/Ib Cohort and Phase 2 Cohort A for the KRYSTAL-1 study in previously treated patients with KRASG12C-mutated NSCLC at the 2023 World Conference on Lung Cancer (“WCLC”). In the pooled analysis, adagrasib demonstrated durable efficacy and a manageable long-term safety profile. We are participating in the ongoing confirmatory Phase III KRYSTAL-12 study in previously treated patients with KRASG12C-mutated NSCLC in Greater China.
•Repotrectinib (ROS1/TRK):
◦NTRK-Positive Solid Tumors: OurIn August 2023, the Center for Drug Evaluation (“CDE”) of the China National Medical Products Administration (“NMPA”) granted Breakthrough Therapy Designation (“BTD”) for repotrectinib, a next generation tyrosine kinase inhibitor (“TKI”), for the treatment of patients with advanced solid tumors that have a neurotrophic tropomyosin-receptor kinase (“NTRK”) gene fusion who have progressed following treatment with TRK TKIs. This BTD was supported by data from both global and Chinese patients enrolled in the Phase I/II TRIDENT-1 study.
◦ROS1-Positive NSCLC:In August 2023, our partner Amgen continuesBristol Myers Squibb (“BMS”) announced updated results from the registrational TRIDENT-1 study, demonstrating that repotrectinib continued to enrolldemonstrate high response rates and durable responses, including robust intracranial responses in patients with ROS1-positive locally advanced or metastatic NSCLC. For example, median duration of response (“DOR”) and median progression-free survival (“PFS”) was disclosed for the first time in several studiesthe pooled Phase I and Phase II population of bemarituzumab, including:patients with ROS1-positive NSCLC: In TKI-naïve patients (n=71) with median follow-up of 24.0 months, confirmed objective response rate by Blinded Independent Central Review was 79%, median DOR and PFS were 34.1 months and 35.7 months, respectively. Based on results from the TRIDENT-1 trial, the FDA accepted the New Drug Application (“NDA”) submitted by BMS for repotrectinib for the treatment of patients with ROS1-positive NSCLC and granted Priority Review, with a Prescription Drug User Fee Act (“PDUFA”) goal date of November 27, 2023. The NDA we submitted to the NMPA for repotrectinib for patients with ROS-1 positive NSCLC has been accepted with priority review.
•TIVDAK® (Tisotumab Vedotin, Antibody Drug Conjugate (“ADC”)): In October 2023, our partner Seagen Inc. (“Seagen”) and Genmab A/S presented results from the Phase III innovaTV 301 global trial in recurrent or metastatic cervical cancer patients with disease progression on or after front-line therapy who received TIVDAK, compared with chemotherapy alone, met its primary endpoint of OS. An Independent Data Monitoring Committee determined that OS crossed the pre-specified efficacy boundary at interim analysis. The key secondary endpoints of investigator-assessed progression-free survival and objective response rate also demonstrated statistical significance. The safety profile of TIVDAK in innovaTV 301 was consistent with the known safety profile of TIVDAK as presented in the U.S. prescribing information, and no new safety signals were observed. We are participating in the global trial and extension study in Greater China.
•Bemarituzumab (FGFR2b): In July 2023, we enrolled the first patient in China in the global Phase III FORTITUDE-101 a Phase 3 study of bemarituzumab plus chemotherapy, versus placebo plus chemotherapy, in first-line gastric cancer with FGFR2b overexpression, and FORTITUDE-102, the Phase 3 portionoverexpression.
•ZL-1211 (Claudin18.2): Based on a review of the 1b/3 studycompetitive landscape and market opportunity, we have decided to terminate internal development of bemarituzumab plus chemotherapy and nivolumab versus chemotherapy and nivolumab in first-line gastric cancer with FGFR2b overexpression.
Repotrectinib. In October 2022, our partner Turning Point Therapeutics (a wholly owned subsidiary of Bristol Myers Squibb Company) provided a clinical data update from the global, registrational Phase 1/2 TRIDENT-1 study of repotrectinib at the 34th EORTC-NCI-AACR (“ENA”) Symposium 2022. Repotrectinib continued to demonstrate meaningful clinical activity in patients with ROS1+ advanced NSCLC, who were tyrosine kinase inhibitor (“TKI”)-naïve or TKI-pretreated, including with ROS1 G2032R resistance mutation. Durable responses and intracranial efficacy were observed in both TKI-naïve and TKI-pretreated patients. Repotrectinib also continued to show clinical activity in patients with NTRK+ advanced solid tumors who were TKI-naïve or TKI-pretreated, and responses were seen across diverse tumor types. Safety is well characterized, manageable with known protocols, and signals potential compatibility with long-term use. Also in October 2022, we completed enrollment in China in all cohorts of the registrational Phase 1/2 TRIDENT-1 study.
BLU-945. In November 2022, our partner Blueprint Medicines Corporation presented an update on the Phase 1/2 SYMPHONY trial data supporting plans to develop BLU-945 in combination with osimertinib in first-line epidermal growth factor receptor (“EGFR”) L858R mutation-positive NSCLC.
Global R&D Oncology Programs. In November 2022, we presented data from our internal oncology pipeline at the Society for Immunotherapy of Cancer (“SITC”) Annual Meeting in Boston, Mass. These presentations focus on two key global discovery programs: ZL-1211, an anti-CLDN18.2 antibody, and ZL-1218, an anti-CCR8 antibody.
Product Candidates – Autoimmune Disorders
VYVGART (Efgartigimod). In September 2022, our partner argenx announced the submission of a Biologics License Application to the FDA for subcutaneous efgartigimod for the treatment of generalized myasthenia gravis (“gMG”) in adult patients and that the European Commission has granted marketing authorization for VYVGART as an add-on to standard therapy for the treatment of adult patients with gMG who are anti-acetylcholine receptor antibody positive. As of November 1, 2022, VYGART has been listed in 10 supplemental insurance plans in China.
Autoimmune Disorders, Infectious Disease, and Neuroscience
ZL-1102•. Efgartigimod (FcRn): In September 2022, we presented results2023, the CDE of the Phase 1 proof-of-conceptNMPA granted BTD for efgartigimod alfa injection (subcutaneous injection) (“efgartigimod SC”) for the treatment of patients with chronic inflammatory demyelinating polyneuropathy (“CIDP”). This BTD was supported by data from both global and Chinese patients enrolled in the ADHERE study. The ADHERE study for ZL-1102 atmet its primary endpoint (p=0.000039), demonstrating a significantly lower risk of relapse with efgartigimod SC compared to placebo. efgartigimod SC demonstrated a 61% reduction (HR: 0.39 95% CI: 0.25; 0.61) in the 2022 European Academyrisk of Dermatologyrelapse versus placebo, and Venereology Congress67% of patients in Milan, Italy.open-label Stage A demonstrated evidence of clinical improvement, indicating that IgG autoantibodies play a significant role in the underlying biology of CIDP. The safety and tolerability profile was consistent with previous clinical trials and the confirmed safety profile of VYVGART. We participated in the Greater China portion of the study.
Product Candidates – Neuroscience
KarXT◦.Schizophrenia: In September 2022, we obtained agreement2023, our partner Karuna Therapeutics, Inc. (“Karuna”) announced that it had submitted an NDA to the FDA for the treatment of schizophrenia, supported by data from the NMPA on the development plan of athree positive registrational trials. We continue to enroll patients in our registrational bridging study in schizophrenia in China. In October 2022, we started patient enrollment for a pharmacokinetic (“PK”) study of KarXT inmainland China.
