# Zai Lab Ltd: Form 10-Q for the period ended Jun 30, 2024

- Company: [Zai Lab Ltd](/companies/zlab.md) (CIK 1704292)
- Form: 10-Q
- Filed: 2024-08-06
- Accepted by EDGAR: Aug 6, 2024, 20:27 ET
- Period: 2024-06-30
- Accession: 0001628280-24-035231
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1704292/000162828024035231/zlab-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1704292/000162828024035231/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $100.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $187.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $35.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $68.8m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2024-04-01 to 2024-06-30 | $61.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2024-01-01 to 2024-06-30 | $116.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2024-04-01 to 2024-06-30 | $79.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2024-01-01 to 2024-06-30 | $148.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | −$76.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | −$146.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $492.0k | us-gaap:InterestExpenseNonoperating |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $605.0k | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | −$80.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | −$133.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.14 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.14 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 975,937,790 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 974,541,780 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | −$132.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-06-30 | $630.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $869.9m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $987.4m | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $251.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $283.2m | us-gaap:Liabilities |
| Short-term borrowings | at 2024-06-30 | $70.3m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2024-06-30 | $704.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,749 characters.

You should read the following discussion and analysis of our financial condition and results of operations together with our 2023 Annual Report and our unaudited condensed consolidated financial statements and the accompanying notes for the three and six months ended June 30, 2024 included in *Item 1. Financial Statements.*

### Overview

We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States. We are focused on discovering, developing, and commercializing products that address medical conditions with significant unmet needs in the areas of oncology, immunology, neuroscience, and infectious disease. We intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide. We currently have five commercial products – ZEJULA®, OPTUNE, QINLOCK®, NUZYRA®, and VYVGART® – that have received marketing approval and that we have commercially launched in one or more territories in Greater China. OPTUNE refers to Tumor Treating Fields devices marketed under various brand names, including OPTUNE GIO® for glioblastoma multiforme (“GBM”). We also have multiple programs in late-stage product development and a number of ongoing pivotal trials across our portfolio.

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 selling, general and administrative costs associated with our operations. Developing high quality product candidates requires significant investment in 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 commercial products and to successfully expand the indications for these products and develop and commercialize our other product candidates. As discussed further below, we expect to continue to incur substantial costs related to our research and development and commercialization activities.

As we pursue our corporate strategic goals, we anticipate that our financial results will fluctuate from quarter to quarter and year to year depending in part on the balance between the success of our commercial products and the level of our research and development expenses. We cannot predict whether or when our product candidates will receive regulatory approval. Further, if we receive such regulatory approval, we cannot predict whether or when we may be able to successfully commercialize such products or whether or when such products may become profitable.

### Recent Developments

### Commercial Products

Net product revenue was $100.1 million for the second quarter of 2024, an increase of 45% compared to the prior year period, primarily driven by increased sales for VYVGART since its launch in September 2023 and NRDL listing in January 2024 and increased sales for ZEJULA and NUZYRA. The NRDL listing for ZEJULA as a maintenance treatment was renewed in the first quarter of 2024, and ZEJULA continues to be the leading PARP inhibitor in hospital sales for ovarian cancer in mainland China. Increased sales for NUZYRA were supported by the inclusion in the NRDL for its IV formulation in the first quarter of 2023 and for its oral formulation in the first quarter of 2024.

### Product Candidates

We continued to advance our product candidates through our research and development activities, including the following developments with respect to our clinical trials and regulatory approvals:

#### Oncology

- **Repotrectinib:** In May 2024, the NMPA approved the New Drug Application (“NDA”) for repotrectinib for the treatment of adult patients with locally advanced or metastatic *ROS1*-positive non-small cell lung cancer (“NSCLC”). The approval was based on the global Phase I/II TRIDENT-1 study that evaluated repotrectinib in TKI naïve and TKI-pretreated patients with *ROS1*-positive NSCLC. We participated in the Greater China

portion of this study. In June 2024, our partner Bristol Myers Squibb (“BMS”) announced that the U.S. Food and Drug Administration (“FDA”) had granted accelerated approval of repotrectinib for the treatment of patients with *NTRK*-positive locally advanced or metastatic solid tumors.

