Zai Lab Limited (NASDAQ:ZLAB) Q1 2023 Earnings Call Transcript May 10, 2023

Zai Lab Limited beats earnings expectations. Reported EPS is $-0.51, expectations were $-0.95.

Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Zai Lab First Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. It is now my pleasure to turn the floor over to Billy Cho, Chief Financial Officer of Zai Lab, who will make introductory comments.

Billy Cho: Thank you, operator. Good morning, good evening, and welcome, everyone. Zai Lab recently issued a press release providing the details of the company’s first quarter 2023 financial results, as well as some recent product highlights and corporate update. The press release is available in the Investor Relations section of the company’s website at ir.zailaboratory.com. Today’s call will be led by Dr. Samantha Du, Zai Lab’s Founder, Chief Executive Officer and Chairperson. She will be joined by Josh Smiley, President and Chief Operating Officer. Dr. Rafael Amado, President and Head of Global Development Oncology and Research and Develop will discuss advances with our oncology product candidates; Dr. Harald Reinhart, President and Head of Global Development, Neuroscience, Autoimmune and Infectious Diseases will speak about progress we’ve made in those three therapeutic areas.

And I will discuss the performance of our market products and conclude the comments on our first quarter financial results. Additional executives will be available to answer questions during the Q&A portion of the call. As a reminder, during today’s call, Zai Lab will be making certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including with respect to our business plans and objectives, clinical trials, sales and revenue forecasts for our products and product candidates, regulatory applications and commercial launches. Such forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance upon them. These statements are subject to numerous risks and uncertainties and actual results could differ materially from what we expect due to a variety of factors, including those discussed in our SEC filings.

At this time, it is my pleasure to turn the call over to Zai Lab’s Founder, Chief Executive Officer and Chairperson, Dr. Samantha Du.

Samantha Du: Thank you Billy. Hello everyone. Thank you all for joining us today. Our first quarter results and progress continue to demonstrate Zai Lab’s potential global best-in-class portfolio and track record of execution, despite challenges from China’s re-opening at the beginning of the year. The positive top line readout from the Phase 3 EMERGENT-3 trial of KarXT in schizophrenia and the positive analysis from the Phase 2 innova TV 207 study from TIVDAK in head and neck cancer further support our belief that these products provide important treatment options for patients in China and globally. We are very excited by the unanimous recommendation of the U.S. Food and Drug Administration Advisory Committee’s in support of approval of sulbactam-durlobactam, the first pathogen-targeted therapy for patients with severe and life-threatening infections caused by Acinetobacter.

Recently, we expanded our lung cancer franchise and enriched our global oncology pipeline with a next generation DLL3 antibody-drug conjugate or ADC program, ZL-1310. This global ADC program demonstrates our continued focus on the ADC space and our extension to the global market. This product complements our lung cancer franchise, and we will leverage our strong capabilities to develop ZL-1310, and look forward to seeing results in patients. I look forward to leading Zai into its next transformational stage of growth, productivity, and global opportunities. To better support me and help meet the strategic and operational needs of our business during this next stage of growth, we are happy to announce that we have promoted Josh Smiley to President and Chief Operating Officer.

Josh’s rich experience and strategic vision will help us further grow as a leading global biopharmaceutical company and deliver on our mission to improve human health and on our corporate strategic goals for driving innovation in China and beyond. I would like now to turn the call over to Josh. Josh?

Josh Smiley: Thank you Samantha. I look forward to taking on this new role for the company and continue to work with Samantha and the rest of our team to move our company forward. I’m very excited about what is in store for us for the next few years that positions Zai Lab to be a leader in bio pharma innovation. We’re pleased with the overall environment this year in China for companies like Zai Lab with innovative therapies that meet significant unmet medical needs. As Samantha mentioned, as a result of the proactive steps taken by our team, Zai Lab has established a good foundation for future commercial execution and strong financial performance. Despite challenges from the COVID-19 reopening in China during the first two months of the quarter, Zai Lab continues to deliver solid growth and overall financial results.

