Hello, ladies and gentlemen. Thank you for standing by and welcome to Zai Lab’s Fourth Quarter 2021 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 Mr. Billy Cho, Chief Financial Officer of Zai Lab, who will make introductory comments..

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 12 months ended and fourth quarter ended December 31, 2021, as well as product highlights and corporate update.

The press release is available in the Investor Relations section of the company’s corporate 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 will be joined by Dr.

Alan Sandler, President and Head of Global Development, Oncology, who will discuss advances with our oncology product candidate; Dr.

Harald Reinhart, President and Head of Global Development, Neuroscience, Autoimmune and Infectious Diseases, who will speak about progress we’ve made in those three therapeutic areas; and I will discuss the performance of our market products and conclude with comments on our financial results.

Additional executive 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 that could cause actual results to differ materially from what we expect.

I refer you to our SEC filings for a discussion of risk factors that could cause our actual results to differ materially from those discussed today. 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..

Thank you, Billy. Hello, everyone and thank you all for joining us. On this call, I'll discuss highlights from our 2021 and what we expect to accomplish in 2022. 2021 marks another year of strong growth and execution for Zai Lab. We significantly expanded our portfolio of potentially first-in-class and/or best-in-class assets.

We made meaningful advances with our global pipeline of 11 assets, including achieving proof of concept for ZL-1102, our internally developed anti-IL-17A Humabody for chronic plaque psoriasis for global rights.

Through business development, we deepened our world-class gastric lung cancer franchises with four additional promising drug candidates, including adagrasib. We bolstered our autoimmune franchise with efgartigimod, a pipeline-in-a-product opportunity; and we expanded into neuroscience with an exciting anchor asset KarXT.

We achieved additional regulatory submissions and approvals, including our first non-oncology approval with NUZYRA. Our commercial execution continues to gain strong momentum for our four marketed products.

We’re pleased to have ZEJULA included in the NRDL for first-line ovarian cancer maintenance treatment, and we expect it to become the leading PARP inhibitors in ovarian cancer in China, given its unique label for ovarian cancer patients, regardless of Biomarker status.

Last, but not least, we further grew our talented global team, both in the United States and China, building a solid foundation for continuing growth and execution who has set clear strategic priorities for 2022 to position ourselves to lead the next wave for biopharma innovation.

First, we will expedite bringing medicines to patients by accelerating the important data results in regulatory filings across our entire portfolio.

We plan to file the NDA for Efgartigimod in China in mid 2022, subject to ongoing discussions with an NMPA and to initiate a China registrational study for Bemarituzumab, the first line gastric cancer in Greater China. Second, we will continue to invest in R&D and advance our internal pipeline with global rates.

We plan to move our ZL-1102 into full global development and submit up to two INDs, both internally developed compounds with global rates in 2022.

Lastly, we leverage our leading position in China to accelerate our growing revenue base into source innovation internally and externally, with potentially transformative access and partnership opportunities. Our mission is to build a leading global biopharmaceutical company.

Looking ahead, we plan to have at least 15 market products approval in more than 30 indications by '25. We believe that the regulatory environment will continue to be supportive of innovative drug pharma companies like Zai Lab.

We're also confident in the long term market potential of our differentiated work class portfolio, designed to address significant unmet medical needs and to create significant value for all of our constituents, including our shareholders.

For example, we're currently forecasting that peak sales of the current assets in our long and key icons are fantastic to generate up to a combined total of 2.5 billion to 3 billion through 2030. And now, I'll turn the call over to Dr. Alan Sandler. Alan..

Thank you, Samantha. Zai Lab’s oncology franchise continued to make progress on all fronts in the fourth quarter, and we expect them a busy productive year in 2022. For Adagrasib, the FDA recently accepted the NDA filed by Mirati in second line, non small cell lung cancer in the United States with a PDUFA date of December 14, 2022.

In January of this year, Mirati announced exciting clinical data from a Phase 2 cohorts of the KRYSTAL-1 study in patients with KRAS G12C-mutated GI cancers, revealing a 41% objective response rate and 100% disease control rate in the 27 valuable patients.

In addition, at ESMO, in September, Mirati reported the top line results of the Phase 2 cohorts in the KRYSTAL-1 study.

In this study, patients with second-line non-small cell lung cancer harboring the KRAS G12C mutation were treated with adagrasib monotherapy at 600 milligrams BID, revealing a 43% objective response rate and an 80% disease control rate.

The safety and tolerability profile was consistent with previously reported findings for adagrasib in patients with advanced non-small cell lung cancer. In addition, Mirati reported positive clinical data from a cohort of the Phase 1/2 KRYSTAL-1 study in patients with heavily pretreated colorectal cancer harboring the KRAS G12C mutation.

