LianBio: Form 10-Q for the period ended Sep 30, 2022

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes thereto as of and for the year ended December 31, 2021 and the related management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections of this report and the section entitled “Risk Factors” in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Some of the numbers included herein have been rounded for the convenience of presentation.

Overview

We are a global, science-driven biopharmaceutical company dedicated to developing and commercializing innovative medicines for patients with unmet medical needs, with an initial focus on in-licensing assets for Greater China and other Asian markets. We have assembled a pipeline of nine assets across five therapeutic areas, each with its own distinct value proposition and the potential to drive new standards of care across cardiovascular, oncology, ophthalmology, inflammatory disease and respiratory indications.

In November 2021, we completed an IPO of our ordinary shares through the sale and issuance of 20,312,500 American Depositary Shares (“ADSs”), at a public offering price of $16.00 per ADS. Following the closing of the IPO, on December 1, 2021, the underwriters partially exercised their option to purchase additional shares and purchased an additional 593,616 ADSs at the initial public offering price of $16.00 per ADS. We received gross proceeds of $334.5 million in connection with the IPO and subsequent exercise of the underwriters’ option and aggregate net proceeds of $304.8 million after deducting underwriting discounts, commissions and other offering expenses.

The following diagram depicts our corporate structure as of September 30, 2022. As of September 30, 2022, the shares of each of our subsidiaries are 100% owned by the respective entity displayed immediately above that subsidiary. Certain warrant rights are outstanding and may be exercised in the future for equity interests in our Cayman parent entity, LianBio, and our subsidiary, Lian Cardiovascular, as described in “Note 10: Equity” in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 31, 2022. Currently, our corporate structure contains no variable interest entities.

Within the organization, investor cash inflows have all been received by our parent Cayman entity, LianBio. Cash to fund our Chinese operations is transferred from our Cayman parent entity down through our Hong Kong entities and then into our Chinese entities through capital contributions. Cash to fund our operations in the United States is transferred from our Cayman parent entity down to our United States entity through a capital contribution.

Recent Business Highlights and Clinical Development Updates

Mavacamten

In August 2022, we announced that enrollment was completed in the Phase 3 EXPLORER-CN clinical trial in Chinese patients with obstructive hypertrophic cardiomyopathy. We expect to report topline results from the trial in mid-2023.

In September 2022, we collaborated with Beijing Lisheng Cardiovascular Health Foundation to launch Joy from Heart, a hypertrophic cardiomyopathy (“HCM”) disease awareness campaign in China. Joy from Heart is China’s first disease awareness program dedicated to improving HCM diagnosis rates and supporting HCM education initiatives for patients and healthcare providers.

TP-03

In August 2022, our partner Tarsus Pharmaceuticals, Inc. (“Tarsus”) announced the initiation of a Phase 2a clinical trial of TP-03 in patients with meibomian gland disease.

In September 2022, Tarsus announced the submission of an NDA to the United States Food and Drug Administration (“FDA”) for TP-03 for the treatment of Demodex blepharitis. Tarsus subsequently communicated that the FDA accepted the NDA with a Prescription Drug User Fee Act (“PDUFA”) target action date of August 25, 2023.

In November 2022, we announced the initiation of the Phase 3 LIBRA clinical trial of TP-03 in Chinese Demodex blepharitis patients. We expect to report topline data from the trial in the fourth quarter of 2023.

NBTXR3

In September 2022, we announced that we began treating patients in Asia in the global Phase 3 NANORAY-312 trial evaluating NBTXR3 for the treatment of head and neck cancer.

BBP-398

In November 2022, we announced that we began treating patients in China in a Phase 1 monotherapy clinical trial of BBP-398 in patients with advanced solid tumors.