InAlzheimer’s disease psychosis (ADP): Karuna initiated the Phase III ADEPT-2 and ADEPT-3 trials in ADP in the third quarter of 2022,2023. We plan to participate in these studies in Greater China next year.
Corporate Updates
We continued to strengthen our partner Karuna initiatedorganizational structure to support the Phase 3 ADEPT-1 study evaluating KarXTevolving needs of our business. For example:
•The Company promoted Dr. Yajing Chen to Chief Financial Officer, effective July 7, 2023. Dr. Chen previously served as our Senior Vice President and Deputy Chief Financial Officer, helping to oversee finance, planning and forecasting, accounting, tax, treasury, and procurement matters since joining the Company in September 2021. She is a treatment for psychosis in Alzheimer’s disease, andseasoned finance executive with more than 20 years of experience in the fourth quarter of 2022, Karuna completed enrollment in the Phase 3 EMERGENT-3 trial in schizophrenia. In addition, in October 2022, Karuna announced that data from the Phase 3 EMERGENT-2 trial of KarXT in schizophrenia was shared at the 35th European College of Neuropsychopharmacology Congress in Vienna, Austria. A poster presentation and symposium included previously reported efficacy and safety data,life sciences industry as well as new additional safety data from the trial.
Recent Business Developments
In September 2022, we entered into a collaboration and license agreement with Seagen for the development and commercialization of TIVDAK (tisotumab vedotin) in Greater China. TIVDAK is the first and only anti-body drug conjugate (“ADC”) approved in the United States for the treatment of adult patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy and is an important addition to our oncology portfolio.
In the second half of 2022, we have continued to enhance our global leadership team. For example, Dr. Peter HuangPh.D. trained scientist. She joined the Company from Zentalis Pharmaceuticals in November asAstraZeneca where she held various roles of increasing responsibility from 2006 to 2021, including Chief Scientific Officer. Dr. Huang bringsFinancial Officer for the U.S. Oncology Business Unit from 2019 to 2021 and Finance Controller of the Global Oncology Business Unit from 2016 to 2019. Her scientific background combined with her significant executive management experience, finance expertise at leading global companies, and business acumen provide a unique and valuable perspective to the Company and will help drive our next phase of growth. Dr. Chen succeeds Billy Cho, who stepped down from his role and left the Company on July 7, 2023.
•The Company appointed Dr. Robert Brown as Chief Medical Officer, Oncology in September 2023 to help accelerate the growth and development for our global oncology pipeline. Dr. Brown is an extensive scientific background and strong leadership andoncology drug development leader, with more than 16 years of translational, research, and clinical development experience, including over 16 years working withinexpertise in the biopharmaceutical industry.areas of oncology, immunology, and neurology. Dr. Huang will be a key member of the Company’s executive management team and is responsible for leading and overseeing the Company’s discovery efforts and translational medicine. In addition, Alette Verbeek joined the Company from Novartis in October as SVP,Brown reports to Dr. Rafael Amado, President, Head of Global Strategic Partnering. She isOncology Research and Development at Zai Lab, and provides strategic leadership and support with respect to the clinical development of our first employee based in Europe and is responsible, among other things, for leading our European business development efforts.
In November 2022, The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) approved the Company’s transition from a listing under Chapter 18A of the Listing Rules of the Hong Kong Stock Exchange (Biotech Companies) to a general listing under Rule 8.05(3) of the Listing Rules (Qualifications for Listing), as the Company has satisfied applicable revenue and market capitalization requirements for listing outside of Chapter 18A. As a result of this approval, the “B” marker will be removed from the Company’s stock short name on the Hong Kong Stock Exchange, effective November 11, 2022.
Recent Legal and Regulatory Developments
Measures on Security Assessment of Cross-Border Data Transfer
On July 7, 2022,Our business has been and continues to be impacted by legal and regulatory developments in the CAC issued the “Security Assessment Measures”,jurisdictions in which sets out a security assessment framework for cross-border data transfers out ofwe operate, particularly in mainland China as well as ground ruleswhere our operations and product markets are primarily located. In July 2023, the Ministry of Science and Technology of the People’s Republic of China published an updated Service Guide for a security assessmentthe Examination and Approval of Sampling, Collecting, Trading, Exporting Human Genetic Resources, which will impact the Company’s practices in filing for cross-border data transfers which was stipulatedan advance approval with the HGRAC. In addition, in July 2023, a revised Counter-Espionage Law intended to strengthen provisions on the Cybersecurity Law and the Personal Information Protection Law.
Aprotection of national security assessment will be triggered if a cross-border data transfer out ofin mainland China fallswent into any of the following scenarios: (i) transfer of important data by data processors; (ii) transfer of personal information (“PI”) by critical information infrastructure operators (“CIIOs”) and data processors that process PI of more than one million individuals; (iii) transfer of PI by data processors that have transferred either PI of over 100,000 individuals or sensitive PI of over 10,000 individuals abroad since January 1 of the preceding year; and (iv) other situations as determined by the CAC. According to statements by the CAC, a cross-border data transfer includes (i) an outbound transfer and overseas storage of data collected and generated during a data processor’s operation in mainland China; and (ii) a remote access or use of data collected and generated by a data processor stored within mainland China by overseas institutions, organizations, and individuals.
Prior to applying for a security assessment with the CAC, data processors are required to carry out a self-risk assessment, which needs to be presented to the CAC along with an application filing and other required materials for a security assessment. During a security assessment, the CAC will primarily focus on risks to national security, public interests, and the legitimate rights and interests of individuals or organizations that such cross-border data transfer mayeffect,
cause. A cross-borderwhich may increase our cyber security or operational costs and could subject us to investigative or enforcement actions by the Chinese government or regulatory authorities. In September 2023, the CAC released a draft regulation, under which certain low-risk data export activities will be exempted from certain transfer of relevant data willrequirements relating to the governmental security assessment, standard contract, and privacy protection certification. While this regulation has not been finalized and is not yet effective, and may not be allowed if the CAC does not approve the security assessment filing. Once the CAC approves the security assessment filing, such approval will remain valid for two years and may be renewed. An application for security assessment needs to be re-submitted if there is a changefinalized or adopted in the cross-border data transfer that may affect the security of the exported data, suchits current form, as changes in the purpose, method, scope, and type of the exported data and changes in the purpose and method of the processing of the exported data by overseas recipients.
The Security Assessment Measures have retroactive effect for cross-border data transfers out of mainland China of relevant data conducted prior to their effective date on September 1, 2022. If a Data Processor fails to complete its security assessment for any of its cross-border data transfers of relevant data out of mainland China prior to the effective date of the Security Assessment Measures,drafted it needs to rectify the failure within six months after the effective date of the Security Assessment Measures.
Proposed Amendments to the Cybersecurity Law of the People’s Republic of China
On September 14, 2022, the CAC published a draft amendment to China’s Cybersecurity Law for public comment. According to the CAC, the draft revisions were formulated to align the Cybersecurity Law with several new laws that were released after the Cybersecurity Law came into effect in June 2017. These new laws include the Administrative Punishment Law of the People’s Republic of China, the Data Security Law of the People’s Republic of China, and the Personal Information Protection Law of the People’s Republic of China, all of which were adopted or amended in 2021.