- **Niraparib (PARP):** In July 2024, data from a Zai-supported study was published in *Cell* that provides new insights with potential to improve treatment of HRD-positive ovarian cancers, including through neoadjuvant monotherapy with niraparib and a combination of niraparib and ZL-1218, our investigational CCR8 antibody.
- **Tisotumab Vedotin:** In April 2024, our partner Pfizer Inc. and Genmab A/S announced that the FDA approved the supplemental Biologics License Application granting full approval for tisotumab vedotin (or TIVDAK®) for the treatment of patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy. We are participating in the global Phase III innovaTV 301 trial and extension study in Greater China.

#### Immunology, Neuroscience, and Infectious Disease

- **Efgartigimod:** In May 2024, the NMPA accepted for priority review a supplemental Biologics License Application for efgartigimod alfa injection (subcutaneous injection) (“efgartigimod SC”) for the treatment of patients with chronic inflammatory demyelinating polyneuropathy (“CIDP”). In June 2024, our partner argenx announced that the FDA approved efgartigimod SC, under the brand name VYVGART® Hytrulo, for this indication.

In July 2024, the NMPA approved a Biologics License Application for efgartigimod SC as an add on to standard therapy for the treatment of adult patients with gMG who are anti-acetylcholine receptor (AChR) antibody positive.

- **Sulbactam-Durlobactam (SUL-DUR):** In May 2024, the NMPA approved the NDA for SUL-DUR for the treatment of adult patients with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia caused by susceptible isolates of *Acinetobacter baumannii-calcoaceticus* complex.
- **Xanomeline-Trospium (KarXT):** In April 2024, our partner BMS presented new interim long-term data from the Phase III EMERGENT program for the treatment of schizophrenia. In the new interim analysis of long-term efficacy data from the Phase 3 EMERGENT-4 open-label extension trial, KarXT was associated with significant improvement in symptoms of schizophrenia across all efficacy measures at 52 weeks, and in the new pooled interim long-term safety and metabolic outcomes from the Phase III EMERGENT-4 and EMERGENT-5 trials, KarXT demonstrated a favorable long-term metabolic profile where most patients experienced stability or improvements on metabolic parameters over 52 weeks of treatment. We are conducting a registrational bridging study in mainland China.

In July 2024, Zai Lab joined the global Phase III ADEPT-2 study evaluating the safety and efficacy of KarXT for the treatment of Alzheimer’s disease with psychosis in Greater China.

- **Early-Stage Global Pipeline:** In May 2024, we initiated a global Phase II clinical trial evaluating the safety and efficacy of ZL-1102, an anti-IL-17 investigational therapy that we are internally developing, for the treatment of chronic plaque psoriasis.

### Corporate Updates

We continue to enhance our portfolio through strategic partnerships and to strengthen our organizational structure to support the evolving needs of our business:

- **Business Development:** In July 2024, we entered into a strategic partnership and global license agreement with MabCare Therapeutics Co., Ltd. Through this collaboration, we expanded our global oncology pipeline with a next generation antibody-drug conjugate targeting ROR1, ZL-6301. ZL-6301 has the potential to be used in the treatment of solid tumors where ROR1 is commonly expressed and in hematological malignancies

where ROR1 is a validated target. ZL-6301 has demonstrated an encouraging pre-clinical profile, and it is currently in the IND-enabling stage. We plan to focus on advancing its global development.

- **Organizational Updates:** In April 2024, Andrew Zhu joined Zai Lab as our Chief Commercial Officer in Greater China. Mr. Zhu’s rich experience in building innovative business models and resource integration will help us further enhance our commercial operations and drive sales and profit growth across Greater China. He joins us from Simcere Zaiming, where he most recently served as Chief Operating Officer responsible for the commercial and pharmaceutical business. He previously served in various operational, sales, and marketing leadership roles at leading global biopharmaceutical companies, including AstraZeneca, Roche, Sanofi, and BMS. In addition, Dr. Rafael Amado was appointed President, Head of Global Research and Development, expanding his role to encompass R&D efforts all of our therapeutic areas upon Dr. Harald Reinhart’s retirement on June 30, 2024.

### Factors Affecting Our Results of Operations

### Our Commercial Products

We generate product revenue through the sale of our commercial products in Greater China, net of any related sales returns and rebates to distributors. Our cost of product revenue mainly consists of the costs of manufacturing ZEJULA and NUZYRA, costs of purchasing OPTUNE, QINLOCK, and VYVGART from our collaboration partners, any royalty fees incurred as a result of sales of our commercial products under our license and collaboration agreements, and amortization of any sales-based milestone fees incurred under our license and collaboration agreements. We expect our product revenue to increase in coming years as we continue to focus on increasing patient access to our existing commercial products, such as through NRDL listing or increased supplemental insurance coverage in the private-pay market, and as we launch additional commercial products, if and when we obtain required regulatory approvals. We expect our cost of product revenue to increase as the volume of products sold increases.

