ZAI LAB(ZLAB) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited condensed consolidated financial statements for Q2 and H1 2021 show total assets increased to $1.90 billion, net loss widened significantly to $163.3 million for Q2 and $396.2 million for H1, driven by increased R&D expenses, with strong financing cash flow from a public offering Condensed Consolidated Balance Sheets As of June 30, 2021, total assets increased to $1.90 billion from $1.30 billion, primarily due to a rise in cash and cash equivalents to $1.77 billion following a public offering, with total liabilities and shareholders' equity also increasing Condensed Consolidated Balance Sheets | Balance Sheet Item | June 30, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | 1,766,573 | 442,116 | | Total current assets | 1,808,603 | 1,216,036 | | Total assets | 1,895,215 | 1,297,638 | | Total current liabilities | 193,917 | 98,043 | | Total liabilities | 223,517 | 128,293 | | Total shareholders' equity | 1,671,698 | 1,169,345 | Condensed Consolidated Statements of Operations For Q2 2021, revenue grew to $36.9 million, but net loss more than doubled to $163.3 million due to sharply increased R&D expenses; for H1, revenue was $57.0 million, and net loss widened to $396.2 million Condensed Consolidated Statements of Operations | Metric ($ thousands) | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | 36,935 | 10,995 | 57,038 | 19,213 | | R&D Expenses | (142,224) | (68,307) | (346,076) | (102,049) | | SG&A Expenses | (54,414) | (23,758) | (90,252) | (42,472) | | Loss from operations | (170,571) | (83,966) | (397,663) | (130,288) | | Net loss | (163,324) | (80,629) | (396,234) | (128,617) | | Loss per share ($) | (1.76) | (1.08) | (4.37) | (1.74) | Condensed Consolidated Statements of Cash Flows For H1 2021, net cash used in operating activities increased to $235.3 million, net cash provided by investing activities was $737.8 million, and net cash from financing activities surged to $820.9 million, resulting in a net increase in cash Condensed Consolidated Statements of Cash Flows | Cash Flow Activity ($ thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | (235,348) | (92,319) | | Net cash provided by (used in) investing activities | 737,828 | (6,521) | | Net cash provided by financing activities | 820,949 | 281,500 | | Net increase in cash | 1,324,457 | 182,672 | Notes to the Financial Statements Key notes detail Q2 2021 net product revenue of $36.9 million from ZEJULA, Optune, and QINLOCK, significant collaboration agreements with potential future milestone payments of approximately $4.54 billion, and share-based compensation expenses Product Revenue - Net | Product Revenue - Net ($ thousands) | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | ZEJULA | 23,366 | 7,446 | 35,972 | 13,791 | | Optune | 9,535 | 3,549 | 16,665 | 5,422 | | QINLOCK | 4,034 | — | 4,401 | — | | Total | 36,935 | 10,995 | 57,038 | 19,213 | - The company is contingently obligated to make future milestone payments of up to approximately $4.54 billion related to its various license and collaboration agreements upon the achievement of specified development and regulatory milestones[79] - In January 2021, the company entered a collaboration with argenx, making an upfront payment by issuing 568,182 ordinary shares valued at $62.25 million, which was recorded as an R&D expense[75][76] - In May 2021, the company entered a collaboration with Mirati Therapeutics for adagrasib, accruing an upfront payment of $65 million; Mirati is eligible for up to $273 million in future milestone payments[77][78] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant increase in net loss for Q2 and H1 2021 to higher R&D expenses from new licensing agreements, while revenue grew strongly, and the company successfully raised $857.5 million in a global offering Recent Developments Recent developments include closing an $857.5 million global offering, advancing clinical trials, establishing new collaborations with Mirati, MacroGenics, and Schrödinger, and noting significant updates to PRC regulations - Closed a global offering of ADSs and ordinary shares in April 2021, raising gross proceeds of $857.5 million[93] - Entered into a collaboration and license agreement with Mirati for adagrasib, a KRASG12C inhibitor, in Greater China[94] - Expanded collaboration with MacroGenics to develop and commercialize up to four bispecific antibody-based molecules[95] - China's new Data Security Law (DSL), effective September 1, 2021, will impact data processing activities and has extraterritorial effect, potentially affecting the company's operations[103] Results of Operations For Q2 2021, revenue increased 236% to $36.9 million, R&D expenses rose 108% to $142.2 million, and SG&A expenses grew 129% to $54.4 million, leading to a widened net loss Expense Breakdown (Q2) | Expense Breakdown ($ thousands) | Q2 2021 | Q2 2020 | Change ($) | | :--- | :--- | :--- | :--- | | R&D Expenses | 142,224 | 68,307 | +73,917 | | - Licensing fees | 97,966 | 42,480 | +55,486 | | SG&A Expenses | 54,414 | 23,758 | +30,656 | Expense Breakdown (H1) | Expense Breakdown ($ thousands) | H1 2021 | H1 2020 | Change ($) | | :--- | :--- | :--- | :--- | | R&D Expenses | 346,076 | 102,049 | +244,027 | | - Licensing fees | 269,248 | 51,720 | +217,528 | | SG&A Expenses | 90,252 | 42,472 | +47,780 | Liquidity and Capital Resources As of June 30, 2021, the company held $1.77 billion in cash, cash equivalents, and restricted cash, primarily from public offerings, with management expecting existing reserves to fund operations for at least the next 12 months - As of June 30, 2021, the company held $1.77 billion in cash, cash equivalents, and restricted cash[165] - Net cash used in operating activities for the six months ended June 30, 2021, was $235.3 million, compared to $92.3 million for the same period in 2020[164][168] - Management expects existing cash to be sufficient to fund operations and capital requirements for at least the next 12 months[165] Quantitative and Qualitative Disclosures About Market Risk The company faces primary market risk from foreign exchange fluctuations due to RMB and HKD operations reported in USD, and manages credit risk by holding high-quality financial institution investments - The company's primary market risk is foreign exchange risk, as its business operates mainly in China with transactions in RMB, while financial statements are in U.S. dollars; the value of ADSs is affected by the USD/RMB exchange rate[177] - Credit risk is concentrated in cash, cash equivalents, and short-term investments held at major financial institutions in China and internationally, which are believed to be of high credit quality[178] Controls and Procedures Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level, with no material changes to internal controls over financial reporting - Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level[181] - No material changes to internal controls over financial reporting occurred during the six months ended June 30, 2021[182] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal or administrative proceedings - The company is not currently a party to, nor is its property the subject of, any actual or threatened material legal or administrative proceedings[183] Risk Factors Material changes to risk factors include deteriorating U.S.-China relations, new Chinese data security laws imposing compliance costs, and the potential delisting of ADSs due to the PCAOB's inability to inspect the company's auditor - Changes in U.S.-China relations and regulations may adversely impact business, operating results, ability to raise capital, and stock price[184][185] - Compliance with China's new Data Security Law and other cybersecurity regulations may entail significant expenses and could materially affect the business, with potential penalties for non-compliance[188][189] - The company's auditor is not inspected by the U.S. Public Company Accounting Oversight Board (PCAOB); under the Holding Foreign Companies Accountable Act (HFCA Act), this could lead to the delisting of the company's ADSs from U.S. stock markets if the auditor is not inspected for three consecutive years (potentially reduced to two)[194] - Uncertainties in the Chinese legal system, including recent government documents enhancing enforcement against illegal securities activities and supervision over overseas-listed companies, could adversely affect the company[198][199] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None reported[201] Exhibits This section provides an index of the exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and officer certifications