Our net loss in the first quarter of 2023 decreased 40% compared to the same period last year, primarily attributable to the increase in product revenue and non-operating income. And we expect strong growth momentum to continue throughout the remainder of this year. ZEJULA continues to perform well with increased sales for ovarian cancer and we believe ZEJULA remains on track to become the leader in its asset class for ovarian cancer in China starting this year. For Optune, our team continued to improve market access by expanding commercial insurance and supplemental insurance coverage. As of March 31, 2023, Optune was covered by 96 municipal or provincial supplemental insurance plans, up from 37 as of March 31, 2022. We’re pleased to have added QINLOCK and NUZYRA to China’s National Reimbursement Drug List, effective in March 2023.

As discussed earlier, we expect a strong revenue ramp-up for these products as a result of their NRDL inclusion. For efgartigimod, the first and only U.S approved FcRn blocker with pipeline and a product potential. We’re getting ready for the commercial launch later this year. As we communicated earlier, we plan to have specialized and experienced team for efgar with approximately 100 employees at launch. We are excited about its potential in China. With respect to our 2023 strategic priorities, we’ve made progress towards the BLA approval of efgartigimod for generalized myasthenia gravis, or gMG and the BLA submission for the subcutaneous efgartigimod for gMG in China. The initiation of a bridging study for KarXT and schizophrenia in Greater China, the initiation of a registrational study for Bemarituzumab in first-line gastric cancer in Greater China, and a full data readout of the tumor-treating field’s LUNAR Phase 3 study in non-small-cell lung cancer.

We’re also advancing our proprietary pipeline with global rights, including by initiating a global Phase 1 study for ZL-1218, or CCR8, and moving ZL-1102, our IL-17 Humabody, into full global development. We recently released our 2022 ESG report that details our ESG strategy, which we call Trust for Life. It has three commitments. First, improve human health. Second, create better outcomes. And third, act right now. We’re benchmarking ourselves against commonly accepted standards and major indexes. We’re continuing to reach more patients with our existing commercial products and are preparing to launch eight additional products as we take the steps to achieve overall corporate profitability by the end of 2025 and reach 1 million patients by 2030.

And now I will turn the call over to Dr. Amado. Rafael?

Rafael Amado: Thank you, Josh. In the first quarter of 2023, Zai Lab’s oncology franchise continue to make progress on all fronts, and we expect to have a productive year. Recall that earlier this year, our partner, NovoCure, announced that the LUNAR clinical trial met its primary end point, demonstrating a statistically significant and clinically meaningful improvement in overall survival when DT field therapy was added to standard therapies compared to standard therapies alone in patients with platinum-resistant non-small-cell lung cancer. We recently announced that the LUNAR data will be presented on the morning of Tuesday, June 6, as a late-breaking abstract in ASCO’s metastatic, non-small cell lung cancer session. We are pleased to have contributed and be part of the LUNAR study.

In China, the incidence of non-small-cell lung cancer is well over 700,000 new cancers per year, or 37% of all non-small-cell lung cancer diagnosed worldwide, and it accounts for 39% of global deaths due to non-small-cell lung cancer each year. We look forward to the presentation of the data at ASCO and are excited about the potential PPCO [Ph] to address such enormous unmet needs for patients with lung cancer, as well as for patients with other tumor types, as subsequent results read out. As Samantha mentioned, in April, our partner Seagen presented encouraging efficacy results from the Phase 2 innovaTV 207 study in TIVDAK in patients with treatment-refractory head and neck cancer at the 2023 AACR annual meeting. At data cutoff the confirmed overall response rate was 40% with 1 complete response and 5 partial responses.

The safety profile was generally consistent with that observed across TIVDAK monotherapy clinical studies. Treatments for head and neck cancer remain a significant unmet need in China, with approximately 71,000 new cancers annually. Following progression on first-line standard therapy, there are limited treatment options. Immunotherapy and chemotherapy have low objective response rates with poor outcomes. While more data are required to expand on this result, we believe TIVDAK could be a promising treatment option for patients with recurrent and or metastatic head and neck cancer, and we are planning to pursue this indication in China in collaboration with Seagen. Moving now to KRASG12C or adagrasib, our partner Mirati presented updated Phase 2 data on the KRYSTAL-1study in patients with pancreatic adenocarcinoma, biliary tract cancer, and other solid tumor, heart, brain, KRASG12C mutations at the plenary series program of the April session of ASCO, and subsequently published the results as a rapid communication in the Journal of Clinical Oncology.

