Zai Lab - Q3 2022

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by, and welcome to the Zai Lab Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to Billy Cho, Chief Financial Officer of Zai Lab, who will make introductory comments.

Billy Cho (CFO)

Thank you, operator. Good morning, good evening, and welcome everyone. Zai Lab recently issued a press release providing the details of the company's financial results for the third quarter of 2022, as well as some recent product highlights and corporate updates. The press release is available in the investor relations section of the company's website at ir.zailaboratory.com. Today's call will be led by Dr. Samantha Du, Zai Lab's Founder, Chairperson, and Chief Executive Officer. She'll be joined by Josh Smiley, Chief Operating Officer, who will discuss advances in our oncology product candidates. Dr. Harald Reinhart, President and Head of Global Development, Neuroscience, Autoimmune, and Infectious Diseases, who will speak about the progress we made in those three therapeutic areas. I will discuss the performance of our marketed products, conclude with comments on our financial results.

Additional executives will also be available to answer questions during the Q&A portion of the call. As a reminder, during today's call, Zai Lab will be making certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our business plans and objectives and timing and success of our clinical trials, our sales and revenue forecasts for our products and product candidates, regulatory applications, and commercial launches. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance upon them. These statements are subject to numerous risks and uncertainties, and actual results could differ materially from what we expect due to a variety of factors, including those discussed in our SEC filings. At this time, it is my pleasure to turn the call over to Zai Lab's Founder, Chairperson, and Chief Executive Officer, Dr. Samantha Du.

Samantha Du (Founder, Chairperson, and CEO)

Thank you, Billy. Hello, everyone, and thank you all for joining us today. The third quarter marked another period of strong execution across our company, including revenue growth, continuing and significant progress in our NDA's and late-stage pipeline and business development. Over the next few quarters and years ahead, I have little doubt that we'll continue to strengthen the company through growth and productivity. Before I get into specific details, I would like to say that I'm very proud of all of our employees across the globe, especially regarding Zai's ability to deliver time and time again, no matter what challenges present themselves. We have built a great culture at Zai focused on innovation to bring transformative medicines to address unmet medical needs. Fundamentally, we have a very productive year so far, and we are anticipating finishing 2022 having delivered on all of our key corporate priorities.

We continue to demonstrate resilient revenue growth in the third quarter, despite some ongoing challenges from COVID in certain regions in China. We expect to deliver significant revenue growth for years to come. Our broad late stage development candidates continue to see strong advances, highlighted by our agreement with the NMPA on development plan for the KarXT for a bridging study with schizophrenia in China. On the business development front, we recently announced a strategic collaboration with Seagen for TIVDAK, which strengthens our ability to address unmet medical needs in women's cancer in China. In addition, we expect to realize significant synergies given our existing commercial infrastructure and strategic positioning in this important disease area. In summary, we remain confident in the fundamental strengths of our business and our ability to create significant shareholder value. With that, I would like to turn the call over to Josh. Josh?

Josh Smiley (President and COO)

Thank you, Samantha. It's been an exciting first quarter as Chief Operating Officer of Zai. Although we currently face some challenging global economic headwinds, to echo Samantha's sentiment, it has been amazing to see the focus and determination of everyone at Zai to continue to deliver on our mission of bringing transformative medicines to patients in China and around the world. The fundamental drivers of value at Zai Lab are strengthened by our experienced leadership team, global talent, and first or best-in-class pipeline. We announced last month that Alan Sandler had left Zai, and we expect to name a new head of global oncology development soon. I'm very excited to support Samantha on the operational side as she personally leads our global oncology function in the interim. I'm also very excited to welcome Dr. Peter Huang to Zai Lab to lead and oversee our discovery efforts in translational medicine.

Peter joined the company from Zentalis Pharmaceuticals this week and has a strong track record in leading internal discovery research as well as external collaborations. We look forward to driving innovation in drug research and development under his leadership. I also had the opportunity to welcome Alette Verbeek to Zai last month as Senior Vice President, Head of Global Strategic Partnering. Alette joined the company from Novartis, and she is our first employee based in Europe. She is responsible, among other things, for leading our European business development efforts. Beyond our commercial progress, which Samantha touched on, I'm excited to highlight key business development updates from the third quarter, especially our new regional and highly synergistic collaboration with Seagen for TIVDAK. As many of you know, TIVDAK is the first and only ADC approved in the U.S. for the treatment of adult patients with recurrent or metastatic cervical cancer.