### 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. We are committed to advancing and expanding our pipeline of potential best-in-class and first-in-class products, such as through clinical and pre-clinical trials and business development activities. As a result, we expect to continue making significant investments in research and development, including internal discovery activities.

Elements of research and development expenditures primarily include:

- payroll and other related costs of personnel engaged in research and development activities;
- fees for exclusive development rights of products granted to the Company;
- costs related to pre-clinical testing of the Company’s technologies and clinical trials, such as payments to contract research organizations (“CROs”) and contract manufacturing organizations (“CMOs”), investigators, and clinical trial sites that conduct our clinical studies; and
- costs to produce the product candidates, including raw materials and supplies, product testing, depreciation, and facility-related expenses.

### 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, and 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 expect these costs to continue to be significant to support sales of our commercial products and preparation to launch and subsequent sales of additional product candidates if and when approved.

### Our Ability to Commercialize Our Product Candidates

We have multiple product candidates in late-stage clinical development and various others in clinical and pre-clinical development in Greater China and the 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 product candidates, 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, and significant marketing efforts before we generate any revenue from product sales.

### License and Collaboration Arrangements

Our results of operations have been, and will continue to be, affected by our license and collaboration agreements. In accordance with these agreements, we may be required to make upfront payments and milestone payments upon the achievement of certain development, regulatory, and sales-based milestones for the relevant products as well as certain royalties at tiered percentage rates based on annual net sales of the licensed products in the licensed territories. As of June 30, 2024, we may be required to pay development and regulatory milestone payments of up to an additional aggregate amount of $294.5 million for our current clinical programs and $561.2 million for other programs, and such payments are contingent on the progress of our product candidates prior to commercialization. As of June 30, 2024, we also may be required to pay sales-based milestone payments of up to an additional aggregate amount of $1,980.0 million as well as certain royalties at tiered percentage rates on annual net sales that are contingent on product performance. If these milestones or royalties do occur, we view related payments as favorable because such payments signify that the product or product candidate is achieving higher sales levels or advancing toward potential commercial launch.

### Results of Operations

In this section, we discuss our results of operations for the three and six months ended June 30, 2024 compared to the same periods in 2023.

The following table presents our results of operations ($ in thousands):

| Revenues | Three Months Ended June 30, 2024 | 2023 | Change $% |  | Six Months Ended June 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenue, net | 100,106 | 68,864 | 31,242 | 45% | 187,255 | 131,661 | 55,594 | 42% |
| Collaboration revenue | 398 | — | 398 | NM | 398 | — | 398 | NM |
| Total revenues | 100,504 | 68,864 | 31,640 | 46% | 187,653 | 131,661 | 55,992 | 43% |
| Expenses |  |  |  |  |  |  |  |  |
| Cost of product revenue | (35,148) | (23,763) | (11,385) | 48% | (68,767) | (45,100) | (23,667) | 52% |
| Cost of collaboration revenue | (85) | — | (85) | NM | (85) | — | (85) | NM |
| Research and development | (61,625) | (76,682) | 15,057 | (20)% | (116,270) | (125,153) | 8,883 | (7)% |
| Selling, general, and administrative | (79,710) | (67,920) | (11,790) | 17% | (148,904) | (130,430) | (18,474) | 14% |
| Gain on sale of intellectual property | — | 10,000 | (10,000) | (100)% | — | 10,000 | (10,000) | (100)% |
| Loss from operations | (76,064) | (89,501) | 13,437 | (15)% | (146,373) | (159,022) | 12,649 | (8)% |
| Interest income | 9,330 | 10,090 | (760) | (8)% | 18,988 | 20,321 | (1,333) | (7)% |
| Interest expense | (492) | — | (492) | NM | (605) | — | (605) | NM |
| Foreign currency losses | (4,108) | (40,079) | 35,971 | (90)% | (6,176) | (31,167) | 24,991 | (80)% |
| Other (expenses) income, net | (8,943) | (1,405) | (7,538) | 537% | 418 | (171) | 589 | (344)% |
| Loss before income tax | (80,277) | (120,895) | 40,618 | (34)% | (133,748) | (170,039) | 36,291 | (21)% |
| Income tax expense | — | — | — | —% | — | — | — | —% |
| Net loss | (80,277) | (120,895) | 40,618 | (34)% | (133,748) | (170,039) | 36,291 | (21)% |