Infigratinib

In October 2022, we reported that our partner, BridgeBio Pharma, Inc. (“BridgeBio”), informed us that Helsinn Healthcare SA, which holds the Truseltiq (infigratinib) NDA in the United States, is permanently discontinuing distribution of the drug and anticipates requesting withdrawal of the NDA in the United States due to business reasons. Due to the planned withdrawal of the NDA, BridgeBio informed us that it intends to close the ongoing global Phase 3 PROOF-301 clinical trial of infigratinib in first-line cholangiocarcinoma (“CCA”). Consequently, we are terminating activities related to the PROOF-301 clinical trial in China and no longer plan to pursue development and commercialization of infigratinib in CCA indications in our licensed territories. We intend to continue to support patients who are currently being treated with infigratinib under the special pilot program implemented in the Bo’ao Lecheng pilot zone in Hainan Province. We expect to continue the ongoing Phase 2a China standalone proof of concept clinical trial of infigratinib in patients with locally advanced, metastatic gastric cancer or gastroesophageal junction adenocarcinoma with FGFR2 genetic amplification and other solid tumors with FGFR alterations. We expect to report topline data from this clinical trial in the second half of 2023.

LYR-210

In August 2022, we refined our development strategy for LYR-210. We plan to conduct a Phase 3 China standalone trial to support regulatory approval in China, leveraging the results of the ongoing Phase 3 trials of our development partner, Lyra. Lyra is expected to complete enrollment in ENLIGHTEN I, the first trial in Lyra’s Phase 3 program, in mid-2023.

In September 2022, Lyra announced that it had initiated ENLIGHTEN II, the second of two global pivotal Phase 3 trials of LYR-210 in surgically naive chronic rhinosinusitis patients. In November 2022, Lyra further communicated a temporary pause in ENLIGHTEN II enrollment to align with internal manufacturing timelines for clinical trial supply.

NX-13

In August 2022, our development partner Landos Biopharma, Inc. (“Landos”) announced topline results from the company’s Phase 1b clinical trial of NX-13. The data showed that NX-13 was well tolerated following evaluation of multiple doses over four weeks compared with a placebo. Based on these data, Landos plans to initiate a Phase 2 clinical trial to evaluate the safety, efficacy and optimal dosing of NX-13 in patients with ulcerative colitis.

Factors Affecting Our Results of Operations

Impact of the COVID-19 pandemic on our operations

Beginning in December 2019, the outbreak of the COVID-19 pandemic created business interruptions for companies globally, including us. For example, in the biotechnology sector, companies, including our company, have experienced delays in their ability to enroll patients at clinical trial sites because of the pandemic, potentially leading to delays in the regulatory approval process. Other outbreaks may occur, or there could be further resurgences of the COVID-19 pandemic (such as current outbreaks in certain locations in China, including locations in which we are conducting clinical trials, which have led to extensive lockdowns), which have caused and could further cause business disruptions in the future.

We have been carefully monitoring the COVID-19 pandemic and its impact on our business. We have taken important steps to ensure the workplace safety of our employees when working within our administrative offices, or when traveling to our clinical trial sites. We may take further actions as may be required by federal, state or local authorities.

To date, we have been able to continue our key business activities and advance our clinical programs. However, the COVID pandemic has impacted our clinical trial enrollment and it is possible that our clinical development timelines and business plans could be adversely affected. We maintain regular communication with our vendors and clinical sites to appropriately plan for, and mitigate, the impact of the COVID-19 pandemic on our operations.

Key Components of Results of Operations

Research and development expenses

We believe our ability to successfully develop product candidates will be a significant factor affecting our long-term competitiveness, as well as our future growth and development. Developing high quality product candidates requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investment in this area.

We expect our research and development expense to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our product candidates and initiate additional clinical trials of, and seek regulatory approval for, these and other future product candidates. These expenses include:

• payments made under third party licensing and asset acquisition agreements;
• employee-related expense, including salaries, related benefits, equity-based compensation and travel expenses for employees engaged in research and development functions;
• expense incurred in connection with the clinical development of our product candidates, including expenses incurred under agreements with contract research organizations (“CROs”);
• costs related to compliance with regulatory requirements; and
• facilities, depreciation and amortization, insurance and other direct and allocated expense incurred as a result of research and development activities.