This collaboration further strengthens our oncology leadership in China, particularly in women's cancer, where we have established a strong sales team and portfolio, including ZEJULA and others. We will leverage such leadership as our team works to commercialize and accelerate patient access to TIVDAK in China. We will join the ongoing global TV 301 phase III confirmatory study and certain potential global studies and other indications. Of course, we continue to evaluate other business development opportunities as well, including potentially transformative opportunities and partnerships for our global pipeline. We've been very disciplined historically and plan to be even more selective in the future in terms of quality deals that are synergistic with our existing portfolio. In terms of commercial progress, we continue to see strong revenue growth led by ZEJULA.

As you may be aware, in October, the FDA expressed some concerns to our partner, GSK, regarding the overall survival data from GSK's NOVA study in the U.S. and the approved indications for Zejula in the U.S. in the recurrent ovarian cancer setting. GSK is currently considering the FDA's feedback and appropriate next steps, but I'd like to highlight today that we do not expect this development to impact our full approval of Zejula in the second-line all-comer setting in China. Notably, unlike GSK's U.S. approval, which was based entirely on GSK's NOVA study, the NMPA's full approval of Zejula in the recurrent ovarian cancer setting is based on a separate study, the NORA study, which is a phase III randomized double-blind placebo-controlled study of Zejula that the company independently conducted in China. While the NORA study is not fully mature to date, we are seeing favorable trends in overall survival.

We also do not anticipate any impact to our first-line ovarian cancer ZEJULA indication in China. The FDA's discussion with GSK does not apply to this indication. This first-line indication is the largest ovarian cancer market opportunity for Zai, accounting for over 60% of ZEJULA's revenue in 2022 in China, and we expect this percentage to increase through the remainder of this year and beyond. Moving to clinical developments for our other oncology assets, most recently at SITC, we showcased two assets with our internally developed pipeline with global rights, including presentations on two key early stage global programs. ZL1211, an anti-Claudin 18.2 antibody, and ZL1218, an anti-CCR8 antibody. For ZL1211, we presented data showing enhanced antitumor activity combined with standard of care chemotherapy in vivo animal models.

For ZL-1218, beyond what was presented in the AACR earlier this year, the data supports ZL-1218 depleting Treg cells from human tumor samples in vitro and in vivo animal models, and our single-cell RNA sequence data indicates that ZL-1218 targets the highly suppressive Treg populations. In November 2022, our partner Blueprint Medicines presented an update on the phase I/II SYMPHONY trial. The data supports the plan to develop BLU-945 in combination with osimertinib in first-line EGFR L858R mutation-positive non-small cell lung cancer. EGFR mutation is one of the most common mutations in non-small cell lung cancer, especially in China. We work closely with Blueprint Medicines to accelerate the global development and potentially change the treatment landscape for EGFR mutated non-small cell lung cancer patients in China.

Further, in September 2022, our partner Mirati presented results from KRYSTAL-1, a multi-cohort phase I/II study evaluating adagrasib with or without cetuximab in patients with advanced colorectal cancer harboring a KRAS G12C mutation at ESMO. We believe the data continue to demonstrate that adagrasib is potentially a best-in-class KRAS G12C inhibitor in CRC. Looking ahead, Mirati expects potential U.S. FDA approval and commercial launch in the United States for adagrasib as the treatment for patients with non-small cell lung cancer harboring this, the KRAS G12C mutation, who have received at least one prior systemic therapy with a PDUFA target action date of December 14, 2022. We remain confident that adagrasib in China can be both first in class and best in class.

We'll try to accelerate the regulatory pathway for second-line plus non-small cell lung cancer monotherapy by leveraging the global data package for the FDA approval, the ongoing PK study in China, and the global confirmatory KRYSTAL-12 study, which Zai Lab joined in the second quarter of 2022. We also recently launched our Trust report. This report provides updates on our environmental, social, and governance, or ESG, commitments and activities since the release of our ESG report last year and describes our latest ESG strategy, which we are calling Trust for Life.

Zai's Trust for Life strategy includes three commitments to improve human health, create better outcomes, and act right now. As part of our commitment to improve human health, we seek to reach 1 million patients with Zai medicines by 2030. Now I will turn to Dr. Harald Reinhart to discuss progress in our autoimmune and neuroscience therapeutic areas. Harald.

Harald Reinhart (President and Head of Global Development, Neuroscience, Autoimmune, and Infectious Diseases)

Thank you, Josh. I'm excited for the opportunity to share with you today the progress across our autoimmune, neuroscience, and anti-infective therapeutic areas. Let's start with Vyvgart or efgartigimod. On the regulatory front, we are happy to share that our partner, argenx, continues to make excellent progress. With the FDA, argenx recently announced the submission of a BLA for efgartigimod SC subcutaneous for the treatment of generalized myasthenia gravis or gMG in adult patients. As a reminder, we at Zai Lab submitted a BLA for efgartigimod IV intravenous for the treatment of patients with gMG in China in the second quarter and expect approval next year. On the EMA front, argenx also announced that the European Commission has granted marketing authorization for Vyvgart as an add-on to standard therapy for the treatment of adult patients with gMG who are acetylcholine receptor autoantibody positive.

