ZAI LAB(ZLAB) - 2023 Q2 - Quarterly Report

FORM 10-Q Filing Information This section provides the official filing details for the Quarterly Report on Form 10-Q for the period ended June 30, 2023, including company identification and filer status Filing Details This section details the company's filing as a Quarterly Report on Form 10-Q for the period ended June 30, 2023, confirming compliance with SEC filing requirements and specifying its status as a large accelerated filer - Registrant is ZAI LAB LIMITED, incorporated in Cayman Islands, with Commission File Number 001-38205[5] - The company has filed all required reports and submitted all Interactive Data Files during the preceding 12 months[6] Filer Status | Filer Type | Status | | :-------------------- | :----- | | Large accelerated filer | x | | Accelerated filer | | | Non-accelerated filer | o | | Smaller reporting company | | | Emerging growth company | o | - As of August 1, 2023, 983,887,430 ordinary shares were outstanding, with 749,901,320 held as American Depositary Shares (ADSs)[7] Table of Contents This section presents the complete organizational structure of the Form 10-Q, detailing all included financial statements, notes, and other required disclosures Report Structure This section outlines the organizational structure of the Quarterly Report on Form 10-Q, listing all major financial statements, notes, management's discussion and analysis, market risk disclosures, controls and procedures, and other information sections - The report includes Condensed Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Shareholders' Equity, and Cash Flows[9] - Key sections cover Notes to Unaudited Condensed Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures about Market Risk, and Controls and Procedures[9] - Other information includes Legal Proceedings, Risk Factors, Unregistered Sales of Equity Securities and Use of Proceeds, Defaults upon Senior Securities, Mine Safety Disclosures, Other Information, and Exhibits[9] Special Notes Regarding the Company This section provides crucial context on forward-looking statements, defines key terms, and highlights specific disclosures related to the company's significant Chinese operations Forward-Looking Statements This section highlights that the report contains forward-looking statements regarding the company's strategy, pipeline, financial results, and regulatory matters, which are subject to inherent uncertainties and risks that could cause actual results to differ materially - Forward-looking statements relate to strategy, business and pipeline potential, capital allocation, clinical development, regulatory approvals, product benefits, collaborations, and future financial results[10] - Key risks include ability to commercialize approved products, obtain funding, results of clinical trials, regulatory decisions, changes in US-China trade policies, Chinese government intervention, uncertainties in the Chinese legal system (e.g., Counter-Espionage Law, Data Security Law), and the impact of COVID-19[10] - Other risks involve CSRC approval requirements, FCPA/anti-corruption laws, currency restrictions, limitations on Chinese subsidiaries' payments, manufacturing compliance, and patent protection[10][11] Usage of Terms This section defines key geographical and corporate terms used throughout the report, clarifying that 'Zai Lab' refers to the holding company and its consolidated subsidiaries, and lists its primary operating subsidiaries - 'Greater China' refers to mainland China, Hong Kong, Macau, and Taiwan[13] - 'Zai Lab,' 'Company,' 'we,' 'us,' and 'our' refer to Zai Lab Limited, a Cayman Islands holding company, and its subsidiaries on a consolidated basis[13] - Operating subsidiaries include entities domiciled in Hong Kong, mainland China, Taiwan, Australia, and the United States, with Zai Anti Infectives (Hong Kong) Limited having non-substantial business operations[14] Disclosures Relating to Our Chinese Operations This section details the significant legal and operational risks associated with Zai Lab's substantial operations in mainland China, emphasizing the company's structure as a Cayman Islands holding company and the evolving regulatory landscape - Zai Lab Limited is a Cayman Islands holding company, conducting substantial operations through wholly-owned subsidiaries in mainland China, with no VIEs. Investors do not hold direct investments in Chinese operating companies[18] - Significant legal and operational risks in mainland China due to changes in government policies, US-China relations, and new regulations (e.g., Counter-Espionage Law, Data Security Law), potentially affecting business, financial condition, capital raising, and stock price[19] - The company is required to obtain various Chinese authority approvals for operations (business licenses, pharmaceutical permits), scientific data transfer (Security Assessment Measures, HGRAC), and future overseas securities offerings (CSRC Trial Measures)[20][21][22][23] Part I – Financial Information This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, shareholders' equity, and cash flows, along with detailed explanatory notes Condensed Consolidated Balance Sheets The condensed consolidated balance sheets provide a snapshot of the company's financial position, showing a decrease in total assets and shareholders' equity, primarily