The draft amendment mainly proposes revisions to Chapter VI of the Cybersecurity Law on legal responsibility which adjust the types and ranges of administrative penalties for violating the Cybersecurity Law that endanger network security and strengthens the network security responsibilities of CIIOs. Generally, the fines and penalties available to be imposed by Chinese regulators have been significantly increased and expanded. The proposed revisions also defer to the legal liability provisions under relevant laws or administrative regulationswould reduce our compliance burden with respect to violations of the Cybersecurity Law provisions relating to the illegal use of networks, overseas transfers of data by critical information infrastructure operations, and personal information protection.
Guide to Applications for Security Assessment of Outbound Data Transfers (First Edition)
On August 31, 2022, the CAC promulgated the first edition of the Guide to Applications for Security Assessment of Outbound Data Transfers (the “Guide”). The Guide provides practical guidance to the implementation of the Security Assessment Measures, which sets out a security assessment framework for cross-border data transfers out of mainland China.
The Guide reiterates the timeline and procedures for applications for security assessment of outbound data transfers under the Security Assessment Measures. The Guide specifies the dossier requirements for applications for security assessment and provides templates for some required documents. Prior to submitting an application for security assessment, the applicant must first conclude an outbound data transfer contract with the overseas recipient of the data transfer and conduct a self-assessment of the risks of the outbound data transfer. Additionally, the Guide clarifies that the application of security assessment shall be submitted to provincial branches of the CAC, who will forward it to the CAC for further review and assessment.
The Guide also clarifies that a cross-border data transfer out of mainland China includes where a data processor stores data collected or generated in its operations in mainland China to an overseas recipient, and where a data processor allows an overseas entity, organization, or individual to access, retrieve, download, or export data the data processor collects or generates and stores in mainland China.
Measures for the Supervision and Administration of Online Drug Sales
On September 1, 2022, the SAMR announced the Measures for the Supervision and Administration of Online Drug Sales (the “Measures”), which will take effect as of 1 December 2022. The Measures set out a comprehensive regulatory framework for the online sale of drugs, including the online sale of prescription drugs and the regulation of trading platforms that engage in the online sale of drugs.
The Measures include six chapters and 42 articles. The main sections include: (i) the obligations, qualifications, and responsibilities of online drug sellers; (ii) the responsibilities of trading platforms for online drug sales; (iii) the supervision and management of online sales of prescription drugs; (iv) the division of responsibilities of drug regulators at all levels in the supervision of online drug sales; and (v) the legal liability for illegal online drug sales. Notably, both drug marketing authorization holders and drug distributors can qualify as online drug sellers. Online sale of prescription drugs is permitted,
but drug retailers and providers of trading platforms for the online sale of prescription drugs must abide by the regulatory requirements specified in the Measures.
PRC Anti-Monopoly Law
On June 24, 2022, the Standing Committee of the National People’s Congress published amendments to the PRC Anti-Monopoly Law (the “AML”), which came into effect on August 1, 2022. The amended AML formally implements China’s latest anti-monopoly policies by, among other things, improving regulatory rules for anti-competitive agreements, expressly addressing monopoly issues in the platform economy, and substantially increasing the penalties for violating the law.
The improvements of the regulatory rules for anti-competitive agreements made by the amended AML mainly includes: (i) expressly stipulating that an agreement which fixes or limits resale prices, that is, a vertical anti-competitive agreement, is not prohibited if relevant business operators can prove that such agreement does not have the effect of eliminating or restricting competition; (ii) formally provides the “safe harbor” regime which stipulates that a vertical anti-competitive agreement is not prohibited, if the parties’ market share in the relevant market is lower than the market share percentage set by the anti-monopoly enforcement agency and other conditions established by the anti-monopoly enforcement agency are met; (iii) codifies that business operators shall not organize other business operators to reach a monopoly agreement or provide substantial assistance for other business operators to reach a monopoly agreement.
The amended AML formally extends the anti-monopoly regulatory regime to the platform economy by outlining the general principal that business operators shall not engage in monopolistic activities, such as by taking advantage of data and algorithms, technology, capital advantage, and platform rules. The amended AML also specifically prohibits business operators from abusing market dominance, such as by using data and algorithms, technology, and platform rules.
Penalties for violation of the AML have been substantially increased by the amended AML. For example, according to the amended AML, if a company completes a concentration of business in violation of the AML that will have or is likely to have the effect of eliminating or restricting competition, in addition to other remedial measures, a fine of up to 10% of the last year’s sales revenue may be imposed. If the concentration of business in violation of the AML completed by the company does not have the effect of eliminating or restricting competition, a fine of up to RMB 5 million may be imposed. In the case that the aforementioned violation has particularly serious circumstances, bad impact, or consequences, the fine imposed may be further increased to between two and five times the aforementioned fine amount.transfers.
Factors Affecting Our 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 advancing and expanding, with thirteenseveral product candidates in late-stage clinical product candidates being investigated as of September 30, 2022.development.
We have financed our activities primarily through private placements, our initial public offering on Nasdaq in September 2017 and multiple follow-on offerings on Nasdaq, and our initial public offering in September 2020 and a secondary listingfollow-on offering in April 2021 on the Hong Kong Stock Exchange in September 2020.Exchange. Through September 30, 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-on offerings 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 $258.4$183.3 million and $396.2$258.4 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our thirteen late-stage clinical product candidates, research and develop our clinical- 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”), contract manufacture organizations (“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 pre-clinical activities and regulatory operations; and
•expenses associated with the construction and maintenance of our manufacturing facilities; andfacilities.
•costs associated with operating as a public company.
The Company is in the process of evaluating its development programs and is developing a series of recommendations for prioritizing these programs to concentrate our resources on programs that have the greatest potential to beneficially impact patients, strengthen our global competitiveness, and provide long-term sustainability.
Selling, General, and Administrative Expenses
Our selling, general, and administrative expenses consist primarily of personnel compensation and related costs, including share-based compensation for commercial and administrative personnel. Other selling, general, and administrative expenses include product distribution and promotion costs, professional service fees for legal, intellectual property, consulting, auditing, and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies used in selling, general, and administrative activities. We anticipate that our selling, general, and administrative expenses will increase in future periods to support increases in our commercial and research and development activities and as we continue to discover, develop, commercialize, develop, and manufacture our products and assets.product candidates. 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. We also anticipate incurring additional legal, compliance, accounting, and investor and public relations expenses associated with being a public company.insurance costs.
Our Ability to Commercialize Our Product Candidates
As of November 3, 2022, thirteen of ourWe have several product candidates are in late-stage clinical development and various others are in clinical and pre-clinical development in Greater China and the United States. Our ability to generate revenue from our product candidates is dependent on our receipt of regulatory approvals for and successful commercialization of such products,product candidates, which may not occur. Certain of our product candidates may require additional pre-clinical and/or clinical development,
regulatory approvals in multiple jurisdictions, manufacturing supply, substantial investment, and significant marketing efforts before we generate any revenue from product sales.
