Zai Lab Limited (NASDAQ:ZLAB) Q1 2024 Earnings Call Transcript May 9, 2024

Zai Lab Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, ladies and gentlemen, thank you for standing by and welcome to Zai Lab's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer and instructions will follow at that time. As a reminder, today's call 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 first quarter 2024 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 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 be making certain forward-looking statements based on our current expectation.

These statements are subject to numerous risks 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 rate on a constant exchange rate basis, which is a non-GAAP financial measure. Please refer to our earnings release furnished with the SEC on May 8, 2024 for additional information on this non-GAAP financial measure. At this time, it is my pleasure to turn the call over to Dr. Samantha Du.

Samantha Du: Thank you, Christine, and good morning and good evening to all who are joining us today. I'm excited to be here to share with you the results from our first quarter. But before I do so, I want to start with a few opening comments. We started Zai Lab with a vision to build a truly innovative and integrated biopharma company, focused on bringing innovative medicines to address the unmet medical needs for patients in China and around the world. We have spent the past few years building our infrastructure, capabilities and pipeline to get us where we are today. We are entering a period of robust growth driven by a late-stage pipeline of first and best-in-class products. We're also advancing our global pipeline where we have three in the clinic today and we expect to add new China and global assets each year through both internal discovery and business development.

This year we expect three new product approvals, which follows the launch of VYVGART late last year. Over the next two to three years we have the opportunity to launch multiple potential blockbuster products and many of those assets are expected to contribute significantly to our revenue way beyond 2028. As we scale our business, we'll continue to expand our operational efficiency. We improve our productivity. Our first quarter results demonstrate our progress across each of these areas. Some commercial execution, increasing productivity from pipeline progress. We expect 2024 to be a strong year for Zai Lab. We are on track to achieve the objectives outlined in our five-year strategic plan including significant revenue growth and achieving profitability by the end of 2025.

We have a strong balance sheet and the cash position of over US$750 million, Zai Lab is in a very good position. And with that I'll pass the call to Josh. Josh?

Josh Smiley: Thank you, Samantha, and thank you everyone for joining the call today. We had a good start to the year with robust revenue growth and continued advancements in our key clinical programs. Our total revenues grew 39% year over year to reach $87.1 million. Our commercial performance was driven by strong execution with the launch of VYVGART and uptake across our existing portfolio. ZEJULA continues to maintain its leadership position in the PARP inhibitor class for ovarian cancer. Key drivers of growth for ZEJULA remain increasing new patient penetration in first-line ovarian cancer and extending the duration of treatment for patients in the maintenance setting. QINLOCK and NUZYRA also showed solid growth benefiting from their NRDL listings in 2023.

Together, these three products collectively grew 24% year-over-year. OPTUNE showed recovery from slowdowns in the second half of last year growing 49% sequentially from the fourth quarter. Now looking at VYVGART. The launch is off to an excellent start. In the first quarter alone, we estimate that nearly 2,700 new patients were treated with VYVGART. Driving the strong initial uptake is our team's ability to execute on several important launch initiatives. First, VYVGART's NRDL inclusion became effective on January 1, which significantly enhances patient access. Since its inclusion, VYVGART has been steadily added to hospital formularies and we are making great progress in line with our expectations. Second, our targeted outreach to physicians has been very successful.

We've engaged our top 1,000 hospitals which account for 80% of the eligible patient population. Our highly specialized sales team of 150 reps is well equipped to not only support the launch in gMG but also upcoming launches of the subcutaneous formulation for this indication later this year and then for CIDP in 2025. Third, we are seeing high adoption from physicians. Nearly 900 healthcare professionals have now prescribed VYVGART and this number continues to climb. Feedback from physicians and patients continues to be positive and we are focused on providing these key stakeholders with best-in-class support. We are tracking well to exceed $70 million in sales of VYVGART this year. Our late-stage pipeline also continues to advance nicely. We anticipate several approvals this year repotrectinib in ROS1+ non-small cell lung cancer, where we have seen a significant improvement in PFS versus current standard of care with CNS benefits.

SUL-DUR the first pathogen targeted therapy addressing ABC infections and the subcu formulation of VYVGART for gMG which provides additional dosing flexibility for patients. Each of these opportunities has the potential to offer significant benefit to patients and we look forward to launching these products in the second half of 2024. Looking ahead to next year, we have the potential to launch subcu VYVGART and CIDP followed by TIVDAK KarXT and bemarituzumab. Many of these potential blockbuster assets are relatively de-risked given their positive pivotal data or compelling proof-of-concept results, positioning us well for future growth. Now moving on to the cost and investment side of the business. In 2024, we expect to maintain R&D expense at a similar level versus 2023, while modestly increasing sales and marketing expenses.