The following table sets forth the components of our research and development expenses for the periods indicated:

Licensing arrangements

Our results of operations have been, and we expect them to continue to be, affected by our licensing, collaboration and development agreements. We are generally required to make upfront payments upon entry into such agreements and milestone payments upon the achievement of certain development, regulatory and commercial milestones for the relevant product candidate under these agreements, as well as tiered royalties based on net sales of the license products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones are recorded in research and development expense in our consolidated financial statements. For the three months ended September 30, 2022 and September 30, 2021, we made no upfront payments or milestone payments. For the nine months ended September 30, 2022 and September 30, 2021, we made upfront payments and milestone payments totaling $25.0 million and $136.9 million, respectively.

The following table sets forth a breakdown of licensing fees by program for the periods indicated:

General and administrative expenses

Our general and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, consulting, auditing, tax services and insurance costs.

We expect that our general and administrative expenses will increase in the future to support continued development and commercialization of our product candidates. These increases will likely include increased costs related to hiring additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. Additionally, we have incurred and will continue to incur increased expenses associated with being a public company, including costs of additional personnel, accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and office insurance costs, and investor and public relations costs.

Interest income, net

Interest income, net consists of interest income received on our cash balances and marketable securities and from the amortization/accretion on the premiums/discounts on marketable securities.

Other income (expense), net

Other income (expense), net consists of unrealized gains and losses on foreign currencies held in our China subsidiary, Shanghai LianBio Development Co., Ltd., unrealized foreign exchange activity from the remeasurement of our intercompany payables, bank fees incurred on our cash balances and depositary fees related to our ADSs.

Income taxes

Provision for income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We expect income tax expense to increase over time as the Company continues to grow net income.

We recorded income tax expense (benefit) of $0.0 million and $0.0 million for the three and nine months ended September 30, 2022 and $(0.4) million and $1.6 million for the three and nine months ended September 30, 2021, respectively.

Results of operations

Comparison of the three months ended September 30, 2022 and September 30, 2021

The following table sets forth a summary of our consolidated results of operations for the periods indicated.

Research and development expenses

Research and development expenses increased by $3.6 million from $4.7 million for the three months ended September 30, 2021 to $8.3 million for the three months ended September 30, 2022. For the three months ended September 30, 2022, research and development cost was primarily attributable to $3.0 million in personnel-related expenses and $4.4 million attributable to development activities to support our clinical trials. The remaining expense was attributable to professional fees.

For the three months ended September 30, 2021, research and development cost was primarily attributable to $1.9 million in personnel-related expenses and $2.0 million attributable to development activities to support our clinical trials. The remaining expense was attributable to professional fees.

General and administrative expenses

General and administrative expenses increased by $7.4 million from $8.9 million for the three months ended September 30, 2021 to $16.3 million for the three months ended September 30, 2022. The increase was primarily attributable to a $5.3 million increase in payroll and personnel-related expenses (including share-based compensation expense) for increased employee headcount and a $3.2 million increase in additional costs incurred due to operating as a publicly traded company. These increases were partially offset by a $1.1 million decrease in consulting costs.

Interest income

Interest income increased by $1.4 million from $0.0 million for the three months ended September 30, 2021 to $1.4 million for the three months ended September 30, 2022. The increase was primarily attributable to our investments in marketable securities and interest earned on cash holdings in foreign countries.

Other income, net

Other income, net increased by $1.3 million from $0.0 million for the three months ended September 30, 2021 to $1.3 million for the three months ended September 30, 2022. The increase is primarily attributable to foreign exchange gains in our foreign entities.

Income taxes (benefit)

Our income taxes (benefit) was $0.0 million, resulting in an effective income tax rate of 0.0% for the three months ended September 30, 2022. Our income tax benefit was $(0.4) million, resulting in an effective income tax rate of 2.9%, for the three months ended September 30, 2021. The variation in the effective income tax rate was primarily due to the effect of certain nonrecurring taxable income in 2021.

