ZAI LAB LIMITED 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 bothGreater China andthe United States . We are discovering, developing, and commercializing innovative products that target medical conditions with unmet needs affecting patients inGreater China and worldwide, in the areas of oncology, autoimmune disorders, infectious diseases, and neurological disorders. As ofNovember 3, 2022 , we have four commercialized products that have received marketing approval in one or more territories inGreater China and thirteen 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 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 annual net sales of the licensed products. During the nine months endedSeptember 30, 2022 , we recorded$50.2 million of research and development expense related to upfront license fees and development milestones payments. 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 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 theU.S. as a result of ongoing discussions with the FDA. InSeptember 2022 , GSK disclosed that it was in discussions with the FDA to discuss overall survival ("OS") data from GSK's ENGOT-OV16/NOVA phase III clinical trial for adult patients with recurrent ovarian cancer irrespective of the gBRCA mutation. We do not expect theFDA's discussions with GSK to impact our approval from the NMPA for ZEJULA inChina . The NMPA's full approval of ZEJULA in the recurrent ovarian cancer setting is based on a separate study, the NORA study, which is a Phase 3 randomized, double-blind, placebo-controlled study of ZEJULA that the Company independently conducted inChina . While the NORA study is not fully mature, to date, favorable trends have been observed 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 inChina will be affected by theFDA's discussions with GSK. We also do not expect a change in our first-line label for ZEJULA; theFDA's discussions with GSK do not apply to this indication. Optune (Tumor Treating Fields or TTFields). As ofSeptember 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 inChina in the third quarter of 2020, compared to 25 supplemental insurance plans as ofSeptember 30, 2021 . QINLOCK. InAugust 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 Chinese 17 --------------------------------------------------------------------------------Society of Clinical Oncology ("CSCO") Guidelines for Diagnosis and Treatment of GIST 2022. As ofSeptember 30, 2022 , QINLOCK has been listed in 96 supplemental insurance plans since its commercial launch in mainlandChina inMay 2021 , compared to 28 supplemental insurance plans as ofSeptember 30, 2021 . We are seeking inclusion of QINLOCK in the NRDL for a fourth-line gastrointestinal stromal tumor indication.
NUZYRA. We are seeking inclusion of NUZYRA in the NRDL for community-acquired bacterial pneumonia ("CABP") and acute bacterial skin and skin structure infections ("ABSSSI") indications.
Product Candidates - Oncology
Adagrasib. InSeptember 2022 , our partner Mirati presented results from KRYSTAL-1, a multicohort Phase 1/2 study evaluating adagrasib with or without cetuximab in patients with advanced colorectal cancer ("CRC") harboring a KRASG12C mutation at theEuropean 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
Bemarituzumab. Our partner Amgen continues to enroll patients in several studies of bemarituzumab, including: 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 portion of the 1b/3 study of bemarituzumab plus chemotherapy and nivolumab versus chemotherapy and nivolumab in first-line gastric cancer with FGFR2b overexpression. Repotrectinib. InOctober 2022 , our partnerTurning 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 inOctober 2022 , we completed enrollment inChina in all cohorts of the registrational Phase 1/2 TRIDENT-1 study. BLU-945. InNovember 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
Product Candidates - Autoimmune Disorders
VYVGART (Efgartigimod). InSeptember 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 theEuropean 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 ofNovember 1, 2022 , VYGART has been listed in 10 supplemental insurance plans inChina . 18 -------------------------------------------------------------------------------- ZL-1102. InSeptember 2022 , we presented results of the Phase 1 proof-of-concept study for ZL-1102 at the 2022European Academy of Dermatology andVenereology Congress inMilan, Italy .
Product Candidates - Neuroscience
KarXT. InSeptember 2022 , we obtained agreement from the NMPA on the development plan of a bridging study in schizophrenia inChina . InOctober 2022 , we started patient enrollment for a pharmacokinetic ("PK") study of KarXT inChina . In the third quarter of 2022, our partner Karuna initiated the Phase 3 ADEPT-1 study evaluating KarXT as a treatment for psychosis in Alzheimer's disease, and in the fourth quarter of 2022, Karuna completed enrollment in the Phase 3 EMERGENT-3 trial in schizophrenia. In addition, inOctober 2022 , Karuna announced that data from the Phase 3 EMERGENT-2 trial of KarXT in schizophrenia was shared at the 35thEuropean College of Neuropsychopharmacology Congress inVienna, Austria . A poster presentation and symposium included previously reported efficacy and safety data, as well as new additional safety data from the trial.