Zai continues to support VYVGART on indication expansion in China and worldwide, and we soon expect to launch the proof of concept trials in two autoimmune renal diseases. Moving to KarXT, the combination of xanomeline and trospium, which we are developing with our partner Karuna in acute schizophrenia. Zai Lab has obtained agreement with the NMPA on the development plan for a bridging study in China. If you recall, results from Karuna's EMERGENT-2 trial were released this August.

This pivotal trial met primary endpoint, with KarXT demonstrating a statistically significant 9.6 reduction in PANSS total score compared to placebo at week five. In addition, Karuna initiated the phase III ADEPT-1 study evaluating KarXT as a treatment for psychosis in Alzheimer's disease, and has completed enrollment in the phase III EMERGENT-3 trial in schizophrenia. Karuna expects top-line data from the phase III EMERGENT-3 trial in schizophrenia in the first quarter of 2023.

Lastly, our internally developed topical IL-17 product, ZL-1102, continues to progress towards initiation of a global phase II study in chronic plaque psoriasis in the fourth quarter of 2022, subject to further feedback from regulators. We recently presented the results of the phase I proof of concept study for ZL-1102 at the 2022 European Academy of Dermatology and Venereology Congress. Regarding our anti-infective portfolio, we had several noteworthy developments. For ZL-2402 or XACDURO, we are on track to submit an NDA for the treatment of Acinetobacter baumannii infections to the NMPA by the end of this year. For omadacycline, NUZYRA, we plan to initiate post-approval commitments for this next year and have started the dialogue with CDE about operational details. Now Billy will speak about progress with our commercial products and financial results. Billy.

Billy Cho (CFO)

Thank you, Harald. Zai Lab continues to execute well with strong results delivered in the third quarter. For the three months ended September 30, 2022, our total revenues were $57.5 million, compared to $43.1 million for the same period in 2021, representing year-over-year growth of 33%. Net product revenues for the period were $39.2 million for ZEJULA, compared to $28.2 million for the same period in 2021, representing 39% growth. $10.7 million for Optune, which we expect to resume its growth trajectory this quarter. $5.5 million for Qinlock, compared to $4.3 million for the same period in 2021, and $1.5 million for NUZYRA, compared to nil for the same period last year.

We believe Qinlock and NUZYRA are on track to enter negotiation with the NMPA regarding potential inclusion in the NRDL by the end of the year. R&D expenses were $99.5 million for the three months ended September 30, 2022, compared to $55.1 million for the same period in 2021. The increase in R&D expenses were primarily due to the $30 million upfront payment for the Seagen deal in the third quarter of 2022, along with increased expenses related to ongoing and newly initiated clinical trials and higher payroll and payroll-related expenses from increased R&D head count and share-based compensation. SG&A expenses were $66.6 million for the three months ended September 30, 2022, compared to $59 million for the same period in 2021.

The increase was primarily due to payroll and payroll-related expenses from increased commercial and general and administrative headcount and share-based compensation as Zai Lab continues to enhance infrastructure and commercial operations for the many new drug approvals and launches, and deliver strong top-line growth. We expect our net product revenue to exceed cost of goods sold and commercial expenses in 2023. Net loss was $161.2 million for the three months ended September 30, 2022, compared to $96.4 million for the same period last year. The increase in net loss was primarily due to $30 million upfront payment for the new collaboration and license agreement with Seagen, and an increase in foreign exchange loss of $36.7 million, which is a non-cash adjustment.

Net loss per ordinary share during the three months ended September 30, 2022 was $0.17, compared to $0.10 for the same period in 2021. Net loss per ADS during the three months ended September 30, 2022 was $1.68, compared to $1.01 for the same period in 2021. As of September 30, 2022, cash and cash equivalents, short-term investments and restricted cash total $1.12 billion, which we expect will provide us with cash runway through 2025. We would now like to turn the call back over to the operator to open the line for questions.

Operator (participant)

We would now like to open the line for questions. If you have a question, please press star one and one at this time. Your first question comes from the line of Michael Yee from Jefferies.