driven by a reduction in cash and cash equivalents, while liabilities remained relatively stable Key Balance Sheet Data (in thousands $) | Metric | June 30, 2023 | December 31, 2022 | | :------------------------- | :------------ | :---------------- | | Total Assets | 1,106,373 | 1,220,140 | | Total Liabilities | 174,059 | 174,545 | | Total Shareholders' Equity | 932,314 | 1,045,595 | | Cash and cash equivalents | 859,155 | 1,008,470 | | Short-term investments | 15,500 | — | | Accounts receivable, net | 47,283 | 39,963 | | Inventories, net | 36,353 | 31,621 | Condensed Consolidated Statements of Operations The condensed consolidated statements of operations show a significant increase in total revenues for both the three and six months ended June 30, 2023, primarily from product sales, leading to a reduced net loss compared to the prior year periods Key Operations Data (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Revenues | 68,864 | 48,176 | 131,661 | 94,900 | | Product revenue, net | 68,864 | 47,575 | 131,661 | 93,670 | | Collaboration revenue | — | 601 | — | 1,230 | | Loss from operations | (89,501) | (98,716) | (159,022) | (178,481) | | Net loss | (120,895) | (137,933) | (170,039) | (220,327) | | Loss per share - basic and diluted | (0.13) | (0.14) | (0.18) | (0.23) | | Loss per ADS - basic and diluted | (1.25) | (1.44) | (1.77) | (2.30) | Condensed Consolidated Statements of Comprehensive Loss The condensed consolidated statements of comprehensive loss indicate a reduced comprehensive loss for both the three and six months ended June 30, 2023, compared to the prior year, primarily due to a lower net loss and positive foreign currency translation adjustments Key Comprehensive Loss Data (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | (120,895) | (137,933) | (170,039) | (220,327) | | Foreign currency translation adjustments | 34,908 | 30,325 | 26,495 | 28,132 | | Comprehensive loss | (85,987) | (107,608) | (143,544) | (192,195) | Condensed Consolidated Statements of Shareholders' Equity The condensed consolidated statements of shareholders' equity show a decrease in total shareholders' equity from December 31, 2022, to June 30, 2023, primarily due to the accumulated deficit from net losses, partially offset by increases in additional paid-in capital and accumulated other comprehensive income Key Shareholders' Equity Data (in thousands $) | Metric | December 31, 2022 | June 30, 2023 | | :--------------------------- | :---------------- | :------------ | | Total Shareholders' Equity | 1,045,595 | 932,314 | | Additional paid-in capital | 2,893,120 | 2,932,053 | | Accumulated deficit | (1,861,360) | (2,031,399) | | Accumulated other comprehensive income | 25,685 | 52,180 | | Treasury Stock | (11,856) | (20,526) | - Issuance of ordinary shares upon vesting of restricted shares and exercise of share options contributed to changes in share count and additional paid-in capital[36] - Net loss and foreign currency translation adjustments significantly impacted accumulated deficit and accumulated other comprehensive income, respectively[36] Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows show a reduced net decrease in cash, cash equivalents, and restricted cash for the six months ended June 30, 2023, compared to the prior year, driven by decreased cash used in operating and investing activities, despite increased cash used in financing activities Key Cash Flow Data (in thousands $) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | (127,989) | (132,027) | | Net cash used in investing activities | (11,252) | (143,869) | | Net cash used in financing activities | (5,379) | (2,240) | | Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (3,707) | (5,144) | | Net decrease in cash, cash equivalents and restricted cash | (148,327) | (283,280) | | Cash, cash equivalents and restricted cash - end of period | 860,946 | 681,623 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering organizational activities, accounting policies, fair value measurements, cash and cash equivalents, inventories, property and equipment, revenue recognition, income tax, other current liabilities, loss per share, related party transactions, share-based compensation, license and collaboration agreements, other expenses, restricted net assets, and commitments and contingencies 1. Organization and Principal Activities This note describes Zai Lab Limited's incorporation, its focus on innovative product development, and its primary geographic markets in Greater China and the U.S - Zai Lab Limited, incorporated in Cayman Islands on March 28, 2013, focuses on discovering, developing, and commercializing innovative products for unmet medical needs in oncology, autoimmune disorders, infectious diseases, and neuroscience[43] - Principal operations and geographic markets are in Greater China, with a substantial presence in Greater China and the United States[43] 2. Basis of Presentation and Consolidation and Significant Accounting Policies This note outlines the financial statements' preparation in accordance with U.S. GAAP and SEC rules, highlighting specific presentation changes and equity investment accounting - Financial statements prepared in accordance with U.S. GAAP and SEC rules for interim reporting, condensed or omitted certain disclosures, and should be read in conjunction with the 2022 Annual