Recent Business Developments
InSeptember 2022 , we entered into a collaboration and license agreement with Seagen for the development and commercialization of TIVDAK (tisotumab vedotin) inGreater China . TIVDAK is the first and only anti-body drug conjugate ("ADC") approved inthe 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 Huang joined the Company from Zentalis Pharmaceuticals in November as Chief Scientific Officer.Dr. Huang brings to the Company an extensive scientific background and strong leadership and research and development experience, including over 16 years working within the biopharmaceutical industry.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, Head of Global Strategic Partnering. She is our first employee based inEurope and is responsible, among other things, for leading our European business development efforts. InNovember 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 theHong 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 theHong Kong Stock Exchange , effectiveNovember 11, 2022 .
Recent Legal and Regulatory Developments
Measures on Security Assessment of Cross-Border Data Transfer
OnJuly 7, 2022 , the CAC issued the "Security Assessment Measures", which sets out a security assessment framework for cross-border data transfers out of mainlandChina as well as ground rules for a security assessment filing for cross-border data transfers which was stipulated in the Cybersecurity Law and the Personal Information Protection Law. A security assessment will be triggered if a cross-border data transfer out of mainlandChina 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 sinceJanuary 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 mainlandChina ; and (ii) a remote access or use of data collected and generated by a data processor stored within mainlandChina 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 transfermay 19 -------------------------------------------------------------------------------- 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 mainlandChina of relevant data conducted prior to their effective date onSeptember 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 mainlandChina 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.
Proposed Amendments to the Cybersecurity Law of
OnSeptember 14, 2022 , the CAC published a draft amendment toChina'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 inJune 2017 . These new laws include the Administrative Punishment Law ofthe People's Republic of China , the Data Security Law ofthe People's Republic of China , and the Personal Information Protection Law ofthe 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 regulations 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
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 mainlandChina includes where a data processor stores data collected or generated in its operations in mainlandChina 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 mainlandChina .
Measures for the Supervision and
OnSeptember 1, 2022 , the SAMR announced the Measures for the Supervision andAdministration of Online Drug Sales (the "Measures"), which will take effect as of1 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, 20 -------------------------------------------------------------------------------- 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 OnJune 24, 2022 , theStanding Committee of theNational People's Congress published amendments to the PRC Anti-Monopoly Law (the "AML"), which came into effect onAugust 1, 2022 . The amended AML formally implementsChina'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 toRMB 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.
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. As a result of this commitment, our pipeline of product candidates has been advancing and expanding, with thirteen late-stage clinical product candidates being investigated as ofSeptember 30, 2022 . We have financed our activities primarily through private placements, our initial public offering on Nasdaq inSeptember 2017 , multiple follow-on offerings, and a secondary listing on theHong Kong Stock Exchange inSeptember 2020 . ThroughSeptember 30, 2022 , 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. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was$258.4 million and$396.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our 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;
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--------------------------------------------------------------------------------•facilities and other expenses, which include office leases and other overhead expenses;
•costs associated with pre-clinical activities and regulatory operations;
•expenses associated with the construction and maintenance of our manufacturing facilities; and
•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 commercialize, develop, and manufacture our products and assets. These increases will likely include increased headcount, increased share-based compensation charges, increased product distribution 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.