Results showed an objective response rate of 35% for the overall cohort. In patients with pancreatic cancer, the objective response rate was 33%, and for patients with biliary tract cancer, it was 42%. Notably, the safety profile of adagrasib was aligned with that previously reported in patients with pretreated non-small cell lung cancer and colorectal cancer. These findings demonstrate a meaningful improvement relative to the historically reported standard-of-care for these cancers, and we are very pleased to see the results of this Phase 2 study, which demonstrate a marked improvement on the current standard-of-care for patients with unreceptible or metastatic KRASG12C mutated solid tumors, including gastrointestinal cancers, where few treatment options exist.

We look forward to closely working with Mirati to advance adagrasib as a potential best-in-class treatment option for patients with tumors harboring KRASG12C mutations. Moving to our internal global research and development programs, we presented new translational and clinical biomarker data from our Global Oncology Program, ZL-1211, and articulated a pinpoint to specific antibody at AACR, showing that ZL-1211 as monotherapy seemed to be tolerated well and showed early signs of anti-tumor activity. In addition to TIFGAC, we’re expanding our pipeline into the antibody drug conjugate or ADC phase and building a portfolio of potential first and or best-in-class ADCs through both internal discovery and external collaboration. Last month, we increased our lung cancer franchise and enriched our Global Oncology Pipeline with a next-generation ADC program, ZL-1310.

This compound is an innovative DLL3ADC discovered by using MediLink’s proprietary TAMLIN platform.. TAMLIN is a next-generation ADC platform designed to leverage the tumor microenvironment to overcome the challenges in current ADC drugs. DLL3 is an inhibitor of the Notch ligand that is overexpressed in small cell lung cancer and neuroendocrine tumors. We will leverage our global development capabilities to advance this product into clinical studies. We are on track to meet all the milestones this year, including the initiation of the bemarituzumab gastric cancer trial in China and the filing of Repotrectinib for ROS1 mutated non-small cell lung cancer with an abundance of potentially best-in-class and first-in-class products, both in China and globally, we are very excited about our expanding oncology pipeline at Zai lab.

And now I will turn the floor over to Dr. Harald Reinhart to discuss the progress in our autoimmune, infectious disease, and neuroscience therapeutic areas. Harald?

Q&A Session

Harald Reinhart: Thank you, Rafael. I’m excited for the opportunity to share with you today progress across our autoimmune, infectious diseases, and neuroscience therapeutic areas. Let’s start with KarXT, the combination of xanomeline and trospium, which we are developing with our partner Karuna in acute schizophrenia. Results from Karuna’s EMERGENT-3 trial were released in March 2023. This is now the third positive registration trial that has met its primary endpoint, with KarXT demonstrating a reduction of 8.4 points in PANSS total score compared to placebo at week 5. KarXT also demonstrated reductions in positive and negative symptoms of schizophrenia as measured by PANSS positive, PANSS negative, and PANSS negative factor subscales, which are secondary endpoints in the trial.

Karuna plans to submit a new drug application to the FDA in the third quarter of 2023, with launch in the second half of 2024 if approved. As Samantha mentioned, KarXT could be a very important treatment option as a new class of medicine for schizophrenia patients in China and globally. Our proposed development plan for China has been accepted by the NMPA, and we are on track to start a clinical bridging trial in June. Regarding our infectious diseases portfolio, the FDA Advisory Committee recently unanimously voted in favor of approval of Sulbactam-Durlobactam or SUL-DUR. We are excited about the committee’s strong vote of confidence. We submitted an NDA for the treatment of Carbapenem-Resistant Acinetobacter Infection to the NMPA in December 2022, with priority review granted one month later.

