Zai Lab Limited (NASDAQ:ZLAB) Q3 2023 Earnings Call Transcript

Zai Lab Limited (NASDAQ:ZLAB) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Zai Lab’s Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today’s conference is being recorded. It is now my pleasure to turn the floor over to Christine Chiou, Senior Vice President of Investor Relations. Please go ahead.

Christine Chiou: Thank you, operator. Good morning, good evening, and welcome, to Zai Lab’s Third Quarter 2023 Earnings Call. Today’s call will be led by Dr. Samantha Du, Zai Lab’s Founder, CEO and Chairperson. She will be joined by Josh Smiley, President and Chief Operating Officer, Dr. Rafael Amado, President and Head of Global Oncology and Research and Development, Dr. Harald Reinhart, President and Head of Global Development, Neuroscience, Autoimmune and Infectious Diseases and Dr. Yajing Chen, Chief Financial Officer. Jonathan Wang, our Chief Business Officer will also be available to answer questions during the Q&A portion of the call. As a reminder, during today’s call, we will all be making certain forward-looking statements based on their current expectations.

These statements are subject to numerous risk and uncertainties that may cause actual results to differ materially from what we expect due to a variety of factors including those discussed in our SEC filings. We will also refer to product revenue growth rates on a constant exchange rate basis, which is a non-GAAP financial measure. Please refer to our earnings release furnished with the SEC on November 7, 2023 for certain disclosures regarding this non-GAAP financial measures. At this time, it is my pleasure to turn the call over to Dr. Samantha Du.

Samantha Du: Thank you, Christine. Hello everyone, and thank you all for joining us today. Throughout the year, we have continued to successfully advance our pipeline, including several important developments for key late-stage programs, such as Bema, KarXT [Indiscernible] and Efgartigimod. In the third quarter, we were especially excited about the launch of our 5th commercial product VYVGART following months of strategic preparation. Although still early in the launch, we are encouraged by the initial demand for VYVGART and by the positive feedback from both physicians and patients. Josh will provide more details on the progress of this very important product launch. We are well positioned to execute on our corporate strategic goals including the launch of multiple new products and new indications over the next few years.

Our pipeline of potential first-in-class and best-in-class products has significant potential to meaningfully improve the lives of patients and we expect this product candidates to contribute to our long-term growth to drive shareholder value. And with that, I’ll pass it to Josh. Josh?

Josh Smiley: Thank you, Samantha. It is an exciting time at Zai Lab as we launched VYVGART, the first FcRn blocker approved for the treatment of generalized myasthenia gravis in China. There are over 170,000 patients in China living with gMG, many of whom continue to suffer from symptoms, such as decreased muscle strength and mobility despite receiving treatment. VYVGART is an important new treatment option for gMG and has the potential to significantly change the way patients are treated today. We’ve already made significant progress through our outreach efforts, having engaged around 75% of our top 200 hospitals since launch in September. And while we are still in very early stages of the launch of VYVGART, we are encouraged by the positive feedback from neurologists and patients.

We are seeing physicians gain experiences on VYVGART and impressively nearly 70% of our top 100 MG specialists have already prescribed VYVGART to a patient. Furthermore, many are repeat prescribers and we are seeing the depth and breadth of prescribing continue to increase. We are focused on increasing awareness, providing education on the benefits of this important therapy and building a strong support network for physicians and patients. Importantly, we are also working hard to increase patient access and we are in the negotiation process for VYVGART’s inclusion on the NRDL, which would allow many more patients to be able to benefit from this therapy. We’re very excited by the potential of VYVGART and not just in gMG but across a wide range of new opportunities.

Earlier this year, we saw positive pivotal data in CIDP. And by the end of 2023, we expect pivotal data in ITP and PV. Next year, we’re expecting the approval of subcutaneous VYVGART and gMG and we believe that being able to provide alternative dosing options, both IV and subcutaneous, is beneficial for patients and caregivers. These are just some of the near-term opportunities for VYVGART to add additional layers of growth to the franchise. Now turning to the rest of the commercial portfolio. We delivered year-over-year product revenue growth in the third quarter of 22% on a reported basis and 27% on a constant currency basis. In addition to the launch of VYVGART, ZEJULA hospital sales grew and it continued to be the leading PARP inhibitor in hospital sales for ovarian cancer in China.

QINLOCK and NUZYRA continued to benefit from their inclusion in the NRDL and our team was able to expand supplemental insurance coverage for OPTUNE. Looking ahead, we will continue to focus on the execution of our strategic goals. First, we are seeking to accelerate our medicines in the market and drive revenue growth. Over the next 12 months to 18 months, we anticipate several important registrational data readouts, including for efgartigimod and Tumor Treating Fields in pancreatic cancer. And we expect to initiate several important trials, including FORTITUDE-102, a trial evaluating bemarituzumab in first-line gastric cancer. Next year, we could see three or more NMPA approvals and four NDA or supplemental NDA submissions in China. Second, we are focused on driving profitability by leveraging our existing capabilities and platforms and by increasing productivity across the organization.