Our License and Collaboration Arrangements
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 aremay be required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and commercialsales-based milestones for the relevant products under these agreements as well as certain royalties at tiered royaltiespercentage rates based on annual net sales of the licensed products. We recorded research and development expense related to upfront license fees and development milestone paymentsmilestones of an insignificant amount and $19.3 million for the three and nine months ended September 30, 2023, respectively, and $39.8 million and $50.2 million for the three and nine months ended September 30, 2022, respectively,2022. We may be obligated to pay up to an additional aggregate amount of approximately $1,337.5 million in development and $5.1regulatory milestone payments and $2,410.2 million in sales-based milestone payments that are contingent on product performance as well as certain royalties at tiered percentage rates on annual net sales. These milestones may not occur at all, or certain development and $274.3 million forregulatory milestones may occur before the three and nine months ended September 30, 2021, respectively.Company has commercialized or received any revenue from the licensed product. If these milestones do occur, we view related payments as positive because they signify that the product is advancing toward potential commercial launch or achieving higher sales levels.
Results of Operations
The COVID-19 Pandemic
Ourfollowing table presents our results of operations have been, and we expect them to continue to be, adversely affected by the effects of the COVID-19 pandemic, including government actions and quarantine measures taken($ in response, particularly in mainland China where our operations and product markets are primarily located. For example, the COVID-19 pandemic has adversely affected patient access to our products, such as through reduced hospital patient load, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. The COVID-19 pandemic has also adversely affected our manufacturing and supply chain and our research and development, sales, marketing, and clinical trial activities. The operations of our suppliers, CROs, CMOs, and other contractors and third parties on which we rely also have been, and may continue to be, adversely affected. Although our net product revenues increased in the three and nine months ended September 30, 2022, as compared to the same periods in the prior year, these revenue increases were negatively affected by the effects of the pandemic, and we expect some additional residual revenue impacts in the fourth quarter of 2022 and perhaps beyond.thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues: | | | | | | | | | | | | | | | | |
| Product revenue, net | | 69,228 | | | 56,963 | | | 12,265 | | | 22 | % | | 200,889 | | | 150,633 | | | 50,256 | | | 33 | % |
| Collaboration revenue | | — | | | 577 | | | (577) | | | (100) | % | | — | | | 1,806 | | | (1,806) | | | (100) | % |
| Total revenues | | 69,228 | | | 57,540 | | | 11,688 | | | 20 | % | | 200,889 | | | 152,439 | | | 48,450 | | | 32 | % |
| Expenses: | | | | | | | | | | | | | | | | |
| Cost of sales | | (25,479) | | | (20,044) | | | (5,435) | | | 27 | % | | (70,579) | | | (53,094) | | | (17,485) | | | 33 | % |
| Research and development | | (58,767) | | | (99,524) | | | 40,757 | | | (41) | % | | (183,920) | | | (219,462) | | | 35,542 | | | (16) | % |
| Selling, general, and administrative | | (68,552) | | | (66,555) | | | (1,997) | | | 3 | % | | (198,982) | | | (186,947) | | | (12,035) | | | 6 | % |
| Gain on sale of intellectual property | | — | | | — | | | — | | | — | % | | 10,000 | | | — | | | 10,000 | | | NM |
| Loss from operations | | (83,570) | | | (128,583) | | | 45,013 | | | (35) | % | | (242,592) | | | (307,064) | | | 64,472 | | | (21) | % |
| Interest income | | 9,172 | | | 3,872 | | | 5,300 | | | 137 | % | | 29,493 | | | 5,235 | | | 24,258 | | | 463 | % |
| Foreign currency gain (loss) | | 4,852 | | | (40,442) | | | 45,294 | | | (112) | % | | (26,315) | | | (73,052) | | | 46,737 | | | (64) | % |
| Other income (expense), net | | 394 | | | 3,963 | | | (3,569) | | | (90) | % | | 223 | | | (6,415) | | | 6,638 | | | (103) | % |
| Loss before income tax and share of loss from equity method investment | | (69,152) | | | (161,190) | | | 92,038 | | | (57) | % | | (239,191) | | | (381,296) | | | 142,105 | | | (37) | % |
| Income tax expense | | — | | | — | | | — | | | — | % | | — | | | — | | | — | | | — | % |
| Share of loss from equity method investment | | — | | | — | | | — | | | — | % | | — | | | (221) | | | 221 | | | (100) | % |
| Net loss | | (69,152) | | | (161,190) | | | 92,038 | | | (57) | % | | (239,191) | | | (381,517) | | | 142,326 | | | (37) | % |
| Net loss attributable to ordinary shareholders | | (69,152) | | | (161,190) | | | 92,038 | | | (57) | % | | (239,191) | | | (381,517) | | | 142,326 | | | (37) | % |
NM - Not Meaningful
Results of OperationsRevenues
The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Revenues: | | | | | | | | | | | | | | | | |
| Product revenue, net | | 56,963 | | | 43,103 | | | 13,860 | | | 32 | % | | 150,633 | | | 100,141 | | | 50,492 | | | 50 | % |
| Collaboration revenue | | 577 | | | — | | | 577 | | | 100 | % | | 1,806 | | | — | | | 1,806 | | | 100 | % |
| Total revenues | | 57,540 | | | 43,103 | | | 14,437 | | | 33 | % | | 152,439 | | | 100,141 | | | 52,298 | | | 52 | % |
| Expenses: | | | | | | | | | | | | | | | | |
| Cost of sales | | (20,044) | | | (12,162) | | | (7,882) | | | 65 | % | | (53,094) | | | (30,535) | | | (22,559) | | | 74 | % |
| Research and development | | (99,524) | | | (55,144) | | | (44,380) | | | 80 | % | | (219,462) | | | (401,220) | | | 181,758 | | | (45) | % |
| Selling, general, and administrative | | (66,555) | | | (59,002) | | | (7,553) | | | 13 | % | | (186,947) | | | (149,254) | | | (37,693) | | | 25 | % |
| Loss from operations | | (128,583) | | | (83,205) | | | (45,378) | | | 55 | % | | (307,064) | | | (480,868) | | | 173,804 | | | (36) | % |
| Interest income | | 3,872 | | | 713 | | | 3,159 | | | 443 | % | | 5,235 | | | 1,171 | | | 4,064 | | | 347 | % |
| Other income (expenses), net | | (36,479) | | | (13,580) | | | (22,899) | | | 169 | % | | (79,467) | | | (12,401) | | | (67,066) | | | 541 | % |
| Loss before income tax and share of loss from equity method investment | | (161,190) | | | (96,072) | | | (65,118) | | | 68 | % | | (381,296) | | | (492,098) | | | 110,802 | | | (23) | % |
| Income tax expense | | — | | | — | | | — | | | — | % | | — | | | — | | | — | | | — | % |
| Share of loss from equity method investment | | — | | | (340) | | | 340 | | | (100) | % | | (221) | | | (548) | | | 327 | | | (60) | % |
| Net loss | | (161,190) | | | (96,412) | | | (64,778) | | | 67 | % | | (381,517) | | | (492,646) | | | 111,129 | | | (23) | % |
| Net loss attributable to ordinary shareholders | | (161,190) | | | (96,412) | | | (64,778) | | | 67 | % | | (381,517) | | | (492,646) | | | 111,129 | | | (23) | % |
Revenues
Product Revenue, Net
The table below presents the components of the Company’s product revenue net for the three and nine months ended September 30, 2022 and 2021 (in($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Product revenue - gross | | $ | 60,446 | | | $ | 47,555 | | | $ | 12,891 | | | 27 | % | | $ | 168,095 | | | $ | 135,490 | | | 32,605 | | | 24 | % |
| Less: Rebate and sales return | | (3,483) | | | (4,452) | | | 969 | | | (22) | % | | (17,462) | | | (35,349) | | | 17,887 | | | (51) | % |
| Product revenue - net | | 56,963 | | | 43,103 | | | 13,860 | | | 32 | % | | 150,633 | | | 100,141 | | | 50,492 | | | 50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Product revenue - gross | | 74,018 | | | 60,446 | | | 13,572 | | | 22 | % | | 220,240 | | | 168,095 | | | 52,145 | | | 31 | % |
| Less: Rebates and sales return | | (4,790) | | | (3,483) | | | (1,307) | | | 38 | % | | (19,351) | | | (17,462) | | | (1,889) | | | 11 | % |
| Product revenue - net | | 69,228 | | | 56,963 | | | 12,265 | | | 22 | % | | 200,889 | | | 150,633 | | | 50,256 | | | 33 | % |
Our product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, NUZYRA, and NUZYRAVYVGART in mainland China and Hong Kong. Kong, 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 $13.9$12.3 million and $50.5$50.3 million in the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, respectively. These net revenue increases were2023, respectively, primarily driven by increased sales volumes, although thesethe launch of VYVGART, and decreased negative effects from the COVID-19 pandemic. Our revenue growth was slowed by the effects on hospital and physician practices from the recent industry-wide anti-corruption enforcement efforts in China. In terms of revenue growth by product, ZEJULA continued to be the leading PARP inhibitor in hospital sales for ovarian cancer in mainland China; increased volumessales for Optune were negatively affectedsupported by increased patient access in the private-pay market, increased sales for QINLOCK and NUZYRA were supported by their inclusion in the NRDL in the first quarter of 2023, and we commercially launched VYVGART for gMG in mainland China in September 2023. The effects of the COVID-19 pandemic including government restrictions or lockdown measures in mainland China, which negatively affected patient access tohad an adverse impact on our products. These net revenue increases were also driven by a decrease in sales rebates related to product price reductions.