#### NM - Not Meaningful

### Revenues

### Product Revenue, Net

The following table presents the components of the Company’s product revenue ($ in thousands):

|  | Three Months Ended June 30, 2024 | 2023 | Change $% |  | Six Months Ended June 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenue - gross | 106,611 | 75,010 | 31,601 | 42% | 199,723 | 146,222 | 53,501 | 37% |
| Less: Rebates and sales returns | (6,505) | (6,146) | (359) | 6% | (12,468) | (14,561) | 2,093 | (14)% |
| Product revenue - net | 100,106 | 68,864 | 31,242 | 45% | 187,255 | 131,661 | 55,594 | 42% |

Our product revenue is derived from the sales of our commercial products primarily in mainland China, net of sales returns and rebates to distributors with respect to the sales of these products.

Our net product revenue increased by $31.2 million and $55.6 million in the three and six months ended June 30, 2024, respectively, primarily driven by increased sales for VYVGART since its launch in September 2023 and NRDL listing in January 2024. Net product revenue growth was also supported by increased sales volumes for ZEJULA and NUZYRA in the three and six months ended June 30, 2024 and for QINLOCK in the six months ended June 30, 2024. ZEJULA sales remained strong as it continued to be the leading PARP inhibitor in hospital sales for ovarian cancer in mainland China following the renewal of its NRDL listing as a maintenance treatment in the first quarter of 2024. The growth in NUZYRA sales was supported by the inclusion in the NRDL for its IV formulation in the first quarter of 2023 and for its oral formulation in the first quarter of 2024. Similarly, QINLOCK sales were supported by its inclusion in the NRDL in the first quarter of 2023.

The following table presents net revenue by product ($ in thousands):

|  | Three Months Ended June 30, 2024 | 2023 | Change $% |  | Six Months Ended June 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| ZEJULA | 44,999 | 42,957 | 2,042 | 5% | 90,500 | 85,637 | 4,863 | 6% |
| OPTUNE | 12,584 | 13,692 | (1,108) | (8)% | 25,064 | 27,034 | (1,970) | (7)% |
| QINLOCK | 7,038 | 7,527 | (489) | (6)% | 13,131 | 8,833 | 4,298 | 49% |
| NUZYRA | 12,295 | 4,636 | 7,659 | 165% | 22,208 | 10,105 | 12,103 | 120% |
| VYVGART | 23,190 | 52 | 23,138 | 44496% | 36,352 | 52 | 36,300 | 69808% |
| Total product revenue, net | 100,106 | 68,864 | 31,242 | 45% | 187,255 | 131,661 | 55,594 | 42% |

### Cost of Product Revenue

Cost of product revenue increased by $11.4 million and $23.7 million in the three and six months ended June 30, 2024, respectively, primarily due to increasing sales volumes and shifts in product sales mix.

### Collaboration Revenue and Cost of Collaboration Revenue

Collaboration revenue was $0.4 million and cost of collaboration revenue was $0.1 million in both the three and six months ended June 30, 2024, and related to promotional activities in mainland China. We had no such collaboration revenue in the prior year periods.

### Research and Development Expenses

The following table presents the components of our research and development expenses ($ in thousands):

|  | Three Months Ended June 30, 2024 | 2023 | Change $% |  | Six Months Ended June 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Personnel compensation and related costs | 31,209 | 29,378 | 1,831 | 6% | 59,217 | 58,034 | 1,183 | 2% |
| Licensing fees | — | 18,282 | (18,282) | (100)% | — | 19,282 | (19,282) | (100)% |
| CROs/CMOs/Investigators expenses | 24,305 | 23,626 | 679 | 3% | 44,209 | 36,065 | 8,144 | 23% |
| Other costs | 6,111 | 5,396 | 715 | 13% | 12,844 | 11,772 | 1,072 | 9% |
| **Total** | 61,625 | 76,682 | (15,057) | (20)% | 116,270 | 125,153 | (8,883) | (7)% |

Research and development expenses decreased by $15.1 million and $8.9 million in the three and six months ended June 30, 2024, respectively, primarily due to:

- a decrease of $18.3 million and $19.3 million, respectively, in licensing fees as a result of decreased upfront and milestone payments for our license and collaboration agreements; partially offset by
- an increase of $1.4 million and $9.2 million, respectively, in CROs/CMOs/Investigators expenses and other costs related to ongoing and newly initiated clinical trials.