Our Ability to Commercialize Our Product Candidates
As ofNovember 3, 2022 , thirteen of our product candidates are in late-stage clinical development and various others are in clinical and pre-clinical development inGreater China andthe United States . Our ability to generate revenue from our product candidates is dependent on our receipt of regulatory approvals for and successful commercialization of such products, which may 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 Arrangements
Our results of operations have been, and we expect them to continue to be, affected by our licensing, collaboration, and development agreements. We are required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and commercial milestones for the relevant products under these agreements as well as tiered royalties based on annual net sales of the licensed products. We recorded research and development expense related to upfront license fees and development milestone payments of$39.8 million and$50.2 million for the three and nine months endedSeptember 30, 2022 , respectively, and$5.1 million and$274.3 million for the three and nine months endedSeptember 30, 2021 , respectively. The COVID-19 Pandemic 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 mainlandChina 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 endedSeptember 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. 22 --------------------------------------------------------------------------------
Results of Operations
The following table summarizes our results of operations for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, Change 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 endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended Nine Months Ended September 30, Change 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 % Our product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainlandChina andHong Kong . Our net product revenue increased by$13.9 million and$50.5 million in the three and nine months endedSeptember 30, 2022 , as compared to the three and nine months endedSeptember 30, 2021 , respectively. These net revenue increases were driven by increased sales volumes, although these increased volumes were negatively affected by the effects of the COVID-19 pandemic, including government restrictions or lockdown measures in mainlandChina , which negatively affected patient access to 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 mainlandChina 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 inDecember 2020 when it was included in the NRDL and again inDecember 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 mainlandChina for those products previously sold at the price prior to the NRDL implementation during the three and nine months endedSeptember 30, 2022 , respectively, and nil and$22.0 million during the three and nine months endedSeptember 30, 2021 , respectively. 23 -------------------------------------------------------------------------------- The Company is scheduled to enter into negotiations with theNational Healthcare Security Administration regarding potential inclusion of QINLOCK and NUZYRA in the NRDL, and inJune 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 endedSeptember 30, 2022 , respectively, and nil and$0.2 million for NUZYRA during the three and nine months endedSeptember 30, 2022 , respectively. The following table presents net revenue by product for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, Change 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 for the three months endedSeptember 30, 2022 from nil for the three months endedSeptember 30, 2021 . Collaboration revenue increased by$1.8 million for the nine months endedSeptember 30, 2022 from nil for the nine months endedSeptember 30, 2021 . These increases were due to our collaborative arrangement withHuizheng (Shanghai) Pharmaceutical Technology Co., Ltd.
Cost of Sales
Cost of sales increased by$7.9 million to$20.0 million for the three months endedSeptember 30, 2022 from$12.2 million for the three months endedSeptember 30, 2021 , and increased by$22.6 million to$53.1 million for the nine months endedSeptember 30, 2022 from$30.5 million for the nine months endedSeptember 30, 2021 . These increases were primarily due to increasing sales volume, higher product costs, and higher royalties.
Research and Development Expenses
The following table sets forth the components of our research and development expenses for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, Change September 30, Change 2022 2021 $ % 2022 2021 $ % Research and development expenses: Personnel compensation and related costs$ 28,478 $ 20,564 $ 7,914 38 %$ 80,325 $ 50,543 $ 29,782 59 % Licensing fees 39,769 5,051 34,718 687 % 50,205 274,299 (224,094) (82) % CROs/CMOs/Investigators expenses 23,407 17,102 6,305 37 % 70,325 52,246 18,079 35 % Other costs 7,870 12,427 (4,557) (37) % 18,607 24,132 (5,525) (23) % Total$ 99,524 $ 55,144 $ 44,380 80 %$ 219,462 $ 401,220 $ (181,758) (45) % Research and development expenses increased by$44.4 million to$99.5 million for the three months endedSeptember 30, 2022 from$55.1 million for the three months endedSeptember 30, 2021 primarily due to:
•an increase of
•an increase of
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•an increase of
Research and development expenses decreased by$181.8 million to$219.5 million for the nine months endedSeptember 30, 2022 from$401.2 million for the nine months endedSeptember 30, 2021 primarily due to:
•a decrease of
•an increase of
•an increase of
The following table summarizes our research and development expenses by program for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, Change 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 endedSeptember 30, 2022 from$20.2 million during the three months endedSeptember 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 endedSeptember 30, 2022 and by$33.5 million for the nine months endedSeptember 30, 2022 , compared to the same periods in 2021, primarily driven by decreased license fees. Research and development expenses attributable to clinical programs decreased by$180.5 million to$119.5 million for the nine months endedSeptember 30, 2022 from$299.9 million during the nine months endedSeptember 30, 2021 . Research and development expenses attributable to pre-clinical programs decreased by$33.5 million to$7.5 million for the nine months endedSeptember 30, 2022 from$41.0 million during the nine months endedSeptember 30, 2021 . Those decreases were driven by decreased license fees.
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.
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--------------------------------------------------------------------------------Selling, General, and Administrative Expenses
The following table summarizes our selling, general and administrative expenses by program for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, Change 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 endedSeptember 30, 2022 from$59.0 million for the three months endedSeptember 30, 2021 primarily due to: •an increase of$7.8 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$3.2 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 mainlandChina andHong Kong after our commercial launch of these four commercialized products; those increases were partially offset by •a decrease of$3.4 million in other costs mainly related to selling, rental, and administrative expenses for commercial operations in mainlandChina ,Hong Kong , andTaiwan .