Sales rebates are offered to distributors in mainland China and the amounts are recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes and level of distributor inventories. The Company lowered the selling price of ZEJULA in December 2020 when it was included in the NRDL and again in December 2021 as a result of an extension in ZEJULA’s indications. Accordingly, the Company accrued nil and $2.8 million for sales rebates as compensation to distributors in mainland China for those products previously sold at the price prior to the NRDL implementation during the three and nine months ended September 30, 2022, respectively, and nil and $22.0 million during the three and nine months ended September 30, 2021, respectively.
The Company is scheduled to enter into negotiations with the National Healthcare Security Administration regarding potential inclusion of QINLOCK and NUZYRA in the NRDL, and in June 2022, the Company lowered the selling price for these products. Accordingly, the Company accrued nil and $2.4 million for sales rebates as compensation to distributors previously sold at the price prior to the reduction for QINLOCK during the three and nine months ended September 30, 2022, respectively, and nil and $0.2 million for NUZYRA during the three and nine months ended September 30, 2022, respectively.
The following table presents net revenue by product for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):the first quarter in 2023, due to 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 COVID-19 pandemic did not have a material adverse effect on our sales volume in the second and third quarters of 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| ZEJULA | | $ | 39,214 | | | $ | 28,162 | | | $ | 11,052 | | | 39 | % | | $ | 102,863 | | | $ | 64,134 | | | 38,729 | | | 60 | % |
| Optune | | 10,662 | | | 10,653 | | | 9 | | | — | % | | 35,051 | | | 27,318 | | | 7,733 | | | 28 | % |
| QINLOCK | | 5,541 | | | 4,288 | | | 1,253 | | | 29 | % | | 9,123 | | | 8,689 | | | 434 | | | 5 | % |
| NUZYRA | | 1,546 | | | — | | | 1,546 | | | — | % | | 3,596 | | | — | | | 3,596 | | | — | % |
| Total product revenue, net | | $ | 56,963 | | | $ | 43,103 | | | $ | 13,860 | | | 32 | % | | $ | 150,633 | | | $ | 100,141 | | | $ | 50,492 | | | 50 | % |
Collaboration Revenue
Collaboration revenue increased by $0.6 million to $0.6 million forFor the threenine months ended September 30, 2023 and 2022, from nilour net product revenue included negative adjustments of $5.2 million and $5.3 million, respectively, as a result of sales rebates to compensate distributors for sales of certain products at prices prior to their price reductions in connection with their inclusion on the threeNRDL in China. Such sales rebates to distributors on previously purchased products are customary in our industry. The negative adjustments in the nine months ended September 30, 2021. Collaboration revenue increased by $1.8 million2023 related to such sales rebates for price reductions for QINLOCK and NUZYRA in connection with their addition to the NRDL in the first quarter of 2023. The negative adjustments in the nine months ended September 30, 2022 fromrelated to such sales rebates for price reductions for ZEJULA due to its inclusion in the NRDL for certain therapies in December 2021 and for price reductions for QINLOCK and NUZYRA in the second quarter of 2022 in connection with NRDL pricing negotiations. Such negative adjustments were nil forand insignificant during the ninethree months ended September 30, 2021. These increases were due to our collaborative arrangement with Huizheng (Shanghai) Pharmaceutical Technology Co., Ltd.2023 and 2022, respectively.
The following table presents net revenue by product ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| ZEJULA | | 41,593 | | | 39,214 | | | 2,379 | | | 6 | % | | 127,230 | | | 102,863 | | | 24,367 | | | 24 | % |
| Optune | | 11,562 | | | 10,662 | | | 900 | | | 8 | % | | 38,596 | | | 35,051 | | | 3,545 | | | 10 | % |
| QINLOCK | | 5,702 | | | 5,541 | | | 161 | | | 3 | % | | 14,535 | | | 9,123 | | | 5,412 | | | 59 | % |
| NUZYRA | | 5,483 | | | 1,546 | | | 3,937 | | | 255 | % | | 15,588 | | | 3,596 | | | 11,992 | | | 333 | % |
| VYVGART | | 4,888 | | | — | | | 4,888 | | | NM | | 4,940 | | | — | | | 4,940 | | | NM |
| Total product revenue, net | | 69,228 | | | 56,963 | | | 12,265 | | | 22 | % | | 200,889 | | | 150,633 | | | 50,256 | | | 33 | % |
NM - Not Meaningful
Cost of Sales
Cost of sales increased by $7.9$5.4 million to $20.0and $17.5 million forin the three months ended September 30, 2022 from $12.2 million for the three months ended September 30, 2021, and increased by $22.6 million to $53.1 million for the nine months ended September 30, 2022 from $30.5 million for the nine months ended September 30, 2021.2023, respectively. These increases were primarily due to increasing sales volume, higher product costs, and higher royalties.volumes.