And third, we continue to focus on expanding our pipeline through internal discovery and through regional and global collaborations. We entered into a strategic partnership with MediLink in April for a next-generation DLL3 program, which we are currently advancing to a global Phase 1 trial. And we also have our topical IL-17 Humabody, which is entering global Phase 2 development. In parallel, we will continue to look for meaningful new external opportunities in strategic areas to further expand our pipeline. We are very excited by the depth and breadth of our portfolio and we are confident that our commercial organization will be able to drive significant revenue growth over the next few years. We are well positioned financially with a cash position of $822 million as of September 30, which we believe will support our business and operations until we reach profitability.

And now, I’ll turn the call over to Dr. Amado. Rafael?

Rafael Amado: Thank you, Josh. Within oncology, our R&D teams are focused on the development of our late-stage pipeline and we have had several updates during the third quarter, which I will briefly highlight. In August, repotrectinib received its fourth Breakthrough Therapy Designation in China for the treatment of patients with advanced solid tumors that have a neurotrophic tyrosine receptor kinase or NTRK gene fusions and have progressed following treatment with tyrosine kinase inhibitors. In addition, for potential treatment of ROS1-positive non-small cell lung cancer, newly disclosed results from the registrational TRIDENT-1 study, showed median duration of response of 34.1 months and median progression-free survival of 35.7 months in tyrosine kinase inhibitor-naive patients.

This impressive durability has the potential to be a major differentiating factor. The National Medical Products Administration has accepted our new drug application for repotrectinib in ROS1-positive non-small cell lung cancer with priority review and we look forward to bringing this important medicine to patients in need in China as fairly as feasible. Additionally, for KRAZATI or adagrasib, our partner Mirati presented two-year follow-up data from the KRYSTAL-1 study in September. In the pooled analysis, adagrasib demonstrated durable efficacy with a median overall survival of 14.1 months, up from 12.6 months previously reported and a two-year overall survival rate of 31% in patients with previously treated KRASG12C-mutated non-small cell lung cancer.

Exploratory analysis suggested clinical benefit in patients with treated stable central nervous system metastases at baseline with responses noted across most baseline communications, highlighting the potential differentiation for adagrasib in KRASG12C-mutated non-small cell lung cancer. We await the results of the KRYSTAL-12 trial of adagrasib against docetaxel, which is the ongoing confirmatory Phase 3 study and which will form the basis for a submission in China in 2024. In October, our partner Seagen announced that TIVDAK demonstrated superior overall survival progression-free survival and objective response rate versus chemotherapy and a prespecified interim analysis of the confirmatory Phase 3 innovaTV 301 global trial in recurrent or metastatic cervical cancer patients with disease progression on or after frontline therapy.

We have participated in this study and continue an extension portion in China. Moving to our internal global research and development programs regarding our DLL3 antibody-drug conjugate ZL-1310, we just submitted an IND in the US and are targeting to initiate a global Phase I study in the first quarter of 2024. Looking ahead over the next 6 months to 12 months we expect several important updates from some of our key oncology programs. As we continue to expand and advance our oncology pipeline, I am pleased to announce that Dr. Robert Brown has joined Zai Lab as a Chief Medical Officer of Oncology. Robert’s impressive medical and drug development background will further strengthen our global oncology research and development team. Dr. Brown will report to me and he will provide strategic leadership and support with respect to the clinical development of our oncology pipeline.

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?

Harald Reinhart: Thank you, Rafael. We have made excellent progress across our autoimmune infectious diseases and neuroscience therapeutic areas this last quarter. Starting with VYVGART or efgartigimod we launched the product for its first indication in gMG in mid-September and already see significant market uptake. We’re also very excited about its potential in treating patients with CIDP or chronic inflammatory demyelinating polyneuropathy. Data from the global trial we participated in showed a highly significant statistical and clinical benefit for patients, including the China subset. Indeed in September the CDE granted Breakthrough Therapy designation for SC subcu efgartigimod for the treatment of patients with CIDP. Existing treatment options are quite limited and problematic given the general reliance on long-term steroids or chronic immunoglobulin therapy.