These results showed that adagrasib alone and with cetuximab demonstrated significant clinical activity and broad disease control in these patients. These results are very encouraging and reinforce our view that adagrasib has the potential to be a best-in-class compound for patients with KRAS G12C mutation.

We plan to join global Phase 3 studies in second-line plus non-small cell lung cancer and second-line colorectal cancer in mid 2022. Moving to bemarituzumab. We plan to initiate a China registrational study in first-line advanced gastric and gastroesophageal junction adenocarcinoma in Greater China in 2022.

Bemarituzumab is a first-in-class FGFR2b inhibitor with a sizable market opportunity in Greater China. There are no approved therapies specifically for these patients in China.

For tumor treating fields, Zai Lab partner Novocure anticipates topline data from the Phase 3 pivotal LUNAR clinical trial testing the efficacy of TTFields together with physician’s choice immune-checkpoint inhibitor or docetaxel for the treatment of patients with stage 4 non-small cell lung cancer by year end 2022 You will recall that in May 2021, the FDA accepted the IDE supplements submitted by Novocure that incorporated recommended changes from the interim analysis of the LUNAR trial conducted by an independent Data Monitoring Committee, including reductions in the sample size to 276 patients and in the follow-up period to 12 months.

We believe that this protocol change is a reason for optimism. For margetuximab, we filed an NDA in HER2-positive breast cancer with the NMPA in December, and the filing was accepted.

MARGENZA is an Fc-engineered antibody molecule developed by MacroGenics as an antagonist of a HER2 receptor and has been approved by the FDA to be used in combination with chemotherapy for the treatment of patients with metastatic HER2-positive breast cancer following treatment with two or more anti-HER2 therapy.

Zai conducted a bridging study of margetuximab, in combination with chemotherapy in advanced previously treated HER2-positive breast cancer that met its primary endpoint of median progression-free survival, as defined by achievement of at least 50% of the efficacy of margetuximab plus chemotherapy in the SOPHIA study.

The safety profile of Margetuximab plus chemotherapy was acceptable and consistent with vaccine in the SOFIA trial. Moving to our internal research and development program, you will recall from our R&D Day last year that we embrace an open innovation model.

Our goal is to file at least one IND per year, and in 2022, we plan to submit up to two INDs for compounds with global rights With an abundance of potentially best-in-class and first-in-class products, we are very excited about our oncology pipeline in Zai Lab.

And now, I will turn the floor over to Harald Reinhart to discuss progress in our Neuroscience, Autoimmune & Infectious Diseases therapeutic areas.

Harald?.

Yes. Thank you, Alan. The fourth quarter for ourseveral very encouraging new developments; clinical and regulatory in our Autoimmune & Infectious Diseases franchise and added a new therapeutic franchise Neuroscience. I’ll start with autoimmune diseases in Efgartigimod.

We had a positive meeting with the NMPA on Efgartigimod to chase the potential for accelerated regulatory approval for generalized myasthenia gravis in China. Subject to further discussion with the NMPA, we expect to file the BLA in mid-2022. Zai’s partner argenx received approval for Efgartigimod in gMG in the United States in December 2021.

And we initiated clinical trials for Efgartigimod in China for other indications; primary immune thrombocytopenia - ITP, chronic inflammatory demyelinating polyneuropathy - CIDP, and pemphigus as well as a pharmacokinetic study. Next, I'll talk about ZL-1102. Zai Lab’s internally developed novel human VH antibody fragment.

ZL-1102 is potentially the first IL-17A targeting topical treatment for patients with mild-to-moderate plaque psoriasis. Last fall ZL-1102 achieved proof-of-concept in a Phase 1b study and is now advancing into global clinical development.

We believe this is the first study to ever demonstrate penetration of a protein biological through psoriatic skin, resulting in a clinical response. Skin penetration was demonstrated by changes in transcriptome for inflammatory markers.

With regards to efficacy, topical ZL-1102 resulted in a 45% relative clinical improvement in local PASI score and improvement in erythema and scaling in target lesion size and improved responder rates. Clinically, we observed an early onset of action and consistent improvement over time.

ZL-1102 had a benign safety profile comparable to placebo with treatment emerging adverse events is where fewer number in mild. Pharmacokinetic studies confirmed lack of systemic absorption. Psoriasis affects approximately 125 million people worldwide, of which 80% to 90% suffer from chronic plaque psoriasis.

As 70% to 80% of these patients have mild to moderately severe disease, it's a strong rationale and patient need to develop a topical formulation with IL-17 directive therapy that worked directly on the lesion and avoids systemic exposure. Current topical therapies provide limited efficacy or have safety issues with long-term use.