The following table presents our research and development expenses by program ($ in thousands):

|  | Three Months Ended June 30, 2024 | 2023 | Change $% |  | Six Months Ended June 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Clinical programs | 21,348 | 32,462 | (11,114) | (34)% | 40,136 | 44,989 | (4,853) | (11)% |
| Pre-clinical programs | 3,139 | 10,758 | (7,619) | (71)% | 5,188 | 13,239 | (8,051) | (61)% |
| Unallocated research and development expenses | 37,138 | 33,462 | 3,676 | 11% | 70,946 | 66,925 | 4,021 | 6% |
| **Total** | 61,625 | 76,682 | (15,057) | (20)% | 116,270 | 125,153 | (8,883) | (7)% |

Research and development expenses attributable to clinical programs decreased by $11.1 million in the three months ended June 30, 2024 primarily driven by a decrease of $8.3 million in licensing fees and $2.8 million in CROs/CMOs/Investigators expenses. Research and development expenses attributable to pre-clinical programs decreased by $7.6 million in the three months ended June 30, 2024 primarily due to a decrease of $10.0 million in licensing fees, offset by an increase of $2.4 million in CROs/CMOs/Investigators expenses related to newly initiated studies and progress of existing studies.

Research and development expenses attributable to clinical programs decreased by $4.9 million in the six months ended June 30, 2024 primarily driven by a decrease of $8.3 million in licensing fees, offset by an increase of $3.4 million in CROs/CMOs/Investigators expenses due to newly initiated studies and progress of existing studies. Research and development expenses attributable to pre-clinical programs decreased by $8.1 million in the six months ended June 30, 2024 primarily due to a decrease of $11.0 million in licensing fees, offset by an increase of $2.9 million in CROs/CMOs/Investigators expenses related to newly initiated studies and progress of existing studies.

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.

### Selling, General, and Administrative Expenses

The following table presents our selling, general and administrative expenses by program ($ in thousands):

|  | Three Months Ended June 30, 2024 | 2023 | Change $% |  | Six Months Ended June 30, 2024 | 2023 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Personnel compensation and related costs | 48,279 | 42,874 | 5,405 | 13% | 94,173 | 83,788 | 10,385 | 12% |
| Professional service fees | 4,951 | 5,793 | (842) | (15)% | 9,054 | 14,348 | (5,294) | (37)% |
| Other costs | 26,480 | 19,253 | 7,227 | 38% | 45,677 | 32,294 | 13,383 | 41% |
| **Total** | 79,710 | 67,920 | 11,790 | 17% | 148,904 | 130,430 | 18,474 | 14% |

Selling, general, and administrative expenses increased by $11.8 million and $18.5 million in the three and six months ended June 30, 2024, respectively, primarily due to:

- an increase of $7.2 million and $13.4 million in other costs, respectively, primarily related to higher general selling expenses for VYVGART which was launched in September 2023.
- an increase of $5.4 million and $10.4 million in personnel compensation and related costs, respectively, primarily driven by headcount growth mainly to support VYVGART; partially offset by
- a decrease of $0.8 million and $5.3 million in professional service fees, respectively, primarily related to decreased legal, finance, and human resources administrative expenses.

### Gain on Sale of Intellectual Property

We had a gain on sale of intellectual property of $10.0 million in the second quarter of 2023 in connection with our sale of certain patent rights and related know-how to a third party. We had no such gain or loss in the current year periods.

### Interest Income

Interest income decreased by $0.8 million and $1.3 million in the three and six months ended June 30, 2024, respectively, primarily due to decreased cash and cash equivalents.

### Interest Expense

Interest expense increased by $0.5 million and $0.6 million in the three and six months ended June 30, 2024, respectively, primarily due to interest expense on short-term debt we entered into in the first half year of 2024. We had no such interest expense in the prior year periods.

### Foreign Currency Losses

Foreign currency losses decreased by $36.0 million and $25.0 million in the three and six months ended June 30, 2024, respectively, due to the decreased level of depreciation of the RMB against the U.S. dollar.