Comparison of the nine months ended September 30, 2022 and September 30, 2021

The following table sets forth a summary of our consolidated results of operations for the periods indicated.

Research and development expenses

Research and development expenses decreased by $101.9 million, from $151.0 million for the nine months ended September 30, 2021 to $49.2 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, research and development cost was primarily attributable to (i) $15.0 million related to a development milestone payment payable pursuant with the Tarsus License Agreement, (ii) $5.0 million related to a development milestone payment payable pursuant with the MyoKardia License Agreement, (iii) $5.0 million related to a development milestone payment payable pursuant with the Lyra License Agreement, (vi) $13.5 million attributable to development activities to support our clinical trials and (v) $8.6 million attributable to higher personnel-related expense, including share-based compensation expense, as a result of increased employee headcount. The remaining expense was attributable to professional fees.

For the nine months ended September 30, 2021, research and development cost was primarily attributable to (i) $55.0 million in upfront milestone payments and $9.4 million of expenses related to warrants issued in connection with the Tarsus License Agreement, (ii) a $20.0 million upfront payment pursuant to the Nanobiotix License Agreement, (iii) a $18.0 million upfront payment pursuant to the Landos License Agreement, (iv) a $14.0 million upfront payment pursuant to the ReViral License Agreement, (v) a $12.0 million upfront payment pursuant to the Lyra License Agreement, and (vi) a $8.5 million development milestone payment pursuant to the exclusive license agreement entered into with Navire. The remaining expense was attributable to higher personnel-related expenses, including share-based compensation expense, and development activities to support our clinical trials and professional fees.

General and administrative expenses

General and administrative expenses increased by $24.4 million from $22.5 million for the nine months ended September 30, 2021 to $46.9 million for the nine months ended September 30, 2022. The increase was primarily attributable to a $15.5 million increase in payroll and personnel-related expenses (including share-based compensation expense) for increased employee headcount, a $9.5 million increase in additional costs incurred due to operating as a publicly traded company.

Interest income, net

Interest income, net increased by $2.1 million from $0.2 million for the nine months ended September 30, 2021 to $2.2 million for the nine months ended September 30, 2022. The increase was primarily attributable to our investments in marketable securities and interest earned on cash holdings in foreign countries.

Other income (expense), net

Other income (expense), net increased by $2.1 million from $(0.2) million for the nine months ended September 30, 2021 to $1.9 million for the nine months ended September 30, 2022. The increase was primarily attributable to depositary fees related to our ADSs and foreign exchange gains in our foreign entities.

Income taxes

Our income tax expense was $0.0 million, resulting in an effective income tax rate of 0.0% for the nine months ended September 30, 2022. Our income tax expense was $1.6 million, resulting in an effective income tax rate of (0.9)%, for the nine ended September 30, 2021. The variation in the effective income tax rate was primarily due to the effect of certain nonrecurring taxable income in 2021.

Liquidity and capital resources

Sources of liquidity

Since our incorporation, our operations have been substantially financed with proceeds from sales of preferred shares as part of the Series Seed financing, the Series A financing, the issuance of the 2020 Convertible Notes and our IPO, which was completed in November 2021. As of September 30, 2022, we had cash and cash equivalents and marketable securities of $311.7 million.

We are a holding company with no operations of our own and, as such, we may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, including the funds necessary to pay dividends and other cash distributions to our shareholders or holders of our ADSs or to service any debt we may incur. Deterioration in the financial condition, earnings or cash flow of our subsidiaries for any reason, as well as any changes in Chinese laws or regulations, could limit or impair their ability to pay such distributions. For additional information, see “Part I—Item 1A—Risk Factors—Risks Related to Doing Business in China and Our International Operations—We may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our Chinese subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Funding requirements

Our primary use of cash is to fund our operating expenditures, consisting of research and development expense (including activities within our clinical and regulatory initiatives and upfront and milestone payments) and general and administrative expense. Our use of cash is impacted by the timing and extent of the required payments for each of these activities.