Moving on to infectious diseases, our partner, Entasis announced positive top line results for Sulbactam-durlobactam known as SUL-DUR from the global Phase 3 registrational ATTACK trial. This trial evaluated the safety and efficacy of SUL-DUR versus colistin in patients with serious infections caused by Acinetobacter baumannii.

SUL-DUR achieved the primary endpoint of statistical non-inferiority in 28-day all-cause mortality. Most patients had pulmonary infections with carbapenem-resistant Acinetobacter baumannii known as CRAB. In addition, SUL-DUR met the primary safety objective of the study, achieving a statistically significant reduction in nephrotoxicity over colistin.

SUL-DUR is the first investigational drug to demonstrate efficacy against CRAB in a prospective, well-controlled clinical trial. CRAB infections are amongst the worst bacterial infections. Safe and effective treatment options are almost nonexistent.

As a narrow spectrum antibiotic SUL-DUR targets CRAB bacteria preferentially, thus potentially avoiding the collateral damage associated with broad spectrum antibiotics. We look forward to bring this drug to China and Asian Pacific where severe CRAB infections are frequently seen in ICUs and associated with high mortality.

We expect to file SUL-DUR with regulators in China in the fourth quarter of 2022. As Samantha mentioned, we received approval for omadacycline NUZYRA for CAP or Community-acquired pneumonia and ABSSSI skin infections and launched the product in December.

Billy Cho, we'll have more to say about NUZYRA in a minute in his discussion of our commercial products. And finally, in the fourth quarter, we entered into the neuroscience area with our agreement with Karuna Therapeutics for rights to KarXT Greater China.

KarXT is an oral investigational drug combination consisting of xanomeline and muscarinic antagonist that stimulates M1, M4 receptors in the central nervous system and trospium and approved muscarinic antagonist that reduces the incidence of peripheral GI side effects.

KarXT has already demonstrated clinical benefits in Phase 2 studies in schizophrenia and Alzheimer's disease. In the Phase 2, EMERGENT-1 clinical trial, KarXT demonstrated clinically meaningful and statistically significant improvement in PANSS total score, which is the total positive and negative syndrome scale.

And also in key secondary endpoints, including PANSS positive sub-score, and PANSS negative sub-score. KarXT was well tolerated much better than xanomeline alone. Karuna is evaluating KarXT in late stage clinical trials for the treatment of schizophrenia and psychosis in Alzheimer's disease.

Recently, Karuna also initiated the Phase 3 ARISE trial evaluating KarXT as an adjunctive treatment for schizophrenia in adults, who inadequately respond to atypical antipsychotics. Additionally, Karuna has initiated a Phase 3 study in Alzheimer's patients with psychosis in May 2022.

Results from a Phase 1b trial, in healthy elderly volunteers indicate that standard doses of KarXT can be administered to elderly adults by maintaining a favorable tolerability profile. Zai Lab will work with Karuna to design the optimal strategy to accelerate the development and regulatory timeline of KarXT in China.

Now, Billy will speak about progress with our commercial products in financial results.

Billy?.

Thank you, Harald. In December, the NMPA approved the NDA for NUZYRA, a novel antibody with both oral and intravenous formulations for the treatment of community-acquired bacterial pneumonia and acute bacterial skin and skin structure infections. The product was launched in December.

NUZYRA was approved as a Category 1 innovative drug and it's locally manufactured in China. It is a fourth Zai Lab product approved over the last 24 months. Our three other market products, the ZEJULA, Optune and QINLOCK continue to achieve robust revenue growth, driven by strong demand and commercial execution.

The ZEJULA continues to perform well building on the news from the last quarter for the first line of ovarian cancer indication was included in the NRDL. This is important as a first line ovarian cancer maintenance treatment is a largest mutation for PARP inhibitors in China.

With this favorable reimbursement decision and ZEJULA unique label for ovarian cancer patients regardless of biomarker status, we expect ZEJULA to gain strong momentum this year and to achieve market share leadership, no later than next year.

In addition, as of December 31, 2021 ZEJULA was listed in nearly 1,300 hospitals in China, providing a strong foundation for further agreement in R&D. Similarly, the launch of Optune is going well and we achieve solid growth.

During the fourth quarter, our key focus on continued to improve market access by expanding commercial insurance and supplemental insurance coverage for Optune and educating target position about a few missing clinical benefits, including survival benefits.

Currently Optune is covered by 33 municipal or provincial supplemental insurance plans, and has become one of the top treatments reimbursements from 2021. As we noted last year or last quarter, I should say, we successfully launched QINLOCK for fourth-line GIST in China starting last summer.