Report[44] - In Q3 2022, foreign currency remeasurement gain/loss on cash flow statements was separately presented, previously included in changes in other current liabilities, with no impact on net cash used in operating activities[45] - Equity investments with readily determinable fair value were $5.1 million (June 30, 2023) and $6.4 million (December 31, 2022), with unrealized gains/losses recognized in other expenses, net[50] - No new accounting standards adopted since December 31, 2022[52] 3. Cash and Cash Equivalents This note details the composition of cash and cash equivalents, including their currency denominations and the regulatory restrictions on RMB balances Cash and Cash Equivalents (in thousands $) | Metric | June 30, 2023 | December 31, 2022 | | :----------------- | :------------ | :---------------- | | Cash | 858,089 | 1,007,423 | | Cash equivalents | 1,066 | 1,047 | | Total | 859,155 | 1,008,470 | | Denominated in US$ | 832,974 | 957,824 | | Denominated in RMB | 21,968 | 45,486 | - Cash equivalents represent short-term and highly liquid investments in a money market fund[54] - RMB-denominated balances are subject to the foreign exchange control rules and regulations of the Chinese government[55] 4. Inventories, Net This note provides a breakdown of inventory components and details the write-downs recorded due to excess, obsolete, or lower net realizable value Inventories, Net (in thousands $) | Metric | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Finished goods | 16,687 | 12,156 | | Raw materials | 19,320 | 19,029 | | Work in progress | 346 | 436 | | Inventories, net | 36,353 | 31,621 | - Inventory write-downs of $0.6 million (six months ended June 30, 2023) and $0.2 million (six months ended June 30, 2022) were recorded in cost of sales due to excess, obsolete, or lower net realizable value inventories[58] 5. Property and Equipment, Net This note presents the net property and equipment, detailing total assets and accumulated depreciation, along with the depreciation expense for the period Property and Equipment, Net (in thousands $) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Total Property and equipment | 82,032 | 79,927 | | Less: accumulated depreciation | (25,622) | (22,064) | | Property and equipment, net | 56,410 | 57,863 | - Depreciation expense was $4.3 million for the six months ended June 30, 2023, compared to $3.6 million for the same period in 2022[60] 6. Revenue This note details the sources of product revenue, primarily from sales of key pharmaceutical products in Greater China, and provides a breakdown of net revenue by product - Product revenue is primarily derived from sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong[61] Product Revenue, Net (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product revenue - gross | 75,010 | 54,339 | 146,222 | 107,649 | | Less: Rebates and sales returns | (6,146) | (6,764) | (14,561) | (13,979) | | Product revenue - net | 68,864 | 47,575 | 131,661 | 93,670 | Net Revenue by Product (in thousands $) | Product | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | ZEJULA | 42,957 | 34,052 | 85,637 | 63,649 | | Optune | 13,692 | 11,592 | 27,034 | 24,389 | | QINLOCK | 7,527 | 623 | 8,833 | 3,582 | | NUZYRA | 4,636 | 1,308 | 10,105 | 2,050 | | VYVGART | 52 | — | 52 | — | 7. Income Tax This note explains that no income tax provision was accrued due to the company's cumulative loss position, resulting in a full valuation allowance against deferred tax assets - No provision for income taxes has been accrued because the Company and all its subsidiaries are in cumulative loss positions for the periods presented[66] - A full valuation allowance was recorded against deferred tax assets of all consolidated entities due to their cumulative loss position as of June 30, 2023, and December 31, 2022[66] 8. Other Current Liabilities This note provides a detailed breakdown of other current liabilities, including payroll, accrued professional service fees, payables for property and equipment, and tax payables Other Current Liabilities (in thousands $) | Metric | June 30, 2023 | December 31, 2022 | | :---------------------------------------- | :------------ | :---------------- | | Payroll | 18,976 | 31,689 | | Accrued professional service fee | 7,922 | 4,080 | | Payables for purchase of property and equipment | 4,344 | 5,269 | | Accrued rebate to distributors | 8,514 | 8,443 | | Tax payables | 15,768 | 13,283 | | Others | 3,500 | 4,054 | | Total | 59,024 | 66,818 | 9. Loss Per Share This note presents the computation of basic and diluted loss per share, clarifying that all outstanding share options and non-vested restricted shares were anti-dilutive Loss Per Share Computation (in thousands $, except share and per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to ordinary shareholders | (120,895) | (137,933) | (170,039) | (220,327) | | Weighted average number of ordinary shares - basic and diluted | 964,817,310 | 957,684,820 | 963,140,360 | 956,603,250 | | Net loss per share - basic and diluted | (0.13) | (0.14) | (0.18) | (0.23) | - All outstanding share options (108.3 million) and non-vested restricted shares (33.5 million) were anti-dilutive for the periods presented[72] 10. Related Party Transactions This note discloses the company's research and development expenses incurred with MEDx (Suzhou) Translational