To date, we have not generated any material revenue. We do not expect to generate revenue from the sale of our products unless and until we (i) complete development of any of our product candidates; (ii) obtain applicable regulatory approvals; and (iii) successfully commercialize or enter into collaborative agreements for our product candidates. We do not know with certainty when, or if, any of these items will ultimately occur. We expect to incur continuing significant losses for the foreseeable future and for our losses to increase as we ramp up our clinical development programs and begin activities related to commercial launch readiness. We may encounter unforeseen expenses, difficulties, complications, delays and other currently unknown factors that could adversely affect our business. Moreover, since the completion of our IPO, we have incurred and will continue to incur additional costs associated with operating as a publicly traded company.

We will require additional capital to develop our product candidates and fund our operations into the foreseeable future. We anticipate that we will eventually need to raise substantial additional capital, the requirements for which will depend on many factors, including:

• the number and scope of clinical programs we decide to pursue;
• the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;
• the cost and timing associated with commercializing our product candidates, if they receive regulatory approval;
• the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive regulatory approval;
• the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time;
• the extent to which we acquire or in-license other product candidates and technologies;
• the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
• our ability to establish and maintain collaborations on favorable terms, if at all;
• our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following regulatory approval;
• the impact of the COVID-19 pandemic and the Russian invasion of Ukraine on our clinical development or operations; and
• the costs associated with being a public company.

A change in the outcome of any of these or other variables with respect to the development and regulatory approval of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If we raise additional funds by issuing equity securities, our shareholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our ordinary shares, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our shareholders.

Adequate funding may not be available to us on acceptable terms or at all. Our potential inability to raise capital when needed could have a negative impact on our financial condition and our ability to pursue our additional licensing opportunities.

Cash flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented:

30

Net cash used in operating activities

During the nine months ended September 30, 2022, operating activities used approximately $68.5 million of cash, primarily due to our net loss of $92.0 million, partially offset by non-cash consideration of $13.9 million related to share-based compensation expense, a decrease of $4.8 million for prepaid expenses and other current assets, an increase of $8.2 million for accrued expenses, and other changes related to operating assets and liabilities.

During the nine months ended September 30, 2021, operating activities used approximately $133.6 million, primarily due to our net loss of $175.1 million, partially offset by non-cash items of $9.4 million related to the warrants granted to Tarsus, $20.0 million of other receivables related to in-licensing and co-development activities related to our strategic collaboration agreement with Pfizer, $5.3 million related to share-based compensation expense, and other changes related to operating assets and liabilities.

Net cash used in investing activities

During the nine months ended September 30, 2022, investing activities used approximately $80.2 million, consisting of approximately $260.4 million for the purchases of marketable securities, and approximately $1.6 million for the purchases of property and equipment, partially offset by the sales and redemption of marketable securities of approximately $181.8 million.

During the nine months ended September 30, 2021, investing activities used approximately $0.2 million, primarily resulting from the purchases of property and equipment.

Net cash provided by financing activities

During the nine months ended September 30, 2022, financing activities provided approximately $1.7 million, primarily resulting from proceeds from the exercise of share options.

During the nine months ended September 30, 2021, financing activities provided approximately $8.2 million in net proceeds due to our issuance of Series A Preferred shares of $2.9 million and the exercise of share options of $5.3 million.

Critical accounting policies and significant judgments and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. Actual results may differ from these estimates under different assumptions or conditions.