The key focus for our launch is increasing physician awareness, market access and the number of patients treated by leveraging INVICTUS trial data and QINLOCK status as the only fourth-line GIST treatment regardless of the mutation status as well as the guideline recommendation by the Chinese Society of Clinical Oncology.

Currently, QINLOCK has been covered by 52 supplemental insurance plans since launched. We're still assessing the impact of intriguing results. However, we note that the fourth-line GIST indication has over 7,000 new patients every year in China and growing, and we are committed to establishing QINLOCK as a standard treatment for this indication.

Now, I’ll discuss our financial results. Product revenues for the fourth quarter and full year 2021 were $44 million and $144.1 million, respectively. Over the same period last year, part of revenues, were $15.1 million and $49 million, respectively.

We just completed our first calendar year of commercialization, and are very pleased with the successful launches and the sales trajectory of our market products. With many more product launches to come, our commercial platform over time is expected to generate strong continued growth and considerable operating leverage.

ZEJULA sales for fourth quarter and full year 2021 were $29.4 million and $93.6 million, respectively. Over the same period last year, ZEJULA sales were $9.9 million and $32.2 million, respectively. Note that there was negative $7.5 million non-recurring adjusted revenue in fourth quarter of 2021.

This was due to one-time compensation to distributors for ZEJULA sold at the 2021 price that remained in the distribution channel before the NRDL implementation. Optune sales for fourth quarter and full year 2021 were $11.6 million and $38.9 million, respectively.

And over the same period last year, Optune sales were $5 million and $16.4 million, respectively. QINLOCK sales for fourth quarter and full year 2021 were $2.9 million and $11.6 million, respectively. And over the same period last year, QINLOCK sales were $0.2 million and $0.4 million, respectively.

R&D expenses were $573.3 million for 2021, compared to $222.7 million for the same period in 2020.

The increase in R&D expenses was primarily attributable to $321.3 million in upfront payments for eight new licensees agreements compared to $83.5 million since 2020, expenses related to ongoing and newly initiated late-stage clinical trials and payroll and payroll-related expenses from increased R&D headcount.

Excluding upfront payments for new licensing agreements, the core R&D expenses were $252 million in 2021, compared to $139.2 million in 2020. Selling, General and Administrative expenses were $218.8 million in 2021, compared to $111.3 million for the same period of 2020.

The increase was primarily due to payroll and payroll related expenses from increased commercial headcount and expanded commercial activities, as Zai Lab continues to expand it’s commercial operations throughout Greater China.

Zai Lab reported net loss of $704.5 million for the full year of 2021, or loss per share attributable to common stockholders of $7.58, compared to a net loss of $268.9 million, or a loss per share attributable to common stockholders of $3.46, for the same period in 2020.

Excluding upfront payments for new licensing agreements, our cash used in operating activity and purchase of property and equipment and intangible assets was $309.2 million in 2021, compared to $143.2 million in 2020.

As of December 31, 2021, cash and cash equivalents, short-term investments and restricted cash totaled $1.41 billion, compared to $1.19 billion as of December 31, 2020. We would now like to turn the call back over to the operator to open up the line for question.

Operator?.

Thank you. We would now like to open the lines for questions. [Operator Instructions] Our first question comes from the line of Michael Yee from Jefferies. Please ask your question..

Good morning, everyone. Thank you very much for the question. Our question was around ZEJULA and thinking about the growth trajectory in 2022 and 2023 and 2024. As it relates to, obviously, getting expanded in NRDL, but also as Billy noted, there were some price adjustments in the fourth quarter.

So how should we think about the growth in the future coming years? But appreciating that we might expect price cuts every couple of years, so talk about that and outlook for ZEJULA? Thank you very much..

Hey, Mike. This is Billy. I'll take your question. So yeah, we're pretty excited to see the momentum, early momentum in ZEJULA.

And of course, looking forward to implementing now the NRDL, inclusion for first-line for all cancer patients, which as we noted in the press release and the current call, it is the largest market opportunity for PARP inhibitors in China.

I believe that, as ZEJULA released in their earnings that the emerging market sales for Lynparza was around $400 million and more than 50% of that came from China.

And what we can share with you in terms of what we see so far based on the data that we are following is that with our entry, we've seen that the size of the pie, so the penetration to PARP asset class in China. And at the same time, our market share within that one pie has both been increasing very nicely.

We expect that to continue for the foreseeable future, this year, and next year and even beyond and that's part of the reason why we had made a comment on this call that NRDL in next year, we actually also expect to be below market share leader in that PARP asset classes space.

So, hopefully that gives you a sense of yes that you're looking forward to your question as well as the confidence that we have I think both the opportunity..

May I ask a little follow-up on the second part of that question, which was related to the price adjustment in the fourth quarter..

Yeah..

We saw this with another major drug as well in China..