Research and Development Expenses
The following table sets forthpresents the components of our research and development expenses for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages) ($ in thousands):
| | | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Research and development expenses: | | | | | | | | | | | | | | | | | |
| | Personnel compensation and related costs | Personnel compensation and related costs | | $ | 28,478 | | | $ | 20,564 | | | $ | 7,914 | | | 38 | % | | $ | 80,325 | | | $ | 50,543 | | | $ | 29,782 | | | 59 | % | Personnel compensation and related costs | | 27,933 | | | 28,478 | | | (545) | | | (2) | % | | 85,967 | | | 80,325 | | | 5,642 | | | 7 | % |
| Licensing fees | Licensing fees | | 39,769 | | | 5,051 | | | 34,718 | | | 687 | % | | 50,205 | | | 274,299 | | | (224,094) | | | (82) | % | Licensing fees | | 9 | | | 39,769 | | | (39,760) | | | (100) | % | | 19,291 | | | 50,205 | | | (30,914) | | | (62) | % |
| CROs/CMOs/Investigators expenses | CROs/CMOs/Investigators expenses | | 23,407 | | | 17,102 | | | 6,305 | | | 37 | % | | 70,325 | | | 52,246 | | | 18,079 | | | 35 | % | CROs/CMOs/Investigators expenses | | 23,136 | | | 23,407 | | | (271) | | | (1) | % | | 59,201 | | | 70,325 | | | (11,124) | | | (16) | % |
| Other costs | Other costs | | 7,870 | | | 12,427 | | | (4,557) | | | (37) | % | | 18,607 | | | 24,132 | | | (5,525) | | | (23) | % | Other costs | | 7,689 | | | 7,870 | | | (181) | | | (2) | % | | 19,461 | | | 18,607 | | | 854 | | | 5 | % |
| Total | Total | | $ | 99,524 | | | $ | 55,144 | | | $ | 44,380 | | | 80 | % | | $ | 219,462 | | | $ | 401,220 | | | $ | (181,758) | | | (45) | % | Total | | 58,767 | | | 99,524 | | | (40,757) | | | (41) | % | | 183,920 | | | 219,462 | | | (35,542) | | | (16) | % |
Research and development expenses increaseddecreased by $44.4$40.8 million to $99.5 million for in the three months ended September 30, 2022 from $55.1 million for the three months ended September 30, 20212023, primarily due to:
•an increaseto a decrease of $34.7$39.8 million in licensing fees in connection with decreased upfront and milestone payments for our license and collaboration agreements.
Research and development expenses decreased by $35.5 million in the increasednine months ended September 30, 2023, primarily due to:
•a decrease of $30.9 million in licensing fees in connection with decreased upfront and milestone payments for our license and collaboration agreements; and
•a decrease of $11.1 million in CROs/CMOs/Investigators expenses due to compensation from collaboration partners related to our clinical trials; partially offset by
•an increase of $7.9$5.6 million in personnel compensation and related costs primarily due to headcount growth and the grants of new share options and restricted shares and the continued vesting of those awards;
•an increase of $6.3 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials.
Research and development expenses decreased by $181.8 million to $219.5 million for the nine months ended September 30, 2022 from $401.2 million for the nine months ended September 30, 2021 primarily due to:
•a decrease of $224.1 million in licensing fees in connection with decreased upfront payments for new license and collaboration agreements as well as decreased milestone payments; partially offset by
•an increase of $29.8 million in personnel compensation and related costs primarily due to headcount growth and the grants of new share optionsoption and restricted shares and the continued vesting of those awards;
•share awardsan increase of $18.1 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials..
The following table summarizespresents our research and development expenses by program for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages)($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Research and development expenses: | | | | | | | | | | | | | | | | |
| Clinical programs | | $ | 63,324 | | | $ | 20,248 | | | $ | 43,076 | | | 213 | % | | $ | 119,468 | | | $ | 299,937 | | | $ | (180,469) | | | (60) | % |
| Pre-clinical programs | | 2,965 | | | 9,988 | | | (7,023) | | | (70) | % | | 7,487 | | | 41,033 | | | (33,546) | | | (82) | % |
| Unallocated research and development expenses | | 33,235 | | | 24,908 | | | 8,327 | | | 33 | % | | 92,507 | | | 60,250 | | | 32,257 | | | 54 | % |
| Total | | $ | 99,524 | | | $ | 55,144 | | | $ | 44,380 | | | 80 | % | | $ | 219,462 | | | $ | 401,220 | | | $ | (181,758) | | | (45) | % |
Research and development expenses attributable to clinical programs increased by $43.1 million to $63.3 million for the three months ended September 30, 2022 from $20.2 million during the three months ended September 30, 2021 related to ongoing and newly initiated clinical trials. Research and development expenses attributable to pre-clinical programs decreased by $7.0 million for the three months ended September 30, 2022 and by $33.5 million for the nine months ended September 30, 2022, compared to the same periods in 2021, primarily driven by decreased license fees. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Clinical programs | | 23,243 | | | 63,324 | | | (40,081) | | | (63) | % | | 68,232 | | | 119,468 | | | (51,236) | | | (43) | % |
| Pre-clinical programs | | 2,013 | | | 2,965 | | | (952) | | | (32) | % | | 15,252 | | | 7,487 | | | 7,765 | | | 104 | % |
| Unallocated research and development expenses | | 33,511 | | | 33,235 | | | 276 | | | 1 | % | | 100,436 | | | 92,507 | | | 7,929 | | | 9 | % |
| Total | | 58,767 | | | 99,524 | | | (40,757) | | | (41) | % | | 183,920 | | | 219,462 | | | (35,542) | | | (16) | % |
Research and development expenses attributable to clinical programs decreased by $180.5$40.1 million to $119.5 million forin the ninethree months ended September 30, 2022 from $299.9 million during the nine months ended September 30, 2021.2023, primarily driven by a decrease in licensing fees related to our license and collaboration agreements. Research and development expenses attributable to pre-clinical programs decreased by $33.5$1.0 million in the three months ended September 30, 2023 primarily due to $7.5the advancement of certain programs to clinical stages.
Research and development expenses attributable to clinical programs decreased by $51.2 million forin the nine months ended September 30, 20222023, primarily driven by a decrease in licensing fees of $41.9 million and $11.5 million in compensation from $41.0collaboration partners related to our clinical trials in the first quarter of 2023. Research and development expenses attributable to pre-clinical programs increased by $7.8 million duringin the nine months ended September 30, 2021. Those decreases were2023, primarily driven by decreased license fees.an increase in licensing fees of $11.0 million, partially offset by cost decreases due to the advancement of certain programs to clinical stages.
Although we manage our external research and development expenses by program, we do not allocate our internal research and development expenses by program because our employees and internal resources may be engaged in projects for multiple programs at any given time.