During the nine months ended September 30, 2022, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

Impact of New Accounting Standards

The adoption of new accounting standards and the impact of recent accounting pronouncements not yet effective on our consolidated financial statements, if any, is discussed in Note 2 to the interim unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

During the period ended September 30, 2022, there were no material changes in our market risk or how our market risk is managed, compared to those disclosed under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on that evaluation of our disclosure controls and procedures as of September 30, 2022, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Information regarding risk factors appears in Part I, Item 1A, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company has reviewed the risk factors, and, except as presented below, there have been no material changes in the Company’s risk factors since those reported in its Annual Report on Form 10-K for the year ended December 31, 2021.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations, and those of our and our partners’ third-party research institution collaborators, clinical trial sites, CROs, contract manufacturing organizations (“CMOs”), suppliers and other contractors and consultants could be subject to natural or man-made disasters, public health epidemics and pandemics like the COVID-19 pandemic or other business interruptions, for which we are predominantly self-insured. The occurrence of any of these business interruptions could seriously harm our operations and financial condition and increase our costs and expenses. Through our partners, we also rely on third-party manufacturers to produce and process our product candidates. Our ability to obtain supplies of our product candidates could be disrupted if the operations of these suppliers are affected by natural or man-made disasters, public health epidemics and pandemics, such as the COVID-19 pandemic, or other business interruptions. Damage or extended periods of interruption to our or our vendors’ corporate, development, research or manufacturing facilities due to fire, natural disaster, power loss, communications failure, unauthorized entry, public health epidemics, pandemics or other events could cause us to delay or cease development or commercialization of some or all of our product candidates. Although we maintain insurance coverage on our facilities, our insurance might not cover all losses under such circumstances, including damage to third-party facilities, and our business may be seriously harmed by such delays and interruption. For example, the biotechnology sector, including our company, has been impacted by the COVID-19 pandemic and could continue to experience negative impact to business operations. Other outbreaks may occur, or there could be a resurgence of the COVID-19 pandemic (including, for example, the local outbreaks and related extensive lockdowns in certain cities in China, such as Shanghai or other cities where our offices and employees are located and in which we are conducting clinical trials), which have caused and could continue to cause business disruptions.

Our or our partners’ clinical development efforts have been and could be further delayed or otherwise negatively impacted, as patients are reluctant or unable to go to hospitals or clinical testing sites to receive treatment. We have experienced delays in the enrollment of patients in our clinical trials due to the pandemic. We believe our business partners have also similarly experienced delays or difficulties in enrollment of patients to their clinical trials due to the outbreak of COVID-19 in their respective territories. The ability to conduct in-person interactions between clinical and medical staff and physicians has also been adversely affected. Additionally, the clinical supply of our product candidates could be negatively impacted due to reduced operations or a shutdown of our third-party manufacturing facilities, distribution channels and transportation systems, or shortages of raw materials and drug product.

Our business and results of operations could be adversely affected by public health crises in the locations in which we, our suppliers, CROs, our licensors’ CMOs and other contractors operate.

Our operations expose us to risks associated with public health crises, such as epidemics and pandemics. Our business operations and those of our and our partners’ suppliers, clinical trial sites, CROs, CMOs and other contractors may potentially suffer interruptions caused by any of these events.

For example, the COVID-19 pandemic has resulted in significant governmental measures being implemented around the globe to control the spread of the virus, including quarantines, lockdowns, travel restrictions, social distancing and business shutdowns. We have taken precautionary measures intended to comply with local regulations and to help minimize the risk of the virus to our employees, such as implementing office closures, including in our China headquarters in Shanghai, and limiting non-essential travel. These measures could negatively affect our business. For instance, if certain of our employees are required to continue to work remotely as a result of local government mandates, company policy updates, or otherwise, absenteeism or employee turnover could increase, or we may experience disruptions to our operations or increased risk of a cybersecurity incident.

In response to recent outbreaks of the COVID-19 pandemic in China, the Chinese government has imposed restrictive quarantine measures, including extensive shutdowns in certain cities in China in which we operate, which have caused business disruptions. These measures, as well as other efforts and effects related to the continued COVID-19 pandemic, may continue for an indeterminate amount of time and have adversely impacted and may continue to adversely impact our and our partners’ businesses, operations and financial conditions, including our or our business partners’ manufacturing and supply chains, clinical trial operations and ability to advance research and development activities and pursue development of pipeline products. Each of these factors could have a material adverse impact on our business, operations and our financial results, including our ability to conduct our business in the manner and on the timelines presently planned.