Yeah..

And so, I'm not sure that Wall Street analysts may appreciate this adjustment every couple of years and how we need to think about that.

And what is your opinion?.

Yeah. Yeah. So it is correct, that this is universal, pretty commonplace in our industry in China, where every time you are included in the NRDL, right before, you're going to have a non-recurring adjustment.

So if your question, Mike is for ZEJULA in particular, what you need to factor in every couple of years, could there be a possibility that you have to renegotiate with for NRDL that would be a case-by-case decision. Yeah. As you know, we also have additional indications that we have time for place.

But, what I can tell you is that, for renegotiating the current indication, it's a lot more modest than, on the headline numbers that you've seen. So for example, ….

Yeah..

We had a 23.6% discount, right, to get the first-line indication which is again a very significant piece for the PARP asset class. A couple of years later on, if we were to renegotiate it'd be a lot more modest compared to the prices that we've seen..

Sure. Thank you..

Yeah. And then, Mike, maybe just to add, sorry, it's Jonathan, here. I was in a negotiation with NRDL late last year, so maybe you can provide a bit more color.

Look, I think, it's an important addition for us, first to include the first to final line that gives us a very strong competitive advantage, given with only old comer product in that frontline setting. So we are really going to expect to get a lot of volume in exchange for a modest discount.

This discount will not come, if we didn't add this indication. So every two years, when we do renew, we do not expect although, you know, things would change, right? Things could change for the better too, we don't know. But, you know, if we didn't have to add that new indication this time, and we will not have to be subject to that discount.

But I think, given our competitive product profile, and given the volume exchange, I think we already seen that, in Q1 that we're getting very good traction in terms of market share growth..

Thank you. That makes sense related to the expanded label. Thank you..

Thank you. Our next question comes from Yigal Nochomovitz from Citigroup. Please go ahead..

Hi, Samantha, Billy and team, thanks for taking the question. You made some interesting comments in the opening remarks regarding the lung GI cancer franchise, if they can generate up to $2.5 billion to $3 billion through 2030.

So just wondering if you could just drill down a bit into that projection, which products are you referring to in lung and GI, can you talk a little bit about the assumptions you're using to get into that $2.5 billion to $3 billion range and what the ramp may look like to get there? And of course, how confident are you that you can hit that that $2.5 billion to $3 billion window by 2030? Thank you..

Hey, Yigal, this is Billy. I'll initiate and others can chime in. So yes, we could provide some more color. But before I do that, I'll just kind of recall that, look, we know, we just wrap up our first calendar year of commercialization. So we're off to the races, and we have great momentum that we're going to build upon.

And, you know, I think we have a lot of new products launching as you know, pretty intense launch schedule for the next three, four years. So we need to make sure that goes well. So we're still making investments.

But we felt as a team, at Zai Lab that it was, you know, it may be useful to both the buy side, sell side for us to offer up kind of a framework on how to think about the commercial opportunity. And so we made those comments and you saw them in real.

So you got I mean – additional call, if I can provide, we can provide on the peak year revenue, number of $2.5 billion to $3 billion, is that first of all, it only includes our current portfolio. The lot of FP [ph] data, et cetera were based on already statistically, already publicly disclosed than you might have.

The portfolio in terms of revenue mix is very diversified. And we're not getting specific numbers and expense just yet but it's not to see that's a pretty diverse revenue portfolio. And because of the fact that we have so many products launching, you've got the waterfall effect as well.

So over the next three, four years, you've got products launching and building, launching and building kind of at the same time. So the growth curve actually accelerates in next later years. But you go, I think that's the extent of, you know, kind of additional color that we can provide at this time, but hopefully, you find it helpful..

Yeah, no, that's definitely a helpful anchor for our modeling. Thanks. And then just one follow-up just on the broader portfolio strategy. Obviously, you have a very nice mix of therapeutic areas oncology and infectious, autoimmune, and now Karuna with neuroscience. So just wondering about how much broader you’d be willing to go therapeutically.

As you know, there are many novel mechanisms and other areas, for instance, cardiovascular, nephrology, disease, even platform approaches in gene and cell therapy are very interesting. Potentially extend the portfolio.

So just could you talk in broad brushstrokes about how you're thinking about broadening the therapeutics -- therapeutic reach with respect to your BD opportunities?.

Yes, we just broke into neuroscience and we're going to stay obviously busy with the afford that we have, but maybe, smack out of getting additional comments on the on additional TAs strategy..

A – Jonathan Wang:.

I think we see a lot of these opportunities, I think what we're really building at Zai is a world-class company with truly innovative best-in-class or first-in-class assets.