Michael Yee (Managing Director, Senior Biotechnology Analyst)

Hi. Good morning. Thank you for the updates. We had two questions. Maybe Samantha or Billy, you could talk a little bit about the fluid dynamics in China as it relates to obviously shutdowns and just general ongoing dynamics even as it relates to say doing business development with U.S. biotechs. For example, I note in the 10-Q, you know, more updates around security measures and, you know, restrictions around cross-border data flow and data information on Chinese patients. So maybe just make some high-level comments about that because it's certainly an issue that has been weighing on investors. That's question number one. Just question number two. I know previously the company suggested NRDL is possible or at least in discussion for devices.

I just wanted to hear an update on that since LUNAR is coming for TTFields and that could be important. Thank you.

Billy Cho (CFO)

Great. Thanks, Mike. Let's I'll probably get started on your first question and then, you know, maybe Jonathan also can kind of chime in on the BD front, and Samantha can make some comments, you know, from any overarching regulatory point of view. We'll move on to your second question. Now, in relation to the COVID situation or, the challenging operating environment due to the ongoing flare-up, it is reality. We've been talking about it and I'm sure you've seen it. It's more like a global phenomenon and, you're spending a lot of time covering it.

Now, this year, you know, starting and really from early on this year and really throughout, we have been, you know, sort of discussing about, you know, how we've been able to kind of operate and even this environment continue to execute well. We've been able to show great durability and resilience, you know, due to some of the specific kind of creative things that we've been doing. But it is. I mean, you know, Mike, I'm not gonna sugarcoat it. I mean, even probably today you're probably seeing news of flare-ups happening, you know, in China and the continuation of a dynamic zero-COVID policy. So, you know, we expect to have additional, you know, sort of, we're monitoring it very closely. We're staying agile.

We're very confident that we can kind of grind through this environment and we'll hope for the best in terms of, you know, sort of getting, you know, into some sense of normalcy, you know, in the not too distant future. If that happens, we think that we'll be positioned even better. Now in terms of your other question on BD and, you know, are there any sort of geopolitical or regulatory, you know, hurdles for us to continue to do BD deals, and to do, you know, very important strategic, you know, important transactions going forward. Maybe I'll have Jonathan chime in here, and then, you know, Samantha can add if she can.

Jonathan Wang (EVP and Head of Business Development)

Yeah. Mike, just on the second part of that question, the short answer is there has been no impact. You know, last year as you saw we've done many, you know, significant deals. We just announced the deal last month, as Josh said, you know, with a very reputable company, Seagen, you know, for a commercial stage asset. China is the second-largest pharmaceutical market. Whether small companies or big companies, it is too important to miss. It's not only because of the commercial opportunity, more importantly, it's also to help them accelerate their global timeline. I mean, if you look at the companies that do well in China, like perhaps AstraZeneca's and others, I mean, they're contributing 20%-30% of their global, you know, patient recruitment pivotal trials coming from China.

At the end of the day, we are providing important medicine, basic medicine, you know, to patients. We do not think this will be affected, you know, even though there are greater, obviously geopolitical concerns around. So far for Zai, you know, for all of our current deals, our negotiating deals, you know, it is a topic to be discussed, but it's never been a roadblock for us or delaying any of our timelines.

Samantha Du (Founder, Chairperson, and CEO)

Yeah, Michael.

Jonathan Wang (EVP and Head of Business Development)

Yeah.

Samantha Du (Founder, Chairperson, and CEO)

Come back to your number three questions regarding government, NHSA has issued some guidance about including medical device in the national reimbursement. I think they definitely have been trying very hard even though now all the medical devices, innovative ones can get a local government sponsored reimbursement. But putting up international level is really key. So they're talking about in two to three year terms. So it's coming, you know, it's not like they're talking about in five to 10 years terms. Even though on, you know, on the NRDL inclusion, more and more government talk about number ones, how much innovation you have, are you the first in class or best in class. Even specifically this year, highlight for rare disease, for children's disease. So that's all helpful to the positive trend.

Michael Yee (Managing Director, Senior Biotechnology Analyst)

That's great. Thank you. Great news. Thank you.

Samantha Du (Founder, Chairperson, and CEO)

Sure. Thanks, Mike.

Operator (participant)

Thank you. We will move to our next question. The question comes from the line of Yigal Nochomovitz from Citi. Please ask your question.

Yigal Nochomovitz (Director)

Yeah, hi. Hi, Samantha and team. Thanks very much for taking the question. I just wanted to follow up on the comments regarding the NOVA versus NORA comparison that you're making. Obviously, it's encouraging to see the favorable OS trends in NORA. Just a few questions there. Can you comment on the percent maturity of the overall survival in NORA? And are you seeing stronger OS trends in gBRCA or the non-gBRCA group? And then what's your current hypothesis as to why in your China trial, in the NORA trial, so far the OS is trending favorably, whereas obviously in the NOVA trial from GSK, it didn't end up that way. Thank you.