We have seen how efgartigimod subcu can meaningfully improve and stabilize disease symptoms in these patients. We look forward to working with regulatory authorities in China to bring this important medicine to patients as soon as possible. We also see significant potential of efgartigimod across multiple additional indications and we will continue to work with our partner argenx on indication expansion. Turning now to KarXT. We are on track enrolling patients in the clinical bridging study to support our China registration. KarXT is the combination of xanomeline and trospium, which we are developing with our partner Karuna for acute schizophrenia. In September, Karuna submitted a new drug application to the FDA for this indication. As a new class antipsychotic we believe that KarXT could become an important new treatment option for schizophrenia patients in China.

For Alzheimer’s disease-associated psychosis or ADP Karuna initiated the Phase 3 ADEPT clinical trial program in the third quarter and we plan to participate in these studies in Greater China next year. And now, Yajing will speak about progress with our commercial products and financial results. Yajing?

Yajing Chen: Thank you, Harald. Now I will discuss our third quarter 2023 financial results compared to the prior year period. Total net product revenues for the third quarter of 2023 was $69.2 million compared to $57 million for the same period in 2022 representing year-over-year growth of 22%. On a constant currency basis growth year-over-year was 27%. This increase was primarily driven by increased sales volumes the launch of VYVGART and decreased negative effects from the COVID pandemic. Our revenue growth was slowed by the effects on the hospital and physician practices from the recent industry-wide anticorruption enforcement efforts in China. Our total net product revenues included $41.6 million for ZEJULA, which increased 6% from $39.2 million as ZEJULA which is in the third year on the NRDL continued to be the leading PARP inhibitor in hospital sales for ovarian cancer in China.

$11.6 million for Optune which increased 8% from $10.7 million supported by increased patient access to this product in the private-pay market. $5.7 million for QINLOCK, which increased from $5.5 million supported by the NRDL listing in March 2023. $5.5 million for NUZYRA, which increased from $1.5 million supported by NRDL listing in March 2023 and $4.9 million for VYVGART, which launched in September 2023. Research and development expenses were $58.8 million for the third quarter of 2023 compared to $99.5 million for the same period in 2022. This decrease was primarily due to a decrease in license fees for our licensed and collaboration agreement. Selling, general and administrative expenses were $68.6 million for the third quarter of 2023 compared to $66.6 million for the same period in 2022.

The slight increase was primarily due to higher general selling expenses, to support new product launches, partially offset by a decrease in professional services fees. Zai Lab reported a net loss of $69.2 million or a loss per ordinary share of $0.07 for the third quarter of 2023 compared to a net loss of $161.2 million for the same period in 2022 or a loss per ordinary share of $0.17. This decrease in net loss was primarily due to increase of product revenue the decrease of licensing fees and the shift from foreign currency loss to gain. We are in a strong financial position ending the quarter with $822.2 million in cash and cash equivalents short-term investments and restricted cash compared to $876.4 million as of June 30, 2023. Based on our operating plan and our anticipated revenue growth, we expect to be able to fund our business through profitability.

And with that, I would now like to turn the call back over to the operator to open up the line for questions. Operator?

See also 12 Best Day Trading Stocks To Buy and Top 20 Drug Companies in the US by Revenue.

Q&A Session

Operator: Thank you. We would now like to open the line for questions. [Operator Instructions] First question comes from the line of Louise Chen from Cantor.

Louise Chen: Hi. Congratulations on the quarter and thanks for taking my question. So I wanted to ask you on the NRDL if you’ve seen any efforts to promote innovation? And then also where is private insurance today or commercial insurance and where do you think that will be over time? And then the second question, I wanted to ask you is on VYVGART and what additional indications that you plan to move forward in the near-term and what your next steps are there? Thank you.

Samantha Du: Hi, Louise, this is Samantha Du. Very happy to answer your question. I think overall in terms of the government NRDL, we have seen they have made several very serious — serious measures to improve health of the health care industry, including multiple updates to NRDL over the last two years. Recently, NRDL updates continued to support innovative medicines, especially in support medicines to address unmet medical needs and with a price — with a reasonable pricing. Of course, how reasonable we’re all going to see very soon, right? Specifically, the increased — the increase in the visibility and transparency on pricing, providing long-term stability of prices, so all of this give us more visible road map for subsequent price cut for novel, novel drugs and also drugs like us which treats patients with unmet medical needs.

That’s what Zai is all about, right? On the anti-corruption, I would say, short-term I think that impact the whole industry. But medium and long-term, I think anti-corruption is a very positive force in the long run — in the medium and long-term run, especially for companies that like Zai Lab have innovative differentiated assets and address unmet medical needs. I’ll stop here, and Louise, sorry. Thank you for asking the question.

Josh Smiley: Thanks Samantha. It’s Josh. Good morning, Louise. And thanks for the questions. I’ll touch on the commercial insurance question briefly. I think this is probably an underappreciated positive also in the China market over the last few years. I think if you look back to end of 2020, I think about 40 million people were covered through some form of supplemental or commercial insurance, by the end of 2022 that number was 150 million — I mean, yes, about 150 million. We do see Louise, that growing to somewhere above 200 million — I mean, it’s been growing this year and growing somewhere above 200 million by the middle of the decade. I think industry reports put that projection somewhere in the range of 200 million to 300 million people.