The extent to which the COVID-19 pandemic may continue to impact our business will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, the severity of COVID-19 or the effectiveness of actions to contain and treat COVID-19, particularly in China and the United States and other geographies where we or our partners and our and their third-party suppliers, clinical trial sites and CMOs or CROs, or any other third parties with which we engage, operate.

As a company with substantial operations outside of the United States, our business is subject to economic, political, regulatory and other risks associated with international operations, including the effects of Russia’s invasion of Ukraine.

As a company with substantial operations in China, our business is subject to risks associated with conducting business outside the United States. Substantially all of our suppliers and clinical trial relationships are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

• economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;
• differing and changing regulatory requirements for product approvals;
• differing jurisdictions could present different issues for securing, maintaining or obtaining freedom to operate in such jurisdictions;
• potentially reduced protection for intellectual property rights;
• difficulties in compliance with different, complex and changing laws, regulations and court systems of multiple jurisdictions and compliance with a wide variety of foreign laws, treaties and regulations;
• changes in non-U.S. regulations and customs, tariffs and trade barriers;
• changes in non-U.S. currency exchange rates of the renminbi;
• changes in a specific country’s or region’s political or economic environment, especially with respect to a particular country’s treatment of or stance towards other countries;
• trade protection measures, import or export licensing requirements or other restrictive actions by governments;
• differing reimbursement regimes and price controls in certain non-U.S. markets;
• negative consequences from changes in tax laws;
• compliance with tax, employment, immigration and labor laws for employees living or traveling abroad,
• including, for example, the variable tax treatment in different jurisdictions of options granted under our equity incentive plans;
• workforce uncertainty in countries where labor unrest is more common than in the United States; and
• business interruptions resulting from geopolitical actions, including war, such as the ongoing war between Russia and Ukraine, and terrorism, health epidemics and pandemics, such as the COVID-19 pandemic or natural disasters including earthquakes, typhoons, floods and fires.

For example, our business and financial results, including our ability to raise capital or raise capital on favorable terms and the market price of our ADSs may be adversely affected by the geopolitical factors arising in connection with Russia’s invasion of Ukraine. Although we do not conduct business in either Russia or Ukraine, our global operations expose us to geopolitical risks, including, in this instance, with respect to how the United States and China choose to respond to the war between Ukraine and Russia. For instance, in connection with this war, the United States and other nations have raised the possibility of secondary sanctions on China, Chinese banks and Chinese businesses that do business with Russia or its allies. We do not currently conduct business in Russia or with Russian counterparties, but we may be impacted by sanctions if third parties with which we do business, such as business partners, suppliers, intermediaries, services providers or banks, are subject to such sanctions or if broader sanctions are imposed. Our business and operations may also be adversely impacted by any actions taken by China in response to the war or any related sanctions or threatened sanctions. If this war continues or expands, or if it leads to continued political or economic instability or terrorist activity, or if it gives rise to further government actions such as sanctions or increased economic or political tensions, in particular between the United States and China, our business and financial results may be adversely impacted and the value of our ADSs may significantly decline. In addition, although we do not currently conduct any clinical trials in Russia or Ukraine, we or our partners may experience disruptions with respect to clinical trials and operations as a result of the war and its related effects, which could materially adversely impact our or their ability to conduct business, including clinical trials, in the manner and on the timelines presently planned.

Financial and capital markets volatility may adversely affect access to capital for life sciences companies including us.