So if there are assets that are synergistic to what we have, if there are assets, which could help with a very large unmet medical need, we certainly continue to pursue those opportunities. We see a lot of these opportunities today, actually, you know, these pipeline of product opportunities.

I think you can expect continue -- quantities of deal flow this year. So I think, especially in these areas, where we have significant presence, you can access to do what we've been doing good at and potentially expand in other areas with -- as we pursue global opportunities or maybe other transformative opportunities as well..

Great. Thanks. Thanks very much..

Thank you. Our next question comes from Anupam Rama from JPMorgan. Please ask your question..

Hey, guys, thanks so much for taking the question. Just a quick specific question on at adagrasib. With the US, do you have second-lines set for later this year. Are there plans to speak to regional regulators on an approval on external China data for second-line lung for adagrasib. Thanks so much..

Alan, do you want to take this one?.

Yes, sure, Billy. Yeah, thanks for the question. So yes, so as you of course know that Mirati has announced the accepting the filing with the PDUFA date that we mentioned earlier in December. And we believe that we are already in contact with China regulators.

And that will continue with our path forward that should not change any of the timelines that we're looking for moving forward. And also, I know our partners Mirati are optimistic that as you know, in the US, sometimes with data that's very encouraging. Those announcements can come before – decisions can come before the PDUFA date.

So we're looking forward to continue to work with our partner Miration this exciting and potential, first-in-class and best-in-class agents in China..

Thanks so much for taking our question..

Thank you. Our next question comes from Jonathan Chang from SVB Leerink. Please go ahead..

Hi, guys, thanks for taking my question. On Bemarituzumab to clarify, are you planning to initiate a registrational frontline gastric study in China in 4Q as a separate study from the Amgen Phase 3 study? And if so can you discuss the rationale for this? Thank you..

Alan, back to you..

Yes, sure. Thanks for the question. This is something that we're in discussion with our partners Amgen as the best method to move forward to get this exciting agent into patients in China. As you know, there's a significant number of patients that express FGFR2b. And so this is something that we're again, very excited about.

We're still working on details as to how that is going to play out. And we'll, of course, be releasing more information as we get closer to that date..

But Jonathan, I think you are correct in assuming that there will be a registrational trial for frontline..

Got it.

But is there a reason why it would be like a separate study from the Amgen studies versus participating in the Amgen studies?.

Yeah, As Alan noted, I think, right now we're prepared to say it's going to be one way or another an efficient registrational trial pathway. So, we're still -- we're working closely..

We're still working out the -- yeas, still working out the details as to the best way to move forward with the option. I'm sorry, that I can't be more specific..

Got it. Thanks for taking the question..

Thank you..

Thank you. Our next question comes from Ziyi Chen from Goldman Sachs. Please ask your question..

Hey, thank you for taking my question. This is Ziyi from Goldman. I think I got two questions on the financials. Number one is on the gross margin in fourth quarter, it's flipped lower compared to previous quarters 51% compared to 72% in third quarter 2021.

So, I'm trying to understand a bit more about the reason behind what's the impact of the sales milestones.

And also, what's the impact from the rebates to the inventory -- channel inventory in fourth quarter? And if we average out or back it out, what will be the reasonable gross margin assumptions, we should be assumed for the portfolio going forward in 2022? And secondly, given the current funding environment in China and also globally for biotech, last year, I think we still -- companies do spend a decent amount of money on BD deals, licensing fees up to about getting very close to $400 million.

But now getting to 2022,when we are facing the challenge in the funding side, how should we think about the budgeting for those BDOs, are we going to spend still a lot of money on the BDOs this year, or we're going to be more focusing on budget control, refocusing on the clinical trials instead of FDE? Thank you..

Hey, Ziyi thanks for your two questions.

So, in terms of gross margin fourth quarter 2021, if you were to add back the non-recurring items, the $7.5 million in our deal, negative adjustment, as well as -- which was in the press release and in our 10-K, it was also disclosed in the cost of goods sold line item, there was a -- also a one-time payment to GSK for hitting a certain revenue threshold of $8 million.

So, without those one-time adjustment, gross margin would have actually increased quarter-over-quarter. So, from 72% in third quarter to about 73% in fourth quarter. So, for the year 2021, if you made those same adjustments, you would have also seen an increase as well.

So gross margin in 2020 with 66 million sorry, 66% and 2021, normalized, it would have been around 70.9%. So in terms of going forward, gross margin for 2022 and even beyond, as you know it's really driven by sort of the product mix and quite large trajectories of each product at that particular point in time.

So there might be some -- we'll need some time to find a kind of a steady state because we have such an intense launch schedule. But hopefully, you see that we're already seeing some sort of productivity gains, right, even in the gross margin level. So -- and then with that said, that segues into your second question.