### Other (Expenses) Income, Net

Other expenses, net increased by $7.5 million in the three months ended June 30, 2024, primarily due to an increase of $8.3 million in loss of our equity investment in MacroGenics, Inc as a result of changes in its stock price.

Other income, net was $0.4 million in the six months ended June 30, 2024, compared to other expenses, net of $0.2 million in the six months ended June 30, 2023, primarily due to an increase of $3.2 million in government grants, an increase of $1.2 million in other miscellaneous gain primarily driven by an increase in sublease rental income, offset by an increase of $3.8 million in loss of our equity investment in MacroGenics, Inc as a result of changes in its stock price.

### Income Tax Expense

Income tax expense was nil in both the three and six months ended June 30, 2024 and 2023.

### Net Loss

Net loss was $80.3 million in the three months ended June 30, 2024, or a loss per ordinary share attributable to common stockholders of $0.08 (or loss per ADS of $0.82), compared to a net loss of $120.9 million in the three months ended June 30, 2023, or a loss per ordinary share of $0.13 (or loss per ADS of $1.25).

Net loss was $133.7 million in the six months ended June 30, 2024, or a loss per ordinary share attributable to common stockholders of $0.14 (or loss per ADS of $1.37), compared to a net loss of $170.0 million in the six months ended June 30, 2023, or a loss per ordinary share of $0.18 (or loss per ADS of $1.77).

### Critical Accounting Policies and Significant Judgments and Estimates

We prepare our financial statements in conformity with U.S. GAAP, which requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex. Actual results could differ from our estimates.

Our most critical accounting policies and estimates, including those that require the most difficult, subjective, or complex judgments and are the most inherently uncertain, are described below.

### Revenue Recognition

We sell our products to distributors (our customers), who ultimately sell the products to healthcare providers, primarily in mainland China. We recognize revenue when the performance obligations are satisfied upon the product’s delivery to distributors.

We offer rebates to our distributors to compensate the distributors consistent with pharmaceutical industry practices. We are required to establish a provision for rebates in the same period the related product sales are recognized. The estimated amount of rebates, if any, is recorded as a reduction of revenue.

Significant judgments are required in making these estimates. In determining the appropriate accrual amount, we consider our contracted rates, sales volumes, levels of distributor inventories, and historical experiences and trends. If actual results vary from our estimates or our expectations change, we will adjust these estimates accordingly, which would affect net product revenue and earnings in the period such variances become expected or known.

### Research and Development Expenses

We have a significant amount of research and development expenses, including with respect to pre-clinical and clinical trials for our product candidates. Such costs are expensed as incurred when they have no alternative future uses.

We contract with third parties to 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 trial activities are accrued based on the Company’s estimates of the actual services performed by the third parties, such as CROs and CMOs.

Significant judgments are required in estimating the actual services performed by the third parties for the respective period and the related expense accruals. In determining the appropriate accrual, we consider a variety of factors, including contractual requirements with respect to services to be provided, related rates, and our assessment of services performed during the period and progress with respect to any contractual milestones when we have not yet been invoiced or otherwise notified by third parties of actual costs. If the actual status and timing of services performed vary from our estimates, our reported expenses and earnings for the corresponding period may be affected.

### Share-Based Compensation

We grant share-based awards, including share options and restricted shares, to eligible employees, non-employees, and directors. Such share-based awards are measured at grant date fair value.

Significant assumptions are required in determining the fair value of share options, which we estimate using the Black-Scholes option valuation model. These assumptions include: (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 term), (iii) the expected dividend yield on our ADSs, and (iv) risk-free interest rates. Since we do not have sufficient trading history since our September 2017 initial public offering on Nasdaq to cover the expected term of our share options, we estimate expected volatility based on movements in the share price of certain companies we consider comparable over the most recent equivalent historical period. Since we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the expected term is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future, and risk-free interest rates are based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. If actual results vary from our estimates or our expectations change, our reported expenses and earnings for the corresponding period may be affected.

### Income Taxes

We recognize deferred tax assets and liabilities for temporary differences between the financial statement and income tax bases of assets and liabilities, which are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some or all of a deferred tax asset will not be realized. Significant judgements are required when evaluating tax positions in accordance with 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 the expiration of the applicable 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.

