The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our 2021 Annual Report and our
unaudited condensed consolidated financial statements and the accompanying notes
included in "Item 1. Financial Statements" in this Quarterly Report on Form
10-Q.
Overview
We are a patient-focused, innovative, commercial-stage, global biopharmaceutical
company with a substantial presence in both Greater China and the United States.
We are discovering, developing, and commercializing innovative products that
target medical conditions with unmet needs affecting patients in Greater China
and worldwide, in the areas of oncology, autoimmune disorders, infectious
diseases, and neurological disorders. As of August 3, 2022 we have four
commercialized products that have received marketing approval in one or more
territories in Greater China and twelve programs in late-stage product
development.
Since our inception, we have incurred net losses and negative cash flows from
our operations. Substantially all of our losses have resulted from funding our
research and development programs and general and administrative costs
associated with our operations. Developing high quality product candidates
requires a significant investment related to our research and development
activities over a prolonged period of time, and a core part of our strategy is
to continue making sustained investments in this area. Our ability to generate
profits and to generate positive cash flow from operations over the next several
years depends upon our ability to successfully market our four commercial
products - ZEJULA, Optune, QINLOCK, and NUZYRA - and to successfully develop and
commercialize our other product candidates. We expect to continue to incur
substantial expenses related to our research and development activities. In
particular, our licensing and collaboration agreements require us to make
upfront payments upon our entry into such agreements and milestone payments upon
the achievement of certain development, regulatory, and commercial milestones as
well as tiered royalties based on the net sales of the licensed products. These
upfront and milestone payments are recorded in our research and development
expense. During the six months ended June 30, 2022, we accrued $10.4 million of
research and development expense related to the achievement of certain
developmental milestones by our partners during the second quarter of 2022. In
addition, we expect to incur substantial costs related to the commercialization
of our product candidates, in particular during the early launch phase.
Furthermore, as we pursue our strategy of growth and development, we anticipate
that our financial results will fluctuate from quarter to quarter based upon the
balance between the successful marketing of our commercial products and our
significant research and development expenses. We cannot predict whether or when
new products or new indications for marketed products will receive regulatory
approval or, if any such approval is received, whether we will be able to
successfully commercialize such product(s) and whether or when they may become
profitable.
Recent Developments
Recent Product Developments
ZEJULA. In June 2022, we presented a new prespecified subgroup analysis from the
Phase 3 PRIME study for ZEJULA in women in mainland China with ovarian cancer at
the 2022 American Society of Clinical Oncology ("ASCO") Annual Meeting. This
analysis examined 384 newly diagnosed stage III or IV ovarian cancer patients
enrolled in the PRIME study who experienced a complete response ("CR") or
partial response ("PR") to first-line platinum-based chemotherapy. In the CR
group, the median progression-free survival ("mPFS") was 29.4 months for
niraparib vs 8.3 months for placebo (HR=0.45; 95% CI, 0.32-0.61; P<0.001); in
the PR group, the mPFS was 19.3 months for niraparib versus 8.3 months for
placebo (HR=0.45; 95% CI, 0.23-0.86; P=0.014); and the safety profile of
niraparib was consistent with previous clinical trials, with no new safety
issues identified in this subgroup analysis.
Optune. In June 2022, the Company and Novocure announced the EF-31 phase 2 pilot
study, evaluating the safety and efficacy of TTFields together with
standard-of-care (chemotherapy alone or in combination with trastuzumab for
HER2-positive patients) as a first-line treatment in patients with gastric
cancer, met its primary endpoint of objective response rate ("ORR") with
supportive signals across secondary endpoints. As of June 30, 2022, Optune has
been listed in 50 regional customized commercial health insurance plans guided
by provincial or municipal governments (or "supplemental insurance plans").
QINLOCK. As of June 30, 2022, QINLOCK has been listed in 73 supplemental
insurance plans since its commercial launch in mainland China in May 2021.