Billy Cho (CFO)

Thank you, Yigal. Josh, do you want to kick it off and others can chime in if needed?

Josh Smiley (President and COO)

Yeah, sure. Good morning, Yigal. Thanks for the question. I think first, in the NORA trial, we'd expect to achieve, you know, the number of events and in 2023. We're you know well along toward maturity, but don't have a specific percentage there. We you know what we can say is at this point, having looked at the data that the you know the numeric trend is you know favorable in both populations. Again, I'd remind everyone that the study was powered for PFS, not OS. We'll you know disclose that data in 2023 when the study is complete.

We take patient safety very seriously, and based on our analysis of the data, you know, given what we had, what we know, from the NOVA study, you know, we feel confident that, there's a positive risk benefit in the data we're seeing from an overall survival perspective, as well. So I think that's, you know, probably the most important thing, and I keep re-emphasizing, we do have a separate study, full phase III, full approval based on PFS.

You know, I think in terms of what, why we may see differences, probably the most significant difference that we know of in the studies is the fact that, you know, we used an individualized dosing regimen in NORA, where, you know, the dosing based on weight and platelet counts between 200 and 300 milligrams. And we think that allows patients to stay on the drug, have fewer side effects and get the full efficacy benefit. That could be one of the reasons. Again, though, as you know, looking at the NOVA study, you know, there's, it was, it wasn't powered certainly for overall survival and, you know, all the challenges that come with crossover and otherwise.

Again, we're confident in the studies that we see in China and confident that we're providing a real and meaningful benefit to patients both in first line and second line allcomer settings.

Yigal Nochomovitz (Director)

Okay. Billy, just on the commercial business, obviously ZEJULA had another strong growth quarter-over-quarter of 15% similar to last quarter. You know, is the conclusion that the COVID headwinds, and I know given the comments you made earlier, but just in general, do you think the COVID headwinds are pretty much behind us? And when would you feel comfortable giving the initial revenue guidance for ZEJULA? And then for Qinlock, obviously there was a very, very strong rebound over the second quarter. If you could elaborate a little bit on the dynamics there. And then finally for Optune, obviously you said you reflect, you know, year-over-year, it's been down a little bit relative to the first half. So can you just give us some thoughts as to how that trajectory will evolve? Thank you.

Billy Cho (CFO)

Yeah. Thank you, Yigal. On ZEJULA, you know, I think, I mean, look, we're still in a challenging operating environment as we've talked about before. You know, we've been able to navigate this well. We expect to continue to navigate it well. While we don't give, you know, guidance on specific revenue and margins, et cetera, at this time, we feel very good about, you know, reiterating our statement that ZEJULA is positioned to be the market share leader by no later than next year. You know, we look forward to delivering that on that goal. On Qinlock, you're right, we had a great quarter in third quarter.

Now, if you recall in the last earnings, we mentioned that we adjusted the pricing to prepare for the NRDL negotiations. Clearly, that helped sort of you know kind of initial demand right off the bat. It continues to be endorsed you know as a within the best practice guidelines not only in advanced line, but even in earlier lines as well. It actually got a little bit of an upgrade on second line, so that could help build awareness for Qinlock. We look forward to getting over the hurdle if we can with NRDL. Let's see if we can get to the rational pricing level that we like or that we can accept. Next year, if under those circumstances, we should have good trajectory.

I think Yigal, you were asking about Optune on the last piece, and you're right. We had a flat, you know, flat quarter year-over-year, you know, at just shy of $11 million. And as you heard from the opening remarks, we do expect to resume growth in fourth quarter and position ourselves well for 2023 and beyond. You know, what really has been going on for Optune, as you may know, is Optune has, you know, it's been the market access strategy has been around in the top cities, you know, supplement insurance is very helpful, and that's a real growth area, and in the large hospitals.

When you have you know, cities like Shanghai, which is in the past, but even like Chengdu, right? It's going to you know, have a more of an impact than, let's say, a nationally reimbursed you know, treatment option like St. Jude, where we have more you know, kind of strategies to maneuver. I think those are the comments that we would like to kind of message to you.

Samantha Du (Founder, Chairperson, and CEO)

Yigal Nochomovitz, there are 2 things that I would like to add here. First of all, I don't think we can claim the COVID situation is over, especially the quarantine situation is still not over. Number 2, in terms of Optune, the major reason is cost, not only we say it's the COVID, right? Also because all the major hospitals now, very few people can take surgery. So surgery has to go through a very stringent, you know, analysis and waiting for COVID testing reports, all of that. Bottom line is that there's less surgery taken on the. Because we usually say if the patients took a surgery, then we'll put it on, right?