We consider positive and negative evidence when determining whether some or all of our deferred tax assets will not be realized. This assessment considers various factors, including 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. Our estimates 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. If actual benefits vary from our estimates or our expectations change, we will adjust the recognition and measurement estimates accordingly, which would affect reported expenses and earnings in the corresponding period.

### Liquidity and Capital Resources

To date, we have financed our activities primarily through private placements, our September 2017 initial public offering and various follow-on offerings on Nasdaq, and our September 2020 secondary listing and initial public offering on the Hong Kong Stock Exchange. In addition, we have raised approximately $164.6 million in private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us in our initial public offering and subsequent follow-on offerings on Nasdaq and our initial public offering on the Hong Kong Stock Exchange. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $132.3 million and $128.0 million in the six months ended 2024 and 2023, respectively. For information on our research and development activities and related expenditures see the Research and Development Expenses, Selling, General, and Administrative Expenses, License and Collaboration Arrangements, and Results of Operations sections in above. In addition, as of June 30, 2024, we had commitments for capital expenditures of $1.0 million, mainly for the purpose of plant construction and installation.

As of June 30, 2024, we had cash and cash equivalents, current restricted cash, and short-term investments of $730.0 million, which we expect will enable us to meet our cash requirements including the funding of operating expenses, capital expenditures, and debt obligations for at least the next 12 months.

Although we believe that we have sufficient capital to fund our operations for at least the next twelve months, we may, from time to time, identify opportunities to access capital through debt arrangements on favorable commercial terms. In February 2024, we entered into three such debt arrangements with Chinese financial institutions that allow certain of our subsidiaries to borrow up to approximately $164.5 million (or RMB1,171.7 million) to support our working capital needs in mainland China. As of June 30, 2024, we had short-term debt of approximately $70.3 million (or RMB501.0 million) pursuant to these debt arrangements. In addition, in July 2024, we entered into an additional such debt arrangement with a Chinese financial institution that would allow Zai Lab Shanghai to borrow up to RMB250.0 million (approximately $34.4 million) to support our working capital needs in mainland China. These debt arrangements will provide us with additional capital capacity that gives us enhanced flexibility to execute on our corporate strategic goals. For more information, see *Note 9* and *Note 16.*

We may consider, or we may ultimately need, additional funding sources to bring to fruition our strategic objectives, and there can be no assurances that such funding will be made available to us on acceptable terms or at all.

The following table presents information regarding our cash flows ($ in thousands):

|  | Six Months Ended June 30, 2024 | 2023 | Change $ |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | (132,279) | (127,989) | (4,290) |
| Net cash provided by (used in) investing activities | 2,446 | (11,252) | 13,698 |
| Net cash provided by (used in) financing activities | 69,870 | (5,379) | 75,249 |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (137) | (3,707) | 3,570 |
| Net decrease in cash, cash equivalents and restricted cash | (60,100) | (148,327) | 88,227 |

### Net Cash Used in Operating Activities

Net cash used in operating activities increased by $4.3 million in the six months ended June 30, 2024, primarily due to a decrease of $31.4 million in net changes in operating assets and liabilities, a decrease of $9.2 million in adjustments to reconcile net loss to net cash used in operating activities, partially offset by a decrease of $36.3 million in net loss.

### Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $2.4 million in the six months ended June 30, 2024, compared to net cash used in investing activities of $11.3 million in the six months ended June 30, 2023. This shift was primarily due to a decrease of $100.0 million in purchases of short-term investments, and a decrease of $3.5 million in purchases of property and equipment, partially offset by a decrease of $68.2 million in proceeds from the maturity of short-term investments, an increase of $11.5 million from acquisition of intangible assets as we made a sales-based milestone payment which was capitalized as intangible assets in the fourth quarter of 2023, and a decrease of $10.0 million in proceeds from sale of intellectual property.

### Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $69.9 million in the six months ended June 30, 2024, compared to net cash used in financing activities of $5.4 million in the six months ended June 30, 2023. This shift was primarily due to $69.8 million in short-term debt proceeds net of related issuance costs as we entered into certain debt arrangements in the first half of 2024, partially offset by decreases of $7.1 million in taxes paid related to settlement of equity awards and $1.7 million in proceeds from exercises of stock options.

### Recently Issued Accounting Standards

For more information regarding recently issued accounting standards, see *Part II – Item 8. Financial Statements and Supplementary Data – Recent Accounting Pronouncements* in our 2023 Annual Report. The Company has not adopted any new accounting standards in the six months ended June 30, 2024.