Selling, General, and Administrative Expenses
The following table summarizespresents our selling, general and administrative expenses by program for ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Personnel compensation and related costs | | 45,410 | | | 41,859 | | | 3,551 | | | 8 | % | | 129,198 | | | 121,382 | | | 7,816 | | | 6 | % |
| Professional service fees | | 4,404 | | | 9,381 | | | (4,977) | | | (53) | % | | 18,752 | | | 24,886 | | | (6,134) | | | (25) | % |
| Other costs | | 18,738 | | | 15,315 | | | 3,423 | | | 22 | % | | 51,032 | | | 40,679 | | | 10,353 | | | 25 | % |
| Total | | 68,552 | | | 66,555 | | | 1,997 | | | 3 | % | | 198,982 | | | 186,947 | | | 12,035 | | | 6 | % |
Selling, general, and administrative expenses increased by $2.0 million and $12.0 million in the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Selling, General and Administrative Expenses: | | | | | | | | | | | | | | | | |
| Personnel compensation and related costs | | $ | 41,859 | | | $ | 34,088 | | | $ | 7,771 | | | 23 | % | | $ | 121,382 | | | $ | 87,560 | | | $ | 33,822 | | | 39 | % |
| Professional service fees | | 9,381 | | | 6,194 | | | 3,187 | | | 51 | % | | 24,886 | | | 14,583 | | | 10,303 | | | 71 | % |
| Other costs | | 15,315 | | | 18,720 | | | (3,405) | | | (18) | % | | 40,679 | | | 47,111 | | | (6,432) | | | (14) | % |
| Total | | $ | 66,555 | | | $ | 59,002 | | | $ | 7,553 | | | 13 | % | | $ | 186,947 | | | $ | 149,254 | | | $ | 37,693 | | | 25 | % |
Selling, general, and administrative expenses increased by $7.6 million to $66.6 million for the three months ended September 30, 2022 from $59.0 million for the three months ended September 30, 20212023, respectively, primarily due to:
•an increase of $3.6 million and $7.8 million in personnel compensation and related costs, which wasrespectively, primarily due to headcount growth, particularly in commercial and administrative personnel, anddriven by grants of new share options and restricted shares and the continued vesting of thoseoption and restricted share awards; and
•an increase of $3.2$3.4 million in professional service fees mainly attributable to our increased legal, compliance, accounting, and investor and public relations expenses associated with being a public company and in connection with sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong after our commercial launch of these four commercialized products; those increases were partially offset by
•a decrease of $3.4$10.4 million in other costs, respectively, mainly related to selling, rental, and administrative expenses for commercial operations in mainland China, Hong Kong, and Taiwan.
Selling, general, and administrative expenses increased by $37.7 million to $186.9 million for the nine months ended September 30, 2022 from $149.3 million for the nine months ended September 30, 2021 primarily due to:
•an increase of $33.8 million in personnel compensation and related costs which was primarily due to headcount growth, particularly in commercial and administrative personnel, and grants of new share options and restricted shares and the continued vesting of those awards;
•an increase of $10.3 million in professional service fees mainly attributable to our increased legal, compliance, accounting, and investor and public relations expenses associated with being a public company and in connection with sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong after our commercial launch of these four commercialized products; those increases wereTaiwan; partially offset by
•a decrease of $6.4$5.0 million and $6.1 million in other costs mainlyprofessional service fees, respectively, primarily related to selling, rental,legal expenses.
Gain on Sale of Intellectual Property
We had a gain on sale of intellectual property of $10.0 million in the nine months ended September 30, 2023 in connection with our sale of certain patent rights and administrative expenses primarily forrelated know-how to a third party in the commercial operationsecond quarter of 2023. We had no such intellectual property sales resulting in mainland China, Hong Kong, and Taiwan.gains or losses in the prior year periods.
Interest Income
Interest income increased by $3.2$5.3 million and $24.3 million in the three and nine months ended September 30, 2023, respectively, due to $3.9increased interest rates.
Foreign Currency Gain (Loss)
Foreign currency gain was $4.9 million from $0.7in the three months ended September 30, 2023, primarily driven by remeasurement gain due to appreciation of the Renminbi (“RMB”) against the U.S. dollar, compared to foreign currency loss of $40.4 million forin the three months ended September 30, 2022, driven by remeasurement loss due to depreciation of the RMB against the U.S. dollar.
Foreign currency loss decreased by $46.7 million in the nine months ended September 30, 2023, primarily driven by decreased remeasurement loss due to depreciation of the RMB against the U.S. dollar.
Other Income (Expenses), Net
Other income, net decreased by $3.6 million in the three months ended September 30, 2023, primarily due to a decrease in government grants of $2.8 million and 2021, and increased by $4.1a shift from a $0.5 million gain to $5.2a $0.7 million from $1.2loss in our equity investment in MacroGenics.
Other income, net was $0.2 million forin the nine months ended September 30, 2023, compared to other expense, net of $6.4 million in the nine months ended September 30, 2022, and 2021,primarily due to increased interest rates during the third quartera decrease of 2022.
Other Income (Expenses), Net
Other expenses, net increased by $22.9$10.1 million to $36.5 million for the three months ended September 30, 2022 from $13.6 million for the three months ended September 30, 2021 primarily as a result of an increase in foreign exchangeour equity investment loss of $36.7 millionin MacroGenics, partially offset by an increasea decrease of $4.3 million in equity investment gaingovernment grants.
Income Tax Expense
There was no change in MacroGenics, Inc. (“MacroGenics”) of $10.4 millionour income tax expense, which was zero in the three and an increase in subsidy income of $3.4 million.
Other expenses, net increased by $67.1 million to $79.5 million for the nine months ended September 30, 2022 from $12.4 million for the nine months ended September 30, 2021 primarily as a result of an increase in foreign exchange loss of2023 and 2022.
$70.2 and an increase in equity investment loss in MacroGenics of $2.1 million, partially offset by an increase in subsidy income of $4.9 million.
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.
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.
Pre-clinical and clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various pre-clinical and clinical trial activities on our behalf in the ongoing development of our product candidates. Expenses related to pre-clinical and clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period.
Judgments and Uncertainties
The process of estimating our research and development expenses involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated costs incurred for the services when we have 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
Share-based awards for our employees are measured at the grant date fair value of the awards and recognized as expenses (1) immediately at grant date if no vesting conditions are required; or (2) using graded vestinga straight-line method over the requisite service period, which is the vesting period.
To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expensesexpense relating to those awards are reversed.
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 ADSs, and (iv) risk-free interest rates, which are based on quoted U.S. Treasury rates for securities with maturities approximating the expected lives of the options. Expected volatility has been estimated based on actual movements in thesome comparable companies’ stock prices of certain comparable companiesprice 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 our ordinaryoption 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, our 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 September 30, 20222023 and 2021,2022, we did not have any significant unrecognized uncertain tax positions.
B. Liquidity and Capital Resources
WeTo date, we have financed our activities primarily through private placements, our September 2017 initial public offering on Nasdaq,and various follow-on offerings on Nasdaq, and our September 2020 secondary listing and initial public offering on the Hong Kong Stock Exchange of our ordinary shares and/or ADSs.Exchange. Through September 30, 2022,2023, we have raised approximately $164.6 million fromin private 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 subsequent follow-on offerings.
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 $258.4$183.3 million and $396.2$258.4 million for the nine months ended September 30, 2023 and 2022, and 2021, respectively. We haveAs of September 30, 2023, we had commitments for capital expenditureexpenditures of $13.8$2.5 million, as of September 30, 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 our costs and revenues.MD&A above.
As of September 30, 2022,2023, we had cash and cash equivalents, restricted cash, and short-term investmentinvestments of $1,120.3$822.2 million. Our expenditures are principally focused on research and development and are largely discretionary. Based on our current operating plan, we expect that our cash, cash equivalents, restricted cash, and short-term investments, will enable us to meet our cash requirements and fund our operating expenses and capital expendituresexpenditure requirements for at least the next 12 months. However, in order to bring to fruition our research and development objectives, we willmay ultimately need additional funding sources, and there can be no assurances that theysuch funding will be made available to us on acceptable terms or at all.