Selling, general, and administrative expenses increased by
•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 mainlandChina andHong Kong after our commercial launch of these four commercialized products; those increases were partially offset by •a decrease of$6.4 million in other costs mainly related to selling, rental, and administrative expenses primarily for the commercial operation in mainlandChina ,Hong Kong , andTaiwan . Interest Income Interest income increased by$3.2 million to$3.9 million from$0.7 million for the three months endedSeptember 30, 2022 and 2021, and increased by$4.1 million to$5.2 million from$1.2 million for the nine months endedSeptember 30, 2022 and 2021, due to increased interest rates during the third quarter of 2022.
Other Income (Expenses), Net
Other expenses, net increased by$22.9 million to$36.5 million for the three months endedSeptember 30, 2022 from$13.6 million for the three months endedSeptember 30, 2021 primarily as a result of an increase in foreign exchange loss of$36.7 million partially offset by an increase in equity investment gain in MacroGenics, Inc. ("MacroGenics") of$10.4 million 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 endedSeptember 30, 2022 from$12.4 million for the nine months endedSeptember 30, 2021 primarily as a result of an increase in foreign exchange loss of 26 --------------------------------------------------------------------------------
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our financial statements in conformity withU.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 recognition
Description
In mainlandChina , 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. Estimated 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 reassess estimates for rebates periodically. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become 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 expenses as of
each balance sheet date in our financial statements based on facts and
circumstances known to us at that time.
27
--------------------------------------------------------------------------------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 vesting 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 expenses 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 quotedU.S. Treasury rates for securities with maturities approximating the expected lives of the options. Expected volatility has been estimated based on actual movements in the stock prices of certain comparable companies over the most recent historical periods equivalent to the options' expected lives. Expected lives are principally based on our historical exercise experience with previous option grants. 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 ordinary 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. 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.
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--------------------------------------------------------------------------------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, 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 ofSeptember 30, 2022 and 2021, we did not have any significant unrecognized uncertain tax positions.
B. Liquidity and Capital Resources
We have financed our activities primarily through private placements, ourSeptember 2017 initial public offering on Nasdaq, various follow-on offerings, and ourSeptember 2020 secondary listing on theHong Kong Stock Exchange of our ordinary shares and/or ADSs. ThroughSeptember 30, 2022 , 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, secondary listing and subsequent follow-on offerings. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was$258.4 million and$396.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. We have commitments for capital expenditure of$13.8 million as ofSeptember 30, 2022 , mainly for the purpose of plant construction and installation. We currently are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and revenues. As ofSeptember 30, 2022 , we had cash, cash equivalents, restricted cash and short-term investment of$1,120.3 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 fund our operating expenses and capital expenditures requirements for at least the next 12 months. However, in order to bring to fruition our research and development objectives, we will ultimately need additional funding sources, and there can be no assurances that they will be made available to us on acceptable terms or at all.
The following table provides information regarding our cash flows for the nine
months ended
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 During the nine months endedSeptember 30, 2022 , our operating activities used$258.4 million of cash, which resulted from our net loss of$381.5 million and cash used in our operating assets and liabilities of$18.3 million , partially offset by non-cash charges of$141.4 million . During the nine months endedSeptember 30, 2021 , our operating activities used$396.2 million of cash, which resulted from our 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 to$424.4 million for the nine months endedSeptember 30, 2022 from$531.4 million for the nine months endedSeptember 30, 2021 . The decrease was primarily due to an increase of$90.3 million in purchases of short-term investments, a decrease of$38.6 million in proceeds from 29 -------------------------------------------------------------------------------- maturity of short-term investment, and an increase of$8.3 million in purchase of property and equipment, offset by a decrease of$30.0 million in payment for investment in equity investee.
Net cash used in financing activities was$1.5 million for the nine months endedSeptember 30, 2022 compared to net cash provided by financing activities of$820.5 million for the nine months endedSeptember 30, 2021 . The shift from cash provided by to cash used in financing activities was primarily because we had proceeds of$818.9 million from our issuance of ordinary shares upon public offerings during the nine months endedSeptember 30, 2021 while there were no such transactions during the nine months endedSeptember 30, 2022 .
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 "Item 8. Financial Statements and Supplementary Data-Recent accounting pronouncements" in our 2021 Annual Report.
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