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Adagrasib. At the ASCO Annual Meeting in June 2022, our partner Mirati
Therapeutics, Inc. ("Mirati") presented full results from the
registration-enabling Phase 2 cohort of the KRYSTAL-1 study evaluating adagrasib
in patients with previously treated non-small cell lung cancer ("NSCLC")
harboring a KRASG12C mutation; these results were concurrently published in the
New England Journal of Medicine. This presentation included results from a
retrospective subgroup analysis from the Phase 2 NSCLC cohort of the KRYSTAL-1
study evaluating adagrasib in patients with KRASG12C-mutated NSCLC and stable,
previously treated central nervous system ("CNS") metastases. The initial
clinical results from the Phase 2 registration-enabling study (n=112) showed
that the ORR was 43%, the disease control rate ("DCR") was 80%, the median
duration of response ("mDOR") was 8.5 months (95% confidence interval ("CI"):
6.2 - 13.8), and the mPFS was 6.5 months (95% CI: 4.7 - 8.4). With a January 15,
2022 data cutoff, the median overall survival ("mOS") was 12.6 months (95% CI:
9.2 - 19.2). With respect to CNS-specific activity in a subset analysis of
stable, previously treated CNS metastases (n=33), results revealed an
intracranial ("IC") ORR of 33% (11/33). Mirati also reported updated findings
from a pooled analysis from the KRYSTAL-1 study, including the registrational
Phase 2 and Phase 1/1b NSCLC cohorts. The initial results of the pooled analysis
of KRYSTAL-1 NSCLC cohorts (n=132) showed that the ORR was 44%, the DCR was 81%,
the mDOR was 12.5 months, and the mPFS was 6.9 months. With a January 15, 2022
data cutoff, the mOS was 14.1 months.
In June 2022, Mirati also announced the results of a prospective analysis from
the Phase 1b cohort of the KRYSTAL-1 study evaluating IC responses of adagrasib
in patients with KRASG12C-mutated advanced NSCLC with active and untreated CNS
metastases. The results of the CNS-specific activity in active and untreated CNS
metastases (n=19) showed an IC ORR of 32% (6/19).
In addition, the Company treated the first patients in Greater China for the
global Phase 3 KRYSTAL-10 study of the combination of adagrasib and cetuximab in
patients with KRASG12C-mutated advanced colorectal cancer and for the global
Phase 3 KRYSTAL-12 study of adagrasib in patients with KRASG12C-mutated advanced
NSCLC in June 2022 and July 2022, respectively.
Bemarituzumab. Our partner Amgen initiated a Phase 1b/2 study (FORTITUDE-301),
evaluating the safety and efficacy of bemarituzumab monotherapy in solid tumors
with FGFR2b overexpression. In addition, Amgen reported that the final analysis
of the FIGHT study, a Phase 2 randomized, double-blind, controlled study
evaluating bemarituzumab and modified FOLFOX6 (mFOLFOX6) in patients with
previously untreated advanced gastric and gastroesophageal junction cancer was
completed, with results continuing to demonstrate that bemarituzumab + mFOLFOX6
improves the clinical outcome of patients with FGFR2b expressing tumors with no
new safety concerns and noting that a greater survival benefit was observed with
increasing FGFR2b expression levels.
Repotrectinib. In May 2022, our partner Turning Point Therapeutics, Inc.
("Turning Point") announced that the FDA granted an eighth regulatory
designation, and third Breakthrough Therapy Designation ("BTD"), to
repotrectinib, for the treatment of patients with ROS1-positive metastatic NSCLC
who have been previously treated with one ROS1 TKI and who have not received
prior platinum-based chemotherapy. In June 2022, the Center for Drug Evaluation
("CDE") of the NMPA granted two Breakthrough Therapy Designations for
investigational repotrectinib for the treatment of patients with ROS1-positive
metastatic NSCLC who have received one prior line of ROS1 TKI and one prior line
of platinum-based chemotherapy and for those with ROS1-positive metastatic NSCLC
who have received one prior line of ROS1 TKI and no chemotherapy or
immunotherapy. The Breakthrough Therapy Designations for repotrectinib were
supported by the data from both global and Chinese TKI-pretreated ROS1-positive
NSCLC patients enrolled in the Phase 1/2 TRIDENT-1 study.