So yes, 2021 was our most active PD year, eight new partnerships and assets, which we're quite excited about. And we were very confident that it creates a lot of value. But you do hit on the point as well, that the current capital market environment is a little bit different than in the previous years.

Now, we believe at Zai Lab that, it kind of dovetails nicely with where we are in our lifecycle. So our revenue momentum will continue this year and beyond, we're already going into productivity drive. So for example, in terms of our sales and marketing team size and spend, we don't expect to see a notable increase this year.

For investments we made last year and even the prior years, we're going to enjoy the benefits, while not sacrificing any growth and also with a mind towards preparing for additional launches in the coming years. But we will or -- and we expect to do additional deals.

And I'll let Thompson and other colleagues chime in, we are very selective as you know. But if there are opportunities, especially in this market, where there's a little bit of a dislocation, if there are very value creating opportunities that meet our very high threshold and criteria, we have the balance sheet to do it.

And we are at the point in time for our company's lifecycle where we have that flexibility to manage growth and productivity..

Thank you. Our next question comes from Seamus Fernandez from Guggenheim Securities. Please ask your question..

Great. Thanks for the question. So just one quick question. Your next big catalyst, I think, really will be tied to KarXT, just love to get a sense for the key attributes that you think are likely to be most impactful.

Is it -- does it relate to both negative and positive symptoms? And then just in terms of the overall environment in China for what I think is largely a nascent opportunity, but one supported by the Chinese government now.

Can you just walk us through how to think about the opportunity for KarXT in schizophrenia, but then perhaps more broadly in Alzheimer's disease? Do you really view these as two unique potential indications? Thanks..

Thanks, Seamus.

Harald, do you want to take the first part of the question and maybe Jon could chime into the second?.

Yeah. Thank you. Thanks for the question. It's really a new opportunity for us. It's an anchor asset as you already heard from others. And we see this really differentiated as a differentiated product for us and in the market here in general and especially meeting an [indiscernible] made in China.

So having said that, you already hinted at the efficacy side in the schizophrenia symptom scores on the negative symptoms side, which is something that is not well taken care of by current second generation antipsychotics. But by the way, it's also efficacious on the positive symptom side.

So we are covering very broadly with this drug combination the most important symptoms that you see in schizophrenia patients. The second point which should really not be forgotten is safety, and the safety of this drug.

It has a totally different safety profile from all the other antipsychotics with their EPS, the Extrapyramidal Symptoms and so on and so forth, which are a class effect seen regularly, weight gain commonly seen, other side effects are related to the serotonin and dopaminergic effects of these drug class.

We are obviously different here and this is one of the differentiating features. What we believe is that, schizophrenia is not well covered on the symptoms score, the negative symptom score, and that's a worldwide phenomenon and we see ourselves differentiated here because there are no other drugs that really cover that area as well as Karuna XT.

So having said that, the overall market size is considerable, it's considerable in general because schizophrenia is such a common indication, such common affliction. But it's also something which the government in China is trying to address now.

There is still a deficit here in the coverage and in the clinical care setting in China for this indication. It was recognized by the government in recent years and they will act accordingly. This is already a well known thing.

Schizophrenia is a very common affliction as I said in China with what we assume is at least 8 million patients that are currently diagnosed as such. And we know that this doesn't cover everybody. This is not a very hard statistics.

It's also a very concentrated market, I should say, because unlike the US or Europe, you don't see the treatment really initiated in 1,000 small places, but it's much more concentrated in the medical centers. So we see this as a way to address rather quickly a high unmet medical need in China.

Does that sort of answer your question or should I go into any details?.

No, that's very helpful. Thank you..

Thank you. Our next question comes from Yang Huang from Credit. Please ask a question..

Thanks for the question. So I got a quick one too. So for 4Q we saw OPTIUNE sales is about 11.6 and QINLOCK sales is about 2.9 something. So QINLOCK sales Q-over-Q is actually declining and the growth for OPTUNE sales and Novocure sales also a little bit slow down. If we look Q-over-Q.

Just want to get some colors, is there a particular reason for what we have seen for these two sales in 4Q? And what could we look forward for just commercial performance for the year?.

Yes. Let me chime in here. Thanks for your question. So there are reasons. But at the same time, I think, at the moment, so kind of in a nutshell, let me just walk you through those two questions, Yang. So Optune, fourth quarter sales is $11.6 million and so for the year $38.9 million.

So we've always said that the launch trajectory is not going to be the same as let's say, a drug like ZEJULA, et cetera. But having said, so, you expect a very durable growth curve over time.

And we know this, because we're also benchmarking, because Optune is such a unique product, we're also looking at how Optune has done, sold throughout the world, including even Asia. And so we feel pretty, as months go by, as quarters go by, we see the progress continuing well. We see that one of our focus areas extremely doing well.