Medicine Co., Ltd., a related party with significant influence from a CEO family member - The Company incurred insignificant research and development expenses with MEDx (Suzhou) Translational Medicine Co., Ltd. during the three and six months ended June 30, 2023, compared to $0.2 million and $0.3 million for the same periods in 2022, respectively. An immediate family member of the CEO held significant influence over MEDx[73] 11. Share-Based Compensation This note details the share-based awards granted, their vesting schedules, fair value determination, and the total share-based compensation expense recognized across different functional areas - During the six months ended June 30, 2023, the Company granted 22.8 million share options and 8.3 million restricted shares under the 2022 Plan. Share options granted since April 2023 generally vest over four years, while prior grants vest over five years[74] - The weighted-average grant-date fair value of share options was $2.23 per share, with exercise prices ranging from $3.35 to $3.99 per share[75] Share-Based Compensation Expense (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Selling, general and administrative | 11,776 | 8,931 | 21,839 | 15,923 | | Research and development | 8,735 | 5,294 | 15,333 | 10,712 | | Total | 20,511 | 14,225 | 37,172 | 26,635 | - As of June 30, 2023, unrecognized share-based compensation expense was $129.2 million for unvested share options (over 3.45 years) and $130.9 million for unvested restricted shares (over 3.21 years)[76] 12. License and Collaboration Agreements This note outlines key financial milestones and upfront payments related to various license and collaboration agreements, including those for SUL-DUR, reprotrectinib, and the ZL-1310 program - Accrued a $3.0 million development milestone in Q2 2023 for SUL-DUR under the Entasis agreement, reducing additional aggregate development, regulatory, and sales-based milestones to $88.6 million[79] - Accrued a $5.0 million development milestone in Q2 2023 for reprotrectinib under the BMS agreement, reducing additional aggregate development, regulatory, and sales-based milestones to $141.0 million[80] - Made an upfront payment of $10.0 million in Q2 2023 for a new strategic partnership and global license agreement with MediLink Therapeutics for the early-stage DLL3 ADC program, ZL-1310[80] 13. Other Expenses, Net This note details the components of other expenses, net, including government grants, losses on equity investments, and miscellaneous gains Other Expenses, Net (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Government grants | 83 | 50 | 83 | 1,627 | | Loss on equity investments with readily determinable fair value | (1,744) | (5,617) | (1,304) | (12,556) | | Others miscellaneous gain | 256 | 70 | 1,050 | 551 | | Total | (1,405) | (5,497) | (171) | (10,378) | 14. Restricted Net Assets This note explains the restrictions on Chinese subsidiaries' ability to pay dividends, including statutory reserve requirements and the amount of paid-in capital restricted from transfer - Chinese subsidiaries' ability to pay dividends is restricted to retained earnings determined by Chinese accounting standards, requiring at least 10% of annual after-tax profit to be set aside as statutory reserves until it reaches 50% of registered capital[83][84] - No appropriation to statutory reserves was made during the three and six months ended June 30, 2023, and 2022, due to substantial losses in the Chinese subsidiaries[84] - As of June 30, 2023, and December 31, 2022, $456.0 million in paid-in capital of the Company's Chinese subsidiaries is restricted from transfer out[85] 15. Commitments and Contingencies This note outlines the company's purchase commitments for property and equipment, confirms the absence of material legal proceedings, and clarifies its indemnification practices - Purchase commitments for property and equipment totaled $3.9 million as of June 30, 2023, expected to be incurred within one year[86] - The Company is not currently a party to any material legal proceedings[87] - The Company enters into indemnification agreements in the normal course of business but has not paid any claims or been required to defend any action related to its indemnification obligations to date[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, including an overview of its business, recent developments in commercial products and pipeline, factors affecting results, detailed analysis of revenues and expenses, critical accounting policies, and liquidity and capital resources Overview This section provides a high-level summary of Zai Lab's business as a global biopharmaceutical company, its commercial products, pipeline, and historical financial performance - Zai Lab is a patient-focused, innovative, commercial-stage global biopharmaceutical company with a significant presence in Greater China and the U.S., focusing on oncology, autoimmune disorders, infectious diseases, and neuroscience[91] - Currently has five approved commercial products in Greater China (ZEJULA, Optune, QINLOCK, NUZYRA launched; VYVGART expected later this year) and thirteen late-stage product development programs[91] - Incurred net losses and negative cash flows since inception, primarily due to significant R&D and SG&A costs, with continued substantial investment expected in R&D and