As we enter this next phase of significant revenue growth, we remain focused on efficient operations. And this includes enhancing commercial efficiency, optimizing resource allocation and increasing productivity throughout the entire organization. We will continue to execute financial discipline and cost management and we expect significant operating leverage as our revenue growth meaningfully outpaces that of our operating expenses. This allows us to prepare for the next phase of growth for Zai Lab as we drive both revenues and profitability. I'm also pleased to announce that recently Andrew Zhu joined as our Chief Commercial Officer in Greater China. Andrew has more than 20 years of experience in marketing and sales management for innovative drug therapies and a proven track record of driving top-line growth and managing large teams and product portfolios with significant revenue and competitive marketing.

He brings rich experience in building innovative business models and resource integration, which will help us further enhance our commercial operations and drive sales and profit growth across greater China. Overall, we continue to make great progress for each of our three corporate objectives, which are to drive revenue growth, achieve profitability and expand our global pipeline. We are on track to reach profitability by the end of 2025 and with a cash position of over $750 million, we expect to be able to fund our operations and business development deals through profitability. And with that, I will now pass the call over to Rafael to discuss the great progress within our oncology pipeline.

Rafael Amado: Thank you, Josh. Let me begin by highlighting some of the key progress updates in our oncology pipeline, since our last earnings call along with our next steps. Starting with repotrectinib, our NDA was accepted by China NMPA with priority review status for ROS1+ non-small cell lung cancer in both TKI-naive and TKI-pretreated patients and we are expecting approval in the next few months. In China, ROS1 rearrangements occurred in 2% to 3% of patients with advanced non-small cell lung cancer. There is a significant unmet need for these patients given the limited durability of clinical benefit due to the emergence of resistance to approved first-generation therapy. Beginning with repotrectinib, a next-generation ROS1 and NTRK inhibitor has been shown to result in high response rates with promising durability in patients with ROS1-positive non-small cell lung cancer, including in those with intracranial disease and in the post first-line treatment settings, which may address the limitations of our generation TKI.

Specifically, we've seen a directional response of 34.1 months and 14.8 months in TKI naive and TKI-pretreated patients, respectively. With these results, we believe repotrectinib has the potential to become a new standard of care options for patients with ROS1-positive non-small cell lung cancer including those whose tumors have developed mutations comparing resistance to previous treatment with ROS1 inhibitor therapy. Next, our tumor treating field franchise. This market our partner, Novocure, announced that the Phase 3 METIS clinical trial made its primary endpoint in patients with brain metastases from non-small cell lung cancer. Patients with TTFields on supportive care exhibited a median time during the intracranial progression of 21.9 months compared to 11.3 months in patients treated with supportive care alone with a statistically significant p-value of 0.016.

TTFields therapy was well tolerated and was associated with sustained quality of life and neurocognitive function. Results from the METIS study will be presented at a late-breaking abstract at this year's American Society of Clinical Oncology annual meeting. We also expect another pivotal readout from TTFields in first-line locally advanced pancreatic cancer by the end of this year. We continue to make great progress with bemarituzumab in collaboration with Amgen and are acquaint to FORTITUDE-101 and 102 studies. These studies are evaluating a doublet and triplet combination respectively in first-line FGFR2b positive gastric cancer with overall survival as the primary endpoint. In addition to our late-stage partner programs we have optimized our global development capabilities and are making excellent progress with our internal global programs three of which we have disclosed and are in clinical studies.

ZL-1310 is our DLL3 targeted homogeneous ADC with high affinity and specificity for DLL3. It utilizes a topoisomerase I inhibitor payload and has shown promising preclinical data, which we presented at the European Lung Cancer Congress in Prague. The program is advancing through a global Phase 1 study in the United States and China for relapsed and refractory small cell lung cancer after progression on platinum-based therapy. And we expect to expand its geographic footprint as the trial progresses. This study will also include patients treated with a combination of a DLL3 ADC and a checkpoint inhibitor. Depending on the totality of the data, we could potentially see early clinical results at the end of 2024 or early 2025. Our discovery efforts are moving at a brisk pace and we are progressing internally discovered product candidates.

In addition, we continue to assess external opportunities across multiple modalities in focused areas of cancer biology with a goal of introducing new products in development this year, as we continue to execute on our global development objective of generating at least one global IND per year. I am excited about the great progress we're making in oncology with our existing and future products. I look forward to the approval and filing of novel and best-in-class oncology drugs and to augment and execute on our regional and global pipelines. And now I will turn the floor to Dr. Harald Reinhart to discuss the progress in our autoimmune infectious disease and neuroscience therapeutic areas.

Harald Reinhart : Thank you, Rafael. Our neuroscience autoimmune and infectious diseases, or NSAiID franchise has also made significant progress advancing our pipeline. Starting with VYVGART or efgartigimod. Beyond what Josh shared about the progress of gMG, our supplemental biologics license application for the subcu formulation of VYVGART in CIDP was submitted to the National Medical Products Administration in China in April. There are approximately 50,000 patients diagnosed with CIDP in China. And today only a small fraction is able to achieve remission with available care. The majority of patients remain symptomatic and the disease can have a debilitating impact on quality of life. Existing treatment options are limited and quite problematic, given the general reliance on long-term steroid or chronic immunoglobulin therapy.