This is also another reason, you know, year-over-year, we didn't see a significant growth or even further growth.

Yigal Nochomovitz (Director)

Got it. Thank you.

Operator (participant)

Thank you. We will take our next question. The question comes from the line of Anupam Rama from JPMorgan. Please ask your question.

Anupam Rama (Managing Director and Senior Equity Analyst)

Hey, guys. Thanks so much for taking the question. Two really quick ones from me. The $1.2 billion of cash, one question we frequently get is kind of what is the cash runway sufficient to? And then on ZL-1102, the internal pipeline program, I think, correct me if I'm wrong, this will be the first global study that Zai Lab conducts on its own. How should we think about the geographic breakdown of this study as you think about Asia, U.S., E.U., and other regions? Thanks so much.

Billy Cho (CFO)

Thanks, Anupam. We'll give the second question to Harald. On your first question on cash runway, we feel pretty good about having runway through 2025, as we stated. You know, our revenue, even this environment, we have a durable, resilient revenue curve, we expect to see that. We just flat out think that, you know, the demand is there, and we see it. Now, we have some on the supply side issues with COVID, but the demand is clearly there for our portfolio and the drugs that we're trying to bring in. We feel pretty good about that. By the way, that's including, you know, BD deals along the way, on an annual basis.

With that, I'll hand it over to Harald on the second question on 1102.

Harald Reinhart (President and Head of Global Development, Neuroscience, Autoimmune, and Infectious Diseases)

Yeah. Hi, this is Harald. You're absolutely correct. This is the first Xy program, which is global, is to go into phase II. It is a drug which we've developed in-house and which has, as you remember, had a very nice proof of concept readout. We are anxious to move into phase II, and we have selected certain territories, North America being one, Asia being another one, Australia being another one. We do believe that we can place the study in various territories, and we are just awaiting the feedback from regulators as to where and in what sequence to place it.

Anupam Rama (Managing Director and Senior Equity Analyst)

Thanks so much for taking our questions.

Harald Reinhart (President and Head of Global Development, Neuroscience, Autoimmune, and Infectious Diseases)

You're welcome.

Operator (participant)

Thank you. We will move to our next question. Please stand by. The question comes from the line of Ziyi Chen from Goldman Sachs. Please ask your question.

Ziyi Chen (Managing Director)

Good morning. Thank you for taking my questions. Two questions. The first one is really on the expense control, 'cause in the past nine months, three quarters, we have seen company have been controlling the OpEx pretty well. Just as Billy mentioned, now you are really extending the cash runway to 2025. We try to understand a bit more on that. What you have done, are you freezing the headcounts or laying off some of the people? And also, have you deprioritized terminating any of the projects? We're trying to understand how you actually achieve that. And more importantly, looking forward, like 12 months, what are the major milestone payment you could potentially pay out and how big that could be?

Second question is really on KarXT. I think you have agreed with CDE that you're gonna run a bridging study. Trying to understand on, you know, how you're gonna design the trial in China and how long does it take for the bridging study to be completed in China and for the potential regulatory filing. Particularly, KarXT is gonna be targeting very different therapeutic areas compared to oncology portfolio you have. In terms of the future commercial strategy, what is your current thinking of that? Thank you.

Billy Cho (CFO)

Hey, Ziyi. Thanks for your questions. I'll take the first and give the KarXT question to Harald. I mean, the controlling the expenses, you know, topic. I mean, we are, you know, the investments that we made and the progress we've made allows us to really not only maintain growth, but also, you know, get into increases in productivity as well. Clearly you see that, you know, this year. But I would say that in terms of, you know, prioritizing our resources, it's really embedded, sort of in how we operate the business and really in our culture.

Even if you go back a couple of years, you would have seen us talk about very quickly being able to prioritize the resources and, you know, even our prioritizing certain programs ahead of others. If you look back, you'll see that cadence and, you know, more specifically this year as an example, over the past two, three sort of filing cycles. We also announced some programs that we have elected to be prioritized so that we can make sure to, you know, continue to grow, you know, and we're making good advances on the mid to late stage clinical programs and also the optimal members that's kicking in into our commercial strategy. You know, I think that'll continue.

You know, we feel pretty confident about that going forward. I think the second, the Part B of that question was on milestone payments. Now, we don't disclose in our filings, you know, the breakdown of the details on milestone payments, but I can tell you, I think there's a kind of a confusion. You know, a lot of people get confused with, you know, these kind of what we call biobucks in the industry, right? You see, you know, pretty big numbers, $200 million, over $1 billion in some of these strategic deals.