## Market risk

As filed, 5,516 characters.

We are exposed to market risk including foreign exchange risk and credit risk.

### Foreign Exchange Risk

Renminbi, or RMB, is not a freely convertible currency. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China (“PBOC”), controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of the Company included aggregated amounts of $21.1 million and $25.1 million, which were denominated in RMB, representing 3% of the cash and cash equivalents as of both June 30, 2024 and December 31, 2023, respectively.

While our financial statements are presented in U.S. dollars, our business mainly operates in mainland China with a significant portion of our transactions settled in RMB, and as such, we do not believe that we currently have significant direct foreign exchange risk and have not used derivative financial instruments to hedge our exposure to such risk. Although, in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs and ordinary shares will be affected by the exchange rate between the U.S. dollar and the RMB and between the HK dollar and the RMB, respectively, because the value of our business is effectively denominated in RMB, while ADSs and ordinary shares are traded in U.S. dollars and HK dollars, respectively.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Greater China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC.

The value of our ADSs and our ordinary shares will be affected by the foreign exchange rates between U.S. dollars, HK dollars, and the RMB. For example, to the extent that we need to convert U.S. dollars or HK dollars into RMB for our operations or if any of our arrangements with other parties are denominated in U.S. dollars or HK dollars and need to be converted into RMB, appreciation of the RMB against the U.S. dollar or the HK dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars or HK dollars for the purpose of making payments for dividends on ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar or the HK dollar against the RMB would have a negative effect on the conversion amounts available to us.

Since 1983, the Hong Kong Monetary Authority (“HKMA”) has pegged the HK dollar to the U.S. dollar at the rate of approximately HK$7.80 to US$1.00. However, there is no assurance that the HK dollar will continue to be pegged to the U.S. dollar or that the HK dollar conversion rate will remain at HK$7.80 to US$1.00. If the HK dollar conversion rate against the U.S. dollar changes and the value of the HK dollar depreciates against the U.S. dollar, our assets denominated in HK dollars will be adversely affected. Additionally, if the HKMA were to repeg the HK dollar to, for example, the RMB rather than the U.S. dollar, or otherwise restrict the conversion of HK dollars into other currencies, then our assets denominated in HK dollars will be adversely affected.

### Credit Risk

Financial instruments that are potentially subject to significant concentration of credit risk consist of cash and cash equivalents, short-term investments, accounts receivable, and notes receivable.

The carrying amounts of cash and cash equivalents and short-term investments represent the maximum amount of losses due to credit risk. As of June 30, 2024 and December 31, 2023, we had cash and cash equivalents of $630.0 million and $790.2 million, and short-term investments of nil and $16.3 million, respectively. As of June 30, 2024 and December 31, 2023, all of our cash and cash equivalents and short-term investments were held by major financial institutions located in mainland China and international financial institutions outside of mainland China which we believe are of high credit quality and for which we monitor continued credit worthiness.

Accounts receivable are typically unsecured and are derived from product revenue and collaborative arrangements. We manage credit risk related to our accounts receivable through ongoing monitoring of outstanding balances and limiting the amount of credit extended based upon payment history and credit worthiness. Historically, we have collected receivables from customers within the credit terms with no significant credit losses incurred. As of June 30, 2024, our two largest customers accounted for approximately 23% of our total accounts receivable collectively.

Certain accounts receivable balances are settled in the form of notes receivable. As of June 30, 2024, such notes receivable included bank acceptance promissory notes that are non-interest bearing and due within six months. These notes receivable were used to collect the receivables based on an administrative convenience, given these notes are readily convertible to known amounts of cash. In accordance with the sales agreements, whether to use cash or bank acceptance promissory notes to settle the receivables is at our discretion, and this selection does not impact the agreed contractual purchase prices.

## Controls and procedures

As filed, 1,448 characters.

### Management’s Evaluation of Our Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Based upon that evaluation, our management has concluded that, as of June 30, 2024, our disclosure controls and procedures were effective.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such item is defined in Rules 13a-15(f)) during the fiscal quarter ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 339 characters.

We are subject to risks and uncertainties that could, directly or indirectly, adversely affect our business, results of operations, financial condition, liquidity, cash flows, strategies, and/or prospects. There have been no material changes in our risk factors from those disclosed in the “Risk Factors” section of our 2023 Annual Report.

Filed Aug 6, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-035231. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.