Financial and capital markets are experiencing significant volatility and the volatility is adversely affecting access to capital and credit for many life sciences companies, but that risk is currently exacerbated for companies like ours with significant operations in China by factors such as the geopolitical tensions between the U.S. and China, the ongoing war between Russia and Ukraine, and the uncertainty about the duration, scope, and effect of COVID-19 restrictions. In the event that these continued adverse market conditions may affect us, we may be unable to obtain adequate capital or credit market financing, obtain that capital or credit on favorable terms, or access such capital or credit in manners most favorable to us.

We are required to obtain certain permissions from Chinese authorities to transfer certain data.

We are required to obtain approval from the Cyberspace Administration of China (“CAC”) when the transfers out of mainland China of certain data that is determined to be important data or personal data falls into any of the scenarios requiring a security assessment by CAC specified in the Security Assessment Measures. The cross-border transfer out of mainland China of data requiring such a security assessment will not be allowed if the CAC does not approve the security assessment filing. In addition, the disclosure, sharing or exporting to foreign parties or entities established or actually controlled by them by a Chinese-owned entity of any data derived from human organs, tissues or cells of Chinese individuals that contain human genetic materials requires a separate notification filing to the Human Genetic Resources Administration of China (“HGRAC”). The HGRAC also requires submission of a copy of the data to be exported. If our Chinese subsidiaries intend to receive certain clinical or personal data from Chinese-owned entities or transfer certain clinical or personal data out of mainland China, they need to first evaluate whether a security assessment by CAC or a clearance from the HGRAC will be triggered by such data transfer, pass the necessary security assessment, and make the necessary notification filings for such data transfer.

If our Chinese subsidiaries do not receive or maintain approvals for such data transfers or inadvertently conclude that security assessments, approvals, or notification filings needed for such data transfers are not required, or if there are changes in applicable laws (including regulations) or interpretations of laws and our Chinese subsidiaries are required but unable to pass security assessments, obtain approvals, or make notification filings in the future, then such Chinese subsidiaries may be unable to effectuate such data transfers and this could adversely affect the operations of our Chinese subsidiaries, including limiting or prohibiting the ability of our Chinese subsidiaries to operate, and our relationships with our licensing and other collaboration partners.

We believe we will be classified as a PFIC in the current taxable year ending December 31, 2022.

We do not believe we were a PFIC for the taxable year ended December 31, 2021, but we believe we will be classified as a PFIC in the current taxable year ending December 31, 2022. We may or may not be a PFIC in subsequent years. Our actual PFIC status for any taxable year will not be determinable until after the end of such taxable year as our PFIC status is a factual determination made annually after the end of each taxable year. There can be no assurance that the IRS will agree with our determination and that the IRS would not successfully challenge our position in any taxable year. We will be a PFIC in any taxable year if at least (i) 75% of our gross income is “passive income” or (ii) 50% of the average gross value of our assets, determined on a quarterly basis, is attributable to assets that produce, or are held for the production of passive income. Because we expect to be a PFIC for our current taxable year, certain adverse U.S. federal income tax consequences could apply to U.S. persons who have acquired our ADSs or ordinary shares with respect to any “excess distribution” received from us and any gain from a sale or other disposition of our ADSs and ordinary shares.

If we are a PFIC in any taxable year in which a U.S. shareholder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC with respect to such U.S. shareholder, regardless of whether we continue to meet the tests described above, unless we cease to be a PFIC and the U.S. shareholder makes the “deemed sale election”.

The adverse U.S. federal income tax consequences of holding interests in a PFIC may be mitigated if the U.S. shareholder makes a valid mark-to-market election or makes valid a qualified electing fund (“QEF”) election with respect to all taxable years the underlying entity is a PFIC during such U.S. shareholder’s holding period or makes a purging election to cause a deemed sale of the PFIC shares at their fair market value in connection with a QEF election. We do not, however, expect to provide U.S. shareholders with the information necessary to make a valid QEF election and U.S. shareholders therefore should assume that a QEF election will not be available with respect to our ADSs or ordinary shares. Further, no assurance can be given that a mark-to-market election will be available with respect to our ADSs or ordinary shares. For additional information, see Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation—of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.