Of course that size is as big as many of the bigger western countries and the supplemental insurance then supports reimbursement at rates for innovative drugs that are closer to US or western prices. So it’s an important segment. And it’s growing. For us it’s important. For Optune, Optune is not eligible for NRDL listing, because it’s categorized as a medical device now. And we’ve had very good experience with supplemental insurance. We’re covered on nearly 100 different supplemental insurance plans, that’s grown from 73 a year ago. And by our account we’re second only to KEYTRUDA in terms of the number of plans we’re covered by. So while we think for our portfolio overall the NRDL listing is the primary sort of focus given the important unmet needs, we’re addressing with our drug that Samantha referenced.

The supplemental insurance market does provide an important backstop and supplemental sort of coverage for drugs, while they’re in the pre-NRDL phase or for things like Optune that aren’t eligible yet. So thanks for that question. I think Harald you can cover I think the question Louise, you had about the next indications for VYVGART.

Harald Reinhart: Yeah. Thank you Josh, and thanks for the question. There is indeed, a lineup of new indications coming up in this year and next year for submission and later on obviously approval. We’ve already spoken about the subcutaneous formulation of efgar which is in gMG not really a new indication but one with a new formulation. Following that is CIDP. It’s a very important indication for us. It’s a large market in China, three times larger than in the US, if I may say. And as such it is a study also that has shown incredible benefit from efgartigimod treatment in a patient population that is not well served currently with only IVIg. Following that, there are two other indications one is ITP, the thrombocytopenia indication for which you have already seen study results earlier this year with the press release from argenx.

And following that roughly at the same time there should be pemphigus vulgaris and foliaceus. This is our third one that is coming through and the results for ITP and the PV study are supposed to come, the end of this year. So this is our lineup. There is also one new indication that we want to start next year which is in TED thyroid eye disease another exciting way of showing and highlighting the efficacy of efgartigimod. And that is at least in the foreseeable future lineup. Thank you.

Samantha Du: Thank you. Yeah. Also I just want to add quick points, Louise. And commercial insurance actually has been in discussion for few years and this year it has to be more and more putting into agenda. But of course when will be effective we’ll see, but I think that’s not somewhere has been the nod or not been rapid. I think there is — they are quite a strong group of people and a very influential group so trying to lobby for the benefits of patients. So I’m very hopeful for that.

Louise Chen: Thank you.

Operator: Thank you for the questions. Next question comes from the line of Michael Yee of Jefferies. Please go ahead.

Unidentified Analyst: Hi, thanks for taking the question. This is [Indiscernible] on the line for Michael Yee. I have two questions. First, can you tell us about the ongoing China anticorruption campaign? And what do you see there? Do you expect any kind of aftermath impact during Q4 and so forth? And secondly I think I have a couple on VYVGART. First I guess you have mentioned $5 million sales in just two weeks after the September launch. So, I wonder how much VYVGART is actually demand versus stocking inventory? And I guess you also mentioned that 70% of the top 100 specialists have already prescribed. So, how would you characterize the penetration there? Thanks.

Samantha Du: So, Josh do you want me to take the first question or you go ahead. Why don’t you go ahead?

Josh Smiley: Okay. I — well, Samantha provided some broader comments on anticorruption, I think to get to the specific question around impacts for the remainder of the year. First, as we’ve stated and then Samantha has talked about, I think from a long-term perspective, focus on anticorruption in health care is good for everyone, patients and companies and providers and certainly for a company like us that focuses on bringing innovative drugs for unmet needs. But in the short-term, there’s no doubt in Q3, it had an impact on prescribing patterns and on health care utilization. We see that in our results and I think all companies to varying degrees are seeing that. I think now there had been these focuses in the past in China.

I think this one given the sort of quick way, it was rolled out I think the generalities that we’re in it as opposed to very specific pieces did cause some challenges in utilization in Q3 resulting in fewer patients being seen fewer procedures. We saw health care practitioners who otherwise would have attended educational events and other things who didn’t do that in Q3 to the same degree. And we did have an impact on sales rep access where hospitals were sort of blocking access to rep. Now, we’ve seen much of that now begin to normalize as we’re here into the fourth quarter. So, we expect and hope that by the end of this year we’re back to sort of normal practices and again good for long-term for the industry and certainly for Zai, but we will see some lingering effect I think in the fourth quarter relatively modest for the things that we’re focused on particularly the VYVGART launch and I’ll transition into that for your question.