commercialization[92] Recent Developments This section highlights recent progress in commercial products, product candidates, corporate activities, and legal/regulatory changes impacting the company Commercial Products This section details the performance of commercial products, noting revenue increases and recent regulatory approvals for key therapies - Net product revenues increased in Q2 2023 YoY for ZEJULA, QINLOCK, and NUZYRA due to NRDL inclusion, and for Optune due to increased supplemental insurance plan coverage[94] - Regulatory approvals in Q2 2023 include Optune for GBM in Taiwan (May 2023) and VYVGART for gMG in mainland China (June 2023), with commercial launch of VYVGART expected later this year[94][95] Product Candidates This section provides updates on the clinical development and regulatory status of key product candidates, including ZEJULA, Optune, Repotrectinib, VYVGART, and XACDURO - ZEJULA (niraparib, PARP): Phase III PRIME study data published in JAMA Oncology (July 2023) showed ZEJULA as first-line maintenance therapy in Chinese ovarian cancer patients significantly extended PFS (24.8 vs 8.3 months for placebo) with an individual starting dose, demonstrating improved safety and tolerability[96] - Tumor Treating Fields (TTFields or Optune): Phase III LUNAR clinical trial demonstrated a statistically significant and clinically meaningful 3-month extension in OS for patients with metastatic NSCLC (HR: 0.74, P=0.035). Phase III PANOVA-3 interim analysis for pancreatic cancer recommended proceeding to final analysis[97][98] - Repotrectinib (ROS1/TRK): FDA accepted NDA with priority review (PDUFA Nov 27, 2023) and NMPA accepted NDA (June 2023) for ROS1-positive locally advanced or metastatic NSCLC[100] - VYVGART (Efgartigimod, FcRn): FDA approved VYVGART Hytrulo (SC injection) in June 2023. Global registrational ADHERE study showed positive topline results (July 2023) for CIDP, meeting primary endpoint with 61% reduction in relapse risk vs. placebo[102][103] - XACDURO (Sulbactam-Durlobactam): FDA approved XACDURO for hospital-acquired/ventilator-associated bacterial pneumonia (May 2023). NMPA NDA for Acinetobacter baumannii infections is under priority review[104] Corporate Updates This section covers recent corporate developments, including a new strategic partnership and a key executive appointment - Entered a strategic partnership and global license agreement with MediLink Therapeutics in April 2023 for the early-stage DLL3 ADC program, ZL-1310, expanding the lung cancer franchise and global oncology pipeline[107] - Yajing Chen promoted to Chief Financial Officer, effective July 7, 2023, succeeding Billy Cho. Dr. Chen brings over 20 years of life sciences finance experience and a scientific background[108] Legal and Regulatory Developments This section outlines recent changes in regulations within Hainan Province and China, including updates to human genetic resources and counter-espionage laws - Hainan Province revised regulations (effective May 2023) for urgently needed imported drugs in the BMTPZ, offering a pathway to accelerate market entry for product candidates in China[109] - Updated Service Guide for Human Genetic Resources (July 2023) will impact HGRAC filing practices[109] - Revised Counter-Espionage Law (effective July 2023) may increase cybersecurity/operational costs and subject the company to investigative actions by Chinese authorities[109] Factors Affecting Our Results of Operations This section discusses key elements influencing financial performance, such as R&D expenses, capital raising, SG&A costs, license agreements, and the impact of the COVID-19 pandemic - Research and development expenses are a primary factor, with sustained investment in internal discovery and a pipeline of thirteen late-stage clinical product candidates as of June 30, 2023[111] - The company has raised approximately $2.6 billion in net proceeds through June 30, 2023, from private placements and public offerings. Net cash used in operating activities was $128.0 million (H1 2023) and $132.0 million (H1 2022)[112][153] - Selling, general, and administrative expenses are expected to increase due to headcount growth, share-based compensation, product distribution, promotion, and public company compliance costs[113] - License and collaboration agreements involve upfront and milestone payments (development, regulatory, sales-based) and royalties. Recorded R&D expense of $19.3 million (H1 2023) for these fees, with potential future payments up to $2.4 billion in development/regulatory milestones and $3.4 billion in sales-based milestones[115] - The COVID-19 pandemic adversely affected operations in 2022 and Q1 2023, but did not have a material adverse effect on business or results in Q2 2023[116] Results of Operations This section provides a detailed analysis of the company's financial performance, examining changes in revenues, cost of sales, research and development, selling, general, and administrative expenses, and other income/expenses Revenues This section analyzes the company's total revenues, highlighting the significant increase in net product revenue driven by higher sales volumes and reduced COVID-19 impact Total Revenues (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :-------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Product revenue, net | 68,864 | 47,575 | 21,289 | 45% | 131,661 | 93,670 | 37,991 | 41% | | Collaboration revenue | — | 601 | (601) | (100)% | — | 1,230 | (1,230) | (100)% | | Total revenues | 68,864 | 48,176 | 20,688 | 43% | 131,661 | 94,900 | 36,761 | 39% | - Net product revenue increased by $21.3 million (Q2 2023) and $38.0 million (H1 2023) primarily due to increased sales volumes and decreased adverse effects from the COVID-19 pandemic compared to prior periods[122] Net Revenue by Product (in thousands $) | Product | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------ | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | ZEJULA | 42,957 | 34,052 | 8,905 | 26% | 85,637 | 63,649 | 21,988 | 35% | | Optune | 13,692 | 11,592 | 2,100 | 18% | 27,034 | 24,389 | 2,645 | 11% | | QINLOCK | 7,527 | 623 | 6,904 | 1108% | 8,833 | 3,582 | 5,251 | 147% | | NUZYRA | 4,636 | 1,308 | 3,328 | 254% | 10,105 | 2,050 | 8,055 | 393% | | VYVGART | 52 | — | 52 | NM | 52 | — | 52 | NM | Cost of Sales This section explains the increase in cost of sales, primarily attributed to rising sales volumes and higher royalty expenses - Cost of sales increased by $6.4 million (Q2 2023) and $12.0 million (H1 2023) primarily due to increasing sales volumes and higher royalties[125] Research and Development Expenses This section details the changes in R&D expenses, driven by increased licensing fees, personnel costs, and CRO/CMO/investigator expenses, with a breakdown by type and program Research and Development Expenses by Type (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Personnel compensation and related costs | 29,378 | 27,045 | 2,333 | 9% | 58,034 | 51,847 | 6,187 | 12% | | Licensing fees | 18,282 | 10,436 | 7,846 | 75% | 19,282 | 10,436 | 8,846 | 85% | | CROs/CMOs/Investigators expenses | 23,626 | 23,368 | 258 | 1% | 36,065 | 46,918 | (10,853) | (23)% | | Other costs | 5,396 | 5,235 | 161 | 3% | 11,772 | 10,737 | 1,035 | 10% | | Total | 76,682 | 66,084 | 10,598 | 16% | 125,153 | 119,938 | 5,215 | 4% | - R&D expenses increased by $10.6 million (Q2 2023) and $5.2 million (H1 2023), driven by higher licensing fees, personnel costs, and CROs/CMOs/Investigators expenses, partially offset by collaboration partner compensation in H1 2023[127][128] Research and Development Expenses by Program (in thousands $) | Program | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Clinical programs | 32,462 | 33,292 | (830) | (2)% | 44,989 | 56,144 | (11,155) | (20)% | | Pre-clinical programs | 10,758 | 1,957 | 8,801 | 450% | 13,239 | 4,522 | 8,717 | 193% | | Unallocated R&D expenses | 33,462 | 30,835 | 2,627 | 9% | 66,925 | 59,272 | 7,653 | 13% | Selling, General, and Administrative Expenses This section analyzes the increase in SG&A expenses, primarily due to higher other costs and personnel compensation, partially offset by reduced professional service fees Selling, General, and Administrative Expenses (in thousands $) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Personnel compensation and related costs | 42,874 | 41,320 | 1,554 | 4% | 83,788 | 79,523 | 4,265 | 5% | | Professional service fees | 5,793 | 8,072 | (2,279) | (28)% | 14,348 | 15,505 | (1,157) | (7)% | | Other costs | 19,253 | 14,009 | 5,244 | 37% | 32,294 | 25,364 | 6,930 | 27% | | Total | 67,920 | 63,401 | 4,519 | 7% | 130,430 | 120,392 | 10,038 | 8% | - SG&A expenses increased by $4.5 million (Q2 2023) and $10.0 million (H1 2023), driven by higher other costs (selling, rental, administrative) and personnel compensation, partially offset by decreased professional service fees[133] Gain on Sale of Intellectual Property This section reports a $10.0 million gain recognized in Q2 and H1 2023 from the sale of certain patent rights and related know-how - Recognized a $10.0 million gain in Q2 and H1 2023 from the sale of certain patent rights and related know-how to a third party; no such gains were recorded in prior year periods[134] Interest Income This section highlights a significant increase in interest income for Q2 and H1 2023, primarily attributable to rising interest rates - Interest income increased significantly by $8.9 million (Q2 2023) and $19.0 million (H1 2023) due to increased interest rates[135] Foreign Currency Loss This section explains the changes in foreign currency loss, primarily driven by the depreciation of the Renminbi against the U.S. dollar - Foreign currency loss increased by $5.2 million in Q2 2023, primarily driven by increased remeasurement loss due to depreciation of the Renminbi (RMB) against the U.S. dollar[136] - Foreign currency loss decreased by $1.4 million in H1 2023, primarily driven by decreased remeasurement loss due to depreciation of the RMB against the U.S. dollar[136] Other Expenses, Net This section details the decrease in other expenses, net, primarily due to reduced equity investment losses in MacroGenics, partially offset by lower governmental subsidies - Other expenses, net decreased by $4.1 million (Q2 2023) primarily due to a $3.9 million decrease in equity investment loss in MacroGenics[137] - Other expenses, net decreased by $10.2 million (H1 2023) primarily due to an $11.3 million decrease in equity investment loss in MacroGenics, partially offset by a $1.5 million decrease in governmental subsidies[137] Income Tax Expense This section confirms that the company reported zero income tax expense for both Q2 and H1 2023 and 2022 - Income tax expense remained zero for both Q2 and H1 2023 and 2022[138] Critical Accounting Policies and Significant Judgments and Estimates This section outlines the company's key accounting policies and the significant judgments and estimates involved in revenue recognition, R&D expenses, share-based compensation, and income taxes Revenue Recognition This section details the company's policy for recognizing product sales revenue upon delivery and the estimation methods for rebates to distributors - Revenue from product sales to distributors in mainland China is recognized upon product delivery, with performance obligations satisfied at that point[141] - Rebates to distributors are estimated based on contracted rates, sales volumes, and distributor inventories, recorded as a reduction of revenue, and regularly reviewed for adjustments[141][142] Research and Development Expenses (Accounting Policy) This section describes the accounting policy for R&D expenses, including the accrual of pre-clinical and clinical trial costs based on estimates of services performed by third parties - R&D expenses are charged as incurred for services with no alternative future uses. Pre-clinical and clinical trial costs are accrued based on estimates of services performed by third parties[143] - Estimates involve reviewing contracts, communicating with personnel, and assessing service levels, especially for services invoiced in arrears or upon milestone achievement[144] - While estimates are not expected to differ materially, variations in understanding service status could lead to over or under-reporting expenses; no material adjustments to prior R&D estimates to date[145][146] Share-Based Compensation This section explains the accounting for share-based awards, including fair value measurement using the Black-Scholes model and the impact of assumption changes on expenses - Share-based awards are measured at grant date fair value and expensed immediately if no vesting conditions, or straight-line over the vesting period. Forfeited awards result in reversal of previously recognized expense[147] - Fair value of stock options determined using Black-Scholes model, based on expected volatility, expected lives, dividend yield (zero), and risk-free interest rates. Expected volatility is based on comparable companies, and expected term uses a simplified method due to insufficient historical data[148] - Changes in assumptions for fair value determination can significantly impact share-based compensation expenses[149] Income Taxes This section details the company's policy for recognizing tax benefits, assessing deferred tax asset realization, and estimating liabilities for unrecognized tax benefits - Tax benefits recognized if 'more likely than not' to prevail, measured at the largest amount with >50% realization likelihood. Liability for unrecognized tax benefits is estimated and periodically assessed[150] - Deferred tax asset realization depends on future taxable income, considering cumulative losses and forecasts. A full valuation allowance is recorded against deferred tax assets due to the likelihood of not realizing them in future periods[151] - Actual benefits may differ from estimates, with adjustments recorded upon audit conclusion or changes in facts/circumstances. No significant unrecognized uncertain tax positions as of June 30, 2023, and 2022[152] Liquidity and Capital Resources This section discusses the company's funding sources, cash flow activities, and current financial position, indicating sufficient liquidity for the next 12 months while acknowledging potential future funding needs - Financed activities through private placements and public offerings, raising approximately $2.6 billion in net proceeds through June 30, 2023[153] - Net cash used in operating activities was $128.0 million (H1 2023) and $132.0 million (H1 2022)[153] - As of June 30, 2023, cash, cash equivalents, and short-term investments totaled $876.4 million, expected to meet cash requirements for at least the next 12 months, though additional funding may be needed for R&D objectives[154] Cash Flow Summary (in thousands $) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | | :--------------------------------------------------------- | :----------------------------- | :----------------------------- | :--------- | | Net cash used in operating activities | (127,989) | (132,027) | 4,038 | | Net cash used in investing activities | (11,252) | (143,869) | 132,617 | | Net cash used in financing activities | (5,379) | (2,240) | (3,139) | | Net decrease in cash, cash equivalents and restricted cash | (148,327) | (283,280) | 134,953 | - Net cash used in investing activities decreased by $132.6 million in H1 2023, primarily due to decreased purchases of short-term investments and increased proceeds from intellectual property sales, partially offset by decreased proceeds from short-term investment maturities[157][159] Recently Issued Accounting Standards This section confirms that the company has not adopted any new accounting standards since December 31, 2022 - The Company has not adopted any new accounting standards since December 31, 2022[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to various market risks, including foreign exchange risk, credit risk, and inflation risk, and how these risks are managed or could impact financial