The following table providespresents information regarding our cash flows for the nine months ended September 30, 2022 and 2021 (in($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Change |
| | 2022 | | 2021 | | $ |
| Net cash used in operating activities | | $ | (258,350) | | | $ | (396,237) | | | $ | 137,887 | |
| Net cash provided by investing activities | | 424,389 | | | 531,446 | | | (107,057) | |
| Net cash (used in) provided by financing activities | | (1,531) | | | 820,478 | | | (822,009) | |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | | (9,132) | | | 695 | | | (9,827) | |
| Net increase in cash, cash equivalents and restricted cash | | $ | 155,376 | | | $ | 956,382 | | | $ | (801,006) | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Change |
| | 2023 | | 2022 | | $ |
| Net cash used in operating activities | | (183,261) | | | (258,350) | | | 75,089 | |
| Net cash (used in) provided by investing activities | | (25,233) | | | 424,389 | | | (449,622) | |
| Net cash used in financing activities | | (6,826) | | | (1,531) | | | (5,295) | |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | | (3,355) | | | (9,132) | | | 5,777 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | (218,675) | | | 155,376 | | | (374,051) | |
Net Cash Used in Operating Activities
DuringNet cash used in operating activities decreased by $75.1 million to $183.3 million in the nine months ended September 30, 2022, our operating activities used $258.42023, primarily due to a decrease of $142.3 million of cash, which resulted from ourin net loss, partially offset by an increase of $381.5$52.9 million andin adjustments to reconcile net loss to net cash used in ouroperating activities and a decrease of $14.3 million in net changes in operating assets and liabilities of $18.3liabilities.
Net Cash Used in (Provided by) Investing Activities
Net cash used in investing activities was $25.2 million partially offset by non-cash charges of $141.4 million.
Duringin the nine months ended September 30, 2021, our operating activities used $396.2 million of cash, which resulted from our2023, compared to net loss of $492.6 million and cash used in our operating assets and liabilities of $16.7 million, partially offset by non-cash charges of $113.1 million.
Net Cash Provided by Investing Activities
Net cash provided by investing activities decreased by $107.1 million toof $424.4 million forin the nine months ended September 30, 2022 from $531.4 million for the nine months ended September 30, 2021. The decrease2022. This shift was primarily due to an increasea decrease of $90.3$602.9 million in proceeds from the maturity of short-term investments, partially offset by a decrease of $126.3 million in purchases of short-term investments, a decrease of $38.6$13.2 million in proceeds from
maturity of short-term investment, and an increase of $8.3 million in purchasepurchases of property and equipment, offset byand proceeds of $13.9 million from a decreasesale of $30.0 millionintellectual property and a disposal of land use rights in payment for investment in equity investee.the second quarter of 2023.
Net Cash (Used In) Provided byUsed in Financing Activities
Net cash used in financing activities was $1.5increased by $5.3 million forto $6.8 million in the nine months ended September 30, 2022 compared2023, primarily due to net cash provided by financing activitiesa decrease of $820.5$3.7 million for the nine months ended September 30, 2021. The shiftin proceeds from cash provided byexercises of stock options and an increase of $1.6 million in taxes paid related to cash used in financing activities was primarily because we had proceedssettlement of $818.9 million from our issuance of ordinary shares upon public offerings during the nine months ended September 30, 2021 while there were no such transactions during the nine months ended September 30, 2022.equity awards.
C. Research and Development Activities and Expenditures, Including Patents and Licenses
Full details of our research and development activities and expenditures are provided in the “Research and Development Expenses” and “Results of Operations” sections above.
D. Trend Information
Other than as described elsewhere in this Quarterly Report on Form 10-Q, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material adverse effect on our revenue, income from continuing operations, profitability, liquidity, or capital resources, or that would cause our reported financial information not necessarily to be indicative of future operation results or financial condition.
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. The Company has not adopted any new accounting standards since December 31, 2022.
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.
Foreign Exchange Risk
Renminbi, or RMB, is not a freely convertible currency. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China (“PBOC”), controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of the Company included aggregated amounts of RMB292.1RMB151.2 million and RMB151.7RMB316.8 million, which were denominated in RMB, representing 4%3% and 2%5% of the cash and cash equivalents as of September 30, 20222023 and December 31, 2021,2022, respectively.
OurWhile our financial statements are presented in U.S. dollars, 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. Weas such, 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”) 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 September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $1,119.5$788.8 million and $964.1$1,008.5 million and short-term investments of nil$31.6 million and $445.0 million as of September 30, 2022 and December 31, 2021,nil, respectively. As of September 30, 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 monitor continued credit 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 these receivables from customers within the credit terms with no significant credit losses incurred. As of September 30, 2022,2023, our two largest debtorscustomers accounted for approximately 38%29% of our total accounts receivable collectively.
Certain accounts receivable balances are settled in the form of notes receivable. As of September 30, 2022,2023, such notes receivable included bank acceptance promissory notes that are non-interest bearing and due within six months. These notes receivable were used to collect the receivables based on an administrative convenience, given these 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,years, which can increase the costs of our products and product 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 or in other countries in which our third-party partners operate.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintainOur management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures that(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed in the reports that we file or submitfurnish under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2)
that such information is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, to allow timely decisions regarding required disclosure.
As of September 30, 2022, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, andthe desired control objective. Based upon that evaluation, our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer havehas concluded based upon the evaluation described above that, as of September 30, 2022,2023, our disclosure controls and procedures were effective at a reasonable assurance level.effective.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2022, there have not been anyThere were no changes in our internal controlscontrol over financial reporting (as such item is defined in Rules 13a-15(f) and 15d-15(f) promulgated under) during the Exchange Act)fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
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 Form 10-Q should be read in conjunction with our 2021 Annual Report, Q1 2022 Form 10-Q, and Q2 2022 Form 10-Q, which describe various materialWe are subject to risks and uncertainties to which we are or may become subject. These risks and uncertaintiesthat could, directly or indirectly, adversely affect our business, results of operations, financial condition, liquidity, or cash flows, and could causestrategies, and/or prospects. There have been no material changes in our actual results to differ materiallyrisk factors from our past results orthose disclosed in the results contemplated by any forward-looking statements we make. We believe the risks described in this“Risk Factors” section of our Quarterly Report on Form 10-Q and our 20212022 Annual Report, Q1 2022 Form 10-Q, and Q2 2022 Form 10-Q 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.Report.
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 from employees by the Company to satisfy tax withholding obligations due in connection with exercise of option shares or vesting of restricted shares during the third 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 |
| July 1 – 31, 2023 | 1,157 | | $ | 27.73 | | — | — |
| August 1 – 31, 2023 | 7,927 | | $ | 24.99 | | — | — |
| September 1 – 30, 2023 | 1,318 | | $ | 26.10 | | — | — |
| Total | 10,402 | | | | |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.Other than as described above, during the period covered by this report, none of the Company’s directors or executive officers has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K).
Item 6. Exhibits.
Exhibit Index
| | | | | | | | |
Exhibit
Number | | Exhibit
|
10.1*^10.1# | | |
| 10.2#^ | | |
10.2*#
| | |
10.3*#
| | |
10.4*#
| | |
31.1*31.1 | | |
31.2*31.2 | | |
32.1**32.1 | | |
32.2**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) |
* Filed herewith
** Furnished herewith
# Management contract or compensatory plan, contract, or arrangement
^ Certain confidential information contained in this exhibit has been omitted because it is both (i) is not material and (ii)
would be competitively harmful if publicly disclosed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| ZAI LAB LIMITED |
| | |
Dated: November 9, 20227, 2023 | By: | /s/ Billy ChoYajing Chen |
| Name: | Billy ChoYajing Chen |
| Title: | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