In China, the situation has worsened due to the persistent shortage of IVIg therapy. As mentioned, we expect the approval of subcu VYVGART in gMG this year, which will provide patients with a second dosing option in addition to IV. We already know that efgartigimod has great potential across multiple additional indications. Therefore, we will continue working with our partner argenx on indication expansion. We expect to join argenx in the registrational study of efgartigimod in thyroid eye disease or TED in Greater China in the second half of this year. Moving to KarXT, this is a first-in-class antipsychotic, combining a centrally-acting muscarinic agonist called xanomeline, with a peripheral antagonist called trospium, which we are developing with our partner Karuna or now BMS for patients with acute schizophrenia.

In April 2024, BMS presented new interim long-term data from the Phase III emerging program at the Annual Congress of the Schizophrenia International Research Society or SIRS. KarXT demonstrated statistical and clinically meaningful improvement in PANSS score and a differentiated safety profile, with continued lack of weight gain metabolic dysfunction and extrapyramidal symptoms over a 52-week period of treatment. We expect to complete enrollment in the registrational bridging study in Mainland China this year, the results of which would support our NDA filing for the treatment of schizophrenia in adults in early 2025. We have yet another substantial opportunity for KarXT, as a treatment for Alzheimer's disease in psychosis or ADP for short.

There are approximately eight million people with Alzheimer's disease in China, and about 45% of these patients display psychotic symptoms and there are no approved treatments for these patients. We will participate in the Phase III ADEPT-2 and ADEPT-3 clinical trials in ADP in Greater China starting in mid-2024. Regarding our infectious diseases' portfolio, sulbactam-durlobactam or SUL-DUR, is treatment for hospital-acquired and ventilator-associated bacterial pneumonia caused by Acinetobacter baumannii. Our NDA submission is under priority review with the NMPA, with potential approval later this year. In China, there are 300,000 cases of Acinetobacter infections annually, with the majority of strains being carbapenem resistance. Patients have limited treatment options and the mortality rate is around 43% even with the best available therapy and care.

Last but not least, ZL-1102, our IL-17 Humabody for the topical treatment of chronic plaque psoriasis, is in the final stages of preparation for a global Phase II dose-finding trial and we intend to initiate the study in the second quarter of 2024. So plenty of progress with clinical studies and two expected regulatory approvals from our NSAiID portfolio in the near future. I look forward to providing updates at our next earnings call. And Yajing, will give an overview of our financial results. Yajing?

Yajing Chen: Thank you, Harald . Now I will discuss our first-quarter 2024 financial results compared to the prior year period. Total net product revenues for the first quarter of 2024 were $87.1 million compared to $62.8 million for the same period in 2023, representing year-over-year growth of 39% or 43% on a constant currency basis. Our revenue growth was primarily driven by increased sales volumes including from the launch of VYVGART, and a decrease sales rebates to distributors resulting from price reduction in connection with NRDL listing for certain products. Now looking at each individual product. ZEJULA's net product sales were $45.5 million, an increase of 7% year over year from $42.7 million for the same period in 2023.

Driven by increased hospital sales in first-line ovarian cancer and increased duration of treatment. VYVGART's net product sales were $13.2 million for the first quarter of 2024, following the launch in China in September 2023 and express listings on the NRDL with pricing that took effect on January 1, 2024. Our revenue growth was driven by expanding physician and patient adoption as well as increased patient access as VYVGART is added to hospital formularies. OPTUNE's net product sales, was $12.5 million for the first quarter of 2024. There was a sequential increase of 49% from the fourth quarter of 2023 with continued recovery expected throughout 2024. QINLOCK grew 367% year over year to $6.1 million and NUZYRA increased 81% to $9.9 million for the first quarter of 2024.

The growth was supported by the inclusion of QINLOCK and the IV formulation of NUZYRA in the NRDL in the first quarter of 2023, as well as the inclusion of the oral formulation of NUZYRA in the first quarter of 2024. Turning now to our expenses. Research and development expenses were $54.6 million in the first quarter of 2024 compared to $48.5 million for the same period in 2023. This increase was primarily driven by increased clinical trial expenses, partially offset by a decrease in milestone fees for our licensed partner. Selling, general and administrative expenses grew to $69.2 million, from $62.5 million for the same period in 2023. This increase was primarily driven by higher general selling expenses, and headcount growth associated with the VYVGART launch.

Both R&D and SG&A expenses significantly declined as a percentage of revenue in the first quarter of 2024 compared to the same period in 2023. And as Josh stated previously we expect this trend to continue as a result of growing revenues and ongoing cost efficiency initiatives. Zai Lab reported a net loss of $53.5 million in the first quarter of 2024 or a loss per ordinary share attributable to common shareholders of $0.05, compared to a net loss of $49.1 million for the same period in 2023 or a loss per ordinary share of $0.05. We are in a strong financial position, ending the quarter with cash and cash equivalents, current restricted cash and short-term investments of $750.8 million compared to $806.5 million as of December 31, 2023. Based on our operating plan and our anticipated revenue growth, we expect to be able to fund our business through profitability which we expect to achieve by the end of 2025.

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

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