performance Foreign Exchange Risk This section addresses the company's exposure to foreign exchange risk, particularly concerning RMB-denominated balances and their convertibility restrictions - Renminbi (RMB) is not freely convertible and is controlled by the PBOC. RMB-denominated cash and cash equivalents were $21.97 million (3% of total) as of June 30, 2023, and $45.49 million (5% of total) as of December 31, 2022[163][54] - The company does not believe it currently has significant direct foreign exchange risk and has not used derivative financial instruments to hedge, but the value of investments is affected by RMB exchange rates against the U.S. dollar and HK dollar[164] - Appreciation of the RMB against the U.S. dollar or HK dollar would adversely affect RMB amounts received from conversions; conversely, appreciation of the U.S. dollar or HK dollar against the RMB would negatively impact conversion amounts for payments[166] Credit Risk This section identifies financial instruments subject to credit risk, including cash, investments, and accounts receivable, and describes the company's management of these risks - Financial instruments subject to significant concentration of credit risk include cash and cash equivalents, short-term investments, accounts receivable, and notes receivable[169] - Cash, cash equivalents, and short-term investments ($874.7 million as of June 30, 2023) are held by major financial institutions in mainland China and internationally, which are believed to be of high credit quality[169] - Accounts receivable are unsecured, managed through ongoing monitoring, and historically collected within credit terms with no significant credit losses. Two largest customers accounted for approximately 31% of total accounts receivable as of June 30, 2023[170] Inflation Risk This section assesses the impact of inflation on the company's operations, noting that recent global inflation has not materially affected results but could pose future risks - Mainland China has not experienced significant inflation recently. Global inflation has not materially impacted the company's results of operations to date, but future higher inflation rates could increase costs and adversely affect results[172] Item 4. Controls and Procedures This section details management's evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Management's Evaluation of our Disclosure Controls and Procedures This section confirms management's conclusion that the company's disclosure controls and procedures were effective as of June 30, 2023 - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, providing reasonable assurance of achieving control objectives[173] Changes in Internal Control over Financial Reporting This section reports that no material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023 - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023[174] Part II - Other Information This section covers additional required disclosures, including legal proceedings, risk factors, equity security transactions, and other miscellaneous information Item 1. Legal Proceedings This section states that the company is not currently involved in any material legal or administrative proceedings - The Company is not currently a party to any material legal or administrative proceedings[176] Item 1A. Risk Factors This section indicates that there have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report - No material changes in risk factors from those disclosed in the 'Risk Factors' section of the 2022 Annual Report[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's recent equity security transactions, specifically detailing the acquisition of ADSs from employees to cover tax withholding obligations Recent Sales of Unregistered Securities This section confirms that there were no recent sales of unregistered securities during the reporting period - There were no recent sales of unregistered securities[177] Issuer Purchases of Equity Securities This section details the company's acquisition of American Depositary Shares from employees to cover tax withholding obligations during Q2 2023 Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | | :----------------- | :------------------------------------------ | :------------------------------------- | | April 1 – 30, 2023 | 2,661 | 30.70 | | May 1 – 31, 2023 | 914 | 42.50 | | June 1 – 30, 2023 | 123,658 | 40.51 | | Total | 127,233 | | - The Company acquired 127,233 ADSs from employees during Q2 2023 to satisfy tax withholding obligations related to equity awards[178][179] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - None[180] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - None[180] Item 5. Other Information This section provides additional information, specifically confirming that no directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the reporting period[180] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various certifications and Inline XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (Exchange Act Rule 13a-14(a) and 18 U.S.C. Section 1350) and various Inline XBRL documents (Instance, Schema, Calculation, Label, Presentation, Definitions Linkbase, and Cover Page Interactive Data File)[182] Signatures This section contains the official signatures, confirming the due authorization and submission of the report [Report Signatures