And in February, the NDA was officially accepted by the NMPA. We look forward to bringing this novel drug to China and to Asia-Pacific, where severe crab infections are frequent and often can no longer be adequately treated because of multidrug resistance. Much progress was made this past quarter in VYVGART or efgatigamot. We submitted the BLA for efgatigamot IV for the treatment of patients with generalized myasthenia gravis, or GMG, in China in the second quarter of 2022 and expect approval and commercial launch this year. We also expect to submit a BLA for efgatigamot SC subq for GMG in mid-2023. We continue to support our partner GenX on indication expansion in China and worldwide. Last but not least, for our internally developed topical IL-17 product CL-1102, we are moving forward with preclinical and regulatory activities in preparation for our global Phase 2 trial.

Let me now hand over to Billy, who will speak about progress with our commercial products and financial results. Billy?

Billy Cho: Thank you, Harald. Now I will discuss our first quarter of 2023 financial results compared to the prior year period. Total net product revenues for the first quarter of 2022 for the first quarter of 2023 were $62.8 million compared to $46.1 million for the same period in 2022, representing 36% year-over-year growth. This included a net product revenue of $42.7 million for ZEJULA, compared to $29.6 million for the same period in 2022, representing a 44.2% year-over-year growth; $13.3 million for Optune, compared to $12.8 million for the same period in 2022, representing. $1.3 million for QINLOCK, compared to $3 million for the same period in 2022; and $5.5 million for NUZYRA, compared to $0.7 million for the same period last year.

Note that product revenue in the first quarter of 2023 included a negative $3.9 million non-recurring adjustment to compensate distributors for sales of QINLOCK and NUZYRA at prices prior to the price reductions made in connection with their initial inclusion in the NRDL. Such sales rebates to distributors on previously purchased products are customary in our industry to compensate those distributors for the new NRDL selling price. Research and Development expenses were $48.5 million for the first quarter of 2023, compared to $53.9 million for the same period last year. The decrease in R&D expenses was primarily due to cost-sharing compensation from collaboration partners related to our clinical trials, partly offset by higher payroll and payroll-related expenses from increased R&D headcount.

SG&A expenses were $62.5 million for the first quarter of 2023, compared to $57 million for the same period in 2022. The increase was primarily due to higher professional service fees and in connection with sales of our products in Greater China and higher payroll and payroll-related expenses with increased commercial headcount. As Zai Lab continued to to expand and invest in its commercial operations in China and infrastructure in the United States in anticipation of substantial growth over the next few years. Zai Lab reported a net loss of $49.1 million, or a loss per share attributable to common stockholders of $0.05 for the first quarter of 2023, compared to a net loss of $82.4 million for the same period in 2022, or a loss per share attributable to common stockholders of $0.09.

The decrease in net loss was primarily due to product revenue growing faster than operational expenses, and the increase in non-operating income, including interest income and foreign currency gains. As of March 31, 2023, cash and cash equivalent, short-term investments, and restricted cash totaled $931.4 million, compared to $1 billion as of December 31, 2022. We would now like to turn the call back over to the operator to open up the line for questions. Operator?

Operator: Thank you. [Operator Instructions] Our question comes from the line of Michael Yee from Jefferies. Please ask your question, Michael.

Operator: Thank you. Our next question comes from the line of Yigal Nochomovitz from Citi Group. Please ask your question, Yigal.

Operator: Thank you. Well, our next question comes from the line of Anupam Rama from JPMorgan. Please ask your question, Anupam.

Operator: Great. Thank you. Our next question comes from the line of Jonathan Chang from SVB Securities. Please go ahead, Jonathan.

Operator: Thank you. Our next question comes from the line of Ziyi Chen from Goldman Sachs. Please ask your question, Ziyi.

Operator: Certainly. Our next question comes from the line of Seamus Fernandez from Guggenheim Securities. Please ask your question.

Operator: Thank you. Our next question comes from the line of Yang Huang from Credit Suisse. Please ask your question, Yang.

Operator: Thank you. Our next question comes from the line of Rebecca Liang from Bernstein. Please ask your question, Rebecca.

Operator: Thank you. I’m showing no further questions at this time. I’ll now turn the call back to Zai Lab CEO Samantha Du for closing remarks.

Samantha Du: Thank you, Operator. I want to thank everyone for taking the time to join us on the call today. We appreciate your support and look forward to updating you again after the second quarter of 2023. Operator, you may now disconnect this call.

Operator: Thank you. That concludes today’s conference call. Thank you for participating. Goodbye.