CLN-081. In June 2022, our partner Cullinan Oncology presented updated data from
the Phase 1/2a study in NSCLC patients with EGFR exon 20 insertion mutations at
the 2022 ASCO Annual Meeting. Of the 39 patients in the 100 mg BID dose group:
16 (41%) had a confirmed PR; the estimated mDOR was greater than 21 months; mPFS
was 12 months; and the safety profile of CLN-081 was amenable for long-term
treatment.
BLU-945. In June 2022, we received a Clinical Trial Application ("CTA") approval
from the NMPA for the BLU-945 monotherapy cohort of the global Phase 1/2
SYMPHONY study in Greater China.
VYVGART. In June 2022, efgartigimod was introduced to the Hainan Bo'ao Lecheng
International Medical Tourism Pilot Zone, and the first Chinese patient was
treated with efgartigimod. In July 2022, the NMPA accepted the Biologics License
Application for efgartigimod alfa injection for the treatment of adult patients
with generalized myasthenia gravis ("gMG") in mainland China.
KarXT. In August 2022, our partner Karuna announced positive topline results
from its Phase 3 EMERGENT-2 trial evaluating the efficacy, safety, and
tolerability of KarXT in adults with schizophrenia. The trial met its primary
endpoint, with KarXT demonstrating a statistically significant and clinically
meaningful 9.6-point reduction in the Positive and Negative Syndrome Scale
("PANSS") total score compared to placebo (-21.2 KarXT vs. -11.6 placebo,
p<0.0001) at Week
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5 (Cohen's d effect size of 0.61). KarXT also demonstrated an early and
sustained statistically significant reduction of symptoms, as assessed by PANSS
total score, starting at Week 2 and maintained such reduction through all
timepoints in the trial. The trial also met its key secondary endpoints,
demonstrating statistically significant reductions in positive and negative
symptoms of schizophrenia, as measured by the PANSS positive, PANSS negative,
and PANSS Marder negative subscales. KarXT was generally well tolerated, with a
side effect profile substantially consistent with prior trials of KarXT in
schizophrenia.
Simurosertib (CDC7 Inhibitor). Based on an extensive review of the data
collected from previously completed studies, we have decided to terminate
enrollment for the study of simurosertib.
ZL-1201 (CD47 Inhibitor). In July 2022, Zai Lab determined a recommended Phase 2
dose in the ongoing Phase 1 trial. Based on a review of the competitive
landscape, Zai Lab has decided to deprioritize ZL-1201 for internal development
but will pursue out-licensing opportunities.
Recent Business Developments
In May 2022, we completed our engagement of KPMG to be our independent
registered public accounting firm for the fiscal year ending December 31, 2022.
On May 25, 2022, the Company received the requisite approvals from the Hong Kong
Stock Exchange and the Financial Reporting Council of Hong Kong, and on May 31,
2022, the Company and KPMG signed an engagement letter, and the appointment
became effective on the same date.
We also completed our voluntary conversion from secondary listing status to
primary listing on the Hong Kong Stock Exchange, effective June 27, 2022. The
Company's ordinary shares and ADSs will continue to be traded on the Hong Kong
Stock Exchange and Nasdaq, respectively, and remain mutually fungible. Because
of our conversion to primary listing in Hong Kong, we are eligible for the Hong
Kong Stock Exchange Stock Connect, a channel by which investors in mainland
China can invest in stocks traded on the Hong Kong Stock Exchange. Our ordinary
shares have been included in the Shenzhen-Hong Kong Stock Connect and
Shanghai-Hong Kong Stock Connect programs since June 2022 and July 2022,
respectively.