So, for example, the supplemental insurance plan, we signed up 33 plans, and it's one of the top assets that can't be reimbursed and only kind of – it’s the only non-drug treatment options. So it really speaks volumes about how much value Optune and tumor treating fields can have in the marketplace. Now, we're not here to make excuses.

But I will also note that there were some restrictions in large hospitals in the Northern region of China due to COVID. But again, we're not going to sit here and complain about that. We're going to really just focus on making sure that the long-term trajectory is remains robust.

So the 9% growth quarter-to-quarter from third quarter to the fourth quarter, like one could say that it's was lower than 12% from second quarter to third quarter. But I also want to make that small remark.

But 2022, we're pretty keen on the supplemental insurance strategy, we see nice robust volume uptake coming from major plants, like Shanghai, like Hangzhou. And it's great to see patients getting access to this technology.

QINLOCK, in a fourth quarter was $2.9 million, $11.6 million for the year, significant growth year-over-year, but it was down from third quarter, but it's not due to demand. We had some channel inventory build. And I think that it was impacted all from the industry outcome.

And I think that's all kind of say at this moment, but the more important point is that we see strong hospital demand in fourth quarter, which was -- which allowed us to absorb the inventory build. And so, I think you kind of reached that mark some point to that..

Okay. Yes. That's helpful. Thank you, Billy..

Thank you. Our next question comes from David Lee from Bank of America. Please ask the question..

Great. Thank you management for giving me the chance to ask a question. So some of – some of my questions have been covered by the previous Q&A. So basically, now I have two questions.

Number one is, so what's your NRDL plan for your newly approved assets? For example, like QINLOCK and NUZYRA? How should we think about your revenue ramp-up? So this is my first question. My second question is, currently you have $1.4 billion cash on your balance sheet.

So, how to spend this money? Where does it – burning reach and the cash long wait now? That's my second question. Thank you..

Thanks, David. So I'll try to quickly address your two questions. The first part on NRDL plan. So you are kind of right note, calling out NUZYRA in particular a like that would require antibiotic in China, even though it's next-generation, innovative second class. It would require NRDL for volume. So it'll be eligible future negotiation.

And then I think you were mentioning about the ZEJULA, but maybe you're talking about QINLOCK as well. So yeah, QINLOCK is also eligible, it was eligible last year, and it will be eligible this year for NRDL negotiation for fourth line. So we'll make and – the right strategic decision based on the outcome of those negotiations.

Now, to your second question about the cash burn, or how to allocate our capital usages, we do have a strong balance sheet, we ended the year with – a little over $1.4 billion. And you will see that in terms of core cash spend, you know, outside of the upfront BD activities. It was just shy of $310 million.

So it gives us a lot of flexibility and buffer. As I mentioned before, however, we're not going to rest on our laurels there. We are still in growth stage. There's no doubt about that. But we're also entering into parts of the stage at the same time.

So I made comments earlier about the – some operating leverage and productivity drive in the commercial investments we made so far. Our R&D, core R&D spend did increase 80% year-over-year from 2021. Our R&D, quite frankly, has been very efficient, given the size of our portfolio.

It will increase this year, given the progress we're making with many assets we brought them last year as well.. But you can expect us to maintain the same level of productivity and efficiency in the R&D side. So, again, it gives us a lot of flexibility on how to manage growth and productivity from here on out..

Alright. Thank you, Billy. That's very helpful. I have no further questions..

Thanks David.

Thank you. Our next question comes from Wilfred Yuen from Macquarie. Please ask the question..

Thank you for taking my question. I've got a quick one on TTF, Tumor Treating Fields, what is our expectation for gastric cancer as we have -- we will have expected pilot trial data later this year. So how should we be thinking of the bar to efficacy that will lead us to design -- to move further to a larger clinical trial? Thanks..

Hey.

Alan, do you want to take this last question?.

Yeah. Yeah, sure. Thanks for the question. As you point out, what we'll be doing is we'll be analyzing the data looking at, in particular, response rates of progression free survival, to see how that matches up with historical controls to see whether that data is exciting enough to move forward in a next registrational type randomized study.

So we're excited and looking forward to the data readouts moving forward. So stay tuned and hopefully, that address your questions..

Got it..

Right. Thank you. I am showing no further question at this time. I'll now turn the call back to Zai Lab’s CEO, Samantha Du, for closing remarks..

Thank you, operator. I want to thank everyone for taking the time to join us on the call today. We appreciate your support and looking forward to updating you again after the fourth quarter. Operator, you may now discontinue the call. Thank you..

Thank you. Well, that does conclude our conference for today. Thank you for participating. You may all disconnect..