What I can tell you is that, you know, while we don't give guidance like next year or over the next 12 months, you know, all the payments related to, you know, development or milestones that we have in our pretty broad portfolio, I would just basically say that it's less than a typical upfront payment for a deal, right? Including the most recent one we did with Seagen. If you just kind of. So I'll just kinda give that framework. The main messaging being, you know, it's in, you know, the actual payment that goes out is quite, you know, quite sensible. And non-material, which is also why we don't have to disclose it, right? 'Cause if it was material, we would.

I'll now turn it over to Harald for the second question on KarXT.

Harald Reinhart (President and Head of Global Development, Neuroscience, Autoimmune, and Infectious Diseases)

Yeah. Thank you. The KarXT situation is really evolving. We have, as you said, reached agreement after negotiations with the CDE on a bridging program, bridging study for China. That study, we have currently an agreement, and we are waiting the formal approval for that, and once that is in-house, we will start the program. We are currently thinking of a study program, and I cannot go into great details, but I can say this much, that it will be very similar as a study design as the EMERGENT studies that you know. There are two identical EMERGENT studies, the EMERGENT-2, which just read out, and EMERGENT-3, which is a copy of EMERGENT-2. We will try to mimic that, with slight modifications as needed. The design is clear.

The structure and the requirements that the regulators have on us is also fairly clear. You know, these are acute schizophrenia studies. Nowadays, they take a total of five weeks to execute the actual study, but obviously there is a follow-up. As far as the portfolio, I think there was some question about that. This is the first study in the area that we call neurosciences. We clearly have an interest to get into neurosciences with several of our other programs. Neurosciences is, for instance, quite dominant on the efgartigimod side of things because we are running a CIDP study there. We are running obviously gMG. We are very familiar with the space as such and have the context in this space. Thank you.

Ziyi Chen (Managing Director)

Got it. Thank you.

Operator (participant)

Thank you. We will take our next question. The question comes from the line of Jonathan Chang from SVB Securities. Please ask your question.

Jonathan Chang (Analyst)

Hi, guys. Thanks for taking my questions. First question on TIVDAK. Can you discuss your views on the opportunities both in cervical cancer and other tumor types, and how much of a headwind or not the ocular toxicities associated with the drug are? On the second question, on the business development front, this has been a quieter year than in the past. Can you provide some color on the considerations for this year and how you're thinking about additional in-licensing opportunities moving forward? Thank you.

Billy Cho (CFO)

Hey, Jon, do you wanna take these questions from Jonathan?

Jonathan Wang (EVP and Head of Business Development)

Sure. Thanks for the question, Jonathan. You know, first, on the first question, the ocular toxicities that TIVDAK has shown are, you know, pretty low-grade ocular toxicities. So, you know, it's, I think, a lot more benign than, you know, some of these other ADCs. And these ocular toxicities, you know, can be easily managed, you know, through your typical eye drops. So, you know, I think the safety profile is actually pretty good for this ADC. And then TIVDAK, you know, it's a first-in-class product, and it's a product which especially in China is very relevant, because cervical cancer is today 110,000 annual incidence. It has the highest mortality of all the, you know, women's, you know, oncology diseases.

You know, especially relevant in China because Gardasil is only approved more recently. You know, for Gardasil and the vaccines to really drive down cervical cancer incidence, it's gonna take decades, you know, because these patients sort of emerge with the disease, you know, in their fifties. You basically have to fast-forward at least 10, 20 years for that really to take effect. We view the incidence is gonna continue to grow. There is a limited number of treatment options. IO is really the only other product that's available here. You know, we believe TIVDAK, a targeted therapy, you know, will be widely used by physicians, in an area with high medical need, you know, in cervical cancer in China.

I think, you know, the other thing is for Zai, you know, there's a lot of synergies because we don't have to add any, you know, sales force. We can just, you know, tag along with our, you know, niraparib ovarian cancer sales team. You know, I think that side is also very advantageous for us, you know, given the relationships we have. Now, on the second question, you know, for business development, you know, first, you know, there are variabilities throughout the year. I mean, last year we had a, you know, at least from a quantity perspective, a lot more deals, and we did, you know, a number of very significant transactions.

You know, admittedly, you know, products like efgartigimod, like KarXT, you know, adagrasib, you know, they don't come every year. You know, first of all, you know, I think there are variability because of that. I mean, we always have a very high standard, you know, when we're bringing assets. It has to be globally competitive, globally differentiated assets. You know, that's first and foremost. Now within that broader context, you know, obviously this year, you know, everybody, because of the capital market, you know, we have to be extra cautious. We are taking approaches as we look internally, as we look externally, to add this additional lens because, you know, we do have a very broad and diverse pipeline today. We have a lot of products to support our growth.