In July 2022, the Board further enhanced our corporate governance by appointing
John Diekman to be lead independent director. The Board continues to believe
that the Chief Executive Officer is best suited to serve as Chairperson of the
Board at this time, including due to her extensive understanding of our business
and industry and her ability to identify strategic opportunities, promote the
effective execution of strategic initiatives, and facilitate the flow of
information between management and the Board. While the roles of Chairperson of
the Board and Chief Executive officer are combined, our lead independent
director will, among other things, lead meetings of the Board when the
Chairperson is not present, serve as liaison between the Chairperson and
independent directors, have the authority to call meetings of the independent
directors, and, if requested by major shareholders, be available for
consultation and direct communication. As a result of Mr. Diekman's appointment
as lead independent director, he stepped down as Chair of the Audit Committee,
although he will continue to serve as a member of the Audit Committee. As a
result, the Board appointed Scott Morrison to be Chair of the Audit Committee.
Josh Smiley, aged 53, joined the Company as Chief Operating Officer, effective
August 1, 2022. Mr. Smiley brings over 26 years of experience working with the
biopharmaceutical industry, including experience leading finance, corporate
strategy, business development, venture capital, and global business services
operations at Eli Lilly and Company. He will report directly to our Chief
Executive Officer and will be a key member of our executive committee. He will
oversee all aspects of our business, finance, and global operations.
Recent Legal and Regulatory Developments
Amendment to the Implementation Regulation of the PRC Drug Administration Law
On May 9, 2022, the NMPA published a comprehensive draft of Amendment to the
Implementation Regulation of the PRC Drug Administration Law (the "Draft DAL
Implementing Regulations") for public comments. The Draft Amendment introduced
changes to the regulatory framework and aimed to codify certain regulatory
initiatives implemented by the Chinese government since the promulgation of the
current PRC Drug Administration Law in 2019 (the "DAL").
The Draft DAL Implementing Regulations propose to extend the reach of DAL to
offshore development and manufacturing activities of pharmaceutical companies to
the extent that the pharmaceutical companies would like to obtain marketing
authorizations for their drug products in mainland China. All overseas R&D
activities and production activities concerning a drug to be marketed in
mainland China and/or already marketed in mainland China should be carried out
in
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compliance with the regulatory requirements specified in applicable Chinese
laws, regulations, rules, standards, and specifications.
Patent linkage and regulatory data protection have been included in the Draft
DAL Implementing Regulations. The Draft DAL Implementing Regulations propose to
grant market exclusivity with a specified period to first-to-market generic drug
contributing to the invalidity of relevant drug patent.
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.
Cross-Border Data Transfers
Measures on Security Assessment of Cross-Border Data Transfer
On July 7, 2022, the Cyberspace Administration of China ("CAC") issued Measures
on Security Assessment of Cross-Border Data Transfer (the "Security Assessment
Measures"), which sets out a security assessment framework for cross-border data
transfers out of mainland China as well as ground rules for a security
assessment filing for cross-border data transfers which was stipulated in the
Cybersecurity Law ("CSL") and the Personal Information Protection Law ("PIPL").
A security assessment will be triggered if a cross-border data transfer out of
mainland China falls 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 may
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cause. A cross-border data transfer of relevant data will 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 change in the cross-border data transfer that may affect the
security of the exported data, such as changes in the purpose, method, scope,
and type of the exported data and changes in the purpose and method of the
processing of the exported data by overseas recipients.
The Security Assessment Measures have retroactive effect for cross-border data
transfers out of mainland China of relevant data conducted prior to their
effective date on September 1, 2022. If a Data Processor fails to complete its
security assessment for any of its cross-border data transfers of relevant data
out of mainland China prior to the effective date of the Security Assessment
Measures, it needs to rectify the failure within six months after the effective
date of the Security Assessment Measures.
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