You know, our share price unfortunately, you know, is not where we hope it can be. We have to take that into consideration, you know, as we look at new BD opportunities as well. Look, if there's another asset like efgartigimod, like KarXT, we will be aggressive, and we will bring it in. In addition to these regional opportunities, you know, we have global opportunities today because today's market is different from last year's from a business development perspective. There are more opportunities that may offer rights which may not be available in past years, including global rights, including, you know, 50/50 global rights, that biotechs in the United States and in China may be interested in because of the conditions.

You know, I think as Josh also made in his remarks, you know, we are also looking at other types of deals which, you know, can we help other types of companies to bring broader portfolio assets, you know, to help them in China from a development as well as a commercial perspective. We are busy. Stay tuned. You know, I'm sure you'll hear more from business development, you know, over the next few months.

Jonathan Chang (Analyst)

Got it. Thank you.

Operator (participant)

Thank you. We will take our next question. The question comes from the line of Seamus Fernandez from Guggenheim Partners. Please ask your question.

Seamus Fernandez (Senior Managing Director)

Oh, great. Thanks for the question. Just, two quick ones. Just as we think about the KarXT opportunity, just hoping that you guys could frame that opportunity for us in terms of the size of the market opportunity again, and perhaps when we might see a possible entry into the Chinese market in China. Just the last question is, you know, specific to the LUNAR study. Can you just help us understand what the timeframe is and if that were to fail, how your investment behind that program would work out? Thanks so much. Bye.

Billy Cho (CFO)

Hey, Seamus, thanks for your question. I'll address your second question first, and then I'll hand the second one to Jonathan on the KarXT opportunity in China. For LUNAR, I mean, there's actually multiple shots on goal. LUNAR is pretty significant. You know, milestone is coming up pretty soon, you know, probably early Q1. You know, I think we'll go from there. Samantha spoke previously about an opportunity to even get national reimbursement in the future. You know, if everything goes well, this will be a real, you know, sort of step change. You know, we're talking about, you know, in a pretty big quantum step change in the real opportunity, in the mass market opportunity here for Tumor Treating Fields.

Now, Seamus, to your question, if LUNAR, you know, data, you know, is not cooperative, you know, there are other shots on goals as well, right? There's, you know, global phase III trials going on right now in pretty advanced stages and progressing across pretty large tumor types as well. You know, is LUNAR important? Yes. Is this, you know, kind of be all, end all? You know, certainly not. But, you know, we're hoping for the best. We remain cautiously optimistic. We'll make a data-driven decision regardless.

Samantha Du (Founder, Chairperson, and CEO)

Yeah. I think with or without LUNAR's success. I don't think it should hurt Zai Lab considering whatever market valuation we're at.

Jonathan Wang (EVP and Head of Business Development)

Hi, Seamus. It's Jonathan. Maybe also to address your first question on KarXT. Look, I think it's a pretty sizable market opportunity. There are 8 million schizophrenia patients in China. Obviously there are other indications which we're working with Karuna to expand. The lead indication, schizophrenia, there are 8 million patients, of which 4 million are currently getting active treatment, you know, on the registry. And so, you know, I think you know the product profile well because, you know, I think not only on the safety side, but on the efficacy side for both the positive and the negative symptoms, there are differentiations.

Given the product profile, given that in this sector there has not really been something innovative, something, you know, this impactful on these different dimensions, I think this product will make a pretty significant impact once we launch it. This market is also very concentrated. You know, the psychiatric hospitals and some of the neurology departments in the larger hospitals, you know, you do not need a large sales team to cover it. You know, we believe looking at other players in this market, you know, you're looking at probably about 200 FTE sort of sales force. We also have coverage in many of these hospitals, you know, with our neurology franchise, with our oncology then. I think there are definitely synergies there.

From a timeline perspective, I think, you know, Harald already mentioned, I mean, we only need to do one abbreviated bridging study. It's a pretty, you know, quick and, you know, simple path forward, and we'll give more guidance, you know, as we start that study.

Operator (participant)

Thank you. I will now turn back over to Zai Lab CEO, Samantha Du, for closing remarks.

Samantha Du (Founder, Chairperson, and CEO)

Thank you, operator. I would like to thank everyone for taking the time to join us on the call today. We appreciate your support and look forward to updating you again in the next quarter. Operator, you may now disconnect this call.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.